Feature: US firms on the march, laterally

London is a battleground for the world’s top two legal cultures and the hiring struggle is a telling manifestation of this – with America seemingly winning

For the past four years I have been conducting an annual survey into lateral partner hires in the London market, research that has attracted interest and brickbats in almost, but not quite, equal measure.

The brickbats have puzzled me. Why is the market so defensive about lateral hiring? My characterisation of lateral hires who last less than five years at the firm which hired them as ‘failure’ has been roundly attacked, as if there is some kind of marketwide attempt to justify what patently does not work some of the time.

I was puzzled, that is, until I accepted that there are so many vested interests bound up in the process of lateral hiring that it was inevitable questioning the enterprise would cause said interests to go on the offensive.

More than that, there is something of a collective will in the market for laterals to work. Partly that is because lawyers still need to believe they can translate viable practices from one firm to another and partly, on the part of firms, to believe there is a quick and painless way to grow.

What else could explain the US survey (ALM-LexisNexis, 2012) finding that while only 28 per cent of managing partners of AmLaw200 firms thought lateral hiring was “highly effective”, fully 96 per cent expected laterals to be part of their growth strategy the following year?

Whatever. The London market remains firmly fixed on – some may say addicted to – lateral hiring. Given that, what can the figures tell us about what works and what does not?

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The facts

This year’s research encompassed 2,869 lateral partner moves in London from 1 January 2006 to 31 December 31 2013. This included UK, US and ‘hybrid’ (merged) firms, foreign firms and moves from in-house straight into partnership.

It excluded moves into firms that subsequently collapsed or were taken over, on the grounds that such an event may have forced a lateral to move precipitately.

On and around 1 January this year all moves were examined to check whether the partner was still at the firm they had joined. Nearly a third had moved on.

As might be expected, in the first two years there is little movement, firms usually giving partners a period of grace or the partner not daring to move on – or being able to move on – so quickly, so the average is misleading. If we exclude the most recent two years of hires, the dropout figure rises to 43 per cent.

At this point we have to talk about what constitutes success or failure in a hire. If your man (and they usually are men) comes in and brings a big client and bills a ton of money in his first two years, then skips off leaving you the client, is that a ‘failure’? Doesn’t sound like it.

Equally, if your man comes in, bills adequately but unspectacularly and hangs on for grim death for seven years doing just enough to avoid the chop, is that a success?

Hence, I am not going to talk about success or failure, but rather the ‘dropout’ rate instead, and ‘longevity of hire’. It is up to you to look at your laterals and decide whether they are successes, failures or in-betweeners.

An analysis of the figures can give us some insight into how differing strategies have worked out for firms, and hence provide some food for thought when considering hires.

Boom-led optimism

The dropout rate varies from year to year, but starkly illustrates what now looks like boom-led optimism in hiring before the recession. Of the hires made in 2007, nearly 66 per cent had moved on by the start of 2014. Contrast this with the dropout rate for 2006 hires – 58 per cent – and you can detect an element of ‘frothy’ hiring.

Dropout rates vary by practice area, with some appearing to be more successful – or at least longer lasting – than others. Most successful in these terms seem to be non-transactional areas with a high legal- technical content, including regulatory, financial services, life sciences, pensions, funds and EC/competition.

More volatile are the transactional areas – corporate, finance and real estate – as well as employment, private client and family. Again, hires made in the boom have fared badly compared with those made in the teeth of the recession.

Over 70 per cent of corporate and real estate hires made in 2007 have already quit or been fired, along with 63 per cent of litigation hires and 62 per cent of TMT hires. That compares with 50 per cent of 2006 corporate hires and 60 per cent of 2006 real estate hires, for example.

America on the march 

US firms are generally thought to have been gaining ground in the UK market and the study bears this out. It has long been understood that these firms are more active in finance and corporate, but this study shows just how much more. US and hybrid firms – those with a major US component – account for 41 per cent of hires in finance and corporate, compared with just 24 per cent of all other hires.

Whereas US firms have concentrated primarily on corporate – where it is possible to sustain a practice with modest critical mass – hybrids have, marginally, favoured finance, accounting for some 16 per cent of all finance hires.

Looking in more detail, the dropout rate of various types of partner in different environments varies radically. For example, the dropout rate for corporate partners moving from UK to US firms is just 25 per cent, markedly below the all-partner average and way below the
dropout rate for those partners who have moved from one US firm to another – 43 per cent.

Corporate partners moving from one UK firm to another do not fare much better, with dropouts at 39 per cent, while those moving from in-house directly into corporate partner positions dropped out in 58 per cent of cases – 67 per cent for those moving directly into partnership at US firms.

Corporate partners moving from US to UK firms, meanwhile, have a dropout rate of 54 per cent. Hybrids fare well whether the lateral comes from a UK or a US environment.

