A client recently asked me an interesting question.
“How much do we have to counter-offer to a partner who has given notice? »
Many factors can play into this calculation. Some are specific to the particular associate. For example, what is the quality of this partner’s work product? Other considerations are broader. Suppose the firm makes a strong counteroffer for this partner. Will it set a precedent that will encourage other associates to go out and get offers from rival companies?
But the key factor should be how much money the business will lose if the partner leaves. Losses due to lost billable hours, investments in the associate and potential refusal of work. Add in the time wasted recruiting and hiring on your own, and a business will face a higher cost than expected.
Lost billable hours matter the most
The most significant cost to a company when an associate leaves is the loss of billable hours. First, the hours lost by the departing partner. Training groups run both lean and full capacity (if not above). And the remaining associates rarely have the ability to rack up hours without sacrifice. The result is a mixture of lost revenue and disgruntled exhausted associates.
Second, there is the less obvious loss of billable hours spent replacing the associate. Hours of billable time recruiting and interviewing candidates by partners and associates. CV review. Conducting interviews. Take candidates to lunch. Assessment of conflict controls. Training of the replacement partner. The list never ends. Lost hours that might otherwise have brought in a new customer or billed a current customer.
How much does a partner departure cost?
The answer to this question depends on the seniority of the partner and the occupation of the group at that time. Losing a key senior partner working a full plate that cannot easily be transferred is the worst case scenario. Losing a junior associate with free hours won’t be as costly.
A 2017 NALP update on associate attrition pegged the cost of replacing an associate at $200,000 to $500,000. That may seem like a lot, but a bottom-of-the-envelope math shows it doesn’t take much to hit $200,000.
Assume that, on an annualized basis, the firm collects 1,600 of the associate’s billed hours, at an average rate of $750/hour. This generates additional annualized gross revenue of $1.2 million. Let’s also assume that the associate’s compensation and benefits cost the company a total of $400,000. If none of the associate’s hours were transferred to others and the position was vacant for a year, the company would lose $800,000. It only takes three months to hit $200,000 in lost revenue. Then add lost revenue from partners and associates who hire instead of bill. Plus a potential signing bonus in a tight hiring market for certain practices. The NALP range becomes not only plausible, but probable.
Mitigation of revenue losses
So, how much to offer in return? The answer varies, but a strict cost-benefit analysis shows that it can be a lot. But what about the hidden cost downstream? Will an effective counter-offer entice other associates to seek their own counter-offers? Will the partner be leaving in a year anyway? If the answer is not a definite “no”, it may in fact be more cost effective to replace them. This is where a company working with a trusted recruiter can significantly reduce costs. A company can take four months or more to replace an associate, let alone upgrade the new employee. If a recruiter has the company’s trust and support and fills the vacancy within two months, that’s a big deal for the company. The increase in fees offered to recruiters reflects this basic economic calculation. Partner turnover is part of law firm life. An instinctive decision to throw money at a departing associate can be a bad decision. Instead, companies should carefully and rationally weigh their options to determine the least-cost path.
Ed. Remark: This is the latest in a series of articles from Lateral Link’s team of expert contributors. Steven Rushing is a Principal based in the Washington, DC office. Steven draws on his extensive network of partner contacts at leading law firms, particularly in the area of patents where he worked as a patent associate at Weil Gotshal and Finnegan Henderson, to help partners and associates to rise to top positions in elite firms and corporations across the United States. states.
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