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Lateral Partner Movement in 2010

The lateral market is currently most complex.  In the coming year, fewer partners with books of business will be willing to move. More extensive due diligence of lateral partners is essential. And it will be essential that the true portability of business will become more of a dicey proposition.

It is quite certain there will be less activity and opportunities than occurred in the past.  An added layer of complexity will be the fact that 2010 will also be a year during which law firms will reduce partner headcounts; this reduction will largely be the elimination of partners deemed to be unproductive, a population largely consisting of service partners, with little or no portable business.

A look backward is essential for planning by firms to plan for a challenging 2010. In 2008, there were approximately 1,200 lateral moves by partners in AmLaw 200 firms. Those partners were largely partners with portable books of business, sometimes accompanied by a small cadre of service partners who were deemed essential for the continued service of existing clients who follow a team leader.  In 2009, this number was less than half.  Simply put, partners are subject to inertia and feel far more comfortable with the devil they know, capitalizing on years of goodwill developed with partners of many years.  Others follow the Jerry Seinfeld approach:  You should bow out only when you are on the top of your game. Most partners have seen a drop off in their business and are reluctant to move when they are not at the top of their game.

Due diligence in this market is far more critical than ever.  A significant value we add to servicing our clients is in providing active assistance in such due diligence.  As we noted above, a multi-million dollar producer necessarily relies on a cadre of others to manage client matters, particularly if the work originated is outside his or her areas of expertise.  These other partners will have developed relationships with the clients.   Accordingly, a review of prior history should include acquiring a thorough understanding of which partners had matter responsibility in the past.  The questions should be obvious:  Is the acquiring firm prepared to bring along service partners?  An affirmative answer simply requires an increase in the investment.  Ramp up costs simply escalate.  Such service partners, if left behind, will for their own survival, make strong pitches to the clients that such clients continue to have them handle the work at their existing firms, for which they have demonstrated previous expertise.  They will caution the clients that moving their work to a new firm will increase the client’s fees as new lawyers will have to first familiarize themselves with files, matters and new clients, while the service partners remaining behind will assure continuity.  A wise firm which is advised that a significant rainmaker is jumping ship will assist these service partners in these efforts.  Management will join in the bear hug.  They will actively participate in these client bear hugs.  They will also be prepared to offer a more attractive fee schedule or fee arrangement to build greater loyalty to the firm.  Service partners, even if invited to join the new firm, may be encouraged by management at the former firms to stay at their old firms and will be offered incentives for retaining clients.

Firms will be less likely to waive notice requirements, almost universally required of a partner electing to withdraw from a partnership and require the departing partner to remain at the firm until the expiration of the partnership agreement’s advance notice obligation.  Some have and will also severely restrict the departing partner’s activities during the waiting period; even going to the extent of requiring the departing partner to leave the office during the waiting period so that clients will be more amenable to the bear hug.  Others have and will severely restrict the partner’s activities during this waiting period, while taking every step necessary to assure the continued representation of the departing partners’ clients.  Management will demand the cooperation of the departing partner; failure to provide such cooperation will be deemed a violation of the partnership agreement and raise ethical issues – on all sides concerned.

All law firms must take note of this strategy if one of its significant rainmakers announces that he or she is pulling the ripcord.  Law firms must also give serious consideration to amending their own partnership agreement to extend such notice requirements so as to protect its own valuable assets.  We suggest a ninety day notice requirement. Law firms may waive or shorten this notice requirement.  The departing partner will have far less wiggle room. They may be placed in a state of suspended animation, unable to join a new firm while still ostensibly a partner at their former firms, while the former firm limits the departing partner’s access to firm resources and, when possible, limitations on client access. During this state of suspended animation, efforts by the partner who has given notice of his or her intention to withdraw from the partnership will be constrained by ethical constraints to solicit clients to a new firm, of which he or she is not a member.  Such partners may in fact be subject to damage claims for failing to exercise his or her continuing fiduciary obligations to the firm in which he or she is ostensibly a partner.  Such damage claims may even be asserted to the acquiring firm.

