The article below is an extract from our 2015 Strategic Lateral Moves Report, which uncovers trends in lateral movements within the legal sector in the US and UK. Our analysis covers regions, market sectors, practice areas and industries. For our 2015 report, we partnered with independent legal research and strategy consultancy RSG Consulting, to broaden our coverage and analysis. To receive a copy of the full report, please email firstname.lastname@example.org
Do lateral hires improve financial performance?
While it’s hard to see the positive contribution new lateral hires add to a law firm’s bottom line in the short-term, the following trends were clear in the data:
Poor financial performance is a predictor of subsequent partner departures at US law firms. There is a clear message that falling revenues are likely to bring more departures in the following year.
There was one positive relationship between lateral hiring and financial performance. UK law firms who had seen revenue growth over the past five years were more likely to be hiring in 2014. This may be a result of a continuing strategy of expansion. It may also be explained by the likelihood that successful and growing law firms are more attractive to prospective hires. At the top level, London remains a fiercely competitive market for talent, and experienced partners are able to exercise a good deal of choice.
Lateral hiring strategies clearly do add value to law firms, many of whom wouldn’t exist at anywhere near their current size or success without having pursued growth through lateral hires. The right hires allow firms to compete in larger markets, for larger clients, and charge higher rates. In fact, lateral hiring is often the sole focus of law firm financial strategies. The head of recruitment at a US law firm described it as “the only way firms know how to increase profitability.”
Law firm financial performance is a measure of a complex set of factors beyond lateral hires, but our interviewees also suggested the following reasons as to why lateral hiring success is particularly hard to measure.
Lateral hiring is an expensive process
It takes time for the contribution of a hire to offset the initial investment and the most active hirers are likely to take a short-term financial hit. As the head of lateral recruitment at a US law firm said, “I think the problem is, when you are hiring it takes a good year. If we added no more laterals for a year we would see an increase in revenue because we weren’t spending on hiring. It takes a breather to see the fruits of your labors.”
Partners take time to start contributing
Some internal recruiters gave partners 6-9 months to build up new books of work, while others did not expect partners to be fully running for a full two years. For most firms, lateral hiring is a medium-term rather than short-term strategy. While individual financial performance can be tracked, it makes it difficult to isolate the contribution of lateral hires at a firm or market level.
Firms are hiring to keep pace with the competition
In busy markets in the US and in non-home markets, law firms may be hiring to stay level with the competition. One partner responsible for lateral hiring at a global law firm suggested a different relationship between financial success and lateral hiring: “Our financial performance has a very positive impact but it also creates a challenge. That the firm has done well over the last number of years makes us a great proposition. But as you do better and better, the pool of candidates you think will do well at your firm will shrink.”