A primary form of strategic competition among professional firms today is NOT the (direct) competition for clients, nor the (direct) competition for junior employees, but the competition for senior lateral hires who come in to the firm with a ready-made book of business, i.e. "warlords with a following."
Building client relationships one at a time is a long slog, and takes persistence and patience. It's hard to break in to new markets and locations solely by organic growth and patient investment: besides, market opportunities might move too fast to take that opportunity. How much easier to grow by bringing in people with pre-existing practices!
This approach is not unique to the professional sector -- it reflects what corporations have long tried to do: increase their corporate return on equity by buying their way in to profitable businesses (and dropping unprofitable ones.)
The success of this approach in the corporate sector has been mixed. The real success of this "portfolio" approach to running (and defining) a firm is not a superior ability to acquire successful businesses, but a superior ability to help them grow once they have joined the "corporate" family. How many corporations have met this standard? How many professional firms, with their focus on attracting "already successful" lateral partners, know how to do this?
My own observation is that firms are playing with fire with this approach. By building the firm on bringing in a high percentage of lateral hires, they compromise the identity, the group cohesiveness, the loyalty that defines a firm. When a firm is managed as if it were nothing more than a portfolio of practitioners, it is unstable. The VERY approach of bringing in lots of laterals works against the thing that would be needed to justify it -- the ability to exploit firmwide relationships and connections to expand and build upon the newly acquired practice.
Yet firms cannot have it both ways: they cannot be a cohesive unit and compete primarily by bringing in outsiders who "grew up elsewhere."
Or can they?
12 comments:
Richard, I agree with you that "growth by acquisition" in both industry and professional services is fraught with difficulty.
I think this stems largely from the sort of "fit analysis" done by both sides.
Leaders examine the business logic but often forget to consider the relational logic of the combination -- and relationships matter even more in the professions than in the corporate world since the "assets" acquired are almost always people assets.
Recent research our team conducted with a cross-section of business leaders does give one clue about where to focus to, as you say, "help them grow once they have joined the 'corporate family'".
When we asked leaders what mattered most in the first 3-6 months of a new leader/ partner/ principal's tenure, the overwhelming response was on building constructive peer relationships.
This activity won out over business strategy, creating a vision, and other "task-oriented" activities that people often focus on.
The big question: How many firms do you know that have a thoughtful, high-investment strategy for fostering those sorts of working relationships when lateral partners join up?
It takes a lot more than a few rounds of golf to help someone learn the unwritten rules.
But failure to do so dilutes the cohesiveness of the existing partnership and just creates messes for firm leaders to clean up later.
Richard and Ted,
At the risk of becoming a contrarian on most posts, I do not agree with either of you.
Gee, I wonder if this guy is a lawyer?
The first question is whether you have a strong culture which a lateral will fit into upon arrival?
The next question is why are you bringing in a lateral?
If the answer to the first question is that you have a strong culture, then your interviewing process is refined to find out whether a person will fit into your strong culture.
If not, no matter how good or how much business someone has, they cannot become part of your firm.
The problem with most service firms is either their idyllic worship of money or trying to create a culture through laterals.
Both are short-sighted and recipes for disaster.
The big mistake is not spending enough time and exercising discipline in the interview process.
You have to realise that if you have a good culture it is worth protecting by carefully selecting people.
Culture can neither be delegated nor is it for sale.
If you are bringing in a lateral that is a good culture fit, then it is accretive to what you already have adding depth to a necessary and strategic practice area.
If you are just brining people in for money, everyone starts behaving like a mercenary.
Laterals must be strategic.
Lateral growth and acquisition is good if you already have a refined culture.
Otherwise, Richard and Ted are correct.
More problems will be created.
I equate this to trying to have a relationship with someone who has cheated on his/ her partner before, once you've done it once they say it's easy to do again.
In other words if folks are willing to jump ship once, could it become easy to move again?
Totally agree Richard.
These hires are all too often time bombs.
What happens in the stress of leading a successful business, the fearless leader forgets all reason and thinks that the answer to increasing the quarterly numbers, is to hire a person with "leads & contacts -- yeah baby".
However, all too often, within six months of hiring, these messiahs turn into pariahs with little or no bond with their peers and clients.
And as for the contacts -- they vanish as soon as the ink dries on their contracts!
