On Dec. 14, National Law Journal editor in chief David Brown discussed the current state of the lateral market with Lynn Mestel, one of the nation’s most prominent legal recruiters, and with the chairs of three top firms — J. Warren Gorrell of Hogan & Hartson, R. Bruce McLean of Akin Gump Strauss Hauer & Feld and Thomas Milch of Arnold & Porter.

Among the questions: Who’s getting hired?; what practices are showing particular strength?; how are compensation issues being addressed?; are firms picking up partners who’ve been laid off?; are individual and small group hires going to be the norm?; and what of the merger of Hogan and U.K.-based Lovells? Will other firms follow suit?

The panel’s verdict: The lateral market is exceptionally hot at the moment — though almost exclusively for business-generating partners.

What follows is an excerpt from a transcript of their discussion, edited for length and clarity.

DAVID BROWN: How do you see the current environment for lateral recruitment, what impact has the recession had on negotiations and hiring?

PARTICIPANTS

J. WARREN GORRELL JR., chairman, Hogan & Hartson
Chairman of the firm since 2001, Gorrell serves as co-director of the corporate, securities and finance practice group.

R. BRUCE McLEAN, chairman, Akin Gump Strauss Hauer & Feld
McLean is a veteran litigator who headed the firm’s litigation group before taking over as chairman.

LYNN MESTEL, president and founder, Mestel & Co.
Mestel is a top legal recruiter based in New York. She founded her attorney placement firm in 1987.

THOMAS MILCH, chairman, Arnold & Porter
Milch focuses on environmental law and toxic torts and previously chaired the firm’s environmental practice.

WARREN GORRELL: Clearly, there are a couple of things that are going on caused by the financial crisis. One, firms are looking to get rid of people who don’t really fit strategically into what they’re trying to do. In a sense, you wonder why you spend a lot of time talking about lateral hiring. The other is, of course, some firms are quite challenged today, and partners are looking for other opportunities where there could be a better platform or safer financial situation or whatever. So from our perspective, anyway, we’ve remained very focused on continuing to hire laterally. I think this time last year we had probably hired 30 partners, and this year we’ve only hired 19. We’ve still been very focused on trying to bring in high-quality lawyers and groups that meet our needs. We typically are skeptical when something just comes across the transom because you don’t really want to inherit somebody else’s problems.

BRUCE MCLEAN: We are seeing more résumés of partners from good law firms come across the desk than we’ve seen in the last five years, and this is true in every place we have a concentration of lawyers. It’s true in California, in Texas, in Washington and in New York. So the number of opportunities we’re getting to look at is probably, by some significant margin, higher than what we’ve seen….[Why?] There are firms realigning their practices, and that has caused a number of partners to be forced to relocate. Secondly, there are partners that are concerned about the stability of the platforms they’re on and, in those instances, there are some really highly talented people in the marketplace. And then, third, there’s sort of just the general level of people changing position at the end of the year. Also, I think as people have looked at how big law firms reacted to the downturn. One of the things I think firms did was to protect their most important partners — not just protect them in terms of income, but protect them in terms of their position in the firm, protect them in the kind of support that they’re getting, protect them in emotional ways. We haven’t seen as many [of] the types of laterals that would have been historically described as blockbusters, people with huge portfolios of business and significant strategic positions in their firm in this deluge of résumés we’ve seen. It’s more often been midlevel partners, some of whom we can tell are in the market not of their own choosing. But there are also partners in the market because their firms have had a downturn and, in the realignment of compensation, to protect the most talented partners, some of these folks have been left out. Their feelings are hurt, or they’re angry, or they’re just not making enough money and they’re exploring their options.

THOMAS MILCH: The one point I would add is that the market is especially good for firms like ours and others that feature two things that are very important right now in the marketplace. The first is firms that have a very strong regulatory practice and a strong Washington element to their practice. Washington is the new Wall Street, right? But I think that the regulatory component and strong litigation practices are attractive and more attractive now than perhaps they were a few years ago to potential laterals. Secondly, I think individuals who have successful practices are attracted more than they were in the past to firms that feature stability and an element of collegiality. I think that both of those features are ones that have been a little bit less rewarded in the marketplace in recent years. I think that firms that have stable growth, but maybe have not been as high-flying [as] others — but that seem to do well every year and have a good atmosphere to practice in — are valued a little higher now than they may have been three or four years ago.

