Right alongside the billable hour, lateral hiring has over the past decade become one of the most derided and yet most enduring aspects of the Big Law business model.

Lateral activity remained robust last year even as it slipped from the highs of 2016. ALM Intelligence, which tracks lateral moves, counted 2,895 partner moves among firms in The Am Law 200 from Sept. 30, 2016, to Oct. 1, 2017. That marked a drop of about 2.25 percent from the same months in the 2015-2016 timeframe, concluding three straight years of growth.

The most active firms in the lateral market were ones that embarked upon perhaps the most straightforward strategy for lateral hiring: opening a new office (or two). All four firms that grew their partner ranks via laterals by more than 10 percent last year did so at least partly as a result of geographic expansion.

Chicago-based Winston & Strawn hired the most lateral partners of any Am Law 200 firm, according to ALM Intelligence. The firm brought on 73 partners, representing nearly 22 percent of its partner ranks. (For comparison, DLA Piper hired the second-most partners, 69—a mere 5.7 percent of its partnership.)

Cozen O'Connor, which added 52 partners—amounting to 17 percent of its partnership and the second-most additions per capita—opened shop in Pittsburgh through hiring a group of Buchanan Ingersoll & Rooney partners. The other two firms to grow their partner ranks by more than 10 percent through lateral hiring, Smith, Gambrell & Russell and Fox Rothschild, opened in Los Angeles and Seattle, respectively.

There is broad consensus among managing partners that an active lateral market will remain a fact of life in the legal market, for better or worse. Answering an Altman Weil survey, 99 percent of managing partners at firms with more than 250 lawyers said they pursued lateral hiring as a growth strategy in 2017. Most of them, 81 percent, said they are doing it to grow profit. That's the second most common strategy aimed at boosting the bottom line—right behind cutting underperforming partners (done by 87 percent of firms).

Those statistics point to one inherent danger in the current lateral market. With less productive partners being shuffled out of many firms, those firms who are looking to grow via the lateral market may be facing a sort of adverse selection problem: Underperforming partners may portray themselves as your firm's next rainmaker. That dynamic goes some way toward explaining a litany of data points showing lateral hiring is fraught with risk. Only 59 percent of lateral moves from 2011 to 2016 were deemed a “success” by managing partners responding to a Citi Private Bank Law Firm Group survey. Of those who told Altman Weil that they hire laterals to boost profit, a mere 53 percent said it actually worked.

“The truth is firms rarely assess cold-eyed the risk-reward ratio based on real-time metrics and economics,” says Bobbie McMorrow, a longtime recruiter near Los Angeles who handled one of the biggest moves of 2017: Hogan Lovells' group hire of former Weil, Gotshal & Manges Silicon Valley M&A experts led by Richard Climan. “The lateral market is a potential business asset and it is a potential risk.”

So how can firms limit the downside? One key is to know what you are in the market for and to understand the pros and cons of that specific type of move. Not all hiring strategies are the same. Here, we plot the benefits and risks of spending big bucks on stars; of hiring large groups; and of recruiting experts, often from government, to broaden well-known practice groups. We also highlight the economic arbitrage of lower-cost firms hiring into bigger markets, and as a baseline for judging the lateral market, the strategy of those firms that still don't participate in the competition for lateral talent.

Stars

The highest end of the lateral market is a space where only a handful of firms have the money to play. Shelling out $10 million for superstar partners is rarefied air.

“There aren't many … firms that are willing to do that,” says Lippman Jungers recruiter Mark Jungers. “There is one excessively notable one. It's a generic brand of groceries in a certain part of the world.”

Jungers refers, of course, to Kirkland & Ellis, which has pursued a star-studded strategy over nearly a decade to build its public M&A practice into a powerhouse. Chair Jeffrey Hammes—who the firm said was unavailable to comment on its lateral hiring strategy—has recruited from once-untouchable firms with hires that include two Cravath, Swaine & Moore partners in the past five years and partners from the tops of Skadden, Arps, Slate, Meagher & Flom; Simpson Thacher & Bartlett; and plenty of other firms. Most recently, the firm brought on private equity rainmaker Erica Berthou, who was global head of the investment management and funds group at Debevoise & Plimpton.

