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CHAPTER 1
Introduction: Smart collaboration and lateral hiring
One of the biggest challenges in today's law firms is recruiting partners, experienced associates and senior business professionals into the firm – and then finding ways to integrate them, retain them and help make them sustainably productive. Firm leaders agree that the war for great talent is at least as brutal as the battle for clients. Yet many law firms mismanage and ultimately undervalue newly acquired talent because they do not have an actionable, data-driven strategy to help them flourish.
This special report offers a new, research-based approach for law firms to improve the lateral hiring of lawyers and business professionals, and the results. Our empirical studies demonstrate the clear benefits for lateral hires who engage in collaborative work with their new colleagues: retention and value production. Laterals who are deliberately integrated into the firm's existing client or internal work and supported in enticing peers to contribute to work they themselves have initiated are significantly more likely to stay with the firm longer, to hit or exceed their targets and to thrive professionally.
We call this kind of interactive work 'smart collaboration'. Smart collaboration is essential to both the practice and business of law. It allows a team of talented problem solvers with specialised legal expertise to integrate their collective knowledge to tackle and solve their clients' thorniest problems, in ways that no single individual could accomplish. Similarly, experienced business professionals can combine their expertise with complementary others – for example, strategists collaborating with technologists and data analysts – to streamline and optimise organisational or client service processes.
While smart collaboration is critical to problem solving, how exactly does it improve lateral hiring outcomes? Smart collaboration helps firms to optimally use the collective expertise and experience of their newly hired members, which gives them the chance to start adding value early on. This in turn promotes their reputation and starts to foster others' trust in them. Collaboration also helps to bring lateral hires up to speed with the way the firm operates – especially the unwritten rules and cultural expectations that are hard to learn except through experience with people who know the norms. Further, it provides laterals with opportunities to build networks of colleagues who can enhance their work and for whom they can reciprocate by contributing valuable knowledge. Through these experiences, new joiners become part of the fabric of the firm, finding not only commercial and professional success, but also more meaning and deeper relationships. In short, smart collaboration – combined with clear planning and proper follow-through – can help lateral hires to acculturate and thrive. The trick, of course, is making sure that your firm is set up to foster this kind of lateral-incumbent collaboration.
For more than a decade, Dr Heidi K Gardner has been studying leadership, teamwork and talent development in professional service firms – first while on the faculty at Harvard Business School and now at Harvard Law School. She has amassed a database containing millions of timesheet, personnel and financial data records across dozens of law and other professional service firms; insights from hundreds of in-depth interviews with lawyers, business professionals, law firm leaders and clients; and responses from thousands of research surveys.
Anusia E Gillespie has been studying and immersed in the business of law for over 10 years in a variety of capacities, including practice and business roles at law firms and at Harvard Law School Executive Education. Attorney Gillespie collaborated with Dr Gardner to perform extensive research and interviews on lateral hiring in law firms in anticipation of this special report. The findings from the culmination of combined research are clear: lateral hiring integration and cross-disciplinary collaboration are essential to increase the odds that lateral hires will be successful and productive in their new firm.
This special report offers a clear rationale for altering your lateral hiring programme, while also providing the tools, processes and best practices for successful implementation. The research and findings are organised into four chapters:
• Chapter II outlines the rationale for change, including the ever-growing war for talent, the cost of losing laterals and the upsides of productive lateral hiring practices. This chapter emphasises why successful lateral hiring and integration are a business imperative in today's competitive marketplace.
• Chapter III offers a blueprint for law firms in determining how to assess and improve their current practices when hiring new talent. Each section relates to a specific phase of the hiring process (preparing to hire, recruiting and interviewing, and integration), with recommended actions and resource allocation, along with examples and case studies. Firms need a well-constructed plan, a relentless focus on execution and clear accountability if they expect to help laterals achieve two-way collaboration quickly and efficiently.
• Chapter IV wraps up the special report by synthesising the key messages, outlining some of the change management challenges associated with implementation and proposing a call to action.
