Biglaw, Lateral Moves

Take This Job And Shove It!

The risks (and costs) of lateral hiring failure is high, so take this advice before you proceed any further.

By Sanjay Kamlani and David Perla  
on

40 years ago, Johnny Paycheck (seriously!) sang:

Take this job and shove it
I ain’t working here no more . . .
You better not try to stand in my way
‘Cause I’m walkin’ out the door

Johnny Paycheck’s reasons were romantically driven, but his sentiment perfectly sums up the legal market today.  Searching for growth, firms across the nation (and the world) have embraced a lateral hiring strategy at the both the partner and associate levels that, in a word, is failing.  Why do firms do it, why doesn’t it work, and what can change for the better?

The Lateral Craze

According to Altman Weil’s report, “2017 – Law Firms in Transition,” nearly all law firms (95.6%) said they would pursue lateral hiring as a growth strategy.  For 250+ lawyer firms, 99% of firms responded that lateral hiring is a growth strategy.  Simply, every large firm in America uses lateral hiring to grow. The Altman-Weil report further notes that two-thirds of firms will also “seek to acquire lateral groups.”

Despite this universal attraction to lateral hiring as a growth driver, the Altman-Weil report confirms a widely cited statistic in the industry — namely, “that half of laterals do not meet expectations in terms of books of business brought in and/or personal productivity.” More on that later.

What’s Driving It?

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So, with results that don’t justify all the lateral action, why do firms do it?  Back in May, in our first column together, we talked about this year’s Am Law 100 report, and what it really told us about revenue in Biglaw.

As a refresher, revenue per lawyer is up, but the distribution of that increase is uneven, and year-to-year results are highly volatile.  As we noted, there is significant and growing revenue stratification between the 50 highest grossing firms, and the next 50 firms, with the top half growing 3.6% and the bottom half declining 1.3%.  In other words, half the firms are up and half are down, making annual profit growth (PPP) that much harder for those “bottom 50” firms.  And volatility is increasing.  According to the American Lawyer, “In 2016, 44 percent of firms who report financial data to the bank [Citi] had a reversal in their rate of PPP growth from the year prior. . ..  In pre-recession times, only about 25 percent of firms on average saw a change in direction in their PPP from year-to-year . . ..”  Thus, the inability to create organic growth is driving firms to try to acquire growth, via lateral hiring.

And the Winners Are . . .

Based on the stats we’ve read, few firms are winning with a lateral strategy.  In fact, most firms don’t even think they’re winning!  According to an ALM Report, only 28% of firms view their lateral hiring strategy as “very effective.” According to that same ALM report, half of all lateral hires will fail within five years.  From a revenue perspective, over half (51%) of lateral hires won’t produce three-quarters of the expected first year book of business.  Worse, 30% of laterals won’t produce even half of the expected book of business.  (See ALM’s report: “Minimizing Risk in Lateral Partner Hiring – Effective Due Diligence.”)  In the last six months, two Am Law 50 law firms reported directly to us that each had to remove two laterals hired in the prior year because of those laterals’ failure to bring in even 30% of the revenue on which they negotiated their compensation, and in some cases also because of a cultural misfit — the old firm let time entry slide to mid-month or even month-end; the new firm thrives on the discipline of time entered by end of next business day.

And the cost?  According to Decipher,[1] an independent corporate intelligence provider that helps law firms reduce the risk of a bad executive-level hire, the cost of replacing a partner hired laterally is 200%-400% of that partner’s annual compensation.  In the aggregate, the 400 largest U.S. law firms lose over $9 billion annually due to “partner mobility,” according to Howard Rosenberg, CEO of Decipher.

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Stop, Look, and Listen

With the risks (and costs) of lateral hiring failure so high, the best advice we’ve heard mimics the street safety advice all learned years ago:  Stop, Look, and Listen.

First, firms should slow down, and not rush to make a hire that may well turn out to be a misfit.  Firms should consider cultural fit, past moves, client durability, and why a prospect is moving.  Culturally, firms need to understand the differences between firm cultures and be honest about how much someone deep into their career can really make a cultural shift.  Rosenberg told us of clients that won’t run even a basic background check until after a lateral partner questionnaire (LPQ) has been completed and an offer letter issued.  He described numerous circumstances where the post-LPQ (sometimes post-offer) investigation turned up disqualifying and/or troubling information that was easily known in advance, and would have precluded an offer in the first place.

Second, firms should review the extensive materials available to them, including information in court filings, deal databases, press clippings, and through simple Internet searches, including social media.  Obviously, firms must comply with HR policies and the law.  But too often firms don’t want to scare off prospects by asking about screening, or miss out on the opportunity to review materials that are readily available, or that can be obtained from or through third party companies.

Finally, firms should listen — to a lateral prospect’s clients, to colleagues at a lateral prospect’s current and past firms, and to colleagues in that prospect’s industry specialty.  And there are at least a handful of third-party companies that now specialize in helping firms screen and de-risk lateral hiring.  For firms concerned about the process, how a candidate may react to being screened, or even the compliance issues involved, using a third party may offer a simpler and faster solution.

As we head into the end of another year of transition in the legal industry, where lateral hiring is now a near universal “growth strategy,” we expect to see at least some firms adapt to the challenges of that strategy.  Barring that, we could be hearing a lot more of Johnny Paycheck’s lyrics.

[1] David is a member of Decipher’s Board of Advisors.

David Perla and Sanjay Kamlani are co-founders and managing directors of 1991 Group.

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