LYNN MESTEL: The market for lateral partners is the most robust it’s been in 22 years. The downturn has caused lateral hiring to become the most direct and possibility the only source to increase revenues. That’s because organic growth for your own client base is just not happening. Your clients are — actually, we all know why without getting into the economics of it. So what’s happening is that the firms are pushing down their bottom producers. That’s the first thing that’s going on. The second thing is that a lot of firms have some very, very big producers, and big producers stay if they’re well paid. But big producers also stay if the firm is well run, and if their share values are actually increasing or at least staying the same. In other words, you can pay a big producer out of your comp system, but that’s not going to make them feel secure. So you have a lot of people who are looking at the valuation of their shares to see what the next valuation of shares is going to be. And then, finally, I think what’s also happened to the lateral-partner market is something that partners have never before experienced — they are deluged with calls from headhunters. Most of the headhunting community was focused on associates. The associate market is now dead, and all of those people in the headhunting community are looking to make a living, and they are cold calling partners, partners, partners. So your partners probably get four to five times more calls today than they ever have.

BROWN: What are the hottest practice areas for recruitment?

MESTEL: I’m really happy to say that we know longer get the command from Ishmael to go find the great white M&A whale….In terms of what’s easy to move, what’s transportable, it goes more into industry areas like insurance and energy. Those seem to be able to pick up, and I would say practice areas that are pretty portable are labor, employment, real estate to some degree — especially when it’s related to clients. And I would say the insolvency and the regulatory pieces. The problem with that is it’s so sought after that it’s really almost overvalued.

BROWN: It seems that you’re all looking for some of the same things. Doesn’t that put you in real competition with each other and the same folks? At the same time you’re facing financial pressure to keep costs down….

MILCH: I recently was visited by someone who is thinking of leaving the government in a field where we have a particular interest and that individual said to me, “you know, I know Hogan & Hartson already has a practice in my area, and I’d really like to go to a place that doesn’t have a practice in my area.” So sometimes you’ll compete, and sometimes you won’t compete depending upon the mix of practices and…the individual’s ambition.

GORRELL: I think our key is recognizing what we need and whether it’s a good fit for the candidate. We are being very focused on the things that we do well — or the things that are naturally extensions of what we do well — as a basis for trying to go after people and convince them that this is the place they want to come. I think there are two other things that are going on now that people are competing with each other over. Five years ago, three years ago, people, all they really wanted to talk about — to the extent they talked about money — was what are your profits per partner and what does your income statement look like. No one ever focused on your balance sheet. Well, today, what are people focusing on? They’re focused on their balance sheet. They like the fact that Hogan & Hartson doesn’t borrow more than $25 million at any one time. Even though we’re a $900 million business, the partners have no liability for any lease or any other obligation and the place has $100 million of capital. That’s a pretty strong financial platform. The second is: What is your track record with laterals? We have had a lot of experience in lateral hiring. That’s actually one of the things that we talk about is: Are we successful in attracting the right kind of people — not only with their practices, but are they the kind of people who you want who are going to fit in and thrive in your organization and will they be integrated and be successful? Since I became the chairman in 2001, we’ve hired 230 lateral partners and 195, or 85%, are still there, and that’s a pretty strong track record, we think. Some of the ones who left, you know, they went to be the general counsel of a client or whatever. So it wasn’t [a] failure.

BROWN: Bruce, are you seeing the same thing?

MCLEAN: I think that there are harder questions about the bank balance sheet. The lateral wants to know that they’re going to fit in with you and your firm’s strategy, if they’re going to be well supported, if there is a history of success.

BROWN: So profits per partner don’t matter? Is that what we’re saying here?

