Lateral damage: failed hires cost London dear

When last year I revealed in The Lawyer (14 February 2011) that around a third of partners hired into London law firms were failing before five years, it was the first time anyone had put figures on what many had long suspected – that lateral partner hiring is a devilish business that goes wrong a lot of the time.

This year’s research takes things   on, encompassing 2,295 hires into UK, US and merged US-UK firms in London from 2005 to 2011. Of those hires, 714 (31 per cent) have already left the firms they were hired into.

That attrition rate only represents the out-and-out failures; behind the figures lurk a raft of other hires that have failed to meet expectations but that have not performed poorly enough to warrant the chop.

And that 31 per cent is just an average figure taken from hires across the six-year period. When we look at individual years to determine how long partners are lasting, the picture is worse. Among partners hired in 2007, more than 50 per cent have already left. Things are a shade better for 2006 partners – 46 per cent have ­already gone – and a little worse for those hired in 2005, with an attrition rate of 51 per cent.

The only crumb of comfort is that partners who last beyond five years seem to stick around, but it is only a crumb. The findings are clear: lateral hiring is risky and expensive.

The cost of failure

One top HR director reckons his firm’s cost per hire is around £100,000. That may be high for some firms and a little low for others, but it certainly fails to reflect the ongoing cost to a firm of a failing hire. At £100,000 per failure those 700 or so failed hires could have cost London firms £70m-plus in the past six years – nearly £12m a year.

By anybody’s reckoning, that betokens a flabby process and yet lateral hiring in London – still the epicentre of the UK market – is hitting record levels in 2012 as firms seek to recruit their way ahead of the competition, raising the spectre of even more wasted money not far down the track.

The figures raise a host of questions, which can be boiled down to three key ones: what is happening, why is it happening and how can the situation be improved?

What’s happening?

Before we dive into the detailed findings by practice area, perhaps the most surprising finding of the research relates to team hires.

The hiring of multi-partner teams has become many firms’ stated preference with regard to lateral partner hiring. The logic is that a team is more likely to transition clients successfully, is less reliant on a single ­individual and will be a more solid hire for the firm.

Although team hires tend to be headline-hitting, they represent a small proportion of all hires – 12 per cent across the study period – although this has been steadily increasing to around 15 per cent last year.

However, team hires are no more likely to succeed, statistically speaking, than individual hires. While early results for teams look good – just 10 per cent of partners hired as part of multi-partner teams in 2010 had left by 2012, compared with 13.5 per cent in the general sample – after that crucial two-year period team-hire partners are slightly more likely to have left than other partners.

Among the Class of 2007, for example, 53 per cent had gone by 1 January this year as opposed to 50 per cent in the general sample, while for the Class of 2008 the figures are 38 per cent and 37 per cent respectively.

The research also found that what we term ‘hybrid’ firms – mainly US-UK mergers, but for the purposes of the study also comprising HQ-less international firms that have a similarly diffuse management structure – are having a slightly better time in the London market than their rivals.

While UK-based firms account for the vast majority of lateral partner hires – 71 per cent in the study period – they have lost 31 per cent of them to date. Non-merged US firms, accounting for 18.5 per cent of hires, have lost 34 per cent. Hybrid firms, very much in the minority, but certainly a growing phenomenon, made 10.5 per cent of the hires but have only lost 27 per cent of their hires to date.

It is worth noting that many hybrid firms are recent arrivals, but only hires made since combination have been counted, and the total number of very recent post-hire lateral ­recruits is relatively insignificant, ­especially as lateral hires are pretty rare for ­hybrid firms in the period ­immediately after combination.

Readers will not fail to have noticed the substantial disparity from year to year and discipline to discipline. This brings us to the second of our questions.

Why is this happening?

As with any research of this kind, the more one drills into the data the more difficult it is to reach definitive conclusions. For example, one can look at 415 finance hires, point out that team hires are slightly more ­successful than non-team ones and suggest that, broadly, one-third of ­finance hires will fail after three years, rising to half after five years.

However, looking at a specific area, such as asset finance, and applying personal or anecdotal knowledge to the relatively small number of hires in that discipline one can surmise that there were specific reasons ­behind some failures that may cause it to buck the trend.

One can certainly speculate that in an area prone to a high level of aborts, such as project finance, when the market falls apart that area is particularly badly hit. This can be seen in the relatively high number of energy and project finance failures during the downturn. The trick, of course, is to be able to anticipate economic ­circumstances in particular sectors or industries – something that, on the evidence of this research, some firms are not that great at doing.

This serves to underline the most important point behind this research: partner lateral hiring is a complex business and difficult to get right. The number of variables is huge and each interacts with others in often unpredictable ways.

Reasons for failure include: poor initial selection; wrong cultural fit; a failure to transition clients; a mismatch between promises made and delivery on either or both sides; poor planning by the hiring department, perhaps with overambitious goals or an unsupportive or even hostile context for the recruitment; and a simple failure to read the market or clients going out of business. A reason could be any of these or a dozen others – or a combination of factors.

Early failures – 13.5 per cent in the first 18 months – would seem to ­suggest poor performance by law firms in planning or selection. Of course, such failures may be par for the course – one cannot be expected to spot everything, although this analysis seems rather convenient.

Failures after a year or so speak of a failure to properly integrate hires or over-optimistic revenue projections in the planning process, but the sharp rise in failures past two years, to a plateau of 50 per cent, indicates a deeper malaise, a failure of strategy and of business planning in the medium to long term.