What does this tell us? For a start, it seems that moving clients from a UK to a US firm, or a hybrid, may be more successful than moving them to another UK firm. This may be because clients perceive an advantage in moving to a US-linked environment, perhaps gaining a broader platform.

The figures show clearly that a move to ‘more of the same’, whether US or UK, results in less longevity, while creating a corporate client base seems to be challenging for former in-housers, particularly in a US environment.

Turning it on its head, the figures seem to show that US firms would do well to concentrate on hiring UK partners rather than attempting to poach from other US firms, and should think carefully before taking on in-house lawyers directly as corporate partners.

The US client ownership model may make it easier for general counsel in the US to create a practice in a law firm, but that could be a tougher ask over here, where corporate relationships are more institutionalised and partner relationships more diffuse.

Focus on finance 

Finance is a key area of growth for US firms in London, and has been a focus for US-UK hybrids. They may be on to something. 

Finance partners moving from US firms to hybrids (dropout: 22 per cent) and UK firms to hybrids (dropout: 30 per cent) have suffered much lower dropout rates than moves in other directions.

Partners moving from one UK firm to another seem to do okay, with dropout a little above average at 36 per cent, while 42 per cent of those moving from a UK firm to a US firm have left. Moves between two US firms (48 per cent) and from US to UK firms (50 per cent) show a higher degree of attrition, as do moves from in-house (50 per cent –all the in-house moves having been into UK firms).

Again, this may be to do with trying to transition clients across cultural boundaries, with ‘more of the same’ moves less attractive to clients, or it being perhaps more difficult for partners to build practices where the territory is already staked out.

It looks particularly problematic to convince clients in this notoriously conservative sector to weather what might seem like a step to a more limited platform (US-UK) or for in-house counsel to win significant work from the sector.

The curious case of litigation

As a former recruiter I know just how hard it can be to persuade firms to hire litigators, especially ‘big case’ litigators who cannot predict where or when the next big case is going to come from.

But the fact is that litigation – the third most popular area for laterals – has a markedly better hit rate than its transactional cousins, with a dropout rate of just 27 per cent.

Interestingly, litigation has a much higher dropout rate in the first few years than either corporate or finance, indicating that firms are either more forgiving of finance or corporate partners in the early stages, or much harder on litigation partners – or both.

UK firms are by far the greatest consumers of litigation hires, taking on more than two-thirds of the partners moving, but US firms are the most successful hirers. The dropout rate for UK litigation partners joining US firms is just 20 per cent, while litigation partners leaving one US firm to join another show one of the lowest dropout rates – 14 per cent – of any type of partner in the whole study.

It is impossible to say whether firms are just being more careful about which litigators they take on compared to corporate and finance partners, or whether litigators are simply better at bringing home the bacon, but the figures seem to show that litigation hiring, especially in these past, turbulent, eight years, has been one of the more successful areas of the market. We might further surmise that US-style litigators, or at least UK litigators plugged into a US client base, can fare well thanks to that more litigation-friendly culture.

Westward ho

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Beyond the raw data crunched for this study lies the overarching theme – the steady march of the US firms.

It is simply too early to say whether the US firm model is a more effective one in evolutionary terms or whether the ‘quiet invasion’ via merger will encounter a degree of pushback – in other words, whether UK firms’ tendency towards a more diffuse and institutionalised treatment of clients will influence the motherships back in New York, Chicago or Houston as US firms become international ones.

What is clear is that London represents a unique battleground for the two leading legal cultures on the planet and lateral hiring is the tip of the iceberg.

If – and it is a big if – US firms win, the UK will lose one of its largest and most profitable export sectors for good.

Mark Brandon is managing director of Motive Legal Consulting. A free pdf outlining the full results of this research will be available shortly from www.motivelegal.com

Beyond transactional practices

Hires into support disciplines, mixed contentious/non-contentious disciplines and non-contentious/non-transactional disciplines have all fared somewhat better than the Blue Riband transactional practices in the past eight years.

Hires into regulatory, tax, EC/competition and pensions have all been remarkably stable, with lower dropout rates than corporate or finance. For employment and IP there seems to be a higher dropout rate in the first year or two, beyond which both practices settle down, with dropout rates lower than either corporate or finance.

This may indicate that firms are more willing to pull the plug on some practices which do not seem to stand on their own merits during the initial period, but practices which make it beyond this trial period do well.

Conversely, dropout rates in family and private client are negligible before year three, after which they rocket, hitting 70 per cent six or seven years out from hire.

It may be that the relatively flat revenues inherent in such practices, sometimes problematic cross-referral relationships and the difficulty in achieving significant leverage does not match some firms’ growth ambitions. After a period of grace, relations appear to become strained.