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.