Lateral hires- the risky business of direct-entry partners
A presentation at the Managing Partners’ Forum meeting on 05 September
2012
Report prepared by Spada
Mark Brandon, founder and managing director of Motive Legal Consulting
Mark Brandon presented the key findings of his research into the successes and failures of lateral
partner hires among law firms. This research investigated lateral hire partner retention between 2005
and 2011.
Background
Throughout his career, both as a former legal journalist and legal recruiter, Mark saw the effect that
lateral partner movement had on law firm growth plans. While it is well known that such moves can
have dramatic consequences on the way in which law firms operate, little quantifiable research had
been conducted. “I noticed as a recruiter that lateral hires in law firms went wrong quite a lot,” said
Mark; “…firms would hire a partner or a team with a great fanfare and then quietly lose them …but
what no one was able to tell me was quite how often this went wrong.”
Mark found that just under a third of the lateral partners had left the firm they joined within five years.
He also noted that US firms were less successful in this area.
“A big phenomenon of the UK legal market was the entry of US firms. Although US firms account for
about a third of the lateral partner hiring, they do worse than the UK in holding onto their hires.”
The Cost of Failure
Mark noted that the average cost of a failed lateral hire is £100,000 due to wasted time and
resources. However he also noted that this figure may be a significant underestimate as it is difficult to
quantify other negative effects of a failed partner hire. These include:
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Potential losses during time partner stays
Wasted time and energy
Poor interview process impacts on the firm’s image
Failed hires impact market credibility
Strategic drift and morale problems
Mark suggested that firms are often unwilling to examine the true cost of such failure.
“There are a number of indirect costs involved…there are also losses during the time when the
partner stays around. Many firms are very reluctant to really examine the cost of failed lateral hires.”
In many cases, law firms hire partners with a particular strategic goal in mind, such as expansion into
a new market. When said hires fail, the strategic goals of the firm are significantly damaged. This not
only costs the firm money but can also have a substantial effect on the market credibility of the firm
and impact upon its reputation.
Why do lateral hires fail?
Mark argued that the main reason behind the failure of lateral hires is a lack of strategic thinking:
“A lot of law firms will tend to hire on the basis that the newly-arriving partner will move the firm
forward. In the eyes of the firm, the hires effectively become the strategy…during the process, I feel
potential hires are often unaware that they are teed-up in that way and therefore this leads to a vast
difference between the two sides in terms of expectation.”
Mark also believes that firms fail to “think beyond the hire”. Law firms often hire before they truly
consider what they are trying to achieve. This creates a poor post-hire integration scenario in which
existing partners feel that the lateral hire is underachieving, resulting in cultural isolation and a belief
by lateral hires that they are not receiving support from their new firm.
Whilst conducting interviews for this research, Mark noted that firms often said that lateral hire
successes occurred when they hired “to-culture” and, alternatively, failures were a result of hiring
“against culture.” However Mark pointed out that firms frequently struggle to articulate their culture.
“When you actually ask them “what is your culture?”… that is when you get a blank stare. You get a
number of soft words and therefore it all seems to be gut-instinct…partners involved in hiring often
say they have a good idea about who will fit in, however, the statistics do not bear out that optimistic
view.”
Understanding the market
Mark suggested that another fundamental reason behind the high failure rate of lateral hires is a poor
understanding of the market and the myth of inexhaustible supply. He gave the example of the tight
candidate pool in Pensions from which firms may wish to attempt lateral hires.
“The Legal 500 only rates 47 firms in London for Pensions, 30 of which have just one partner or one
‘hybrid’ partner working on Pensions. This means you have a pool of about 100 quality partners…the
supply is definitely not inexhaustible…”
Warning signs
Mark noted that firms should look out for a number of warning signs when considering a candidate for
a lateral hire including:
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If someone has never moved
If someone does not have an accurate grip on their financials
If someone is reluctant to give client referees
Integration and culture
If lateral hires are to succeed, it is very important that firms have an integration process that reflects
their culture:
“If you have a particularly laissez-faire, management-light, entrepreneurial, collegiate culture…the
integration process should reflect that. Equally if you have an organised culture, you need to have a
very organised integration process.”