But Kirkland is far from alone in the increasingly competitive pursuit of the brightest talent.

Commenting on the firms that are best at recruiting the most sought-after talent, one recruiter says: “I always start with Latham & Watkins. Kirkland is fantastic. And Paul Weiss is suddenly a close contender.”

Recruiters are still buzzing about the roll Paul, Weiss, Rifkind, Wharton & Garrison chairman Brad Karp has been on. Perhaps his biggest splash was recruiting Cravath's Scott Barshay in early 2016. Shortly thereafter, the firm added a group of leading antitrust partners from Cadwalader, Wickersham & Taft led by rainmaker Charles “Rick” Rule. That haul helped boost Paul Weiss' financials last year, with profits per partner rising 7.1 percent, to $4.38 million, with top-line growth of 10 percent to $1.22 billion.

Karp, who did not return a request for comment on the firm's lateral strategy, has an advantage shared by Kirkland in recruiting top partners from Wall Street competition that maintains tight lockstep compensation. While Paul Weiss is mostly a lockstep firm, 10 percent of its stars receive bigger paychecks. Compensation for Barshay, for instance, was reportedly just shy of $10 million.

“What is really changing is what I call the bold, audacious hiring, away from the New York-based Wall Street firms,” says Alisa Levin, recruiter and principal at Greene-Levin-Snyder, citing Kirkland's hire of Berthou from Debevoise and Barshay's move to Paul Weiss from Cravath. “In the past, you just wouldn't think of those people as movable.”

Recruiters are of two minds on deals that lure partners away from brand-name firms such as Cravath. It's hard to know what, if any, institutional clients will be pulled out with them. But at the same time, the best partners at those firms have developed their own brand in the market. Since few partners move at lock-step firms, a move such as Barshay's is viewed as a challenge to the lockstep system.

While star recruits have a mixed track record, Barshay's move to Paul Weiss is largely viewed as a success, bringing the firm business from clients such as chipmaker Qualcomm Inc.

Stephen Nelson, managing principal at executive search firm The McCormick Group, expects star lateral hires to continue in the coming years.

“The star partners are still stars” after they've left their firm, says Nelson. “If they are stars, they do have business of their own. And they're just recognized by the legal community as being really special and a difference maker. And that is going to continue.”

Star partners typically require higher pay packages than what they earned at their former firms, premiums that are in part a recognition that they probably didn't need to leave a place where they knew their partners well and have already established success.

“There is always that ounce of trepidation about is this going to work out,” says Credentia Inc.'s Kay Hoppe, a Chicago-based legal recruiter. “And the premium might be just a little bit of security to say, 'We believe in you and we are going to share the anxiety and make sure you succeed.'”

Few firms can spend that kind of money on a single partner. Paul Weiss and Kirkland are two of six firms with profits per equity partner (PPP) of more than $4 million last year. There were 16 firms in The Am Law 100 with PPP over $3 million.

While there is no true minimum PPP number that would preclude a firm from taking on a partner with a paycheck nearing seven figures, it becomes an increasingly difficult sell to bring on a partner making so much more money than his or her peers.

That's because successfully bringing in partners with north of $20 million in business requires more than a checkbook. Managing partners at those firms that do it often wield considerable power, enabling them to reach consensus on big moves. And the partnership must also have a broad enough distribution of power (and clients) so that a new big fish won't draw the ire of his or her new partners.

Those cultural concerns are why Dan Binstock, a Washington, D.C., partner at recruiting firm Garrison & Sisson, says that it can sometimes be more difficult to place a lawyer with a $20 million to $25 million book of business than a partner with a fraction of that. Incoming stars can threaten the established leaders within their new firms. That is more likely when the firm already has an established practice in the new partner's area.

