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The Economics of Lateral Hiring at Law Firms

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Law firm economics are no longer reserved only for managing partners and members of the management committee. It's imperative that all attorneys—associates as well as partners—understand how law firms operate from an economic viewpoint. Grasping the concept is necessary if you are planning to go through the lateral recruiting process. Many attorneys don't understand the economic implications inherent in hiring experienced legal talent. As firms become more operational oriented and look more and more to the "bottom line," you must begin to understand the economic implications of moving from one law firm to another.

SEARCHING FOR SALARY AND PARTNERSHIP INFORMATION



As we've already discussed, when you jump into the lateral job market, you should educate yourself on the markets in which you're interested in working, including researching the salary levels and the trends in granting partnership credit to lateral candidates. Too many people fail to educate themselves in the beginning on what the market will bear and later, after months of work, find out that their current situation is better than their other options in the marketplace. It doesn't make sense to waste time interviewing in a market in which you can't afford to work.

Legal Search Consultants

One relatively untapped source is legal search consultants. They know the legal market as well as anyone and often are open to giving you ballpark salary figures for specific levels and types of experience. Contact reputable headhunters in your potential market, and ask them to give you a reality check.

Local Chambers of Commerce

Contact the local chamber of commerce for salary and cost of living information on particular cities and regions. Keep in mind that salary levels are often relative to the cost of living in an area. For example, in the southeastern United States, legal salaries are much lower than in the Northeast. But the cost of living is equally as low. In fact, your standard of living may be higher in this region, even though the salary levels appear to be very low. There are also markets in which the salary levels are low in comparison with the cost of living. San Francisco is an ideal example of this phenomenon. The salaries in the Bay Area just do not measure up to the high cost of living there. Have a general idea of your cost of living threshold as you go into the interviewing process and know what your bottom line is.

Salary Surveys and Publications

There are numerous publications and surveys that you may find helpful as an overall resource but that may not be tailored to specific job markets. If you are looking at smaller markets, there may be less outside information available. Primary research on your particular market is often the best and most reliable, up-to-date source of information.

THE CONNECTION BETWEEN SALARY AND BILLING RATES

Law firms often tie associate salary levels to billing rates and partner compensation to the amount of business you bring in the door. When you negotiate your salary at a new firm, you should understand how your salary level will affect your billing rate, which ultimately will affect the amount of work you have, that is, your billable hours. Let me show you what I'm talking about.

First-year associates making $70,000 might have a billing rate two times their salary, or $140 per hour. (Drop the last three zeros and multiply by two.) As associates progress up the ladder, gaining more experience, their billing rates and salaries also increase. As long as associates continue to develop their expertise, clients continue to pay their increasing rates. But if associates reach a point where they can no longer produce the quality of work expected at their experience level, and clients pick up on it, firms have to adjust rates or write off billable time. If this situation isn't remedied, these attorneys usually find themselves on the job market.

Firms use different formulas to determine these rates. An average rate could easily be two times your salary, so if you're making $75,000, your rate might be $150 an hour. Some firms will use even larger multipliers. You should find out, during the interview process, what multiplier a firm uses.

When you move from one firm to another, all things being relatively equal, you expect to continue this progression, moving up the ladder in terms of experience, billing rate, and salary level. But you have to be able to continue to do the work at your level of development, you have to be able to bill at a rate that justifies your salary, and within a relatively short period of time, you must make a profit for your law firm.

If you move around too much, continually throwing yourself backward in terms of experience, your salary level and billing rate will also lag behind. Changing areas of expertise or moving to markets where salary levels and billing rates are lower can alter the logical progression that many associates simply take for granted.

Problems That Can Occur

Lateral job moves can create a host of economic problems. Just make sure that you are aware of these implications before you decide to jump ship. The following are some of the scenarios in which this tends to happen:

  • An associate moves from one firm to another but does not possess the same level of expertise and training as his peers in his law school class at the new firm. You always take a chance when you make a lateral move from one firm to another. You must be prepared to come up to speed very quickly.
     
  • An associate is given salary and partnership credit for a clerkship, and she is expected to start out as a second- or third-year associate even though she is technically only a first-year associate. She must immediately perform out of her league and must come up the curve two or three times faster than her peers. Again, some are able to come up to speed quickly, while others are not.
     
