The problems at some firms are easy to spot: Senior partners don’t want to retire, transition clients or give up compensation. There are no formal succession plans in place. How is your firm planning to deal with its future?

These are difficult things to discuss, acknowledges John W. Olmstead, so he set out to make the process easier by writing a “The Lawyer’s Guide to Succession Planning: A Project Management Approach for Successful Law Firm Transitions and Exits.”

“An effective succession and transition strategy involves coming to terms with aging and retirement, developing a timeline and identifying transition candidates either internally or externally,” he writes.

The failure to plan for succession can have major repercussions, Olmstead says, including a loss of clients, loss of senior talent and leadership, instability, defections and firm breakups, among others.

YourABA got in touch with Olmstead to find out how to plan succession right.

We’re into a wave of Baby Boomers retirements that will be going on for years. What advice do you have for firms that do not have a succession strategy in place?

I believe that a succession strategy and plan should be part of every strategic plan and partnership, operating or shareholder agreement. However, many firms don’t have these plans and agreements in place. For many firms, the best time would have been years ago to have put these plans and documents in place. The next best time is now. The urgency will depend on firm size and the age of the owner or partners. If the owner in a sole-owner firm or any of the partners in a multi-owner firm are in their 50s it is imperative that the firm get started. Clients and referral source relationships as well as management responsibilities will have to be transitioned to others in the firm or outside the firm if the firm pursues the sale of the practice or merger. This takes time. Specific strategies will depend upon firm size, client type, management role that specific attorneys have in the firm and the ages of the owner or partners. Sole practitioners and sole owners will have the most moving parts and face the greatest challenges.

You write that the most important ingredient in succession planning is to “start early.” What defines “early” and is there a time when it’s too late?

It depends upon firm size, size and type of book of business that an owner/partner is managing, firm management responsibilities that an owner/partner has and whether the owner/partner has groomed others in the firm in each of these areas.  Solo practitioners have the greatest challenge since they have no associates or anyone in place to transition the practice to. Therefore, the practitioner must hire and groom an associate that could buy the firm or become a partner and eventually buy out the owner’s interest, sell the firm to another firm or merge with another firm. Other options would be to become Of Counsel with another firm or simply close down the practice. This takes time. Larger firms have other partners to whom clients and management responsibilities can be transitioned. If a partner’s clients are individual single-matter clients and the partner has no management responsibilities, the time for an effective transition will be shorter than it will be for partners managing numerous large corporate institutional clients with multiple contacts in the organization. I like to see a succession plan for an owner/partner begin five years prior to the retirement/exit date. For some, less than three years is too late – for others, one year.

How should firms deal with partners who don’t want to retire?

Many larger firms have five-year phasedown retirements for this reason and require equity owners to properly transition clients and management responsibilities. Some firms tie retirement pay or compensation to completing a successful transition program.

A plan might include the following:  

• The person in question becomes a Transition Partner as of the commencement of the phasedown and begins client and management transition at that time and ending on his/her retirement date, at which time he/she retires and withdraws from the partnership. Compensation of the Transitioning Partner is proportionately reduced by the amount of reduction in the Transitioning Partner’s present work schedule.
• The Transitioning Partner is responsible for the collection of his/her accounts receivable and billing of his/her Work-in-Process throughout the entire transition phase unless delegated to his/her Co-Responsible Partners.
• The Transitioning Partner’s purchase price (payout) is to be calculated immediately prior to the beginning of the transition period and in the same time and in the same manner in accordance with the Firm Partnership Agreement, and will be paid only upon the completion of the transition period.

Some firms have mandatory retirement programs and some firms are providing economic incentives for the transitioning partner to hand off work to other partners in the firm.

The internal succession/transition plan provides a mechanism for the firm to outline a general timeline for a senior partner’s retirement, a process to effect an orderly transition of clients and management responsibilities and a vehicle for starting initial discussions.

You recommend that lawyers think about their retirement as a case and map out a timeline, starting with the retirement date in mind and working forward. How does this help?

What is written down, what is measured, what is calendared is what gets done. Effective succession project management requires discipline and accountability. A project plan is a document with milestone and due dates, start dates, tasks and action items, required resources and names of those responsible for different tasks and action items. The key is to have a continuous flow of planned activities that generates momentum and have assigned responsibilities and accountabilities.  Unless attorneys approach their retirement like a case or project and develop a succession/transition/exit plan with calendared timelines, the project will experience fits and starts, timeline drift and the needed momentum will not materialize.

One option for succession is to merge with another firm, but you write that one-third to one-half of all mergers fail to meet expectations due to cultural misalignment. How can this be avoided? 

Law firms exploring possible merger partners often move too quickly to financials and the economics of the merger. I try to get law firms to hold off on providing financial information until after three get-acquainted meetings. I like to see the initial focus on the people, culture and general fit. Poor fit causes more merger failures than practice economics. 

You write that succession/transition plans have to be flexible. Why is that?

Situations change, and different partners have different goals, timelines and objectives regarding retirement. One size simply does not fit all. A sole owner might start down the road of offering equity to associate attorneys in the firm and later find out that none of the associates are interested in equity and the owner then has to explore merger or practice sale options.