Beware the drizzle makers

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  • A good article.

    Law firms should be quicker to admit when lateral hires go wrong. In Newcastle in 2010 there was a high profile lateral hire. The individual had practically run the ship at his old firm but spectacularly failed at his new firm. The new firm acted quickly to end his involvement with their practice.

    From the outside, I admired the new firm: they acted decisively. My view of the old firm is that they must have accepted chronic underperfomance, probably for many years.

    Nobody wants failures but it can be handled in a manner than enhances the firm's reputation.

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  • SO what you're saying is that at the end of year 2 "Bob" has billed £1.4M, with an increasing run rate and the firm has paid him £660,000. Trust me Mark, that is good business. Assuming the improvement continues we can assume at least £1.5M year 3 which means a total of £2.9M out of which he's been paid £990,000. Why wouldnt you run with that? I respectfully suggest you stick with writing and let others run their business.

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  • I would take a punt on Bob. So yes some do fail but I agree with Mr Leatherland. That's not a bad return. You have to speculate to accumulate. And as for adding the loss to next year's target. If that became common practice, no-one would ever move. I suggest the author needs to get a reality check.

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  • Couldn't disagree with the article more. No lateral hires means that the scope for diversifying and expanding the client base is significantly reduced and then you're relying on tenders, cold Business Development or your brand to attract these new sources of revenue (or pasting videos of your partners singing on YouTube if you happen to be DWF ).

    Providing any hires are covering costs in Year One, before kicking on in Years Two & Three then firms are no worse off albeit than PEP may take an inital hit. Many firms which are recruiting on this basis are proving to be pretty successful at bringing good people on board and with nowhere near the casualty list of partners that some are experiencing. If anything it's firms with unrealistic expectations (and who decide to roll over 'profit debt' as per the above article) which are causing these moves to fail. Quite clearly if 'Bob' is billing £1.5m then he can either stay at Firm One and be tarnished with falling short of daft targets, or go to Firm Two who will welcome him with open arms and pay him about £500k to reflect the increased value of the following.

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  • Well, I seem to have stirred some debate, which was rather my intention! And glad people are disagreeing with me too.

    To your point Andrew, it does rather depend on what your costs are and what your profitability targets are too, doesn't it? It may - as you say - be good business. Part of the reason I chose a marginal example such as 'Bob' is to illustrate the point. Bob is exactly the kind of partner that most firms would go for without hesitation, but failing to do even fairly basic calculations around what people are bringing in and what the 'tail' of accumulated costs are. Do that too often and get it even slightly wrong and you're faced with an aggregated disaster.

    To your other point "assuming that continues to increase..." is a big assumption; very often it doesn't, perhaps levels out or even drops, and some firms only realise too late. My main point is that allowing these costs to rack and rack is putting additional pressure on your existing partners, something the Dewey disaster demonstrated in spades.

    I would also agree with Anonymous (pity you don't put a name to your comment, but hey...) that zero laterals is a bad thing, and that was never my point (I wonder if Anonymous had read the article before firing off the response). On the contrary, previous research I did (available on my website) seems to point to the fact that prudent hiring is the best strategy. Personally, I see laterals as a potentially great source of new creative energy, new business development possibilities and service methodologies.

    Anonymous's point about PEP taking 'a hit' is the valid one. If you are only doing one hire a year that may be neither here nor there, but do six, seven or ten who all undershoot and your PEP is taking hit after hit after hit, again as Dewey found out to its cost. My grapevine suggests that a number of UK firms are also suffering the ill-effects of too much lateral hiring and too little digestion.

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  • When it all boils down, the role of a Partner is a role with a heavy burden of business development/sales and fee earning. It's not a pure "delivery" role. As such, I doubt very much if the cited kissing of rabbit's feet in the legal profession is markedly different from that in any other industry or profession hiring for senior sales /BD professionals.

    What perhaps is different is that other industries tend to have remuneration systems with a much, much higher bonus elelment than is the norm in the legal profession. Elsewhere, "basics" are lower but bonuses are higher.

    The need/desire to hire laterals won't change that much, the methods employed to recruit them can't really change that much, but the system of remuneration perhaps should in order for firms to better balance their risk when hiring.

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  • A very trenchant point. One of the bedevilling things for partners is balancing all the requirements of the job, particularly these days. It is interesting to note that rainmakers are often derided as being "not very good lawyers" as if to suggest that one can be good at BD or technical law and not both.

