Law Firm Marriages

I’m spending time with many firms these days that seem to be really interested in “combining,” partnering up, or at least acquiring groups of great lateral partners. Apart from the conventional observation that these efforts to juice up growth “inorganically” often mask failed efforts to grow “organically” (i.e., acquiring new clients!), aspirations typically reflect some pretty undeveloped thinking about why another firm would want to combine with their firm.

Lawyers – that is to say, law firms – tend to be pretty narcissistic in their everyday thinking anyway. It’s not surprising that firms embarking on a “combination-quest” think only about what they are looking for in a target firm, and not the converse. Now that the commercial legal services market has changed more in the past ten years than it had in the previous 100 years, law firms in search of target firms or lateral groups need to re-think and freshen up their answer to the question, “Why should a law firm seriously consider combining with us?”

Firms capable of being a good fit have to see something in your firm they want and know they need. Don’t make it hard for them. Out of the gates, PLEASE express a genuine interest in their view of how they would like to – and, in fact, would – benefit from combining with the right firm. Conventional criteria still apply (geographic footprint, practice group mix, economics, etc.), but should be consulted within the “necessary but not sufficient” context. In today’s legal environment, other emerging screening criteria are starting to matter a lot more and inform the best decisions about courtship and ultimate marriage.

It’s the Music You’ll Make Tomorrow That Matters, Not the Music You’re Making Today

It is more important now than ever for serious firms to paint a detailed picture of where a combined enterprise is trying to go and how it is going to get there. The best “renderings” do a great job of isolating all of the gaps in the two firms today – both as independent firms and as combined firms. Bolting together two firms usually doesn’t instantaneously address these gaps. In short, it’s just as important to realize how far the combined firm will be from full potential as it is to realize what the ultimate potential looks like. You’ll be better positioned to sell a desirable firm on the opportunity you represent if you’re honest about the admitted difference between “desired state” and “present state.” Additionally, have a detailed plan – articulated with conviction – for addressing that gap over the next five to seven years.

They’re Buying Vision and Innovation as Much as Anything

You should put together a clear, detailed, and ambitious multi-year innovation agenda. The economy is active, and most law firms are chugging along at a solid economic clip; it’s very easy for firms to get complacent about their day-to-day operating performance and their future. However, if there’s one area in which many firms are exhibiting great self-awareness (and humility), it is relative to innovation. “Innovation-phobic” firms know when they’re not doing anything to help their clients experiment with new ways to consume, manage, and measure legal work. These firms feel exposed, and often can be very attracted to another combination firm that has come up with a thoughtful multi-year innovation agenda, and a roadmap to become that firm of tomorrow.

That Culture Thing

Everybody talks about culture and it connotes such a fuzzy measure of a firm’s composition – it’s easy to be cynical about whether culture matters at all. The truth is that for firms that are built for success today, culture is everything. Peter Drucker famously said that “culture eats strategy for breakfast!” The challenge of course is that culture means nothing if you can’t touch it, feel it, and define it. Law firms that are serious about finding the right combination partner firm should define all of the cultural attributes and features of their firm in objective, describable elements that can be measured.

Additionally, such firms must be able to identify what processes, structural incentives, managerial methods, and training regimes support and produce the objective elements that make up their firm’s culture. It’s one thing to say that we are collaborative, team-oriented, and care about the success of other partners; it’s quite another thing to point to a specific bonus structure and monitoring process that activates partners to, in fact, behave this way. At Edge, we use a tool called the Edge Cultural Assessment to develop an understanding of all objective elements of firm culture; with this tool, our understanding of culture is removed from the abstract and subjective and is translated into the measurable and concrete.

Write It Down

If you’re a true believer about why a target firm should be interested in combining with your firm, then you’ll need to articulate all of those reasons, linkages, and benefits with conviction. It’s hard to express conviction about your own combination criteria and process if you haven’t taken the time to write them down on paper for prospect firms to digest. Remember, both firms are potentially placing a very big bet on an unknowable future. The only insurance policy target firms have is your intentionality about the summit, and the mountain you’ll need to climb together. Bring them along – and, in so doing, seduce them – by expressing as much of your thinking on paper as possible.

“Law firm combinations” and “lateral partner recruitment” sound like easy ways to drive growth. However, seasoned law firm leaders know that it’s easy to make bad decisions, and very difficult to mature and execute good decisions in this realm. My advice is to know who you are well, do your homework, and sell the plans you’ve authored for future success so you can get credit for being intentional and ambitious. Don’t let your appreciation for the summit distract you from your respect for the mountain!

