Thursday, July 16, 2015

Enter the Rainmaker: Do Lateral Hires Really Pay-off for Law Firms?

A survey by The American Lawyer showed that lateral hiring was a key hiring strategy last year for US law firms looking to grow their business. Early this year another industry trade publication reported that firms were luring top talent with “gargantuan compensation packages” and said that recruiters were predicting the legal industry might see its first US$10 million lateral hire this year.

Do these rainmaker recruits really pay off? A new research study co-authored by CEIBS Professor of Organisational Behaviour and Human Resource Management Tae-Yeol Kim finds that bringing on partners from other firms does increase firm performance, but only to a point. The study looks at data regarding lateral partner hires in 148 US law firms between 2004 and 2008 whose headquarters are dispersed across 39 cities in the US. The average number of partners among firms in the study was 222.

The results show that hiring lateral partners can help firms improve performance, provided the firm has adequate resources to keep the new partners focussed on the job they were hired to do. For example if the firm has a low ratio of law associates to partners, then bringing in new partners from other firms is not likely to be an effective way to grow the business.
However, the results also show there is a point where increasing the number of lateral hires will be a drag on firm performance; it will reduce the motivation of existing lawyers and their high compensation will eat into profit margins.

Besides law firms, the co-authors say their findings can also be applied to accounting and consulting firms, as well as other professional services firms. These firms use the “up or out” system – recruiting and training recent graduates who are rewarded with a much-prized partnership a few years later if they prove their talent.

Recruiters in the legal sector should keep these results in mind in future. The recent drop in the number of law school applicants in the past couple years means there will be fewer law associates in future to groom for partnership. That could mean more need for lateral hires, and fewer law associates to support them.

Professor Kim’s study is titled “Lateral Hiring and the Performance of Professional Services Firms: The moderating effects of leverage ratio”. It has recently been published in The International Journal of Human Resource Management. Read it here.

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