Smart Growth Part 4: Lateral Partner Hiring

10.16.19 | Posted By: Susan Duncan

As we discussed in Smart Growth Part 1, hiring lateral partners or small groups of partners and associates provides law firms with short and long-term opportunities to add partners with strong client relationships and portable books of business to shore up their revenue numbers.   Whether adding well-known and positioned rainmakers to a practice or industry group to expand capability and bench strength, replacing retiring or departed partners, opening an office in a new market or filling in talent gaps in the middle of the partnership, lateral hiring continues to burgeon.

The Altman Weil 2019 Law Firms in Transition survey reported that 92% of law firms use lateral partner hiring as their primary strategy for growth. According to Risky Business: Rethinking Lateral Hiring,  a survey by Decipher and ALM Intelligence, nearly 9,000 partners in AmLaw 200 firms made lateral moves from 2014 to 2018 and the total book of business moving through lateral markets is estimated to be $17.1B. The survey found that nearly 20% of AmLaw 200 partners make some type of professional transition each year.

 

The Failure Rates of Lateral Partner Hiring

 

Firms continue to hire laterals despite high levels of failure. While many firms have tried to improve their lateral hiring processes and outcomes by appointing partners to the oversight role as well as experienced recruiting professionals within their firms, the outcomes are still disturbing and raise serious questions about why the lateral frenzy continues without abatement. According to the Decipher/ALM Intelligence survey:

  • 75% of lateral partners fail
  • 90% laterals have trouble generating business at their new firm
  • 48% laterals leave within 5 years
  • 35% laterals fail to fit in at their new firm
  • 62% fail to bring their promised book of business
  • Of those who stay, nearly 50% fail to break even within 5 years
  • 30% of laterals delivered less than half their expected books of business

 

The Cost of Failure

 

The failure metrics of lateral hiring are directly related to the high costs of lateral hiring as a growth strategy. In an attempt to bring short-term and long-term revenue to a firm, the expense of these failed hires can easily outweigh promises of financial gain.  Again, according to the Decipher/ALM Intelligence Survey:

  • Cost of replacing failed lateral is between 200-400% of lateral’s first year compensation
  • Average acquisition cost of each lateral hire is between $2.3-$4.2M with some over $5M
  • Largest 400 U.S. law firms lose $9.1B/year due to failed laterals
  • One third of AmLaw 200 firms encounter client conflict problems with laterals
  • 35%+ firms experience malpractice issue arising from lateral partner – average loss (in paid claims) is eight times more for a lateral than an incumbent partner

The overall cost of failure to law firms is very high and much greater than just the cash outlay and lost billable time, however.  There are three additional consequences that can negatively impact the firm:

Clients. Having partners join your firm then leave on a routine basis can endanger client relationships.  While many clients are now used to seeing lawyers move from firm to firm, the perception of constant movement or unsuccessful acquisition can have a negative impact.  Even for those clients who follow their key partners to new firms, it is not always a simple or seamless transition.  Opening new files, clearing conflicts, adjusting to different firm billing and administrative policies and new personnel can be very disruptive to the attorney-client relationship.

Internal dissension. A revolving door can create friction and confusion among existing partners who may harbor doubts about the soundness of the firm’s business and management strategies. Concerns about new laterals’ motivations and styles may prevent existing partners from committing to actively cross-sell with laterals. Hiring and highly compensating lateral partners also often stirs resentment among “homegrown” partners who feel the only way to be recognized, advance or jump in compensation is to leave the firm and lateral into another firm.  Associates may worry about future firm stability and their chances of being promoted to partner.

Bad press.  Any pattern of serial partner departures or defections garners media attention and can negatively affect how the firm is perceived among business leaders, other lawyers, potential recruits, referral sources, etc.  Even worse, once there is a public perception that a firm is struggling with defections, it often results in more aggressive efforts by headhunters to proactively outreach to other partners at the firm who might otherwise have been happy to stay where they were.

 

How to Improve Your Success with Lateral Partner Hiring Decisions and Outcomes

 

If lateral partner recruiting is to remain your firm’s growth strategy of choice, it would behoove you to put in place a better, more sound business approach to the recruiting process.  Below are several suggestions:

Be strategic, not “opportunistic.” The first step is to develop sound, well-researched, market-driven plans (see prior posts Smart Growth Part 1: The Why and How of Growth, Smart Growth Part 2: Your Strategy Must be Much More than a Plan and Smart Growth Part 3: Using PESTEL and SWOT to Inform Strategy).  Your growth strategy likely will include several methods for growth only one of which may be lateral hiring. You should consider whether your investment dollars might be better spent growing talent internally by retooling current partners or senior associates or foregoing this growth strategy for another. You should do the business analysis, make the business case and define the measures of a successful outcome. At all times, hiring a lateral partner should align with and be driven by a strategic goal, a confirmed client need or market opportunity.

 

Assess and improve your lateral recruiting process.  Before engaging in any more lateral partner hiring, take a careful look at the process you use now and the people who are involved in this for the firm.  You likely have hired numerous laterals in the last five years.  Which of those have been most successful and which have not succeeded? What were the reasons for success or failure? What could have been done differently and better?  Chances are, you can much improve the methods and speed with which you conduct searches, especially if the decision to hire has already been researched and grounded in sound strategy.

