Lateral Hires: The Good, The Bad And The Ugly

How often is the lateral hire of a partner or team from another firm judged to have been an unqualified success? Rather less often than might be hoped.

Unless the process is properly managed, the scope for fallout is disproportionately high. This article explores some of the lessons learned by others, many from cases where the writer has been involved in the clean up.

Extreme cases have included –

• Litigation from the partner’s former firm;

• Discovering that the partner has no practising certificate;

• Large-scale theft of client money;

• Mortgage fraud;

• Conflicts, legal or commercial, with existing clients who withdraw instructions;

• Court orders disqualifying the firm from acting on a valuable current matter, and loss of fees for work already done;

• Failure of key clients to follow the lateral;

• Loss of existing key staff who see outsiders promoted over home-grown talent;

• Cashflow problems - new practice areas or jurisdictions bring different client profiles and expectations;

• Massive hikes in insurance premiums.

It has been said that the key differentiator between laterals and home grown partners is that you have not had a chance to discover the faults of the lateral. Those who have been willing to leave their last firm may also be less loyal to your own and move on again if they have not been carefully selected. Yet some firms succeed at lateral hiring and use it to fulfil ambitious expansion plans effectively. An example is DLA - 142 partners recruited in Europe and Asia in the past three years, a further 59 in the USA in the past year, and expansion into Australia now under way. Meanwhile, 67 have been promoted internally over the three years.

The first issue has to be establishing the need, and ensuring that consistency with the firm’s overall strategy. Opportunistic recruitment, of a partner who happens to be available, regardless of whether his or her specialty and client base has any relevance to the firm’s current strategy, is unlikely to succeed, though doubtless there are exceptions which prove the rule.

The strategy so far as lateral hiring is concerned is little different from the firm as a whole, encompassing –

• Services – what you do;

• Clients - who you do it for;

• Geography – where you do it;

• Process – how you do it.

The need for more partners should not go unchallenged, particularly in a world where few areas of practice have been untouched by the growth in commoditisation which has extended its unwelcome tentacles beyond mere volume work to the more esoteric areas of commercial practice.

Sometimes the need will be self-evident – too much work and not enough people to do it, or it may address succession issues; in those cases, a client following may not be required, and the target partner may already act for the same client at another firm, often the easiest situation to manage. The partner may of course have covenants preventing him or her acting for the same client, but client pressure may help overcome that obstacle.

The plan may however be to expand into new areas of work, new locations or even new jurisdictions. It is here that the firm needs to be most careful because it is embarking on a voyage into the unknown. The proposed recruit may be able to help develop the firm’s understanding, but it has to be borne in mind that the recruit may have an inherent conflict, fuelled by the desire to leave an unhappy working environment.

The target may already be known, but that is not a reason for ignoring best practice in recruitment procedures. It can legitimately be a passport to a first interview, but not to admission into the firm.

Executive headhunters – not necessarily the firm’s usual recruitment agents – can help. (As an aside, the writer has heard that they may have other uses too – in reverse headhunting to help move on partners who are no longer wanted!)

People who are moving may not be seeking specially enhanced remuneration packages, because they know that in due course they will cause disenchantment elsewhere in the practice and be susceptible to challenge. An appropriate level of Profit per Partner is a more likely attraction. Setting targets and matching reward to them will be a key challenge to manage.

The lateral will usually have to leave their existing partnership. This may raise several issues, because the exit may be greeted with hostility. Notice periods in US firms are generally very short, but in UK firms may be anything between six months and nearly two years. (The latter generally arises in firms which require a full year’s notice expiring on an accounting year end.) Garden leave may also be an issue if there is provision for it in the partnership agreement, though client pressure may sometimes be brought to bear.

Tactically, communications between the departing partner and his or her existing firm should be open and honest. It is important to strive to maintain good faith on both sides.

Restrictive covenants may be a problem outside the USA (where the client has the right under the Sixth Amendment to the lawyer of his or her choice). Whether they are enforceable otherwise will generally depend on whether or not they are excessive. In practice however, firms are usually careful these days not to overstep the mark and risk rendering covenants wholly unenforceable. They can be a powerful tool for negotiation and there may be room for compromise or negotiation in relation to specific clients or work types.

Covenants may prevent departing partners from soliciting staff as well as clients, and this can be a problem if the acquiring firm is seeking to acquire a team.

