Shall I itemize the offenses for you?
- By focusing externally on laterals, we risk sending the message internally that those stalwart contributors on the team are second class citizens—we’re not romancing them as energetically, are we? I believe the “romance” analogy applies here with force. What do you do to court a lateral? Have drinks and dinner; introduce him/her to your most presentable and charming partners; dress yourself up—you get the idea.
- Likewise, in pursuing laterals, we’re (by hypothesis) focused on bringing new clients on-board, rather than cultivating and strengthening our relationships with existing clients. Clients will surely be less aware of this—and wouldn’t really care if they knew—than incumbent partners, but you’re choosing to fight a battle which is far harder to win. Roping in a new client is always harder than deepening the ties to an existing one.
As for the “accounting for performance” offenses, the primary one is that we don’t.
As our “drizzle-makers” author writes (selective excerpts, and emphasis supplied):
So, what are we talking about in real terms? Well, let’s imagine an example partner, we’ll call him Bob. A fixed-share equity partner in a mid-tier firm, Bob reckons he has a following of about £1m. He is earning about £300,000. He goes to see a few firms and gets an offer of £330,000, plus a potential bonus if he overperforms.
The firm is thinking that, if Bob is good for his stated following, his recruitment will neatly cover all the bases according to the traditional Rule of Three by which many firms still assess the viability of hires. One third of Bob’s revenue will cover his remuneration; a third for costs, such as property, staff and riotously expensive chocolate biscuits for the client meeting rooms; and a third for profit. It all sounds great. Let’s call it £330,000 for Bob; £330,000 for attached costs, including any staff, property and so on; and £340,000 for profit.
Except Bob, like many lateral partners, fails to hit his revenue target in his first year. Actually, he doesn’t bill anything in the first six months, but then he finishes the year at a decent run rate, billing a total of £500,000, or about half his stated following – not an uncommon experience among lateral partners.
Still, people at the firm are pleased. Bob’s run rate in the last couple of months of Year One is above the rate he needs to bill £1m per year. In many firms, that would most probably be the end of that. At the start of the new financial year, the account would effectively be zeroed and Bob’s healthy new run rate would mean the first-year loss would not be accounted for.
In fact, if we are going to judge the hire fairly we should roll over that loss into the next year and add it to his target, making his Year Two target £1.5m – three times what he billed in Year One.
Let’s imagine he puts in a sterling effort in Year Two and bills £900,000. Now, that would cover his salary and costs quite comfortably and make a small contribution to profit – if we were starting at zero. But, of course, we are not starting at zero. So instead we have a £600,000 undershoot on our combined Year One and Year Two expected revenue.
Looked at another way, if we assume Bob’s remuneration is not going to rise over, say, four years [but assuming 3% inflation and a goal of 5% annual increase in PPP], our Bob is going to have to bring in around £4.2m in his first four years just to cover his costs and make an average contribution to profit.
This starts to look brutal. If Bob bills £500,000 in Year One, that leaves £3.7m to bring in over three years, or £1.2m-plus a year. If he bills £900,000 in Year Two, that leaves £2.8m for the last two years, or £1.4m a year. And let’s not forget that, at this level, Bob is merely maintaining, not enhancing, firm profitability, which is not quite the point of lateral hires.
How many firms have done these “maths?” Has yours? If not, why not?
We’re not done.
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