Is It Worth Hiring Stars? Lateral Partner Hiring And The Myth of Talent Portability

“Hiring a star should be a well-thought out strategic decision, not a knee-jerk reaction to a perceived opportunity or emergency. Generally speaking, a firm should contemplate hiring a star only to fulfill a specific operational aim: to raise standards or introduce fresh ways of doing business or to fill a critical slot when there is no time to train anyone internally.

Even when a firm has such a clear-cut goal in mind, the potentially corrosive effects on morale and dedication of bringing in a newcomer need to be acknowledged and carefully weighed. There is no avoiding transplant shock. It is also hard to avoid scuttlebutt about the newcomer’s salary or the up-and-comers’ preoccupation with what the newcomer’s hire means for their own opportunities to advance.”

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In Chasing Stars: The Myth of Talent and the Portability of Performance, Boris Groysberg, a Harvard Business School professor, challenges what is an article of faith for many law firms…. That you can, and therefore should, hire stars.

No one doubts that a law firms’ most valuable resource is its people – after all, that’s the accepted view of all knowledge-based enterprises. But Groysberg questions what actually makes stars “stars” and whether, if they move jobs, they can simply provide a plug-and-play solution for their new firms. He questions the underlying assumption that talent is, in fact, portable. Rather than simply accept the free agent concept that has fueled the lateral partner hiring surge over the last few years, Groysberg explores the idea that “a part of individual performance is specific to a particular workplace and not readily transferable elsewhere”. I started looking at Groysberg’s research because I have been looking at the reasons why lateral partner hiring – which remains a key “strategy” for law firms – has consistently proven so disappointing over so many years. I wanted to explore whether we in the legal sector can learn from Chasing Stars.

Right up front, I need to make this clear: The research I reference in this article is focused on equity analysts working at U.S. investment banks. Analysts are not lawyers. I get that. And I appreciate that lawyers are generally quick to differentiate themselves from every other industry and business. So, if you want to stop reading, look away now. However, just before you go, bear in mind that Chasing Stars is based on an empirical study over nine years and packed with evidence drawn not only from the analyst world but also from other professions, ranging from CEOs to football players, from fund managers to… lawyers.

All this to say, I write this article not to assert that equity analysts are a direct analog to law firm partners but to question whether or not there isn’t something to be learned from looking at the experiences of another industry, specifically one in which knowledge and relationships play a central role to the business. Absent a full study of law firm partner portability, looking at the same issues, Chasing Stars gives us invaluable data in terms of empirical research that may help us better determine whether law firm partners who are stars can successfully move laterally. And there’s a reason that the research didn’t focus on lawyers: because there’s a lack of reliable objective data about performance. Two partners may have the same job title but they may well perform very different roles within their firm with very different economic outcomes for the firm. For lawyers, star status is simply not objectively quantifiable and publicly observable. So for the purposes of this article, I intend to use equity analysts as a proxy for law firm partners. In one key respect there may be no meaningful distinction, namely the view that“individual talent is the prime determinant of performance”. When hiring stars, investment banks covered by the research, took the view that those individuals’ performance was independent of the companies they worked for and was thus highly portable. As a result, individual analysts were seen as free agents who could be persuaded to sell their services to the highest bidder. Does this sound familiar?

Stars have a “strong and persistent tendency… to undervalue the importance to their individual success of their firms’ capabilities and resources and their own ability to make use of those resources.”

Groysberg set out to test the theory that if performance is predominantly a function of individual talent and skills, a change in firm should not adversely affect individuals’ short- or long-term performance. Spoiler alert: Overall, star analysts’ “performance declined, sharply and for a prolonged period of time, following a move”. Given this, maybe it’s not so surprising that so many lateral partners are viewed as failed hires.  

Groysberg concludes that “there is no simple answer to the question “Are stars portable?” A better question would be “Which stars are portable under which circumstances – and why?”’

If you look at where a star is dependent on a firm’s resources and specifically who/what contributes to their success, you will find colleagues and teammates, organizational culture, processes and policies as well as systems/technology. And you will find that all of these are capable of underpinning and contributing to a star’s success. However, stars themselves have a “strong and persistent tendency… to undervalue the importance to their individual success of their firms’ capabilities and resources and their own ability to make use of those resources”.

