Allen & Overy Opens Up New Boston Office

We are used to seeing articles involving Am Law 200 firms who raid each other for lateral partners.  We might be seeing the beginning of a new development—international firms, especially those based in the UK, joining the lateral partner fun.  The news of Allen & Overy’s entry into the Boston market has largely flown under the radar, but it merits further analysis. 

The basics of the deal are straightforward- Allen & Overy is opening up its Boston office after lateralling five partners from Goodwin. The partners work in IP litigation and related fields and together will establish a U.S.-based Life Science practice. 

The potential upside of this move for Allen & Overy is clear. Boston is perceived to be one of the centers of healthcare law and life sciences.  Goodwin is definitely a name in that market, so if Allen & Overy wants to get noticed, especially in the Boston legal market, they undoubtedly have succeeded. 

But at what cost? 

It is already well-established that law firms have tended to overpay for lateral partners. They tend to overestimate the extent to which their book of business is portable. In addition, when lawyers move together in groups, such moves are more likely to command a premium. If one assumes that the five partners moving to Allen & Overy have a collective book of business in the neighborhood of $10 million or more, it is likely that A&O paid a whole lot. And the compensation costs associated with such a move are on top of the costs of opening up an office in a Class A building and potentially entering into a long-term lease. It is safe to presume that this constitutes an investment in the tens of millions of dollars over the next several years. 

There are good reasons to be skeptical about the long-term prospects of such a move. Large law firms have struggled to keep lateral partners; once lawyers leave one firm it is not uncommon for them to move again within a few years.  Lawyers also tend to underestimate the importance of firm culture when they make a lateral move and Americans are less used to this than their European counterparts with interacting with professionals from other countries.  There is a good possibility that Allen & Overy paid through the nose and won’t be able to recoup their investment. And if one or more of the partners hits it big, one of the very biggest US firms could swoop in and convince one or more of the five partners to return to their American roots. 

However, if this move turns out for Allen & Overy, it is clear that very few international firms can afford to re-create this strategy. Hiring laterals and entering into long term leases are beyond the reach of all but the biggest and well-heeled international firms. Most international firms must therefore adapt to a world in which having a relationship with a U.S. firm as part of a consortium is a lot less effective or impressive than it once was. 

There are a lot of moving parts here, but it appears that it will be more important for mid-sized U.S. firms to become more aware of what the biggest international law firms are doing in the U.S. 

How Lateral Partners Should Negotiate Compensation When Working With a Recruiter

Today’s post covers a very specific scenario. We’ve talked before about filling out Lateral Partner Questionnaires (LPQs) as a non-equity partner and how to present your portable book of business when that information will have direct bearing on the compensation offered to you. The very specific scenario we’re touching on today is a lateral move to a non-equity partner position when a recruiter is involved.

The presence of a recruiter changes certain elements of the negotiation at each stage of the interaction between the law firm and the potential lateral partner.

The Beginning 

In the very first steps of the process, a recruiter can serve as a bridge to make sure that the firm and the person being recruited are in the same universe. They can easily identify a floor for the candidate and set expectations for both parties.

At this juncture, candidates should not be too specific. Keep your options open by expressing that all elements of compensation will come into play, including how the firm calculates equity partner compensation and any requirements to buy into the partnership. Too often, lawyers provide a single number to a recruiter to signify their base salary, only to find out later that a more flexible approach would have served them better.

In salary negotiations, it’s easy to accept less than you asked for but very hard to get more than you initially requested. So, as a starting point, quote a range that goes above what you are willing to accept. Accompanying those numbers should be a message that communicates your openness to negotiating. For example, if the lowest base salary you would like to receive is $300k, at the beginning of the process, tell the recruiter something along the following lines: “I am looking for something in the range of $350k, subject to other elements of comp of course.” This response will help the recruiter help you by setting an initial bar, while also signaling flexibility on your part.

The best time to convey this information is prior to filling out the LPQ. This can be instrumental in setting a salary you’re happy with even if the details of your portable book of business don’t justify quite as high of a number.

The Middle

If the interview process is proceeding well, salary may come up again before the firm provides an offer. At this stage of the process, the recruiter again acts as a conduit, delivering information between parties. The candidate will continue to disclose more as the process continues, and the recruiter can help to frame those details in a way that will assist the firm in determining an appropriate level of compensation. The recruiter can sometimes convey candidates’ sensitivity to reductions in proposed pay better than the candidates can themselves. To some extent, a recruiter can act as an advocate for you.

The End 

Toward the end of the process, either after or just before the firm provides an offer, you will reach a point where your interests as a candidate and the interests of the recruiter diverge. As consultants to lawyers, we have seen first-hand that recruiters will generally want to wrap up these deals, while you might have more questions or see an opportunity to leverage your bargaining power.

At this step in the process, it is often most effective for the candidate to speak directly with decision makers at the firm about compensation, marketing resources the firm will provide, what is required to become an equity partner, and other elements of present and future compensation. This is good preparation for negotiating compensation in future years when the recruiter won’t be in the picture. In the case of a regional or national firm, it may be necessary to talk to someone at the firm’s headquarters, not just at the branch office you’ll be working with.

Recruiters play an important and useful part in some lateral moves. And if you do work with a recruiter, it is important to keep them in the loop. Unless something has seriously broken down in your relationship with your recruiter, you should let the recruiter know that you will be talking directly to decision makers at the firm.

But don’t make the all-too-common mistake of relying on the recruiter to get you the best possible compensation package or the answers to your most difficult or sensitive questions.

When you understand how your relationship with a recruiter can progress, you will be in the best position to negotiate the compensation you want and, most importantly, make a career move that serves you, your clients, and your life.

