Law Practice Management Asked and Answered Blog

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Feb 14, 2024

Law Firm Succession – Transition of Senior Partners Leadership and Management Roles

Question: 

I am one of three founding partners in a 17 lawyer insurance defense firm in Houston. We have a total of 18 lawyers in the firm – 3 founding equity partners, 4 other equity partners, 5 non-equity partners, and 6 associates. The three of us founding partners are in our 60s and approaching requirement and are concerned about succession planning and transition. We feel that we are in good shape concerning transition of clients but not so concerning management roles and responsibilities. The firm is managed by the three of us and we have kept tight reigns on the administrative/management side of the house. We would appreciate your thoughts.

Response: 

A successful transition strategy involves three components.

  1. Legal Skills (lawyering skills)
  2. Client and Referral Source Relationships
  3. Firm Management and Leadership Roles

While it sounds like you are in good shape concerning legal skills of your other partners and client and referral source relationships, work needs to be done in the areas of firm management and leadership.

Law schools do not train or develop managing partners or lawyer managers, nor does doing excellent and complicated work for demanding clients. Highly competent attorneys do not necessarily make good managing partners or lawyer managers. Some of the best lawyers are the worst managers. The better lawyer managers have a second sense for people and management, in addition to being good lawyers and possibly outstanding rainmakers. Many firms develop successors to management by delegating to selected mid-level and junior partners short term management assignments and by rotating these partners through various management areas to develop their general management skills rather than developing particular lawyers as specialists in specific management areas. These firms begin to train mid-level and junior partners by assigning short term, low risk management activities before entrusting them with key management jobs.

Management Skills

The following are recommended areas in which the management skills of mid-level and junior partners can and should be developed:

  1. Client relations, including origination, development and retention;
  2. Acceptance of new clients and matters and the management of performance of legal work in substantive practice areas and sub-specialties;
  3. Associate recruitment, training and development of a personal and professional nature, promotion, evaluation and compensation and termination;
  4. Administrative staff organization, relationships and utilization;
  5. Budgeting for revenue, expenses, capital expenditures; billings and collections; financial and variance reporting and utilization of resultant financial data and management information;
  6. Technology including computers, software, other equipment and technical support from non-lawyer specialists;
  7. Leases, space utilization, negotiations and construction.

Techniques for Developing Skills

On-the-job-training is the most effective technique for developing and refining the management skills of mid-level and junior partners. Three of the most frequently used approaches for teaching management skills include being assigned to a committee, being elected or appointed to a management or leadership position and serving as a member of a special team.

  1. Committee Membership: Mid-level and junior partners may be appointed or elected to serve on the management or other committees. Depending upon the form of firm governance, partners may be appointed or elected to represent various age groups and/or regional offices in multi-office firms. They may be chosen to serve on other committees such as marketing, associates, recruiting, lateral hires, administrative staff, financial, ethics or the management committee, etc.
  2. Appointed positions: Partners may be appointed to manage functional areas of administrative or substantive firm activity. For example, a partner may be appointed to chair a practice area or one of its sub-specialties. Another one may chair the marketing committee. A third may serve as the firm’s ethics partners, etc.
  3. Special Team: A partner may lead a special team to address a specific issue or function. For example, a partner may be requested to recommend new or emerging practice areas. Another may explore the feasibility of establishing a new regional office. A third partner who has an interest or background in technology may direct the firm’s automation effort, etc.

The mid-level or junior partner selected for training should receive administrative assignments and his or her performance should be evaluated accordingly. Each lawyer manager should be requested to develop a plan for the year, including goals and proposed action plans for accomplishing their objectives. They should be required to review these plans with the head of the committee or the partner to whom they are accountable. Partners who are appointed or elected to specific positions should be accountable to a partner or committee responsible for their actions and be evaluated on their performance. Many law firms consider the success or failure of partners in planning and implementing administrative assignments when recommending or setting their compensation levels. This is done to encourage the firm’s “best and brightest” partners to accept administrative assignments and not feel uncomfortable because they may record fewer billable hours. Also, it would be wise for the managing partner or executive committee to identify and provide other non-monetary forms of recognition to successful lawyer managers.

