January 31, 2023
Creating Successful Outcomes for Lateral Partner Transitions
The law firm lateral partner data suggests that most lateral partners do not meet revenue expectations at their new firms in their first year. This is bad news for the partners, whose compensation may be based on those expectations, and may be reset according to reality. This is also bad news for law firms bringing in lateral partners, who often make significant investments in lateral partners that may not pay off when, or as, expected.
The Glass May Be Half Empty
These statistics point to a more general problem affecting partner departures. Despite the highest hopes for departing partners and for their new firms, both frequently overestimate the upside potential, and underestimate the potential risks, of their new relationship, at least in the short term. But partner departures and lateral moves can be an incredibly profitable endeavor — unlocking enhanced value both for the partner and for the firm — if each has realistic expectations.
It’s not difficult to understand why partners and law firms tend to see things with rose-colored glasses. They are humans. It turns out that accurately estimating potential risks and rewards is not something that humans typically do very well — ironically, even lawyers who are trained to identify and analyze risks are often not very good at this when it relates to themselves. Lawyers who otherwise tend to be characterized by pessimism and gloominess often can be wildly optimistic about the business prospects of lateral partner moves.
Nobody Promised You a Rose Garden
The partner departure context tends to exacerbate normal human tendencies to underestimate risks and overestimate rewards. Partners generally don’t depart their firms if they are happy and content. They leave because they are unhappy, unsatisfied, angry, annoyed, or their firms are experiencing unexpected change or crisis, or worse. And law firms seeking lateral partners may be motivated by trying to fix a problem or crisis: flagging revenue, a gap in practice areas, or filling a hole created by a partner or group who departed. And change, especially rapid and dramatic change, is also not something that many lawyers or law firms typically do very well.
So for either side, to the extent that any lateral partner move is the result of an effort to solve an immediate problem, and necessarily involves big changes, it can generate magical thinking. When reality catches up, it can be jarring, to say the least.
Keeping It Real
Fortunately, with a disciplined approach to assessing the potential risks and rewards of partner departures and lateral moves, both the firms and the partners can keep themselves firmly grounded, which will increase the likelihood of success at the new firm
1. Analyze the data. Oddly enough, many law firm partners don’t have a solid and detailed understanding of how profitable their practices are, and whether that profitability will translate to a new firm. Revenue is great, but it is not the same as profitability, and the latter matters more. Do you have a model, even a rough one, that explains how profitable your practice is and whether that will increase at the new firm? It’s not terribly difficult to get a clear picture of profitability, but without it, you are flying blind.
2. Discount the numbers. Most lawyers typically would not give their clients only the best-case scenario in any risk assessment. Yet that is what many lawyers and law firms do in the context of lateral moves. When you look at your practice to analyze it for a lateral move, consider discounting the numbers for the first year. If you hear anyone mention the word “synergy,” run away screaming. After all, transitioning a practice is something that will take time away from the actual work. And if you happen to have a dispute with your former firm, which can happen, add in an additional distraction. When you are making projections, discounting the numbers can lead to a more realistic picture, at least for the first year.
3. Mind the gap. Don’t underestimate the potential for these types of transition distractions to hamper a practice’s performance in the first year at a new firm. There are transaction costs involved in any partner departure and, depending on how the move develops, these can have a significant effect on the bottom line in the short term. Similarly, don’t expect, or base projections on, a scenario where every one of the clients or everyone on the team makes the move to the new firm. Each has its own calculations in these transition scenarios, and you should plan that at least a few will not make the move.
These are all contingencies that can be anticipated, and should be accounted for, to reduce the likelihood of surprises on both sides.
4. Consider the culture. The culture at a new firm is obviously important in any move. But recognize that the culture of the firm may also affect the practice’s performance in the short term. Does every associate at the new firm work until midnight or leave at 5:01 p.m.? How is remote v. in-person work being addressed? Do other partners at the firm bill significant amounts on their own matters? Are partners expected to handle significant administrative responsibilities for the firm in addition to running their practices? Assessing the impact of the new firm’s culture on the practice — for both sides — is a key to accurately predicting performance.
5. Anticipate potential problems. Don’t build expectations around the assumption that the old firm will go gently into that good night. If you handle the partner departure process properly, or your onboarding lateral group does, you can minimize the risk of disputes with the former firm. But you can’t eliminate those risks. And even though you may not get involved in an overt legal battle, disputes happen frequently enough — even about potentially minor issues — that it is important to anticipate this and to account for it as part of the transition plan and in any practice performance projections in the first year and potentially beyond.
Partner departures and lateral moves can create winning scenarios for both the partners and the firms. But taking a disciplined approach to projecting the performance of any practice is the key to avoiding potential unpleasant surprises for both sides.
Dena M. Roche
O’Rielly & Roche LLP