Fit, Finance, and Culture Are Crucial in Recruiting and Retaining Lateral Hires
The legal industry has changed rapidly over the past twenty years. Studies such as Greentarget’s 2018 Legal Industry Outlook suggest that firms are struggling with a flat demand for legal services. Regardless of their size or geographic presence, firms are faced with higher expenses driven by technology advances, increased client sophistication, and the corresponding challenges of increased security (of documents and communications) needs.
Rate pressure from clients and the competition to provide services that were formerly within the exclusive domain of the practicing attorney are simultaneously stunting revenue growth. The reality of an aging attorney population, low law school graduate rates, and increasing competition from alternative legal providers means that the race to acquire legal talent with books of business is getting more urgent and increasingly competitive.
Law360 recently published its annual review of the largest 400 law firms (based upon attorney headcount) and reported that the average rate of annual growth in the top 400 is only 2 percent. Most law firms recognize that recruiting experienced lawyers with business is needed to remain flat. As a result, the legal marketplace has become a seller’s market for those practicing lawyers with portable clients and business.
The 400 largest firms are by far the most active in terms of recruiting new lawyer talent. Many are competing by offering high base pay to recruit lawyers. Base pay, however, should not necessarily be the determining or even the biggest factor for laterals with a mature or growing book of business. Lateral candidates need to look very closely at fit, culture and the overall compensation opportunity being offered before deciding on where to move their business.
When Clients Don’t Fit, Neither Do Their Lawyers
Many lawyers seek alternatives to their current firms because they conclude that while their firm likes the revenue that their clients provide—the firm does not actually want or value the client or the lawyer controlling that business. At many law firms, there is an annual battle between firm management and the practicing lawyer over rate increases. Management wants to raise rates to cover increased costs and raise revenue and the individual lawyer fears being priced out of doing the work for the clients that they serve. Many lawyers serving mid-market, privately owned clients, work at a firm focused on representing large institutional clients with a national or global presence. It is generally easier for firms with institutional clients to raise rates because those clients can afford high rates. That said the larger clients have more market power to demand discounts off the face rate charged by these law firms. However, lawyers at these firms with smaller market clients do not have that power. All too often, lawyers wait until they lose clients or the client’s market share because of rate increases at their current firm before deciding they no longer fit at their firm. Once those clients leave for a quality, but lower cost, alternative, it is hard to win them back. Conversely, if a lawyer is focused on representing mid-market clients and works at a firm that does not generally represent those clients, there is a reasonably good chance that a move to a different firm catering to the same market segment served by the lawyer will both improve the lawyer’s ability to serve the needs of their existing clients and improve their ability to attract new clients in that same market space. Furthermore, some lawyers are hybrids doing work for excellent clients in the privately-held marketplace and the institutional space, but their current firm cannot (or will not) provide the support needed to grow that client base in the privately-held space.
There is no question that the way that lawyers attract, retain and grow clients differs from marketplace to marketplace. Given that reality, lawyers who are thinking about moving to a new firm need to have a good understanding of the new firm’s client base and market focus to determine if their business fits with the new firm’s vision and strategic plan. In the end, if there is not a match between the lawyer’s existing practice and that of the new the law firm, a “bigger” base salary may only be a good short-term fix. “Fit issues” generally do not go away and tend to create problems that will likely not be solved in the long run.
While Fit Should Come Before Finance, Finance Still Matters
I often ask lawyers I meet with about their firm’s compensation philosophies. Most of the time I get a variant of the same response, which is an embarrassed chuckle and the statement “Good question—wish I knew!”
Most firms claim to have an objective compensation system; but what they have are objective elements in what is really a subjective compensation model. These models are usually reliant on decisions by a compensation committee or a few key people in senior management. If the lateral candidate is not part of or “in” with that group, the lawyer often requires them to submit a “hero” memo to explain why they should be paid what they think that they are worth. All too often, this results with a disappointing compensation meeting with management.
The old tenure-based compensation model is still commonplace. Those firms cannot compete for lateral talent using a tenure-based model though. The result is a contract pay plan that lasts a few years. At the end of the contract, the firm’s hope is that the lawyer will see the benefit of remaining at the firm long term and thereafter join the system in which the other tenured lawyers are participating. While this happens on occasion, the lawyers leave to go elsewhere frequently because they do not see the value in the tenure-based model and/or they use their own market power to cut a new and better deal.
Reprinted with permission from the March 14, 2019 issue of The Legal Intelligencer. © 2019 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
ABOUT TIM LYNCH
Mr. Lynch is the Managing Partner of Offit Kurman. He also sits on the firm’s Executive Committee. As such, he is responsible for all of the lawyer operations at the firm and he is heavily involved in the daily operations and strategic planning for the firm. Before moving into these roles, he chaired the Commercial Litigation Practice group at the firm. He has a national practice that focuses acting as general counsel and special litigation counsel for many entrepreneurs as well as owner-managed businesses and their owners in a wide array of industries. In that regard, he regularly advises clients on strategic, growth and corporate issues. He also regularly advises financial institutions and key employees on employment and regulatory issues.
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