This then becomes an expensive liability and problem.
In the euphoria of the fast buck, business leaders forget their company values of "hiring for attitude and cultural fit".
And so the pariah has to be "removed -- managed out".
Enter me, stage right, Head of HR, dressed in black ...
Bryan, I think we're furiously agreeing, not disagreeing.
What we're all saying here is that expanding through selective use of lateral hires is not, in and of itself, a problem.
What's a problem is the title of this blogpost -- using lateral hires as a means to achieve strategy through acquiring a "portfolio" of partners or practices.
It's the portfolio attitude that's the problem.
All of us here are saying that laterals can work if, and only if, they are well integrated into a firm that already has a culture, identity and strategy, and if both sides accept that managed integration, not autonomy, is the key.
Okay, I'll bite and take a dissenting view (just like a lawyer).
Lateral recruitment is, at its core, part of a star system (or portfolio strategy, as Richard more elegantly put it) of organisational development.
The sales pitch for such recruiting is, "we like what you do and how you do it, how about coming to do it here?"
That kind of ego-oriented sales pitch is a tough genie to put back in the bottle.
For that reason, recruiting stars (in this case, signifcant laterals with a "book of business") is philosophically at odds with building and maintaining any corporate culture other than a portfolio strategy.
Even if the organisational culture was something other than a star system (say, a more team-oriented culture) to beging with, the very act of recruiting stars changes that culture.
Basically, you can't build the New York Yankees (apologies to Red Sox Nation) and the Oakland Athletics at the same time.
Erik,
You are right of course but it is not that simple.
Sometimes you need to build talent in an area faster than you can grow it organically.
So what do you do?
Do you go after it and get the right person at the right time or do you wait 5 years and grow it and hope that the client will be patient?
More and more work requires multiple disciplines.
Sometimes you can grow it but more often you cannot.
You have to buy it.
Buyers definitely beware but should you sit on the sidelines or are you realistic about serving every need?
There is a limit of course.
If I am a farmer and someone says can your cows make cheese I might say yes.
If I am a farmer and someone wants me to make hubcaps, then let them go to another firm.
Sorry Richard, I did not see the subtlety that you applied in your response.
Bryan,
You make a fine point.
I agree with your premise that sometimes circumstances warrant buying a star rather than growing organically.
After all, the Oakland A's have not won the World Series since 1989.
Richard's question was can firms have it both ways -- keep a cohesive unit and compete by hiring laterals?
While I recognise it is by no means an easy strategy decision to make (if clients want your cows to make cheese, it's hard to say no), I think the answer to Richard's question is no.
Firms can do one well or the other well or both poorly.
Perhaps the answer varies by industry, but I have rarely seen a law firm with a cohesive culture to begin with, let alone a law firm that maintains such a culture after going on a practice buying spree.
Interesting discussion.
Richard made the statement "By building the firm on bringing in a high percentage of lateral hires, they compromise the identity, the group cohesiveness, the loyalty that defines a firm".
I agree with this statement.
It does, however, raise the question of what is the right percentage of lateral hires?
I think it is important to develop and promote from within.
I also think it is important to bring in new perspectives and skills from outside.
The challenge is keeping a healthy balance and creating an environment with mutual respect so that the insiders and outsiders become a cohesive team and work towards a common goal.
I just came out of our quarterly meeting where we bring together some of the top strategists from across the company.
I didn't count, but I would estimate that over 1/2 had been around for a long while (10 years) and 1/4 were hired within the last 3 years and the rest in between.
I think it was a pretty good mix.
There was respect for the knowledge and expertise that each person brought to the table -- there was respect for the "new perspectives and experience" that the new-timers had and for the "deep organisational connections and experience" that the old-timers had.
And, I think everyone was making a sincere effort to work towards the common goal of making the company successful and strengthening the team to achieve this.
So, do I think it can be done?
Yes!
But, as with everything else, it has to be executed properly.
I agree with the comments that it is important to have a good cultural fit.
I think mutual respect is critical.
I think it can be done in a team-oriented culture, but you have to create the right environment to make it successful.
(By the way, I just made it into the group of "10 years with the company".)
I noticed that throughout the post Richard was careful about stating that an extreme number of laterals is bad (e.g., "high percentage", "lots of", "primarily").
