Lateral expansion (part 2)

 By Thomas Berman, principal of Berman & Associates

This is the second half of a letter in two parts.

A colleague of mine says that hiring laterals at any level and in any context is high risk. The reality is that many law firms are not particularly sophisticated in making lateral hire selections for their head office, let alone for a branch office in which lateral hires are called upon to ‘carry the flag’.

So, what are the factors that play a prominent role in the success or failure of such an enterprise? 

Grand delusions

The particular partners in a law firm who are proposing a merger, assimilation of a smaller firm or lateral hiring will generally exercise their mathematical skills relating to addition but not subtraction (or division for that matter). They will list the firm’s revenues, add that to the revenues of the lawyer to be included and arrive at a total.

Unfortunately, these situations are generally not so simple: clients stubbornly have their own ideas about these issues and conflicts scenarios are among the many factors which work against simple addition.

To avoid these issues, careful planning must play a significant role. Among other things, the firm must be assured that such a move will not result in the disaffection of an existing client or create competition with another lawyer or law firm which has been a dependable source of new business (you might be amazed at how often this is the case).

Adding a new practice area (or hiring particular lawyers) may also achieve a greater level of competition with another law firm that has never really attempted to compete for the firm’s core business. In some cases, the other (perhaps larger and more powerful entity) has not seen fit to engage in the ‘piracy’ (robbing clients from one firm to another) which is such a constant today. Such a firm may become, when a regional office is established, a formidable competitor. That’s one reason that the addition of the law firm or laterals may exercise more of a subtraction than an addition. 

Upsetting the balance

Adding lateral hires is always a challenge because of issues involved in partnership standing, compensation and roles within the firm. A common error made by many firms is to hire new lawyers, insinuate them into the partnership ‘scale’ and assume that it will have little or no effect upon existing lawyers in the firm. This idea vies with ‘the earth is flat’ for its foresight.

Hiring laterally impacts every lawyer in the firm in some manner. Associates see their chance for partnership take a step back. Junior partners see their opportunity for equity ownership decreased exponentially with the number of hires.

The situation is exacerbated by the element of a separate office, because often a premium is paid to the lawyers to open the office, with bonus payments for the office’s success. All of this means that the firm may make sacrifices it had not intended to make in opening another location. 

Professional liability

Unless actions are taken to protect the basic entity, a world of trouble can ensue in the hiring of lateral attorneys and/or establishing a branch office (unfortunately, we have several clients who can testify to acuity of this statement).

Professional liability policies are based upon the coverage at the time the claim is made. To a large extent, more senior lawyers are going to be hired upon their existing “book of business”, which they are encouraged to bring with them into the firm. Difficulties the lawyer may have had with their client(s) previously are therefore inherited by the primary firm. Professional liability claims made against the lateral become a part of the base firm’s profile for the purposes of acquiring insurance coverage. If there have been claims, they become part of the primary firm’s profile.

In some cases, lawyers left over from a merger situation (those not asked to join the new entity) will practise for the first time on their own and often without professional liability coverage. Depending on the jurisdiction, claims which are made against those lawyers will very often (unfairly) be made against the ongoing firm for “public policy” purposes. The ongoing firm is left to clean up and a substantial expense is added to the cost of the decision to create the branch.

Parting thoughts

Law firms make decisions for all sorts of reasons: some good and some bad. Creating a regional or branch office using lateral partners works out at least some of the time and can pay handsome rewards. However, it must be done with real care and analysis to be a success.

tberman@bermanassociates.net