What It Costs When Talent Walks Out the Door

Illustration by James O’Brien

 

You might think, given all the lateral moves in Big Law, that unceasing turnover is an unavoidable cost of doing business. After all, the business model of elite firms is built on attrition. The vast majority of firms don’t even quantify the cost of turnover.

Well, I have. I’ve collected and analyzed years of data involving lateral movement at numerous U.S. and international firms. The effort has been part of my research into best practices for attracting, retaining and promoting women leaders at elite firms.

Three findings are of particular interest:

  • It costs more money to replace your stars than you probably think.
  • To replace top female talent, it takes months longer and costs more (as a percentage of salary) than it does to woo top male talent.
  • Keeping star lawyers, especially female stars, satisfied at your firm should be a business priority, given the colossal cost of replacing them and the accompanying disruption to business performance. Yet for too many firms, it’s not.

What’s included in the cost of turnover? Salaries, signing bonuses, relocation costs, recruiting costs, administrative time and revenue lost while the position is open all figure into the calculation. Then there are the costs associated with onboarding, credentialing and training. Last and more difficult to quantify are reduced productivity and decreased revenue while a new lawyer’s practice gets up and running.

Let’s say that the revenue lost as a result of the departure of one full-time attorney is $5 million. (For superstar partners in prime practice areas, the figure can be closer to 10 times that amount.) Add to this loss recruitment costs of 9 to 11 percent of the lawyer’s compensation and startup costs (onboarding, credentialing, training, etc.) in the range of 22 to 24 percent of compensation. Using this revenue estimate, the total cost of losing and replacing the attorney ranges between $6,550,000 and $6,750,000.

In the halls of many firms, some whisper that the total cost of losing a lawyer can reach 1.5-2 times annual salary, especially for lawyers in a firm’s most important practice groups. Moreover, talent lost from practice groups that are considered breadwinners—in particular, female talent—can be extremely damaging and more important that one might think. (Among other things, the group dynamic is badly shaken.)

Researchers studying turnover with other service providers offer additional information. A growing body of research links high turnover rates to shortfalls in organizational performance. The more extensive the social capital of the employee who left, the more dramatic the erosion of the firm’s performance.

Other research demonstrates that employers can spend the equivalent of six to nine months of an employee’s salary to find and train a replacement.

Finally, one study estimates that turnover-related costs represent more than 12 percent of pre-tax income for the average company and nearly 40 percent for companies at the 75th percentile for turnover rate.

A Hot Commodity

Firm leaders are beginning to understand that when done right, diversity pays. Law firms with significant numbers of women leaders have a far better chance of solving complex problems, which leads to increased innovation and drives financial growth.

But diversity costs dearly when it’s done wrong—when there’s little effort to retain or promote female talent, and women walk out the door. That’s because, in a profession where leadership is largely dominated by men, women leaders are a hot commodity. One of the ways I’ve gotten elite firms to focus on ways to foster a sustainable, attractive, gender-balanced culture is by drawing attention to the cost of losing top female talent.

A key finding of my research, one that impacts costs, is that it takes longer to replace female talent. The time required for replacing a male lawyer ranges from six to 11 months. Replacing a female lawyer requires seven to 14 months. This finding has implications in terms of cost, revenue loss and loss of performance within the organization.

My research also indicates that the cost of replacing a female lawyer is higher than the cost of replacing a male counterpart. The range varied based on the practice group the attorney belonged to, but the differential is about 10 percent for junior and senior associates and 20 percent for partners.

Specifically, concerning male lawyers, it costs 100-140 percent of salary to replace junior associates; 140-200 percent for senior associates; and 200-380 percent for partners. By contrast, the cost of replacing female lawyers is 100-150 percent of salary for junior associates; 150-210 percent for senior associates; and 210-400 percent for partners.

Here’s another curious thing I’ve found. At many firms, the number of lateral partner hires made over the last 10 years exceeds the number of homegrown partners, especially for women. This need to move to become a partner is a considerable expense to the losing firms and in many cases suggests that firms are overlooking the talent under their own noses.

The departure of top female talent impacts firms in some ways that can be hard to see. It is often felt acutely by the teammates they leave behind. And their impact as role models in a profession with relatively few women at the very top cannot be underestimated.

The Implications

Law firms must size up the turnover risk of specific lawyers, especially top talent. This proactive approach allows firms to forecast an employee’s potential decision to leave. Anticipating this potential loss, the firm can nudge the relationship or the environment to retain the employee, retain a talented workforce and thus maintain a competitive advantage.

And firms must adjust their female-talent strategies to grow and retain female leaders. One of the first steps is to understand the cost and reasons for female turnover at your firm.

Then you need to operate diversity efforts to benefit your firm and retain top women—not balloon the cost of doing business by attracting these stars, training them and then watching them walk out the door.

These approaches won’t prevent every star from making a move to another firm. And you’ll likely need to continue to make some lateral hires, too. But my research suggests that firms can save themselves considerable cost if they take better care of the stars or would-be stars they already have.

Paola Cecchi-Dimeglio, J.D., LL.M., Ph.D., is a behavioral economist and chair of the Executive Leadership Research Initiative for Women and Minority Attorneys at the Center on the Legal Profession at Harvard Law School and a senior research fellow at HLS and Harvard Kennedy School. Email: pcecchidimeglio@law.harvard.edu or @HLSPaola.