Law firms owe much of their success to the hard work of baby boom generation senior partners. I know these folks well—I was one of them before I retired. They have big investments in their firms, reflected by big capital account balances. They consider these investments risk-free and expect returns of funds on demand when they eventually retire. That their firms might someday lack the liquidity to do so is inconceivable.
Underlying these beliefs is an assumption widespread among my peers: that younger partners will retain enough of their clients and bring in enough new business to replace the revenue these big producers once generated. Most have no idea whether this assumption is justified. Many firms have no viable plan for developing the crop of brilliant practitioners and business-getters they will need to replace baby boomers. As a result, their sustainability is unevaluated, untested—and therefore unknown.
Planned or not, succession is certain to occur. It’s only a matter of when and how. What is not certain is whether the firm will retain any value when the next generation takes over.
Unsustainability Is Always a Risk
A common disclosure by brokers and financial advisers is that “past performance is not indicative of future results.” While most law partners are familiar with this disclosure, they assume because their businesses are profitable now, they will be profitable always. And why not? They are great lawyers who are adept at bringing in new business. They think of their firms as perpetual. Because they are making a lot of money, they put succession planning (preparing for the transfer of clients and assets to the next generation when they retire) out of mind.
I am baffled by this viewpoint as it reflects mass amnesia about how fragile law firms are. Even storied and once-successful firms can collapse when their fortunes change—and fortunes can change fast. Stroock Stroock & Levan closed its doors after 147 years, having earned $250 million the prior year. Howrey earned $573 million the year before it collapsed. Other firms abruptly downsize, as did venerated insurance recovery firm Anderson Kill, when Reed Smith hired away nearly half its lawyers. These risks are inherent to the business of law. It is dangerous for any firm to think it is immune.
A firm’s risk of abrupt contraction or failure can be substantially reduced by planning how to replace its current generation of producers. Without such a plan, even if the firm works deliberately to replace these producers, this work will be done in the dark. Any prediction of its future sustainability will amount to educated guesswork.
Succession Is Inevitable
I sometimes hear law firm managers and partners talk about succession as if it were a contingent hazard—something that may or may not happen, and therefore may or may not need to be planned for.
This is a fallacy. Succession from a firm’s existing owners to new ones is inevitable as every generation of lawyers will someday stop practicing law (voluntarily by retiring, or involuntarily by death or disability). Those left behind will be their successors. Someday, when the last Baby Boomer partner heads for the exit, these successors will face one of two scenarios:
- If they are as numerous and good at lawyering and rainmaking as my generation was and they inherit their retired partners’ clients, then the firm will keep pumping out profits. It will retain its value as a revenue machine because the fuel source on which it runs—billable hours produced by skilled business-getters—has been replaced in its entirety.
- But suppose this fuel source is not completely replaced and that the next generation cannot keep the machine running at the same speed. This can happen for any number of reasons. The successors might be as talented as the retired partners but not as numerous. Or they might be as numerous but not as talented. Perhaps retired partners transitioned only some of their clients to younger lawyers. Or perhaps they ignored succession and transitioned none at all.
Whatever the reason baby boom partners were not fully replaced, firm revenue will drop once they are gone. What comes next is a trip down a well-trodden path.
The firm will first try to stop the bleeding by cutting expenses. But paychecks to staff must be covered, and office leases and the water bill have to be paid. Unless the firm can rapidly increase top-line revenue, fixed costs will swallow the profit margin, and partners with portable practices will begin to bail out. Absent a miraculous turnaround, a run on the bank will follow.
Those left behind will try to find a buyer or merger partner. But once the firm is stripped of its big producers, a merger of equals will be out of the question. In a far more likely scenario, some healthy firm will pick off those productive partners who remain, and purchase nothing. When the dust finally settles, partners hoping for the return of their capital will be badly disappointed.
Effective Succession Planning Is Not Inevitable: What to Do
Here’s what their firm should have done.
First, it should have created a timeline of tasks calculated to develop promising younger producers (organically, laterally, or both) and retain the clients of older ones, with a target date for reaching a revenue plateau equal to what the latter previously produced. This timeline would include estimated retirement dates for key partners—not always easy information to get, because aging lawyers may not want to commit (to their firms or themselves) to endpoints for their careers. When a firm begins these conversations with its partners early (I recommend starting in their late 50s), it gets better data and can make better estimates.
Second, the firm should have done a deep dive into what motivated retired partners with big practices to successfully migrate their clients to younger partners. It should then have invested in incentives aimed at these motivation points, to improve client retention.
What induces partners to do the considerable nonbillable work that practice migration requires is not difficult to discern. Some do it because their partnership agreements say they must. Others do it out of regard for their younger partners. Most do it or don’t do it based on compensation.
If a firm’s comp system protects retiring partners’ income while they perform this vital task, they are far more likely to do the work effectively, and the firm is far more likely to keep their clients. Configuring compensation to get to this result is an investment in succession. In my experience, the amount of this investment almost always exceeds the revenue lost when retirement succession fails.
Finally, the firm should have identified structural threats to replacing its senior producers and taken action to neutralize them. An example is the sharing of origination credit by older and younger partners during client transitions. Some firms rely on older partners to negotiate credit-sharing deals with their lieutenants, without formalizing the process to establish precedent and ensure fairness. These negotiations often fail, resulting in bad feelings and lost clients. In many cases, both can be avoided when a firm builds parameters around these discussions to manage expectations and mediate disputes.
The Bottom Line
Most law firms know they need to replace the revenue produced by my generation. They just have no plan for achieving it. Some think that growth alone will do the trick, but this is a haphazard strategy. Firms that adopt it miss the fact that growth happens only by putting the right successors, in sufficient numbers, in place to exceed the revenue generated by the previous generation. Rarely is this achieved without careful planning. Any firm that gets there on the fly, without advance planning, has dodged a bullet. It may not be so lucky when the next existential threat comes along.
Even the most profitable firms risk failure someday if they do not master succession planning. It isn’t easy. An effective succession plan takes a lot of work to pull off. But firms that bite the bullet and do it anyway can expect the best possible reward: Sustainable enterprises, in which sustainability could be assessed at every stage, are positioned to flourish when my generation has moved on to well-earned retirements.
A former senior partner with Am Law 100 firm Barnes & Thornburg, David Wood retired after a 38-year career as a trial lawyer representing large corporate clients. In his final two years of practice, he spent hundreds of hours migrating his $6 million book of business to younger partners. He now advises law firms on how to replicate this process, and how to navigate issues linked to the topic of succession planning, including whether and to what extent to regulate partner retirement. He can be reached at david.wood@davidwoodconsulting.com.
