In the first of a two-part series on talent retention, Nick Humphrey explores employee churn and the common reasons why partners and employees leave law firms and take their talent and knowledge elsewhere.
Churn costs top American law firms more than US$9 billion a year, so it is crucial to examine the reasons why partners and associates resign, as well as the hidden costs of talent turnover.
The first point to note is that people leave firms for different reasons. Many are searching for a promotion or a pay rise, sometimes they are burnt out, but often their departure is due to poor leadership such as a lack of clear vision and values, tolerating bullying or harassment, or a simple failure to mentor.
What is churn?
In simple terms, churn occurs when practitioners leave your firm, taking with them client contacts, your valuable know-how and perhaps other staff. In professional services industries such as law and accounting, partners and employees are among your main assets. You invest tens of thousands of dollars into training and mentoring them – and then they walk out the door.
Churn should be split into regretted churn and non-regretted churn, but this article focuses on regretted churn and particularly the loss of your future stars. The truth is that the days of a ‘job for life’ are long gone.
A few generations ago, it was not uncommon for professionals to work at one or two firms for their entire career. Now, tenure has dropped significantly to about seven years for practitioners aged over 45 and only four years in the 35-to-44 age bracket. The tenure for millennials (those born between 1980 and 1994) is dramatically lower: less than three years on average. They are also likely to change jobs six or seven times in their career and are far more likely to change industries (at least twice).[1]
What is the cost of churn?
A 2016 report presents data on the true extent of practitioner churn among top US law firms:[2]
The true cost of churn is not well understood by many firms. We report on billable hours, profit per partner and other financial key performance indicators, but we don’t often track staff retention, staff engagement or churn. Following are some issues to consider.
Direct costs: This relates to the cost of hiring a replacement. The firm might need to pay significant recruitment fees, particularly when replacing partners and their teams. There might also be a sign-on bonus to attract the right talent and perhaps higher overall salary costs.
Lost profit: The partner or associate who resigns represents lost profit. The revenue they generated helped cover all your fixed costs (lease payments, IT support, hardware, secretaries) and usually contributed towards the profit pool. When they leave, the profit walks with them and invariably the leaver takes clients as well.
Training: The cost of training the new team on your systems and structures is not insignificant. The leaver was up and running; a productive member of your team. The replacement will need formal training on your document-management systems, time recording, conflict check process, internal policies and procedures, as well as on the informal processes of how your team does things (such as the tone and style for advices, process management and house rules on contract drafting).
On-boarding/exit: In many firms the search process and on-boarding process can take several months, including interviewing candidates, running reference checks and obtaining internal approvals. Similarly, the exit process is consuming for the partner and HR (including handovers, exit reviews and other paperwork).
Leaver’s lost productivity: While the leaver is disengaged and thinking about leaving, they will also be less productive. Their heart won’t be in their work and, rather than being 100 per cent focused on client service and building the firm, they are weighing up their options, drafting a CV, going to job interviews and so on.
Impact on morale: In the months before someone resigns, they are usually complaining to anyone who will listen, including their co-workers and clients, about how poor your firm is. In addition, resignations of high performers are always unsettling. Empty offices and work-stations make people feel as though the business is shrinking, or like they’re seeing the ‘rats leaving a sinking ship’.
Hidden costs: A firm that is unable to retain high performers runs the risk of tainting its brand as an employer of choice. Potential lateral partners, associates and even clients will wonder why your firm is unable to retain its employees.
Clients may also become dissatisfied when the associates working on their matters are constantly resigning and being replaced with new ones without background knowledge on the file or the client’s ‘house rules’ for doing work. [3]
Putting a number on it
A rule of thumb for associates is that the total direct cost of churn is 2 to 2.5 times their annual salary. [4] Another source estimates: [5]
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the costs of replacing a departing associate are in the range of $250,000 to $500,000;
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firms are currently spending up to 1.5 per cent of their annual revenues on associate recruitment and retention;
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it takes three to four years for a firm to recoup the costs it sinks into recruiting and training a new associate; and
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law firms may lose money on more than a third of their new hires.
Given the significant costs involved, why then haven’t firms devoted serious time, energy and resources to tackling the problem? One potential answer is that associate attrition is a central part of the law-firm business model. The path to partnership is sometimes called a ‘tournament’, with only a small number battling their way to the top.[6] The firm can only make a relatively small number of partners each year to ensure the profit per partner remains high.
Why do practitioners resign?
This section explores some of the most frequently given reasons for leaving. It is worth noting that while the problems below are fairly universal across the industry, the precise push-pull factors will vary significantly from leaver to leaver.
