Not much—at least not unless you’re a headhunter.

(I’m not going, in this column or probably anywhere, to itemize the transaction costs and other deadweight losses it takes to make this market work, but suffice to say they’re quite material: If you need convincing, just ask your CFO to estimate placement fees, foregone revenue during transitions, lag time in collecting A/R and WIP, integration costs, and general “friction” and lost productivity as everyone is preoccupied with the deal and its aftermath.)

Here’s the bottom line: According to Bill and Chris, “using an arsenal of multivariate statistical methods” (and nobody but nobody does it better than they do in Law Land), they “were unable to find a relationship between a lateral partner hiring strategy and higher law firm profitability.” Nailing down their conclusion is this: For the top 10% of most-active firms in the market (the 20 most active among the AmLaw 200), “the odds of them having above-average growth in profits per partner one, two or three years later is slightly worse than a coin toss” (emphasis mine).

I could end this column right here on this fairly conclusive economic note. But you know that I won’t.

So what on earth is going on here?

As Bill and Chris immediately admit, “perhaps this is telling law firm leaders what they already know,” because managing partners seem to be holding two opposed and inconsistent thoughts in their head at the same time. Statistics from respected surveys (ALM—LexisNexis 2012) show both that:

  • (a) 96% of managing partners reported that more lateral hiring would be part of their firm’s growth strategy for the next two years; and
  • (b) only 28% called lateral hiring “highly effective,” defined as “most laterals have been retained and contributed to business growth.”

To paraphrase with only the slightest of spin: “Key to our strategic plan is to outgrow the trend using a very expensive tactical device that fails to differentiate us from 24 out of 25 of our competitors—and our batting average using this technique is appalling.”

Now, to be fair, Bill and Chris also found that if increasing top-line revenue, and not profitability, is the goal, aggressive lateral hiring indeed delivers outsize topline growth. I think a more interesting question—one Bill and Chris didn’t get to in their article—is whether it increases revenue per lawyer. I had the chance to ask them about this in an email and they responded that it does “nothing meaningful” to anything other than top-line revenue. Chris elaborated:

We’d considered a lot of possible outcomes — RPL, PPP, profit margins, etc. The only thing laterals really moved the needle on was gross revenues. Not surprising at all, since it’s just a “size” effect. But it suggests that lateral partners are neither intrinsically more profitable than home-growns, and/or that they don’t necessarily bring that with them (at 100% yield) when they move. None of these are earth-shattering insights, and many (most?) managing partners would probably say that it confirms their own experience. But it’s nice to have the data on our side as well.

I did my own analysis of the growth in revenue of the AmLaw 100 firms over two time frames, adjusted for inflation and change in lawyer headcount, and here’s what I found, using the starting year (2002 and 2008, respectively, as an index = 100):

AmLaw 100 Growth Revenue Lawyers CPI Real performance
2002—2013 209.0 140.0 130.0 106.4
2008—2013 113.9 112.6 111.7 90.9

In other words, no matter how impressive the AmLaw growth statistics may seem, the “corrected” figures—in constant dollars and constant headcount—show us to be closer to treading water mode than we may have thought. My theory, not to be oblique about it, is that the lateral partner hiring frenzy has been fueling the same illusion.

Shall we return to the door through which we came in?

If our lateral partner obsession is, on all the evidence, irrational, what’s going on here?

Related Articles

Email Delivery

Get Our Latest Articles Delivered to your inbox +

Sign-up for email

Be the first to learn of Adam Smith, Esq. invitation-only events, surveys, and reports.

Get Our Latest Articles Delivered to Your Inbox

Like having coffee with Adam Smith, Esq. in the morning (coffee not included).

Oops, we need this information
Oops, we need this information
Oops, we need this information

Thanks and a hearty virtual handshake from the team at Adam Smith, Esq.; we’re glad you opted to hear from us.

What you can expect from us:

  • an email whenever we publish a new article;
  • respect and affection for our loyal readers. This means we’ll exercise the strictest discretion with your contact info; we will never release it outside our firm under any circumstances, not for love and not for money. And we ourselves will email you about a new article and only about a new article.

Welcome onboard! If you like what you read, tell your friends, and if you don’t, tell us.

PS: You know where to find us so we invite you to make this a two-way conversation; if you have an idea or suggestion for something you’d like us to discuss, drop it in our inbox. No promises that we’ll write about it, but we will faithfully promise to read your thoughts carefully.