In downturn, no break on legal fees

Big firms hold rates steady or raise them

By Kit Chellel
Globe Correspondent / January 16, 2010

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In the down economy, cash-strapped corporations are facing pressure to reduce the millions of dollars they spend on legal advice each year. But most big law firms are freezing the rates they charge companies or increasing those fees, two recent studies show.

Law firms, which charge several hundred dollars per hour for legal advice, typically keep their rates a closely guarded secret. But a national survey in December by legal consultancy Altman Weil found that firms with 1,000 or more lawyers would raise their rates by an average of 4 percent at the start of this year.

And locally, about 85 percent of the lawyers at 230 of the Boston area’s top companies said their external law firms had kept their fees the same in the past year, while 15 percent said they had raised rates, according to a survey by Boston-based BTI Consulting in October.

BTI’s president and founder, Michael Rynowecer, said law firms are holding their rates steady or raising them to preserve profits. Most big law firms, he said, divide annual profits among partners, making profitability vital for attracting top lawyers.

“If you drop your rates,’’ he said, “you are giving up your profits.’’

Law firms rarely comment publicly on pricing, and six of the largest Hub firms, including Ropes & Gray, Goodwin Procter, WilmerHale, and Bingham McCutchen, declined to comment for this story.

But high legal costs are causing increasing tension between large commercial law firms and their clients, many of whom say that other service providers, such as insurance or cater ing companies, have reduced rates during the recession.

As the lead lawyer at North Reading-based technology company Teradyne Inc., Charles Gray is in charge of the group’s multimillion dollar legal spending. He said two Hub firms have approached him in the past month about increasing their fees, although he would not specify which firms.

“I just had a debate with one of the large firms,’’ said Gray about a firm that wanted to increase the Teradyne’s fees by 6 percent. “I was flabbergasted.’’

Although hourly rates vary depending on the type of work and the size of the client, the cost of advice from the most experienced partners at elite Boston firms can be as high as $700 to $900 an hour for company work. Gray, for one, said this top-end rate had been rising steadily at around 7 percent a year for nearly two decades.

“When I started out as a lawyer in 1989, a corporate partner at my firm announced he was the first to bill over $300 an hour,’’ he said. “Now, high level partners bill up to $900 an hour.’’

Some industry observers say law firms that keep their rates high run the risk of losing business. They say clients are more likely to turn to smaller, boutique law firms, where the cost of legal advice is much lower, or to large firms offering innovative billing methods.

In fact, pressure from clients to cut legal bills has led many law firms to change their billing methods, with more firms using alternatives to the traditional system of charging by the hour for a lawyer’s services. This system has been criticized for encouraging inefficiency by rewarding lawyers who bill for more hours than necessary.

Now, at many firms, clients can pay upfront for a project with a fixed fee arrangement, or pay more or less depending on the success of the work. For example, a bill can be reduced if a takeover attempt is not successful.

During the past year, these practices have become more common at larger firms, although hourly billing remains prevalent. In December, for example, State Street-headquartered WilmerHale said it would be “aggressively pursuing’’ alternative billing arrangements as part of its new strategy.

“There is enormous opportunity for law firms that are delivering superior value,’’ said BTI’s Rynowecer. “They are gaining market share in the downturn, and they will keep that share when the market turns around.’’

Mark Solakian, general counsel and vice president at Cambridge life sciences company Helicos BioSciences, said while rates continue to go up, “law firms are cognizant of what clients are going through, and have been more willing to offer discounts.’’

James Peck, chief lawyer at Clinton-based manufacturing and plastics company Nypro Inc., agrees that firms need to be willing to offer alternative billing options.

Faced with mounting legal costs, last year Peck asked all the company’s advisers to cut rates by 15 percent.

He also has adopted fixed fees for the company’s day-to-day legal work, while continuing to use hourly rates for larger projects like litigation or takeovers.

“The rates of the big firms are so high,’’ he said. “If they don’t change their approach, they are going to get less and less work.’’