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Does lateral hiring produce higher partner profits? Not according to the statistics

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Does lateral hiring produce higher partner profits? Not according to the statistics

Jan 31, 2013, 01:48 pm CST

Most large law firms are playing the lateral churn game. Less productive or profitable partners are pushed out, and lawyers who can bring in clients and money are hired.

But if all firms are playing the same game, can anyone win? Indiana University law professor William Henderson and Pennsylvania State University affiliate law professor Christopher Zorn consider the question in an article for the American Lawyer.

By one measure, aggressive lateral hiring doesn’t work. The authors find no statistically significant relationship between an aggressive lateral strategy and profits per partner. In fact, the most profitable firms tend to have the lowest rates of lateral hiring. But on a different level, Henderson and Zorn say, lateral hiring works because it can bolster a law firm’s ability to survive.

“If the lateral market is a game that most firms have to play, but very few can win, the best strategy may be the one that produces the lowest risk of failure,” Henderson and Zorn write. “Success may be simply avoiding the fate of more than a dozen Am Law 200 firms that have collapsed in recent years as partners lost faith in the enterprise and headed for the exits. Since we can’t win, we play not to lose.”

Aggressive lateral hiring may not result in higher profits, but it can lead to additional revenues and more high-quality lawyers, Henderson and Zorn say. And large, profitable firms are least likely to fail since they are better able to weather a loss of a large group of lawyers. These big firms may also be better positioned to pitch for work requiring a global reach.

“So the irresistible lesson here is that while bigger may not be better, it is probably safer, at least from the perspective of law firm managers,” they write. “Lateral hiring does have a statistically meaningfully relationship with higher revenues and hence market share. That may be good enough to survive until a more compelling strategy comes along.”

Related coverage:

ABAJournal.com: “The Dewey effect: Lateral hiring hits three-year high, DLA Piper tops hiring list”

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