If you had to bet, would you expect the level of lateral partner hiring over the next 12 months among AmLaw 200 firms to:
(c) stay about the same?
My guess is that you would bet (a) or (c). And yet, despite lateral partner hiring being a favored growth strategy for law firms, industry observers have repeatedly questioned its efficacy in recent years. Lateral hiring is, according to the stats, more often ineffective than it is successful. Logically, it should be fading as law firms restructure their business models to reflect changing client attitudes and a shifting competitive environment. But that doesn’t seem to be happening. So, now, let’s project further ahead. Extend the timeline to 2025 and ask yourself whether lateral partner hiring will increase, decrease or stay about the same over the next ten years. Is your answer different? If so, why?
As the legal services sector continues (albeit unwillingly in parts) to restructure, there are various trends that will cause lateral hiring to slow down over the next 10 years:
- The disaggregation of legal services will increase, and the price competition that causes and results from it will accelerate.
- The deregulation of legal services will continue and will lead to global shifts toward more liberalized service environments – this will produce more competitors to law firms (e.g. large accounting firms building their legal capacity, LPOs such as Pangea3, technology driven providers such as LegalZoom, and alternative service models such as Axiom).
- Traditional leverage models will continue to change: The number of partnership-track associate positions will fall + the number of indefinite non-partner positions will increase + the number of staff attorneys will increase, at least for the time being (see 5 and 10.).
- More tasks will be routinized through standardization and technology.
- Technology will increasingly replace lower paid staff attorneys and associates.
- Fewer equity partners will be ‘made up’ as client relationships and business generation become the only significant criteria for partnership, and in order to keep PEP high and to sustain high compensation packages for the star partners.
- BigLaw will continue to chase market share and revenue, which for most firms will be a survival tactic rather than a long-term business strategy – this will keep lateral hiring levels up until the other trends take full effect. Partners in high margin practices will move upstream and partners in lower margin businesses will move downstream.
- Lower margin work will continue to shift to LPOs and alternative service providers.
- Segmentation of law firms will accelerate as high PEP becomes essential to the elite firms as they seek to maintain market position and market share. The gap between the elite and the rest of the AmLaw100 will become more pronounced as will the gap between the AmLaw100 and the Second Hundred and the rest of the market.
- The current generation of baby boomer partners will continue to age out (the last baby boomers were born in 1964 so are 51) and law firms will contract as partner attrition gathers pace and as their competitors increase market share and technology accelerates (including the application of advanced software and machine learning to legal services which will play a much greater role and erode the need, and premium rates, for specialist knowledge workers).
The confluence of some, if not all, of these factors is already shrinking the partner pie by reducing the demand for legal services from Big Law (and other law firms that are structured and operated using a conventional law firm business model). Over the next ten years, reduced demand will lead to fewer traditional law firms, with fewer lawyers and fewer equity partners. And, fewer equity partners will ultimately mean fewer laterals.
So, now, what about that bet? Is (b) making sense?
In practice, absent merger, lateral partner hiring remains the favored growth survival strategy for law firms notwithstanding its challenges. And, despite the broader indications of structural change affecting the legal services sector, the widespread use of lateral hiring is not likely to change unless there is external pressure. Much of BigLaw is still locked in a lateral arms race. Whether surviving or thriving is their goal, firms need to up their lateral hiring and integration success scores or adjust their expectations. Beyond that, while playing the lateral game, smart firms will take a long hard look at their business models and longer-term strategies for competing in the changing legal services environment.
For now, law remains a relationship-based business. However the next ten years work out, unless partners (and the relationships they have as trusted advisors to their clients) disappear completely, there will continue to be a transfer market for top talent. Identifying that talent and ensuring that it is properly integrated with the rest of the team will continue to be an imperative for law firms seeking to avoid expensive short- and long-term mistakes.