Lateral hires are risky. Even managing partners responding to the Hildebrandt/Citi 2015 Client Advisory’s confidential survey admitted that only about half of their lateral partners are break-even at best — and the respondents had unrestrained discretion to decide what qualified as “break-even.” As Ed Newberry, co-global managing partner of Squire Patton Boggs told Forbes, “[L]ateral acquisitions, which many firms are aggressively pursuing now … is a very dangerous strategy because laterals are extremely expensive and have a very low success rate….”
Beyond the financial perils, wise firm leaders understand that some lateral partners can have an even greater destructive impact on a firm’s culture. In late 2014, former American Lawyer editor-in-chief Aric Press interviewed Latham’s outgoing chairman Bob Dell, who was retiring after a remarkably successful 20-year run at the top of his firm. Dell explained that he walked away from prospective lateral partners who were not a good cultural fit because they stumbled over Latham’s way of doing things.
Press wrote: “Culture, in Dell’s view, is not a code word for soft or emotional skills. ‘We think we have a high-performance culture,’ he says. ‘We work at that. That’s not soft.'”
Under the Radar and Under the Rug
Most lateral hiring mistakes attract little public attention. Firm leaders have no reason to highlight their errors in judgment. Fellow partners are reluctant to tell their emperors any unpleasant truth. If, as the adage goes, doctors bury their mistakes and lawyers settle theirs, then managing partners pretend that their mistakes never happened and then challenge anyone to prove them wrong. The resulting silence within most partnerships is deafening.
Every once in a while, a lateral hire becomes such a spectacular failure that even the press takes note. When that happens, the leaders of the affected law firm have nowhere to hide. Which takes us to James Woolery, about whom I first wrote five years ago.
Without mentioning Woolery specifically, I discussed a May 28, 2010 Wall Street Journal article naming him was one of several Cravath, Swaine & Moore partners in their late-30s and early-40s taking “a more pro-active approach, building new relationships and handling much of the work that historically would have been taken on by partners in their 50s.”
“We’re more aggressive than we used to be,” 41-year-old Cravath partner James Woolery told the Journal. “This is not your grandfather’s Cravath.”
A Serial Lateral
Six months later, it wasn’t Woolery’s Cravath, either. He’d already left to co-head J.P. Morgan Chase’s North American mergers and acquisitions group.
In 2013, only two years after accepting the Chase job, Woolery moved again. With much fanfare, he negotiated a three-year deal guaranteeing him at least eight million dollars annually to join Cadwalader, Wickersham & Taft. How was the cultural fit? The firm’s chairman, Chris White, described him as “the epitome of the Cadwalader lawyer” who deserved the lucrative pay package that made him the firm’s highest paid partner. A new title created especially for Woolery — deputy chairman — also made clear that he was White’s heir apparent.
To no one’s surprise, in 2014 Cadwalader announced that Woolery would take over as chairman in early 2015. As he prepared to assume the reins of leadership, the firm took a dramatic slide. The current issue of The American Lawyer reports that Cadwalader posted the worst 2014 financial results of any New York firm. Woolery’s guarantee deal looked pretty good as his firm’s average partner profits dropped by more than 15 percent. The firm’s profit margin — 26 percent — placed it 87th among Am Law 100 firms.
On January 19, 2015, the firm’s managing partner, Patrick Quinn, convened a conference call with all Cadwalader partners to convey a stunning one-two punch: Woolery would not become chairman, and he was leaving the firm to start a hedge fund. Woolery was not on the call to explain himself.
Unpleasant Press
No law firm wants this kind of attention. No client wants its outside firm to project uncertainty and instability at the top. No one inside the firm wants to hear about someone who has now been “thrust into the role of designated chairman of the firm,” as The American Lawyer described Patrick Quinn.
Woolery is gone, and so is Chris White, the former Cadwalader chairman who sold fellow partners on Woolery and his stunning guaranteed compensation package. White, age 63, left the firm in November to become co-CEO of Phoenix House, the nation’s largest non-profit addiction rehabilitation center.
Meanwhile, newly designated Cadwalader chairman Quinn says that the firm has no plans to change its strategy, including its reliance on lateral partner hiring. Maybe Chris White can use his new job to help Quinn and other managing partners shake their addiction to laterals. Apparently, first-hand experience with failure isn’t enough.
The Belly of the Beast 
The myopia and denial about lateral partners is nothing short of staggering. A year or so ago I met some guys who’d developed software that purported to have a very high success rate at predicting who among a firm’s lawyers would become a successful rainmaker. In fact, they claimed that the prediction would work even if administered to law students. Intrigued by the possibility, I set about investigating whether or not there was a market for it. Of all the potential use-cases, I figured that lateral-partner decisions were the biggest personnel bets that firms make.
I spoke with Edwin Reeser, a respected law firm management consultant, who told me that most laterals bring with them only about half of the business that they project. I had some firsthand experience with that, but I was completely unprepared when he told me that most laterals lasted only about two years with their destination firm. I reasoned that the first deficiency could be attributed in part to factors beyond the lateral’s control, such as M&A activity, clients telling them what they wanted to hear about how much business they’d do together at the new firm, and their former firm’s efforts to retain the work. The loss of 50% wasn’t the problem. The inability to replace that work was the big problem. Two years later, it would make sense that the lateral would be the first to know that he or she wasn’t going to hit those origination targets. It’s not a bad idea to get yourself out the door before someone insists on it.
The impact of the lateral bet just went up a lot.
To test all this, I called a number of managing partners whom I’ve known a long time, have worked with, and respect greatly. They all validated Reeser’s success metrics. When I asked whether or not they would use software that accurately assessed rainmaking capability, most said no, that they didn’t see the need, that they felt they did a pretty good job vetting lateral candidates via their rigorous interview process. This was hard to reconcile. How do smart people acknowledge that the lateral-hiring process produces such poor success rates, yet still consider their vetting process reliable?
“Victory has a hundred fathers and defeat is an orphan.”
Count Galeazzo Ciano
Great points as usual Steven. Mike there are a few firms turning the corner on the lateral hiring mess. There are some ways to probe that can reveal the truthiness of a potential partners book. In the end though, it is really the clients choice about whether the work follows the partner to his or her next resting place. Clients tell us they are looking to their firms and lawyers to provide consistency and some level of predictability on a number of levels. I have witnessed well known firms with very high hourly rates all but give away work to keep the business rather than see it walk out the door with a departing partner. Maintaining long term market share is more important than short term profits to these firms and they are also offering reliability and predictability to the client.
Murray, I’ll believe the “turning the corner” argument when I see the metrics change.
You’re correct that who does the work is the client’s choice, not the lateral’s. However, despite the antiquated ethics rules prohibiting it, no sane lateral moves without finding out how much of his business his clients will support him taking with him to the new firm. So, while it’s the client’s choice, it’s the lateral’s responsibility to learn what that choice will most likely be. The issue isn’t how much of what they claim they’ll bring that they actually bring. It’s whether or not they can replace what they don’t bring. So far, that’s where they’ve come up short to such a degree. Lots of lawyers’ books of business are the product of fortunate accidents or inheritance rather than the product of strategic intent and skilled action.
Pingback: Best Blogs in May: | John O. Cunningham