Even Cravath, Wachtell Must Now Fight ‘the Talent Wars’

There was a time when elite Wall Street firms such as Cravath or Wachtell seemed to rise above the lateral tug-of-war among other firms. That doesn’t appear to be the case any longer, with a handful of partners from both of these firms announcing their departures for competitors last month.

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“I don’t think these are one-offs,” legal recruiter Sabina Lippman said. “It’s a pattern.”

Firms like these will need to adjust their mindsets—and perhaps their pay structures as well—to stay at the top, according to two New York-based legal recruiters who spoke on our podcast, On The Merits.

Lippman, co-founder and global managing partner at CenterPeak, and Todd Merkin, executive director of Wegman Partners, spoke to Bloomberg Law’s Jessie Kokrda Kamens about this newest phase of what Lippman calls “the talent wars.”

Merkin said that these firms have “really been focused on talent retention, and not so much on talent acquisition. So they’re a little bit behind as far as that goes.”

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This transcript was produced by Bloomberg Law Automation.

TRANSCRIPT:

Host (Jessie Kamens):

Hello and welcome back to On the Merits, the news podcast from Bloomberg Law. I’m your host, Jessie Kamens.

Cravath, Swaine & Moore, and Wachtell, Lipton, Rosen & Katz are two of the most profitable law firms in the country. The lawyers they hire after law school often stay for their entire careers, and the firms rarely hire partners from other firms. This is in contrast to most other law firms. Over the past couple of decades, it’s become the norm for associates, partners and even practice groups to jump firms.

When it comes to poaching, Cravath and Wachtell used to be nearly impregnable, as one of our guests today put it. That’s not necessarily the case anymore. Just last month, a handful of partners left these two Wall Street-based firms for other big law rivals. Many in the industry are beginning to wonder whether any firm is safe from having their lawyers lured away.

That’s what we’re going to be talking about today with two New York City legal recruiters, Todd Merkin and Sabina Lippman. Merkin is the executive director of the recruiting firm Wegman Partners, and Lippman is a co-founder and global managing partner at CenterPeak. She also personally worked on brokering the exits of some of the lawyers who recently left Wachtell.

As you’ll hear in a bit, both Lippman and Merkin don’t think either of these firms are in any immediate danger. But they disagree on whether these departures pose a more long-term threat to the firm’s elite status.

I started the conversation by asking Lippman whether she was surprised that any lawyer would be willing to leave Wachtell.

Sabina Lippman:

In seeing a couple of initial moves from Wachtell, I think we realized that, you know, no firm is really immune from those things. And I think, you know, Wachtell has done a number of things extraordinarily well. But as far as some of the things that you see firms doing who have managed to pivot, there’s a lot of focus on succession and on helping the next generation of partners to kind of own, you know, clients and be able to grow their own practices.

You know, really the only thing at this point that creates tenure in legal profession is a portable book of business. And I think it’s smart for when lawyers are a firm where that, you know, it might be the most fantastic elite firm in the world, but where that is more difficult because of various structural factors to look at if the world keeps changing at this rate, will I still be as marketable in five years or in 10 years?

And in fact, we placed two people out of Wachtell recently who were, you know, in the 40s. And you know, they can speak for their own motivations. But in my mind, I think this is something that people in that kind of bracket need to consider.

Host:

Can you say more about that succession planning and what is fueling these moves? I’d like to hear more about that.

Sabina Lippman:

Yeah, well, I think if you’re at a firm where the majority of business is held by people who are quite senior, and you don’t see as much that that is transitioning to younger partners, you then start to take on, you know, more leadership and more client responsibilities. And instead, it’s, you know, while there is some of that at every firm, you know, at some firms, it’s more stagnant. And that’s happening very, very gradually and not really benefiting a significant number of people in the next generation.

Then that’s what I mean by succession. You know, when you start to see those next gen folks stepping up and you’re seeing that you know, Latham, Sidley, Davis Polk, Paul Weiss, firms like that, you know, someone who is 38 with a 5 to 10 million dollar practice, then becomes 43 with a 25 million dollar practice and that happens all the time. And then there are firms where that doesn’t happen very often.