The downturn is significant, and some may say it has distorted the figures, but if that were so and law firm practices were, in essence, fine but simply suffering along with the rest of the economy, one would have expected hires made in 2008 – in the teeth of the recession – to have been much more successful, given the awareness of how tough things were and how this possibly curbed risk-taking and encouraged better planning. Yet 37 per cent of the partners hired in 2008 have already left for one reason or another – hardly evidence of better performance under pressure.

How can the situation be improved?

Our third question is as multi-faceted as the what and the why. Having said it is difficult to get right, some firms are more successful than others. In fact, some firms in the research – which will remain nameless – have an attrition rate of more than 70 per cent, while a tiny handful can claim not to have lost a single lateral they have hired in the six-year period. The majority fall in the 25 to 30 per cent area.

However, as proved in previous ­research into whether lateral hiring is delivering value (The Lawyer, 31 ­October 2011), some firms with zero-attrition have not performed spectacularly compared with those with higher attrition rates, suggesting a more forgiving environment that has hit financial performance. That research showed clearly that firms with a conservative, but active, hiring strategy fared better than those hiring a lot of partners or very few.

With such a complex process, there are any number of areas where problems might arise but we can suggest three broad areas for improvement: planning, selection and integration.

Strategic planning for recruitment seems like common sense, but anecdotally it is a weak point for many firms, with a demand to grow revenues quickly turning into “we have a budget to recruit” and “let’s instruct a recruiter” approaches.

Efforts to boost the success of ­lateral hiring vary from firm to firm, but more often than not partners and HR directors aver that the hires that work are the ones most closely aligned culturally to the firm they are joining.

As such, a systematic approach to hiring lawyers is relatively rare, firms usually preferring to let hiring departments do their own thing, sometimes, but not always, assisted by HR professionals.

The sheer number of variables involved in the lateral hiring equation defies easy analysis and the human mind therefore turns to ‘intuition’ to simplify what might otherwise be ­bewildering. An intuitive analysis often rejects data, claiming that empirical analysis is impossible. Firms thus recruit primarily by gut feeling, but it is clear that this is an expensive way to proceed.

Just because the problem is complex one does not mean it is insoluble. It does mean, however, that ­solutions are multifarious: better business planning ahead of hire; greater understanding of what defines your culture (for how can you successfully recruit to culture if you cannot articulate your own?); more accurate mapping of the recruitment context in political and organisational terms; better research into who to hire; better organisation of the recruitment process; greater focus on business plans in the recruitment process; and better integration of partners. These are just some suggestions. There are many more.

The most difficult realisation is that there are no easy answers to the London conundrum. Every firm needs to look at its lateral hiring programme and ask itself one simple question: is our failure rate acceptable, given what we are trying to achieve? If it is, fair enough. If it is not, the question becomes: what are we going to do about it?

Mark Brandon is managing director of Motive Legal Consulting.

A PDF entitled ‘Lateral Partner Moves in London – Annual Survey (2012)’ is available free from www.motivelegal.com or from mark.brandon@motivelegal.com

The research

This was the second year of the Motive research and took in another year of lateral hiring (2010-11), encompassing 2,295 hires from 2005 to 2011.

The research noted when each partner (or team) was hired, and then looked to see whether the partners were still at the firms they had joined by the cut-off date of 1 January 2012. This, in turn, built on last year’s cut-off date of 1 January 2011, giving a more in-depth picture of the longevity of hires that will, in time, develop into a very robust data-set.

Not counted as ‘failures’ were those where the firm had subsequently collapsed. Also discounted either were partners hired during mergers.

The research looked at distinctions between partners in broad service categories (finance, corporate, real estate and so on); between UK, US and ‘hybrid’ US-UK firms, the latter category also encompassing some international firms; and between partners hired individually and as part of multi-partner teams.

We divided partners by year of hire to create ‘Class of…’ groupings for each year.

Finance rules

Finance remains the area of highest demand when it comes to hiring for firms in London, accounting for 415 of the hires in the study, or 18 per cent. Next comes corporate, with 16 per cent, then real estate on 10 per cent, closely followed by litigation.

Overall failure rates for these areas are broadly comparable, but when one begins to delve more deeply into the figures some disparities emerge that can be linked to economic circumstances.

The study obviously covers the period of the recession and, looking at the figures, one can see some interesting effects. For example, partners hired in 2007 – immediately prior to the recession – are significantly more likely to have failed than those hired before that time or following it.

It is notable that 48 per cent of finance partners, 51 per cent of real estate partners and 55 per cent of corporate partners hired in 2007 have already left – more, in each case, even than partners hired the year before.

TMT and private equity partners were among the worst investments, with 60 per cent of TMT partners hired in 2007 having left or been fired since and a whopping 80 per cent of Class of 2006 private equity hires having failed to make the grade.

The canniest pre-recession hires turn out to have been employment, restructuring/insolvency, arbitration and tax partners.

Of course, hindsight is 20:20, but the figures suggest that if you see a storm on the horizon, it is time to start hiring the guys likely to get busy when it hits and quit hiring the others.

Any partners in US firms who were opposed to hiring corporate and finance partners as the storm clouds gathered can congratulate themselves. Non-merged US firms have lost 57 per cent of their 2007 corporate and finance hires to date, while hybrids have lost 63 per cent of corporate and 58 per cent of finance hires from that year. UK firms fare little better than their transatlantic cousins, almost certainly reflecting the different economic cycle in the US.

Litigation is a curiosity. Pre-recession, demand for litigation lawyers was weak compared with those in transactional disciplines, and the hires made before the recession hit seem to have been poorly, or at least unluckily, chosen. Fully 62 per cent of Class of 2006 and 57 per cent of Class of 2007 litigation hires have failed, those partners perhaps moving on to greener pastures when work levels picked up or simply failing to perform in a market everyone says did not pick up as much as some thought it would.