    Alas many law firm systems are not sophisticated enough to reflect the true impact of partners on the client relationship. Regulatory partners suffer badly from this, often being the first point of call for the client but unable to bill like a corporate lawyer. Thus they may be pivotal to the relationship but crucified in pure billing terms.

    I think most partners I know would say that in the final analysis, billing big is what really matters. I, personally, would prefer a holistic approach where the true input - financial and otherwise - of a partner is properly assessed and accounted for. After all, the best rainmaker in the business will fall flat on his (usually his) face if the lawyers behind him aren't great.

    A firm that just concentrates on billing to the exclusion of everything else is, in the words of my friend Bruce McEwen, simply a hotel for lawyers. Which is fine if you want to work in that kind of firm, but most people I meet don't.

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  • The argument that you want to stir debate wears thin after a while - particularly when you are quite simply wrong.

    No firm is as naive to the reality of lateral moves as you always seem to assume. They are in fact very sophisticated and experienced in this area. They do understand that in most cases the transfer of work and build-up of WIP will impact on first year revenue probably to the 50% you suggest: certainly two thirds of normal run rate achieved in year one is considered very good.

    Although it would take too long to deconstruct and describe all of the errors in understanding within your "Bob" example and I am reluctant to engage with that example at all there are two elements that need to be addressed. Firstly your "Sunk Block" or fixed costs as most people would refer to them: in your scenario your candidate covers salary cost plus £170,000, this money does not vanish; it dilutes albeit modestly the fixed costs carried by the other partners. Secondly firms do not hire laterals for a one year run - or purely for their portable business. Presumably you would expect a firm to discard "Bob" after year one absorb any associated costs and forego all future revenue, profit and other contributions they would otherwise have enjoyed. They would then need to re-start a recruitment process for a person similar to "Bob" because they still require a person with his technical and managerial skills within the firm.

    Debate is great when it is about something meaningful; it is tiresome when the premise behind the subject under debate is flawed.

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  • Perhaps your own firm, Anonymous, is "very sophisticated and experienced", but many - very many - are not, and there is evidence of at least one major international firm being destroyed by its mismanagement of its laterals programme, so I would reject the assumption inherent in your, rather condescending if I may say so, response.

    I could name - but won't for obvious reasons - several top firms which have taken on laterals who, rather than billing the millions they have promised, have undershot so catastrophically I daresay I could collect more money with my hat on the pavement at my local Tube station, yet where that has been largely swept under the carpet for political reasons. Very sophisticated reasons, no doubt.

    Speaking to a range of leading firms as I have, few seem to calculate the true costs of laterals on the business - which is my main point here. I didn't just come to market with this stuff; a few helpful COO and chief execs at leading firms have pored over my detailed methodology (presented not in depth here but in my new book), and I thought long and hard before sharing it.

    The true costs, "modest" as they may be in the case of one lateral but highly damaging in aggregate if several undershoot and continue to undershoot, do not as you say simply vanish; rather, other partners are paying the price for them in one way or another.

    It has been my observation that the management of some firms are obsessed with lateral hiring to the detriment of those who have remained loyal to the firm, signing guarantees to win 'big-hitters' who often don't perform, eschewing performance or service re-design measures in favour of 'rescue by lateral' and failing to fully appreciate the knock-on effects of favouring laterals over incumbents.

    I do not 'assume' that firms are naïve about laterals, but few firms take enough lateral hires to give every department experience of what the process is like in various scenarios, and every scenario is unique. Information-sharing between departments, meanwhile, is usually entirely absent. Whereas there is usually some degree of management/board oversight, even to the interviewing process, few firms collect or share information centrally or attempt to actively learn from poor process; on the contrary, interviewing is something that many people think they can simply do without any training (the best firms tackle this point, of course).

    The result is that the laterals process is often dogged by insufficient planning, inadequate process and poor integration, with the result that roughly half of laterals leave or are gone within five years. If that is a 'win' for your firm, well, good for you, but my ongoing research and efforts are prompted by conversations with managing partners who don't think that is good enough and want to change it for the better.

    The facts are the facts and I have never disguised them: most laterals stay for the medium-to-long term, but an awful lot don't. I, personally, think the fall-out rate is too high and might be improved by better planning, better process and better integration. Facing up to the true cost of hiring laterals is one important part of the jigsaw.

