Lateral Hiring and Law Firms: Good Enough to Survive
In total, 30,000 lawyers have made at least 1 lateral move in the last 13 years. In fact, 2,020 lawyers made lateral moves in 2000, with 70% of firms making at least 1 lateral hire. In 2007, that number jumped all the way up to 3,620. Two years later in 2009, the number fell to 1,990 moves following the bank crisis. But in 2011 this figure jumped back to 2,560 with 89% of firms making at least 1 lateral hire. Since then, the trend has only continued upward.
But that begs the question—is lateral hiring an effective strategy for firms? What trends currently exist and lend to the discussion? William Henderson and Christopher Zorn address these questions in a recent American Lawyer article, “Playing Not to Lose”. A closer look reveals that while lateral hiring is important for today’s law firms, it is not necessarily a strategy that puts firms ahead—but it is one that keeps them from falling behind.
Interestingly, Henderson and Zorn’s research suggests there is no substantive statistical link between a firm’s aggressive lateral strategy and higher profits per partner. “Indeed, the most profitable firms tend to have the lowest rates of lateral hiring—roughly 1% per year.” Even so, it is a strategy a vast majority of firms are still pursuing. In fact, 96% of Am Law managing partners reported they expected to hire laterally in the next 2 years, but only a meager 28% indicated they felt this had been a highly effective strategy in the past.
So why do firms keep hiring laterals? The short answer is to keep up. The new reality is one firms must face: 4.6% of a firm’s partnership joins laterally each year while 3.0% leaves. More laterals are entering the market each year, and, they are going to go somewhere. Therefore, according to Henderson and Zorn, “if the lateral market is a game that most firms have to play, but very few can win, the best strategy may be the one that produces the lowest risk of failure. Success may be simply avoiding the fate of more than a dozen Am Law 200 firms that have collapsed in recent years as partners lost faith in the enterprise and headed for the exits. Since we can’t win, we play not to lose.”
Other lateral market trends found by Henderson and Zorn include:
- 95% of lateral hires are made within the same geographic market.
- Lateral movements internationally are increasing, with 9% in 2002 up to 22% in 2011.
- A new trend away from “upstream” movements (larger/more profitable firms). Today, movements are more often “downstream” and “peer-to-peer”.
- Large increases in partner-level candidates hired from in-house and local/state government backgrounds.
- Different practice areas have different economic pulls. Antitrust, White Collar & Securities Enforcement, General Corporate, M&A/Private Equity/Emerging Business are at the high end of profits per partner and revenues per lawyer. L&E and Trusts & Estates are at the low end.
- Lower revenue firms hire more laterals.
- Large, profitable firms are less likely to fail. A firm of 1,500 is more likely to sustain the lateral loss of a key practice group than a firm of 300.
- Law firms are allocating more pay to equity partners and top producers. This may be effective in the short term, but has consequences in the long term.
Thus, according to Henderson and Zorn, “the payoff of aggressive lateral hiring may not be higher profits, but additional revenues and more high-quality lawyers.” Having said that, a bigger law firm does not guarantee a better law firm, but it does appear to be the safer option for now. As a result, firm size and lateral hiring will likely continue to grow. This of course is by no means is a perfect strategy, but according to Henderson and Zorn, “that may be good enough to survive until a more compelling strategy comes along”.