Lateral Hiring: Five Metrics for Benchmarking Top Performers

business intelligence

Lateral Hiring: Five Metrics for Benchmarking Top Performers

There’s an old adage in marketing that half the budget is wasted, we just don’t know which half.  The same might be true for law firm lateral hiring, as stated by a recent ALM survey which found a disconnect between the goals and results of these programs.

Most law firms say lateral hiring is important to growth, however, about half of these hires deliver below expectations. More specifically, the survey found “30 percent of laterals deliver less than half their expected book of business in their first year at the new firm,” according to an article in the American Lawyer titled Law Firms Struggle With Lateral Partner Due Diligence, Report Finds. “Another 21 percent deliver only half to three-quarters.”

“Law firms have come a long way in developing due diligence processes for lateral hiring but the subsequent evaluation process appears to be coming up short.”

Law firms have come a long way in developing due diligence processes for lateral hiring but the subsequent evaluation process appears to be coming up short. Due diligence quantifies expectations, while evaluation helps a firm understand if a lateral hire is meeting those expectations.

The lessons gleaned from a continuous measurement program ought to feed back into the due diligence process. In this way, the effects snowball: the true failures in lateral hiring become less likely and the lateral hires that were good become great. This is important because law firms that crack the code on lateral hiring can develop a competitive edge.

“Based on recent experience, lateral movement between law firms has become a way of life,” wrote Andrew E. Jillson in a piece titled Law Firm Lateral Hiring: Preparing for the Upcoming Free Agent Season. “With a widening gulf between the top law firms in the AmLaw 200 and the rest, the better performing firms have a significant advantage in the lateral hiring space.”

Five Lateral Hiring Metrics to Consider

When developing metrics for evaluating lateral hires, I recommend law firms review historical data. This is because the lateral success measures you want to analyze ought to be long term.  Data is easier to mine today, so going back between two and five years is common. Even looking as far back as 10 or 15 years is feasible with modern data mining techniques.

Precisely which metrics your firm should monitor will vary from firm-to-firm based on the market focus, staff organization and firm growth strategy. For example, the metrics to measure a lateral hire specializing in litigation will be different from a patent or trademark attorney. Therefore, the metrics I offer below are suggestive – based on my experience with hundreds of firms – rather than prescriptive.

1. Responsible billable hours. This measure isn’t about the 2,000 hours the lateral logs individually, but rather the 14,000 hours the individual is responsible for on the matters they manage. This number will be compared year-over-year to understand whether the book of business the lateral brought over is growing, declining or staying steady.

2. Effective rate. This metric looks that the value of the work versus what the law firm actually billed. This is effectively long term billing realization, but I call this the “effective rate” because it highlights the hours for which a firm cannot invoice. However, to use this metric effectively the firm also has to understand the pricing process. For example, if a firm bumps the standard rate of a specific lateral from $500 per hour at his or her previous firm – to $750 per hour – it puts existing clients at risk. The firm must understand how this will impact long-term realization, even while benchmarking for improvement.

3. Cash Collections. I often recommend firms use cash as a metric rather than collection realization because the latter gets murky. For example, if I bill $1 million this year, but also finally collected on billings from previous years, it clouds the metric and can look far better – or far worse – depending on the circumstances. Cash is a straightforward metric for measuring over time, as long as it is used in conjunction with other, more nuanced metrics.

4. Profitability Margin. In a manufacturing business, calculating profitability is relatively easy: revenue – costs = profitability. In law and other professional services, it’s more challenging because of the need to use different allocation methods for attributing the cost of resources that do the work. So long as the firm has a profitability model established, the end-margin is the ultimate measure of success to track over time. With regard to laterals, using an established profitability model and a “same-store sales” concept can provide useful insights into potential trouble areas.

5. Business development hours. A lateral hire that brings in a book of business provides an obvious immediate gain, but law firms should also measure business development hours (BDH) in the long run as well. There are two basic ways to measure BDH. The first is through new client billable hours, which measures new clients earned. The second way is by tracking new matter billable hours on existing clients, which shows whether or not the firm is gaining more work from the existing book of business the lateral brought to the firm.

Making Meaningful Comparisons

Just as important as the metrics that are selected, ensuring that comparisons are adequate and meaningful play a large role in determining success. Laterals aren’t operating in a vacuum so the firm shouldn’t measure them as such. To the extent the firm can, it should group laterals into classes, the lateral class of 2017 for example or a lateral group based on a geographical presence, and then benchmark these groups against the aforementioned metrics. This gives the firm a holistic view of its lateral hiring program and helps determine benchmarks at various points in the process. This can provide both an early warning system as well as the opportunity to determine where a process can improve over time.

Also valuable is to compare lateral classes against native firm attorneys. This is an effective means to understand what the firm has gained. Lateral hires are something akin to a “free agent” in sports, so the firm wants to ensure it’s getting something over and above the price of acquisition – and without subsidy. It also can provide a reasonable expectation of the time required to see a return on investment from lateral hires. With enough time and data points, the firm should be able to identify the time horizon for a lateral to reach (or exceed) the expectations of existing attorneys.

Guiding Principles for Lateral Metrics

A law firm must have metrics in place before a lateral joins a firm – and the metrics selected should answer this question in the long run: What does a law firm expect from a lateral that’s been with the firm for 10 years?

Keep in mind it’s easy to come up with a number, but it’s really hard to tell if that number is giving you what you want. If law firms continuously seek to answer that question, they will inherently link lateral due diligence with performance – and, by extension, expectations with results.

Recommended reading: