Making lateral hires may seem like a simple way to grow your business, but if you get it wrong – and most firms do – the consequences could be dire. Mark Brandon outlines the pitfalls, and how to avoid them in your firm.
If you are going to grow your firm, you have a number of options. You can merge, which can be cumbersome and complicated, and far from a guarantee of success. You can ‘grow your own’, which is time-consuming and expensive. Or you can hire laterally, bringing partners and, hopefully, their practice, into your business.
Make sure you have fully considered all the financial implications of the hire in question and how the partner (or team) will integrate into your business
This third option seems by far the simplest: take in a partner, get their clients, and sit back as profits rise. So why does it so often not work out like that, and how can you make sure you get it right in your firm?
The extent of the failures is quite shocking. My most recent annual survey into partner lateral hiring (available free from my website at www.motivelegal.com/index.php/downloads), which looked at the endurance of 2,763 partner hires across a six-year period, revealed the following.
- One-third of partner hires are outright failures, with the partner leaving the firm they join within five years.
- While failure rates are low in the first two years, they jump to around 50% by year five.
- Over 60% of hires made in the year before the recession, 2007, have already failed.
- Failure rates are higher in some areas – including corporate, finance, private equity, projects and private client – than in others.
- Specialist areas such as tax, employment and financial services show markedly lower failure rates than mainstream areas.
- US firms have significantly higher failure rates than other types of firm.
- Moves from in-house directly into partnership are much more likely to fail than other moves.
The survey covers London not only because it is my focus, but also because it is probably the single busiest market in the world for lateral partner hiring, and home to not just UK firms, but also a host of US firms as well as what I call ‘hybrid’ firms: merged US and UK practices, with a unique culture. This hiring crucible gives us the opportunity to spot trends and learn lessons about partner lateral hiring in law firms, which are applicable wherever you are based and whatever the size or composition of your firm.
Another issue that the figures do not show is what one managing partner friend of mine calls ‘drizzle-makers’ – those hires who do not perform especially well, but bring just enough rain to wet the ground. Industry insiders reckon that partner hires are outright successes in as few as 10% of cases.
By my reckoning, failed lateral hires have cost London law firms at least £90m in wasted costs in the last six years. So what is going wrong, and what can be done to make things better?
Why lateral hires fail
Problems which can eventually sink a hire occur in each of the three main phases of hiring: planning; process; and integration. I will look at each in turn.
Before we get to that, however, it is worth considering what a lateral hire actually is. Many recruiters – especially companies coming into the legal market from other sectors – consider partner hiring to be just another type of executive recruitment, akin to hiring a director or CEO. In fact, since hiring a partner – any partner – will hopefully also entail taking on their active income stream, the exercise is actually more like a miniature merger. There needs to be a robust business plan; diligence needs to be undertaken; and there needs to be some kind of strategic impact assessment about how the incoming business might affect the firm’s existing business.
Firms often focus instead on ‘fit’ or ‘cultural fit’, relying on the ‘gut feel’ of the interviewing partners rather than any attempt to measure the relevant cultural parameters, either of the firm or the potential hire. I am not saying that cultural fit is not important – far from it, it is vital. But the high levels of failure surrounding lateral hiring would seem to suggest that firms are getting it wrong as often as they are getting it right; ‘gut feel’ is not a very reliable guide to success, yet it remains the main arbiter of partner lateral hiring.
Problems around lateral hiring start off in the planning stage. Firms rarely ask themselves in any depth about how they might grow; they often jump at the off-the-shelf solution of lateral hiring, because it seems easy. You have no need to ask – beyond cursory diligence about whether this is a good chap from a decent firm and so on – whether the hire is economic, because if you get a partner with a profit-making business, they will pay for themselves. As long as the fit is right, hey presto. Another big attraction is that someone else – the recruiter – is doing quite a bit of the work (in return, of course, for a handsome fee).
So, the answer to the question ‘how do we grow corporate?’, for instance, would seem to be: ‘hire a corporate partner with a following’.