Planning for the transition of law firm leadership and management calls for the ability of the current managing partner or members of the management committee to spot leadership and management potential among the partner complement. Once this potential has been identified the current management must nurture and develop this potential so as to provide the future leaders of the firm.

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John W. Olmstead, MBA, Ph.D, CMC

Aug 24, 2022

Law Firm Succession – Incentives for Partners to Transition Clients

Question:

I am the managing partner of a twelve lawyer firm in Dayton, Ohio. We are a first generation business litigation boutique. We represent mid-size companies and handle multiple matters for these clients. We  have seven equity partners and five associates in the firm. Three equity partners were the original founders and the other four were made partners later on. All seven partners originate client business and have significant books of business. Three founding partners are in their early 60s. We have had little success in succession planning and it seems that the three partners are reluctant to let loose of their clients and even begin any sort of client transition. Our compensation system does not encourage transitioning clients. I would appreciate any thoughts that you may have.

Response: 

I believe that succession planning and client transition, especially for institutional clients, needs to start early – in many cases five years prior to retirement. Retiring partners need to be motivated to:

Here are a few ideas:

1. Retirement Date Notification

Each each partner has the obligation to notify the managing partner, or the executive committee, of his or her
intended retirement date, at least three to five years before their actual retirement from the firm. This notification will begin the transition period which will end upon the partner’s retirement, during which time certain steps will be taken to transition the retiring partner’s clients.

2.  Identification of Transition Clients 

Suggest that the retiring partner and the managing partner, or executive committee, schedule a meeting to review those clients the retiring partner originated or serves as the key client relationship partner. They should also review the types of work and fees generated by these clients.

3.  Client Transition Duties 

The retiring partner and the managing partner, or executive committee, should agree upon those tasks and transitioning activities that will be performed by the retiring partner during his or her transition period. These may include regular visits to the client by the retiring partner and the partner to whom the client will be transitioned.

4. Determining Success of Transitioning Efforts 

Annually, during the transition period and in connection with the firm’s annual compensation review process, an evaluation will be made by the managing partner, or executive/compensation committee, with the transitioning partners, about the retiring partner’s efforts in performing the transitioning activities performed by the latter during the previous year. The managing partner or executive/compensation committee will determine whether the retiring partner is performing the transitioning duties in a satisfactory manner.

5.  Determining Retiring Partner’s Compensation 

Generally, the compensation of those partners who are transitioning towards retirement will be determined in the same manner as compensation for all other partners. However, with respect to the retiring partner, the managing partner and members of the management/compensation committee will pay particular attention to the former’s performance of the transitioning duties assigned. If it is determined that the retiring partner is satisfactorily performing the transitioning activities, the retiring partner will continue to receive full credit for those fee collections from clients being transitioned, in the various categories considered by the managing partner and members of the management/compensation committee in setting compensation. However if it is determined that the retiring partner is not satisfactorily performing the transitioning activities, or if the fees generated from these clients increase or decline, those factors will also be considered by the managing partner and the management/compensation committee in setting the retiring partner’s compensation, and the compensation may be increased or reduced appropriately.

6.  Fee Credit Allocations 

In order to provide incentive to those partners to whom clients are being transitioned, and to insure that those attorneys are fairly compensated for their efforts in transitioning and maintaining these client relationships, the partners designated to be the transitioning partners for the client to be transitioned will also receive credit under the categories as may be applicable, for the fees generated by these clients during the transition period, provided that the managing partner and the members of the management/compensation committee determines that the transitioning partners are making satisfactory efforts to  accomplish the transitioning of clients.

Assignment of credit to the transitioning partner will not reduce the amount of credit allocated to the retiring partner, unless the retiring partner is not satisfactorily performing the transition activities, as described above.

7.  Billable Hours 

To allow reductions in billable hours while also providing time to perform the transitioning activities, without penalizing the retiring partner from a compensation standpoint, a retiring partner will be allowed to reduce his or her billable hours during the transition period without an adverse effect on his or her compensation, so long as the retiring partner is satisfactorily performing the assigned transition activities. Any reduction to the retiring shareholder’s billable hours in excess of the percentage reduction allowed may result in reductions of the retiring partner’s compensation.

