Why Do Laterals So Often Fail? Poor Due Diligence, Researchers Say
It’s costly to hire laterals, and yet nearly half leave after five years. Researchers from ALM Intelligence and consultancy Decipher asked why the process was so flawed.
By Dan Packel
Over a four-year span between 2014 and 2017, the lateral moves between firms in the Am Law 200 brought with them a total book of business valued at over $17 billion, according to ALM Intelligence.
And yet, the number of laterals who leave their new firm within five years has been estimated at nearly 50 percent. Putting the two numbers together illustrates the serious consequences for firms that enter, and fail, in the lateral market.
Applying the upper estimate of a 47 percent failure rate from American Lawyer contributor Hugh Simons, firms lose over $2 billion a year in revenue from failed laterals.
“That’s an astounding amount,” said Howard Rosenberg, co-founder and CEO of legal intelligence provider Decipher. And this inefficiency was the starting point for a report released in February by Decipher and ALM Intelligence exploring why so many lateral acquisitions come up short.
The issue is also exacerbated by the ubiquity of lateral hiring. According to the report, between 2014 and 2018, there were almost 9,000 lateral partner moves within the Am Law 200. And almost no firms are on the outside looking in: ALM Intelligence data shows that 97 percent of these firms made a lateral partner hire in that interval.
Put simply, law firms count on lateral hiring to solve all sorts of problems and create just as many opportunities: from boosting sagging revenue to delivering an entry to new markets. Report co-author Nicholas Bruch of ALM Intelligence calls it a “golden egg.”
But beyond the lost revenue, these hires don’t come cheap. According to the report, the average cost of acquiring a lateral partner was $2.3 million in 2018, including one year of compensation, recruiter fees and other internal costs. Most laterals ultimately receive two years of compensation, driving the average up to $4.2 million.
With the stakes so high, one would think that law firms would put significant resources into feeling out potential partners with due diligence and integrating them soundly. Not so, according to Rosenberg.
“Getting partners to work seamlessly within an existing partnership is a real challenge,” he said.
Bruch draws a direct link between the lack of due diligence and the failure to integrate. Over 50 interviews with law firm leaders and other experts with experience in lateral hiring revealed stories about new arrivals not fitting in. Sometimes this manifested in fights with other partners, other times by not treating associates in the way that the existing partnership believed they should be treated.
“The group didn’t think about how these people would fit,” he said.
Decipher co-founder and general counsel Michael Ellenhorn added that the new partner’s promised business too often doesn’t come along.
“A lot of that simply goes down to poor due diligence on part of the hiring firm,” he said. “You didn’t do what you were supposed to do.”
For Bruch, the problem is, paradoxically, a culture of collegiality among lawyers. They’re uncomfortable asking hard questions of their future colleagues.
“Nobody wants to be mean to their partner,” he said. “What happens if, down the road, something happens to them, and their practice isn’t that profitable.”
A move to more professional management might be part of the solution, but it’s not an overnight answer. Rosenberg was formerly the chief operating officer of Baker McKenzie in Washington, D.C. ”I think the intention is right: Bring people in from a different background and with different a skill base,” he said. But the partnership structure still resists change.
“It’s a whole education process that’s playing out in real time as we speak,” he added.
Some firms are making strides in improving the vetting process. Bruch said he spoke to a managing partner who shared that the one drawback with having a team designed to chase a partner was that it it’s particularly difficult for that team to say no.
“We separated the due diligence function from hiring function,” the managing partner told Bruch. “We have a team to say no and a team to say yes, and it’s our job as management to decide between the two.”