Richard -- What do you think is the "right percentage" of lateral hires?
Susie, I think the proportion of laterals depends on the absorption rate.
The stronger the pre-existing culture and the existence of methodologies to integrate people, the more laterals a firm can go for.
(You're a scientific kind of person -- maybe we can do an article together on this, developing a formula!)
As I wrote in my recent article The One-Firm Firm Revisited, one hallmark of the most successful professional firms is that when they do use laterals, there is no argument that the lateral must adjust to the culture and approaches of the firm, and not vice versa.
That's why I used the term "portfolio management" in the title of this blogpost.
It's not laterals I'm against -- it's failing to integrate them.
Susie, everyone else -- what do you think affects the "Maximum absorption rate" for laterals?
What are the indicators that a firm can succeed with such a strategy, and what are the indicators that it cannot?
If you wanted to increase your firm's absorption capacity, what would you work on?
Great paper, Richard!
I should have done a literature search.
And, you got my wheels spinning on the formula challenge!
Clearly, you are quite the manager!
:)
Here are a few thoughts.
Please note that they are just first thoughts in the spirit of brainstorming (and thus are kind of sloppy).
So, they need a lot of work.
First, we need to define our terms.
I'm not sure if you meant "maximum absorption rate" or just "absorption rate".
In any case, I am going forward with "absorption rate".
Definition: Absorption rate = Rate that "outsiders" becomes "insiders"
What affects the absorption rate for laterals?
LATERALS (outsiders)
• How much they fit in with the company culture and values.
• How much they value and respect the people and the company.
• How much they listen and accept new ideas from the insiders.
• How much they get to know the people and the networks in the company.
• How much they learn about the current and past projects done in the company.
• How much they align with the various initiatives and projects going on in the company (rather than start their own).
INSIDERS
• How much they value having the laterals integrated in the company.
• How much they listen and accept new ideas from the laterals.
• How much they get to know the laterals.
• How much they integrate the laterals with their people and their existing networks.
• How much they integrate the laterals into their projects.
MANAGEMENT
• All of the things under "INSIDERS", and ...
• How strong the management team (especially upper management) is, including how enlightened they are.
• How much they value and prioritise integrating the laterals into the organisation.
• How much they develop and grow the insiders.
• How many opportunities they provide for the insiders.
• How much they reward the insiders (should be close to equal to a new lateral).
• How much they provide venues for the insiders and laterals to socialise and integrate.
• How much they manage to the integration, i.e., promote teamwork and punish old boy network behaviour.
• How much they understand that mid-term results are as important as near-term results (and sometimes more important).
• How much they understand that integration is an important near-term result.
• How much they understand that integration hard to achieve, and thus must be worked on explicitly.
COMPANY
• Depth of existing culture (as you said).
• Level of morale.
• Number of people inside who recognise, believe, and accept that there is a need for getting laterals from the outside.
• Ability to hire people who match the culture.
• Ability to reward the internals at a rate comparable to the laterals (aside from first-time sign-on bonuses).
• Level of self-confidence and trust.
• Level of communication skills -- level of listening and level of expressiveness and willingness to respectfully contradict each others opinions ... ability to work through differences.
What are the indicators that a firm can/ cannot succeed with such a strategy?
• How fast you are reaching integration or success (consider the definition of success).
• Number of visible short-term wins.
• Fraction of laterals that stay.
• Length of time laterals stay.
• Number of projects the lateral is invited to participate in.
• Number of insiders who interact with laterals.
• Number of laterals who interact with insiders.
• Size of lateral's "network" over time.
If you want to increase your firm's absorption capacity, what would you work on?
• Increase your internal development and reward programs -- it shouldn't feel like the laterals are doing better than the insiders/ loyalists. Don't play favorites.
• Keep a balance of internals and externals at the top.
• Respect the old, respect the new.
• Develop/ Enlighten upper management on teamwork, collaboration, value of laterals. And, reward them that way! (Requires very good management!)
• Making people understand there is a need for new perspectives and that the result will be better. Show the win!
• Create an expressive culture, and a culture that values respect.
That's it for now ...
Anyone want to iterate (including shortening this)?
:)
Don't miss the follow up comments by Susie here using the lessons learned from integrating a new player into a hockey team.
Really interesting!!
Post a Comment