When a large number of smart, accomplished, ambitious people seem to be behaving in a way that makes no rational sense, there has to be an irrational explanation.

I’ve written and spoken before about my overall attitude towards aggressive lateral partner recruitment. As Calvin Coolidge reportedly said, leaving church and asked by a reporter what the minister said in his sermon about sin, “he’s agin it.”

So with me and lateral partner recruitment as a “strategy.” As far as I’m concerned, the burden of proof is decidedly on the advocate to show why this lateral hire can beat the odds, and steep odds they are. (See Our Arms’ Race 1 and Our Arms’ Race 2.) And when I say “burden of proof on the advocate,” I also mean accountability: As in $$.

Rare is the lateral who doesn’t have one or more “sponsor” in the recruiting firm: “We absolutely positively have to have Dick; now! He’s the greatest [trial lawyer/M&A guru/tax genius] I’ve ever seen.” Well then, if Dick is so great, we’re sure you wouldn’t mind agreeing to have, say 10% of your compensation, plus or minus, over the next three years depend on how Dick works out. Lawyers, however, positively recoil at the mention of accountability, so you may file this advice under imaginary if you like. But think about how Sponsor A and Sponsor B would be far more invested in Dick’s success if you struck this deal.

Now we have Bill Henderson and Chris Zorn’s cover story in The American Lawyer, “Is Reliance on Lateral Hiring Destabilizing Firms.” (Disclosure: Bill and Chris are both friends, but their work is their work and we haven’t discussed my writing this column; they’ll see it when you do.)

Their article’s “hook” is a spectacular and nuanced analogy to evolutionary theory, invoking the concept of “Fisher’s runaway,” where a trait that makes an individual more attractive for mating can work to reduce the species’ survival rate overall—the classic example being the peacock’s tail, which attracts peahens, but also absorbs disproportionate nutritional resources, attracts predators both large (it’s conspicuous, to say the least) and small (mites, fungi, bacteria), and makes flight, on the ground or in the air, laborious and slow.

The analogy is simple: Law firms can perhaps increase their own attractiveness in the marketplace in the short run by aggressive lateral recruitment, but it seems to be making most large firms worse or no better off in the long run.

The baseline facts are not in dispute:

  • lateral partner hiring has increased ever since American Lawyer Media began tracking it in 2000: from 70% of firms to 90%, with from 1,900 to 3,500 lateral moves every year—the peak years were 2007 and 2008, which should surprise no one;
  • to the extent there’s any discernible pattern to all this Brownian motion, lawyers seem to be sorting themselves out into higher- and lower- intrinsic value practice areas, with specialists in M&A, white collar, private equity, and securities enforcement (areas “in close proximity to the C-Suite,” as Bill and Chris nicely put it) generally migrating from lower to higher RPL firms, and those in labor and employment, T&E, and regulatory compliance moving to lower RPL firms; and
  • “churn” is highest at large, geographically distributed firms—close to 10% at some firms in some years—as compared with the most profitable firms, where it’s ~1% among the top 20 firms in profitability.

They also describe a change in the overall dynamic of the market for laterals since 2000: Originally it resembled major league baseball’s farm system, where lawyers from firms outside the AmLaw 200 or in the second hundred firms tended to move “upstream” to larger firms, but recently it far more closely resembles the free-agency market within MLB, as partners move between firms with comparable profitability.

So what has all this churn accomplished?

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?

I believe the explanation is one part psychology and one part desperation necessity. Consider:

  • From the Reagan/Thacher era at the latest, and arguably starting even earlier, BigLaw as a whole was indeed on a growth tear. For perspective, the largest law firm in the country in 1965 had 125 lawyers; in the most recent NLJ 350 tables, Firm #350 was within a dozen of the same number.
  • The consequence is that virtually anyone above junior associate level has experienced that growth run first-hand and shelves of behavioral economics literature would tell you this has conditioned them to set their expectations for more of the same.
  • We as human beings and as organizations find growth dynamic, exciting, vital. It’s more exciting to launch a new brand than to reconfigure an old one; to open a new office than to strengthen an existing one; to land a new client than to win a greater wallet share from an existing one; and to hire a new lateral than to cultivate home-grown talent. Having an affair is a thrill; strengthening your marriage takes actual commitment and follow-through. Managing partners and hiring partners are exempt from none of this.
  • Lawyers by predilection, training, and selection are insecure. Validation as evidenced by success at an external courtship is a powerful narcotic.

We need to break the habit, to “just say no.”

You’re going to tell me we benefit from the rejuvenation of incoming immigrant blood with fresh perspectives. As a native-born New Yorker, I resoundingly agree. But look at corporate America, where top-level turnover in the form of de novo recruits from outside the company is actually relatively rare; promotion from within is always preferred, and the default question when a vacancy occurs is whether anyone already on the team can fill the gap. Fresh perspectives are great; but is that really what any of us think lateral partners bring? Of course not; the last thing we’re expecting (or rewarding) is temerity. We’re looking for revenue, pure and simple.

Or you’re going to tell me laterals make sense when they’re moving to a better “platform.” (I think of “a better platform” as the incessant and pounding refrain in that catchy and well-known Hollywood musical composition, The Headhunters’ Chorus.)

A better platform is indeed a valuable goal—the one time in 20 it’s actually true. I file talk of better platforms in the same mental space I reserve for vows to quit smoking and lose weight: Great idea, but good luck with the execution, pal.

Finally, I mentioned “necessity.”

I’ve written, and Bill and Chris evidently agree, that BigLaw has moved into a phase of fighting over market share. I needn’t dwell on this, or on the twin disruptions of disaggregation and substitution assaulting our citadels. If you regularly read Adam Smith, Esq. you can fill in the here-truncated analysis on your own.

So managing partners, practice group leaders, executive committees, and noisy gorillas in general, agitate for lateral partner hires: Because it’s a known lever that’s readily to hand and which has worked in the past. It shows we’re doing something, dagnabit.

Is it even possible for a lateral recruitment strategy to make sense?  Well, of course.

One of the scarcest of commodities in our world is the gifted partner who can actually forge a bond with clients, become that welcomed adviser, and provide such superb service that considerations of price and alternative suppliers drop off the radar.  A rare talent indeed – perhaps even more rare in Law Land,  where every custom and experience between college and making partner seem to be militating in favor of turning out people who are on hair-trigger to challenge everything they hear, come it from the mouth of friend or foe, who have such a powerful sense of  urgency that they tend to rush through every human encounter to get to “the answer,” and who lack all grace and resilience when faced with setbacks.  Still, there are such people, and another way of saying they’re scarce is to say that there aren’t enough to go around.  So:

  • If your firm has a well thought out strategy that involves how it can actually differentiate itself in the eyes of clients in the marketplace;
  • If targeted laterals – a few a year – can “I swear on the Bible” advance that strategy in ways you can explain in 25 words or less, without reference to “book,” or “revenue;” and
  • If you can actually segregate the wheat from the chaff in the crucible of recruiting and interviewing

then and only then would I tell you to proceed.

This is hard work; virtually  no one seems to be doing it.  Instead we’re following the pack, something we do exceptionally well (and are exceptionally comfortable doing).

My attribution of this to the late, great Peter Drucker may be mistaken, but I hope he would forgive me if they’re not his words: “The only business strategy worse than not having one is borrowing your competitor’s.”

Of course, to avoid doing that you might actually have to think—different.

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