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  • I can't see how "Bob" is going to negatively impact on profitability provided he (a) covers his salary; and (b) cover's his share of sunk costs. Given he's not taking from the profit pool as a fixed share, PEP should (provided the incumbents drizzle make at the same rate) remain the same.

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  • Ah, there's the nub of it. I do concede that my example could have been better chosen.

    I was talking to someone about our Bob earlier, and they made the point better than I obviously have; Bob falls into the category of unexciting hires that undershoot their promises and sort of do enough to cover their costs, if you 'lose' some of the investment costs. However, it's quite likely Bob will sag a little bit along the way and the hire ends up being entirely uninspiring in the final analysis and may cause disruption internally, especially if he only performs averagely.

    Two further points recruiters have mentioned to me, which are worthy of mention:
    - I didn't include the recruitment fee, which could be £110k on Bob (but likely to be less, and nothing if he came direct)
    - Many incumbents are in fact drizzlemakers and will need sorting.

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  • I would be tremendously happy to be in a firm where we look at laterals on the basis they contibute 33 per cent in year one to profit. Good business that.

    People move and firms hire for strategic reasons normally and if you are presented with someone who can cover their draw and their costs in year one from what they will bring that's pretty appealling if the real reason you want them is strategic. Indeed I have seen laterals for strategic reasons brought in on immediate and openly loss making terms. Thats called the firm making "an investment" I understand. Its a question normally of whether 2 plus 2 makes five from both sides' point of view. Bob has a good practice so why should he move as well? If you want what he brings to the party you might have to be commercial about it too.

    Also it depends on how you bring in Bob in terms of costs. If you hire three associates and two PAs from day one your costs go up big time but in the recent market conditions you haven't had to do that. Most firms have the capapcity to take people in and build with them.

    I would like to know actually what the figures are for partners who were made up with the firms they trained with and how often they move. We lateral hire to replace some of those. Isn't it just a much more liquid market now and that is driven by the fact that all of our practices are so interdependent on the shifting skill sets around us?

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  • Thanks for that. The only thing I'd take issue with there is that law firms 'normally' hire for strategic reasons, otherwise pretty much agree on all points.

    I think the best firms do hire strategically, yes, but in order to do that, you first have to have an actual strategy, and many firms don't.

    As I say, I think in retrospect what I should have done is been a little more careful with my example (Bob). My attempt to show the actual costs of Bob over the first four years could have been more finely drawn. Most laterals, as you intimate, don't contribute to profitability and nor are they expected to (in most firms anyway), and if they do, that's great.

    One of the points which has been - quite rightly - levelled at my research is "what counts as success?" and there is no 'one size fits all' answer to that question, as many law firms are finding out at the moment.

    You are absolutely right about the increasing complexity of the market. I think the most successful firms and practitioners have a good handle on this. Partners made up at their firms have a huge in-built advantage over laterals, and often find it a rude shock when they move to a firm where they have to rebuild their entire business context. I don't have any figures for the whole market on the success of these moves, but it would be an interesting little project that I'll definitely give some thought to.

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  • Ok, perhaps a touch more care could have been shown with the Bob example but - to the Editor - please can we have more articles like this that actually involve thought, analysis and, in consequence, (reasonably) measured debate?

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  • I am interested to see the "rule of 3" quoted in the article and not challenged in any of the responses. As an associate, we are all under pressure to increase billing and year-in-year-out targets increase significantly in excess (as a percentage) of salary. A few years back I raised, in general conversation with a new-hire partner, the "rule of 3" and was told that that was out of date and targets these days had to be about 4 x salary to make a reasonable profit (mind you, she had just escaped a firm that had collapsed, so perhaps that is a reflection on the reason for their collapse!)

    Is the rule of 3 still a normal measure in the profession? (And am I out of date for still referring to us as a profession? :o) )

    As a supplemental issue, can someone explain why Bob, who covers his expenses and makes a contribution to actual profits by the end of Y2, is a drain on the firm at all? Assuming that Bob is not equity, once his costs are covered every £ he makes adds to the overall PEP. Is it not the case that had Bob not been hired, those profits would not have been made at all? Bob may not be the most glamorous hire, but the equity partners are still richer than they would have been without him. Profit as a percentage of turnover may fall, but profit itself rises.

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