In the latest "Practice Innovations" article, we look at the lateral partner market, which one would assume is undergoing a lot of change. Yet, it is not — though that itself might change
Given all the changes in the legal market, one might assume that the lateral partner market would also be caught up in some level of change. Somewhat surprisingly, this segment of the market has not changed much over the past decade, although possible changes may be coming in the future.
The lateral partner market obviously involves law firms looking to acquire new partners, and often involves “recruiters” many times referred to as “search firms.” While in some cases law firms make direct contact with potential laterals through existing relationships (e.g., law school classmates, former law firms, etc.), recruiters can develop and maintain relationships with partners in various practices and geographies, giving them a view of the lateral landscape that law firms are unable to have.
One scenario under this model is when the recruiter become aware that a partner wants to leave their current law firm, and will shop the lawyer to other law firms that the recruiter and the candidate feel will be a good fit. This is a very “opportunistic” approach, since other law firms may or may not have that type of partner on their strategic list (if they have such a list). The other main and more effective approach is where law firms meet with the recruiter and provide guidance on the types of partners they want to add; then the recruiter goes out in the market, making direct contact with potential candidates. When interest is found, the recruiter will then help the identified candidate build a story for how they will fit into the new law firm. This then initiates a process within the law firm to take the candidate through various steps to review them and ultimately decide whether to make an offer or not.
The lateral partner market continues to be very active as law firms increase their focus on growth, which is seen as critical to maintaining their success of many firms going forward.
Recruiters get paid a percentage of the compensation the candidate partner receives when they join the new law firm. It should be noted that law firms are very dependent on recruiters for a pipeline of good candidates. This creates a situation where the customer (the law firm) has to act somewhat like a seller to the search firm(s), even sponsoring legal recruiting conferences in order to curry favor with better recruiters.
Some law firms will have a team that manages the process, while others have internal recruiters to facilitate it. On the law firm side, the process includes different levels of interviews and a diligence process. The primary tool for diligence is called the Lateral Partner Questionnaire (known as the infamous LPQ) where the partner candidates provide information about their book of business, including major clients and revenue from each one over the past three years or so.
Growth-Driven Market Facing Change
The lateral partner market continues to be very active as law firms increase their focus on growth, which is seen as critical to maintaining their success of many firms going forward. This higher focus on growth will create more tensions in the lateral partner market, since many law firms have similar growth strategies. Given this pressure, we should expect to see some changes coming to the lateral partner market.
Indeed, we are starting to see some changes occur, but these are very embryonic. As law firms push for growth, they will need to commit more and different resources to achieve their goals. I have noted via various articles, conversations and press releases that show many large firms appear to have a very similar growth strategy, looking to focus their growth on high-margin practices in major markets (e.g., New York, San Francisco, Chicago, Washington, D.C., etc.). Of course, logic dictates not all of these firms — mine included — can succeed with the same strategy. Instead, we should expect a much more competitive market, where large law firms have to be more aggressive in competing for many resources, including lateral candidates.
One possible approach to succeeding in this new environment is to shift the strategy and mindset on the lateral front from “recruiting talent’ to more of an M&A approach. If you think about it, lateral partner acquisition really involves a business identifying where it has holes in its platform or where it needs to strengthen its offerings. I use the word “acquisition” here very purposely — other businesses have well defined acquisition strategies, and it’s time for law firms to do the same.
Absent an overall law firm-level strategic plan, law firms can look to their business units (practice groups) for guidance on where the needs of the business exist. With this information, the acquisition team can focus its efforts with recruiters on the more strategic needs of the law firm. And while firms should be striving for more strategic acquisitions over opportunistic ones, they also should not ignore good opportunities when they arise. However, just taking what falls in your lap is not a great business model.
This all means law firms need to start changing up their game and their internal talent to manage all of this. A more aggressive growth strategy will not be accomplished with the same resources, doing it the same old way.
Conducting Diligence on Laterals
Another aspect of lateral acquisition that needs attention is conducting diligence on new recruits. Currently, diligence is very much a self-reported function with law firms relying on candidates to report, via their LPQs, on any issues of relevance. Again, contrast that with how firms’ own clients perform diligence on their acquisitions. They trust, but verify, any stated comments about a targets’ financials and other matters. Another missing component from diligence has been profitability — law firms may ask about revenue, but they should also be determining the projected margins of the work the candidate will bring over.
The legal market presents challenges to the diligence function subject to ethical restrictions. However, law firms can and should do a better job. For starters, they should be designating specialized resources to the diligence function, establishing a more rigorous and well-defined process for how lateral candidates are sourced, screen, reviewed, and acquired.
The legal market presents challenges to the diligence function subject to ethical restrictions. However, law firms can and should do a better job.
And once acquired, how well the new partners are integrated into the law firm is an important factor. Ideally, best practices to prepare for a successful transition would include initiating integration efforts earlier in the acquisition process, instead of waiting until the offer was accepted. More and more, firms are establishing formal lateral integration programs. These programs help develop business plans for the incoming partners, to better facilitate their successful landing at the new law firm. Firms can also establish play books for how partners can be more effectively introduced to fellow partners and existing clients.
I recall one client lamenting how a law firm failed to let them know of a newly acquired asset, requiring the client to instead search the market for the same expertise it had readily available at that law firm.
Traditional success rates for laterals are typically measured at the five-year mark; and unfortunately, the success rate for retention in the lateral market has been less than stellar with recent market data showing this rate at around 60%. With lateral partners being the number one capital investment a law firm makes, it only makes sense for them to maximize the return on that investment by doing everything possible to drive the success of acquired partners.
Conclusion
The lateral partner market is ripe for substantial change. With the increased emphasis on growth for large firms, we should start to see more and better managed investments being made for this function. In fact, the legal market would do well to take cues from its own client base and begin treating the lateral hiring function more like an M&A situation — complete with well-thought out diligence and integration functions — rather than an opportunistic talent recruiting one.
