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Will The Lateral Market’s Clouds Part in 2014?

Ed. note: This is the latest installment in a series of posts on lateral partner moves from Lateral Link’s team of expert contributors. Today’s post is written by Michael Allen, the Managing Principal of Lateral Link, who focuses exclusively on partner placements with Am Law 200 clients.

With the recent news of eight Weil partners in Dallas leaving for Sidley Austin and Wilson Sonsini announcing the elimination of 35 staff positions in Palo Alto, many are looking towards the fourth quarter with cautious optimism. Traditionally the fourth quarter is the most difficult to predict; even the most basic analysis of Q4 shows that there is little correlation between the rate of change in partner moves from the previous year, and the rate of change in total moves from the previous year (ΔP/ΔT). This essentially means that the total lateral moves over the course of the fourth quarter are an inadequate measure for estimating future lateral partner moves in the fourth quarter. However, gauging the first three quarters, this measure is highly effective, yielding a nearly 85% correlation year to year — compared to 44% in Quarter 4.

There are many factors that complicate lateral moves in the fourth quarter, the most conspicuous being bonuses. Every law firm has a method for compensating its partners. Some compensation plans are highly structured, but many others include subjective elements. Distribution plans incorporating percentages or units of participation with a reserve are often-times structured to incentivize an attorney to remain at the firm through the fourth quarter. Simplified, a partner will receive a variable draw and at the end of the year, and the balance of the net profit will be distributed. There is the general consensus that partners will wait to collect their bonuses at the end of the year before making a lateral move. This evidence may be anecdotal, but nonetheless lateral movements in the past have been about 30% greater in the first quarter compared to the previous fourth quarter…

When lateral movement does take place in the fourth quarter, it is often a group of attorneys within a practice area and the benefits of a move outweigh the potential loss of income. For example, in the fourth quarter of 2012, Larry Rosenfeld, the former national co-chair of Greenberg Traurig’s employment law group, moved to Squire Sanders with partner Daniel Pasternak and senior associate Laura Lawless Robertson. Additionally, four attorneys left Vinson & Elkins in Houston for Latham.

Another method of predicting partner movement in the fourth quarter is to compare the rate of change in fourth quarter lateral movements of a given year to the rate of change in partner movements in the first three quarters of that year. If we ignore 2010 (an extreme outlier), then this data set yields a more accurate prediction of Quarter 4 than the previous comparison (ΔP/ΔT). Nonetheless, it is still woefully imprecise.

Even the most rudimentary examination of this data reveals that gains and losses in partner movement is much less pronounced than the movement across associates and counsels. Although, the number of partners moving in Quarter 4 increased by an average of 18% from 2008 to 2012 (the average of each year’s rate of change). Meanwhile, the number of lateral associate moves over the same timeframe increased at an average rate of 42%. Furthermore, the standard deviation is much lower for partner movements in Quarter 4 then associate movements since 2008, demonstrating that though Quarter 4 partner movements are less predictable, they are also significantly less volatile.

This rough analysis of the upcoming fourth quarter paints a somewhat abstruse picture; however, our advanced analysis has shown that this fourth quarter will indeed experience a slowdown comparable to the decline seen through the first three quarters of 2013. This downturn will likely be more pronounced in lateral associate movement. It is likely that the number of lateral partner moves will dip below 300 for the first time since 2010. Although many self-proclaimed market prophets are decrying these recent downturns and law firm closures as the demise of Biglaw, our data suggests that cautious optimism is in store for 2014.

Disclosure: This series is sponsored by Lateral Link, which is an ATL advertiser.

Lateral Link LLP is one of the largest legal recruiting agencies in the world, with 13 offices in the United States and Asia. Lateral Link has been recognized by the Wall Street Journal, The American Lawyer, the ABA Journal, the Daily Journal, and the National Law Journal for its innovative approach to legal placement. Lateral Link recruiters are former practicing attorneys who have consistently succeeded in placing partners, associates, general and corporate counsel into some of the most reputable law firms and organizations in the world.