8.  Other Incentives 

Some firms have used post retirement client retention incentives in which a percentage of collected fee revenue for clients that stay with the firm are paid for a few years to retired partners as an incentive to effectively transition clients to other lawyers in the firm.

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John W. Olmstead, MBA, Ph.D, CMC

 

Jan 26, 2022

Law Firm Succession Planning & Practice Transition – Have I waited too Long?

Question:

I am the sole owner of a twelve-lawyer defense litigation practice in Chicago. We represent automobile manufactures and have approximately ten major clients. I am the only equity partner in the firm and all of the other lawyers in the firm are associates. Two associates are seasoned lawyers with substantial experience and have been with the firm for many years and the other nine have less than five years experience. The two seasoned associates are in their mid-sixties. I am sixty-eight. I just realized that the firm’s office lease expires in eight months and I have decided that this is a good time to retire. I will not sign another lease and I would like to be completely retired in the next six months. My wife has some health issues and I need to devote my total time time to her. I have talked with the two senior associates and they plan on retiring as well. Therefore, I will have to either close the firm or find another firm interested in taking over the firm. Have I waited too long?

Response: 

Possibly so. Eight months is a very short timeline to locate another law firm that might be interested in acquiring or merging with your firm. However, this is not always the case. I have had situations where interested parties were located in a month or two through cold approaches, discussions held, details worked out, and the transaction concluded within six months. If you have a few firms in mind that you could approach the process could go much quicker than if cold approaches have to be used. So your timeline is not impossible but you need to get started yesterday. Keep in mind that client transition is paramount in the success of such arrangements and usually the acquiring firm wants a transition period, often of a year or so in which you work at the firm in a consultant capacity to assist with client relationship management and transition. Therefore, you might have to stick around in an Of Counsel role for a year or two.

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John W. Olmstead, MBA, Ph.D, CMC

May 26, 2021

How/When to Admit a New Law Firm Partner

Question: 

Our firm is a six lawyer family law firm located in the Chicago suburbs. There are two equity partners and four associates in the firm. Approximately five years ago the founder of the firm decided to retire and he sold the practice to myself and another associate in the firm. We just finished making our last payment the end of last year. We have an associate that we do not want to lose and he has inquired about his future with the firm and partnership. He has been with the firm for two years. My partner and I are considering offering him a partnership interest but do not know where to start. Any suggestions that you have would be appreciated.

Response: 

The two of you should start by asking yourselves the following questions:

The majority of firms that I work with regardless of size have a non-equity/income partner tier that an associate advances to prior to being considered for equity partnership. This gives associates the feeling of career progression, the title of partner which helps with client and peer recognition, additional responsibility in the firm, and additional compensation. Your associate may not even be expecting or be ready to become an equity partner – they simply want to know what the next step is in their career advancement and whether equity partnership is even possible in your firm down the road. Last week I interviews ten associates in a firm and six out of ten advised me that they had no interest at all in equity partnership. So, don’t assume that your associate is even interest in equity partnership.

I suggest that you give these issues serious thought before jumping off the cliff and prematurely admitting another partner. Adding another equity partner is a serious step and should be give appropriate due diligence.

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John W. Olmstead, MBA, Ph.D, CMC

May 05, 2021

Law Firm Succession Planning – How Important is a Formal Appraisal Valuation of the Firm?

Question: 

Our firm is an eight lawyer litigation firm in Portland, Oregon. We have three founding equity partners in their early sixties and late fifties, three non-equity partners, and two associates. Recently the equity partners began succession planning discussions among ourselves. Our preference would be an internal succession and transition to the younger non-equity partners in the firm. In our discussions we were discussing buy-in, buyouts, and valuation and one of my partners suggested obtaining a formal valuation. What are your thoughts regarding hiring a business appraisal firm to provide us with a formal appraisal/valuation of our firm?

