Laterals: what's your return on investment?
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Do you have a growth strategy, or just a recruitment strategy? And just what are you getting out of the time and money you put into recruiting partners and teams?
Those are my tough questions for today, although I believe that some firms think recruitment strategy and growth strategy amount to the same thing, certainly if their strategic behaviours - such as they are - and the investment they seem willing to put into their activities is anything to go by.
At this point I will throw in an ugly phrase: return on investment (ROI).
Now, ROI is what firms really should be looking at when it comes to lateral hiring, but in law firms, this is a very vexed question. It is vexed principally because the starting point for it is calculating and understanding the true financial picture around partner and team lateral hiring, something which, if my casual research is anything to go by, is far from a perfected science in law firms, if indeed it is even undertaken in the first place.
Some HR directors I have spoken to freely admit that they do not calculate lateral hire breakeven at all, given how politically sensitive it is or the partnership’s reluctance to face up to failed strategic initiatives. Having done some of the groundwork myself on coming up with a framework for lateral hire breakeven (more on that to follow…), I can attest that it is quite a complex exercise, leaving aside the political dimensions, which will vary from firm to firm and department to department.
However, without understanding the real level of investment that a firm is making in a lateral partner or team, the firm simply cannot calculate its return on that investment and cannot judge whether the money spent on lateral hiring might be better spent elsewhere.
To illustrate, let’s ask the question: “If we spend the same money we were going to spend recruiting this partner or team on, say, marketing, training, advertising, pay rises or a big fat client party, what would be the comparable return on investment?”
I’d bet that most law firms’ answer to that would be: “Absolutely no idea.”
Actually, I’d go as far as to say that it hasn’t occurred to most firms to even frame the question like that.
Growth in law firms is seen principally as a function of lateral hires, including team acquisitions, or mergers, both of which add production capacity, if you like, but neither of which is guaranteed to add profitable growth, which is really the only thing that matters in the long run.
Now, every marketing book under the sun will tell you that the easiest new revenue to gather comes from existing clients, yet law firms are often quite bad at doing this, or at least use relatively crude methodology to try to make it happen. Actively diverting spending away from increasing production capacity (lateral hiring) to active business development via strategic restructuring, technology investment, improved service design and aggressive pricing methodology may get you to where you need to go without all the bother of lateral hiring.
Rather, lateral hiring - and merger to a lesser extent - is seen as the easy option. It has become the default position as regards law firm strategy.
For, let’s face it, the primary purpose of lateral hiring is not to hire interesting and exciting new lawyers who can create improvements in a law firm’s service offering that may prove attractive to clients; it is to capture client relationships and, down those new channels, to sell pretty much the same product to an expanded client list. Why else would client following be crucial and cultural fit - ie “don’t rock the boat” - be so important?
True innovation comes from disrupting current models to create new models, and by investing to meet often long-term strategic aims. Unfortunately, lateral hiring, as currently practised, usually does neither of these, and is very often - about 30 per cent of the time in big firms according to my research - an absolute failure, and very often results in what one managing partner friend of mine calls “drizzle-makers”, a term that should speak for itself.
Incoming partners are actively dissuaded from disrupting existing patterns of behaviour and judged in very crude terms over a short time period; very often the hire is the strategy and yet the hire is not allowed to transform, merely expected to add volume or a fractional degree of dimension to the offering.
Marketing, training and, to a lesser extent, other development activities are what law firms do anyway, so it probably doesn’t occur to switch revenues from one to another by way of an alternative. One interesting exercise might be to view all the activities under the same ‘development’ budget heading, with ROI applied rigorously across all activities.
But until law firms start to properly calculate the return on investment they get from lateral hires and ask themselves the thorny question - “what might happen if we spent this money on something else?” - little will change.
Those without a coherent approach to practice investment will continue to underperform.
Mark Brandon is managing director of Motive Legal Consulting