Effective lateral partner hiring requires active involvement of firm leaders, partners, recruiting professionals and other administrators who are included in management-level strategic and financial decisions. Designate a partner “owner” of each lateral search – the person who will be accountable for the successful outcome of a lateral hire. (Too often, a decision is made my management, a practice group leader or a rainmaker to hire a lateral and as soon as that person arrives, none of those people are held accountable for success or failure.) Establish effective interview protocols to ensure each person involved in interviews consistently covers specific areas of inquiry with each candidate. Finally, if all signals are a go, have an effective team ready to “sell” the candidate on your firm.  He/she likely has many other options.

 

Develop the ideal candidate profile.  If each lateral partner search is precipitated from a well-designed strategy, it should be clear what type of person, skills and client relationships will be required for success. Different offices/markets, competitive landscapes, leadership dynamics and financial alignment will all impact whether there will be a good fit.

  • What specific skill sets in the service niche are required to supplement or provide the expertise you seek?
  • What specific client types and representations will be relevant and transferable to your firm/practice?
  • How much new business do you expect the lateral to bring to the firm and what is a realistic portability goal, given what you are willing to pay for this (and given what you now know about failure rates about what actually comes in versus what is promised?)
  • Which existing firm clients would benefit from the skills/experience of the lateral?
  • What types of personalities, work styles, team skills and values will best meld with your firm and the practice group, department or office into which this lateral will be placed?
  • What will motivate the lateral to leave his/her existing firm or employer to join you and what will prevent the lateral from leaving your firm in another year or two?
  • In what type of firm or other organization are you most likely to find this individual?

 

Be realistic about what it will take to attract someone to your firm, for instance, whether you can afford this person.  If laterals move only for money, they may not stay long with your firm before moving again.  If they move for more autonomy or control or power, they may become disruptive to other partners or undermine the priorities and policies established by the firm’s leaders.

 

Carefully select and manage your executive search partner(s.) Some  executive recruiters seem to just be interested in making a placement to earn the search fee and therefore are less focused on making a good match between the partner and the firm.  Ideally, you want to work with executive recruiters with whom you have had success, who keep lines of communication open, who strive to understand your culture and your strategic goals and who don’t waste your time sending you resumes of partners that don’t fit a specific need. They are committed to making a long-term, successful match.

Truly successful candidates will not want and need to protect their firms, clients and current partners from the confusion or embarrassment that untimely “leaks” can cause so asking for and expecting extreme care and confidentiality is critical.  Firms should select recruiters with high integrity to protect the firm, clients and candidates.

Firms and recruiters must be willing to provide honest information about the firm including potential opportunities but also drawbacks. Recruiters must also be well-equipped to sell the positive aspects of the firm — it is helpful if the recruiter knows and has met other key partners in the firm or practice group the firm is seeking to hire.

 

Thoroughly vet candidates.  Despite the statistics above about failure rates, the costs of failure including higher malpractice claims, many firms do a poor job of vetting partner candidates. Firms often shy away from many of the vetting steps below for fear a lateral partner will be turned off and not come to the firm.  But is it better to “lose the candidate” because s/he is impatient and feels insulted by your process or is pleased you are taking such care to ensure a mutually successful match?

 

A Due Diligence Checklist

  • Obtain a certificate of good standing from the Bar.
  • Check for malpractice claims including contacting your state’s board of investigative claims
  • Conduct criminal and financial background checks
  • Discuss/determine residual financial obligations and lawsuits from other firms
  • Review lateral’s current partner agreement for any clauses that might have an impact
  • Seek a current health report and clarify any current health issues
  • Seek out more information on candidates’ personal conduct, their professional relationships and their practice – don’t take the candidate’s Lateral Partner Questionnaire (LPQ) as the complete picture
  • Require a detailed business plan and evaluate how strategic, insightful and in line with your firm’s vision/practice it is
  • Do a personality assessment to assess personal style and cultural fit
  • Consider the candidate’s abilities in critical success areas:
    • Ability to generate new clients, be entrepreneurial and opportunistic – this is especially important if existing clients don’t all follow him/her to your firm, which is likely
    • Approaches to practice and personal productivity, profitability and healthy financial practices
    • Client relationship development and service delivery
    • Opportunities within the firm’s existing client base for the lateral to become involved, to add expertise or value
    • Team leadership, management, leverage, oversight and development of talent (the last thing most firms need is another solo practitioner only focused on his own practice/book and compensation)
    • Lateral’s real motivation to make a change to a new firm – could be purely financial, better platform, ability to charge lower rates, opportunity to advance to leadership or out from under shadow of a major rainmaker, etc. Or have they been asked to leave?
    • The firm culture the lateral is leaving – the plusses and minuses that might impact the way the lateral behaves in your firm
  • Include key executives in the interview process including the general counsel (to help evaluate any risks) and the CFO (to evaluate financial projections, billing and collection habits, profitability of practice, etc.).

 

The mutual success of a firm/lateral match will be improved greatly if you both honestly evaluate the goals and fit.  How the firm operates, its cultural values and standards, its governance and compensation models, how it incentivizes or disincentivizes cross-selling, sharing and open communication, will all impact whether the match will succeed.

Since the majority of firms will continue to hire laterals, they need to enhance the likelihood of success through better approaches to onboarding and integration. Our next Smart Growth post will address Effective Lateral Integration.

RainMaking Oasis provides consulting, training and coaching services to law firms and lawyers in the areas of business development and growth strategy, innovation, client retention and expansion, succession planning and leadership and personal effectiveness skills. Please contact Susan Duncan at sduncan@rainmakingoasis.com.