A high-profile lateral hire with a large client following can boost a firm's reputation. But, writes Frank Maher, there are significant risks that firms need to address if they are to avoid an expensive mistake


'It could all have been so different.' Graham, managing partner of the London office of Wallis Grommet Forrest Gump LLP, contemplates the events of the past year.


The triumphant hire of Martin, a new partner from their most bitter rivals, had excited the press, the existing team and sector-focused client base with seemingly certain prospects of substantial fees from his client following.


The trouble started when a number of clients decided not to follow. One major client of Martin's did - but the firm's largest existing client then withdrew all instructions, saying there was no way they would instruct a firm that acted for a market rival.


The firm's insurers dug their heels in on renewal; they did not like Martin, muttering darkly about problems at his previous firm. So the firm had to change insurers, with a substantial hike in premiums.


Then disaster struck - a huge claim as a result of flawed vendor due diligence Martin had undertaken without following the firm's standard procedures. Its previous insurers had been right.


Then followed the threat of action against the practice's management by disillusioned partners in the firm's US offices, who were profoundly shocked at the damage to the firm.


Is this all rather a lot to go wrong in one case? The case study is fictional, but I have seen many a disastrous lateral hire where any semblance of due diligence has been eclipsed by media hype, and even cases where the lateral hire's activities have rapidly descended into mortgage fraud with severe reputational damage and loss of key clients.


Like plumbers with dripping taps, law firms used to advising clients on due diligence frequently fail to apply the same standard of care to their own affairs.


Before embarking on recruiting a lateral or a team, a key question is: why do you want them? It may offer growth through leverage, or it may help mitigate other issues, such as succession planning.


The main difference between laterals and home-grown partners is that you have not had a chance to discover the faults of the lateral. Then there is the inevitable risk of preferring the new recruit over established talent who become disenfranchised in the process, particularly if the lateral's remuneration package is out of kilter with the rest of the firm.


Does the lateral specialise in work you already do? If not, you may not understand the risks you are taking on, and may not understand how it will work financially. Lockup, for example, may differ radically from your existing work types.


Laterals in branch offices doing work nobody else does are particularly high risk; firms frequently put elaborate risk management procedures in place in their principal office and do not replicate them in overseas or branch offices.


The process should start with careful selection of the target. Often, the target will already be known to the acquiring firm, but that is no reason for dispensing with normal recruitment checks.


The target's duty to existing partners and duties of confidentiality to clients can limit the free flow of information, but there are partial solutions, and not just information in the public domain.


You should regard previous billing history with caution, and seek assurance wherever possible from the client following; post-acquisition billings are rarely more than a fraction of the amount promised. If clients do follow, normal client engagement procedures apply, including agreeing terms and money laundering checks.


Basic recruitment checks are often overlooked even by the largest firms - Legal Risk's top 100 law firm professional indemnity and risk management surveys show that many basic checks are not being done, even by some of the country's largest firms, although the position has improved substantially over the past three years. Failure to check references may invalidate fidelity cover.


Verifying claims history may be difficult but, as most firms choose from a handful of insurers, it is worth asking one's own insurers. Recruits should also be asked to warrant their claims history. Watch, in particular, for claims with the value stated as 'not known' - perhaps a euphemism for 'don't want to know'.


Insurance aspects should always be considered before committing the firm to the hire. Often, they are left until too late. Careful planning of both primary and top-up cover can make a real difference and avoid costly mistakes. Any merger merits taking advice on insurance strategy.


Those acquiring niche firms or teams should also keep in mind the successor practice provisions in the Law Society's minimum terms and conditions of insurance; even though they are not taking over a whole firm, they may trigger a dissolution that causes an inadvertent risk of acquiring the liability to insure another firm's liabilities.


Disciplinary records should be checked - and practising certificates. I am aware of two instances of partners in major international law firms who had no practising certificate, one because he had never qualified as a solicitor.


Having selected the right target, you cannot assume that he will slot into your existing firm and work the same way you do. Integration should start long before the recruit arrives - at the discussion stage.


If you have partner-to-partner review and file audit procedures (you do, don't you?) and you expect partners to share files and pass over work, then the lateral needs to commit to this in advance.


Once they arrive, it can be invaluable to appoint a mentor who can help in the integration process.


Finally, what of the claim by the US partners for mismanagement? Management liability policies are being taken out by law firms to protect against such risks, and are still relatively inexpensive in the UK.


Such a policy might have given Graham some comfort, along with proper planning and advice, before the recruitment deal was sealed.


Frank Maher is a partner in Legal Risk solicitors, specialising in risk management, professional indemnity and anti-money laundering