Response: 

While I don’t wish to downplay a formal valuation, they can be expensive and I find often not really used in the final outcome, especially when it involves selling partnership interests to others within the firm.

Most law and other professional practices sell (to outside parties) for a multiple of annual gross fee income. Often this is discounted (sweat equity discount) when assets or shares are sold to other attorneys within the firm. Generally, this rule-of-thumb method of valuing a law practice is used to value the practice. However, the eventual value of a law practice comes down to what an interested party is willing to pay. In the final analysis the value of the practice is what an outside buyer or an attorney working for the firm will pay for (or invest) the practice. The valuation process is simply a tool to use to help you begin discussions and get to this point.

Many law firms with multiple partners view the law firm simply as a compensation vehicle designed to put as much income as possible in the pockets of the partners. They do not see the firm as an investment vehicle nor do the partners expect unfunded buyouts when they retire or otherwise leave the firm. These firms try to fund retirements with 401k and other retirement vehicles so there is no unfunded buyout upon retirement. The goal of these firms is to be in a position to acquire and retain top lawyer talent. Often these firms simply require an initial capital contribution and return cash-based capital accounts and earnings to date upon withdrawal or retirement. Sometimes a founder benefit is provided for the original founder(s) of the firm as a reward for their sweat equity establishing the make and making the initial investments. Such founder benefits are often a percentage based on an average of a founder’s compensation over the past three years.

Value in a law practice is largely personal to the lawyer and that individual’s ability to attract and retain clients. The lawyer has knowledge, experience, skill, judgment, and reputation—all elements of professional goodwill – not institutional or firm goodwill. As long as clients primarily hire lawyers, as opposed to firms, this will remain a guiding principle in valuing law practices. This is not to say that some firms have not created a “brand identity” that is separate and distinct to the institution. And in larger practices, the servicing team (including other partners and other practice specialties) influence the client’s selection decisions. Those firms are rare.

Often when selling partnership interests to others in the firm affordability and terms plays a larger role than valuation.

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John W. Olmstead, MBA, Ph.D, CMC

Sep 04, 2019

Merger vs Transitioning Our Firm to Our Associates

Question:

I am one of three founding partners in a twelve attorney insurance defense firm in New Orleans. The three of us are in our early sixties and contemplating retirement in the next several years. The three of us have been discussing our succession plans and are wondering whether we would be better off merging with another firm or transitioning the firm to our associates. What are your thoughts on this matter?

Response: 

A majority of firms prefer transitioning to the next generation of attorneys within the firm whenever possible. Many founding partners at this stage of their career are often not ready to move to another firm unless they have to.

Advantages of transitioning to associates in the firm include:

Disadvantages of transitioning to associates in the firm include:

I believe that you should start by taking a critical look at the demographics of your associates and raise the following questions:

  1. What are the retirement timelines for each of you? Will you be retiring close to the same time?
  2. Do you have the bench strength – your present associates – to serve your existing clients if the three of you are no longer with the firm?
  3. If the three of you were no longer with the firm could your present associates retain your existing clients?
  4. Do any of your associates have the leadership and management skills to lead and manage the firm?
  5. Do any of your associates have the will to take over the firm and buy-out your interests?

Your answers to the above five questions will determine whether you should consider a merger strategy. It is often difficult to get a “founders benefit” (goodwill value) in mergers with other firms.

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John W. Olmstead, MBA, Ph.D, CMC

Jul 17, 2019

Law Firm Succession – Pros and Cons of Hiring an Associate as My Succession Plan

Question: 

I am a sole practitioner in San Diego, California. My practice is mostly general practice with some emphasis on commercial real estate. I am 64 years old and am looking for a way to transition and exit my practice in the next three to five years. I am the only attorney in the firm however there are three legal assistants that work for me. I have been considering hiring an associate so that I have someone to sell my interests to in the next three to five years. I have never had an associate so I would appreciate your thoughts concerning the wisdom of hiring an associate at this stage of my career.