• The appendix provides firms with practical, research-based tools, including an interview guide, best onboarding practices, new hire strategic considerations, a firm and client-based business plan, a logic-driven decision tree, database criteria for assessing new hiring practices from the last five years and case studies for comparative analysis.
Productive lateral hiring has the power to grow revenues, increase innovation and build an inclusive firm culture. In fact, a typical firm spends roughly 70% of total expenses on talent, including recruitment, salaries, benefits, training and retention. But firms often fail to create intentional processes – onboarding, collaboration and long-term integration that evolves with the needs of the hire – to provide new laterals with the smoothest transition. Going forward, firms will need to allocate significant funds to cybersecurity and other technology investments just to stay alive. Those that fix and optimise their talent systems to save money will maintain profitability; others risk a downward spiral of lower profits, then loss of exceptional talent, which further reduces profitability. If your firm is failing to fully harness the power of your talent, the time for research-based strategic change is now.
CHAPTER 2
The business case for integrating lateral hires
1. The war for talent
Law firms' war for talent is rooted in their war for clients. Increasingly, sophisticated clients are demanding much more from their law firms, including cross-disciplinary problem solving that draws on expertise in law, business, technology and strategy. One-dimensional legal problems have swelled into multi-faceted business problems that span departments, disciplines and geographies. As one general counsel put it, "I don't have legal problems. I have 'problem' problems."
Moreover, regulatory changes have opened the door to increased competition from new players in the legal arena. The focus on quality metrics and output-based performance measures is upending traditional ways of measuring work. Clients are demanding diverse teams because they know that diversity promotes innovation and superior quality. Technology is driving down costs and creating both opportunities and threats for many kinds of legal working. As a result, law firms are facing the urgent question of how to adapt to a globalised legal marketplace in the midst of disruption and reinvention.
The only sustainable way to respond is to make sure you have talent not only with the right expertise, but also with the willingness to use knowledge in a collaborative way to tackle clients' and your firm's most complicated, high-value problems and opportunities. The firms that will thrive in this hyper-competitive, dynamic market are those which have figured out what mix of talent they need to achieve their strategy – and which know that mix includes more than the most senior lawyers. Strategically minded firms are seeking strong business professionals: leaders with few (if any) client-facing responsibilities who focus on the successful operation of the firm in core functions such as marketing, finance, IT and human resources. Talented executives streamline processes to help lawyers focus on the 'bread and butter' of the firm. The best business professionals are therefore just as critical to firm profitability and success as their legal counterparts.
Law firms are therefore fighting a war for talent on three fronts: for partners, for more junior lawyers and for business professionals. And for each segment, this war is hotter than ever.
For partners, increased mobility has fostered the emergence of a free-agent mentality. Encouraged by growing legions of headhunters, experienced legal practitioners today have a keen sense of their value in the marketplace and face far fewer cultural taboos about jumping ship for a more lucrative offer. In some of the hottest areas, it is not unusual for professionals with an in-demand specialty to receive multiple calls every week from recruiters or competitors jockeying for their expertise.
Similarly, high-performing associates are also experiencing a jump in desirability. As firms expand their reach – in terms of both industries and jurisdictions – they are seeking 'up-and-comers' who view switching firms as a strategy for achieving higher compensation and quicker promotion to partner. For millennial associates, switching firms is commonplace, as they never experienced the stigma that plagued older generations. "An expanded network, a signing bonus and a shorter runway to partner if I play my cards right," said one associate in our research about the potential benefits of switching firms. "I like my current firm, but I would be crazy not to make a move soon."
Layered on top of this is the breakdown of the former gentlemen's agreements that divided up the legal landscape into what might be called 'spheres of influence'. In the legal field – as in many other professional fields, including accounting, engineering and consulting – the entrance of international firms into previously domestic markets has fuelled competition for top-end partners. For example, when US firms began their push into London, many City lawyers massively spiked their income by joining the first wave of partners to sign up with these newcomer firms.