  • A fifth-year associate moves to another firm, getting the five years of partnership credit he wanted. He is up for partnership consideration within 18 months after joining the new firm. That time period is too short for the firm to properly evaluate him despite the promises he was made, so he is "put on hold." He would have been better off to have come in with less credit, so that he would not have been furloughed for partnership consideration. Who knows how long he will remain stagnant, and in his mind that mark will always be on his record, despite his unique circumstances.

    An associate demands such a high salary that her billing rate is much higher than other associates in her class. Partners are hesitant to use her because her rate is so high, so the associate has little billable work, is unprofitable, and is ultimately terminated.

The moral of these stories: Understand the economic implications of making lateral moves in law firms at every level of development. These issues will only become more important as law firms look more and more to the bottom line. Educate yourself now so that you know how to make the right long-term decisions. If you make demands on your new firm, just make sure you can live up to the possible consequences. Shortsighted associates rarely ever make it to partner.

CHANGING JOBS AS A LATERAL PARTNER

It has becoming increasingly common in the current job market to jump from one law firm to another, even as a partner. Not too long ago, the practice of "cherry picking"—plucking partners with lucrative client bases away from their firms—was shunned and practiced only by "renegade" law firms. As clients continue to tighten their belts and shop the market for lower legal fees with multiple law firms, firms are more interested in adding partners to their letterhead who possess big books of portable business. Becoming a self-sufficient partner is more important than ever to your stability as a practicing attorney.

What It Takes to Move

Experienced legal search consultants indicate that a junior partner wanting to move to another firm in a large legal market should have a bare minimum of $350,000 of portable business to be seriously considered by another firm. A more experienced partner candidate (someone who has been a partner for more than just a few years) should possess at least $500,000 of portable business. And if you really want to be a player, you should have more than $500,000 of documented portable business, preferably in the range of $650,000 or more. Obviously, these figures will vary depending on the market you are in, so you need to be familiar with the requirements in your area before you start shopping the market.

When you seriously consider moving from one firm to another, hoping to take your business with you, keep in mind the fact that firms often discount the amount of portable business you claim to have. So be conservative in your estimates because you can be assured that the firm considering you will be even more conservative in their estimation of your stated client base.

How Partners Move from One Firm to Another

Partners have just as difficult a time securing new employment as associates. As you move up the ladder, your options tend to either increase or decrease exponentially. There's little middle ground. But partners have their own sources to rely on when looking for a new position.

  1. It's who you know. If you made it to partner, you obviously have multiple contacts in your legal market. At this point in your career, networking should be a relatively easy task. Very often, partners wanting to leave their current firm work behind the scenes using the contacts they've made over the years. They often have a general idea of which firms will be interested in them. And experienced attorneys often know from the start which firms they're interested in as well, especially if they only want to move across town.
     
  2. Legal search firms. Sometimes partners wanting to make a move utilize the services of a legal search firm. Time is a factor, and many busy partners simply don't have the time to locate the firms that may be interested in them. Others want to make sure that they "shop" the market and exhaust all available opportunities. Confidentiality is another important factor. Headhunters can explore potential opportunities without divulging the name of the attorney. And some partners may not have the contacts in a market necessary to locate a new position. If moving to a new and unknown market, using a legal search firm may be a necessity.
     
  3. You're recruited. Some partners find that they are being recruited by another law firm. You may not be on the market for a new position, but an offer may come along that you simply can't refuse. If a firm is attempting to develop a new area of expertise, often they'll go out and find a partner in another firm who has that expertise fully developed. A more junior partner who works in the shadow of a well-known attorney may find himself or herself faced with the opportunity of being number one in another law firm. Or another firm may lure you with a higher salary, more stock options, or the opportunity to open new offices abroad. Many attorneys are lured away from their current firms in this manner.

The Risks Involved

There is a great deal of secrecy involved in the partner job search, and it's often risky to place yourself on the auction block. You risk the chance that your current firm will find out you are on the market, and you risk your clients discovering that you are changing firms. Managing to leave your current firm on good terms, taking your clients with you, and remaining on good terms with your colleagues, all at once, is difficult at best. And often you do not know until the bitter end whether your clients are coming with you and which of your former partners truly are your friends.

How Long the Process Takes

The process of moving from one firm to another as a partner either tends to happen very quickly or takes much longer than the process as an associate. If your move isn't going to take place overnight, allow six to nine months for the process. While occasionally the switch happens very quickly, almost overnight, usually it takes much longer than you anticipate.

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