With this in mind, it’s worth taking a look at what is and isn’t portable when a star moves jobs:

Portable -

  • Education and training
  • Personal qualities and attributes
  • Technical knowledge and competence
  • General knowledge
  • Leadership and business skills
  • Experience
  • Personal relationships with clients and outside contacts

Not Portable - 

  • Firm's reputation
  • Firm's networks and connections
  • Routines and procedures
  • Internal relationships (colleagues)
  • Internal support networks
  • Firm-specific knowledge
  • Capabilities at current employer that support the star's activities 

It’s worth thinking about how we can refine this list for law firm partners so that we are clear in our analysis as to what realistically can be achieved with a lateral partner hire.

Are There Lessons to Be Learned?

What else can we extract from Groysberg’s research that can be applied to lateral partner hiring by law firms?

One crucial piece of advice from Groysberg is to make sure that the gains anticipated to result from a star’s hire should not all flow to the star him- or herself, leaving no advantage for the firm. Wisely, Groysberg concludes that if the only one to derive value from the hire is the star, the firm may be better off hiring and developing (and working to retain!) up-and-coming performers rather than “stars” since they will ultimately contribute more value to the firm.

Portability of individual performance hinges on the distinction between skills/knowledge and, in law, relationships, that are firm-specific and those that aren’t – the more firm-specific, the less portable. Candidates from firms that espouse a free agency approach to talent/business generation are likely to underestimate how much their individual performance is dependent on, or the extent to which they have benefited from, firm-specific support. So, when contemplating hiring a star, it would be smart to consider the culture at the candidate’s current firm and that firm’s capabilities, resources and compensation practices. If these encourage, by design or otherwise, the acquisition of knowledge, skills, capabilities and individual relationships that are not context-dependent (i.e. that don’t, in real terms, bind the candidate to the firm), a star is less likely to be inhibited by a move. The corollary is that he or she is more likely to be able to transfer his performance to the new firm. However, this may be less common than you assume.

“People make organizations perform better. The organization also makes people perform better.”

Since only some part of a star’s performance is entirely individual, it’s not therefore surprising that stars suffered a “performance penalty” when moving. The quality of the working environment of a star’s “firm of origin” is a strong predictor of performance. In practice, individuals from certain firm cultures find it easier to take advantage of the free agent system than others – the relative quality of the firm of origin and the destination firm is key – those who moved upstream experienced little or no decline in short- or long-term performance. Those who move downstream saw the sharpest decline in performance.

All this means that if you want to predict performance and likely success, you would do well to look at the firm which the lateral is leaving and assess the character and quality of the firm, together with its work environment. How does it differ from your firm?

Up – Down – Sideways: The Impact of Moves

Based on Groysberg’s research, the extent to which high performance can be transferred to another firm is heavily influenced by the firm of origin and the destination firm. Not surprisingly, a star who moves to a better firm by reference to resources and capabilities – and I think we can also throw in market position, rank, prestige, and reputation here – has the most to gain by moving. Such a mover is least likely to experience a significant adverse impact in terms of personal performance over the short- or long-term. A star who moves to a comparable firm experiences a dip in performance. Among analysts this was typically a two-year thing. As you might expect, a star who moves to a weaker firm suffers when he or she leaves a resource-rich environment and is likely to experience the sharpest and most persistent decline in performance. For some of these analysts getting back to their previous star performance could prove to be an elusive goal.

“Hiring a star resembles an organ transplant.”

Groysberg tells us what we may know from observation but which, it seems, many involved with lateral partner hiring still choose to ignore: Hiring a star is “likely to damage the morale of incumbents”. Those who do the hiring “tend to underestimate the magnitude of the upheaval and aftershocks”. It starts with compensation but, in order to please incoming stars, firms allocate resources in addition to comp. They provide support that incumbents do not have and understandably, those incumbents say “Wow, if you given me that level of support, I could have done better – I could be that “star”!” Groysberg confirms that perceptions of unfairness and inconsistency may spread quickly and lead to refusal to cooperate with the star newcomer and/or the decision by others to leave.

