The Americn Lawyer’s cover story this month is on lateral partner movement in 2011, with 2,454 partners leaving or joining AmLaw 200 firms, a 22% increase from 2010 and back to the average for the boom years of 2005 to 2009.
We’re here not to emulate National Enquirer type “who’s up and who’s down” (read the article if you want the scorecard), but to examine the industry-wide phenomenon.
To put things in context, 2,500 partner moves means about 5% of AmLaw 200 partners moved. I don’t know if you think that’s high, low, or “who knows,” but I think one partner in 20 per year is a very high rate of change. (For statistics wonks in the audience, it implies that the entire partnership ranks of the AmLaw 200 could move to other firms in about 15 years.)
The Wall Street Journal also covered the story (“Law firms chase growth by poaching partners”) which contained this sobering statistic: Billing rates increased only 2% overall last year, which is probably even with inflation, at best.
What are the putative reasons for firms engaging in this behavior? Let’s go to the quotes:
- “The fastest way to increase volume is to buy it,” Tom Clay, Principal, Altman Weil
- “For us it’s pretty simple; the desire to improve our position in specific markets by adding very specific skill sets,” Frank Burch, DLA Piper’s global co-chairmain.
- “We look for superstars,” John Quinn, managing partner of Quinn Emanuel.
- “Clients and laterals are attracted to us because of the depth and breadth of our global network,” says North American managing partner of Baker & McKenzie Philip Suse.
Lovely words, but isn’t it all about the books of business? Well, yes: Says Clay, “You have to assume about three-quarters of lateral acquisitions are because you’ve got business to bring.” This, we can stipulate, is the heart of the matter.
The problem is, it’s not harmless, as the conclusion of the American Lawyer article notes sharply:
With no sharp economic rebound in sight and competition among law firms remaining intense, the talent wars of 2011 could turn bloody. Jerome Kowalski, a law firm consultant and principal at Kowalski & Associates, says that 2012 could be one of the strongest years for lateral movement in recent memory. “Firms lose a bunch of partners, revenue dips, and the managing partner says, ‘We have to tighten our belts,’ and partners with portable business leave. That’s how firms unwind.”
The question is simple: At what price?
- Notorioiusly, laterals overpromise and underdeliver on their “books;” Managing partners I know well converge on a statistic that about 2/3 of laterals wash out.
- Guarantees, “superpoints,” and other elisions of the receiving firm’s compensation structure, rightly, breed deep resentment among the loyal incumbents. “I’ve been here XX years and I get nothing special; maybe I should threaten to leave!” More than one partner has said this (more or less) to me in the wake of high-profile lateral acquisitions at their firm. Once that seed is planted, it’s hard to forget. (And if you’re married, don’t ever fantasize about how much better life could be if you were divorced; you will have just taken Step #1 to thinking the unthinkable.)
- The seductive pursuit of the superstar lateral distracts management from running the ship and paying attention to the A and B players already on board and toiling away. And just as winning a new client via an RFP or otherwise gives everyone an exotic adrenaline high, this can come at the cost of tending assiduously to your existing clients. Flirting and affairs are exciting and tempting for a reason; but marriage and commitment are what matter.
So we’re thirsting for revenue, and in a static market to boot. This is known in Econ 101 as a battle for market share. You can try to buy it if you will, but the lateral partner seduction dance isn’t even a serious attempt to buy it: At best it’s a desperate move to rent it.
One last Econ 101 observation: All of you out there who believe the lateral partner musical chairs game can increase overall demand for AmLaw 200 services raise your hand. Anyone? Anyone?
I submit this entire expensive gavotte is one big zero sum game. With substantial deadweight losses in management opportunity costs, insults to the morale of your loyal troopers, headhunter fees, and distraction.
If it’s not a zero sum game, what is it? I welcome your dissenting thoughts.