Wisconsin Lawyer: Getting Your Ducks in a Row: Three Steps to Effective Succession Plans:

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    Getting Your Ducks in a Row:
    Three Steps to Effective Succession Plans

    Serving clients well includes planning for what will happen when you’re no longer around to provide that good service.

    Michael F. Moore

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    The tolling of church bells to mark various events was an important feature of daily life in England in 1624. John Donne was an English poet and a Church of England cleric. Donne observed that when a funeral bell was heard it was a reminder that we are nearer death each day: that is, the bell also tolls for us.

    Succession planning for many lawyers and law firms often reflects a similar inevitability. There are certain demographic realities rippling across the legal industry and forcing change upon lawyers and their firms. In many situations lawyers and law firm leaders are struggling to prepare for what lies ahead. John Donne’s actual quotation can be instructive.

    “No man is an island, entire of itself; every man is a piece of the continent, a part of the main. If a clod be washed away by the sea, Europe is the less, as well as if a promontory were, as well as if a manor of thy friend’s or of thine own were: any man’s death diminishes me, because I am involved in mankind, and therefore never send to know for whom the bells tolls; it tolls for thee.”

    Donne’s words offer the positive insight that the sound of the bell also reminds us we are all connected and depend on each other. Whatever affects one affects all. Ernest Hemingway chose the quotation for the title of his 1940 book about the Spanish Civil War because he wanted to demonstrate solidarity among the various allied groups fighting Franco and the fascists. Effective succession planning requires we address many variables, none necessarily more important than the others. However, all frequently are interconnected and depend on individuals’ personalities and qualities.

    Lack of Planning

    American law firms and lawyers are aging rapidly. By 2020, more than 50 percent of the legal work force will be over age 55. This will be accompanied by a sharp decrease in the number of lawyers between the ages of 35 and 55. These demographics appear to indicate many law firms face a potential 20 percent drop in the number of partner-client relationships. Despite this, a recent survey confirmed that only 26 percent of law firms have formal succession plans in place. More than 60 percent of the law firms claimed to be relying on an informal or ad hoc process if needed.

    Michael F. Moorecom mmoore moores-law Michael F. Moore, Lewis and Clark 1983, is a professional coach for lawyers and founder of Moore’s Law, Milwaukee. He has more than 25 years’ experience in private practice, as a general counsel, in law firm management, and in legal recruiting.

    Effective succession planning usually begins with matching the firm’s specific demographic trends with revenue generation by individual. This frequently illustrates the potential for a 20-40 percent reduction in revenue production within the next five years as older partners no longer participate in the firm. This separation may be caused by retirement, disability, or, unfortunately, even death. How soon will a new generation of lawyers replace the revenue lost when highly productive partners retire or die? How will lawyers transition accountability for important client relationships when those lawyers are no longer available?

    Despite the obvious need for answers to these and other common questions, my personal experience has been that many senior lawyers do not want to retire or transition client matters to other lawyers. Many lawyers understandably regard succession planning as an awkward and difficult subject.

    Knowledge Succession

    Effective succession planning requires specific strategies to transfer knowledge to the younger lawyers who are the future of the firm. Often law firms may appear to be a collection of individual practices. At many law firms, a senior lawyer’s separation from practice will happen without information being transferred. This information has recognized value because it includes both knowledge and experience. However, the value can be lost if effective knowledge-transfer methods are not expanded beyond the occasional one-on-one teaching moment. Exponential success can be created from a culture of willingly sharing information.

    During their careers lawyers create, use, and store valuable amounts of information. Examples include details about key clients, the core values of a firm’s culture, its practices, and important historical details. Without effective knowledge transfer, research might be duplicated and agreements and other documents created from scratch when models already exist. This is a missed opportunity to not only improve efficiency but also create the advantage of using best practices. Many clients expect such knowledge transfer to already be in place and are not willing to pay for duplicate work product that is inefficiently created.

    Building an Effective Succession Plan

    Step 1: Connect strategic and succession planning decisions.

    • Identify the long-term vision and direction of the organization.
    • Analyze future growth opportunities.
    • Include succession planning within strategic objectives.

    Step 2: Analyze the gaps.

    • Identify core competencies and technical requirements.
    • Determine current talent and expected needs.
    • Determine leadership needed for long-term continuity.
    • Develop a strategic business plan based on needs.