Remuneration: Many practitioners leave in search of a pay rise. There is often a ‘switching premium’ whereby laterals get a sign-on bonus and/or pay rise to move firms. A Job Pulse survey found that salary is the strongest motivator for lawyers considering a career move, with 31 per cent citing a higher salary as the main reason.[7]
It is also important to consider internal relativities. Many partners and lawyers are concerned about how their salary or drawings compare with peers in their own firm. High performers, even if they are less experienced, will feel unfairly treated if an average or poor-performing practitioner is paid more simply because they have more experience.[8]
Similarly, if two associates are on similar salaries, but one is working long billable hours and the other is able to keep regular hours, concerns about fairness and value contributed will become a push factor.
In the case of partners, they are expecting to be paid a significant portion of the profit they generate (about 25 per cent to 30 per cent). Firms with low profit margins will obviously be unable to pay their partners as much as high-margin firms. To keep their top performers, firms must be able to maximise their margin and pay to the margin.
Career progression: A lack of promotion or career progression is a common reason given for moving firms. The Michael Page National Employment Survey of 35,000 employers found that 30 per cent of respondents listed career progression as the main reason for their last job change.[9] The Job Pulse survey referred to above found that career progression (17 per cent) and job instability in their current role (14 per cent) are key motives for moving firms.[10]
So associates will move not just for a promotion, but to go somewhere where they see that the potential for promotion is better. In the case of senior associates, if the firm has a large number of other senior associates vying for promotion, this can be a push factor. Similarly, if the practice economics are not stacking up for additional promotions (e.g. poor margin, the sector is out of favour, the group is strategically not favoured by management) this will be another push factor. This is where the ‘up or out’ policy is important – if you don’t have some attrition, particularly of your poor performers, they take up valuable opportunities from your stars, who may move elsewhere to get more ‘daylight’.
No clear vision and values: Another reason why people resign is that their firm doesn’t have an exciting and clearly communicated vision. Stakeholders, particularly incoming millennials, want to be part of something growing and meaningful. They want to be part of an engaging journey and contribute beyond themselves (hence the importance of authentic pro-bono and community programs). Making more money for the boss doesn’t really cut it anymore.
According to McCrindle, millennials are seeking:
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employment whereby they resonate with the values and purpose of the organisation;
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more than just remuneration – social aspects (such as opportunities for collaboration, social events, co-working spaces and team building) are more important;
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‘higher-order drivers’, such as the “triple bottom line (people, profit and planet), volunteer days, organisational values, corporate giving programs, career pathways, further study, training and personal development”.[11]
Too focused on profit: Often the only time staff hear from management is when they are being chased on financial hygiene matters: “Where are those missing timesheets? Why haven’t you hit budget for the month? Have you chased your debtors?”
While these things are important, management must spend more time communicating about non-financial issues – strategy, vision, values, innovation and customer experience. Management should ensure they are a coach and mentor, not just the ‘school principal chasing late homework’.
Conflict: Another often-cited reason for leaving is conflict with co-workers, a supervisor or management. This can be due to poor communication (not being invited to client calls or copied on correspondence, yet being asked to prepare advices), abrasive work styles (everything is always urgent or not good enough) or perhaps even bullying or harassment (not necessarily yelling or threats, but action as simple as constantly chasing work products). Supervising partners need a high level of self-awareness about how they brief and interact with their teams. Management then has the difficult task of holding partners to account for their behaviour, even if that person is a rainmaker.
Trust: Leavers often say that their supervisor didn’t do what they said they were going to do. They didn’t come through with the extra resources, the pay rise wasn’t forthcoming or the promotion was delayed yet again. All leaders, whether they are in management or a supervising partner, must deliver on their core promises.
Burnout: A recent study shows that a “very significant reason for practitioners leaving firms and seeking alternative careers is the high level of time commitment that firms demand”.[12] It is a given that during certain peak periods staff will spend more time in the office. However, when extremely long hours become the norm, constant pressure can lead to exhaustion, burnout and a general pessimism toward work. People who feel they are suffering from burnout may lack clarity in their thinking and are more likely to make decisions based on emotion.
The MIT Workplace Center surveyed almost 1000 respondents and found that:[13]
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more than half who had left a law-firm practice did so because of “workload pressures”;
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almost 60 per cent cited “long work hours” as one of their reasons for leaving;
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almost 20 per cent of men and 30 per cent of women left firms due to a lack of flexibility in work hours; and
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more than 40 per cent of men and 60 per cent of women left because of the difficulty they experienced integrating their work with their personal or family lives.
Alternative career paths: Research in Australia suggests:[14]
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a significant number of practitioners do not want to be law firm lawyers in the long run and many see law as simply a stepping stone to other careers. In particular, the research concludes practitioners feel that they have multiple career options open and are not bound to the ‘traditional’ law firm career path;
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contrary to the assumption that this is a generational issue, the results were consistent across generational groups; and
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only 19 per cent of junior associates in large international law firms hold partnership aspirations.
Command and control: A common complaint is that the management style is ‘command and control’ rather than ‘collaboration and consultation’. The management simply made a decision that affects fee earners without talking through the implications. Cutting support services, opening or closing an office, hiring a new HR director or bringing a lateral partner on board are all decisions that other partners will seek to be involved in.
Similarly, management that controls information and selectively releases data to suit its own agendas is taking a risk. Without the facts, people speculate and assume the worst.
Goal-posts unknown or moving: Your team members need to know exactly what is expected of them courtesy of clear and concrete targets. What is required from them – in areas such as billable targets, business development, mentoring and skill acquisition – must be articulated. It is the theory of game design. If goals are unknown or unobtainable, people will give up and do something else. If the goals are hazy, they will lose focus wondering if they are on track.
Poor innovation/bureaucracy: A potential push-factor for leavers is that their firm is not investing in technology and is too bureaucratic. Business is dynamic and complex and our clients demand faster and better service for lower fees. Today’s firms must be able to implement structural and system change quickly and efficiently. Management needs to be nimble and find ways to cut the red tape so teams’ work can be frictionless.
When do practitioners resign?
Recent research considers not just why workers resign, but also when: “What really affects people is their sense of how they’re doing compared with other people in their peer group, or with where they thought they would be at a certain point in life. We’ve learned to focus on moments that allow people to make these comparisons.”[15]
Some of the discoveries of the report are:
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work anniversaries of commencing with the company or being promoted into the current role are natural times for reflection, and job searches actively increase by 6 per cent and 9 per cent, respectively, at those points;
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birthdays, particularly midlife milestones such as turning 40 or 50, can prompt employees to reassess their careers. Job searches increase 12 per cent just before birthdays;
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class reunions and other large social gatherings can be catalysts. People naturally tend to measure their progress relative to others and job searches increase 16 per cent after reunions.[16]
This article provides an understanding of why employees leave law firms. In the next article, I will examine some strategies that law firms can use to improve retention.
About the author
Nick Humphrey is Managing Partner of Hamilton Locke. He is the chairman of the Australian Growth Company Awards and author of several books on business and leadership, including Maverick Executive: Strategies for Driving Clarity, Effectiveness and Focus.
Sources:
1 Interview with Eliane Miles, Social Researcher, McCrindle.
2 Pamela Deneurve, “Top 400 US Law Firms Lose $9.1 Billion Due To Turnover,” February 25, 2016, https://www.linkedin.com/pulse/top-400-us-law-firms-loose-91-billion-turnover-pamela-deneuve
3 Johnson, Joshua S., “Associate Attrition and the Tragedy of the Commons,” (January 1, 2008). The CRIT, Vol. 1, No. 1, pp. 71, Spring 2008. Available at SSRN: https://ssrn.com/abstract=1492971 or http://dx.doi.org/10.2139/ssrn.1492971
4 Rachelle J. Canter, Ph.D, “What Can You Do to Keep Good Lawyers?” Law Practice Management, May/June 1999.
5 Johnson, pg 69
6 Johnson, pg 64
7 Neil Hodge, “Retaining Lawyers,” 2008, The In-House Perspective, Vol 4, Issue 3.
8 Neil Oakes, “What does it take to manage talented lawyers?”, Law Society Journal, August 2006.
9 Cameron Cooper, “A Hire Calling”, 2006, Australasian Law Management Journal.
10 Hodge, above.
11 Ashley Fell, The McCrindle Blog “The Millennial Workforce; Creating Culture Purpose and Impact,” June 8, 2017; http://www.mccrindle.com.au/the-mccrindle-blog/the-millennial-workforce-creating-culture-purpose-and-impact
12 Dr Elisabeth Hetterich, “How to Stop Lawyers Leaving Law Firms,” Practice skills and Management/Staff retention, February 2013.
13 Johnson, pg 74.
14 Johnson, pg 55.
15 Paul Garland, “Why People Quit Their Jobs”, Harvard Business Review, September 2016.
16 Ibid