This trend transcends even formerly stable localised markets such as Bogota, Munich, Phoenix and scores of other cities around the world. For example, when firms such as DLA Piper and CMS expand their Latin American presence, their arrival causes a significant uptick in labour market competition – not only for partners, but also for associates. Tales abound of lawyers doubling their salaries overnight and then subsequently negotiating for additional perks such as preferred parking, flexitime and increased holidays.
In many jurisdictions, a 'new normal' has emerged concerning salaries and poaching. Many Chilean law firms have reportedly skipped over their direct competitors by recruiting lawyers from in-house positions into a range of practice areas. Full-scale lift-outs of entire practice groups are likely to become the next phase for recruiting in these hot legal markets. Yet the odds of success for all these lateral hiring efforts is worse than a coin toss.
So far, we have hinted at the idea that collaboration plays a critical role in changing the success equation, and we return to that idea more fully towards the end of this chapter. First, though, we consider what is at stake if your firm does not take steps to drastically increase the likelihood of success in lateral hiring.
2. The cost of losing laterals
Laterals – partners, associates and business professionals – who leave the firm significantly depress the bottom line. While firms fiercely compete to recruit and hire the industry's best and brightest, accumulating stars without a strategic plan and simply hoping for the best does not work. Most firms recognise – and research confirms – that it takes three to five years for star lateral hires just to reach the level of performance they achieved in their old firms, let alone to become even more productive.
In reality, though, most lateral hires who are struggling to become productive in their new firm simply don't push through the 'pain barrier' and stay long enough to reach previous levels of stardom. Instead, they leave the firm after a few years, at best. And for all failed lateral hires, it is not just their expertise that walks out the door. The critical relationships that they had curated internally and externally to problem solve and produce – these also disappear.
2.1 Lateral partners
In law firms, the area that is most researched is that of lateral partner productivity and retention. One study of leading law firms in London yielded some truly abysmal statistics: fully 20% of lateral partners were no longer with the firm one year after joining and 50% had left within five years. The latter figure corresponds to a recent study of the global legal market, showing that the average five-year attrition rate for lateral partners is an astounding 47%. Research in labour economics suggests that the cost of each failed lateral partner is more than double the individual's annual compensation – 213%, to be precise. So, for example, the typical cost of replacing an equity partner in the United Kingdom will be at least £500,000; for equity partners in top firms, however, that cost rises to a staggering £3.3 million. When considering the cost of failed hires, firms may calculate the direct costs (eg, recruiter fees, bonus guarantees); but many fail to appreciate indirect costs such as the opportunity costs of partners' time spent interviewing.
Given that two to three years of strong performance are needed to recoup recruiting costs and compensation-above-contribution through the transition period, the attrition of lateral partners at five years is a loss-making proposition for most law firms today.
Beyond failing to retain star lateral partners, firms typically have another cohort of under-performing lateral partners who do stay at the firm, but fail to achieve a profitable return on investment. The Wharton School's Matthew Bidwell, in a study of lateral hiring aptly named "Paying More to Get Less", looked at six years of personnel data from the US investment banking branch of a financial services corporation. He found that, despite external hires generally having more education and experience than internal hires, external hires performed significantly worse for the first two years of their employment than workers who were promoted to the same job from within the organisation. Furthermore, he discovered that lateral hires were far more likely than internal workers to leave their job – because they either quit or were fired. At the same time, Bidwell concluded, external hires cost the firm 18% more money in salaries than did their internally promoted colleagues.
Most law firm leaders we interviewed believe that a similar pattern holds across the legal sector. As one partner explained, "Failures linger longer in many firms: the longer they stay, the more problematic. Most firms fail to recognise or lack a mechanism to deal with the problem of an unproductive lateral. So many firms have favourable policies under their partnership agreement that make it really hard to get rid of disasters."
In addition to recruiting and compensation costs, lateral partners may consume resources that firms are unable to recoup. For example, if expectations are not properly managed, a lateral partner who was previously employed at a firm with a heavy business development focus may unintentionally blow the new firm's marketing budget by filling an active conference calendar.
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Excerpted from "Smart Collaboration for Lateral Hiring"
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