We have been hearing for years that this would be the decade that industries across the country would begin to see and feel the effects of the retirement of the baby boomer generation. In fact, according to a recent report that appeared in American Law Magazine, 16% of baby boomers will retire in the next five years, and another 38% will retire in the next decade. These baby boomers, individuals born post World War II from 1946-1964, makeup nearly 75 million Americans, which to put it into perspective, is nearly 20% of the U.S. population. No one feels this noticeably large shift more than law firms. This age group represents nearly one-half of the partners listed in the most recent Am Law 200 report. Ready or not, the exodus is upon us.
Law firms that do not have a transition plan in place for retiring baby boomers must address an array of issues, including:
- Talent Pool Reduction. Many firms ceased hiring efforts in the economic downturn of 2008, which created a large gap between the age groups of firm professionals and overall workforce
- Client Transition. According to an Altman Weil Pensa article, partners 60 and over are responsible for at least one-quarter of law firm revenue.
- Client Relationships. Clients become too attached to one partner and feel uncomfortable with transitioning, which leads to trust issues, and ultimately client loss.
- Pay Offs. Although most law firms did away with expensive, unfunded buyouts, at the very least, they have to pay back the partner’s cash basis capital account. In order to make payments, the firm will have to use current earnings as most have never put money aside for this eventuality.
- Capital. Capital becomes more challenging as more is going out to retiring partners than is coming in from newly promoted partners.
- Alienation of Younger Partners. By not addressing the professional development and monetary needs of younger future partners, you could face a mutiny.
- Letting Go. In many cases, partners truly believe they want to or need to work as long as possible due to personal circumstances, such as the economic downturn of 2008, their family or for the love of the profession.
So what is to be done? In an industry where growth is challenging and the changing lateral market and realization rates are down, an effective and well-executed transition plan is the difference between a law firm thriving or barely surviving. Based on the factors above, retiring partners may not make the transition easy. Here are a few ideas to help your firm start or strengthen your transition plan.
- Economic Effect. Raising the retirement age, capping and lengthening the time of payouts to retired partners, changing retirement formulas, or using defined contribution plans may be a quick fix.
- Develop Your Bench. Where else will you draw the talent to be the next firm partners? Investing in a professional development plan that rewards success and encourages a strong work ethic and culture will pave the way for young, ambitious new attorneys to move up the ranks and effectively handle the transition.
- Develop Your Plan. Identify those partners nearing the retirement phase (approximately 3-5 years before their intended retirement date) and begin meeting individually to review the client block, discuss phasing out productivity and compensation. Above all else, make these meetings flexible and a two-way conversation.
- Be Sensitive. This career change should not be taken lightly, and often the ego of the partner may get in the way of a smooth transition. Remember to consider the proper title for your retiring partner. Ask the partner what he or she wants to do, be upfront with what the firms expect and have an open discussion about hopes and fears.
- Plan Transition Meetings. Schedule regular meetings with the retiring partner, new partner and managing partner to monitor the progress of the transition. Regular follow-up is key.
- Stay Focused, Start Small – Develop an individual plan for each client to be transitioned. Recognize that some clients are more important than others. Set realistic expectations. Be sure to start with a small number of clients in order to have a better chance to succeed.
- Show Initiative. Put the new partner in a position to prove his or her legal skills to the clients and to develop the personal relationship needed to retain the client.
- Introductions. Consider introducing two partners to a potential new client or an existing client. This makes a transition easier.
- Incentivize. Motivating retiring and new partners through the compensation system is a great way to encourage the retiring partner to transition their client and the new partner to build the client relationship and ultimately take over. I have seen scenarios where law firms offer the retiring partner a small percentage of the client’s receipts on a declining scale each year once the partner has retired (for example, 10% the first year, 5% the second year and 3% the final year).
Hopefully, by integrating the above ideas and making succession planning and strategic planning an everyday part of the firm management, you will be in a much better position to maintain your clients and ensure the longevity of your firm.