Here are some of the highlights, and then we’ll have some thoughts on what it means:
- “Failure” is defined as leaving a firm, as opposed to the more finely-tuned test of whether a lateral achieves net profitability. You could argue that this is overinclusive because some who depart, particularly after five years or more, should be profitable at that point; but I believe the flip side is that many others who stay seriously underperform and may be overall loss-creating. Yes, it’s a rough and ready hurdle, but it seems about right to me.
- Pre-recession hiring was at a high, with 2007 the all-time peak year in the study period; but 61% of 2007 laterals are now gone from the firms they joined.
- Failure rates for partners joining US firms are higher (40%) than at UK firms, but merged US/UK firms perform best of all (25% failures)
- In-house refugees fare very badly, with failure rates of 43 to 55% and “pockets of even greater failure.”
It probably comes as a surprise to no one that strong variations display themselves by practice area. Here are some of those findings, with hypotheses to explain them in parentheses following:
- Transactional work records the highest failure rate in general, with 41% in finance and 31% in corporate failing within three years (could it be that these clients are less “portable” than litigation clients?);
- Real estate, for reasons that scarcely require explanation, took a “clobbering;” from 80% failed after 8 years to 20% after just two years.
- Hiring into narrower specialties (IP, EC/competition, and insolvency are mentioned) do better in general, with white collar regulatory showing the highest success rate. (We imagine this to be the flip-side of corporate/transactional work, where clients are more likely to hire [and follow] the lawyer rather than the law firm.
Contrary to popular wisdom that clients are more likely to follow a team than an individual, there’s no meaningful difference in success/failure between groups and one-offs. Take that seriously next time one of your partners, or a recruiter, approaches you proposing a “can’t miss” team hire. I would approach this pitch with the Scottish verdict front and center: “Not proven.”
So let’s get to the ultimate question: How are we doing and what’s going on here?
Albert Einstein once said that the definition of insanity is doing the same thing over and over again and expecting a different result. Firms with failure rates above 50 per cent – and there are a few – might consider what they are doing wrong rather than just trying to play the percentages and failing.
Having said that, even a 15 to 25 per cent dropout rate, at a cost of £100,000 per hire not including actual losses or background costs while in place, makes it a pretty expensive game. Not only that, but it seems self-evident that consistently hiring lateral partners who do not perform to expectations will degrade firm profitability over time.
Of course, hanging on to your lateral hires is no guarantee of success either. It is worth noting that the failure rate of hires into Dewey & LeBoeuf, pre-collapse, was lower than average and substantially lower than some US rivals that continue, seemingly healthily, to date.
I might also note that one UK firm that has recently suffered a number of departures and continues to post disappointing figures lost not a single one of the lateral hires it has made since 2005 until quite recently, and that several more which look to have had a stable hiring record have posted disappointing results for the past few years. (emphasis supplied)
To me, the most interesting hypothesis of all that can be drawn is simply that something’s going on beyond sheer random luck. If luck determined outcomes, there would be no variations across practice areas or reflecting the “nationality” of the arrival and destination firms (US or UK, and US or UK, producing the four permutations). In other words, you are not at the mercy of the recruiting roulette wheel. Since we know that every firm and their brother is pursuing lateral hiring as much or more than ever, here’s what you can do to increase your odds of success:
- Hire strategically. Hire to fill holes in your capabilities; where there’s pre-existing, strong, acknowledged client demand; and/or where your onboard team is stretched beyond capacity.
- Don’t hire to buy—you’ll likely just be renting, in any case—revenue. Revenue for revenue’s sake is not a strategy.
- If you look at financial metrics before pulling the trigger on a lateral (and if you don’t you’re committing managerial malpractice) a modest suggestion: Focus #1 on profitability, not revenue. You don’t pay your partners with revenue, you pay them with profits, and every firm that’s ever failed has been collecting respectable levels of revenue up until the day the lights went out and even beyond.
- Plan A: Don’t issue guarantees.
- Plan B: Don’t issue guarantees.
- Plan C: If you absolutely positively must, make them:
- Strictly time-limited
- Tied, numerically if possible, to firm performance; and
- Tied, numerically if possible, to individual performance.
- Integrate laterals into your firm’s existing compensation matrix as soon as possible (see A, B, and C above)
- And a final idea: Put each lateral’s internal “sponsor” on formal notice that they will be partially accountable for the lateral’s success or failure, and follow through (yes, this means compensation) by holding them to the results they implicitly promised. This should have two salutary effects:
- It will help discourage promiscuity (“Frank never saw a lateral he didn’t like”), encouraging more finely honed judgment in the longer run; and
- It allocates a disproportionate amount of the pain, if pain there is, on the proximate cause of the pain. Otherwise everyone pays pari passu for what’s primarily one person’s poor judgment.
A last, critical, point, which I would have richly enjoyed making had not Mr. Brandon relieved me of the need: