Sorry Partner, Not For Just a Million

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In the world of L.A. law, $1 million just doesn’t open the doors it once did.

For many years, when a Los Angeles attorney reached $1 million in portable business, the proverbial doors to the lateral market of top-tier law firms would open. But those days are over.

According to law firm managing partners and recruiters, the book-of-business standard for lateral hires has risen, especially over the past two years, and especially if the potential lateral is seeking entry into a firm’s equity partnership.

“A million dollars these days is tough to move,” said Larry Watanabe, a San Diego-based recruiter who works with Los Angeles partners. “With everything else going up, we are getting a lot more calls from firms that only want to see $1.5 million and would prefer $2 million.” Watanabe declined to name those firms.

Portable business is a standard measuring stick for lawyers. It represents the amount of revenues a lawyer’s clients would be expected to pay a law firm in a year. Those clients would stay with the lawyer instead of the firm.

Legal marketplace watchers have tied the evolution of the rising levels of portable business to seemingly opposing forces: increased costs at the same time law firms have enjoyed increased profitability.

An increase of associate salaries is one recent example of costs going up. At some firms, first-year associate salaries have risen by a total of $40,000 within the past two years to $165,000.

But these firms have become increasingly more profitable. A ranking of America’s 100 highest grossing firms, a number of which maintain Los Angeles offices, released in April by American Lawyer magazine, reported that a record 59 had average per-partner profits of at least $1 million.

A firm generating $1million dollars in profits per partner would likely have a book of business average of at least $2.5 million.

Much attention has been paid to the internal impact of these developments. In an effort to sustain profitability, law firms have “de-equitized” partners and scaled back less lucrative practices such as real estate and labor and employment. But less attention has been paid to the impact on the lateral market. As law firms have become more profitable, the bar to entry has become even higher for partners who make lateral moves, which are typically moves to similar firms but for a greater share of the money they generate.

“The financial rewards attached to becoming partner have become greater,” said Edwin Reeser, managing partner of the Los Angeles office of Chicago-based Sonnenschein Nath & Rosenthal LLP, “and therefore to earn a seat at the table you need to contribute more.”


New standard

While these premium $2 million plus entry fees have been commonplace at large Los Angeles-founded firms such as Latham & Watkins LLP and the local outlet of some elite New York firms, it has emerged as the industry standard.

Currently, the local offices of firms such as Washington, D.C.-based Hogan & Hartson LLP, Sonnenschein Nath and San Francisco-based Pillsbury Winthrop Shaw Pittman LLP also want lateral partners in those ranges.

More regional firms likes Sheppard Mullin Richter & Hampton LLP and Manatt Phelps & Phillips LLP would also like to see those figures for equity partner candidates.

Los Angeles is generally considered a first-tier legal market but it is litigation heavy and does not have a large supply of high-rate paying Fortune 500 companies throwing off the transactional work that is found in New York.

Legal observers said the $1 million standard reflected the reality that Los Angeles is essentially a middle market economy dominated by small- and medium-sized business that don’t want to pay premium rates for legal services.

According to Los Angeles-based legal recruiter Gregg Ziskind, during the infancy of California’s lateral partner market in the early 1980s, the portable business standard was $500,000. For much of the 1990s, the portable business requirement hovered around $1 million at top tier firms. But it wasn’t until recent years that the figure has shot-up as the legal practice in Los Angles has nationalized, with the arrival of more firms based in other cities, and rates have increased past $500 an hour.

“Partners in New York and Boston, where the rate structure might be higher, aren’t interested in subsidizing a practice in Los Angeles,” said Sandy Lechtick, a Los Angeles-based legal recruiter.


Billing impact

Those lawyers not able to grow their business much beyond $1 million tend to migrate to regional firms. And it is not just the overall book-of-business standard that has risen in recent years. For many of these firms, the billing rate is equally as important.

Three local offices of national firms have rejected potential equity partners who could bring $3 million in business but had a billing rate of only $450 an hour, instead of $550 or more, Lechtick said. That’s because it would take too many billable hours by too many lawyers to get to the $3 million.

Top-tier law firms though haven’t turned their back on all lawyers who don’t exactly meet a specific list of requirements and have developed innovative ways to bring on board partners who may not meet their increased standards. Several law firms have either expanded or created non-equity partnership tiers, which allow them to hire lawyers at the partner title who may not generate the business necessary to be an equity partner.

Firms also have a smorgasbord of other titles such as “counsel” and “of counsel” to offer lawyers who may not quite meet the lateral partner standards.

Additionally, law firms are willing to relax these requirements for lawyers who are viewed as up and comers or fill a specific void. While these firms would steer clear of a 60-year-old $1 million dollar partner, they are much more receptive to 30-year-old potential hires who only generate $1 million.

And firms have also been known to relax partnership requirements if they need a partner in a specific practice area where there is a pre-existing flow of work.

But in a generic context, national firms increasingly only want partners generating $1 million in profits, not revenue.

John Jameson, a Los Angeles-based legal recruiter, said “You just can’t get into all the places you could a few years ago with a million dollars.”

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