Wednesday, March 6, 2019

Cultural Fit is Leading Us Further From a Solution to The Lateral Hiring Problem.

A recent report by ALM Legal Intelligence provides some eye-popping statistics on the performance of lateral hires among the AmLaw 200. According to their latest research, lateral recruiting is a risky growth strategy. Laterals among the AmLaw 200 have as much as a 47% failure rate, are only 50% likely to stay five years and failed laterals cost the industry an estimated $2 billion a year! The report goes on to estimate that the average cost of acquiring a lateral partner in 2018 was $2.3 million, including one year of compensation, recruiter fees and other internal costs. Multi-year guarantees are even more expensive.

The research, based on interviews with law firm leaders, suggests that firms don’t do a good job of figuring out cultural fit. One law firm leader commented that “the group didn’t think about how these people would fit in,” As such, the report suggests that cultural fit needs to be amplified in the due diligence and integration processes.

Personality and culture are fuzzy concepts. What’s more likely is that the industry is struggling to identify the metrics which truly drive lateral success. It’s hard to imagine a lateral who brings the majority of their book of business to a new firm not fitting in. ‘Culture’ sound more like a explanation than a cause. With stakes so high, we need to understand the causes of failure and the drivers of success. A focus on ‘cultural fit’ as opposed to practice and client dynamics is leading us further from a solution to the lateral hiring challenge. Culture follows rainmaking. Not the other way around.

In my work with laterals, and as the creator and original co-author of the ALM Legal Intelligence Lateral Hiring Report in 2015, I’ve come to the conclusion that success is best predicted by the practice and client characteristics of the incoming lateral’s book of business. The industry needs a common set of metrics to evaluate the potential for client mobility. No due diligence process in any other industry would be considered complete without this analysis.

A whole new view of the viability of any candidate can be gained by examining the lateral’s client relationships; each client company’s likely risks and motivations for making a move; the cross-servicing depth and entrenchment characteristics; the economics and incentives available to encourage a move; the client company’s reliance on the lateral or other practice areas, among other criteria. The indicators of client mobility, while not yet scientific, do lend a degree of objectivity to the analysis. The above considerations are just a couple of the analysis points that need to be considered for a complete due diligence analysis. This type of analysis requires not only deeper, probing questions by the recruiter but an understanding of business fundamentals, business decision making processes and, to an extent, an investigative curiosity.

Further complicating our due diligence is the fact that what we look for in laterals is also, often times, the qualities that make it hardest for clients to switch firms. For instance, we look for laterals with a large book of originations. A large book is often the result of laterals who have cross sold numerous services into their client companies. That’s a good thing, right? Yes. It’s terrific for the firm who enjoys those deep ties throughout the firm. But not so good for a firm looking to buy those ties. Each additional practice area divides the chance that client company will follow the lateral. A single use practice is much more mobile than a practice which has tentacles into several different practice areas. This common-sense reality is rarely included in the analysis or due diligence process. But it is the reason that groups of laterals are more successfully lifted out than a sole lateral is from a firm. Shouldn’t these factors be included in the Lateral Partner Questionnaire and in candidate interviews?

Who conducts the due diligence interview can also a problem. We might like to think that Partners are the best practice and company diagnosticians but that’s simply not the case. In my years of coaching the most senior partners in the largest law firms in the world, I’ve found that lawyers often have a very difficult time seeing the structural challenges inherent in their practices. They have an even harder time identifying the best strategy to overcome those challenges. The value I bring is as an objective, informed outside observer who can provide the perspective that can help them cut to the strategic focus they need. Why would we think they could adopt the diagnostics necessary for a thorough lateral due diligence process of a potential partner? They don’t. And it is not practical to think they can. The potentiality of a partnership creates its own biases and blindness.

Many firms view the challenge of lateral recruiting as a challenge of finding a supply of qualified candidates. That’s only part of the problem and really a problem that should be dealt with only after a sound vetting strategy is already in place. Fewer candidates that actually work out and meet revenue expectations is a better course of action because it has the added benefit of improving client satisfaction, an enhancing the firm’s recruiting reputation and improving the firm’s investment ROI.
The due diligence process I have long championed requires a deep dive into the lateral’s client mix, relationships and practice synergies. These are objective criteria that can be easily evaluated through the candidate interviewing process. I leave the cultural evaluation to the partners since that is something difficult to see from the outside but is also a self-fulfilling prophesy that bears little on the lateral’s critically important early success in moving clients.

Laterals are counted on to solve all kinds of problems for law firms from entering a new market to boosting revenues to infilling expertise. It behooves us to find a better solution framework. Maybe a loss of $2 billion on revenues of $17 billion is an acceptable cost of doing business. But lateral failures have hidden costs that may be even more costly to firm morale and client satisfaction. It’s time the industry take a more thoughtful approach to lateral hiring and force a more detailed conversation inside the firm about the data points that can predict lateral success.

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