LATERAL THINKING: WHAT TO CONSIDER BEFORE BRINGING ON LATERAL PARTNERS

Oct 2, 2018 9:30:00 AM | Michael Marget

Hiring lateral partners remains all the rage—despite the fact that fewer than six in ten can be considered a success. When considering law firm lateral partner hiring, here are some important things to think about:

1. UNDERSTAND THAT It’s a seller’s market.

Ninety-nine percent of managing partners at large firms (250+ lawyers) tell Altman Weil that lateral partner recruiting remains their top strategy for boosting the bottom line, meaning small to midsize law firms seeking laterals will find a crowded marketplace. But, buyer beware!

2. Lateral candidates MAY promise more than they deliver. 

Laterals may overpromise, but they seldom do this intentionally. Remember, it is the client, not the lateral, who decides when and how much of the their legal work will transfer to your firm. So, do your due diligence.

3. Understand the lateral’s motivation for making a move.

Laterals should be able to articulate a clear reason for wanting to change firms. If the prime motivation is higher compensation, will your firm be able to match rising expectations over the long term? Remember, money cannot buy loyalty—it can only rent it temporarily. Also, how likely is it that you will get into a bidding war against other firms and/or a matching offer from the lateral’s current firm? No one wants to be cast into the role of stalking horse when it comes to lateral partner moves.

4. Verify the lateral’s credentials.

Once, on the eve of extending a lateral an offer, I discovered the candidate’s law license had been suspended four months earlier for failure to file their annual renewal form. Our firm decided to take a pass, not wanting to become involved in the drama (and downtime) to assist with readmission.

5. Ask about past or possible ethical complaints, malpractice claims, or tax issues. 

Nobody likes surprises—and there’s nothing worse than finding out your new partner has a closet full of skeletons.

6. ENSURE ALL potential conflicts HAVE been highlighted and cleared.

The only thing scarier than hiring a lawyer practicing with a suspended license or with a “past” is uncovering an unresolvable client conflict after the deal is done. This nightmare scenario may involve the departure of a legacy rainmaker whose feels the practice is conflicted by the lateral’s practice.

7. BE SURE YOU CAN articulate (to yourself and to your partners) the firm’s motivation to add A lateral.

Will the lateral addition simply add bulk to the firm (with the thought that more lawyers equals higher firm revenue) or is it strategic (to add a new practice area, or acquire new clients who require your firm’s niche services)? Will the lateral be accretive and help improve the firm’s future? With nearly 40% of laterals likely to be unsuccessful, every lateral decision requires ‘strict scrutiny.’

8. CONFIRM THAT THE lateral hire IS really necessary.

If you are looking to replace a departed partner, do you really need the replacement or can the work be redistributed? (How is “need” defined?) Will hiring a lateral senior associate or younger partner disrupt advancement of other young lawyers?

9. CREATE AN integration plan.

How do propose to make the lateral “more successful” at your firm? Do you assign a lateral mentor? Introduce them to successful former laterals to learn how to learn the ropes? What is the plan to integrate legacy partners with the lateral’s clients and introduce their practice to existing clients? These questions should be well thought-out and detailed in an integration plan.

10. Do your financial due diligence.

Do you forecast the lateral’s revenue generation assuming “best case,” “midrange,” and “worse case scenarios (see point #2)? Does the financial due diligence forecast three years out? Are the incremental cost assumptions reasonable (including out-of-pocket expenses like visits to the lateral’s clients to introduce the firm)? What will be the impact on the firm’s bottom line at the end of the current year? When does the firm break even?

11. CONSIDER the downtime.

There are at least two types of downtime involved with lateral moves. One form is non-billable time a lateral must spend briefing clients, obtaining release letters and awaiting transfers of files; it always takes longer than anticipated. The expense problem results from less-than-full employment of the lateral by the new firm.

In 2014, I studied the financial performance of 25 laterals who joined an Am Law 100 firm between 2008 and 2011. The lateral professed on average to originate $1.1 million of work at their prior firms and work 1,850 billable hours annually—60% billed to their own clients and 40% on work originated by others. Three years out from their start dates, their annual originations averaged 80% of what was projected (see point #2), and their billable hours averaged less than 1,600 because they received lesser internally referred work from other partners before. (I’ll discuss this project in more detail in another blog.)

12. BE SURE the lateral’s financial package makeS sense.

How do you establish the lateral’s “market price?” Do you offer “market value” and, if not, how much higher are you prepared to go? Remember, there’s likely a “greater fool” out there ready to outbid you. Is the pay comp comparable to what equivalently performing legacy partners earn? (“I’ve been a partner for 10 years, but a new guy with the same book of business gets a better deal. What about me?”) Outsized pay packages tend to paint a target on the backs of laterals. A better approach is to reach an agreement that assures if a lateral produces “X,” the compensation will be in the range of “Y to Z;” it sends a message that the lateral is willing to share the risk and reward with his or her new partners.

13. BE prepared to act quickly. 

Lateral candidates have a short half-life, so speed is essential. Firms that have streamlined the lateral hiring process have an advantage in closing deals.

14. Keep a Lateral scorecard. 

When I was a law firm COO/CFO, I kept tabs on our laterals. Once a year, I would pull up the Excel spreadsheet and update their annual stats against our original financial due diligence expectations. The Managing Partner and I would review the results and prioritize those laterals (and their mentoring partners) we needed to speak with to set new expectation goals for the coming year. It was our job to manage the lateral mentors and the laterals themselves to continue their career growth. Managing is never over; rather, it is an ongoing process that must be maintained in order to achieve upward success.

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Law Firm Management, Lateral Partners

Michael Marget

Mike Marget is an erstwhile large law firm manager with tours of duty as COO at Katten Muchin, Jenner & Block and CFO at Holland & Knight, among others. He’s currently president of 4L Law Firm Services which provides accounting, bookkeeping and related back office services to small/midsize law firms and co-CEO of NSource, LLC, a law firm consultancy. His blog, Law Firm CFO, is dedicated to every law firm manager who has ever asked the question, “Why me?”
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