Purely as a numbers game, an attorney seeking to lateral into a firm in a smaller city/legal market is going to have a harder time finding and landing a job – the smaller the market, the fewer mid-to-large sized law firm jobs will be available. Making it even more difficult is the fact that smaller cities are often more desirable than larger markets due to quality-of-life and cost-of-living factors, which results in both lower turnover (people decide to stick around), and more people competing to fill the few openings that do come online. With a greater number of candidates and smaller number of positions, it is obvious that law firms in smaller markets can generally afford to be more selective.
Thus, if you are thinking of targeting a smaller market in your job search, it is worth thinking about exactly how the firms will be selective, and what that means for your own chances as a candidate. Having worked with many candidates looking at smaller markets, as well as meeting and talking with the recruiting coordinators from law firms in smaller markets, there are typically three critical factors (beyond the general quality of a candidate's education and experience) that will determine in large part a given candidate's success. I reference certain West Coast markets as examples here, since that is the region I specialize in for the United States, but these factors will be applicable no matter which region you are working in:
1) Do you have local ties?