Sum people

Does your firm give much thought to how long it expects lateral hire partners to stick around, or is the emphasis on getting them to profitability as quickly as possible?

The results of the third year of my research into lateral partner hiring in the London market show that failure rates remain persistently high. It also shows markedly different success rates depending on the specialism of the recruited partner, and also where they come from and the environment they go into.

It provides some interesting pointers for firms looking to hire successfully and for partners in the recruitment process, and busts a few myths along the way. Let’s look at some of the data.

32% duds

The research examined 2,763 partner hires in the London market between 2005 and 2012. It found that nearly a third (32 per cent) of these have already failed; that is to say the partner has already left the firm or has been removed since joining.

Failure, of course, is a relative term. The study records only those partners who have left, and not those who have remained but are underperforming - what one London managing partner calls “drizzle-makers” - but in so doing it does assume that a hire that has lasted less than seven years has not been a success, which may not be quite the case in practice.

The time taken not just to recover investment costs but to achieve a level of profitability over a number of years sufficient for the hire to be judged a success will vary from firm to firm. As such, where possible I have tried to identify recruits by the year they were hired, to allow the reader to judge whether a hire that lasts five years, for example, might qualify as a success in their firm.

The effects of the recession can be seen in the study. Pre-recession 2007 was the peak hiring year for laterals, but 61 per cent of the partners hired in that year are no longer at the firms they joined.

Failure rates in US firms are roughly a third higher, at 40 per cent, than in UK firms, but hybrids - merged US-UK firms - fare better than either group, with a fallout rate of just 25 per cent.

Candidate background also matters. Hires from hybrid firms into UK or US firms fare better than those from other firms, while the statistics show that US firms are better advised to hire partners from US or hybrid rivals than from UK firms, confirming what many market observers would find obvious - that US and UK firm cultures are different.

Talking of culture shock, hiring from in-house straight into partnership also shows a much higher failure rate than for partner to partner moves - 43 per cent of all in-house moves to private practice over the study period have failed compared with the 32 per cent average across all hires. The rate climbs still higher, to 55 per cent, when the destination is a US firm, and there are pockets of even greater failure.

Transaction stations

Transactional areas record the highest failure rates generally in terms of discipline recruited, with figures especially poor in US firms.

Overall, firms can expect 41 per cent of finance hires and 31 per cent of corporate hires to fail within three years. Partners hired at the transactional high-water mark, in 2007, have been even less successful than average; 57 per cent of ­finance hires and 67 per cent of ­corporate hires made in 2007 have failed.

Looking into the detail shows what a clobbering real estate has taken in the recession. Of partners hired in 2005, 80 per cent are no longer at the firms they joined at the time, while 66 per cent of 2007 hires have failed, and even 20 per cent of 2010 hires.

Litigation, meanwhile, throws up some interesting results that may pour cold water on the idea that litigators are risky hires. For a kick-off, the overall failure rate is lower than average, at 28 per cent, and litigators seem to do much better at US firms than either finance or corporate hires, with a failure rate markedly lower than both those cases.

However, some pre-recession litigation hires have struggled to make their way. Some 65 per cent of 2007 hires and 66 per cent of 2006 hires have failed.

Specialist effects

Hires into some specialist areas, such as EC/competition, financial services, intellectual property (IP) and insolvency/restructuring, mean­while, show much lower failure rates than for mainstream transactional areas. Financial services and regulatory (including corporate crime) show the lowest failure rates by discipline, indicating these are far more likely to be stable hires.

Other intriguing bits of data also emerge. Finance hires seem to fail more quickly than others, or perhaps firms have had less patience with finance lawyers in this tricky market.

Failure rates in commercial (50 per cent) and environment (53 per cent) buck the trend for specialist areas, evidence of one discipline that has struggled to find its place in a world that has moved inexorably towards specialisation, and of another that has faded from the spotlight somewhat and is seen as a nice-but-not-critical for businesses in straitened circumstances.

Team hires, meanwhile, are not the panacea firms might wish, with failure rates practically identical to partners hired individually, although it remains flavour of the month among those recruiting, presumably because it seems more likely that clients will come over with a team.

