Why is Succession Planning for Law Firms So Difficult?
Although a number of law firms have been proactive in efforts to address transition or succession issues, surprisingly, those firms represent a distinct minority. According to a 2013 Altman Weil survey, just about one-quarter of firms had a formal succession plan in place. The results of subsequent Altman Weil surveys were no less alarming. In 2015, only a third of firms had a formal succession planning process and, in 2016, roughly 50% of firms were very to extremely concerned about the firm’s preparedness to deal with the retirement and succession of baby boomers.
A lack of succession planning is a leadership and cultural issue – one that may, at some point, have a significant impact on the stability of the firm. So why do law firms procrastinate taking the issue on, and why does it seem like such a herculean task?
There are never issues until there are...
First, succession planning, by its very nature, is not an immediate issue. For many firms, a significant portion of revenue is derived from one or more of its long-standing, established practices, many of which continue to be led by a named and/or senior partner. With the continuing growth of these practices, it might appear premature to invest the time and resources necessary to address succession. In fact, firms are often reluctant to develop a plan for succession, taking the point of view that if it ain’t broke, don’t fix it. Unfortunately, this approach leaves firms little time to thoughtfully address succession in a way that seamlessly transitions client relationships and leadership from one generation to the next.
But there is often more to the story…
Generally speaking, law firms have experienced significant increases in profitability over the last thirty years. Much of this growth was driven by practitioners who developed high-profile, specialized practices, which enabled the practitioners to build successful teams around themselves. Keep in mind that the majority of these practitioners are baby boomers – a cohort typically known for being work-centric and motivated by position and prestige. Their individual successes contributed to the growth of their firms, and many have ultimately become leaders of their firms and/or practices. As firms have continued to thrive under their leadership, there has been little appetite for change and no planning for the day when transition is not only wise but also necessary. Yet, for many of this generation, retirement is not an option, and a high percentage continue to work as if they could live forever.
A further complication…
Following the 2008 financial crisis, a hard reality set in – the nature of legal practice had changed. Among other things, the crisis contributed to shifts in the demand for legal services, the structure of teams providing those services (leaner is better) and an increased focus on pricing. Coupled with advancements in technology and increased competition, firms have been faced with the task of restructuring how they do business. However, during this difficult period, the practices of those same baby boomers (and significant revenue from those practices) have become more important than ever. Ironically, this increased reliance on baby boomers post-2008 led firms to push the succession plan discussion even further into the future.
And then, there is the next generation…
Of course, in every firm, as junior partners develop and become successful, the pool of potential leaders grows. The problem with taking the time to further develop and cull out the next generation of leaders is that it costs money, and the dilemma becomes more vexing—in an environment of shrinking or flat demand for legal services, pricing pressures, increased competition, etc., every firm wants it best players on the field doing what the firm needs them to do—generating revenue and building their practices. So… can firms really afford to take them off the track?
A ticking time bomb...
Now, a decade after the beginning of the financial crisis, many firms remain confronted with the succession issue, which they were able to successfully kick down the road… until now. Often hidden from public view, for many firms, succession issues lurk at all levels within the structure of the firm—in management, at the practice group level and in the administration. In many firms, the next generation of partners (and potential leaders) is still not ready for the roles they will soon be asked to take. For those firms who have not already thoughtfully prepared for transition, the issues related to succession and their impact on the health of the firm are among the highest priorities of current leadership.
Letting go is easier said than done…
It should not be surprising that many of the most highly-valued baby boomers are still not quite ready for the type of transition that would most help their firms. In some cases, it’s ego. In other cases, it’s a resistance to retirement. In still other cases, there continues to be an attitude that it ain’t over ‘til it’s over. Increasingly however, all are coming to grips with their own longevity as partners.
According to a 2016 survey conducted by Major, Lindsey & Africa, approximately 16% of current partners will retire over the next five years, and 38% in the next decade. Many are focused on what they can do to institutionalize client relationships they have helped create and passing the baton in their leadership roles. But letting go is easier said than done.
How should firms deal with the transition? More specifically, how should firms approach discussions with their high-performing senior partners who are in the vicinity of retirement? At the same time, how can firms enlist this group of high performers to help the next generation institutionalize their practices and take on new leadership roles before the senior partners actually retire? And finally, what role does compensation play in the solution?
These are challenging questions, and there are no simple answers. All firms are different, and their leading practices of today may not be the strategic practices of tomorrow. In contemplating a succession plan that takes these issues into account, firms might consider starting with the following key questions. How should we:
prepare the next generation of potential leaders?
reexamine firm strategy to take account of both the transition issues and changes in the business of law since 2008, if not already formally done?
initiate conversations with partners in the vicinity of retirement early enough so that there is a mutual understanding (and preferably agreement) as to the best steps to take for a successful transition?
approach the role of compensation in successful transitions? and
convey to the rest of the firm the need to focus on transition earlier so that succession planning becomes the norm and not the exception?
