Consider the impact on your loyal incumbents, not just from the financial perspective, but far more importantly from the morale/esprit dimension.
Primary among the distractions to sound economic analysis is embracing the fallacy of sunk costs, or the error of putting a current economic value on expenses committed to in the past which can’t be recovered no matter what you do. Again, our drizzle-maker friend:
Let us look at just one of these [financial misconceptions about lateral partner economics]: The notion of ‘spare desks’. The firm has paid the rent for the building, already has the furniture and is already committed to lighting and heating the space, so slotting a new partner in is just using up sunk costs, yes?
True, but failing to apportion any part of that cost to the new partner is gifting them an invisible subsidy. [Incumbent partners] Clive and Derek have a right to expect that Bob contribute his share of costs, otherwise they are simply paying for the newbie. To look at it another way, perhaps the partner you are busy de-equitising because he is not profitable enough would be more profitable if he did not have to bear a share of the costs of the 12 laterals you took on last year who are busily draining your war chest through underperformance.
Back to “Clive and Derek,” our hypothetical incumbent partners. How do you suppose all this lateral partner romancing energy makes them feel?
Finally, isn’t all this lateral partner musical chairs a zero-sum game for our industry, that is to say, we the firms, but with an enormous toll paid to the recruiters in the process?
Why should we continue to enable a practice that’s tantamount to a fruitless arms race for us, the sovereign nation-states supposedly calling the shots, where only the arms merchants win?
Having been a lateral (twice), and having been an interviewer of laterals at firms large and small, I offer a couple of thoughts on why some firms pursue laterals, on what reasons make sense, and what reasons don’t.
1. Firm has a practice group in one area and wants to extend its reach to existing clients by offering a closely related area. For example, a firm that represents real estate developers in transactional and financing work recruits a land use and zoning attorney to join the group, who can work on the land use parts of the same transactions. This makes sense.
2. Firm has a practice group led by rainmakers who are bringing in not just more work than the group can handle (hire associates), but more work at a higher level than the group can handle. The solution is to recruit an experienced lawyer in the same field to join the group. This makes sense.
3. Firm has a cadre of underperforming (or overpaid, depending on your point of view) partners whom management doesn’t want to cut, confront, or re-compensate, and thinks that if it can recruit some high performers, the problem of the underperformers will get diluted down to where the other partners stop complaining. This does not make sense. Problems don’t go away just because the firm has larger offices.
4. Firm wants to make it back onto a top ten (or 50, or 100) list on size rather than merit, and hires lawyers simply for bulk. This is expensive advertising.
Of these the one that most mystifies me, and the one I’ve seen most often, is no. 3, where a firm recruits more lawyers because it doesn’t have the nerve to face up to the problems it is having with the lawyers who are already there.
lateral hiring is a disaster. It’s another effort to add revenue by essentially looking at a lawyer as a generator of revenue. they are primarily not. the answer for BigLaw on revenue is to adopt sophisticated, outbound new business sales divisions. No firms, anywhere, fully have this. But they should. Until the profession understands the value of these divisions (which are the way succesful real world companies generate new revenue) – then this debate is basically pointless. Sure, laterals are a disaster. I agree. By why not focus on the alternatives? the argument’s been won. Law firms are failing because they refuse to learn and implement real world solutions. BigLaw is going to continue to bump along, losing market share. A long, slow decline. And sadly no spirit or interest in finding real solutions that exist. Tragic.
Here’s my question about the “maths.” Why are you evaluating this on the theory that the new lawyer needs to add to profit the first year? Why isn’t the investment in a new lawyer evaluated like an investment in a piece of equipment?
You don’t necessarily expect the new computer system to pay for itself in the first year. Isn’t it rational to look at that first-year shortfall you identified as an investment, not an expense, so that you can make it up over time? Happy to be corrected . . . .
Bob:
Thanks for contributing.
Believe me, I do not think laterals need to bring in big revenue (and we can only cross our fingers, given the sorry state of what passes for “business intelligence” in law firms, profits) in year one or even years one through five inclusive. Firms make strategic investments with no short-term ROI all the time, and God bless those that do.
I was only trying to address the terms of the lateral arms’ race on its own ground, if you will, because managing partners will always tell you it’s how they plan to grow revenue (and crossing their fingers, profits).
In fact, changing the subject altogether from buying (or more realistically, renting) revenue to placing knowing strategic bets on the firm’s future would be immensely welcome.
Bruce