Cubs vs. Yankees: Why Lateral Hiring for Most Law Firms Makes Sense

It is amazing that the legal media continues to actively discuss whether lateral hiring is a good idea.  The gist of the argument appears to be that law firms seeking to expand their revenue base or enter a new practice area have no real alternative but to actively seek lawyers with portable business to join the firm.  The opponents to lateral hiring believe that laterals are nothing but a stopgap solution and that they will be out the door as fast as they came in if the firm has a bad year or another firm offers them more money.  The opponents to lateral hiring suggest that the real solution is to carefully hire great young lawyers directly out of law school, mentor and develop them and then give the new lawyers the opportunity to become business developers for the law firm.

The debate is identical to one that baseball fans have been having for years.  Should teams build themselves by paying outrageous salaries to superstar free agents, or should they develop players through their farm system with a few trades to fill in the gaps?  Without argument, the Chicago Cubs have the best farm team system in baseball.  Their selection criteria is impeccable and they are masters of developing talent and moving them up in the system slowly and carefully.  The Cubs operate in the manner that every expert recommends as the best way to develop a successful baseball team.  The New York Yankees, on the other hand, is the poster-team for free agency because their huge media market gives them the revenue to support the highest payroll in baseball, more than twice that of the Cubs.  The Yankees view their farm system as fodder to throw into deals to help make trades.

Just about every baseball fan thinks the Cubs are doing it right and doesn’t like what the Yankees big spending ways are doing to baseball.  Similarly, most legal observers (particularly law school professors who write about this but have suspiciously vested interests) think that the law school hiring model is what all law firms should use.  They support this by pointing to the fact that the most successful Wall Street law firms have the lowest percentage of lateral hiring. While baseball may not be the perfect metaphor for law firm recruiting, there is a broader lesson.  In any business, the textbook solution that makes sense on a theoretical level may simply not be applicable in the real world.  Here’s the problem…

The U.S. legal market is becoming increasing bifurcated.  Large law firms in capital market cities (what the media has come to call “Big Law”) operate on a completely different construct than other large and mid-sized law firms.  We see the difference in profitability, size of clients, sophistication of legal work, billing rates and associate salaries.  Part of the reason is that the banks, venture capital firms and other sources of financing are demanding that capital market law firms handle their major transactions.  Accordingly, on an increasing basis, only the less sophisticated transactional work is available to non-capital market law firms. As a result, Big Law, particularly the Wall Street and international mega firms, more than ever before, represent the brass ring for law school graduates.  These firms have the largest summer programs, hire the most first year lawyers and –this is important – have work that is sufficiently interesting and challenging to attract the best new lawyers from the best schools, and have enough of that work to keep their plates full.

Indeed, highly successful firms are not successful because they hire first year lawyers rather than aggressively seeking laterals.  Instead, they are able to avoid hiring laterals because they don’t have to.

Actually there are additional reasons why the most successful firms don’t hire many laterals.  The average revenue per equity partner in the top 25 AmLaw 200 firms is about $4.5 million while the average for the bottom 25 is less than a third of that amount.  The standards for the most successful firms are higher and there simply aren’t that many laterals with $5 million books of business floating around.  So the lateral opportunities are fewer for the most successful firms.

For large non-capital market and mid-sized law firms, there really isn’t much of a choice if they want to grow the firm, enter a new practice area or generate work to fill lawyers’ empty plates.  Even if they were able to attract top law graduates, they can’t afford the large scale first year hiring because their client base won’t tolerate paying for their training.  And, after the firm invests in their training, headhunters will lure the best people away during their middle associate years.  Worse, should a firm defy the odds and keep a top associate who becomes a star they can build a practice around, it will take a minimum of six to seven years – a life time to law firms.

Lateral hiring has its problems.  There is a risk that the lateral will not perform as anticipated or will stay for only a short period of time.  Laterals tend to have a disproportionately large impact on law firms’ cultures and, with headhunter fees and empty pipelines, large volume hiring can cause a big hit on profitability in the short term.  And, as we have so recently seen, over zealous inducements to laterals can put law firms out of business.

But for all the tisk tisking of the law schools and the people at NALP, lateral hiring can, when done successfully, infuse a firm with enthusiasm, favorable publicity and a level of capability that would have been impossible to achieve through traditional law school hiring.

Sure, in a perfect world we would all love to populate our firms through traditional on-campus recruiting and summer programs, just as we yearn for baseball to build winning teams through active farm systems.  But it’s not a perfect world and I don’t see one coming.

Oh, by the way, last year the Yankees won 95 games, third best in the majors while the Cubs came close to tying a team record by losing 101 games, the second worst team record in major league baseball.