Continue client relationships, knowledge & revenue as partners retire
After a retirement party for one of your firm’s partners, the partner leaves to start the next stage of her or his life, and the members of the firm go back to their desks. Will they wonder “What’s next?” Or, do they have a firm idea of how to continue the revenue stream, the relationships and the knowledge held by that now-departed partner?
With a wave of Baby Boomers retiring or just downshifting, many law firms are faced with the fact that some of the people who built the firm are on their way out the door. They take with them three significant assets: their relationships and the trust built up with clients, their knowledge of the law and of their clients’ affairs, and the revenue attached to those two assets.
This triple threat impacts the firm’s future, and other aspects as well such as its ability to recruit the best and brightest graduates and key mid-career professionals. Putting steps in place to capture the value of departing partners is important to attracting and retaining top talent, according to an interview with the COO of a leading mid-size accounting firm.
So, how real is this problem? The Canadian Bar Association says that a significant number of actively practicing lawyers are currently of an age to be thinking of retiring or slowing down. And it is important to note that these older partners are responsible for a quarter of their firm’s revenue. That’s a potentially major hit to the firm’s income if they retire and that revenue does not stay with the firm. Despite the danger, many firms do not have a formal succession planning process in place.
Why is succession planning a problem for law firms?
The elephant in the room, when it comes to discussion of law firm succession, is the fact that relationships with clients are held by the firm’s partners, not the firm itself. This has an upside in that clients receive individual attention from a lawyer who is well experienced in their situation and objectives.
But it also means that if the owner of the relationship – the partner – moves on, retires or dies, it can be difficult for the firm to continue that relationship and revenue stream. It also means that the partner is not motivated to help with succession planning and may even oppose it, because owning the relationship with the client is a source of power and security. Generally, the partner’s payout upon departure will be based on their billings over the previous years, so they are motivated to keep as many billable hours as they can, rather than pass those hours on to an associate to give them a chance to build a relationship with the client.
Some firms have a mandatory retirement age that puts a hard deadline on the succession process – but if there is no set age, the partner may well defer any succession planning steps as long as they can.
As well, the partner may find it easier to focus on generating billable hours, rather than supporting the succession planning process. This is partly because very few people like the thought of growing old, much less planning for it.
Building a culture that supports succession planning
Because of the economic and psychological issues involved, succession planning is not an easy item to put onto an agenda. But it is necessary for the firm’s sustainability. Here are some steps that we have found effective in supporting law firms through generational change.
Get a grasp of the consequences of not acting
It may be necessary to add some urgency to the situation by determining what’s at stake. This includes determining how much of the firm’s revenue depends on each partner, and estimating how much of that revenue would be at risk if the partner were to disappear tomorrow. External professional counsel with accounting expertise, who have helped law firms understand their cash flows, can make this process easier and the figures resulting, more acceptable. It is important that the process be financially rigorous, defensible and transparent.
Find out any systemic barriers to succession
As noted, in many firms the relationship with the clients is owned by the individual partners rather than the firm at large. This can provide a built-in incentive for the partners to hold those relationships tight. For this reason, it is important to examine the partnership agreement, the compensation model and any current succession planning measures to see if they pose a barrier to smooth succession of client relationships.
Build a system for succession planning
Building a smooth process for succession planning includes setting out expectations – providing reasons for partners to involve associates and other team members in meetings with clients, moving eventually to having associates take meetings themselves. Sometimes, partners will need coaching on how to delegate effectively.
It helps if there are clear milestones set up, with timelines and deadlines. It also helps if there are financial rewards to encourage partners to do their part in the process.
And, the junior partners and associates will also need to be prepared to take the reins – possibly with leadership training, business development training, and building their own professional profile as thought-leaders in their field.
Because of the need to continue the focus on generating billable hours, it can be a good first step to engage a team of external providers who understand law firms and their culture, and who have helped other firms to build sustainability through a smooth succession process.