Compensating Transition

Sometimes it seems like you can't win. Law firms spent the better part of two decades effectively extricating themselves from unaffordable, life-threatening unfunded retirement packages during a period of constantly growing business, only to find they have few if any financial mechanisms available to incent retiring partners to actually transition their clients to the next generation, prior to retirement. Not that most firms were particularly good at linking unfunded deferred compensation to transition, but in theory, at least, you could. But now, at a time when it appears a permanent buyers' market has set in and the market is growing slowly if at all, retaining clients through partner transition is ever more critical. And most firms are woefully short of actual tools to encourage such transition.

Pay Lip Service to Transition Today '

A limited number of “institutionalized” law firms ' generally among the highest regarded and well-established firms ' have effectively grown up with client transition principles as part of their cultural DNA. And for these firms the clients are as often “clients of the firm” as clients of partner X. But for the vast majority of commercial firms, including virtually all mid-market firms, clients are far more attached to the individual than to the firm. At least most of them are. And while most of these firms have a stated objective of ensuring a smooth transition of the clients of retiring partners to other partners of the firm, that stated objective unfortunately tends to be the beginning and the end of the firm's involvement in the process. As a result, while successful client transitions take place, they are almost always because the individual partner wanted them to occur and behaved in a manner that would encourage the transition, irrespective of the efforts of the firm itself. Worse yet, in many cases the actual policies of the firm work against client transition rather than in its favor.

The core challenge on this front is the compensation system. Most firms drive the bulk of their compensation from two key productivity factors, namely “origination” (a.k.a. some measure of the partner's contribution to the client base) and “working attorney fees” ' the amount of cash produced from the partner's own efforts. While many other factors are and should be considered, these two are the dominant factors and the ones that most affect behavior. This may be fine for most of the partner's career, but has an obvious impact on the motivational structure of the partner approaching retirement.

To ask the obvious: How can a firm expect a partner to transition clients if it continues to pay him or her based on maintaining control over those clients and personally doing as much work as possible? Interestingly, these factors are less determinative with truly major rainmakers. Those lawyers cannot function without integrating significant and high-performing partners into their client relationships. But for the vast majority of valuable law firm partners ' e.g., those with $1-3 million of “portable business” ' this motivational structure is determinative and ironclad. As a result, the tendency is to get partners who will only attempt client transition when: 1) they have secured their own permanent financial independence; and 2) they are absolutely sure they want to retire within a couple of years. Not surprisingly, many never quite get around to it.

To Change the Outcome, Change the Dynamic

We are not recommending a return to unfunded retirement plans and all the dangers they presented, although there are some clear advantages to having the ability to link future compensation to successful client transition. (Few of the old unfunded approaches actually did that, although we do recommend that those few firms that still retain such approaches at least firmly link those plans to client transition.) There may come a time in the future where different ownership structures, notably public ownership concepts, may provide stronger tools, but for now we need to work within the current economic models. We believe a financial mechanism combined with a different set of expectations for partners approaching retirement could increase the probability of success.

The first step is to assure that the process begins reasonably in advance of the expected retirement date of the partner. This has become increasingly problematic as firms back away from mandatory retirements and many partners have chosen to extend their working careers beyond “normal” retirement ages due to recent investment market conditions. In addition, the process needs to get started before the partner's client contacts retire, in effect allowing the firm and the client to transition together. To this end, we recommend that law firms begin to think differently about anyone within a limited number of years of normal retirement age, irrespective of whether that partner is likely to retire at age 65 or not. Transition takes years, not days, and by age 62 all partners should be working with their clients with relationship transition as a primary goal. But how can the firm encourage such an approach? Meeting with the partners starting at a specific age, requiring “plans” and the like are all elements of a successful transition approach, but in the end you also need to realign financial incentives to create a supporting structure for your efforts.