    Step 3: Develop succession strategies.

    • Identify development and learning strategies.
    • Include formal skill development and mentoring.
    • Provide feedback on action-learning projects.
    • Identify recruitment and retention strategies.

    The Ethical Duty of Succession Planning

    Although no one wants to think about dying or becoming disabled to a point at which working is impossible, planning for such an eventuality is an ethical requirement for lawyers. Even in the most comprehensive and orderly succession plan, certain specific obligations of the lawyer must be addressed.

    In 1992, the ABA Standing Committee on Ethics and Professional Responsibility issued Formal Opinion 92-369. That opinion states, in part, that “[t]he death of a sole practitioner could have serious effects on the sole practitioner’s clients.… Important client matters, such as court dates, statutes of limitations, or document filings, could be neglected until the clients discover that their lawyer has died. As a precaution to safeguard client interests, the sole practitioner should have a plan in place that will ensure insofar as is reasonably practicable that client matters will not be neglected in the event of the sole practitioner’s death” (emphasis added).

    Clearly, succession planning is required for the sole practitioner. When a lawyer is part of a law firm, this obligation is extended based on the expectation that other lawyers in the firm will step in to handle these matters. Creating a succession plan becomes an ethical obligation to safeguard client interests.

    In Wisconsin, for example, SCR 20:1.1 (Competence) states as follows: “A lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.” The rule implies that the duty of competent representation requires, at a minimum, that the lawyer has ensured that upon his or her own death or disability, someone will step in to avert the client prejudice that could occur if telephones go unanswered, mail goes unopened, or deadlines pass without attention.

    Further guidance comes from SCR 20:1.3 (Diligence): “A lawyer shall act with reasonable diligence and promptness in representing a client.” Comment 4 explains that “[u]nless the relationship is terminated as provided in Rule 1.16, a lawyer should carry through to conclusion all matters for a client.” Taken literally, to “carry through to conclusion all matters for a client” means that the lawyer should anticipate and address the needs of his or her client upon death or disability.

    Comment 5 now makes very clear that “[t]o prevent neglect of client matters in the event of a sole practitioner’s death or disability, the duty of diligence may require that each sole practitioner prepare a plan, in conformity with applicable rules, that designates another competent lawyer to review client files, notify each client of the lawyer’s death or disability, and determine whether there is a need for immediate protective action.”

    Comment 18 to SCR 20:1.6 (Confidentiality of information) requires that a lawyer “act competently to safeguard information relating to the representation of a client against unauthorized access by third parties and against inadvertent or unauthorized disclosure by the lawyer or other persons who are participating in the representation of the client or who are subject to the lawyer’s supervision.”

    This means that arrangements should be made while a lawyer is still alive and not disabled to create a succession plan to keep client information confidential. The succession plan should address confidentiality of client matters. At any law firm, the firm policy manual or employee-training process should address confidentiality during emergency situations. If not addressed, in the perhaps challenging period that would follow the lawyer’s death or disability, client confidentiality might be breached by office staff believing the circumstances are extraordinary and that it might be permissible to disclose client information outside the normally established procedures.

    The ethical obligations of succession planning for lawyers are extended to nonlawyers by SCR 20:5.3(b) (Responsibilities regarding nonlawyer assistance). Comment 1 confirms that “lawyers with managerial authority within a law firm [are required] to make reasonable efforts to establish internal policies and procedures designed to provide reasonable assurance that non-lawyers in the firm will act in a way compatible with the Rules of Professional Conduct.”

    Client Succession

    Effective succession planning often requires law firms to generate new client relationships and revenue to replace what might be lost with the departure of a productive partner. One way is to service clients with teams and cross-sell other services to existing clients. This is true whether you are a member of a small or large firm. The number one place to look for revenue growth is among the firm’s existing clients because you have already created a relationship with these clients. They know you and your firm, they like working with you and the firm, and above all, they trust your advice and your judgment.

    The financial impact on the firm of a partner’s retirement, including personal productivity and marketing ability, must be carefully assessed. If the lawyer was a significant part of the business development of the firm, there will be an obvious effect if that partner does not maintain a relationship with the firm. It may even be necessary to work out an “of counsel” arrangement, at least temporarily, for the specific purpose of transferring that lawyer’s relationships to other lawyers at the law firm.

