Practical ways to focus on the future.
While 3% more law firms now view succession planning as a goal and priority than in 2022, it’s still a focus for less than a quarter of firms — ranking behind internal efficiency improvements, size growth and other objectives, according to Thomson Reuters’ State of U.S. Small Law Firms report.
With no shortage of work tasks, small firms can struggle to dedicate much bandwidth to succession planning, says Suzette Welling, CLM, member of the Suncoast Chapter and President of Law Practice Edge, which provides law firm management, HR and other services.
“With a lot of smaller firms, it, you see a head-in-the-sand-type of approach,” Welling says. “They know it needs to be done, but they just don't have the time to think about it, or they don’t even know where to begin.”
However, without a plan in place, if a key firm member leaves sooner than anticipated, productivity, client relationships and potentially profitability can quickly veer off course, says John Mitchell, Managing Director at professional service-based consultancy KM Advisors.
“In a 2,000-lawyer firm, they’d be one-tenth of 1% of the firm’s business,” Mitchell says. “In a small firm, they might be 10% — that creates a major cashflow problem for most firms.”
Smaller firms may not be able to add an entire department to oversee succession planning efforts. A dedicated employee, though, can help relieve some administrative and managerial tasks to free firm leaders up to focus on the future.
“One of the things you could start thinking about in terms of succession is what can I offload from somebody?” Mitchell says. “I've seen a lot of small firms get an outstanding executive director, or whatever title they choose to call that person — sometimes a [chief operating officer]. It's basically a senior staff person who is responsible for operations.”
After identifying potential upcoming firm leadership needs and candidates to fill the roles, a firm can begin positioning for later success.
“Law practice is such a personal thing. You really have to be intentional about bringing other attorneys into the fold. If there isn’t someone to take the place of that partner who is retiring or semi-retiring, they’re just going to go someplace else.”
One of Welling’s clients asked her to prepare what she describes as “almost a school for their up-and-coming partners,” where senior attorneys will learn about topics ranging from realization rates to how to mentor younger attorneys and why it’s important.
“We're going to be spending time on leadership [and] profitability,” she says. “By educating them [on] all of these things that add not just to the bottom line, but to your firm culture, it makes a huge difference in retention — because today, that's what's most important to the people we're hiring.”
Firms’ financial approach to retirement can be another succession planning element to consider.
Allowing enough time to fully acclimate clients to a new firm member so they trust the person is crucial, Welling says.
“Law practice is such a personal thing,” she says. “You really have to be intentional about bringing other attorneys into the fold. If there isn't someone to take the place of that partner who is retiring or semi-retiring, they're just going to go someplace else.”
Some firms continue to pay attorneys well to transition their clients to another firm member, Mitchell says — which may also necessitate a pay bump for the person who’s taking over and doing more work.
“There’s a period where you may not like the economics,” he says. “But if the next generation is fully integrated and you do some important work for the client, it's way harder for that client to leave — because their next trusted advisor has been working with them for four or five years. If you try to do succession work in 60, 90, 120 days, it’s rare that you're going to hold onto a client.”
It’s not uncommon to offer time-related compensation at retirement — for instance, as long as a client stays with the firm for the next three or four years, a departing attorney gets a certain percent of the profits, according to Doug Miller, Chief Operating Officer at Sutter O’Connell, which employs approximately a dozen attorneys in Cleveland and Nashville.
“The best practice, everybody will tell you, is have it defined in your partnership or shareholder operating agreement — is there an age? Is it when your book drops off?” Miller says. “They’ve got a book of business, and they want to be paid for it; how does that [happen]? If you have some kind of framework, that helps.”
“You’re really in a tough spot in a small firm, if you don’t have some processes in place ahead of time that people get socialized around.”
Running the numbers can confirm if the plan will be feasible.
“Some firms, you're a 25% owner,” Miller says. “You get 25% of the assets. That can literally bankrupt a [firm if] they don't take into account uncollectible debts. You may not have the cash for that.”
Rounding partners and administrators up for a retreat each year can generate great ideas about how the firm can move forward; Welling suggests implementing a system of checks and balances to monitor the firm’s progress toward 90-day, one-year and other objectives.
One of the law firms she’s worked with established a partnership track and attorney benchmarking system that defined the criteria required to reach equity partner and other levels.
