The Changing Face of Succession Planning
Stephen P. Gallagher
In 2006, Oregon Attorney Assistance Program (OAAP) was one of the first, Bar-related organizations to conduct a retirement survey of its members. In June of this year, they invited 6000 of their members 50 years and older to fill out a similar survey. Their findings should serve as a canary in the coal mines for the profession. In the current survey, bar members 60 – 69 represented over half (53%) of survey participants. Combine this with the 50% of respondents who are planning on retiring from practice or their primary career in the next five years, we are clearly looking at the perfect storm. The anticipated transition from practice of the baby-boomers, and the experience and expertise drain that will result from their exodus, is clearly underway.
With 10,000 Americans turning 65 years of age every day, law firms throughout the country are scrambling to figure out how to deal with their own aging workforce.
Aging is no longer just about people 65 and older; people of all generations are increasingly embracing the idea of living longer, living better, and maintaining a balanced, vital lifestyle. In many ways, our aging population is changing how we work and live—permanently altering the course of our lives.
Aging is a personal matter rarely discussed outside immediate family. In a law firm setting, younger partners are usually the first to bring up succession planning as an area of concern. With the alarming data coming out of the Oregon Retirement study, succession planning at every level of the organization has to be taken more seriously. The problems associated with our aging population are too critical to be ignored. These are also not going to get any easier if left unattended.
The traditional meaning of “retirement” has always been a single event—withdrawal from the workforce into leisure, relaxation, and a slide to the end of life. Lawyers have only had two options available to them when it comes to retirement: continue working full time or close the door and walk away. Today, law firms are in an excellent position to change this by designing new support networks, creating new lines of services, public policies, and personal behaviors to better serve both the aging workforce as well as this rapidly changing legal marketplace.
The need for more flexible and accommodating work options affects not only those who are approaching traditional retirement, but younger women and men who don’t fit inside the traditional partnership model. Today, according to the Oregon Retirement study almost two-thirds of the 2016 participants reported that they expected to continue to be working full- or part-time at age 65.
I’d like to share a parable or tale about a first-generation law firm to try to illustrate how a lack of succession planning can pull a firm apart. I then would like to recommend steps this firm can take to address their increasingly complex problems related to their aging workforce. Our first challenge will be to look for a shared vision, a “common ground”, where partners of all ages are able to get past whatever has been keeping them from making decisions based on what is good for the firm itself.
Our goal is to convince all partners of the firm to take ownership of the ideas that emerge, because when people have had input throughout a change process and believe they have influenced the direction things are going in, it is much more likely that the ideas generated will be implemented and maintained. I contacting partners of several legacy law firms that have had successful transition programs in place for generations. I will apply what I learned to the story of The First-Generation Law Firm that follows.
The First-Generation Law Firm – A Tale
In the spring of 1990, four young lawyers met one snowy evening at a local watering hole in Upstate New York to share their frustrations in working for one of the city’s largest law firms. Each had been working the equivalent of two full-time jobs and they all sensed their personal lives were slipping away. It did not take them long to decide to join forces for the purpose of branching out on their own. These young entrepreneurs turned their backs on quite lucrative careers and took a leap of faith on each other to navigate through those early difficult years. New family bonds were formed, and a law firm emerged.
For these young upstarts, this was a time as rich in opportunities for advancement as for the potential of disaster. They prided themselves on listening to each other as a way of renewing trust in shaping each other’s dreams. After all, wasn’t that why these young “Turks” got together in the first place? Today, the firm has thirty lawyers and fifty-five support staff. You may know similar firms in your own professional travels.
Our four life-long friends started the firm with promises to share equally based on individual contributions. Succession plans and retirement concerns were rarely discussed, and they never reached agreement on any funding sources for retirement. After all, the practice was expected to continue its growth, so they thought money would always be there when seniors started retiring.
As new partners joined the firm, lines of communication remained open, however, succession planning never seemed to make it onto the partners’ agenda. They did remain steadfast in telling all new partners that, “You enter naked and you leave naked” meaning, you don’t pay anything to become a partner and you don’t get anything when you leave the firm. Partners began referring to their lack-of-a-plan as their “Dying-at-your-Desk” strategy. I don’t think anyone realized the potential long-term impact this strategy would have on the firm.
The founding fathers are now in their mid to late-sixties with one having celebrated his seventy-second birthday. They have always prided themselves on training all new hires, and as such, they felt they had built a solid team over the years. What they are finding is that many of these new internet-savvy young partners have dramatically different interests, life-goals and even loyalties.