Above all, the departing partner needs to remember that duties of good faith to existing partners continue with full force. This may inhibit the provision of billing information to the new firm. Giving notice to clients has to be handled carefully, ideally by use of a mutually agreed form of notice. The acquiring firm would do well to avoid advising the lateral on partnership issues.

Lawyers traditionally have a close affinity to 'their precedents' - a technical term for confidential documents generated for, and paid for by, previous clients of the firm, and not just those prepared by the individual partner.

Documents can escape more easily these days than ever before, and departing partners should remember their duties to their existing partners before resorting to misuse of email and portable data storage devices.

Departing partners will also need to consider the financial and taxation aspects of their exit.

Even the largest firms are surprisingly lax at carrying out normal recruitment due diligence, as was revealed by Legal Risk’s Top 100 UK law firm Professional Indemnity and Risk Management Survey. (Reprinted in LPM Volume 5, Number 4, March 2006.)

Key points to check include insurance claims record, practising certificate, CV, disciplinary record and references. In some jurisdictions (particularly England and Wales), the insurance implications of successor practice liability also need to be considered. Other insurance issues are dealt with separately below.

Client following alone should not be the sole basis for selection. It may not happen for all sorts of reasons. Nobody can guarantee delivery of the goods, except perhaps a sole practitioner or small firm. Experience suggests that more often than not only a third of the fees promised will in fact follow. From the clients’ point of view, the move may involve disruption they could do without

The new clients may have an approach to business with which you are unfamiliar. For example, they may have different expectations on pricing and success-based remuneration. They may want you to share the risk through alternative pricing – but they want you to carry the ultimate risk of liability. Or they may want half a job for half the price without, in the final analysis, a corresponding reduction in the scope of duty.

Try and take up client references: a small proportion, perhaps one in six, may not be as glowing as the lateral expects. Inevitably, you may have to resort to less formal checks however. Other members of your firm may have experience of dealing with the target, as may other professionals with whom you deal. The trade press and legal directories can be a useful source of information, though firms tend to promote more media hype over the transactions and the associated bills than they do over the negligence claims which sometimes ensue.

New clients must go through your client engagement process, including money laundering checks.

Space permits only limited consideration of this issue.

As premiums are rated on matters such as fee income, work type, geography of the firm and the clients (particularly the USA), and claims records of the firm and its partners, it means that any anticipated change in these dynamics needs to be cleared with insurers before you commit to the hire. Bear in mind too that they may already have previous experience of your target!

Ask the recruit for disclosure of claims and circumstances – and have it signed. Be suspicious of claims where the amount is ‘not known’ – often a euphemism for ‘Enormous’.

Remember that your insurers may choose not to cover the type of work or jurisdiction in which the firm is now involved.

Particularly where the firm is acquiring a team or even a whole firm, there will be real opportunities for strategic advantage and cost saving to be gained by taking advice on insurance issues.

Management liability policies may protect against action by the lateral’s former firm – or even one’s own partners who, in one case, were unimpressed by the lack of due diligence undertaken on recruitment.

Too often firms do little more than provide new partners with a secretary and dictating machine and leaving them to get on with it. They need to be imbued with the culture of the firm, integrated into the team where they will work, and to the firm as a whole. Mentoring can make an important contribution here.

Yet the integration process really starts before they arrive, indeed before the deal is even agreed. If you want the new recruit to embrace aspects of your firm’s practice which for all you know may be wholly alien to them – file audit, sharing clients and passing work over to others being quite basic examples – they need to be told about them up front and subscribe wholeheartedly to them. They may say it already happens in their existing firm, but we know only too well that even the best run firms say they have procedures which are not fully implemented in practice.

If the lateral is to work in a branch office, the need for supervision becomes ever more important. Claims records of many professional firms are littered with problems emanating from branch offices, including many of the largest liability claims. One leading American broker commented that a lateral in a branch office who was the only person doing that type of work carried a 100 per cent risk of a claim. It is borne out by the writer’s experience.

Organic growth provides cultural fit, creates loyalty through internal promotion and carries no surprises, but is difficult in new practice areas and it is hard to develop new strengths. Lateral hiring can provide strength in depth and may bring an instant client base but at a cost and with a variety of risks which may be hard fully to assess, may disillusion your existing staff, cultural fit may be a problem, and above all, you don’t know their faults. Be prepared to allow three years for your investment to mature.

There is no substitute for due diligence, yet lawyers who specialise in advising clients on it have a poor record when acting for themselves, proving the old adage that the lawyer who acts for himself has a fool for a client.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.