Around 8 per cent of the hires in the study were double - or triple - moves, that is to say partners who have joined one firm, then left, joined another and then left that one (in some circumstances bouncing through another firm in the meantime). Firms are rightly sceptical about partners who have moved around too much, or perhaps this figure would be a lot higher.

Better than average

Many firms will look at this and think “we’re doing well”, and they’d be right, certainly compared to the average of 32 per cent failure rate across all hires. In fact, the failure rate of hires into most of the mid-sized to large UK and hybrid firms is between 15 per cent and 25 per cent, and the figures are skewed by some firms that are not only worse than average, but also seem to be pretty darned terrible at lateral hiring in the round.

Albert Einstein once said that the definition of insanity is doing the same thing over and over again and expecting a different result. Firms with failure rates above 50 per cent - and there are a few - might consider what they are doing wrong rather than just trying to play the percentages and failing.

Having said that, even a 15 to 25 per cent dropout rate, at a cost of £100,000 per hire not including actual losses or background costs while in place, makes it a prettyexpensive game. Not only that, but it seems self-evident that consistently hiring lateral partners who do not perform to expectations will degrade firm profitability over time.

Hold on

Of course, hanging on to your lateral hires is no guarantee of success either. It is worth noting that the failure rate of hires into Dewey & LeBoeuf, pre-collapse, was lower than average and substantially lower than some US rivals that continue, seemingly healthily, to date.

I might also note that one UK firm that has recently suffered a number of departures and continues to post disappointing figures lost not a single one of the lateral hires it has made since 2005 until quite recently, and that several more which look to have had a stable hiring record have posted disappointing results for the past few years.

What works, of course, is getting it right. My previous research (see The Lawyer 31 October 2011) found the most zealous hirers performed relatively worse than more conservative direct rivals, albeit that firms which were too conservative about hiring were also outperformed by those with a slightly more active programme.

What Dewey showed - and what one might conjecture lies behind the woes of a few firms - is that a hiring strategy with too many compromises, too many income guarantees, a failure to integrate hires and a wilful blindness in the hiring process can lead to disaster.

More than luck

If lateral hiring were just a matter of rolling the dice and seeing how the numbers come up, the failure rates across different disciplines and from one type of environment to another would be identical. The fact they are not, and that marked differences do occur, suggests more could be done to improve lateral hiring by adapting your ­approach depending on what discipline the hires are coming from and their cultural background.

The research throws up some interesting data on what might and might not be working, in general terms. For example, US firms do markedly worse recruiting in both key transactional areas - corporate and finance - than either UK or hybrid rivals. Not only that, but finance partners moving from one US firm to another are much more likely to fail - 49 per cent - than those moving from a UK firm to a US firm, for example (29 per cent).

This would seem to indicate that while banks instructing partners in UK firms are willing to give a US firm a go, perhaps believing they will get access to a more international flavour of advice, they seem more reluctant to change from one US horse to another, where the difference might be difficult to detect. This seems to be backed up by the similarly high failure rate of finance partners moving from a US firm to a UK one (50 per cent), where perhaps the client senses a potential diminution in the range of advice or access to key US markets.

The phenomenon seems to repeat in another global industry, TMT (technology, media and telecommunications), where the failure rate of partners moving from a US to a UK firm is way above the ­average, at 56 per cent. Neither result augurs especially well for UK firms trying to make their way in a global market.

What it may mean is that not only do firms need to do more thinking about whether their platform represents enough of a difference for the incoming partner to get over the ‘better the devil you know’ factor, but also that candidates need to

put a lot more work into explaining their move to clients rather than simply assume they will move across.

Other pockets of difficulty for US firms include taking corporate partners directly from in-house - often a disaster, according to the 80 per cent failure rate of such hires, compared with 45 per cent for those who join UK firms. Partners moving from one US projects/infrastructure firm to another US firm also has a high failure rate - 70 per cent. Perhaps the failure rate of such hires says something about the lack of identifiably different offerings - or maybe about the unpredictable nature of the business.

In-house divide

The in-house/US figures are particularly striking, and could point to the more porous nature of the in-house/private practice divide in the US and the greater propensity for lawyers to move over it and transition relationships at the same time.

