Steven Harper (Karen Hoyt)
Over the past 25 years, law firm management consulting has grown from a cottage industry into a big business. In a recent Am Law Daily article, “What Critics of Lateral Hiring Get Wrong,” Brad Hildebrandt, one of the field’s pioneers and chairman of Hildebrandt Consulting, provides a comforting message to his constituents:
“Large law firms are weathering the storm of the past five years and continue to transform their businesses to operate with efficiency and agility amid a new set of client expectations.”
Hildebrandt v. Altman Weil
Hildebrandt correctly notes that painting all large firms with a single brush is a mistake. But his general description of most firms today is at odds with the results of a recent survey from another consultancy. Altman Weil’s “2014: Law Firms in Transition” [PDF] contains a summary of responses from 803 law firm leaders (constituting 42 percent of the nation’s largest 350 firms) that includes these highlights:
• “The survey shows clear consensus among law firm leaders on the changing nature of the legal market. … [But] law firms are proceeding without an apparent sense of urgency.”
• “Less than half of the law firms surveyed are responding to the pressures of the current market by significantly changing elements of their traditional business model.”
• “Most firms are not making current investments in a future they acknowledge will be different—and different in seemingly predictable ways.”
• “Only 5.3 percent of firms are routinely looking farther than five years out in their planning.”
The conclusions that Altman Weil draws in this survey comport with those found in its October 2013 Chief Legal Officer Survey [PDF]. That CLO survey asked clients to rate their outside law firms’ seriousness about changing legal service delivery models to provide greater value. On a scale of 1-10, the median score, for the fifth straight year, was 3.
Hildebrandt v. Georgetown/Thomson Reuters Peer Monitor and Henderson
So what are most big firms doing? To put it bluntly: growth through aggressive lateral hiring. Hildebrandt responds to “academics, journalists, former practicing attorneys and countless legal bloggers” who question that strategy. Count me among the critics.
I agree with Hildebrandt that acquiring a well-vetted lateral partner to fill a specific strategic need is wise. What he seems reluctant to acknowledge is that too many laterals have become little more than portable books of business whose principal purpose is to enhance an acquiring firm’s topline revenues.
“Growth for growth’s sake is not a viable strategy in today’s market,” the 2014 Georgetown/Thomson Reuters Peer Monitor Report on the State of the Legal Market [PDF] observes.
Unlike Hildebrandt, the report’s authors observe that most firms are pursuing exactly that approach: “[Growth] masks a bigger problem—the continuing failure of most firms to focus on strategic issues that are more important. …”
Professor William Henderson has done his own extensive empirical work on this subject. His recent American Lawyer article “Is Reliance on Lateral Hiring Destabilizing Law Firms?” concludes: “The data is telling us that for most law firms there is no statistically significant relationship between more lateral partner hiring and higher profits.”
Hildebrandt v. Citi/Hildebrandt
Big Law partners acknowledge the truth behind Henderson’s data. Hildebrandt suggests that statistics “show that more than half of lateral partners are successful.” Presumably, he’s referring to the 2014 Citi/Hildebrandt Client Advisory [PDF] in which only 57 percent of law firm leaders describe the laterals they recruited between 2008 and 2012 as “successful,” down from last year’s 60 percent. (The survey—a joint effort by Citi and Hildebrandt Consulting—even allowed the respondents to use “their own measure of success.”) If those responsible for their firms’ aggressive lateral hiring strategies acknowledge an almost 50 percent failure rate, imagine how much worse the reality must be. Nevertheless, the lateral hiring frenzy continues, often to the detriment of institutional morale and firm culture.
With respect to culture and morale, Hildebrandt rejects the claim that lateral partner hiring crowds out homegrown associate talent. But last year’s Citi/Hildebrandt Client Advisory [PDF] suggests that it does: Comparing “the percentages of new equity partners attributable to lateral hires vs. internal promotions in 2007 … with percentages in 2011 reveals a marked shift in favor of laterals”—a 21 percent decrease in associate promotions versus a 10 percent increase in lateral partner additions.
Nevertheless, Hildebrandt offers this assessment: “In the six years prior to the recession, many firms admitted far too many partners—some into equity partnership, many into income partnership. A driving factor in the number of partners in the lateral marketplace is that firms are coming to grips with the mistakes of the past. Lax admissions standards have been a far greater issue than mistakes made on laterals.”
When I read that passage, it seemed familiar. In fact, Chapter 5 of my latest book, “The Lawyer Bubble: A Profession in Crisis,” opens with this quotation: “The real problem of the 1980s was the lax admission standards of associates of all firms to partnerships. The way to fix that now is to make it harder to become a partner. The associate track is longer and more difficult.”
I was quoting Brad Hildebrandt’s own words as published in The National Law Journal’s “The NLJ 250 Annual Survey of the Nation’s Largest Law Firms: A Special Supplement—More Lawyers Than Ever In 250 Largest Firms” in September 1996.
Hildebrandt’s evergreen wisdom is consistent. But is it correct?
“Fool Me Once, Shame On You …”
Evidently, most firms followed Hildebrandt’s advice during the 1990s because the overall leverage ratio at big law firms has doubled since then. His recent suggestion that “lax admission standards” caused firms to make “far too many” equity partners during the six years prior to the Great Recession of 2008-09 is particularly puzzling.
In the May 2008 issue of The American Lawyer, editor in chief Aric Press noted that during the “Law Firm Golden Age” from 2003 to 2007, “partners reaped the benefits of hard work—and of pulling up the ladder behind them. Stoking these gains has been a dramatic slowdown in the naming of new equity partners.”
Meanwhile, the swelling ranks of income partners reflect a different strategy: using the nonequity partner tier as a profit center. The strategy is misguided, but pursuing it has been intentional, not a “mistake.” (Take a look at The American Lawyer article “Crazy Like a Fox,” by Edwin Reeser and Patrick McKenna.)
Even so, Hildebrandt’s words reassure firms that are recruiting laterals for all the wrong reasons and/or tightening the equity partner admission screws. Tough love might better serve the profession.
Steven J. Harper is an adjunct professor at Northwestern University and author of “The Lawyer Bubble: A Profession in Crisis” (Basic Books, April 2013) and other books. He retired as a partner at Kirkland & Ellis in 2008, after 30 years in private practice. His blog about the legal profession, The Belly of the Beast, can be found at http://thebellyofthebeast.wordpress.com/. A version of the column above was first published on The Belly of the Beast.