The Underlying Economics of Lateral Mobility

Here, in reverse order of importance, are the economic forces that determine the nature and pace of law partner lateral hiring:

5. Low firm-specific investment in human capital
4. Leverage, or the ability of successful partners to employ other lawyers, enabling large-scale individual practices
3.The shared fate of partners in a law firm and vicious and virtuous circles
2.Variable and often limited value of firms’ brands relative to the reputations of successful individual partners
1. Diversity of partner pay programs

5. Low firm-specific investment in human capital

The success of a law partner depends upon many things but deep knowledge about the firm he or she works in or joins is not one of them.  What can be learned about the workings of a particular firm can be learned quickly and without much cost.  The need to acquire costly firm-specific knowledge might present problems for recruits in settings where intimate knowledge of a firm’s networks of technologies or people is needed. There is no such impediment to changing law firms.

4. Leverage, or the ability of successful partners to employ other lawyers enabling large-scale individual practices

Leverage is what makes lateral hiring worthwhile.  Successful rainmakers employ other lawyers within their firms for large or numerous cases and the scope of this leverage multiplies the profit contribution of the rainmaker.  When we look at the market for physicians or university professors we see competition among institutions but without the same intensity as we observe in the market for law partners.  That is mainly because doctors and teachers are not big employers within their institutions and are not thought of as contributors to institutional profitability to the same degree as rainmaker law partners.  There are exceptions, of course.  Universities are reputation-maximizers, so the competition for those professors at the very top of their fields can be intense.  Scientists who win big research grants do employ teams and it is safe to suppose that they are recruited in a manner resembling law partner recruitment.

3. The shared fate of partners in a law firm and vicious and virtuous circles

Although individual partners’ practices are often portable from firm to firm, there is no doubt that when the fortunes of a law firm decline, every partner is affected.  The sense of shared fate in firms with strongly cohesive cultures can mitigate against the centrifugal force arising from a streak of bad results.  But when partners leave while other firms are doing well, those who are capable of being recruited will naturally wonder how much better off they would be somewhere else.  Fear of being the last partner left to turn out the lights can induce a vicious circle of departures and failing fortunes for the firm.  We all remember the names: Shea & Gould, Brobeck, Heller Ehrman, Howrey, Dickstein Shapiro and many others.  In hard times for the profession as a whole especially, the pace of lateral hiring is quickened by partners leaving firms in decline.  By the same token, a successful firm that earns a reputation as a good haven for laterals benefits from the virtuous circle of talent gains and profit gains.

2. Variable and often limited value of firms’ brands relative to the reputations of successful individual partners

Like everything else about the law profession, the value of law firm brand and reputation are not subject to generalization.  We all know the firms whose names are synonymous with success and power.  We also know firms whose brands, despite a fine reputation, do not much enhance the prospects of their partners.  And we all know clients who say, “I hire the lawyer, not the firm.”  Many successful partners can change firms without losing business; that is the condition of the law profession that enables partner mobility.  It’s less easy to move in, say, the audit and management consulting occupations.  People do leave the Deloittes, PWCs, McKinseys, Accentures and the like, but unless they move to one of the small number of equivalent firms their personal practices will shrink because the reputations of these firms typically loom larger for clients than the reputations of individual partners.  Loyalty of clients to individual law partners and the clients’ willingness to change firms to stay with those favored partners enables lateral mobility.