As Partners Retire, Shifting Clients and Compensation Is Delicate

As seasoned law firm partners near the twilight of their careers, the prospect of retirement presents their firms with a pivotal challenge: how to preserve and gracefully transition high-value client relationships.

Law firms are inclined to approach partner retirements uniformly. Most firms should prioritize transitions—and give up on attempting it in some circumstances—based on several variables, including the peculiarities of the senior partners involved, the team they have or haven’t built beneath them, and most critically the preferences of the client.

The frustration of implementing firmwide policies for client transition follows from those policies being rooted in two significant misconceptions.

The first is that the client relationships in question are institutional, rather than personal. There are a handful of practices at a handful of firms for which that is true—situations where it’s commonly said, “No general counsel ever got fired for hiring [Name of Firm] for this kind of matter.”

Most law firm leaders don’t live in such a world—at least not for most of their practices. General counsel are fond of saying, “I hire lawyers, not law firms.” Firms rarely have the luxury of simply informing clients that their next major matter will be run by the former lieutenant on their matters. Clients will have opinions about a senior partner’s lieutenants, and they can decide whether they want to send work to them or to another firm entirely. Pretending the firm gets to control senior staffing is naive.

The other significant misconception is that partners in our current culture don’t uniformly approach 65 or any other age with a conviction to retire or wind down.

The typical law firm consultant’s response to this problem is to advise a firm to motivate the senior partner financially to transition the practice, nonetheless. That’s much easier said than done in a world of finite resources.

Formulaic compensation systems are particularly challenged in this regard. If a firm pays for billings per se, that isn’t going to motivate a senior partner to hand billings down. Perhaps a firm ameliorates that outcome by awarding billing credit two ways or three, but taking any of those credits away from a senior partner who wants to keep working risks motivating that senior partner to take their book of business somewhere they will be paid for it.

Alternatively, keeping a major allocation of billing credit with the senior partner as the transition occurs risks underpaying the lieutenants that the firm needs to hold onto the client long term.

Firms with a multi-factor, non-formulaic compensation system designed to reward senior partners for passing clients to a designated successor might have an easier go of it. But regardless, how many partners can a firm pay for doing the same work?

Inevitably, where a senior partner isn’t enthusiastic about effecting a transition, a firm must pay a partner compensation premium to achieve a low-risk client transition. If a firm shortchanges either the senior partner or the lieutenants, the firm risks losing them to the lateral market.

It’s a delicate dance. So, what’s the solution?

One size doesn’t fit all when it comes to transitioning clients. Firms must first and foremost accept that not every client relationship will transition—and invest resources accordingly. Where a senior partner and the firm have agreed to a retirement or wind-down strategy and where that senior partner has developed a strong team of lieutenants who are respected by the client, the transition plan writes itself.

Outside of those happy circumstances, triage is required. That general counsel who “hires lawyers, not law firms” may not hire the next lawyer a firm puts in line. In some cases, this is because the senior partners haven’t developed a suitable younger generation to fill their shoes.

Rather than struggle to achieve a transition on the assumption that the client can be convinced to embrace a sub-optimal lieutenant, a firm should acknowledge that some practices or client relationships won’t exist after the senior partner in question rides into the sunset.

Firms will likely have to overspend. If a firm has promising young talent they want to retain, and the senior partner has no plan to retire, the firm will likely have to overspend. Senior partners will expect to be well-compensated to train junior attorneys and facilitate a smooth introduction to their clients as though they were still fully in charge.

The most successful transitions happen with full transparency, with both the senior and junior members understanding their role in the plan, including the firm’s compensation strategy for each of them. In a formulaic compensation system, this may entail commitment of bonus dollars to smooth the transition.

A firm must decide which client relationships matter most and are best positioned to be transitioned effectively from an internal personnel perspective. It also must be willing to abandon a practice or client relationship altogether if and when a key senior partner finally retires.

For relationships that a firm commits to transition, it must honor senior partners with financial incentives and an active role in the transition, while also giving junior lawyers competitive compensation and room to spread their wings in their practice.