Biglaw, Lateral Moves, Musical Chairs, Partner Issues, Partner Profits

A Closer Look at Lateral Partner Hiring

Musical Chairs

Is lateral partner hiring a game of musical chairs that law firms can’t win? Anecdotes about unsuccessful lateral hires abound. You hear stories about high-profile partners moving from Firm A to Firm B, often lured by huge guarantees, only to leave Firm B a few years later, after failing to integrate or deliver the expected business.

And some of the most successful firms in all the land, places with immense prestige and sky-high profits, do very little lateral hiring. Their refusal to engage in the lateral market hasn’t seemed to hurt them.

When it comes to lateral hiring, should firms “just say no”? Well, that’s not what’s actually happening in the marketplace. Last year, lateral partner hiring climbed, suggesting that it must be working out — at least for some firms….

The American Lawyer just released its 2013 Lateral Report, a comprehensive collection of articles and data about lateral hiring in 2012. And according to Am Law, the lateral market is booming. Dewey know why?

Dewey & LeBoeuf may be gone, but in the lateral market, its legacy lives on. In the 12-month period ending September 30, 2012, 280 Dewey partners flooded the market, helping drive the total number of Am Law 200 lateral partner moves to its highest point in three years.

The American Lawyer’s latest lateral survey found that 2,691 partners left or joined Am Law 200 firms during the 12-month period. That was a 9.7 percent increase from the previous year, when 2,454 partners switched firms, and a 33.6 percent increase from 2010. (The numbers for 2011 were boosted in part by another big-firm failure, Howrey, which sent 208 partners into the lateral market.) All told, 2012 marks the highest number of moves since the 12-month period ending September 2009, when a record 2,775 partners changed jobs, largely because of the failure of four big firms: Thacher Proffitt & Wood, Heller Ehrman, Thelen, and WolfBlock.

And the trend shows no sign of abating. If anything, it may pick up in 2013:

In a survey of leaders of large firms released in October by LexisNexis and ALM Legal Intelligence, the research arm of The American Lawyer ‘s parent company, 96 percent of respondents said their firms plan to pursue lateral partners over the next two years, and nearly three out of four respondents expect their firms to increase lateral hiring over the next five years. In The American Lawyer ‘s annual Law Firm Leaders survey [“Vote of Confidence,” December 2012], more than 60 percent of respondents said they spend 11–50 percent of their time hiring laterals.

So some firms are investing heavily in lateral recruiting. Is the investment paying off? Not for everyone, according to a second article in the Am Law series:

In 2010 a fast-growing Am Law 50 firm wanted to find out how much value it was getting from its lateral hires. The firm compared the revenues and profits generated by new hires who joined in 2007, 2008, and 2009 with the compensation paid to them. The results were discouraging, according to the firm’s chief, who asked that the firm’s identity remain confidential. As a group, the laterals were just breaking even: “From a strictly financial point of view, we found that lateral hiring had been neither accretive nor dilutive” to profits, he says.

The firm in question revamped its lateral hiring process, and more-recent lateral partner hires have increased profits by about five percent. But one might wonder if five percent is a good return considering the high cost of lateral talent:

Lateral partners are never cheap. Existing law firm partners and firm personnel can spend large amounts of time finding, interviewing, and vetting potential recruits, says Susan Saltonstall Duncan, president of consulting firm RainMaking Oasis Inc. (Duncan also spent a year as the chief strategy and development officer of Squire Sanders.) There can be significant travel costs incurred in the interview and integration process when partners may fly to various offices to meet new colleagues and clients. Headhunter fees can range from 20 to 30 percent of an incoming partner’s annual compensation. And the lag time in the new partner’s billings and collections means that most laterals won’t generate any revenue for the first three to six months of their tenure at a firm.

Firms can improve their lateral partner hiring processes in several ways. Here are some examples, along with the firm employing the strategy:

  • Appoint some partners to play “devil’s advocate” during the due diligence process, i.e., to argue against making the lateral hire in question (Squire Sanders).
  • Wall off the recruiting process from the pay negotiation process, by having each step handled by different sets of partners (DLA Piper).
  • Improve integration, perhaps by assigning multiple lawyers to help each new partner become more at home at the new firm (K&L Gates).

These are all shrewd moves. There’s certainly a lot of room for improvement in the lateral process. In the longest and most detailed article in the report, Professors William Henderson and Christopher Zorn, both part of the team at Lawyer Metrics, look back at the past dozen years of data about lateral hiring. Their conclusion:

[W]e find no statistical relationship between an aggressive lateral strategy and higher profits per partner. Indeed, the most profitable firms tend to have the lowest rates of lateral hiring — roughly 1 percent per year. Yet, outside this elite group, the lateral churn is substantial, with a growing proportion of The Am Law 200 wading into the lateral market. In 2000, 70 percent of The Am Law 200 hired at least one lateral partner. By 2011, the percentage had increased to 89 percent. Departures follow the same pattern.

Perhaps we’re being overly pessimistic about lateral hiring. There’s nothing inherently wrong with it; in fact, it has worked out quite well for certain firms. K&L Gates, for example, estimates that 80 to 90 percent of its lateral hires are successful.

But it has been disastrous for other firms. The most prominent, of course, is the dearly departed Dewey & LeBoeuf, which went on a lateral hiring spree before its collapse.

At the end of the day, lateral hiring is just like any other implement in the toolkit of law firm strategy: it should be used intelligently, judiciously, and in moderation.

The 2013 Lateral Report [American Lawyer]
Escape Routes [American Lawyer]
Building A Better Lateral [American Lawyer]
Playing Not to Lose [American Lawyer]
A Nothing-in-Moderation Guy: Patrick Fitzgerald [American Lawyer]
All-Star Laterals [American Lawyer]

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