Focus: Hiring Strategies – Slow but steady is the way in firms’ quest for lateral value

Recent research shows that a cautious approach to lateral hiring pays dividends

Pair 1: City-based international firms

These firms provide a general service to substantial UK and international clients. The pair had virtually identical turnover, RPP, PEP and gross profit margin figures at the start of the period.

Conservative win
These two organisations started the survey period with pretty much ­identical RPPs as well as very similar turnovers, partnership sizes and PEP figures.

Whereas Firm B’s RPL figure was quite a bit lower than Firm A’s ­initially, by 2010 Firm B had closed the gap, showing a big increase in turnover and keeping its profit ­margin steady, although equity ­partners seem to have taken a hit in ­difficult trading conditions.

While the firms’ hiring strategies seem to have been broadly similar, Firm B was either picking better or integrating better, for its attrition rate is a quarter that of Firm A.

What appears to be a more ­conservative strategy all round, with a continuing emphasis on partners ­delegating work at Firm B (RPP +4 per cent, RPL +12 per cent) rather than keeping it to themselves at Firm A (RPP +11 per cent, RPL -14 per cent) seems to have paid dividends, albeit at the expense of the headline PEP figure.

Although there is, in some respects, little to choose between the two, Firm B’s more careful hiring strategy seems to have paid off, with the firm now being some 20 per cent larger than its rival and having closed the gap on the important measures of RPP and RPL.

Pair 2: national firms

Surprisingly, this was a more complicated grouping in which to find direct comparators, given the seeming similarity in strategies. These two are quality firms relying primarily on UK sources for their fee incomes. They had similar RPPs at the start, although one was smaller in turnover and size of partnership. They have very different lateral hire strategies.

Cushioning the crunch
These two also started out with a ­virtually identical ’punching weight’ in terms of RPP, although one was larger than the other in terms of turnover and partner numbers, and its PEP was higher (albeit with a lower gross profit margin), ­indicative of a tighter equity structure.

They had different growth strategies across the period. Firm A ­followed a reasonably substantial lateral hires programme, hiring 29 partners while cutting partner numbers overall (what some might call ’upgrading’). Firm B, meanwhile, hired cautiously – just six appointments in five years – ­preferring instead to bring partners in at the bottom and not cut numbers, resulting in an 11 per cent increase in partners.

Both firms suffered in tough trading conditions, with profit margin and PEP down, but Firm A’s ­hiring strategy, despite a 24 per cent fallout rate, seems to have cushioned it, with marginal improvements in RPP and RPL allowing it to slow its decline in PEP. Its rival suffered badly, with home-grown talent seemingly unable to generate more work from existing clients or bring in new ones, with resultant double-digit drops in RPP and RPL and a brutal 30 per cent reduction in headline PEP.

Pair 3: City-based sector-focused firms

Both these firms are specialists in a particular broad sector, although both have general service capability and international interests. They started with similar financials in some regards (RPL, PEP and RPP) but differences in turnover, number of partners and profit margin, with the smaller of the two being superficially the superior financial performer.

Risk-free reward

From very similar starting positions these two specialist super-boutiques adopted quite different growth strategies.
Firm A chose a radical strategy of lateral hiring, equivalent to almost half its partnership in new arrivals, with an overall boost to partner ­numbers of more than a third in the five-year period.

Firm B seems to have chosen much more carefully, its attrition rate among its fewer lateral hires just a tenth of its rival’s. Instead, it underwent a mini-merger (not included in the lateral hires figures here), ­taking in what amounted to several teams, boosting not only turnover and partner numbers, but also, in concert with its lateral hire programme, ­hiking all its other measures.

Both firms suffered from tough trading conditions, but Firm B seems to have weathered them better thanks to a more conservative and less fluid – and therefore less risky – strategy.

Pair 4: City-based private wealth firms

These firms are what one might term City-based ’independents’, reliant for a high proportion of their income on private wealth, including private client, trusts, real estate and matrimonial work. Both have international interests to some degree.

hey started in an almost identical position with regard to size of partnership and PEP, also having similar profit margin, turnover and RPP figures.

Fortune favours the brave

These firms started with many ­similar figures across the board – turnover, size, profit and PEP – although Firm B’s RPP and RPL stats were higher, indicating perhaps a tighter equity at Firm A and better fundamentals at its rival.

The five-year period has put clear blue water between the two, with Firm B besting its rival on every measure, although both have seen their headline PEP figures fall.
Both firms in this category have pursued pretty conservative hiring strategies, although the increase in partner numbers at Firm B indicates that either more partners have been made up in the period or fewer lost, or most likely both.

From this distance, Firm A’s ­distinctly sluggish performance across the five-year period does not seem to have benefited from the injection of new lateral hire blood in the same way other firms have.

One could conjecture that Firm A has been too conservative, or ­perhaps simply more ineffective, at persuading the right lateral hires to join.

Pair 5: Scottish firms

Both these firms are based in Scotland and both have significant London operations. The firms were almost identical in size, turnover and RPP terms at the start of the surveyed period, although PEP was slightly higher in one than the other, and profit margin considerably greater.

Soft on laterals

The two Scottish firms in our sample started out head-to-head in many respects, with similar turnover and partnership numbers, and broadly comparable in other measures.
Both pursued significant lateral hiring programmes, with Firm A channelling some of its lateral hiring energy into securing a mini-merger – something its rival eschewed, ­preferring single partners.

Firm B seems to be the clear ­winner across the period, most notably losing not a single one of the 15 partners hired during the period. However, its performance over the five years can be seen to be pretty static, with increases in partner ­numbers and turnover not producing any corresponding increase in the fundamental numbers of RPP and RPL, and PEP only inching up.

However, this conservative ­strategy is enough to have let it put a little distance between it and its now larger rival, Firm A, whose ­fundamentals have gone the other way, with revenue, profit and ­headline PEP all falling.

One might ask, though, whether Firm B is being tough enough on its laterals. It is all very well to lose none, but if they are not bringing a marked financial difference to the firm, should another strategy not be ­considered?

Pair 6: Midtown firms

Our last pair are quite different firms, based in ’Midtown’: between the City and the West End. The two started off looking very similar in many ways, virtually identical in size and with comparable RPP and RPL figures, but radically different in character and approach.

All’s well

In some ways this final pairing is the most interesting because the two firms are, culturally, chalk and cheese.

However, at the start of the survey period they had many similar financial fundamentals.

The only real ­differences between the two were in the amounts of ­revenue, and hence profits, being driven through ­partners. The ­partners at Firm A were getting much more bang for their buck than those at Firm B.

In the intervening period Firm A adopted a radical lateral hiring strategy, taking in 20 partners, equivalent to almost half the original number. Firm B was a lot more conservative in this regard. That conservatism extended to selection and ­integration, with Firm B losing not a single hire in the period, compared with a 25 per cent attrition rate at its ­comparator.

By the end of the period, Firm B has closed the profit gap on Firm A despite the latter’s ’sound and fury’ lateral hire programme, and both headline profits and margin were up, although both firms could be said to have weathered the economic storm pretty well compared with the ­market norm.