“It helps partners who may be thinking about retiring in the future, because they now have associates who know what they need to do to take over one day,” she says. “The associates are taking some responsibility for that by making sure they are reaching out and asking for the assignments and experience that will help them.”
Knowing when leadership members will step down is critical so firms can provide opportunities for younger firm members to advance.
During his more than three-decade career working in law firms, Miller says he’s seen talented associates leave because, as they were preparing to take over for a retiring partner, the person decided not to leave.
Long-time firm members can sometimes struggle with the idea, Mitchell says, because their work is so closely tied to their identity — which poses later challenges for firms.
“You’re really in a tough spot in a small firm, if you don't have some processes in place ahead of time that people get socialized around,” Mitchell says. “For instance, a lot of firms keep changing what mandatory retirement is; or they change it for [one] person — for this rainmaker, we’re going to say 75 now,’ and when the person gets to 74 and a half, it’s, ‘We’re going to make it 78.’ Then they keep waiting, hoping the person steps down.”
Attorneys may not always tell leadership their intended timeline for leaving has changed.
“You've got to communicate and check in, and not just assume it's all going according to plan,” Miller says. “Maybe now he's feeling good, so he thinks, ‘I might as well work.’”
Moving into another position, such as of counsel, could be a way for the firm to retain an attorney’s specialized skills or relationships, Mitchell says, without having the person remain in a leadership, client management or equity partner role.
Law firms may also tap into external resources to help both the firm and employees who are approaching retirement age prepare for what the future will look like.
A financial advisor, for instance, can help firm members confidently determine when they’ll be able to exit the workforce and still maintain their desired lifestyle. If providing regular access to one is outside of the firm’s budget, advisors who charge a fixed fee — often a percentage of the assets under management — to create plans might be an option, Mitchell says.
Similarly, a solo practitioner could turn to a career coach for guidance on the timing and scope of their post-workforce life; or a small firm might bring a coach in to offer seminars and help individual attorneys realize they may have other options.
“One of the things you could start thinking about in terms of succession is what can I offload from somebody? I’ve seen a lot of small firms get an outstanding executive director, or whatever title they choose to call that person — sometimes a [chief operating officer]. It’s basically a senior staff person who is responsible for operations.”
Due to the personal relationships small firm leadership members tend to have with each other, they can struggle to address situations where health considerations may be preventing a partner from performing at an effective level, according to Mitchell.
“In a 2,000-lawyer firm, you might not know this person very well, even if they’re a big rainmaker,” he says. “But in a smaller firm, they may have been your mentor. You have to take action, and it’s really, really hard.”
While keeping a psychologist on retainer may not be realistic for smaller firms, they can possibly obtain a referral or other assistance from a local mental health service provider, Mitchell says. If the firm has an employee assistance program, he also advises calling its 800 number to inquire about resources.
“If it’s something we think is impacting their ability to practice — whether it’s behavior or cognitive abilities or emotional stability — it's helpful to get somebody who has professional expertise to help you have the conversation,” he says. “In a smaller firm, ideally, partners are close enough that they know each other’s families. A life partner, spouse or an adult child could be helpful to get that person in to see [a] health care [provider].”
Considering all the possible angles a succession plan could encompass, law firm leaders might understandably feel overwhelmed with options when they try to create one. Mitchell advises firms start small, instead of worrying about how to construct an overly intricate strategy.
“A good plan that is well-executed will always be better than an outstanding plan that has mediocre or no execution,” he says. “Assess your risk — if someone has a health issue; or other law firms are trying to compete in a space you used to dominate — what could we do to mitigate some of that risk? That’s enough to get going.”
The end result doesn’t need to be a fancy document or overflowing binder that addresses every potential outcome. Ensuring firm members are on the same page, Mitchell says, is more important; things should begin to fall into place after that.
“The biggest thing with succession planning is it’s a mindset,” he says. “Everybody sees why this is important — this is why we are always thinking about how to develop our younger people: Who’s coming after our clients, when it is going to be our time to step down, and how we make sure that’s a smooth transition. If you believe succession planning makes sense, then you can start to figure out the steps.”
No attorney wants to think about what happens when they stop practicing, but it’s crucial to have those conversations now. Debbie Foster, Partner at Affinity Consulting, joined Legal Management Talk to discuss how to bring up those difficult conversations and why it’s important to not only your firm, but your clients, to have a solid plan in place in case a lawyer retires or has to stop working. Listen at alanet.org/podcasts or download wherever you get your podcasts.
