Questions concerning the lateral market, candidates and law firms have been accumulating — the most frequent ones will be addressed this month.
Q: What is the current state of the lateral partner/group market? If the market is changing, what are the reasons?
A: The market is active and shows strong signs that it will continue to escalate. As one may have surmised, the recession had a profound impact on the slowdown in the lateral market in the past two years. Many partners, especially those who were concerned about their firms’ financial stability, left as the recession hit. Other partners, who otherwise would have moved — or at least were open to exploring such a transition — decided it was more prudent to stay in an uncertain economic climate.
The first camp of partners was generally more risk averse. Many expressed the sentiment that they did not want to add more uncertainty to a professional life that was already in flux. For them, it was a much safer play to sit tight and do their best to hang onto their portfolio of work.
The second category includes partners who were on the precipice of leaving, primarily because of changes that were about to be inflicted upon them by their firms. For example, some of these partners were in practice areas that their firms were about to de-emphasize. Other partners practiced in disciplines in which looming rate increases would have imperiled client relations.
The recession had an odd effect on these partners — it almost was as if a magic wand were cast over them that stopped time. Because firms understandably focused on maintaining top line revenue, practices that would have otherwise been jettisoned or de-emphasized were back in favor, as the dollars they generated were now more important. Similarly, practices that were about to be hit with rate increases were spared that fate. In some cases, rates were frozen, and in others, rate discounting (including in firms that normally eschewed such actions) fully opened the pressure relief valve.
As the economy is now showing signs of recovery, the calculus is changing for laterals. Many partners in category one have now regained their footing, and confidence, about exploring a move, as their practices have solidified and appear to be much more portable. The suspended reality bubble in which the partners in category two have been living is also about to burst. Rates are starting to move up — albeit at lower percentage increases than in the past — and the enhanced scrutiny over the viability of certain practices in some firms has returned, too. This has created a “back to the future” scenario for these partners that cannot be ignored any longer.
On the buyer side, some law firms remained active during the recession and capitalized by bringing in some strong performers who should do even better in the days ahead; these firms remain active today. Many other firms were much more conservative and focused on revenue and costs, which was a perfectly sensible approach. These firms were not averse to looking at laterals who fell into their laps, but they generally were not willing to make significant investments during the downturn. These firms are a bit more bullish today and although they have not dived back into the market, are at least wading in slowly.
Q: How has the economy changed things for partners considering a move?
A: There are four principal post-recession changes. First, there are significant changes in firms that cannot be detected on websites, in reported performance metrics, or even in general impressions that exist in the community. Some firms are poised to really take off, whereas others, despite their numbers, are much worse off than many realize. Firms in the latter category have cut or lost many more partners than were reported, or may have used almost every last Band-Aid in their arsenal to stanch wounds, which would be almost impossible for a busy partner to know. As such, the shorthand, pre-recession views of firms that a partner may think are still valid, and may be the foundation for assessing the market, may be outdated, which could be quite problematic if they are used in evaluating a move.
Second, the due diligence that a partner should conduct in looking at prospective firms is now more comprehensive and complex. While one does not need to be an MBA, the range of financial indicators that should be examined has increased well beyond just knowing a firm’s PPP and RPL. Similarly, there are a number of inquiries about operations that should also be made, as these, too, are indicative of financial stability and are reflective of what life may be like as a partner in a firm. Finally, the partnership or shareholder agreement that many do not read, or either skim like they are hurriedly looking at a menu during a quick lunch break, has similarly become more important today.
Third, because firms are much more selective, even when considering partners with good books of business, the game has similarly changed with respect to how many firms, and the type of firms, a lateral should consider in weighing a move. This has lengthened the process for most laterals, and, for someone trying to do this alone, can make it a daunting task, especially if he has a busy practice to maintain.
Finally, the aforementioned changes in firms have made determining someone’s value on the open market much trickier than it was a few years ago. There are certain practice areas that are valued more highly today (in some firms, but not others), some clients that are more attractive than others (to certain firms), and other factors that impact value more significantly in 2011 than 2008. Similarly, the types of deals that firms structure for laterals have changed in most markets. The partner, then, who calls a friend or other contact in another firm, even if that person happens to be in senior management, and strikes a deal on his own, is quite likely to have left significant dollars on the table. The partner also is likely to have structured a deal that could have been more advantageous if he had more in-depth market knowledge.
Q: How have law firms changed in evaluating partner candidates?
A: There are also four primary changes on the law firm side. First, as with candidates, law firms, too, have become much more rigorous in conducting due diligence. The inquiries as to metrics, clients, and others involved (if it is a group move) are more pervasive. The number of lawyers who participate in the interviewing process has also risen in most firms. This is understandable, as it provides a good safeguard in evaluating a candidate. A potential downside, though, is that due to lawyers’ inherent skepticism, it also increases the odds of one or two persons raising an objection that could scuttle a deal that ideally should have happened.
Second, although firms will always look at a top flight partner with a good book of business who is moving on his own, the clear trend, for firms, is to recruit groups. The investment that a firm makes in a group acquisition, in terms of dollars and integration time, can be better rationalized with groups. Additionally, subject to the exception of a solo partner who has a loyal and long-standing client base, groups normally enhance the odds that the lead partner’s work will transfer in a move.
Third, firms have to work much harder, and be more creative today in luring top laterals. The pre-recession strategy of relying on a firm’s reputation, citing performance metrics, and trotting out the same core group of partners to repeat the mantra of “We are _____ (fill in the name of your favorite firm)” often is not good enough now. As noted, reputations post-recession are in flux, so firms need to redefine who they are and make that case anew. The competition among firms is much fiercer for top laterals — particularly because of the impact that they can have on the bottom line — so a fresh approach pays dividends and can be the difference maker.
Finally, in what will become even more important in the future, firms need to become more comfortable in considering candidates who have made multiple moves in their careers. Every firm would love the perfect candidate, who is the quintessential team player, has only been at one firm throughout his career, and has a sizable book. Very few people like this exist, as the vast majority of such people perceive (rightly or wrongly) that they are in the perfect firm and will only be separated from it by death or retirement. Even if that perfect candidate is open to considering a move, the task of moving him, unless it is to a firm with a different platform that is truly needed for clients, is a Herculean undertaking.
Consequently, the field of lateral rainmakers is heavily populated by partners who have moved several times (or more) in their careers. As statistics show that younger to midlevel partners are likely to move even more often in their careers, this trend will only become more pronounced in the future. The upside for firms is that these partners are more proactive, can inject life and enthusiasm into their new firms, have clients that will follow (as they have done so before), and will actually pull the trigger when a good offer is presented. The task for the acquiring firm is to create an environment that is compelling enough that it will become the lateral’s final home. •
Frank Michael D’Amore is the founder of Attorney Career Catalysts, www.attycareers.com, a Pennsylvania based legal recruiting and consulting firm that focuses on law firm mergers and partner placements. He is a former partner in an Am Law 200 firm, general counsel in privately held and publicly traded companies, and vice president of business development. He can be reached at firstname.lastname@example.org..