Law Practice Management Asked and Answered Blog

Category: Keep

Aug 15, 2018

Six Worries That Keep Law Firm Managing Partners Awake at Night

Question:

I am a new managing partner in a thirty-five attorney firm in Tucson, Arizona. I replaced the previous managing partner who retired. He was the firm founder and had been in the position since the firm’s inception. I have had this position for six months and I am finding the job overwhelming – trying to serve my clients and managing the firm at the same time is very difficult. What are the major challenges that managing partners are having.

Response:

I understand and appreciate your situation. Managing partners advise me that the following challenges are what keeps them awake at night:

Managing cash flow. Investments in technology, higher salaries for attorneys and staff, and longer collection cycles are all having a negative impact upon cash flow. Contingency fee firms have additional cash flow challenges. Managing partners must insure that client bills are going out promptly, client payments are deposited promptly, and vendor bills are paid “just in time.” Cash shortfalls will have to be financed with additional partner capital contributions or bank loans.
Satisfying hard to please clients. Institutional clients are demanding more from their law firms in terms of service offerings, geographical coverage, responsiveness, and fee arrangements. Law firms are finding that the market for legal services is a buyers market and that they must continually innovate in order to continue satisfying client demands. Many are conducting client satisfaction interviews with these clients in order to measure client satisfaction and identify needed improvement areas and new opportunities.
Competition from other law firms and non-law firm service providers. The oversupply of lawyers, advertising, and the internet has increased competition between law firms. In addition to the competition between law firms, law firms also also facing competition from other service providers as well. Managing partners are finding they have to allocate more resources to advertising and marketing. Websites, internet search engine optimization, and pay-per-click internet advertising is becoming the norm for many firms.
Getting new clients and keeping existing clients. Today clients are less loyal and more likely to switch law firms than in years past. Managing partners are having to work harder to retain existing clients and acquire new clients. Acquisition of new institutional clients often requires responding to request for proposals, bidding for engagements and projects, preparation of quality proposals, and making presentations to prospective clients.
Succession and retirement of senior partners. Many law firms are experiencing a “bunching” of numerous senior partners approaching retirement at the same time. Succession and transition planning is critical to the continued success of these firms. Getting partners to openly discuss their retirement plans is a major challenge that managing partners are facing.
Getting and retaining top talent. Acquiring and retaining top lawyer and staff talent is becoming more difficult and more costly for law firms. Even though there is an oversupply of lawyers on the market there is still a shortage of experienced lawyer talent in many practice areas. Lawyer search timelines and recruiting cost are on the rise.

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

Mar 22, 2016

Law Firm Partner Retirement Buyouts – How to Keep from Breaking the Bank

Question:

Our firm is a 14 lawyer firm in the Boston suburbs with 4 founding partners and 10 associates. Two of the partners are in their 50s and two are in their 60s. Several years ago we adopted a retirement buyout plan for the founding partners where each partner upon retirement is paid the balance of his cash-based capital account and a multiple of one times an average of his last three years earnings paid out over a five year period. I am concerned that when partners begin to retire the retirement payouts will place undue stress on operating funds and the firm's ability to continue to be successful. I would appreciate your thoughts.

Response:

If nothing else you should consider a cap that places a limit on how much can be paid out in a single year where aggregate payments to all retired partners in any one year are capped at 10 percent or less of distributable net income. Any obligations that cannot be paid in one year as a result of the cap would be rolled forward to the next year also subject to the same cap.

Unfunded plans can present problems down the road if they become unaffordable for the next generation of attorneys as they have to be funded out of future earnings. You should look into ways to fund your partner's retirements as much as possible through 401k and other retirements plans, life insurance policies (on each of the partners that can fund the buyout in the event of death or where paid up cash values can be used upon retirement to apply toward buyouts, and sinking funds (Rabbi Trusts, etc.) where funds have been set aside out of current earnings.

We all have been witnessing what is happening with governmental unfunded pension programs. The same thing is happening with law firms that have unfunded retirement programs as baby boomers are retiring in record numbers.

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