Troubling Signs for Non-Equity Partners

The legal services industry, along with much of the country, is coming to terms with the reality that COVID-19 is not the short, temporary interruption many had hoped. We are beginning to see law firms make more permanent adjustments. Headlines in publications like the American Lawyer are already highlighting the acquisition of stars in hot practice areas, but what won’t be included in the press releases is what will happen to less-desirable practices areas and less-favored attorneys.

While winners in bankruptcy, internal corporate investigations, and healthcare may be sought after right now, a larger number of attorneys work in areas of litigation and transactions that are slowing down. Behind many announcements of new partners will likely be untold stories of other lawyers at those firms who have been demoted from the ranks of partner or had their compensation reduced.

Through the end of the year and into the first quarter of 2021, we expect to continue seeing attorneys who represent certain industries, such as retail and hospitality, suffering severely. Lawyers whose work is focused on serving these industries should start to create options for themselves now. Many partners, regardless of the clients they serve, will need to consider making a move during the first quarter of 2021 when bonuses are usually paid. Given the magnitude of the economic, societal, and health-related changes that are buffeting our lives, some lawyers who have always felt secure at their firms will find themselves looking for an exit in the months to come.

While we may be in physical isolation, this is not the time to isolate from one’s network. For non-equity partners whose clients have been hit especially hard, avoid the temptation to wait for the bad news to come to you. Likewise, it’s a sign of intelligence, not weakness, to begin identifying allies with whom you can discuss forthrightly your situation and your concerns.

By starting the process now, attorneys can give themselves the time to cultivate strong relationships within their networks before asking for any favors. This is also the moment to be present for one’s existing clients through the hard times. When economic activity returns to more normal levels, the demand for legal professionals will return for a vast majority of lawyers. But non-equity partners first need to cross some very choppy waters.

How to Evaluate a Lateral Partner Move

Attorneys are changing law firms at an unprecedented rate. Many of those who are changing employers are of counsel, non-non-equity partners, and even associates with a relatively modest book of business. As a result, law firms need to evaluate a wider array of lawyers. Too often, neither the law firm nor the lawyer has a solid basis for evaluating whether it is advisable to change firms or bring someone on board as a lateral hire.

Here are ten observations and tips for evaluating the financial aspects of a potential lateral move.

1.  Most lateral moves have been disappointing financially relative to the initial expectation of the law firm.  Firms should therefore be skeptical when deciding whether to hire a lateral lawyer.

2.  Lawyers who seek to make a lateral move tend to exaggerate their books of business and even more so how they expect that book to grow as a result of the move to a new firm.  This is not to say that lawyers are committing fraud regularly. In my experience consulting on this issue, I see that both the firm and the lawyer overestimate the benefit of moving firms.

3.  To counteract the tendency to be unduly optimistic, the law firm should ask for detailed and historical data about the revenues generated by the lawyer. Moreover, the firm should assume the actual results will be less favorable than the projections they receive.

4.  Revenue projections are especially suspect when they materially exceed the lawyer’s recent historical performance. In one egregious example, a lawyer whose billings had decreased for two straight years projected a 50% increase in the first year at the new firm. Could this happen? Yes, but no factor, including a significant reduction in the lawyer’s hourly rate, is likely to generate such a large increase in revenues.

5.  Just as lawyers tend to overstate the revenues they will generate, they tend to underestimate the costs associated with the move. This is especially true for estimated marketing costs. I have seen lawyers project increased revenues exceeding $100,000 while only incurring $1,000 in additional marketing costs.

6.  Law firms should require detailed marketing plans of lateral partner candidates. Those plans should identify the lawyer’s current clients by name as well the names and job titles of individuals they intend to contact to pitch business at the new firm. The marketing plan should also include the costs associated with acquiring such clients. Sometimes the lawyer has an unrealistic expectation of what the new firm will be willing to invest to promote their practice. For example, a bankruptcy lawyer expected that their new firm would spend $40,000 a year for the lawyer to attend a dozen or so industry-specific conferences. The firm was willing to spend about ten percent of that amount. This is a conversation that should have happened before the lawyer changed firms.

7.  Law firms should be especially wary of bringing on attorneys whose book of business is wrapped up in a single client.  Law firms rarely take into account the added risk associated with having a lawyer who has an undiversified portfolio of clients, and too often the compensation provided by the law firm doesn’t adequately take this risk into account.

8.  Law firms need to explore risks associated with client conflicts sooner in the process. Many firms focus on the issue of conflicts only after they have essentially decided to bring a lateral partner on board. This on occasion has led to embarrassing situations where the lawyer notifies their employer of their departure only to find out that they can’t immediately move to the new firm because of a client conflict.

9.  When evaluating potential risks associated with a lateral move, firms need to look at conflicts broadly—beyond the relationships that would violate the applicable ethical rules. For example, a firm that represented a company in a specific industry was in deep discussions with a lawyer who represented a company in that industry. The two companies were not legally adverse; they never had sued or did business with each other. In the context of a lateral hire, however, it would be prudent to know whether the leaders of the firm’s client would object to having the firm represent a competitor through the newly hired lateral. Again, the best time to have this conversation is before the law firm agrees to hire the lateral.  Sadly, this doesn’t happen nearly as often as it should.

10. Firms often underestimate the cash flow effects of hiring a new lateral. This is because the expenses pile up from the very first month, often in the form of salary, benefits, and some marketing-related costs. But the revenues that the lateral hire generates don’t hit the firm’s bottom line for several months. Thus, it is not unusual for the lateral hire to have a negative impact on cash flow for a few months or sometimes longer. Firms should therefore create a monthly profit and loss projection that shows the effect of bringing on the lateral hire. When they do, they often see that hiring lateral lawyers for their book of business is a riskier enterprise than most firms originally realized.