MCLEAN: I think that profits per partner will always matter, but I think that a stable performance is more important than one that’s erratic. So you have seen firms in the past three or four years that have had the peaks of high profits per partner and then the depths of 20% reductions in their profitability. I think that those are the kinds of firms that would make people nervous about joining where, I think, as Tom was saying before, if you have a steady, solid, substantial performance, including profits per partner, that’s going to be more attractive.

GORRELL: I wouldn’t say profits per partner matter a whole lot. I think what’s more fundamental is whether you have a range of compensation that allows you to comfortably attract the type of people who you want and slot them into your system.

BROWN: So if you want a big-name partner with a big book of business, are you willing to go in, bust the bank and maybe fight internal battles to get the person?

GORRELL: I don’t know if you’re asking about Bob Bennett [a top Washington lawyer and longtime Skadden, Arps, Slate, Meagher & Flom partner who moved recently to Hogan & Hartson]? But Bob Bennett can come to Hogan & Hartson and fit comfortably into our compensation system. Honestly, we don’t have a lot of really any significant dissension over hiring people today. People understand we’re in this for the long run. We have a strategy, we’re executing on it, and people understand all the due diligence that’s done. When we propose a partner, they fit into our compensation system. We plan the strategy. So it’s not like breaking the bank for anyone. You’re doing something that’s consistent with what you’re doing with your existing partners which, of course, is critical for it to be successful.

MESTEL: You know, the three of you are fortunate and put a lot of hard work into being in this position where you have that kind of range of profitability and you can slot these people in. But for firms that produce a very high level of work and yet can’t get their high-end compensation to comfortably fit, to attract rising stars, to attract people with large portable books of business, to attract big names in the industry, those are the ones that are really kind of under the gun and they are making probably much more dramatic change in their law firms if they want to compete in this lateral market. And, again, they have to compete in the lateral market because, if they don’t, their own client base is not growing. They’re not going to get any more legal work from their own clients. In fact, everyone’s own clients are putting tremendous pressures on law firms for pricing which, again, is going to affect the whole lateral market and how firms are able to react to these clients.

BROWN: So how do those firms make that sale and keep their other partners happy?

MESTEL: They fail. It’s really how it works.

MILCH: I think we’ve been fortunate enough to get in the last couple of years…individuals who made very good money, but they were also focused on the income of other people on their team. They were very focused on going to a law firm where somebody who did not bring a lot of business was highly valued by the firm and would be compensated in a fair way and had a future. In many firms the rainmaker does very well, but the people underneath the rainmaker do not do at all well. And when you can offer somebody a firm where not only will they do well, but that other individuals who work with them will do well, that is a big factor to significant business-getters.

BROWN: So if this is working for you, how did you get there? Because, as Lynn says, a lot of firms are failing us. They can’t make this happen. Can you walk us through the process of how you got to the place you’re in?

MCLEAN: I think Tom’s example is a great example. If you find a partner in a lateral market who is as concerned or more concerned about how the people that work on that partner’s team will be treated than they are about how they’re treated, that’s like the gold standard in lateral-partner recruiting. So the only question is how do you get your firm in a position where you recruit those kinds of people and you don’t recruit the kinds of people where you’re going to be in an annual negotiation over how much money they wish to be paid given the size of their practice. I think, over the long haul, what you want to do in trying to build your firm is to hire people who’ve got that kind of mentality.

MILCH: One of the best things we did in the last few years is to emphasize integration to a much greater degree than we have in the past. We have a team of people that includes both lawyers and nonlawyers who are very focused on the integration process and what happens after somebody comes to the firm. I think it’s fair to say that many years ago people would come to our firm, they’d walk in and they’d turn on the lights and suddenly all those great support people would disappear. We try very hard to integrate them by having them very actively involved with our marketing group, having them very actively involved with a team of partners who both work in their area and also don’t work in their area. What that does is it helps us get people to stick to us. It helps us to maximize the benefits of having them join us. But it also helps us enormously in recruiting the next lateral group because, inevitably, those are our ambassadors to the future person who might join us.

