The size of the candidate’s book of business is not the controlling factor in determining the success of a lateral partner hire; rather, profitability is the key concern. A $5million book of business is not worth the same to every law firm’s bottom line, and the calculation depends upon several factors. The true value of any lateral partner or group acquisition includes not only objective metrics such as portable business, fee rates, operating margins, and compensation structures, but also “softer” metrics such as intra-firm cultural costs and benefits of lateral hires.
Profitability based on “hard” or objective data
The lateral partner vetting process includes assessing raw data from the Lateral Partner Questionnaire to estimate profitability. The same candidate has varying values at different firms. Some of the metrics creating those differences include:
- Operating margins of both lateral’s practice and the target firm. (How much profit a firm or lawyer makes after paying for costs of production such as wages, resources, etc., expressed as a percentage of revenues, reflecting the efficiency in controlling the costs and expenses associated with business operations.) In most lateral acquisitions, they should be a close match.
- Timing/aging of collections—the quicker collected, the better.
- Realization rates—hours worked versus fees collected; 85%+ is good
- Rates and hours billed (include any alternative fee arrangements).
- Leverage/overhead for practice—look at billing rates and compensation of other lawyers in the group; how do those numbers compare to those of associates at the target firm?
- Cost of additional support for lateral—does firm need to hire/beef up other practice areas to maximize the lateral’s potential?
- Mix of business/clients—how many clients? Many small or few large? Geographically diverse? Complementary to those of the target firm?
- Are there potential business conflicts and future legal conflicts in addition to current legal conflicts?
- How does the candidate’s current compensation levels and expectations fit in with the system at the target firm? It’s a red flag if the candidate is more interested in money than the opportunity to develop his/her career and client base or insists on a premium or being slotted into higher tier than the firm suggests.
Lateral hires can add to a law firm’s bottom line by bringing qualities other than a sizeable book of business. Law firms may see value in candidates whose reputation elevates the firm’s brand, such as with high-level government hires with prestige, contacts, or special expertise which the firm can sell to its current clients and which will attract further business. Those candidates are long-term investments, but must be vetted carefully so not to set unrealistic expectations on either side. The acquiring firm must understand the difference between investment hires versus hit-the-ground-running candidates to more accurately estimate their economic impact and plan necessary time for the firm to recoup costs and realize profits.
A law firm might hire a candidate without a huge client following also in cases where the lawyer has demonstrated leadership expertise and the firm sees a future need and role for that in, for example, its strategic growth or succession planning.
While it is safer to expand practices with the firm’s strategic plan in mind, building around strengths, sometimes firms are presented with an attractive opportunistic hire. Firms must be careful when expanding into a new practice area, industry sector, or geographic area if it does not already have some expertise there. Rather than blindly following trends, it should carefully consider whether the move makes sense for the firm’s particular circumstances. There are challenges to predicting future profitability for a new practice area, but the firm must ask: Will premium work become commoditized over time? How will future regulation affect the practice? Are there other barriers to profitability? The target firm also must beware of diluting the firm’s brand by trying to be all things to all people and turning off partners who will leave for perceived better management and profitability.
“Soft” costs and benefits
Despite attractive financial metrics, personality disruption can negatively impact the bottom line. The acquiring firm must know its culture and assess whether the candidate is a good fit. During the interviewing process the firm may become aware of potential personality issues. It can choose to hire the candidate anyway, but must plan how to manage them and minimize any negative impact within firm and with clients. Eccentricities usually are easier to tolerate in a home-grown lawyer than a lateral. If the lateral’s quirk is something clients will value and pay for, then plan to manage and set boundaries with that candidate. Otherwise, it’s more prudent to pass. Even with the best cultural fit, the firm must expect some resentment by other partners (counsel, senior associates) who see their opportunity for advancement impacted. This usually is minimized if the hire is driven by practice group’s expressed need for specific expertise rather than imposed from above.