My first question, rather, would be ‘why grow corporate?’ A nebulous feeling that your corporate department is underpowered and you would make more money if you had a bigger one is not a good enough reason. What is the aggregate level of untapped demand for corporate within your existing client base? From whom are they buying corporate services at the moment? How will you dislodge their current advisers? How will those advisers respond to a threat? If you have to go out and get new clients, why will they be buying from you? Do you have the right platform for a(nother) corporate partner or team?
Rather than thinking ‘the hire is the solution’, consider your firm’s strategic objectives and challenges, and then which hires either could cover gaps in your offering to existing clients or could propel you to winning new clients in your targeted business areas. Undertake proper business planning and conduct an impact assessment on your existing practice, as well as a detailed competitor and pricing analysis, and then take a hard-headed look at the real investment you will need to put in, and over what period of time.
Also think carefully about the political dimensions of hiring. Managing by making lateral hires – to replace, oust or outflank awkward or lazy partners, for instance – is almost always a disaster, yet it is curious how often firms try to do it. Consider how existing partners and fee-earners in a particular team will be affected by the recruitment of your desired ‘star striker’. Some careful diplomacy and engagement at the planning stage will make integration far easier.
Poor recruitment processes
Process is where many mistakes are made. To begin with, you need to be careful with your recruiters. Choose recruiters you trust, and take time to educate them and bring them into your business confidences.
Plan your process properly. Systematic interviews are a good idea, although trying to get partners to stick to them is often the devil’s own job. Try to keep the process smooth and slick. Aim to impress, even the candidates you are not going to take on, as this will give a good impression of your firm in the market. Make sure interviewing partners only cancel interviews in an emergency – that does not include the vast majority of client work, by the way – as you will soon lose the confidence of both potential candidates and your recruiters if you do not seem to be considering lateral recruitment a priority. In this process, momentum is everything.
Get a proper business plan from the candidate and take time to analyse it properly. If the plan is rubbish – two sides of A4 is not a business plan – throw it back and tell them to do it again, outlining what data you need. It needs to include, at a minimum: a proper account of charge-out rates and recovery; client revenue, present, projected and historical, and likelihood of transfer; and any and all detail on other financial implications of the hire, as well as narrative about the business, a plan for business development, and preferably some kind of competitor analysis.
Make sure you have fully considered all the financial implications of the hire in question and how the partner (or team) will integrate into your business. It is highly unlikely that your hire will break even before the end of the second year: the investment could take four or five years to begin to deliver meaningful profitability. Is this something you are prepared for?
Finally, at the offer stage, consider how your offer may affect how your new partner acts. Over-reliance on target-related bonuses and a low base could mean your new partner hoards work to hit targets, which may impede successful integration. Go too far the other way – income guarantees, for instance – and there might be too little incentive to generate revenue.
Following the hire, there will be an inevitable honeymoon period, but it during this time that much can go wrong. Trusting that your lateral will simply perform to expected levels may not be enough. It could be that there are small but important differences between their previous firm and yours – such as different billing practices – which could result in degraded performance.
This is where good integration comes in. Contrary to popular belief, cross-selling does not just arise spontaneously – it needs work. The key thing is to make sure that your new partner learns about your existing partners and, importantly, what they can do. They, in turn, need to learn about his or her capabilities. There will be some inevitable trial and error, so it is important to be flexible and forgiving. Here is where good interviewing will pay off; if you have found the right individual, problems are much less likely.
A ‘first hundred days’ plan is a good idea in the early stages, but good monitoring and early remedial action are also key, so make sure you devote proper management resources to the task. Professional business coaching can be useful, but may be beyond the means of a smaller firm.
The final word
A good lateral hire partner or team can transform a business, but failure to get it right can degrade profits and cause all kinds of strategic problems for a firm.
Making hiring a priority, undertaking proper planning, interviewing well and spending time to integrate your hire will not all happen naturally, but will give you a much better chance of making that key hire work for you in the long run.
If you want to know more…
… about lateral partner hiring, Managing for Success readers can get £95 off Mark Brandon’s new book, Lateral Partner Hiring for Law Firms: Hiring for Success (RRP £295). To access this exclusive discount, quote MS200 when ordering online.