MESTEL: All the soft stuff is nice…but the tail wags the dog. Really, partners who have good books of business have very, very important service partners around them that, by necessity, must be properly compensated. But in the final analysis, the relationship that the lateral has with their client base is the most important — and I’m not discounting all the other things that everybody has said because every single one of those things are important, too. But in the final analysis it’s about the relationship with that client base, where that client base is going, and whether that client base is going to easily transition to whichever firm that they’re going to join. And I really think that, in terms of looking at the lateral market, I would like to ask a question to these gentlemen, if I can, which is: How do you evaluate a lateral partner’s relationship with the client base that you are seeking to now integrate into your law firm prior to their coming to your firm? But how do you do this without breaking any partnership rules, because it’s probably the hardest thing — I don’t know how you can possibly really do it.

MCLEAN: I’m going to now talk about some of the issues that I think are related to this, including some of the mistakes that a firm can make when they only are looking at that book-of-business category. There are client relationships; it’s part of the package. How do you deal with that? It is the biggest problem with lateral recruiting — the ultimate match of how much business is pulled over and whether those solid client relationships are real. So a couple of things: First, one of the things we look at in terms of laterals is whether we have a common client. When you have a common client, it’s really easy to get a read. In fact, you may have a read before you actually go through the recruiting process. That’s kind of easy going — where there is some level of experience that can give you a level of comfort about the quality of the client relationship. The second thing is that we have a fairly extensive lateral-partner questionnaire. What we look at is the longevity of the client relationships and sort of sustainability. I think we tend to de-emphasize partners that have had one really good year with a client, because they’ve had a single big matter — where it’s a transactional or a piece of litigation. And we discount maybe a relationship with a new client as opposed to an old client. We take a look at the sustainability of the client relationship [when] trying to make a determination about whether the client has a rich, deep stable relationship with a lateral partner.

GORRELL: Fundamentally, you have to be satisfied that the person is someone who you want to join your firm. I mean, I can think back of a guy who we hired 20 years ago. He came over and his largest client didn’t come, and it surprised him and, of course, it surprised us. But he was the kind of guy about whom we said, “hey, this is somebody who really fits in, we can make something of this.” We were patient and it worked out great. He came to Hogan & Hartson for exactly the right reason, and it worked.

BROWN: Warren, your firm is in serious talks with Lovells about a merger. This is sort of an instant lateral move for hundreds of lawyers. First of all, why not grow through lateral movement? Why go for such a large-scale merger at this point?

GORRELL: Well, when I agreed to help you guys out today, I didn’t realize this would be the day we’d be voting. [Hogan & Hartson partners were voting on whether to proceed with the merger. They approved the deal.] So your question is timely. Look, I think it’s fair to say we’ve always had a real aversion to mergers. We’ve actually done three that were largely acquisitions. Our aversion typically has been from the fact that, you know, you get some things that you don’t want in a merger, and you either have to deal with it up-front or you deal with it afterward. Having sort of been on both sides of that with the prior ones, I think up-front is the way to go. But our view of what our firm needs to be and the capabilities we need to have, we couldn’t get there fast enough just by going and hiring groups of lawyers in different markets. We really felt that, with the changing market, there actually is a huge amount of demand for high-quality global capabilities. There’s really not a firm that will have that kind of capability that we will have and, you know, you couldn’t assemble that kind of quality capability in our lifetime. We said we’d have to do it. So when I proposed this to the partners and reminded them of my personal aversion to mergers and told them this was a rather large exception, they got it. You know, we aren’t taking lightly integration. We’ve got a lot of work ahead of us, assuming that this gets approved.

BROWN: Mergers are tough when it comes in integration. What steps are you proposing to take if you merge — assuming the vote goes the way you hope?

