In a low demand environment, law firms have taken to hiring laterals as a method for gaining market share with 93.7% of firms reporting the pursuit of lateral acquisition as a growth strategy.
This is a trend that is not fading, as market pressures continue to mount and competition becomes fiercer lateral hiring continues to rise, growing 36% since 2010. That is cumulative growth. According to Altman Weil, when isolating the trend to last year alone, 85% of law firms reported adding laterals in order to bring new business to the firm.
Growing revenue through the procurement of a lateral’s book of business as well as the expansion of expertise within the firm has yet to prove itself in the marketplace. A recent study found that for most firms there is no statistically significant relationship among lateral hiring and higher profits, which suggests that growing revenue through a lateral acquisition strategy is diluting profits rather than increasing them.
That is not to say that lateral hiring as a growth strategy is rendering poor results for everyone; for the majority, however, the results are mixed. In fact, the same study found that the odds of a firm having above average growth in profit per partner three years out from hire is less than 50%.
The strain on profitability comes from a few angles. In terms of the investment, according to a report by ALM Legal Intelligence and Group Dewey Consulting, the estimated cost of laterals for the Am Law 200 is $1.3 billion in compensation. With such a high price-tag there is a lot of pressure for firms to recoup their investment, but laterals are not necessarily delivering. According to the same report, only 28% of candidates are delivering more than their promised book of business while 30% deliver less than half. Furthermore, Altman Weil reports that only 47% of firms lost lawyers who took business with them in the same time frame. These results highlight that a large portion of lateral candidates are failing to transfer promised portable business to the new firm.
Another issue when attempting to convert lateral hires into revenue generators is the failure of firms to do proper due diligence, which according to the recently released 2016 Law Firm Risk Roundtable Survey is in part attributed to the former firms’ security, confidentiality and data policies prohibiting adequate disclosure to evaluate potential conflicts. This may partially explain the low proportion of hires delivering on their promised book of business as outlined above and also contributes to mounting concern around conflict-management within firms.
The same Law Firm Risk Roundtable report found that conflicts are now ranked as the topmost risk management concern among 37% of US law firms, a priority that has grown 15 percentage points in the last two years. As firms get larger, they generate more and more conflicts; and with this growth, it is increasingly more complicated to clear conflicts for all parties. Other issues are at play as well, including clients becoming more demanding in extending the definition of what constitutes a conflict, lack of clarity around “who is the client” (including corporate subsidiaries and affiliates), and the consolidation of clients in certain industries.
Integration for Laterals is Vital
Lastly, inadequate lateral integration programs are standing in the way of realizing lateral potential. Failure to build a program that measures the impact of hiring as well as misalignment between lateral hiring processes and the firm’s strategy are creating a difficult landscape for laterals in which to be successful. Firms are too easily impressed by the size of a lateral’s book of business rather than determining if that business aligns with the firm’s strategy and if the candidate is a good cultural fit. Once a lateral is hired, the onboarding process is less than desirable, with a whopping one-third of firms reporting that they had no formal integration plan. Even more concerning, for those that have a plan, a majority reported that their plan focuses on administrative issues with little mention of strategic planning.
While experiences vary significantly for each lateral and each firm, on average, the difficulties that firms face with lateral hires could be shrinking law firm profit margins by as much as 3%. With the rising popularity of lateral hiring as a growth strategy, the results illuminate the difficulty of pursuing this strategy.
But perhaps it is worth pursuing — especially as market share becomes harder to come by. If done correctly, it can be worth it. Think of the 28% of firms that hired laterals who brought with them more than their promised book of business.
These successful firms are pursuing the right candidates which align with firm strategy — hiring through committees with a clear vision of the needs of the firm and helping the vetting process to ensure a good fit. Other elements of a successful lateral programs include, a strong conflicts practice to assess client mobility prior to hire, but also extending into intake once the partner has been brought on board. Lastly, an onboarding process as well as a culture that supports performance management through accountability and measurement are crucial.
In order for firms to be successful, they need to be able to manage the skills and experience of lawyers in line with their business development goals and broader strategy. With the right tools in place, laterals can be successful within a firm. If a firm can do it well, they will gain market share and emerge as the real market leader with the bench strength to handle a breadth of legal matters.