Response: 

In general I prefer an internal succession strategy when the firm has an attorney or attorneys in place that are willing to step up to ownership and take over the firm. Often this is easier said than done. Issues you will face will include:

  1. Unless you are loaded with work that you are unable to handle or you hire an attorney that can bring work with him or her you will be increasing your expenses and reducing your income/compensation.  Since you have operated all these years with just one attorney I assume that there is only enough work to support one attorney. If you are ready to slow down to a reduced work schedule and take less compensation that is another matter. If not, you may want to look for an experienced attorney with some business rather than hiring a lawyer fresh out of law school or wait a little longer till you hire someone.
  2. Associates require care and feeding – in other words training, mentoring, etc. A certain amount of training and orientation will be required even with an experienced attorney. Revenues may lag from one to two years and your will be saddled with their compensation and other related expenses. You have no experience with mentoring attorneys and this may be something that you are ill equipped to do or don’t want to do.
  3. You may end up hiring and training in an associate only to have them leave the firm in a year or so to join another firm and possibly take clients with them.
  4. The associate you hire may only be looking for a 9-5 lawyer job and have no interest in owning a law firm.
  5. The associate you hire may expect to have you hand them your practice for free and he or she may be unwilling to pay you for your practice.

Many firms have had positive experiences with transitioning their firm to associates. Just be aware of the possible pitfalls. You may be better off going a different direction.

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John W. Olmstead, MBA, Ph.D, CMC

Oct 31, 2018

What Law Firms Must Do to Remain Competitive in the Internet Age

Question: 

I am the managing partner of a twelve attorney family law firm in Kansas City, Missouri. We have been in practice going on thirty years. Over the last ten years we have shifted more of our advertising from print directories and advertising to the internet. Today virtually all of our work comes from the internet. While to some extent this has been a blessing it has also been a curse as we must continue to make investments in search engine optimization, update the website, pay to be included in online directories, etc. It is a vicious circle and we are losing business to new attorneys just starting out that are putting up first class websites and making online investments.  I would appreciate your thoughts.

Response: 

The internet as well as advances in information technology has and will continue to be the key driver forcing change in the legal marketplace as well as other segments and our daily lives as well. Shopping malls are disappearing from our communities and department stores are struggling for survival. Being the king of the hill or the biggest is not the strategic advantage that it once was. The internet is leveling the playing field in many industries as well as law firms.  There are new opportunities and new competitors. Consider the following:

  1. Everything is being commoditized. More practice areas are moving down the value curve and prices are becoming more price sensitive.
  2. Disintermediation of traditional delivery channels. The internet provides new access to information and is eliminating the middleman. It is impacting how we shop, bank, conduct business, and pay our credit cards and taxes. It is also impacting how clients locate and select lawyers and how legal services are delivered.
  3. Our society is becoming – more and more – a DIY (Do it Yourself) nation.
  4. Lawyers competitors are just a click away whether they be legal process outsourcing providers (LPO) in India, other lawyers in your state – but further away and servicing clients remotely, legal publishers, or online form providers.
  5. New client opportunities for your may also be just a click away.

Challenges and Questions to Think About

  1. How do you deal with commoditized transactions?
  2. How do you tie yourself to your client in an online world?
  3. How do you compete with new models and approaches to the delivery of legal services?
  4. How do you compete with virtual law firms?
  5. Would you consider adding a online delivery component to your traditional brick and mortar practice?
  6. Should you consider other practice areas?
  7. Should you consider expanding your geographical reach in areas where you are licensed and other areas by forming relationships with licensed attorneys in those areas.

Here are a few suggestions:

  1. For your practice area you should continue what you are doing and maximize your online and electronic marketing investments.
  2. Online reviews are becoming more and more important. Have a protocol in place that asks clients for reviews upon completion of their matter. Make it easy for them by providing them with appropriate online links.
  3. Your website does not do enough to demonstrate expertise. I do not see any evidence of attorneys publishing any articles, serving on law related committees, or chairing such committees pertaining to family law. There are no testimonials from past clients or others on the website. Get your attorneys writing articles, get them published where you can, and get them posted to your website. Get testimonials from past clients and referral sources and post them to your website. Also get your attorneys involved in bar and other law related associations. Do more to build the brand of the firm and the individual attorneys. Many of my family law firm clients still receive a bulk of their business from past client referrals and referrals from other attorneys.
  4. Consider satellite offices in some of the suburban communities in Missouri and Kansas. I have family law firm clients that have been quite successful with multiple offices – staffed and not staffed.

