Succession Planning :The illusion of law firm permanence vs. the reality of good succession planning

By David E. Wood

Law firms go to a lot of trouble to create the illusion that their existence is perpetual.  They have nice offices in tony locations.  Their reception areas and conference rooms are well-appointed.  Their websites are things of beauty.  They give the impression that they have been fixtures in their communities for generations — and will continue to be so for generations to come.

This is, of course, an illusion.  Most law firms work from leased offices staffed with employees they can fire at will.  They typically own very little beyond their accounts receivable and the capital contributions of their partners.  When competing for engagements, they sell the perceived value of services yet to be rendered.  The perception of value derives in large part from creating the impression that the firm’s presence on the planet is permanent.

No one thinks this is really so.  Corporate consumers of legal services know that law firms rise and fall, grow and contract, just as their companies do.  They understand that the lawyers on whom they rely today will be gone someday.  Some will get old and retire.  Some will move to firms that have business or ethical conflicts that preclude continued representation.  Others will take jobs in government or in-house.

Yet clients buy into the illusion of law firm permanence, despite all evidence to the contrary, because it is in their interest to suspend disbelief about firms’ obvious impermanence.  If clients pretend that their law firms’ existence is perpetual, they never have to think about all the work it would take to replace them.  Their outside firms are always incumbents.  Relationships with them are sticky.

Sticky client relationships are the Holy Grail of law firm business development.  They are what all law firms crave.  So why do so many firms risk dissolving the illusion of permanence by doing little to retain the clients of senior partners after they retire?  Why is succession planning at most firms so ineffective, and so antithetical to creating the real permanence that clients want?

Many firms compensation systems defeat succession planning

This author recently conducted a poll asking law firm leaders to name the primary obstacle to creating and executing effective retirement succession plans.  A whopping 75 percent of respondents reported “loss of income to retiring partners” as the chief reason.  This author regularly addresses roundtables attended by law firm managing partners.  When asked why their partners do not cooperate in transitioning client relationships to others before they retire, these leaders often cite:

• Compensation systems that permit senior lawyers to maximize their earnings by hoarding work, and not sharing credit with younger lawyers, making succession impossible.

 

• Senior partners’ unwillingness to do the considerable non-billable work required to migrate a big practice to younger lawyers unless their compensation is protected.

 

• Retiring partners’ preoccupation with their personal interests over those of their firms, answering requests for help on client transitions with, “What’s in it for me?”

 

This shows that firms know why they are not retaining the clients of retiring partners and replacing the revenue they produce:  Their compensation systems do not permit incentivizing older partners to do the work succession requires.  Other partners do not perceive retaining retiring partners’ practices as sufficiently beneficial to their firms — and therefore to them individually — to warrant making changes to these systems.

As a result, lawyers retire without successors in place, clients decamp for other firms, and the cycle of partners building practices from scratch, then abandoning them at retirement, begins again.  These self-inflicted wounds undermine the illusion of permanence that law firms work so hard to create.

For a firm to achieve permanence, it must be willing to change

For a firm to prosper and grow over successive generations, it must be willing to change its culture, how it delivers services to clients, and how it compensates its partners.  A firm’s founders lay the foundation for a lasting business with a strong reputation, but a firm’s longevity is not dependent upon its founding partners or its initial reputation.  For a law firm to achieve permanence, in fact, rather than the illusion of perpetuity, it must be willing to make three changes.

First, firms must change their cultures to win their partners’ trust that their work on succession will be honored and valued.  It is not unreasonable for an older lawyer planning retirement to feel reluctant to accept a pay cut for doing this work.  This lawyer can reasonably be expected to devote a certain amount of uncompensated time to this effort as part of a partner’s duties to the firm.

But expecting a retiring partner to divert a substantial number of hours from billable to non-billable tasks, with no financial acknowledgment of the value this brings to the partnership, is not realistic.  A strong culture that emphasizes the good of the firm is best achieved when loyalty is reciprocal:  The retiring partner helps execute a succession plan because it is the right thing to do, and the firm rewards this effort in a way that encourages this behavior.

Second, a firm must change the way it delivers services, making and honoring an unconditional commitment to provide them with uninterrupted service when a relationship partner becomes unavailable for any reason, including retirement.  Many law firm websites trumpet their devotion to their clients, as if this distinguishes them from their competitors.  The same firms often do little to ensure that their clients are not left in the lurch when their lead partners retire.  When a firm guarantees its clients smooth intergenerational transitions, these clients tend to stay when their relationship partners retire.

Third, a firm must be willing to change outmoded compensation systems to encourage strong succession planning and implementation.  Partners should be penalized for hoarding work and refusing to share credit, making succession impossible — and the firm must accept that some will leave rather than suffer this penalty.  Firm leaders should be given the discretion to financially motivate senior partners to migrate their clients to successors — within reason.  Older partners should be asked to disclose their intended retirement dates so that succession plans can be put in place.

The law firms that have made these and other fundamental changes in their compensation structures are systematically replacing their retiring partners, and retaining their clients.  The many others  that cling to succession-averse compensation structures are not.

Effective succession planning and execution creates real continuity

The appearance of permanence is an important part of the value proposition law firms offer, because it is what their clients want.  Clients need to feel like their lawyers are just a text or phone call away, 24/7/365, and are willing to suspend disbelief about their law firms’ actual permanence to get it.  At a firm that shows clients through proper intergenerational turnover management that these services will always be available, stability and permanence of client relationships are not illusory.  They are a fact.

 

 

David Wood is a retired trial lawyer who helps law firms and senior partners plan and implement retirement succession programs. He can be reached at  [email protected].