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.