In these slow-to-no-growth times of sluggish demand for legal services, AmLaw 200 firms pin their hopes on lateral partners to boost revenue and increase market share.
But is lateral hiring helpful or detrimental in the long term? That is the question two law professors who study Big Law raise in a thought-provoking piece, “Is Reliance on Lateral Hiring Destabilizing Firms?” It appears in The American Lawyer’s annual lateral hiring report.
William Henderson of Indiana University and Christopher Zorn of Penn State University report that their analysis of 13 years of data from The American Lawyer on lateral hiring at AmLaw 200 firms shows that it increases revenue but not profitability for large firms. They conclude that it does not make firms better off in the long term.
The American Lawyer, a sister publication of The Daily Report, has been tracking lateral partner hiring at AmLaw 200 firms since 2000.
“As a statistical matter, lateral partner hiring does not reliably improve a law firm’s relative profitability. Among the 20 AmLaw 200 firms most active in the lateral market, the odds of them having above-average growth in profits per partner one, two or three years later is slightly worse than a coin toss,” write the professors, who are also principals in LawyerMetrics, a legal consultancy.
The professors note that lateral hiring used to be regarded with suspicion by established firms because of the worry that it eroded the partnership’s cohesion. They quote Paul Cravath from a 1948 history of New York’s Cravath, Swaine & Moore saying that he avoided lateral hiring because he did not want the firm’s young associates and partners “subjected to the discouragement of seeing someone come in over them from the outside.”
Instead firms preferred to develop talent organically and cultivate future partners from first-year associates. Some firms still take that approach–such as Atlanta’s Bondurant Mixson & Elmore, a highly profitable 33-lawyer firm that is not part of the AmLaw 200–but they are becoming increasingly rare.
Times have changed and the slow-growth economy and sluggish demand for legal services have caused AmLaw 200 firms to rely on lateral hires for revenue growth.
“Decades of relentless growth have conditioned law firm partners to associate growth with vitality and dynamism, often through large incoming classes of associates. In the absence of organic growth, incoming lateral partners provide evidence that the firm is still vital and attractive,” the professors write.
It is a mantra among large law firm leaders that they do not grow for the sake of growth. But hiring laterals can be an uncertain proposition, no matter how much due diligence a firm undertakes.
“Several law firm leaders have also told us that most laterals fall well short of their projected ‘realistic’ revenue goals,” Henderson and Zorn write. “Yet engaging in lateral partner hiring helps persuade partners and practice group leaders, particularly those sponsoring a lateral candidate they perceive to be desirable, that the firm is ‘doing something’ vis a vis peer firms. The only consolation is that the hit-rate for hiring successful lateral partners is low throughout the industry, so firms that do it badly can still maintain their relative position. It is a strange dynamic.”
The data show that lateral hiring has become more common at large firms over the past decade—no surprise there. The proportion of AmLaw200 firms hiring or losing lateral partners in a given year has increased from 70 percent to almost 90 percent, Henderson and Zorn write.
“The market for lateral partners is a brisk one. Since 2000, the volume has varied between 1,900 and 3,500 lateral moves annually, with the volume peaking during the frothy days of 2007 and 2008.”
In 2013, 2,522 partners from AmLaw 200 firms made moves, according to The American Lawyer.
The nature of lateral hiring has changed, however, the professors found. In the early 2000s, it resembled a baseball farm system, where movement was from partners at smaller firms to larger AmLaw 200 firms. Now lateral activity is mostly by partners moving between large firms, more akin to baseball free-agency.
Churn is lowest at the nation’s most profitable firms, with only 1 percent partnership turnover on average at the 20 most-profitable U.S. firms, Henderson and Zorn write. (It’s not clear if these firms are the most profitable firms in the AmLaw200 or the nation’s most profitable firms. This is worth noting because the nation’s most profitable law firms are not necessarily among the AmLaw200.)
Partner churn is greatest at large firms with far-flung offices, which the professors speculate is because it is difficult to find partners with clients that need the services of a global law firm and can afford the rates.
DLA’s Tony Angel—the ultimate lateral hire
Steven Harper, a former Big Law partner turned gadfly, piggybacked off Henderson and Zorns’ article in a post on his blog, The Belly of the Beast, that examines the fate of a very high-profile lateral hire, Tony Angel. He is the global co-chair of DLA Piper—an enormous firm with far-flung offices and noticeable churn—to ask whether laterals help a firm in the long-term.
Earlier this month DLA Piper announced that Angel and Lee Miller would step down as global co-chairs at the beginning of 2015, to be replaced by Nigel Knowles, the managing partner of international business for the firm, and Roger Meltzer, currently co-chair of the Americas.
Angel and Miller will continue to have “important advisory roles,” DLA Piper said in a Feb. 4 announcement.
DLA Piper, which was created by a three-way international merger in 2005, has mushroomed since then into the world’s largest law firm, with 4,200 lawyers and 2012 revenue of $2.4 billion, through an aggressive strategy of lateral hires, acquisitions and mergers with other firms. (It opened an Atlanta office in 2006.)
The firm recruited Angel as global co-chair in Nov. 2011 for a reported compensation of $3 million per year for a three-year term. While serving as managing partner of Linklaters from 1998 to 2008, Angel transformed it from a top Magic Circle firm in London to a leading global firm. DLA Piper, which is structured as a Swiss verein, tasked him with integrating and streamlining its extensive and far-flung operations.
Angel, a British citizen with a residence in Israel, told the Jerusalem Post in January that DLA Piper’s rapid international growth “does not represent ‘scale for the sake of scale,’ but that its current size and [the] umbrella of countries it offers services in allows DLA to ‘wrap itself around the world’s leading multinational companies’ to help them reduce the number of law firms they need to rely on from as many as “200 to as few as eight.’”
Harper casts a skeptical eye on Angel’s short tenure as DLA Piper’s global co-chair, even though Angel will have served a bit longer than his agreed-upon term when he steps down at the end of the year. “Only those who work at DLA Piper can say whether Angel’s brief reign was a success (and why it’s over so soon),” he writes.
Harper acknowledges that both gross and average profits increased for the DLA Piper verein in 2012 (the most recent figures are available) but uses the firm’s drop from #53 to #77 in the most recent AmLaw Midlevel Associate Satisfaction survey to wonder whether its culture is suffering.
Angel’s successor, Meltzer (who is on the board of directors for ALM Media) is also a lateral hire, joining DLA Piper in 2007 from Cahill, Gordon & Reindel.
He told AmLaw Daily after DLA’s announcement that Angel was stepping down that the global megafirm model is working for DLA Piper.
“In a flat market for legal services you’ve got to be able to take [work] away from someone else, and by being in a lot of different places we’re in a position to cross-sell and grab market share,” he said.