In 2010 a fast-growing Am Law 50 firm wanted to find out how much value it was getting from its lateral hires. The firm compared the revenues and profits generated by new hires who joined in 2007, 2008, and 2009 with the compensation paid to them. The results were discouraging, according to the firm’s chief, who asked that the firm’s identity remain confidential. As a group, the laterals were just breaking even: "From a strictly financial point of view, we found that lateral hiring had been neither accretive nor dilutive" to profits, he says.
Over the next two years, the firm tweaked its lateral hiring process. Firmwide practice group leaders, instead of local offices, got more of a say in determining lateral hiring goals. Each new lateral partner was assigned a mentor in his or her practice group to help with the integration process. For a lateral’s first two years at the firm, senior management received monthly reports on the lateral’s hours and collections, and there were formalized check-ins with laterals at three-month, six-month, and one-year anniversaries.
The result? Lateral partner additions over the most recent two years have boosted profits modestly, perhaps by 5 percent, the firm’s chief estimated. "I do believe that lateral hiring has made us a stronger, more attractive firm," he says. "But there is no doubt that there are other things that we could do to improve. We keep searching for them, and if we knew what they were, we would do them."
What managing partner wouldn’t? Hence the conundrum for much of The Am Law 200: With vast amounts of money at stake in promised compensation, headhunter fees, and partner time, just about every firm wants to improve its lateral hiring process. Some have modified their interview or compensation negotiation processes. Others have created integration teams or developed complex financial models to project a lateral’s likely profitability or breakeven points. At many firms the process of hiring a fellow partner has been transformed from a decision based on the gut instincts of one or two partners to a formal, centralized process that involves the entire firm.
But despite all of these refinements, the success rate of most lateral hires is unimpressive. Many consultants and the most recent Citi Private Bank Law Firm Leaders survey peg it at 60 percent at best. Firms may be coming up with better procedures for each step of the lateral hiring process, but they often fall short when it comes to implementing them. Due diligence can be rushed or left incomplete; lofty integration plans might be forgotten or shoved aside after a new partner’s first weeks.
"Law firms talk a good game, and they get what they should do or need to do [to improve lateral hiring]," says law firm consultant Peter Zeughauser. "But that doesn’t always translate into execution."
Lateral partners are never cheap. Exist ing law firm partners and firm personnel can spend large amounts of time finding, interviewing, and vetting potential recruits, says Susan Saltonstall Duncan, president of consulting firm RainMaking Oasis Inc. (Duncan also spent a year as the chief strategy and development officer of Squire Sanders.) There can be significant travel costs incurred in the interview and integration process when partners may fly to various offices to meet new colleagues and clients. Headhunter fees can range from 20 to 30 percent of an incoming partner’s annual compensation. And the lag time in the new partner’s billings and collections means that most laterals won’t generate any revenue for the first three to six months of their tenure at a firm. In total, Duncan estimates that a lateral partner’s direct and indirect costs to a firm can easily run as high as that partner’s initial annual compensation, thus doubling the cost of the partner during the first year—and that doesn’t include such incremental overhead as associate hours, office space, and administrative costs.
The bottom line is that even if a lateral is a huge financial success, a firm may not break even on its investment for months, if not years. "For us, a quick time [for our investment in a lateral] to turn positive is six to nine months," says Janice Hartman, global development partner at K&L Gates. "Twelve to 15 months is [considered] fine and is the average today, and there are people who take much longer for a variety of reasons," she says.
In recent years many Am Law 200 firms have formalized their lateral hiring process. Take Perkins Coie. In July 2008 the firm hired Karen Andersen, a Major, Lindsey & Africa recruiter who also holds an MBA, as its first chief lateral recruitment officer. Her mandate is to centralize and organize the firm’s lateral partner hiring. Andersen meets with practice group chairs twice a year to determine hiring needs, and she oversees each step of the hiring process. It is Andersen, not a practicing attorney, who makes sure that the firm runs a conflicts check at the outset of the hiring process. She’s responsible for refining the firm’s financial model and projections for each candidate, and she helps to ensure quality control in the interview process. While the firm previously lined up a series of 30-minute interviews for each candidate—a format that tended to encourage superficial discussions and repetition—Andersen organizes longer group interviews between the candidate and two or three partners. She also gives the interviewing partners a PDF packet that includes the candidate’s biography, the lateral partner questionnaire, any common clients, the firm’s rationale for recruiting the candidate, and which areas should be covered in the interview.
"My hope is to never have an interviewer say, ‘Oh, you went to Stanford Law, so did I,’ " says Andersen. "We want them to be very specific, to discuss business plans."