“It's all about chemistry,” Binstock says. “The way to assuage those fears is they've got to get to know each other and realize that everyone can benefit from it. It won't be a $20 million practice that will work as a silo.”

Few Laterals

While most firms in the Am Law 200 boast about new lateral partner hires, a shrinking group of firms still hire very few, if any, lateral partners, relying only on associates for future partnership ranks. These include lockstep firms and Wall Street firms that typically only make exceptions when hiring former government officials.

Leaders at several lockstep and Wall Street firms say they don't feel any pressure to change their hiring strategies due to the heightened competition for star talent and rainmakers.

“We have an incredibly strong lockstep culture,” says Lev Dassin, a partner at Cleary Gottlieb Steen & Hamilton. “I think people who grow up in the culture and stay and people who have been around the block a few times understand the culture is an important aspect of it.”

Cleary's only U.S. lateral partner in 2017 was Matthew Solomon, who served for more than 15 years at the Securities and Exchange Commission and the U.S. Department of Justice. The firm rarely hires lateral partners in the United States, but when it does, the recruits are primarily in litigation and they mostly arrive from the government, Dassin said. “Almost everyone is home-grown,” he says.

Angela Burgess, co-head of Davis Polk & Wardwell's white-collar criminal defense and government investigations group, says that the firm only brings in a few lateral partners each year, most often from the government. That hasn't changed in recent years and she doesn't expect that strategy to change, she says. In 2017, the firm hired Kenneth Wainstein, a Cadwalader partner who has two decades of Justice Department and White House experience; Howard Shelanski, an antitrust partner with high-level experience at the Federal Trade Commission and the Federal Communications Commission, and Hong King-based Patrick Sinclair, a Ropes & Gray partner and former federal prosecutor.

“Our lateral hires are fairly unique,” Burgess says, citing the firm's “strong tradition of promoting from within.”

Sullivan & Cromwell hired two antitrust partners in 2017, including Renata Hesse, former head of the Justice Department's Antitrust Division, and Michael Rosenthal, formerly of Wilson Sonsini Goodrich & Rosati.

Daryl Libow, managing partner of its Washington office and co-head of the firm's antitrust practice, calls the new hires “very unusual” for the firm. “Looking at the future we decided that we already have a fantastic merger clearance practice but a lot of our lawyers are pretty senior and we were looking at the future and expanding globally,” he says.

Levin, the recruiter at New York-based Greene-Levin-Snyder, says that she sees some signs that Wall Street firms are gradually warming to the lateral market. “Wall Street firms will take calls from me and listen,” Levin says. “At the very least they want to know who is on the market and the trends, but it has to be a very, very strong [set of circumstances]. A lot of the stars have to align for them to really take action. They have to have a pressing need, they have to make sure it doesn't hit the runway of other people.”

Levin said these firms are warming to the idea because they're much more attuned to market pressure, now competing for talent and business with firms such as Latham and Kirkland.

“It's a smaller and smaller group of firms that don't resort to lateral hiring as a growth strategy,” she says, but for Wall Street firms, “They get the elite people, they have an enviable client base. I don't see it changing that fast.”

Cahill Gordon & Reindel is one firm that is slowly getting more comfortable with lateral partner hires. The firm hired only one lateral partner in 2017, Nola Heller, a former federal prosecutor whom partner Herbert Washer calls a “superstar” in intellect and people skills and who could help train the firm's associates on regulatory and enforcement matters. “We already have terrific partners and we don't have a lot of need, but when we have the opportunity to bring in somebody special, who is really focused on a practice area very important to us, we have to look at that opportunity,” he says.

Washer, a member of Cahill's executive committee, says that he was one the first lateral partner hires “in a long time” when he joined about six years ago. “The firm's thinking is evolving a bit,” he says. “When there's an undeniable need, I think the firm is more willing to look at it.”