GORRELL: I think integration, we’ve always recognized how important that was. We have a partner, and that’s all he does — lateral partner hiring and integration. He works on developing the business plan for people coming in and then integrating them into the practice and socially into the firm. And we’re sort of modeling our efforts here in the same way. It’s clearly practice-driven on a global basis. We had a number of both practice and social things that we’re doing just to get people to know each other and what they do. So I think we probably, all of us, spend a lot of time focusing on connection. Particularly as you get larger, you have to have people be vested in your firm and feel connected to it and, as we do this, really getting people to be connected to Hogan Lovells is going to be a big challenge. We also have a global implementation committee that will be charged with looking at client opportunities, determining priorities, making sure we have the right people in the right places and all of those sorts of things.

BROWN: For Bruce and Tom, would you consider a merger like this for your firms?

MCLEAN: Well, I think — to try to answer this diplomatically, I think that all mergers need to be driven by strategy. So one of the key points that Warren made was that one of the reasons they could do a merger of this size was because the Hogan & Hartson partners bought into the Hogan & Hartson strategy. This was just a big step in the implementation of that strategy. So for our firm — and Tom’s firm, I’m sure, as well — we have our own well-defined strategy and if we found a merger partner that allowed us to take a big step in the direction of the implementation of the strategy, we would definitely enthusiastically explore that. While we haven’t come to the conclusion we have to find a merger partner, do we look at that? Absolutely, we do look at it. I think one other thing that comes into the mix, if you have the aspiration to be a global law firm, do what you’re doing around the world, the idea that you can do that in onesies and twosies on four continents or five continents is just daunting. That’s not the near-term horizon. It’s as far down the road as we can see. I think a firm certainly in a position that we’re in would find that way of executing a global strategy virtually impossible. The only way you can execute a strategy of being a significant global provider of legal services from our present position would be to do that through a merger.

MILCH: I tell my colleagues all the time that no person who’s leading a law firm in 2009 or 2010 could possibly be a responsible leader if he or she did not consider a major step like the one that Hogan & Hartson did. I think that probably in the case of all three of our firms, we’ve been visited by or had meetings with people over many years talking about all kinds of options, whether it be an international combination or a combination among firms that are not [currently] international, but looking at a more global presence by having a bigger firm. There are a lot of pros and cons, and I think in our firm we very much believe in having to respond to the globalization of the practice, and we think there are a number of different ways to respond to that. But one way to respond to it certainly is a major combination. But it’s got to be the right fit and the right firm, and it also has to fit where you are in your own development at that time.

GORRELL: I think that last point is critical: It has to be the right firm, at the right time, and both of our firms have worked together for many, many years and know each other well. But we started off really focused on all the soft things, to use Lynn’s words, because culturally, we had to know that we were compatible. We’re quality, high performance, but we’re committed to diversity, we’re committed to community service — things that those of us in Washington care about, our firms stand for that. It’s not necessarily the case around the world that people do. The one thing you have to say about this is that, if you ever do it, you want to do it from a position of strength and one where there’s a very high level of cultural compatibility.

MESTEL: Because of this economic downturn, law firms are under tremendous pressure now, especially those that have fixed operating costs, a lot of leases, and now that their partnership ranks are down, legal work is down, we believe that it’s just the natural evolution of things. We are going to see more mergers because of the economic climate. Clearly, you’ve got to know what you’re doing, because they can be disastrous as others, unfortunately, have experienced. On the other hand, if it’s done right, you’re really going to be in a much better and stronger place. But it’s going to be happening and, actually, in London now, this transaction is causing a tremendous amount of chatter amongst the British firms — “the Americans are coming!”

MILCH: I recognize that it’s very important to the recruiting industry that mergers be trumpeted. I can tell you that some of the very, very best lateral candidates we’ve seen in the last 24 months are refugees from recent law firm mergers. But I think that the jury is out on exactly the extent to which this will accelerate huge numbers of mergers among the top firms. I do agree that there’s more interest, and certainly there’s a huge amount of interest in what happens.

MESTEL: There will be lots of different law firms resulting from all of this. Different sizes, but definitely some mergers and rollups.

BROWN: Let’s talk about the folks who are forced to relocate either in groups or as individuals. I’ll start with Lynn on this. How hard is it for those folks to actually make a lateral move to get a job….

