Focus: Lateral partner retention - Exit signs
14 February 2011
Hiring laterals is a risky business: finally, the statistics that tell us quite how badly US firms have got it wrong
Is hiring partners laterally a waste of time? Well, no. Every now and again a new partner snatched from the loving embrace of a rival works out beautifully.
But groundbreaking new research by Motive Legal Consulting, published today (14 February), provides some much-needed empirical evidence to back up several crusty old legal market truisms.
Such as: ’there’s no longer such a thing as a job for life’; ’there’s never been more mobility in the UK legal market’; or (and this one is many a UK lawyer’s personal fave) ’US firms are much more brutal places to work than ours’.
Motive’s research strongly suggests that the latter argument in particular may have legs. It analysed the fates of 1,944 lateral partner moves over a five-year period, asking a simple question: “Was each individual partner lateral hire made during that period still at the firm they had joined?”
The results were astonishing. Within three years of joining, a third of all partners had moved on. And after five years that jumped to 44 per cent.
By some distance the poorest performers were US firms. Over five years US firms in London took on 540 partners. In certain core areas, such as finance, 45 per cent of these partners had left their firms by July 2010.
Take a shorter timeframe and the results are just as startling. Of all the partners hired into US firms in London from the start of 2006 to the end of 2008, a total of 330, 36 per cent had left by the end of 2010. At UK firms over the same period, 27 per cent (221 partners) had moved on by last year.
The immense cost of hiring alone should be a warning as to the importance of these figures. One senior HR director estimates that the average cost per hire at his firm is £150,000. On those numbers, that 36 per cent translates into £17.8m worth of wasted effort.
Any US firm that has borne the brunt of partner exits in recent years - think Mayer Brown, Paul Hastings or White & Case - will no doubt already be all too familiar with these statistics.
In London it has always been suspected that plumping for a US firm was a significantly more risky proposition than joining a UK rival. Now there is proof that this is true.
The sheer numbers involved in Motive’s research - 1,944 London partner moves made between 1 September 2005 and 31 July 2010 - highlight the extent to which the UK legal market has changed in recent years.
As the executive partner of White & Case’s London office Oliver Brettle points out, until 10-15 years ago the law was the type of profession where people did not move around very much.
“I think there’s an element of law catching up with the rest of society in terms of people being willing to move to further their careers,” argues Brettle. “The thing is, once a partner’s moved, and if the moving process was less stressful than they’d thought, then they may be more likely to move again.”
That mobility has been helped by the fact that in recent years many firms have been more than happy to show they are willing to move people on through redundancies and restructurings.
“I think people started thinking they’d better be prepared to look after themselves,” says one partner at a City firm.
Brettle’s firm was one of the biggest partner loss casualties last year, but he insists that White & Case is taking steps to reinforce its growth with a more cohesive culture.
“We believe that the organic growth model we’ve adopted is working well,” stresses Brettle. “In terms of integration of laterals, it’s a long process, but things like moving partners around the globe all help cement relationships in a global firm.”
Mark Brandon, founder of Motive and author of the research, says the results clearly flag up two key themes: in many cases hiring partners laterally simply does not work; and US firms are worse at it in London than their UK counterparts.
(Click on the images to view larger versions)
More than a few partners could attest to the cultural chasm that exists between many US and UK firms, a point Brandon is happy to address.
“I think that hires tend to work well when there’s the least difference between the environment a partner’s leaving and the one they’re coming to,” argues Brandon. “If the gap’s too great the hire likely won’t work.”
In the interests of balance, it is fair to say that, even after decades of US firms scouring the London market for laterals, most are still outsiders that are likely to get it wrong more often than the locals.
“The findings in this research are intuitive to me,” argues Ashurst senior partner Charlie Geffen. “You’d expect the UK firms’ greater knowledge of the market would mean they’d have more success at integrating laterals.”
Brandon agrees, pointing out that “UK firms have home-field advantage”.
But the chairman of one of the global legal market’s most prolific lateral hirers, Peter Kalis of K&L Gates, says the attrition rate among some US firms in London is unacceptable, highlighting cultural reasons as among the chief culprits.
So why are US firms worse at hiring laterally in the UK than their domestic counterparts?
“[For] the same reason that the UK firms are so dismal in their US recruiting,” replies Kalis. “Cultural insensitivity, naivete and hubris.”
Kalis, as head of one of the world’s largest US firms, is quick to suggest that the survey results should not be used in a one-size-fits-all sense.
“The study treats all US firms monolithically - this is fallacious,” argues Kalis.
There are 100 or more US firms in London, he adds, and most of their offices “are more aspirational than mature”.
“In the corner of the market that we occupy, with nearly 150 solicitors in London, we look for three things when we hire - lawyerly excellence, a collaborative state of mind and an aptitude to grow their client relationships across our platform,” says the K&L Gates chair. “Our partners are expected to be great destinations for legal work and also to be portals to the firm at large, through which clients introduce legal commerce flowing across our platform.”
“London,” he adds, with a dig in the ribs of his City rivals, “is a great place to recruit smart and collaborative lawyers who are in platform-challenged firms”.
The chairman of another substantial US firm in London also highlights culture as a key issue when recruiting partners laterally.
“I believe our London office is very attuned to the local culture and customs,” asserts Reed Smith chairman Greg Jordan. “We’ve added a lot of partners and our retention rate’s excellent. I don’t think our office feels like a London satellite of a big US firm.”