Other firms have moved to ensure that lateral candidates are looked at skeptically. Following an analysis of lateral hiring in 2010, Seyfarth Shaw saw a need for more partners to play devil’s advocate during the due diligence and vetting process. "We recognized that the [recruiting partners who were] making the presentation [for hiring the lateral] were some of the best advocates in the country, and so to ensure the best decisions, we wanted to ensure that someone was on the other side" of that argument, says Paul Mattingly, national chair of the firm’s real estate practice group. Today, the memos submitted to the executive and administrative committees on each prospective lateral partner must contain a section detailing risks and mitigating factors, and the members of those committees must challenge the rationale for each candidate and probe the details of each candidate’s resume and assumptions behind his or her business plan and projections.
Firms are trying to be careful as well when it comes to setting a lateral’s pay. DLA Piper removes the lawyers responsible for recruiting a potential lateral from the negotiations over pay, says New York managing partner Peter Pantaleo. "It’s really difficult to recruit someone and then try to negotiate compensation," he says. "You can get excited about a person and [just] want to do the deal." The firm also refrains from guarantees, instead slotting candidates into its point chart according to targeted performance. The firm then can use bonus pools to compensate laterals at the end of the year for materially exceeding that expected performance, Pantaleo says.
Integration is another area where firms are taking care. Assigning new laterals a mentor in their practice to help navigate and assimilate into the firm has become standard practice at many Am Law 200 firms. For the last nine years, K&L Gates has gone a step further and assigns a four-person team to each new partner, says New York administrative partner Elwood "Woody" Collins. This team consists of the lateral’s office administrative partner, a second partner in the office, a third partner in the same practice group but in a different location, and a marketing professional in the business development group. That group must deliver a written progress report to the management committee every three months during the lateral’s first 18 months, Collins says.
All of these efforts notwithstanding, it’s unclear whether firms have really improved their lateral hiring. With few exceptions, most law firms are loath to quantify their success rate with laterals publicly. (K&L Gates’s Hartman was one of the few to offer a number on the record: She estimates that 80–90 percent of the firm’s hires are successful.)
In fact, "success" in lateral recruiting is a nebulous concept, many lawyers say. A successful hire can be defined as a partner who delivers on business projections made during the interview process, one who brings over a certain number of clients or matters (or expands work being done with current clients), one who establishes the firm in a new practice area or locale, or even one who is simply a good citizen and team player.
But even using a generous definition of success, many law firm leaders privately concede that there is still much room for improvement. "Quite a number of managing partners and chairmen will admit that they think they’re doing well if 50 percent of the hires over the past three years are succeeding," says Ward Bower, a principal at Altman Weil Inc. A 2012 survey of managing partners by Citi Private Bank showed that law firm leaders viewed an average of 22 percent of the lateral hires who had joined their firms between 2006 and 2011 to be "very successful," while 38 percent were seen as "successful." (The remaining hires were seen as "break-even" or "unsuccessful.") These results are likely inflated, says Dan DiPietro, chairman of Citi’s Law Firm Group, since the survey allowed respondents to define success according to any criteria of their choosing and didn’t require firms to submit supporting data.
In large part, it’s a problem of implementation, consultants say. Take the lateral partner questionnaire (or LPQ, as it’s known colloquially). Over the past decade most firms have developed comprehensive lateral partner questionnaires that ask candidates to detail billings, rates, clients, and matters, among other financial and personal information. The LPQ is often the backbone of a law firm’s due diligence, and it can reveal potential issues or weaknesses. But the document is often time-consuming for laterals to complete, and it’s not uncommon for candidates to resist filling out the form or to turn it in with missing information. Firms anxious about losing a promising candidate to a competitor may extend an offer based on an incomplete questionnaire, Zeughauser says. In the same way, assigned integration teams or firm mentors may sound great, but in practice, they often eschew any real accountability for integrating a new partner, he adds.
That lack of discipline can extend to compensation as well. "There is a real tendency to overpay," says Altman Weil’s Bower. In most cases, laterals won’t move unless they are going to make more money, he says. But the economic performance of the hiring firm may not be very different [from the candidate's current firm], so unless that partner was underpaid, the hiring firm will be paying more for that lateral than it would pay a homegrown partner of comparable productivity. "In the old days, firms could overpay people for a few years, and [the legal market's overall revenue and rate] growth would make up for it," Bower says. Today, heightened competition and pricing pressure means there is much less room for error.
And then there is the challenge of managing expectations. Laterals with large Rolodexes and lucrative books of business may—or may not—be able to bring over key clients or build new practices, law firm leaders say. And even highly profitable lateral partners may have a limited impact on a firm’s overall profitability. "There is a lot of knee-jerk lateral hiring," Duncan says. "Firms need to be realistic about what they can achieve with lateral partners." But as is the case with improving the lateral hiring process itself, that’s easier said than done.