Even in the age of the internet expertise, professionalism, and reputation is important. Do all you can to convey this through your website and your initial communications with clients.

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John W. Olmstead, MBA, Ph.D, CMC

Jun 12, 2018

Law Firm Strategic Planning – Culture as an Essential Ingredient

Question: 

Our firm is a twelve attorney firm – eight partners and four associates in Phoenix, Arizona. The firm was founded by the present partners twenty years ago. We are an eat-what-you- kill firm – partners are allocated their fees, overhead is allocated, and their compensation is their individual profit. While we have a firm administrator that handles the day-to-day management of our operations, we have done a poor job of long-term management and planning. One of our partners has suggested that we develop a strategic plan. However, I believe this would be difficult for us given that we never meet, have different ideas of our future, have never been able to agree on any major decisions, and unwilling to be accountable to each other and have a general attitude of mistrust. I don not believe we even have a firm culture – in essence we are eight separate practices operating under the guise of a partnership. Your comments are most welcomed.

Response: 

It is very hard for partners in an eat-what-you-kill firm to come together and implement a strategic plan when the partners have no common values, goals, or objectives. Eat-what-you-kill firms more often than not have no culture at all. Three components that are linked, reinforce each other, and must be balanced are strategy, compensation, and culture.

Culture is the outcome of how people are related to each other in a law firm, thrives on cooperation and friendship, and defines the firm’s sense of community. Culture is the glue that holds a firm together and is built on shared interest and mutual obligation. A firm’s culture boosts a firm’s identity as one organization and prevents disintegration and decentralization. Without a common culture a firm lacks values, direction, and purpose.

You firm is a fragmented or confederation culture and as such will find it difficult to even get started on a strategic planning process unless you are willing to change. You might want to spend some time addressing the question of whether you want to continue operating as lone rangers or whether you want to become a firm-first law firm. This will require that the partners give up some independence and be accountable to each other.

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John W. Olmstead, MBA, Ph.D, CMC

Nov 15, 2017

Law Firm Marketing – Paid Seminars

Question:

I am a partner in a six-attorney estate planning firm in Dallas, Texas. For many years our primary marketing activity has been seminars that we put on for clients, prospective clients, and referral sources. These seminars have been either put on solely by our firm or in partnership with other organizations such as nursing homes, hospitals, etc. These seminars have been free of charge. We provide a lot of value at these seminars and have been wondering whether we should charge a fee. We would appreciate your thoughts.

Reponse:

Do not assume that you must offer free seminars to get a marketing-benefit spinoff nor that only free seminars produce other business. In some respects paid-attendance seminars are even more powerful as marketing media than are free seminars. For one thing, the attendees who pay to attend are serious prospects. They are prospects that are qualified at least to the extent of having demonstrated serious interest in the subject, whereas at least some attendees at a free seminar are curiosity seekers with nothing better to do that afternoon or evening.

This is balanced by the heavier attendance at the free seminar, which may produce a greater number of good prospects, if not a better ratio of good prospects to curiosity seekers. That is there is a presumption of heavy attendance, for there is no guarantee of heavy attendance even at a free seminar.

There is a compromise position possible. You may opt to subsidize your own seminars by keeping the cost of attendance low which should produce good attendance, while still screening out the idle curiosity seekers. This would enable you to have modest registration and attendance fees.

I suggest that you review your past attendance history, ratio of attendees that have become paying clients, and determine whether you have an issue of curiosity seekers. If you have been doing a good job converting attendees to clients and have not had a problem of curiosity seekers I would probably stay with free seminars. If you have problems with curiosity seekers and your costs are getting out of control – I would consider modest registration and attendance fees. I would not look to these seminars as being a profit center for the firm.

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John W. Olmstead, MBA, Ph.D, CMC

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