How can this be done? The specifics will vary from firm to firm, and sometimes from partner to partner, but several general concepts have a role:

• For partners with a reasonable client base, billable hours and personal revenue generation need to take a back seat to client transition. Formally dropping or lowering billable hours expectations without dropping compensation tiers is a good initial starting point. Occasionally you even need to go so far as to formally limit the number of hours a partner can bill before he or she incurs a negative impact to compensation.
• Next, emphasize firm client transition rather than revenue generation. $1 million of regularly occurring, completely transitioned work is worth far more than, say, $3 million of one time, ephemeral work, all other things being equal.
• Create confidence that the partner will not be “working himself out of a job” ' a hugely sensitive issue for many, even if rarely discussed directly. While the firm cannot realistically hold on to people long after they stop working, it can create assurances that there will be a place for them for a reasonable period after successfully transitioning clients (with meaningful things to do.) For example, perhaps the firm could commit to allowing a partner to continue till 68 with a reasonable compensation package, in return for successfully transitioning his practice between ages 62 and 65?
• Create alternative value propositions for senior partners. For someone who has had a successful career of developing clients, perhaps their post-65 career could be focused on developing (and working with) new clients on the condition that they are immediately “transitioned” to younger partners to manage and care for, with a compensation package that looks the same as it would if they maintained control? Or even better, pay them more for turning over the clients than they would earn for “controlling” them. The key here, though, is real transition, not simply listing them on someone else's client sheet.

Although these concepts are somewhat general, they can be applied in most firms with some modification of the underlying partner compensation structures. The keys to success include: 1) recognizing the needs and desires of the partners involved and working with them to assure that their needs are met rather than just the firm's; 2) creating a sense of personal safety that allows the partner to actually transition their clients without losing their personal security blanket; and 3) creating alternative opportunities for the partner to make valuable contributions in the latter stages of their career, without the need to hold tight to long-term relationships. If these concepts are incorporated with active leadership engagement in the process, the probabilities of success increase dramatically.

Conclusion

Client transition is never easy, but the way most firms approach the subject reduces, rather than increases, the likelihood of success. Given that new work and new clients are extraordinarily difficult to obtain in the current environment, paying better attention to retiring partner transition can be one of the most important things a firm can do to ensure its long term client base.

Joseph B. Altonji is a Founding Principal of LawVision Group LLC, a Strategy, Management, Leadership and Business Development boutique for the legal profession, and has been working with law firms for almost three decades. He can be reached at 312-466-5648 or at [email protected].

Sometimes it seems like you can't win. Law firms spent the better part of two decades effectively extricating themselves from unaffordable, life-threatening unfunded retirement packages during a period of constantly growing business, only to find they have few if any financial mechanisms available to incent retiring partners to actually transition their clients to the next generation, prior to retirement. Not that most firms were particularly good at linking unfunded deferred compensation to transition, but in theory, at least, you could. But now, at a time when it appears a permanent buyers' market has set in and the market is growing slowly if at all, retaining clients through partner transition is ever more critical. And most firms are woefully short of actual tools to encourage such transition.

Pay Lip Service to Transition Today '

A limited number of “institutionalized” law firms ' generally among the highest regarded and well-established firms ' have effectively grown up with client transition principles as part of their cultural DNA. And for these firms the clients are as often “clients of the firm” as clients of partner X. But for the vast majority of commercial firms, including virtually all mid-market firms, clients are far more attached to the individual than to the firm. At least most of them are. And while most of these firms have a stated objective of ensuring a smooth transition of the clients of retiring partners to other partners of the firm, that stated objective unfortunately tends to be the beginning and the end of the firm's involvement in the process. As a result, while successful client transitions take place, they are almost always because the individual partner wanted them to occur and behaved in a manner that would encourage the transition, irrespective of the efforts of the firm itself. Worse yet, in many cases the actual policies of the firm work against client transition rather than in its favor.

The core challenge on this front is the compensation system. Most firms drive the bulk of their compensation from two key productivity factors, namely “origination” (a.k.a. some measure of the partner's contribution to the client base) and “working attorney fees” ' the amount of cash produced from the partner's own efforts. While many other factors are and should be considered, these two are the dominant factors and the ones that most affect behavior. This may be fine for most of the partner's career, but has an obvious impact on the motivational structure of the partner approaching retirement.