They are beginning to realize that their own generosity may end-up backfiring on them. They are no longer comfortable hiding behind what they had done in the past. One of the more junior partners announced at a partners’ meeting that she had just read that three million baby-boomers are expected to live to be 100 years old, and she was convinced that at least three of the four founding partners are working on reaching that milestone.
Rather than allowing the founding partners to “Die-at-their-Desks,” a better way for this firm to pursue succession planning would be to take immediate steps to address at least some of the problem caused by the glut of senior partners staying too long at the top of the firm’s inverted pyramid of ownership. At the same time, the firm can begin to put policies in place to avoid this same situation in the future.
Building On-Ramps and the Off-Ramps
With today’s aging partner mix, firms will need to find better ways to support and even encourage partners to take earlier steps in planning their own transition away from full-time practice into a new stage of living. For many lawyers, work can be an enriching experience that may not need to end at an arbitrary age of 65 or even 70. For others, they find themselves caring for infants and elderly parents simultaneously, sandwiched between generations and playing multiple roles, so, retirement in the traditional sense may not even be an option for them, so all they know to do is continue working. I can assure you that this topic never came up during that first planning session on the snowy evening in Upstate New York.
I’d like to share several approaches drawn from the experiences of legacy law firms. I hope these may help other law firms in dealing with their aging workforce.
1. Each firm I met with in preparation for this article used the year a partner turned 65 as the year the individual turned their ownership interests back to the firm, the family. This was not considered mandatory retirement, but rather the year the firm became responsible for each partner’s continuing employment contract. Several of the firms started earlier with a written succession plan prepared by partners during their 62nd or 63rd year. This gave partners a two to three-year window to transition clients while assuming new roles and responsibilities in the firm. This time could also be used to help individuals prepare for full retirement.
From our story, our founding partners are already 65+, so this new rule would immediately apply to them. If the founding partners had agreements in place among themselves, a committee of the partners should be formed to reach a compromise to bring this to resolution. With the disproportionate number of senior lawyers in many firms, it is important to take actions now, and to put into place rules that keep this from happening again. Using a Compensation Committee or Retirement Committee, the firm would assume responsibility for managing yearly contracts for all partners who are no longer equity partners. Our founding partners hand-picked their succession attorneys, so their best interests should be served along with the interests of the firm.
2. Find a way to adjust compensation formulas to better serve the needs of the entire law firm. The promises made by the founding fathers to each other during their early years, may need to be re-balanced in light the cost of maintaining a law practice particularly in terms of attracting and retaining key talent. Solving the problem of school debt-loans for young lawyers needs to be part of the re-balancing strategy. Firms that have funded insured coverage for retirement benefits are in a much better position of meeting obligations to aging partners. We cannot go back in time, can we.
3. Another important strategy to consider is the use of some form of mandatory savings account for all partners. In addition to the standard 401-(k) investment plan, the firm I spoke with withheld between 4% and 10% from each partners’ draw in order to build up a retirement fund. This clashes with our founding father’s succession strategy of insisting that partners, “enter naked and leave naked.” These legacy firms (or families) assumed responsibility for making sure all partners were financially prepared for retirement, at whatever age they chose to exercise that option.
4. I have found that firms that genuinely care for all their personnel are better prepared to help their pre-retirees through the transition period. These firms recognize that once a senior lawyer begins winding down a long career in the law, he or she may need support in terms of flexible roles and work styles suited to one’s experience and inclination, and reduced hours, flexible schedules, and more control over one’s time—before and after the point of official “retirement.” Going to more flexible retirement policies as well as more flexible work schedules for all lawyers will demonstrate a fundamental shift in the way lawyers of all ages live their lives.
5. Provide Short and Long-Term Disability Insurance for all partners. Explore how an Executive Bonus Plan funded with whole life insurance might be used to provide tax-advantaged supplemental retirement income for all partners. Anything the firm can do to help insure that partners will receive 70 – 80% of current draw upon retirement will help senior partners transition to a new life in retirement
Finally, to return to the Oregon Attorney Assistance Program survey one last time, one of their most striking changes between the 2006 survey and the 2016 survey was the significant increase in participants working as sole practitioners. Mike Long, Attorney Counselor for OAAP concluded that, “Perhaps this change represents late career transitions of lawyers who previously practiced in larger firms.” One has to keep in mind that if law firms cannot find ways to offer more flexible retirement options for the aging workforce, they will always be able to return to the local watering hole in Upstate New York forces for the purpose of branching out on their own again.
Stephen P. Gallagher