Asked and Answered

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

Q. I am an equity partner in a 36-attorney firm in Miami. We have seven equity partners, eight non-equity partners, and 21 associates. Our practice is limited to civil litigation defense and our clients are institutional clients consisting of business firms, governmental agencies, and insurance companies. The ages of our equity-partners are: 64 62, 60, 58, 54, 48, and 44. The firm does not have a succession plan for the senior partners and has not discussed the matter. I am not sure what the partnership agreement provides. I am concerned about our future if we don’t start addressing this. I would appreciate your thoughts.

A. With three members already in their 60s, you are going to have some retirement bunching issues before long and I agree that you should start planning and deal with this sooner than later.

The partners as a group need to start talking and the senior partners should begin sharing their ideas and plans concerning their retirement goals. There should be an ongoing dialog with your senior partners. Review the firm’s partnership/operating/shareholder agreement. After reviewing these documents, determine how the firm’s policy regarding retirement, if there is one, will affect various partner’s retirement timelines, compensation, and payout. Does the policy require mandatory retirement at a certain age? Ascertain whether the policy provides for phase-down. How does the phase-down handle management and client transition? Is there an “Of Counsel” provision after retirement? The firm needs to reach an agreement with its senior partners nearing retirement concerning their retirement timelines, client and management transition, and retirement payout or return on invested capital.

The initial challenge in a larger firm is to determine who the successor or successors will be to transition clients and management responsibilities. This may be no easy task especially if the firm is in first generation and the retiring partner is one of the founders.

Client Transition

In firms your size, clients are more likely to be large sophisticated clients, possibly Fortune 500 companies, which refer many matters to the firm during the course of a year. Often such clients may be both a blessing and a curse for the firm. A blessing in that their business provides the firm with huge legal fees during the course of a year. A curse in that their business represents a large percent of the firm’s annual fee collections and a significant business risk if the firm were to lose the client. An effective client transition is critical, takes time, and must be well planned.

Successful client transition – moving clients from one generation to the next – is a major challenge for larger firms. Shifting clients is not an individual responsibility but a firm responsibility. To effectively transition clients the individual lawyer, with clients, must work together with the firm to insure the clients receive quality legal services throughout the transition process. Both the individual lawyer and the firm must be committed to keeping clients in the firm when the senior attorneys retire. Potential obstacles include:

• The firm’s complacency regarding the relationship between the responsible attorney and the client;
• Clients who are uncomfortable with other lawyers in the firm doing their legal work;
• Other lawyers in the firm not being familiar with the client’s business;
• Senior attorneys who do not include younger attorneys in meetings with clients; and
• The point lawyer not identifying the appropriate lawyer successor to the client.

Management Transition

In larger firms, partners may have management responsibilities as well as client responsibilities. A retiring partner may be a managing partner, executive committee chair or member, or serve as a chair or member on other firm committees. Retiring partners will have to transition these responsibilities to other partners in the firm.

Transitioning client relationships and management responsibilities effectively can and where possible should take a number of years – preferably five years – typically not less than three years. For this reason, many firms use five-year phasedown programs for retiring partners. These plans provide detailed timelines and action steps for transitioning client relationships and management responsibilities.

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John W. Olmstead, MBA, Ph.D, CMC, (www.olmsteadassoc.com) is a past chair and member of the ISBA Standing Committee on Law Office Management and Economics and author of The Lawyers Guide to Succession Planning published by the ABA. For more information on law office management please direct questions to the ISBA listserver, which John and other committee members review, or view archived copies of The Bottom Line Newsletters. Contact John at jolmstead@olmsteadassoc.com.