To ask the obvious: How can a firm expect a partner to transition clients if it continues to pay him or her based on maintaining control over those clients and personally doing as much work as possible? Interestingly, these factors are less determinative with truly major rainmakers. Those lawyers cannot function without integrating significant and high-performing partners into their client relationships. But for the vast majority of valuable law firm partners ' e.g., those with $1-3 million of “portable business” ' this motivational structure is determinative and ironclad. As a result, the tendency is to get partners who will only attempt client transition when: 1) they have secured their own permanent financial independence; and 2) they are absolutely sure they want to retire within a couple of years. Not surprisingly, many never quite get around to it.

To Change the Outcome, Change the Dynamic

We are not recommending a return to unfunded retirement plans and all the dangers they presented, although there are some clear advantages to having the ability to link future compensation to successful client transition. (Few of the old unfunded approaches actually did that, although we do recommend that those few firms that still retain such approaches at least firmly link those plans to client transition.) There may come a time in the future where different ownership structures, notably public ownership concepts, may provide stronger tools, but for now we need to work within the current economic models. We believe a financial mechanism combined with a different set of expectations for partners approaching retirement could increase the probability of success.

The first step is to assure that the process begins reasonably in advance of the expected retirement date of the partner. This has become increasingly problematic as firms back away from mandatory retirements and many partners have chosen to extend their working careers beyond “normal” retirement ages due to recent investment market conditions. In addition, the process needs to get started before the partner's client contacts retire, in effect allowing the firm and the client to transition together. To this end, we recommend that law firms begin to think differently about anyone within a limited number of years of normal retirement age, irrespective of whether that partner is likely to retire at age 65 or not. Transition takes years, not days, and by age 62 all partners should be working with their clients with relationship transition as a primary goal. But how can the firm encourage such an approach? Meeting with the partners starting at a specific age, requiring “plans” and the like are all elements of a successful transition approach, but in the end you also need to realign financial incentives to create a supporting structure for your efforts.

How can this be done? The specifics will vary from firm to firm, and sometimes from partner to partner, but several general concepts have a role:

• For partners with a reasonable client base, billable hours and personal revenue generation need to take a back seat to client transition. Formally dropping or lowering billable hours expectations without dropping compensation tiers is a good initial starting point. Occasionally you even need to go so far as to formally limit the number of hours a partner can bill before he or she incurs a negative impact to compensation.
• Next, emphasize firm client transition rather than revenue generation. $1 million of regularly occurring, completely transitioned work is worth far more than, say, $3 million of one time, ephemeral work, all other things being equal.
• Create confidence that the partner will not be “working himself out of a job” ' a hugely sensitive issue for many, even if rarely discussed directly. While the firm cannot realistically hold on to people long after they stop working, it can create assurances that there will be a place for them for a reasonable period after successfully transitioning clients (with meaningful things to do.) For example, perhaps the firm could commit to allowing a partner to continue till 68 with a reasonable compensation package, in return for successfully transitioning his practice between ages 62 and 65?
• Create alternative value propositions for senior partners. For someone who has had a successful career of developing clients, perhaps their post-65 career could be focused on developing (and working with) new clients on the condition that they are immediately “transitioned” to younger partners to manage and care for, with a compensation package that looks the same as it would if they maintained control? Or even better, pay them more for turning over the clients than they would earn for “controlling” them. The key here, though, is real transition, not simply listing them on someone else's client sheet.

Although these concepts are somewhat general, they can be applied in most firms with some modification of the underlying partner compensation structures. The keys to success include: 1) recognizing the needs and desires of the partners involved and working with them to assure that their needs are met rather than just the firm's; 2) creating a sense of personal safety that allows the partner to actually transition their clients without losing their personal security blanket; and 3) creating alternative opportunities for the partner to make valuable contributions in the latter stages of their career, without the need to hold tight to long-term relationships. If these concepts are incorporated with active leadership engagement in the process, the probabilities of success increase dramatically.

Conclusion

Client transition is never easy, but the way most firms approach the subject reduces, rather than increases, the likelihood of success. Given that new work and new clients are extraordinarily difficult to obtain in the current environment, paying better attention to retiring partner transition can be one of the most important things a firm can do to ensure its long term client base.

Joseph B. Altonji is a Founding Principal of LawVision Group LLC, a Strategy, Management, Leadership and Business Development boutique for the legal profession, and has been working with law firms for almost three decades. He can be reached at 312-466-5648 or at [email protected].