“It was only more recently that some of those old line firms joined the movement. And Cahill has been one of the last holdouts,” Washer says. But he adds, “We do it in the most cautious and opportunistic” way.

Experts

Yes, most rainmakers are known as experts in their field. But the strategy of bringing in a $20 million practice is distinct from recruiting partners known for their special legal chops in a particular practice group or industry. Firms often target these types of experts from government roles, and they are viewed as a way of differentiating their firm's services from competitors.

Among the most active firms pursuing this strategy in the past year was Crowell & Moring, which brought on 17 partners, according to ALM Intelligence—some 9.5 percent of the firm's partners. The firm added from a bevy of governmental bodies. Paul Rosen, a former federal prosecutor who served as chief of staff to Jeh Johnson at the Department of Homeland Security, came over in April. In October, the firm added white-collar and regulatory enforcement partner Rebecca Ricigliano in New York from the New Jersey Department of Law and Public Safety. September saw the firm add Alexis Gilman, an assistant director in the Federal Trade Commission's competition bureau.

“That has been part of our strategic ambition for a long time—to continue to really play to our regulatory strength [and] to grow and expand in regulatory areas that play to the needs of our clients,” says Phil Inglima, who took over as chair of the firm from Angela Styles in October.

Competition for this type of talent is fierce, with almost every government hire drawing interest from plenty of firms inside the Beltway. That gives the candidates a certain leverage even though they may not have a large book of business right away. In many cases, they also face time restrictions on working directly with the agencies they left. Recruiter Binstock says that a common theme of interviews with ex-government lawyers involves questions about how the firm will integrate them with current clients.

For that reason, these partners often require a longer investment from the firm before a payoff. Firms also invest in business development for these new partners and help them develop business plans.

“The risk with those [government] hires is are they working as a figurehead and a business developer, or are they being brought on to bill hours?” Binstock says. “Sometimes people with high-level positions in the government want to take advantage of their network. They may not want to be billing hours that much.”

Akin Gump Strauss Hauer & Feld also has a long history of recruiting from government positions, which has helped it become the nation's highest paid lobbying firm, pulling in $36 million in 2016 for that work. In 2016, the firm brought in former Democratic North Carolina Sen. Kay Hagan and G. Hunter Bates, a former chief of staff to Senate Majority Leader Mitch McConnell, among others.

“We hire to build on our expertise,” says Kim Koopersmith, chairperson of Akin Gump. “That has led us to focus on laterals, many of whom come out of the government, where we see a natural link between their expertise and what our clients need.”

Expert recruiting isn't limited to former government employees, however. There are certain practice groups that are viewed as a necessary expertise within a firm but rarely draw their own books of business, such as a tax practice or ERISA. Energy regulations are increasingly viewed that way, says Nelson of The McCormick Group.

Often, those practices are needed in M&A deals. And while these so-called “service partners” may not bring with them much in the way of portable business, firms still need to be able to convince clients they have the knowledge to guide their deals through thorny legal areas.

Nelson says that while firms have traditionally shied away from hiring partners without their own business, that is changing as clients are increasingly detached from personal relationships. That makes these sort of expertise hires all the more important. But they can be difficult to gauge, because firms need to understand their value beyond their portable business.

“There used to be this idea that clients don't hire law firms, they hire lawyers. And that is largely becoming a fallacy,” Nelson says. “They want a reliable team that understands the clients; understands the way the client wants their matters handled; and clients want it done on a value proposition.”

Many firms that have a strategic focus on certain industries are also heavily invested in adding experts in those fields. Companies facing similar legal challenges often want to work with lawyers who have a deep knowledge of their industry.

Orrick, Herrington & Sutcliffe, for instance, has a strategy focused on three industries: technology, energy and finance, says chairman Mitchell Zuklie. Being able to clearly articulate that strategy has helped draw interest from experts in those fields, Zuklie says.

