Monday, May 21, 2018

Two common practices within the legal industry may be increasing partner churn while eroding client loyalty. These are the practices of making unplanned and poorly vetted 'opportunistic' hires and failing to conduct thorough client portability due diligence. 

The vast majority of lateral hires are 'opportunistic' hires. That is, recruiters present candidates and law firms hire those laterals for the opportunity they present vis-a-vis their book of client relationships. But the portability of that book of clients often goes without serious scrutiny. These hires are an offshoot of a 'growth-for-the-sake-of-growth' philosophy, not as a result of a thoughtful plan to improve service delivery to existing clients. That rationale tends to come after the fact. 

The lure of easily added revenues is tantalizing if not completely irresistible in a flat market. But opportunistic hires fail more often than they succeed, a fact that is not lost on the majority of law firm leaders. To mitigate their investment risk, firms are tying compensation to the acquisition of the lateral's clients, thereby transferring almost the entirety of the risk to the lateral. When clients move to the new firm, the lateral's compensation increases relative to client billings. If those clients don't port over, the lateral bears the brunt of the financial burden.

This 'easy money' play has also incentivized growth in the number of legal recruiters. As a result, legal recruiters are inundating law firms with candidate resumes. A 2015 study by my company and ALM Legal Intelligence found that AmLaw 200 law firms averaged over 300 resumes a year from attorneys seeking a change in law firms. Several firms reported more than 600 resumes a year from recruiters. But law firms have not pushed back and required better due diligence or proof of client portability. And that's a good thing: it's not in the recruiter's interest to vet whether that candidate's clients will actually move or not. Because too many of them don’t. Were law firms to require that recruiters do so, they would surely reduce the number of resumes they received.

Guarantees based on the full value of the attorney's client relationships are increasingly rare and offered only to those attorneys with undeniably portable client books or personal brands so strong they can alter the reputation of the new firm. While it is completely understandable why a firm would do this, even advisable, one has to wonder whether this practice is in the long-term best interest of the industry. Were firms required to pay for the full value of a lawyer's client book, they would undoubtedly examine much more carefully the portability of those clients. 

What effect is this having on the legal industry?

I believe several trends are emerging which are not in the best long-term interest of law firms. First, lateral moves are increasing at a steady pace. We're beginning to see signs of churn in these numbers- partners who have moved more than once over the course of a few years.

Secondly, client loyalty is embedded in the concept of making life easier for clients. Partners who move to new firms, test this loyalty because it requires additional work on the part of clients regardless of whether they choose to move with the partner or choose not to move and substitute that lawyer. Regardless of the strength of the relationship, it is a deduction to the loyalty account of that partner's relationship with the client. Clients are responding with less loyalty to their outside counsel. 

This is not to argue that lateral recruiting is not an effective growth strategy. Hires that expand the firm's offering in substantive ways, who add needed bench strength or who bring a large book of clients to the firm can make for strategically sound acquisitions. Lawyers generally are well equipped to assess the first two strategies. But evidence suggests that they are not qualified to determine the third. A reliable system to evaluate the portability of a client book is in desperately needed in order to reduce the risk of opportunistic hires. Until this happens, clients and their lateralling lawyers are, more often than not, the end losers. 


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