O sócio-diretor Rodrigo Guerra, da área de Societário, Fusões e Aquisições, participou da matéria “Fleeting visit”, publicada na Latin Lawyer. A reportagem aborda as estratégias dos escritórios brasileiros para fazer novas contratações.
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Fleeting visit
Wednesday, 25 May 2016 by Rosie Cresswell
More and more firms in Latin America are using lateral hires to achieve growth, particularly in Mexico and Brazil, but given the speed with which some are out the door, is it really the best strategy asks Rosie Cresswell
The interviews go well. Everyone gets on swimmingly during the introductions, the conflict checks work out and there is an apparent shared enthusiasm for the future. Surely the firm has found the ideal match? The lateral hire is introduced to the partnership and everything gets off to a positive start, but it’s not long before cracks begin to emerge. The new partner is failing to deliver, while rumours circulate the existing partnership about the exact size of his or her compensation package. In a short space of time, the rift becomes unmanageable: the lateral moves on to a new venture, while the firm is left to pick up the pieces.
It’s a fairly common scenario in law firms across the world. While lateral hires look good on paper, making them successful in reality is a difficult task.
Latin Lawyer reported on 73 lateral hires in 2015, up from 66 in 2014. The 10.6 per cent increase continues a rise of lateral hires in the region since 2008. Lateral hires are still far more commonplace in Brazil and Mexico than anywhere else. Brazilian firms made 38 per cent of the hires, while Mexican firms accounted for 23 per cent. Elsewhere, lateral hiring remains low. In 2015, there were six in Honduras thanks to BLP opening up in the country, five in Argentina as firms prepared for the change in administration, four each in Colombia, Guatemala and Ecuador (in the latter Ferrere made them all as it established an office there), two in Peru and one in Venezuela and Chile.
But how successful is it? To find out, we looked back at the lateral hires Latin Lawyer reported on between 2008 and 2013 to see how many of those hires are still with the firms today. We limited our analysis to the biggest lateral hirers – Brazil and Mexico. The findings were eye-opening: in both markets, around half those lateral hires had moved on from the firms by 2016.
In Brazil, we reported on 142 lateral hires in those six years. Just 73 of them remain at the hiring firms. In Mexico, 24 of 44 hires remain. The numbers are based on reporting of partner hires from another firm’s partnership, of independent practitioners or the absorption of a firm (as opposed to a merger where the firm’s name changes). We also counted appointments from in-house or government roles, but did not include the hiring of associates from other firms as partners.
Around half of the hires in Brazil in that period were made by just six firms, which brought in between eight and 14 more partners each, giving a combined total of 63. By the start of 2016, some 38 were no longer with those firms – a 40 per cent success rate on average. The attrition rate is worse for some – four out of 14 remain at one firm, while two firms have bid farewell to six or seven of nine hires.
Meanwhile in Mexico, the game of musical chairs fuelled by foreign firms entering the market is well documented. Firms hire on a smaller scale to those in Brazil, in line with their smaller headcounts overall. In the period from 2008 to 2013, two firms hired five partners, four brought in four each, while the 15 others were more conservative and only hired one or two. Of the six biggest hirers, four were US firms. Lateral hires are essential to enter a new market, but the experience of US firms in Mexico shows how hard it can be to get right. A number of firms have plundered entire teams of rivals, only to see those teams up and leave for another competitor. It can be hard to keep up with who is working for whom.
A wider phenomenon
The region’s steady incline in laterals alongside a questionable success rate mirrors what is happening in the US and the UK. The American Lawyer reported a 5.6 per cent increase in lateral hires among US firms last year, with numbers up by 43.5 per cent since 2010, alongside some pretty damning evidence against the strategy. For example, the American Law Institute carried out a study of 50 National Law Journal 350 firms with Group Dewey Consulting, published late last year, which found that 30 per cent of lateral partner hires delivered less than half their promised book of business after a year. (Twenty-eight per cent brought in more than what they promised.) In fact, the study estimated that lateral hiring problems could actually reduce law firm profit margins by as much as 3 per cent. Meanwhile, a 2014 survey by Citi Private Bank Law Firm Group found that 54 per cent of partners hired in the previous five years were considered as a “break-even” on investment by law firm leaders. All of this comes after the Georgetown/Peer Monitor’s 2014 ‘Report on the State of the Legal Market’ told law firm leaders to resist growth for growth’s sake and concentrate on more important strategic issues.
In the UK, Mark Brandon of Motive Legal Consultancy made a study similar to that of Latin Lawyer into 1,944 lateral partner moves over a five-year period and found that a third had left within three years of joining, and 44 per cent had moved within five years.
Various factors can be blamed for failed lateral hires – an ill-conceived strategy behind the decision, poor choice of candidate or a lack of proper integration into the firm. Firms want things to happen fast. They focus on the business the new arrival could generate rather than getting to know the personality of the partner. Negotiations over money are sometimes handled badly, distorting both sides’ expectations. But if handled correctly, laterals can and do help firms achieve growth. In some cases it can be the only viable option to realise a strategy, for example establishing an office or launching a new practice area if there are no suitable associates for the job. But how can firms reduce the high risk of failure? To find out, we spoke to firm leaders in Brazil and Mexico who made hires during the 2008–2013 period and who have experienced successes and failures.
Do it for the right reasons
“Unless you have a very solid business plan, unless you make a decision very much based on where you want to go, areas you want to solidify and by how much, this, together with the characteristics of economy will definitely make the turnover quite relevant,” says Paulo Vieira of Vieira Rezende Advogados. One and a half years ago, Vieira Rezende began a five-year plan that required an overhaul of all areas of its management. Any lateral hires must now fit within that plan. “We had to understand where we are and where we want to be, the lawyers we are after, the project that interests us and what are they looking for and how to remunerate,” says Vieira. Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados also identifies its lateral hiring needs according to its five-year plan and there is evidence of other Brazilian firms rethinking their approach to hires.
Opportunistic hiring tends not to work out. If the market gets wind that a high fee earner at a rival is on the lookout for new opportunities, the offers will start flying in, but hires based on short-term returns tend not to pay off. “If we know that an important firm is losing a good partner, we won’t automatically try to target that partner as it could create more trouble [for our firm internally] than benefits, but if we know that partner could help us develop a new practice area or enhance an existing one, then it’s something we will analyse,” says Jorge Mondragón, who believes such an approach has helped his firm, González Calvillo, SC, build environment and litigation practices.
Of the 38 firms reporting hires in 2015, 28 firms made hires to deepen existing practice areas, while 14 brought in partners to set up new areas. Some firms did both, making a series of hires over the year for various reasons. “Lateral hires make sense when it’s a strategic situation,” says TozziniFreire Advogados’ Maria Elisa Gualandi Verri. “For an area that is booming and if we don’t have in our pipeline someone ready for that position it would make sense from a strategic point to have someone else.” Trench, Rossi e Watanabe Advogados (in cooperation with Baker & McKenzie) has made 12 lateral hires in the past five or six years. Traditionally, lateral hires have not been its main source of growth, but they implemented the strategy recently to fill in the gaps in practice areas where they were not the strongest – for example tax litigation, financial products and capital markets. Tauil & Chequer Advogados has been on an aggressive hiring spree in recent years to build on its original energy offering. Alexandre Chequer sees a window of opportunity in the Brazilian market because of the rivals he sees struggling to build institutions. “Firms still have owners, which makes top talent unhappy on how they conduct business,” he says.
Two firms from the 2015 data were setting up offices. For a firm to enter a new market, its only options are to absorb a local firm or hire partners. “I don’t think to be able to be a real player in a new market you can just wait seven to nine years for lawyers to come up the ranks as partners,” says Luis Riesgo of Jones Day, which has been one of the more aggressive US firms hiring in Mexico in recent years, and, apart from one or two exceptions, has kept hold of most of them to date. It has just made its first promotions in Mexico City. This is in contrast to other US lateral hirers whose entire partnerships have changed since they entered the market.
The phenomenon of US firms entering the Mexican market offers an interesting case study about why lateral hires fail. The high number of partners moving on in a short space of time raises questions about firms’ strategies and approach to picking candidates; it also shows the importance of getting buy-in from laterals, who must be attracted by more than the financial package on offer. Leopoldo Hernández, a law firm consultant at Kerma Partners, says too often firms do a poor job on recruiting. He thinks US partners should spend a lot more time on the ground getting to know laterals and focus more on margins than revenue. “There is a huge difference between the margins in which US and Mexican firms operate,” he says, adding that US firms overestimate Mexican lawyers’ books of business. “Unless you bring in rainmakers – of which there are about 10 in Mexico that have huge amounts of origination – they can’t be highly paid. If US firms pass overheads to local firms, there is no way they can be profitable.”
Cards on the table
In a region where firms are built by families and close friends, relationships are the glue holding partnerships together, meaning the cultural fit takes precedence over what clients a candidate might bring. Law firm leaders are largely united in the belief that organic growth is best, so laterals only make up a small part of the partnerships of most firms. Most Latin American firms approach bringing in outsiders with extreme caution, and some avoid it at all costs. A lateral hire joining the partnership will have spent many years working in one and sometimes several organisations, each with its own culture, and there’s no guarantee of compatibility.