“We like growing internally, but we also recognize there will be people who have unique skills that aren't here and we want to be able to provide the most relevant and important legal solutions to our clients,” Zuklie says.

Firms will often pull in experts in new fields, with one recent example being fintech or cryptocurrencies, says Marcie Borgal Shunk, founder of consulting firm The Tilt Institute. Shunk says that kind of expansion needs to be based on well-known client needs.

“If you have these stalwart clients for years and you know there's this growth in fintech and bitcoin and all these topics are of concern in that industry, [if] you're missing that expertise or knowledge, it makes sense to pull that expertise in,” Shunk says. “But to do [lateral hiring] for the sake of growth, it's a fuzzy strategy.”

Rate Arbitrage

As the biggest firms chase ever-higher profits per partner, some lower-rate practices get left behind. One lateral hiring strategy is for other firms to pick those pieces up.

“If you are a firm that has $1.5 million to $4 million in PPP, it's very, very hard to have partners billing less than $800 an hour,” says Jungers, a recruiter who splits time between Milwaukee and Los Angeles. “And there are practices that it is very, very hard to bill $800 an hour. So you have seen some of those practices migrate out of those firms.”

One firm that has been among the most active in scooping up those practices via the lateral partner market is Kansas City, Missouri-based Polsinelli. The firm of roughly 800 lawyers is one of just three firms to rank in the top 10 in lateral hiring over the past two years when measured as a percentage of the partnerships. Polsinelli has added 94 partners over the past two years, according to ALM Intelligence.

Much of the firm's recent growth has been in Chicago, where it has grown from just six lawyers in 2006 to 99 as of mid-December. The firm has found success recruiting from some of the city's legacy firms, many of which have pursued a more international, higher-profit model.

“For some people, we can lower their rates and it unleashes more work from their current clients,” says Chase Simmons, who will take over as Polsinelli's chair on Jan. 1, 2019.

Polsinelli's lower rate structure, which recruiters say can come in around 20 percent lower than some firms, is achievable in large part thanks to its lower-cost base in Missouri. Nearly 44 percent of the firm's lawyers are based there, as are most of its support staff.

One practice that has blossomed under the rate-arbitrage play that Polsinelli offers is the firm's health care group, which is led by Matt Murer in the Windy City. Murer says that the firm seeks to offer a full range of services to middle market, national companies, which fits the description of even some of the largest companies in the highly fragmented industry.

“Firms in the Am Law 100 say they want to do only the marquee, complex work for Fortune 100, 500 companies,” Murer says. “Well, that's a pretty limited world. And their rate structure—many would tell you, and [general counsels] have told us … makes them a luxury. We've focused on being a full-service firm, certainly in health care.”

Polsinelli's lateral hiring strategy has led to impressive financial growth. While head count has grown just above 50 percent since 2010, revenue has grown 162 percent—coming in at $439 million for 2016. PPP, however, has yet to take off. The firm had PPP of $695,000 last year, down from the prior year's $725,000.

Polsinelli's strategy has been mimicked by other firms. Most recently, Cleveland-based Benesch, Friedlander, Coplan & Aronoff has been attracting partners from large Chicago firms. The firm started an office in the Windy City two years ago and already has more than 30 lawyers.

Gregg Eisenberg, the firm's chair, says that he makes about 30 trips from Cleveland to Chicago a year, sometimes traveling six hours roundtrip to meet for coffee with a recruit. Part of the firm's success is attributable to the rate pressure that partners are feeling at bigger firms as clients seek to lower costs, Eisenberg says.

“We sell expertise; a great bench and great lawyers,” Eisenberg says. “And it's inherent that we don't charge as much as a firm that has 600 lawyers across the world. That's just not us. There are some practices that have rate pressure, and that is one of the reasons people join us. It's not the reason at all. But it's definitely a factor. The environment has changed. Corporate legal budgets are constrained, and clients are looking for value.”

