It was late 2006 and economic storm clouds already were gathering when lawyers Philip Karter and Herbert Odell tried to convince the leaders of their firm that their profitable Conshohocken-based tax practice could take even more business away from larger firms if they cut rates.

But the managers of their firm, Miller & Chevalier, based in Washington, would hear none of that. What's more, the message that Karter and Odell received from firm managers was that they did not want a Conshohocken office at all, and that it would be most desirable if they packed up and moved to the nation's capital.

So Karter, Odell, and others started looking for a new opportunity.

They found it with a 100-lawyer, Houston-based firm, Chamberlain Hrdlicka, with a tax practice that matches their own. They are cutting rates, snagging clients and, either through foresight or good luck, are on the leading edge of a favorable trend as big clients seek to lower costs by turning more often to smaller firms.

The practice, still based in Conshohocken, although it is referred to as the "Philadelphia office," is even more profitable - partners average about $670,000 a year.

And the firm has leased enough office space in Conshohocken to expand from eight lawyers to 17 in the next year.

"We loved living here and had no desire to move," said Karter, 53, the Conshohocken managing partner. "Our clients didn't care whether we were in a town with a name they couldn't pronounce" as long as they were being well-represented.

The decision of Karter, a former Justice Department tax lawyer, and his colleagues to retool their business plan with the option of lowering rates if needed - a decision that essentially forced them to find a new law firm - is a recurring theme in the current legal climate.

Clients are placing pressure on law firms large and small to cut costs. In this climate, small firms that provide high-quality service for less money are thriving, or at the very least holding their own in a tough legal market.

"Smaller firms are picking up big-law business by forgoing the sort of profits and overhead that have characterized big firms in recent years," said Larry Ribstein, a professor at the University of Illinois College of Law and an expert on the economics of the legal industry.

Chamberlain Hrdlicka had a flourishing tax practice at its core for years. But it has expanded into other practice areas, including intellectual property, maritime law, and oil and gas. And the Conshohocken office, while also heavily focused on tax-related issues, is branching out as well.

Karter recruited Jewell Lim Esposito, 45 - with whom he practiced in Washington in the 1990s at the firm of Dewey Ballantine, now known as Dewey & LeBeouf L.L.P. - to advise corporate clients on employee-benefit matters.

Karter said he expected the Conshohocken office to continue to focus on the core areas of tax planning and litigation while branching out into estates and trusts, intellectual property, trade, and regulatory practices.

Marianna Dyson, chairwoman of the executive committee of Miller & Chevalier, the firm Karter and Odell left in 2007, said her firm originally affiliated with the Conshohocken practice because of its tax expertise, not because of a need to have an office in the region.

"We respected the decision of these lawyers to move their practices to a different platform, and we wish them all the best at their current firm," she said.

The office was founded by Odell, 71, also a former Justice Department tax lawyer, who practiced for years at Center City's Morgan, Lewis & Bockius L.L.P. It has for years had many large corporate tax clients, and its lawyers have practiced in jurisdictions throughout the United States and in Europe.

That tax law remains a central focus of the firm was one of the reasons that Karter and his colleagues were able to recruit Stewart Weintraub, a tax partner at Center City's Schnader, Harrison, Segal & Lewis L.L.P., in March.

Weintraub, 64, was content at Schnader, but he said his ears pricked up last fall when he got a call from a recruiter who pitched the idea of his moving from the 200-lawyer Schnader to the Conshohocken firm.

He liked the idea of the firm's flexibility on rates. That would permit him to lower rates if needed to lure new clients. For years, he had been competing against smaller tax firms, many in Harrisburg, with only limited success because the smaller firms had lower overhead and did the work for less.

"I lost business," Weintraub said.

He also liked the firm's formula compensation system, in which pay is tied to the number of hours that a lawyer bills and the amount of business that the lawyer generates.

In the legal industry, such formula pay plans are known as "eat-what-you-kill" compensation systems, a term Karter frowns upon.

"I prefer something a little less carnivorous," he said with a chuckle.

But the advantages, particularly for small firms, are huge, Karter said. Since the criteria are largely objective and formula-driven, firm leaders do not have to spend weeks or months each year wrestling over imponderables like attitude, enthusiasm, and potential. Moreover, compensation is visible to all the partners, so there is no mystery about who is paid what and presumably there is a ready explanation for why one lawyer is earning more than another.

Karter and Weintraub said there was another benefit, though. Linking pay to factors like business generation and hours billed - and only those factors - is a powerful incentive.

"The work that I do, the people I work with; it makes you want to get up in the morning and go to work," Weintraub said.

Contact staff writer Chris Mondics at 215-854-5957 or cmondics@phillynews.com.