Host:

Another question for you, Sabina, are firms like Cravath and Wachtell also recruiting laterally or do they still train their partners from the ground up?

Sabina Lippman:

For Wachtell, I can’t speak to what they might be now doing on a partner level, but we haven’t seen, you know, any or there might be a few that we don’t know about, but there seems to be marginal or zero partner laterals. You know, again, I might have missed a few, so I can’t say it’s zero.

With Cravath, they have done some partner laterals, but it’s been very low in terms of the percentage of additions compared to peer firms. And both firms do recruit associates laterally.

Host:

Todd, let’s turn to you. You’re currently working mostly with associates, but you’ve worked with partners in the past. What’s the difference in the stakes for these different types of lawyers?

Todd Merkin:

So I think there’s a little bit of an interrelationship between the two. In the past, partners, I think, were viewed much more holistically than they are today, right? Today, it’s mostly about Rainmaker as king, Rainmaker as queen, Rainmaker as oligarch, and they’ve sort of been the drivers of, you know, fairly of a lot of the revenue that these firms are generating.

But as you can imagine, the way that you compensate partners is going to impact behavior, right? And if a partner is getting compensated primarily for their ability to originate work and bring in business and create more leverage as a result of that, then they are theoretically going to be spending less time doing other things. It could be firm citizenship. It could be mentoring, training, sponsorship, right? It could be a lot of things that contributed to organic growth.

And we are now in a climate where we’ve pivoted away from organic growth to lateral hiring as being the main source of generating revenue. And as a result of that, I think a lot of associates would tell you that the professional development piece is lagging a little bit. And speaking as somebody that’s been in the industry for over 20 years now, I think that’s certainly true. You know, I think that that piece, the professional development piece is a piece that firms are dealing with and it’s a challenge for them. You know, how do we create this sort of happy medium or strike a balance between, you know, partners as originators and partners as also cultivators of talent and raising the next generation up from the ground floor?

Host:

Do you find that many associates that are wanting to make a switch are focusing on this professional development piece? And if so, do the elite Wall Street firms, do those still hold the same appeal for early career attorneys?

Todd Merkin:

Yeah. You know, I think that the reasons why partners move versus why associates move, a lot of it still is very much being driven by brand prestige, brand and prestige, not just specific to the firm itself, but maybe you have a practice area in mind that you’d like to envision yourself practicing in. And so, to the extent a certain firm’s brand is tethered to a particular practice, right? I don’t know that at the outset, they’re quite thinking about culture as much.

You know, I think that when they’re going through the OCI process and the process of choosing a firm, you know, having spoken on multiple law school campuses over the years, you know, I think the rubric or the dynamic that a lot of them are still thinking about is fairly focused just on what’s the best firm I can go to, whether it’s for my practice or more broadly, and then sort of figure out things from there.

Host:

When a partner leaves one of these Wall Street firms, is it a guarantee that they’re able to bring their book of business with them? Or is that part of the negotiation? How does that work?

Sabina Lippman:

When a partner leaves any firm, there’s no guarantee that they will be able to bring their book of business. I think if the reason that you’re leaving is partially because the firm has made it difficult for younger partners to build books of business, then it becomes less likely that they will. Oftentimes there will be clients who they know are probably going to follow them and give them deals, but it’s a really individual situation.

There are some lawyers who, you know, like if, for example, you have somebody who’s doing private equity finance, for example, much of that work is billed by the private equity deal side lawyers. And so those people might be able to bring some business, but where the private equity deal lawyer is controlling the business, it might be harder to move.

So for the majority of firms, you’d have to look at that on an individual partner basis and say, so if there are, let’s say, 40 million of billings that you tend to do annually, you know, the amount that comes could be anywhere from, you know, zero to 40. Hopefully it’s not zero, but it really is that subjective.

That’s why firms that did not do lateral partner questionnaires a number of years ago have started to ask for this because, you know, you want to make sure that if, you know, you’re paying something well into the eight figures that, you know, you have some sense of what the relationships are that would follow.

Host:

What else does a lateral partner questionnaire ask about besides business that’s likely to come with you?

Sabina Lippman:

Generally, it will have three sections. One will be the business data that will entail sort of a chart that looks at the top 10 clients and what the projected levels of business for the upcoming year are, and then maybe the last two or three prior years, and then sort of a miscellaneous section for smaller clients. And then it’ll ask for billing rates going forward and then in the past, and similarly for billable hours. That’s basically what the business section is.

Occasionally there’ll be some portion of business plan talking about what might be client opportunities and how to build those on the new platform. The second section is ethics. You know, all the, did I do any bad things? Anything having to do with malpractice, Me Too types of things, paying taxes. Firms will also do a background check separately to verify some of this, but this is the first level of diligence on ethics. And then the third portion is conflicts.

Host:

Todd, you told us after the news about Cravath broke that you didn’t think this was any cause for alarm for that firm because compared to other firms, they still have a pretty low departure rate. Can you expand on that?

Todd Merkin:

Yeah. So let me preface it by saying that I don’t think that this is so much a what’s wrong with Cravath, what’s wrong with Wachtell story, right? I think that this has a lot more to do with less internal forces and more external market forces and developments and trends that we’ve been seeing taking place in big law for the last few decades.

On one hand, I think that these firms like Wachtell, like Cravath, I mean, we could really put firms like Cleary and Debevoise and S&C in that same group, right? Firms of that ilk, they are more vulnerable today and they are more susceptible to attrition than they used to be, but they remain elite firms. So I don’t have any concerns that this is a sign that they’re going to go the way of Cadwalader or Shearman & Sterling or anything like that.

I do think it’s noteworthy that it’s been happening at a higher clip more recently, right? I think that’s certainly noteworthy. I think a couple of things that you can say specific to firms like Cravath and Wachtell are that they’ve really been focused on talent retention and not so much talent acquisition. So they’re a little bit behind as far as that goes.

Firms like Kirkland, firms like Latham, firms like Jones Day, Paul Hastings, Sidley, et cetera, they were always very strong firms. What they weren’t was elite in New York. To be a major, major player in the New York legal market, you need to have a strong public M&A practice. You need to be a powerhouse in the private equity space. You need a really strong debt finance practice, really strong private funds practice.

The firms that have been ascending to the point where they now have a seat at the table these indigenous Wall Street New York firms that really had the table by themselves for a long time is the investment in these practices and their ability to woo talent from some of these firms. In large part, the reason why they’ve been able to do that is because of the fact that we’ve seen a structural shift in terms of partnership models, right? This shift from the one-tier, all-equity, pure lockstep structure to a mostly two-tier merit hybrid model, or a black box model in some cases, that’s allowed a flexibility with regard to partner compensation that has really leveled the playing field. It’s changed the game.

When you look at some of the firms that are now mentioned in the same breath as firms like the ones that we’re talking about, I think you really look no further than that to see why that’s happening.

Sabina Lippman:

Yeah. I guess my larger comment and what Todd mentioned is I can’t agree more with the fact that firms outside of New York are starting to become more dominant in New York. I guess I disagree that the Cravath moves are not some sort of a signal. It’s not a Cadwalader kind of a situation. Cravath is a powerful firm and has a lot of credibility and has many of the top practitioners and will continue to be. So I’m not predicting any sort of a Cadwalader sort of situation, but I think it is significant. I think that if you don’t pay attention to that, even if it’s not something that is along the lines of a Cadwalader, that it’s a problem, that it does mean something. I don’t think these are one-offs. It’s a pattern.

Host:

Those were legal recruiters Sabina Lippman with CenterPeak and Todd Merkin with Wegman Partners and that will do it for today’s episode of On The Merits. For more updates, visit our website at news.bloomberglaw.com. Once again, that’s news.bloomberglaw.com.

The podcast today was produced by myself, Jessie Kamens, along with David Schultz and Meghan Tribe. Our editors were Chris Opfer and Alessandra Rafferty, and our executive producer is Josh Block. Thanks everyone for listening. We’ll see you next time.