In short, the responses of others to a star’s arrival may include:

  • Demoralization;
  • Stress;
  • Dissatisfaction;
  • Infighting;
  • Reduced effort;
  • Deteriorating team dynamics; and
  • Resistance.

Of course, all of these may lead to the loss of other talent. But let’s stay focused on stars and another vital issue: integration.

Groysberg found that “stars who changed employers overvalued their universally applicable general skills and underestimated the degree to which their intellectual tool kits were firm-specific”. One of the consequences is that during the vital integration phase, stars can be slow to adapt to a new firm and its culture. Intellectual and professional hubris means that stars can resist changing their own attitude, approach and processes to fit with the new firm and will do so only when they see their performance slipping. Groysberg confirms that a plan for integration is crucial, asking whether the star will operate a stand-alone franchise or be integrated completely into existing operations? In any event, he concluded, integration needs to be “deliberate and fast” and initiated early in the hiring process. Casual or ad hoc integration efforts are ineffective.

How to Address the Challenges of Lateral Partner Hiring

For those of us involved with lateral partner hiring, are there ideas we can extract from Groysberg’s findings? Yes. Action points for firms considering a “star” hire include the need to:

1.  Think deeply about hiring and integration/assimilation.

2.  Draw up a systematic plan to guide both hiring and integration which includes:

  • analyzing and understanding the anatomy of your firm’s culture, work environment and capabilities compared with those of the star’s current firm;
  • identifying specific definable qualities of homegrown stars;
  • looking for candidates who both share those qualities and come from a similar firm culture;
  • avoiding “shopping locally” and instead looking for stars outside their immediate market segment.

3.  Acknowledge and carefully weigh the impact of bringing in a lateral hire.

4.  Conduct thorough due diligence and pre-hire research.

5.  Develop “accurate projections of growth and profit margins, using outside information alongside in-house analyses to minimize bias”.

6.  Be realistic and take a hard look at possible problem areas including:

  • The magnitude of the firm’s expected gains;
  • The strength of the competition;
  • The culture of the department which the star will join;
  • The attitudes of the star’s future colleagues;
  • The star’s personality; and
  • The cost of any support functions or resources needed by the newcomer.

7.    Avoid assuming that a star will be a plug-and-play: Use that specific integration plan you drew up!

8.    Ensure that there is parity with existing homegrown stars. Do not allow new hires to become highly paid outliers in the context of the firm’s overall compensation strategy.

“… for most law firms there is no statistically significant relationship between more lateral partner hiring and higher profits.” (Henderson and Zorn)

Conclusion

It’s one thing knowing that a half (or more!) of all lateral partner hires are seen as failures by law firm management. It’s quite another identifying why and what to do about it. Beyond the action points suggested above, how should we re-assess lateral hiring? Surely, there has to be some reason why lateral partner hiring has proven so disappointing as a growth strategy in so many cases? Surely, there has to be some explanation as to why “for most law firms there is no statistically significant relationship between more lateral partner hiring and higher profits” as Prof. William Henderson and Prof. Dr. Christopher Zorn have concluded (‘Is Reliance on Lateral Hiring Destabilizing Firms?’, The American Lawyer, 3 February 2014)? And while I could give you many reasons – from flawed strategies to inefficient processes to inconsistent and ineffective interviewing and poor integration – perhaps there is a more straightforward over-arching explanation that goes beyond the specifics of law firms and which reflects challenges experienced across other industries and professions? Maybe chasing stars makes sense far less often than it does. Perhaps, after all, the free agency concept is an over-hyped sports metaphor and the reality is that talent, in the form of law firm partners, is not half as portable as law firm leaders and recruiters want to believe?

This article is based on (and quotes in italics are from):

Chasing Stars: The Myth of Talent and the Portability of Performance, Boris Groysberg, 2010, Princeton University Press

If you are involved with recruiting and integrating lateral partners, I recommend that you add this book to your bookshelf!