And indeed, given that Reed Smith’s London office is largely made up of legacy Richards Butler, one could hardly disagree; US firms that have merged in London have not on the whole fallen prey to the mistakes made by City start-ups.
But there is no doubt that it can be much more of a cultural shock for Brits joining US firms, which often remunerate on an eat-what-you-kill basis, than the other way round.
Money is an important scorecard on both sides of the Atlantic, but traditionally revenue and profit generation holds a place nearer to the heart of the Americans - a point that goes to the heart of the rationale for hiring partners in the first place. In other words, does it matter if they bring a book of business or not?
“We don’t hire laterals just for revenue, it’s strategic fit we’re looking for,” claims Ashurst’s Geffen.
He believes that if US firms are hiring partners to just add turnover “they’re likely to be less patient”. If, on the other hand, a firm is recruiting for strategic fit reasons, it is likely to spend more time integrating them into the business.
“We’re always hugely suspicious of anyone who says they’re bringing X million of work with them,” adds Geffen. “On the whole clients tend to be pretty loyal. We’d never add a lateral just to add revenue.”
Add in the common belief that one should always halve any book of business figure promised by a candidate, and Geffen’s approach makes particular sense.
Brandon believes it is this gap between expectation and reality when hiring laterals that is to blame for the high fallout rates.
“The trouble is, firms assume that everyone works like they do and so don’t do enough work on establishing what the differences are for each individual partner,” he argues. “They expect everyone to just adapt to fit their culture, and some people find that more difficult than others.”
In other words, part of the problem with hiring partners laterally is that many firms try to apply general rules to unique situations.
“The key is to make sure you carry out thorough due diligence on the partners you take on,” says Brettle at White & Case. “And while everyone oversells themselves, there’s no point in a candidate saying, ’I’m entrepreneurial’, when in truth they prefer being a line partner servicing other partners’ work and institutional clients.
“But it has to be two ways - a firm has to be as open and transparent as the candidate.”
Along with comparing the overall performances of US and UK firms, Motive drilled down into the detail. It analysed moves into the key practice areas firms have recruited into
(see box). Once again, US firms performed less well than their UK counterparts.
For example, US firms accounted for 28 per cent (540) of all moves in the five-year period, with the Americans placing particular emphasis on hiring finance, corporate (particularly private equity) and tax specialists.
But many of these partners did not last long. While 30 per cent of the finance partners taken on by UK firms in 2007 had left their firms by the end of 2010, the comparable figure for US firms was 45 per cent.
Similarly, UK firms had lost 29 per cent of their 2007 corporate hires by the end of 2010 compared with 42 per cent among their US counterparts.
“Of course, for finance partners the figures may be distorted by the financial crisis,” admits Brandon. “I suspect also that they’re distorted by the fact that finance partners tend to be hired by top firms, whereas a much greater proportion of the market hires corporate partners. The pressures are greater at top firms, so more of them may fail anyway.”
Brandon believes the key issue his research underlines is that lateral partner hiring in the UK is an uncertain business.
“The premise is deceptively simple: hire the right person with the right skills. But in fact it’s an incredibly complex recruitment task,” insists Brandon. “That it goes well as often as it does is a testament to the commercial sense and flexibility of the individuals involved in each process, but that it often fails is equally unsurprising.”
Brandon says many firms are hooked on the idea that a ’white knight’ in the form of the perfect candidate is out there somewhere. They then focus on attracting that individual, or the nearest to them that they can get.
“They rarely, if ever, consider whether there’s a market for their proposed expansion and how it might really affect their existing practice,” Brandon adds. “Instead, they presume that their white knight will provide all the answers they need.
“But as the research suggests, quite often that just doesn’t happen. Law firms need to do more strategic thinking and more business planning, not just turn to hiring as a quick fix.”
Judging by these results, they need to do it sooner rather than later.
Lateral losses by practice group
Motive’s data shows that the London lateral partner recruitment market peaked in 2007, with a total of 443 hires. Last year the market showed signs of life, with a 28 per cent increase on 2009 during 2010’s first seven months.
And while 2009 was widely perceived as being the depth of the recession, 362 partners were hired, 95 of them (26 per cent) into US firms, a 32 per cent increase on the number announced in 2006 (16 per cent for US firms).
Finance and corporate (not including private equity) were the main areas of interest, accounting for 35 per cent of all partner moves in the five-year period (real estate, litigation and employment were the next most popular areas).
The research found very different hiring patterns between US and UK firms, highlighting both the differing business strategies between the two groups and the effects of different economic cycles in the two countries.
US firms accounted for 39 per cent of all finance hires, with 2007 the peak year. UK firms peaked in 2008.
The peak hiring yearfor corporate was 2007 with a total of 87 hires.
US firms’ peak corporate hiring period came a year later in 2008, when they took on 26 partners, 35 per cent having already left.
UK firms are more successful than US firms in hiring corporate partners. UK firms lost 29 per cent of corporate partners hired in the period between 2006 and 2008 compared with 42 per cent for
Private equity, real estate and tax
US firms accounted for 45 per cent of private equity hires and 54 per cent of tax hires. Just 10 per cent of real estate hires were into US firms.
Highest fallout rates
The highest fallout rates by practice area were for private client (37 per cent fallout over five years), planning, environment and health and safety (37 per cent), projects and energy (30 per cent) and construction (29 per cent).
The most successful were restructuring and insolvency (7 per cent), regulatory (13 per cent) and TMT (14 per cent).