Tuesday, July 1, 2014

UK Style Third Party Due Diligence May Be Key to Improving Lateral Success

A 2013 study reports that only 28% of law firms say their lateral hires met their expectations for results. Another study covering a seven-year period showed lateral partner failure rates of 32%. And then there’s the churn. One study found that 20% of laterals leave within the first year and 50% are gone within five years.

Despite the weak results, 98% of managing partners report lateral recruiting as a primary growth strategy for their firms. And they are spending big money- an estimated $600,000 to $1.5 million on average in the first year for each lateral partner they bring on board when lost billable time, recruiting fees and other costs are totaled.

Why aren’t laterals more successful?

It may be that U.S. firms don’t conduct a rigorous enough due diligence protocol on lateral candidates. The research suggests that internal assessments don’t delve deep enough into a potential lateral’s client relationships nor cover a broad enough scope of the various qualities that contribute to a lateral’s success in a new platform. Whether that’s because they don’t know the questions to ask or don’t want to ‘depose’ a potential new partner, the due diligence process clearly is not working well.

Another theory may be that lawyers suffer, like every other profession, from the ‘cobbler’s shoeless kids’ syndrome or what is technically called the ‘domain dominance’ effect- the challenge many professionals have of applying their knowledge, skills and capabilities to their own situation. The condition is perplexing but very real. So real that the concept has become embedded in our culture: Police officers who are more violent at home than the civilian population; financial advisors who don’t follow their own investment advice; physician’s with poor health habits; marriage counselors whose marriages are more fragile than their clients; the preacher whose kids are the wildest in the congregation. It may be that the client portability aspects of the lateral due diligence may best be performed outside of the firm.

Interestingly, this is exactly the practice of most UK law firms who routinely use outside, non-recruiting agency consultants to perform the due diligence on prospective candidates. In the UK, 50% of law firms use an outside consultant to review and assess the book of business and develop an estimate of the work expected to come with the lateral. Throughout Europe, the number is closer to 70%.

According to the UK firms, outside due diligence consultants add a deeper level of objectivity to the business case for a lateral candidate. They don’t share the biases that in-firm attorneys may have about their own firm and practice strengths and, as such, provide more realistic projections of the work and clients that will come with the lateral. They can more effectively explore the incentives and motivations key clients have in moving with the attorney beyond lower rates or larger platform opportunities. And the UK consultants perform a broader assessment and explore the candidate’s management style, their business development capabilities, their business and industry acumen, even how well they treat colleagues and staff, among other important characteristics.

Most importantly, independent due diligence providers are adept at ‘once removed’ client assessments. That is, they are very good at assessing the likelihood of clients porting over to the new firm without the benefit of actually speaking to those clients- although many UK firms and candidates opt to allow for confidential client interviews which are conducted in a way that protects the identities of those involved. They assess the strategic importance of the work the attorney performs for each of the key clients and the ease with which those clients could switch their work to another attorney.

Behind closed doors, law firm leaders recognize that the failure rate of senior lateral hires is a problem.  But so far, their skepticism hasn’t translated into a more thorough and objective approach to due diligence and a greater scrutiny of a candidate’s client portability claims. That will likely change though as pricing and competitive pressures force law firm leaders to examine the risks and costs of failed or marginally performing lateral hires more carefully. California law firms may be wise to adopt the practice of their UK peers and begin to incorporate the use of independent due diligence in their lateral recruiting processes.
Want an objective opinion on your next lateral hire? Call Group Dewey Consulting at 502-693-4731.