MESTEL: You mean when they’re being downsized?

BROWN: …that’s right, downsized.

MESTEL: There are some people who have no books of business, and it becomes almost impossible unless they just have a coveted skill set and an excellent reputation. Truly, there’s a lot of tragedy going on right now. Unemployed very excellent practitioners spent decades working God-knows-how-many hours at the practice, and now they can’t get a job. If a lateral has somewhere between a half a million to a million dollars of the business, there’s always a place for them. That’s sort of the good news about the entire legal market. It’s very, very wide and it’s deep and it can handle a lot of these people.

BROWN: Do you, as a law firm, managers, look twice? Do you, for lack of a better phrase, hold it against folks if they’ve been downsized and they’re looking at your firms?

MCLEAN: If you know or you can read into the résumé that a person’s been downsized, instinctively you say, “well, why do I want to take somebody else’s problem?” Some other good law firm has made the decision that this person can’t contribute, and why would I step in to that other firm’s shoes? But, actually, that really shouldn’t be the end of the analysis. Sometimes they’re going to be downsized because the practice is a 30-partner practice that needs to be 25-partner practice. What you also have to look at is how is this person’s skills going to fit into what we’re trying to do. We had a number of very, very successful laterals come into our firm with no portfolio business.

GORRELL: I think it’s a really big red flag that someone else is asked leave. Even if it’s a 25-lawyer practice, you’re wondering why they’re No. 26, and that’s not the way we build our business or see ourselves. Having said that, I think it depends on where the person is in their career. Take securitization. A lot of people are trying to get out of it, because they didn’t have enough work. Actually, there are really good practitioners in firms that were asked to leave that we definitely would look at. They don’t have a lot of portable business today because there is no market for that kind of work. But certain elements of it will come back and you can get some really good people. Outside of something like that, though, if it was just someone who had a litigation practice or a corporate practice, I think it would be a really hard sell at Hogan & Hartson to do that.

BROWN: Same for Arnold & Porter?

MILCH: I think Bruce and Warren hit the nail on the head.

BROWN: Is there anything that, when you hear it coming from a lateral’s lips that is an absolute deal-killer for you, something that makes you instantly say, “you know, this person probably should look at another firm.”

MILCH: If somebody has been a partner in four or five different firms, I think we are all concerned about whether they might habitually jump from firm to firm.

BROWN: Why is that a bad thing?

MILCH: Because the benefits of hiring a lateral are either long-term or not at all, and I don’t think I’ve had any occasion that I can recall in someone that joined our firm, stayed for two years and then left. I don’t think we would view it as a success irrespective of the size of the business.

MCLEAN: I agree that a red flag is going to be sort of somebody who is a serial lateral mover. We don’t like that very well. But in terms [of] the way that an interview goes, if the lead part of the discussion is money, that’s kind of a deal-killer. When we go through lateral process, we want to talk about why Akin Gump would be a better platform, why that partner is moving laterally, why we would be a better platform for them than where they are. We get pretty far down the line before we even know how much business are you going to bring on and how much money do you want for that business. If a candidate accelerates that discussion, wanting to know about the money first, that’s a bad sign for us.

GORRELL: That’s the biggest red flag for us, too. The money discussion happens at the end. In fact, most people don’t come to Hogan & Hartson to make more money today. It’s actually not part of the culture; it’s just not what people are really driven by.

MESTEL: There’s two things that we hear. One is if they want guarantees. We’ve always spent a lot of time explaining that that is not actually a realistic expectation at all. But a lot of people come in and say “I won’t even talk to them unless they’ll give me a two-year guarantee.” So that’s usually — that’s the first flag. And the second one is if they really start spilling out all of this stuff about their current partnership and what they don’t like. If they really hate their current partners and they really have a tremendous amount of tension, that’s a big turnoff because it’s usually that the person themselves has the problem. There is no law firm or partnership that you should be that angry at. It should be a business move and professional, but a lot of people come in and rant.