Tag Archives: Steven Rushing

Featured, Management

The Cost of Law Firm Associate Turnover

A client recently asked me an interesting question. 

“How much should we counteroffer an associate who has given notice?”

Many factors may play into that calculation. Some are specific to the particular associate. For example, how good is this associate’s work product? Other considerations are broader. Assume the firm makes a strong counteroffer for this associate. Will that set a precedent that encourages other associates to go out and get offers from rival firms?

But the core factor should be how much money the firm will lose if the associate leaves. Losses from lost billable hours, investments in the associate, and potentially turning away work. Add in the lost time spent recruiting and hiring on their own and a firm will face a larger cost than expected.

Lost billable hours loom largest

The most significant cost to a firm when an associate departs is lost billable hours. First are the hours lost from the departing associate. Practice groups run both lean and at full (if not above) capacity. And rarely do remaining associates have capacity to pick up hours without sacrifice. The result is a mixture of revenue loss and unhappy burned out associates.

Second are the less obvious loss of billable hours spent replacing the associate. Hours of billable time recruiting and interviewing candidates by partners and associates alike. Reviewing resumes. Conducting interviews. Taking candidates to lunch. Assessing conflicts checks. Training the replacement associate. The list never ends. Hours lost that could otherwise have brought in a new client or billed a current one.

How much does an associate departure cost?

The answer to this question depends on the seniority of the associate and how busy the group is at the time. Losing a key senior associate working a full plate that can’t easily transfer is the worst-case scenario. Losing a junior associate with spare hours will not be as costly.

A 2017 NALP Update on Associate Attrition pegged the cost of replacing an associate between $200,000 and $500,000. That may sound like a lot but a back-of-the-envelope calculation shows that it doesn’t take much to reach $200,000.

Let’s assume that on an annualized basis the firm is collecting on 1600 of the associate’s billed hours, at an average rate of $750/hour. That generates annualized incremental gross revenue of $1.2 million. Also assume the associate’s compensation and benefits cost the firm a total of $400,000. If none of the associate’s hours transfer to others and the position was vacant for a year, the firm would lose $800,000. It only takes three months to hit $200,000 in lost profits. Next add lost revenue from partners and associates hiring instead of billing. Plus a potential signing bonus in a tight hiring market for certain practices. The NALP range not only becomes plausible, but likely.

Mitigating lost revenue

So, how much to counter offer? The answer is variable, but a strict cost benefit analysis shows it can be a lot. But what about the hidden downstream cost? Will an effective counteroffer incentivize other associates to seek out their own counteroffers? Will the associate leave in a year anyways? If the answer is not an emphatic ‘no’ it may actually be more cost effective to replace them. That’s where a firm working with a trusted recruiter can bring the cost down substantially. A firm may take four months or more to replace an associate—let alone bring the new hire up to speed. If a recruiter has the trust and backing of the firm, and fills the vacancy in two months, that’s a great deal for the firm. Increasing fees offered to recruiters reflects this basic economic calculus. Associate turnover is a part of life at law firms. A knee jerk decision to throw money at a departing associate may be the wrong move. Instead, firms should carefully and rationally weigh their options to determine the least costly path forward.

Associate Tips, Featured, In-House Tips, Tips

Dreaming of an In-House Gig? Don’t Make the Jump Too Soon!

In-house counsel positions sound like the promised land for many Biglaw attorneys. A better lifestyle and no billable hours, plus decent compensation. Who wouldn’t want that? To what extent the in-house grass is in fact greener is a matter of debate though. Experiences vary greatly from one company to another. But for many lawyers, the in-house track can be a good long-term fit.

However, as I discussed on a recent episode of Movers, Shakers & Rainmakers, there is tremendous risk in making the switch too soon. Risk that many law firm associates don’t realize when they jump at the first in-house role they can get. A premature exit from the law firm track can severely stunt an in-house counsel’s career growth. When companies make in-house offers to relatively junior associates, they tend not to warn candidates that entering at a junior level will probably prevent them from being on the General Counsel track in the future. Armed with this knowledge, associates must educate themselves about in-house career trajectories. If they do accept an in-house role, they must do so with correct assumptions.

Different learning curves

At a top law firm, the knowledge you gain is on the cutting edge of your practice area. You work for clients who bring their most pressing issues to you to solve. Whether handling novel issues in bet-the-company litigation or providing counsel on eye-popping deals. Clients rarely pay expensive outside counsel billing rates for routine matters. In-house attorneys, by contrast, work for a single client. The matters are more often routine and more cost effective if done on the company payroll. They can provide the allure of a broader range of subject matters than your experience at a law firm. But when cutting edge issues do arise, the company will tend to send them to external counsel.

The upshot is that the knowledge base you bring with you from law firm work will be critical. It can be the key ingredient in your competitiveness for in-house leadership roles. Companies promote attorneys who can more cost effectively solve problems in-house. The more high-end experience you have the more problems you can solve. But a third-year associate moving in-house will have a smaller knowledge base than someone more senior. You will churn out relatively easy and repetitive work on a small number of problems. That is more akin to a staff attorney, and staff attorneys are not on track for internal advancement. Worse yet every minute you do not realize this it hurts your long term career. Should you decide you would be better off back in private practice you may find returning to the law firm track challenging. Firms do not value in-house and private practice experience as the same. You will be behind your class year. A class year cut is a possibility, but firms prefer not to deal with that — they would much rather hire a lateral candidate from another law firm.

When to make the switch

So when is the optimal time to make the jump? It depends on your practice area and the company in question. As a general rule though, five full years practicing is a good benchmark. As a sixth-year associate, you will bring real substantive experience to the table. You will have put in your 10,000 (billable) hours. You will have dealt with clients, taken on leadership roles, and be able to tackle more problems. Most important, you will more likely hit the ground running at the company. Your in-house leadership will have confidence to assign you greater responsibility. Your position on the GC track will be more secure. In certain transactional fields where in-house work is very similar to outside counsel work — tech transactions, for example — you can make the switch a year or two earlier. But even in these niches, you will want to wait until you have solid mid-level associate experience.

There is also a silver lining in waiting. You will have a greater appreciation for the various legal career paths. Not only will you have a clearer sense of what law firm partners do (and don’t do). You will also have worked directly with clients and seen the realities of in-house work. This increases the likelihood that you will make the right decision for you. Whether that means shooting for the partnership or joining an in-house team. It also gives you greater optionality in case you make the wrong decision. A former sixth-year associate can pivot back to the law firm track after spending a year or two with a company easier than a third year. Lawyers with this profile are often strong candidates for law firm counsel positions.

In-house careers can be a great option for many attorneys. But if you’re eager to trade law firm life for an in-house gig, make sure you understand the tradeoffs. You may not relish spending an extra couple of years in the Biglaw grind, but that investment is likely to pay real dividends when you finally make the in-house switch. Measuring your career in decades you would be smart to take a long-term view.