'A Certain Glue Factor'

Outside of law firm collapses, it was rare that Am Law 200 firms raced to swallow large groups of lawyers. Now, for some firms, such as Winston & Strawn and Cozen & Connor, it's part of their preferred growth plans.

At Cozen O'Connor, the firm in 2017 hired 10 from a Santa Monica boutique and about 26 lawyers from Buchanan Ingersoll.

At Winston & Strawn, the firm's 73 lateral partners this year include 10 from Chadbourne & Parke, 12 partners from McDermott Will & Emery and about two dozen lateral partners from various firms when Winston & Strawn opened in Dallas. Now the firm is seeking groups of laterals in New York in capital markets, public company M&A and private equity.

“The clear preference of the firm is to grow through larger groups of lawyers,” says Michael Elkin, vice chairman and managing partner of Winston & Strawn's New York office. “It's not to say we won't make additions for individuals. But, where we have excelled in terms of the lateral market over the past say five years or more is when we brought in large groups of lawyers.”

Explaining the benefits, Elkin says, “There is a certain amount of connectivity in terms of the lawyers' relations to each other,” their association with long-standing clients, “and a certain glue factor which makes it easier to get integrated in the fabric of our firm.”

For his part, Cozen O'Connor CEO Michael Heller says, “you frankly spend almost as much time on lateral groups as you do on onesies and two-sies,” while “the likelihood of success is much higher with groups than it is with your one-off recruiting.”

Clients tend to transition better with large group moves. “The groups are more likely to bring their clients without battle from their prior firm than one-offs are,” Heller says. If the firm will spend a significant amount of time on lateral recruiting, “we might as well do it with groups that are more likely to be successful,” he adds.

Both Elkin and Heller also point to operational efficiencies by bringing in larger groups. “If a firm does not need to increase overhead in costs, such as real estate and IT, then the group's revenue, less their direct costs,” such as compensation and secretarial support, “should fall to your bottom line,” Heller says. By adding a group, “I can now spread my overhead costs over more lawyers,” Heller says. “In a sense, I'm getting additional revenue without increasing my costs.”

Of course, not every firm can take on the investments of group hires, and the risk multiplies with each additional lawyer in the group. When groups come in, they typically don't bring with them work-in-process or accounts receivable, Heller says, which means the hiring firm has to cover their costs, including compensation, travel and entertainment and support staff, for perhaps several months without revenue, Heller says. “We happen to have the cash flow and the capital to do that. Not every firm does,” he adds. However, he adds, “The reward is worth the risk.”

At Winston, Elkin says the firm pays close attention to integration to make group hires effective. “We socialize the new lawyers into the fabric of the firm and we get them involved in business committees so they get involved in ongoing business,” Elkin says.

Hoppe, the recruiter from Credentia, says that group additions are a shift in recruiting requests. “I used to get requests for an individual and a specific practice area. Or an amount of business in a certain practice area. And people now almost always want groups. And the idea is that it takes the same amount of time. And it also gives you a little bit of depth with respect to the clients.”

A parting thought

In the end, there is one aspect of lateral hiring that many recruiters said is critical to successfully executing any of these strategies: Speed.

Firms that have consolidated the lateral hiring process into a streamlined process are at an advantage. That often means a managing partner or hiring committee that has a track record of successful hiring and can secure buy-in quickly from the partnership. Those leaders clearly and consistently communicate the firm's strategy to partners, recruiters said. So, when an opportunity arises that fits within the firm's strategy, they are able to act quickly and boldly.

“The only thing you can say that is consistent with reality across [all firms] is no matter what your basic culture and strategy is: As a firm, can you make decisions rapidly?” says McMorrow, the West Coast recruiter. “Leadership is hyper important. [Yet,] it's not honored, treasured or understood any more than strategy.”

CORRECTION: An earlier version of this story misstated the months that two partners joined Crowell & Moring last year. Paul Rosen joined the firm in April and Rebecca Ricigliano joined in October.