Part of an acquiring firm’s due diligence must include checking references, at the appropriate time, which should be after an offer is made and the offer should also be subject to positive references.  Be assured that no potential partner will ever identify a reference that will provide anything other than a glowing recommendation.  Accordingly, a strategy must be developed for speaking to others with whom the partner has crossed paths.  These inquiries must be discrete and carefully couched, for every obvious reason. The experienced recruiting firm is uniquely positioned to add significant value here.  Reports to the acquiring firm must be made with complete fidelity, without reference that the recruiting firm may be jeopardizing its own fee. Successful recruiting, most particularly in this market must be more focused on building enduring relationships with law firms rather than focusing on grabbing a fee on a particular transaction.  Certainly, placing a partner does provide immediate economic gratification. Placing a partner who has been less than candid about his or her business or a partner who has a track record of being less than a good citizen and has a track record of being a management problem simply tarnishes the recruiter’s long term relationship and credibility with a law firm.

We have successfully provided our client law firm clients with a more palatable solution.  We conduct such due diligence on a strictly fee for services basis and agree to condition our engagements in such matters on our not offering an alternative candidate, eliminating any sense that our loyalties are divided.  Such engagements, while not being quite as financially rewarding as making a contingent fee placement does demonstrate the high quality of the services we provide; more significantly, it also enhances our relationships, which in the long term are substantially more critical than grabbing a substantial fee for a placement that does not work out.  Future candidates offered by recruiting agencies who previously placed partners who became problematical, results in skepticism when future candidates are presented, particularly when the recruiter knew or should have known that a candidate posed significant issues.

And, the acquiring should also, within ethical constraints, consider meeting with and speaking to major clients.  But before they even get there, the firm must have vetted, more carefully than ever before far more detailed financial disclosures potential partners provide. Again, this is an area in which we do provide significant value.  Reviewing and making recommendations regarding amending  a firm’s lateral questionnaire so as to require more detailed prior performance, future projections and calling for and reviewing a business plan is another area in which we do provide value.

Firms and recruiters will also be seeing many partners who will explain that they are leaving their firms because (a) they have great opportunities which they are not able to exploit at their current firms;  (b) they are not getting adequate support from their current firms;  they actually have the client relationships although others receive origination credit because of historical anomalies; (c) their firms are in financial extremis or (d)  their firms are not amenable to alternative billing requirements that clients are requiring.  We will also see partners seeking life rafts when two or three large firms will inevitably implode this year.  There will be many gems among this group of potential laterals, but the wheat must be very carefully separated from the chaff.  Rest assured we will all see much chaff.  Law firms pride themselves in their due diligence skills, investigative abilities and finely honed discovery techniques on behalf of behalf of clients.  These skill sets must be deployed to the fullest extent in this market. Recruiting firms which have proven track records of client loyalty can and do provide significant value in these areas.

More on lateral partner movement issues can be found at http://kowalskiandassociatesblog.com/2011/01/05/essential-due-diligence-in-lateral-law-firm-partner-movement/ and in my book, Navigating the Perfect Storm: Recruiting, Training and Retaining Lawyers in the Coming Decade ( http://kowalskiandassociatesblog.com/2010/11/18/navigating-the-perfect-storm-recruiting-training-and-retaining-lawyers-in-the-coming-decade-now-available-in-paperback/ )

Much of what we describe here is certainly a sea change in how business has been done in the past.  But only an ostrich can ignore the enduring sea changes of the last 18 months.

Our follow up report containing both a post mortem of 2010 actual results in lateral law firm partner movement and projections for 2011 can be reached through this link.

(c) Jerome Kowalski, 2010.  All Rights Reserved

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One Response

  1. […] begin hunting for new homes in the first quarter and will largely not land until the third quarter. This is precisely the pattern we anticipated early last year, as reported in the press and this was pretty much what we actually saw in […]

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