Law firms sticking to the old “portable business” ratios in evaluating lateral partners find themselves losing ground.
Over the past few weeks, we have seen a recurring pattern in our legal recruiting activities. Let’s say we recruit a candidate with $2 million in originated business. However, because of relationships that other partners at their current law firm have with certain clients, that partner is only in a position to take $1 million to a new firm. Because they are paid at their current firm on the basis of $2 million, the economics don’t work; thus, a candidate with quality skills, good client relationships, and a strong business development record, becomes Typhoid Mary.
This phenomenon will only increase as firms put more effort into integrating partners and using client teams and corporate law departments become more rigorous in evaluating outside counsel with more of a focus on teams and service delivery. As a result, firms sticking to the old “portable business” ratios in evaluating lateral partners find themselves losing ground.
Many firms with which we work have modified their yearly evaluation systems to stress not just the basic numbers (originations, working hours, etc.), but also what each partner has done for the good of the firm as a whole. At those firms, partners who don’t share their clients, and don’t accept assignments from their peers, get marked down during the evaluation process.
But those same firms look at laterals in a completely opposite way. Once the due diligence forms are completed, partners and financial personnel grill laterals about the extent of their client relationships, and those who admit there are other relationships with those clients at their current firms are greeted with skepticism. In the end, firms feel safer going with those “lone wolves” who tightly control their client relationships. It should be no surprise that many of those partners don’t integrate into their new firm and end up moving on when a better deal comes along.
In today’s environment, the lateral hiring evaluation should mirror what firms do when evaluating their existing partners. Yes, business development is important (as is the ability to keep busy); but the evaluation needs to be focused more on the longer-term potential of the lateral as opposed to what the lateral will do in the next 12 months.
One group of firms that have been able to better calibrate their lateral hiring efforts have been those with a closed compensation system. In those firms, leadership is trusted to bring in laterals that will make positive contributions in the long run, even if the firm has to “overpay” them based on the portable book model. At those firms, the inevitable partner grousing about “how can we bring in this partner when he/she makes more than I do,” is avoided.
Open compensation systems have their advantages, particularly in fostering a sense of a “true partnership.” However, those firms could initiate a key change that will serve them well in the lateral market. They could manage lateral entrants under a closed compensation model during the lateral review process and in their first two years of service (which tends to correspond to the initial guarantee period). Given that most laterals now enter as contract partners anyway, it would seem like a great way to acquire talent, and provide them a runway towards full integration into the firm. After the contract period is up, those partners can be evaluated on the entirety of their contributions to the new firm.
The war for talent continues to get more competitive. Firms that tend to evaluate laterals as individual fiefdoms will lose out as the legal industry continues to evolve.
TMG’s Take is a regular e-mail advisory produced by The McCormick Group. The company’s Legal, Government Affairs, and Law Firm Management groups combine the expertise of more than 15 Consultants to help law firms fulfill all of their lawyer and administrative recruiting needs. TMG’s Take covers topics across the spectrum of law firm management, including associate and partner compensation, growth strategies, marketing and business development, operations and facilities management, finance and accounting, professional development, and technology. Please direct all inquiries to Steve Nelson, Managing Principal at (703) 841-1700 or snelson@tmg-dc.com.
