It has been called the "pig in the python" – a graphic image of Canada's Baby Boom generation that has moved through time and is now nearing retirement. Law firms that manage this outsized demographic wave well can position themselves to maintain their revenue streams, transition knowledge and relationships and preserve partner equity. Firms that do not take action may lose revenue and equity when partners leave for other firms or retire, causing the partner's client relationships to be lost to the firm.
Rhonda Klosler, Chief Operating Officer at Collins Barrow Toronto, notes, "A good succession plan is also valuable in attracting and retaining top talent. Good people will come and grow with the firm if they understand the firm has a commitment to transferring ownership to the next generation."
With years of experience advising law firms, Collins Barrow Toronto conducted a recent survey that reveals succession as a key law firm priority. The survey indicates that 79 per cent of the equity partners from the law firms surveyed range from age 50 to 65. Canadian Bar Association figures paint a similar picture, showing that a significant number of actively practicing lawyers are at an age where they are retiring or contemplating phasing down. The depth of change will be most prevalent in law firms where baby boomers have been instrumental in building, growing, managing and leading.
Perhaps most critical for law firms are estimates that these older partners control at least a quarter of total firm revenue. Without steps to transfer those client relationships to the next generation, a firm's future may be compromised. Despite the inevitable move toward retirement for this critical class of senior lawyers, many firms do not have a formal succession planning process in place. Without systematic planned transitions, the firm will lose revenue, valuable relationships, and a wave of skills and knowledge when the individual leaves or retires.
Hasan Khorasanee, a senior manager at CIBC's Professional Services Group, has noted, "Succession is a key issue facing Canadian law firms. The business development, legal experience and leadership gaps are issues our clients tell us they are facing and which all firms should be actively planning for."
What gets in the way of succession planning at law firms?
One of the key reasons law firms struggle with succession issues is structural: the client relationships are seen as being held by the firm's individual partners, rather than the firm as a whole. While this helps reassure clients that their main partner contact will be well informed of the issues, it carries significant downsides from the firm's perspective.
If the partner moves to another firm or retires, it may be difficult for the firm to retain the stream of work from that client. In addition, the partner has no great incentive to support a smooth succession in the run-up towards retirement. The partner's retirement payout, if one exists, is generally based on their last few years of billings, so there is no incentive to pass billable hours on to a successor partner. As well, partners may want to protect their importance within the firm by staying central to the client relationship.
There are conflicting views among firms regarding the inclusion of mandatory retirement age clauses in partnership agreements. Critics note that the absence of a mandatory retirement age often complicates the succession planning process.
Often, managing partners themselves do not consider succession planning to be a priority, creating yet another barrier to implementing effective processes. But what is pushing the succession planning issue to greater prominence is the pig-in-the-python situation – the number of partners expected to head for the exits in the next few years.
Building a culture that supports succession planning
Succession planning is not an easy agenda discussion item, but it is critical that leadership address it. It is critical to a firm's future sustainability, especially as it relates to knowledge and relationship transfer to incoming leaders. Each law firm's situation is different, but here are some of the steps we have found effective in encouraging smoother succession planning, so that the firm can continue thriving as partners retire.
Quantify the risk to see what is at stake
Many firms do not have a clear idea of their risks and exposure to potential loss from the looming retirement wave. Determining the amount of the firm's revenue that is tied to each partner and estimating how much of this revenue would be lost upon the partner's departure will give an idea of the issues at stake. Bringing in external professional counsel, including advisors who have worked with a wide range of law firms and understand how to place valuations on a revenue stream, can add transparency and accuracy to this process.
Review partnership agreements and compensation models
Firms should review their partnership agreements and compensation models to ensure they do not include clauses that would act as disincentives to a senior partner from active succession planning. Partner compensation in the years immediately prior to retirement, as well as the pension payout – if one exists – should be tied to a successful transition of client relationships.
The managing partner must champion succession planning
We have found that in most law firms, few initiatives happen – particularly major cultural and structural changes – without the active support of the managing partner. This would include a major change, such as one that would reward and encourage equity partners to support succession of client relationships.
Create a culture and process around succession planning
With so many barriers stacked against effective succession planning, it may be necessary to state clearly what behavioural changes must be made to support good succession planning. This can include setting out standards on how partners are expected to involve junior professionals in meetings with clients, in the management of files, and responsibility for seeking new business from existing clients. The succession process should be accompanied by milestones and timelines that must be met.
Create incentives for partners to support succession planning
Once a clear succession planning process is established, there should be financial rewards for partners who meet recognized milestones. It is important that junior partners buy into the plan and that senior partners help junior partners grow the practice.
Create a culture that develops the next generation of partners
It is great to have senior partners on board with a transition plan, but it is also important to ensure the next generation of partners are prepared to take on that responsibility. Creating an environment that is focused on developing the leadership skills of the firm's top talent is key. Formal mentoring and coaching programs and robust learning and development curricula focused on soft skills will serve firms well.
There is no easy fix for the succession planning issues facing law firms. Attention to the issues and a businesslike approach can go a long way, but do not underestimate the time it takes to properly transition relationships. The process does not happen overnight and it requires real effort and commitment. In the same way law firms' clients rely on their legal counsel to help them with issues beyond their expertise, law firms can rely on expert succession planning advice from advisors who are familiar with the issues and have the necessary skills to help.
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