Getting the right fit requires knowing the candidate, from a professional and personal perspective. “We try to collect information on the candidates: interviews, information our departments have, our previous experience with the person, from previous conferences and public information,” says Mattos Filho’s José Eduardo Carneiro Queiroz. “We try to make sure the person has good understanding of the culture at our firm and will adapt to working at Mattos Filho.” At González Calvillo, at least two or more partners must already have a close relationship with any lateral hire, particularly from a professional perspective. For example, they have worked alongside, or opposite, the candidate. Trench Rossi has two types of due diligence – into the candidate’s reputation and conflicts of interest. It will often work with a head hunter to investigate the lawyer’s reputation. Kerma’s Hernández suggests getting into the mindset of the lawyer. “Understand the drivers of the candidate – why do they want to join? Is it a lifesaver, is the business model [of their existing firm] not working? Is there a real possibility of alignment between firm and the lawyer?”
The American Lawyer reports that more firms in the US are harnessing analytical tools that use data to estimate lawyer billing rates and assess potential laterals’ chances of profitability. Most firms have a questionnaire to identify which of the candidate’s clients might follow him or her and how that would affect the firm’s numbers. While Latin Lawyer is not aware of firms in Latin America using data analytical tools, detailed questioning is becoming more commonplace. Siqueira Castro Advogados uses a detailed interview approach that focuses on the candidate’s soft skills. “We raise questions in order to understand… if he or she is going to fit,” says CEO Alfredo Ferrari. “We analyse what clients they will be in touch with. Do they have the personal skills the client wants? Do we believe they will be able to do cross-selling? Are they a team player?”
The due diligence must be two-way. As much as the firm needs to know about the candidate, it needs to show the candidate what’s on offer for them. Lawyers need to buy into the culture of the firm. If they only join because of the pay packet, they could be quite easily tempted by a more generous offer from elsewhere further down the line. Having a clearly laid out strategy that can be shared helps. “The main reason [for failure] is whether or not expectations are realistically set in the beginning,” says Lobo & de Rizzo Advogados’ Rodrigo Millar de Castro Guerra. “We brought people in in the past but didn’t spend enough time discussing each other’s expectations. Problems are always related to that in my experience.”
As part of the buy-in, the candidate must accept the firm’s compensation model. Making exceptions for lateral hires is a dangerous game, as the spectacular fall of Dewey & LeBoeuf shows only too well. If a lateral has a huge income and doesn’t like how partners are remunerated, giving him or her a different package is ultimately going to harm the institution. “Sometimes you decide you want to hire a well-known lawyer with huge revenues, but if he doesn’t fall into the strategy or agree with how partners and associates are compensated or that partners are working for the good of the institution, at end of day the price you pay is too high,” says Vieira. “It’s harmful to the institution if they don’t embrace the strategy of the firm.”
To avoid any disputes in this area, Lobo & de Rizzo agrees on a fixed compensation for the first two years. “After that we check performance and how integrated the partner is and assign a place within the lockstep system based on income generated profits, clients brought to the firm, integration and many other aspects,” says Guerra.
Having buy-in from existing partners is crucial if the lateral hire is to work. “That’s the most difficult question,” says Trench Rossi’s Simone Dias Musa. “You need to involve from the beginning the heads of practice who are related or could be related to get good integration with the partner. If they come on board too late in the process, they won’t take responsibility. Give them accountability.”
It also helps to show how the new partner can enhance their practice areas. “By working together to present our capabilities in many areas of practice, it’s easier to integrate and make these laterals succeed in our platform,” says Chequer. “Partners understand that they will get the real work.”
Only once a cultural fit has been established does the business analysis begin. Firms can then measure the financial viability of the hire. Trench Rossi uses a formula to calculate earnings per partner, which differs for equity and non-equity partners, to project profitability for the next three to five years, which is used to evaluate performance and calculate the time frame for breaking even.
It’s expected that most laterals coming from other firms will have at least some portable clients. In 2015, 22 of 38 firms hired from other law firms, as opposed to companies or government organisations. Whether or not the book of business is the main driver for the hire, it does need to be incorporated into the firm. “It’s always important for sure,” says TozziniFreire’s Fernando Serec. “We don’t have huge negotiations with a big expectation of numbers at the beginning, but we discuss the nature of clients due to existence of conflicts not only for the firm not to be disappointed but for new members if they can’t bring their most important clients. We look at potential conflicts to guess the income the partner will produce.”
For a lateral hire to be a success, firms first need to be honest about their motivations and ask themselves what’s achievable. After that, they need to put a lot of work into getting to know the candidate, their motivations and their practice. While it seems obvious, many firms don’t. In the future, the lateral hire market will be fuelled increasingly by younger generations rising up the partnership who are more comfortable moving between firms. This will push firms into making themselves more comfortable with the idea of comparative strangers entering into the partnership. By setting out their stall early on, firms can increase the chances of the gamble paying off.
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