Mark noted that integration issues are often cited by failed partners as a reason for leaving their new
firm within the first year. Law firms need to learn from their mistakes instead of “burying their heads in
the sand when the lateral hire process goes wrong”.
Do lateral hires generate value?
Mark noted that the benefits that lateral hires may bring can vary dramatically from firm to firm. There
are many reasons behind the varied results.
In a second piece of research Mark compared six pairs of UK law firms with similar characteristics,
spanning the financial years 2006-2010. The firms were chosen for their similarity in size,
composition, sector focus, location and revenue per partner (RPP). Mark compared turnover, profit
margin, PEP, revenue per partner and revenue per lawyer at beginning and end of period against the
lateral hiring programmes of the firms in question.
The ‘Goldilocks’ strategy
Mark’s research has led him to believe that firms wishing to achieve successful lateral hires should
consider a ‘Goldilocks’ strategy:
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Firms with more conservative hiring strategy perform better
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Firms with lower lateral hire attrition perform better
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‘Goldilocks’ strategy seems ideal - not too hot (managing by lateral hire) and not too cold
(overly conservative lateral hire strategy)
Mike Jones, founder and director of IV League Talent
Mike shared with the group the story behind IV Legal Talent and his insights into alternative forms of
legal recruitment.
Mike gave the example of his acquaintance John, an outsourcing deal lawyer in his mid-40s and a
London partner in a large US law firm.
John was unhappy with his current firm and had grown tired of both the routine and “a sense of déjàvu”. While he felt that a lateral move to another firm wouldn’t change the root cause of this
dissatisfaction, he was uncertain as to what other paths, if any, were available.
Why unhappy?
Mike noted that John was unhappy due to three main factors:
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Micro-management
Routine
Reward
“He was unhappy with the environment in which he was practicing… he was very happy with his
clients and they were happy with him, he was very happy with the work and also, and this can’t be
said of all lawyers, with the business development role.”
“Having to be in the office whether there was a deal on or not. John was beginning to resent having to
follow a path or pattern regardless of the level of work flow.”
What else is there?
Mike explained the virtual law firm model to the group. The virtual law firm model provides a central
hub of administrative support that allows lawyers to work from home. Such a system provides lawyers
with control over their workload and unlimited flexibility.
Mike then introduced the revenue share reward model noting that while, “…there aren’t swanky
offices and you are not given a salary or guaranteed income, you take home a share of the revenue
you generate due to your client relationships”.
However, in Mike’s view, there is one significant flaw in the virtual law firm model with regards to
lateral partner hires, namely, large clients would be unlikely to follow the lawyer into such a model,
regardless of their relationship with the individual, due to the vast difference in the perception of
prestige.
Another option
Mike decided that it would be a good idea for John to offer a top 50 law firm the same deal as he
would Keystone. The deal was completed in weeks and IV League Talent was born.
IV League Talent acts as a “marriage broker” between lawyers like John, who desire flexibility similar
to the virtual law firm environment, and prestigious law firms that are willing to take on ‘consultants’ on
these terms.
Benefit to Firms
Mike suggests that this model can provide great benefits to law firms, including:
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Lateral hires with no recruitment fees
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Partners with “guaranteed” client following
No salaries, bonuses or guaranteed payments
No equity dilution
Cross-selling opportunities
Mike concluded his introduction by focusing on the increase in cross-selling opportunities brought
about by such arrangements:
“The lawyers are incentivised to cross-sell immediately. They get paid immediately. If John makes a
referral into a bit of a top 50 law firm that isn’t outsourcing focused…then that work gets done by
Corporate, billed next month and John gets paid! The incentive is transparent; it’s obvious, it’s
immediate. Having a few people in your firm with this arrangement actually helps your cross-selling.”