While it is difficult to say definitively, US firms hiring in-house lawyers as corporate partners have either been unlucky, or maybe they are making too many assumptions about the viability of the hire or spending too little time properly planning for and integrating the newcomer.

The successes

The figures also clearly show that firms generally have a much greater degree of success with hires into specialist disciplines, such as tax, financial services and EC/competition. It may be that because such hires are often dependent on other practices (such as corporate or litigation) and that client relationships are often held elsewhere in the firm, specialist partners are less mobile.

It may also be that the lawyers in such disciplines - either by nature or nurture or both - may be of a more conservative bent, less minded to move for the promise of more money or excitement. Either way, specialist hires would seem to be more solid.

This is the same for litigation. Litigators often get a bashing in partner recruitment because income streams are difficult to predict, but the overall failure rate is lower - at 28 per cent - than the average, and all classes of firm have success where the cultural match is good.

UK firms taking UK litigators have seen a 26 per cent failure rate, whereas US firms taking litigation partners from other US firms have had just 22 per cent of them fail.

US firms taking UK litigation partners, meanwhile, have seen 32 per cent of them fail, which would seem to point to something of a cultural difference. Failure rates at hybrids range from 21 to 25 per cent depending on the background of the partner.

The observations around specialist hires and litigators may be worth building in to your calculations. If, statistically speaking, a transactional hire produces more revenue but is markedly more likely to leave the firm after just a few years, and a specialist or litigation hire is likely to produce lower revenue but is far more likely to stick around, it is more likely that the specialist hire will work out over time. Profitability may be in the long-tail.

My observation is that specialist hires are in fact often put under similar pressure to transactional partners with the result that they often leave, citing unachievable targets. Reduce the pressure on them by accepting they will be less productive in revenue terms and you further increase the chance they will stay and break through to profitability in the longer term.

In transactional disciplines, meanwhile, firms need to think more carefully about whether the promised pipeline they are relying on exists in reality. The high level of failure in both finance and corporate seems to suggest that more questions need to be asked, and it should be understood and factored into risk calculation that candidates who can demonstrate a good degree of portability can just as easily up and leave a couple of years down the track if things don’t seem to be going well.

This raises the question about whether the standard two-year period for judging success should be different for varying types of partners. Again, you need to look at the revenue patterns of your own partners to be able to judge, as well as factoring in the true costs of hiring, but that’s for another day and another article. However, you should not go away from reading this thinking that I am laying all the blame for non-performance on firms’ failure to properly plan or integrate their hires.

One of the mystifying things about the effective failure rate of roughly 50 per cent after three to four years in most disciplines is why partners are proving so unadaptable, or simply making such poor choices in the first place.

Partner candidates in process need to think more carefully about where they are ending up and what they may have to do differently. US firms, for example, manifestly present a more difficult environment for UK partners and in-house lawyers, so candidates with a US offer on the table need to think about how well they will adapt to the new environment and perhaps do some deeper thinking about what might make them more successful.

Recruiters also have some questions to answer here. Yes, firms make the final decisions on hires and it is their responsibility to do the calculations, but what are recruiters doing to make sure hires stick around?

One could argue that it is in fact against the recruiter’s interests that a hire lasts. If someone only lasts two years in post, not only is it not the recruiter’s responsibility but when the partner does leave, they may well get the candidate back and the post to recruit for once again - a nice win-win-win. With churn like this it is little wonder the legal recruitment market in London is saturated with players eager to join the free-for-all.

Firms need to ask themselves whether their suppliers have a genuine conflict of interest or whether this is just a quirk of the system they have to live with. Firms might also quiz recruiters more carefully about what they are doing to overcome this and what they can do to ensure that not only are they finding suitably qualified hires, but hires that will endure, before parting with the eye-­watering sums often associated with a search assignment.

Ultimately, this year’s figures are no better than last year’s. Until we see some changes in how partner lateral hiring is conducted, it will continue to be hit and miss, to the detriment of client and candidate alike.

Mark Brandon is managing director of Motive Legal Consulting www.motivelegal.com