    Managing client succession can be a challenge. My personal experience has been that lawyers rarely fear that one of their fellow lawyers who they recommend to a client will do a poor job for that client. However, what they do fear is losing control of the client relationship. Every client has specific and often unique traits, which the lawyer has taken great effort to address as their relationship has developed. The risk of interference with this personal relationship and the business that flows from it when another lawyer is introduced to the client can be problematic. Successful client succession activities therefore require a high degree of both detail and trust.

    Leadership Succession

    Where will the new leaders of the law firm come from? Effective succession planning usually requires developing future leaders. This is because successful leaders of law firms are most often the role models of the firm’s cultural values. Every law firm has a unique defined culture created by the shared values of the lawyers at the firm. These shared values are demonstrated through behaviors that are deemed appropriate and acceptable for creating success at the law firm. The values then become internalized, part of daily routines. The values also help define the expectations of those lawyers who choose to embrace the firm’s unique culture.

    My experience working with law firm leaders at firms of various sizes has confirmed that lawyers need specific skills to be truly effective in leadership roles. These leaders must understand their firm’s finances and have the strategic thinking skills necessary to address increased competition. In other words, law firm leaders must understand their markets and their firm’s place in them.

    Effective law firm leaders also require excellent interpersonal and communications skills. This includes both the courage to make tough decisions and the patience to try and reach consensus. In addition, the most effective law firm leaders have a keen sense of humor. This is significant because lawyers frequently take themselves too seriously, and creating a positive culture often requires the prioritization of the positive things happening all around us.

    Depending on the structure of the specific law firm, there are different ways to transition leadership responsibilities. Assigning specific tasks to future leaders will test their ability to organize and handle projects. These “next-generation” leaders should understand and be involved in any financial decisions for the firm, such as renewing the premises lease, managing the line of credit, and determining compensation of staff as well as lawyers. If the firm has a formal mentoring program, participation by future leaders should be a requirement. As a mentor, the lawyer becomes responsible for organizing and coordinating the work of other lawyers and employees as well as assisting in their assessment and formal evaluation.

    Obstacles to Getting Started

    Effective succession planning often requires some difficult conversations with other lawyers and even with ourselves. Many lawyers prefer to avoid these if possible. But it is usually better to get started rather than agonize over the inevitable.

    One place to begin is to focus on actual activity and not one’s impressions or expectations. What are the practical realities of the lawyer’s succession path? What are realistic timelines and objectives along that path? Try to identify some specific activities, and avoid being generic or vague. If you are the one who must initiate the discussion, start with the positive. Try to be empathetic and see the situation through the eyes of the other lawyer. Focus on needs, solutions, and the details of execution.

    Valuing a Law Practice

    What is the true value of a lawyer’s practice? Frequently, effective succession planning will require an answer to this valuation question. What is being valued? Valuing any business concern is a challenge. When that concern is a closely held business, the task is complicated by several factors. When that closely held business is a professional services firm, the task is complicated further. And when the professional services happen to be a legal practice, the valuation task becomes the most difficult of all. This is because value in a law practice is largely personal to the lawyer and his or her ability to retain clients.

    The commonly accepted method for valuing a lawyer’s practice is valuation by an average of annual earnings. The starting point is usually a three-year average of the lawyer’s total annual compensation. A goodwill multiplier will be applied to this amount. The multiplier represents the likelihood that the clients who produce the revenue will continue to produce revenue after the lawyer’s separation from the firm.

    The goodwill multipliers for service businesses are lower than for manufacturing businesses. In professional service firms the multiples are lower yet, and in law firms they are generally the lowest. Once again, this is because value in a law firm is often largely personal to its lawyers and their ability to attract and retain clients.

    Determining goodwill value requires consideration of certain information such as number of clients, transferability of client base, and stability of flow of future revenues. Practice goodwill includes such things as location, nature, and duration of practice; capital structure; employee and supplier relationships; agreements; and advertising. Professional goodwill includes such things as experience, skills, reputation, work habits, demonstrated earnings power, and professional success.

    The value of the goodwill is likely based on expected future earnings, which may fluctuate depending on the type of law practiced, the fee basis, and general economic conditions. The issue is the predictability of future returns. Goodwill may really only have value if it increases future returns.

