lateral hiringAs the Am Law 100 firms continue to show strong growth, individual firms are focusing on hiring as one of their top strategies for improving revenue and profitability. The recession hit law firms hard, resulting in over 8,000 job losses among the Am Law 100 firms. Despite improvements in headcount in the last few years, some firms are still hesitant to make significant changes in how they hire. However, lower demand, fee pressures and increased competition mean that firms cannot afford to maintain the status quo. Continuing growth is necessary to assuring clients and attorneys that the firm is positioned to best serve clients’ needs. Today’s legal environment requires that law firm leaders be strategic, proactive and nimble in growing the firm. If they are not doing that, then partners need to take action to change management. Unfortunately, some firms hinder those changes. Trust and accountability are lacking, which is felt in ineffective lateral hiring practices and in turn hurts the firm’s competitive position.

State of the Legal Market

According to the 2018 Report on the State of the Legal Market, law firms overall are continuing to experience sluggish growth in demand for their services. However, the exception to this are the Am 100 firms who have “significantly outpaced both Am Law Second 100 and Midsize firms in a number of key indicators including percentage growth in demand, worked rates, fees worked, overall revenues, and cash collections.” Notwithstanding these results, the legal market remains challenging for even top firms. Am Law firms are increasingly moving into secondary cities like Boston, Philadelphia and Minneapolis to help fuel their growth; in some cases, acquiring regional law firms or practice groups. This in turn is creating more competition and disrupting the legal landscape for local and smaller firms. The smaller firms are competing with top firms not just for clients, but for attorneys. As a result, their recruitment efforts must be particularly effective, and in some cases, they are meeting these challenges by hiring attorneys in new markets drawing them away from top firms.

In addition, while Am Law 100 firms are doing better than other firms, growth is not distributed evenly. As noted by Bruce MacEwen, the President of Adam Smith, Esq., in his analysis of 2017 Am Law 100 data: “[t]he Am Law 100 is not remotely a ‘normal’ distribution; it’s a power curve, with a few big players, a lot more in the middle, and a long tail of smaller fry.” What can firms do to make sure they are among the ones enjoying the improved revenue and profitability?

Reviewing Hiring Practices

Law firms admit that increasing headcount is an important growth strategy for them. An Altman Weil study from 2017 found that 56 percent of law firm leaders believe headcount growth is a requirement for the firm’s success and two-thirds of respondents planned to add groups of laterals. A recent ALM Intelligence study similarly found that “85 percent of Am Law 200 firms reported that hiring laterals was one of their two most important revenue growth strategies for the coming year.” If firms believe this, then why are so many failing to do it effectively?

Despite many firms’ “commitment” to growth, in our experience, they often put obstacles in the way of effective hiring. The reasons often involve issues of trust and power. Within some firms, partners are reluctant to delegate hiring decisions to management. Instead, they create a bureaucracy where too many partners have a say in hiring which in turn means firms cannot move quickly or be proactive in seeking candidates.

These obstacles also make it difficult for firms to make strategic hiring decisions. Often individual partners are focused on their own practice group needs and may not have the time to analyze how developing other practices or geographic areas may be a better choice for the firm. In addition, many firms succumb to opportunistic hiring—that is, they see a resume of someone with a big book of business and hire the individual regardless of whether it fits with their hiring strategy. In contrast, a management committee charged with hiring is better able to focus on the needs and priorities of the firm with less interference from partners. They are also better equipped to do the necessary due diligence to ensure the lateral is a good fit and will be a successful hire.

Changing Management Infrastructure

When firms refuse to delegate decision-making to management, they risk losing out to their competitors. Am Law 100 firms are too large to have partners getting involved in every decision. Studies have shown that having a more corporate structure can have substantial benefits as firms grow, including a positive impact on profits per equity partner. Some firms are even turning to business professionals to manage areas like Human Resources and Recruiting. Regardless of whether firms employ a Chief HR Officer or rely on a hiring committee, the point is that large firms must assign responsibility to a specific group for more effective hiring. Partners need to focus on their own practice and not get involved in minutia.

This won’t happen, however, until there is management accountability. At some firms, the partners don’t trust the firm’s chair and management committee because there is no ability to vote them out of their position whether because of the firm’s rules or internal politics. That’s why building an effective law firm management infrastructure must empower both sides—management to make hiring decisions and partners who can “fire” those who are not satisfactory.

The first step is to have true open management committee elections on a regular basis. This means fostering a democratic culture where elections aren’t merely to confirm the status quo and trust is cultivated and earned. This enables partners to have a voice in the firm’s management but let’s them feel comfortable delegating every day decisions to trusted leaders. The most successful firms are embracing openness and collaboration with strong leadership focused on strategic growth. Holland & Knight managing partner, Steven Sonberg said it well: “What I’m good at … is trying to develop collaboration and consensus of ideas, and generally leaving people alone to do things they do well.” Similarly, Ira Coleman, chairman of McDermott Will & Emery, credits the success of the firm in achieving $1 billion in revenue to an agenda focused on “indispensability to clients; high achievement, productivity and profitability; and a happiness factor” among the firm’s attorneys.

Firms who don’t develop this kind of culture risk losing partners to competitors unless they can demonstrate stellar results in growing the firm. For example, firms like Goulston & Storrs have already benefited from recruiting partners looking for a law firm that encourages collaboration and trust. As noted by Martin Fantozzi, co-managing director of the firm, “The intimacy you can have in this environment and the personal connectedness you can have in this environment is different.” Deborah Manus, managing partner of Nutter McClennen & Fish agrees saying “a lot of people like to work at a place that is a true partnership.”

The reality is that lower demand for legal services and more competition requires that firms look to lateral hiring to increase revenue and profitability. Firms who engage in strategic hiring and adopt a process which centralizes decision-making and provides accountability will be more successful than their competitors. Although many law firm leaders may object to changing their practices, in this business and legal environment, firms who don’t grow will be left behind.

Originally published in The New York Law Journal