    Justice Benjamin Cardozo, in Marriage of Brown, 150 N.E. 581 (N.Y. 1926), defined goodwill as the tendency for customers to return to the same location or business because of its name or other attributes, regardless of its location. The value of goodwill should also consider referral base, client type, source of new clients, area demographics, and costs associated with setting up a new practice and attracting new clients. In other words, how long would it take to generate earnings similar to those available immediately?

    The nature of the client base tends to differentiate the value of one professional practice from another. A higher value may be given to a practice that provides services to its clients on a recurring basis versus relying on direct marketing for continued revenue. Practices may be worth more in areas where there is heavy competition because it might be more effective to transition an existing client base than attempt to start one from scratch. This is particularly true when the personal connections between a lawyer and his or her clients are more important than the lawyer’s technical ability.

     In summary, the goodwill multiplier is likely to be higher if repeat business is expected. Smaller practices will have lower multiples of earnings if it appears client relationships will not be retained. For example, a specialized practice that tends to rely on referrals from other professionals who base their referrals on the reputation of the lawyer with expertise will have a lower value than a more diverse practice drawing revenue from multiple sources.

    Generational Conflicts

    Effective succession planning usually requires resolving generational conflicts. In many law firms, four generations are trying to work together. They are commonly referred to as the traditionalists, the baby boomers, the generation (gen) Xers and the millennials. The boundaries between generations are not specifically defined or rigid, and not every individual follows the same pattern as others in his or her generation. However, each generation does have in common economic, social, political, and demographic events that usually shape the perceptions and values of individuals who experienced them.

    Overcoming these differences, improving communication, and gaining a deeper understanding of shared values will be necessary. Traditionalists and baby boomers should delegate client relationships and challenging work as well as boring and routine assignments. This requires extra effort to give timely and useful guidance. Gen Xers might need to understand this kind of feedback is not instantaneous and may have to be requested. Millennials might need to learn to accept criticism, avoid excuses, and improve their listening skills.

    Bridging the generation gap also requires recognizing differences, reconciling shared values, and learning techniques to achieve common goals. Traditionalists will expect written memos and direct, specific requests for work to be done. Many baby boomers expect to have meetings at any time and any place, including scheduling last-minute events whether day or night. Both generations could check voice and email messages more frequently and try to respond promptly to requests for information.

    Many gen Xers highly value work-life balance and prefer to use technology to balance personal and client matters. Millennials often expect to minimize personal interface and prefer to primarily communicate through technology such as voice mail, email, and texting. Both generations could switch from instant messaging and emails to face-to-face communication or at least use the phone more.

    Traditionalists and baby boomers should embrace alternative work styles and create organizational options. Gen Xers should understand that client service always comes first, and face time is important to advancement. Millennials should realize that understanding and accommodating generational differences is still developing at most law firms. Personal needs do not come before client and firm needs.

    Making Succession Planning a Reality

    Among my law firm clients, succession planning is rapidly moving from a strategic objective to a competitive necessity. Firms that have created succession plans are more effective when transitioning the leadership roles within the firm as well as key client relationships. These activities allow firms to minimize the dramatic revenue loss that frequently accompanies any transition of productive partners out of the firm.

    Commencing the succession planning discussions is difficult. It will require changes to common methods and the adoption of new paradigms of success. An effective succession plan must include knowledge transfer, client development, and leadership transition as well as competitive adjustments for the market impact of diversity and value migration. However, we know that a knowledge advantage means nothing unless you also have an action advantage. Lawyers must be proactive and plan now for the inevitable effect of demographics and time on their practices, their clients, and their law firms.

    Meet Our Contributors

    What was the most memorable trip you ever took?

    Michael F. MooreDefinitely a close tie between our first trip to a Winter Olympic games in Norway and our second trip to the Winter games in Italy. In Norway my wife and I saw incredible athletes and met interesting people from all over the world. We hiked uphill in snow to watch Alpine skiers race by. We celebrated with crazy Dutch speed-skating fans when a Norwegian set a world record. We learned the Olympic experience is so incredible that one day we would have to share it with our four children.

    In Italy we were very fortunate to make that a reality. To experience the national pride at a hockey game with the United States and Russia facing off. To engage with people from other countries whose English skills were very good. To personally witness the winning and the losing, but most of all the incredible will to do your very best. Although more than 10 years have passed since Italy, my children still talk about their experiences on that trip.

    com mmoore moores-law Michael F. Moore, Moore’s Law, Milwaukee.

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