How do you retire from a law firm?

BY Shadrack Muyesu

Unlike other (un)professional labour markets which thrive on internal promotions, law is considered to be highly open with a lot of room for lateral entry. Legal practice is defined by turbulence and unpredictability. Add that to the numerous restrictive guidelines (such as rules against advertising) on which the profession is anchored, and loyalty to a particular firm immediately seems detrimental to a self-serving lawyer.

The question becomes, why should I stay and chase another’s dreams when I can curve my own niche in private practice or pursue more lucrative engagement elsewhere?

Yet this is not a blanket trend. As numerous studies have shown, large firms are more inclined to promoting junior staff than they are importing outside talent.

A particular research by Douglas Wholey, Determinants of Firm Internal Labour Markets in Large Law Firms, in fact reveals that three of every four partnerships in large law firms are filled through promotions.

Again, there are many reasons to this but principally, the proud history of most of these firms and the sensitive nature of the cases they handle, tied with the personal nature of client-advocate interactions, behoves managers to tend towards retaining talent. 

To what extent can this trend be replicated in small law firms? How does a firm hire, assign duties and/promote? What is the best practice? These are questions that, on their own, demand an entire study. As such, it’s only fair that such a discussion be reserved for a larger discourse.

This article explores an infrequently asked yet equally pertinent question: how should firms manage transitions?

Role transitions

Changes in technology and in the money markets, the growing population of lawyers as well as the generational shift towards a younger, tech-savvy yet impatient workforce and clientele are no doubt going to leave a dramatic impression on how law firms operate.

A role transition may be within a firm as a transfer or to another firm; it also includes firm succession, especially where the top brass management is involved.

Where succession is involved, role transition is a form of separation. It is a big deal. With the entry of a generation of hard-to-keep millennials, transition is bound to get even more critical. Management of transition is what determines whether a firm’s legacy will pass on to later generations. And partners are scared of it.

A 2013 Altman Weil Law Firms in Transition survey revealed that 77.6% of senior partners did not want to retire; 73.2% did not want to transition clients or give up compensation and that of law firms with 50 or more lawyers, and only 27% had formal succession plans. But most curious is that, of those surveyed, 45% reported fear of retirement, mortality, aging and succession. In fact, these were considered uncomfortable topics for senior partners to discuss with their partners.

A great example perhaps would be how old age and an affliction with Mad Cow Disease drove a previously indomitable Danny Crane to the brink of lunacy in the popular legal drama series Boston Legal.

One effective yet less explored strategy (perhaps due to the fears expressed or other challenges as expressed by David Maister in The Trusted Advisor) is cross selling. According to Dr Olmstead in Law Firm Succession & Exit Strategies – Transitioning Client Relationships and Management Roles, Cross selling is giving additional services to an existing client whereby an attorney other than the primary relationship attorney may perform these services.

Alternatively, a firm may pursue a client transition – which constitutes a formal handing over of a client to another partner or the next generation of partners by the firm. It is usually spread over a number of years. Of most importance in a transition is that the client continues to receive quality legal representation.

Successful managerial transitions have also proved quite problematic. Again, the best practice is to stretch the process out over the years though a system of mentorship and apprenticeship. Dr Olmstead, in Law Firm Succession & Exit Strategies – Transitioning Client Relationships and Management Roles, provides some valuable steps. These include inviting younger equity partners to serve as members on the executive committee, where they can chair the Executive Committee and other committees, or assigning them direct responsibility and oversight for a specific management function such as client development/marketing, human resources/personnel, financial management or heading specific projects.

Others include allowing younger equity partners to participate in the development of the firm annual budget and financial plan, to participate in performance reviews of non-equity partners, associates, and staff, providing them with access to all firm financial records and reports, allowing them to attend all partner meetings, inviting them to meetings with the firm’s accountants and other advisors, having them participate in the recruitment and hiring of attorneys and staff, and rotating such partners in a variety of management and leadership roles over the three-to-five-year transition period.

Also recommended is the need to develop a good compensation structure. As espoused earlier, compensation is a great way of providing motivation and identifying potential managers of the firm. A good structure also proves clarity as the work an existing partner can handle in relation to compensation. It reduces the anxiety associated with loss of income.

Other strategies of managing transition include settling protracted problems, identifying and communicating areas where early wins can be achieved so as to ease the new partner into their new role, mobilizing the support of sensitive peers without which the new partner will stall, and formally defining what will happen upon transition, among others. Ultimately, effective communication is key.

Managing separation

Making room for ‘of counsel’ engagements

A firm may choose to retain the employment of a separated advocate as an “of counsel”. As the name suggests, of counsel advocates are neither associates nor partners but merely practitioners whose service a firm finds valuable and may wish to engage from time to time. They are practitioners that have a close relationship with the firm.

They could be retired partners who offer service as consultants, probationary partners, lawyers employed on a part time basis, or those the firm wishes to retain without the option of making partner. The method would be a great way of retired partners to feel valued, even outside active practice.

Of counsel relationships are only beginning to gain traction and obviously, bar consultancy, they are yet to take proper root in Kenya. Pending the development of proper of counsel relationship guidelines, an of counsel advocate can be compensated normally by a salary, by payment of retirement benefits, consultation fees or by division of fees in particular cases. Use of these options depends on the restrictions within a jurisdiction, otherwise, terms of engagement and compensation may be freely negotiated.

Retirement equity

A greater fear for potential retiree is the loss of income. To deal with this, some large firms guarantee the pension and/or annuity of long serving partners when they retire. The duty to pay retired partners is carried forward as part of a firm’s liabilities and is paid out of current income. While a popular way of cutting out goodwill from the accounts of the firm they pose a great hindrance to many mergers.

Retirement may also be on the basis of equity valuation. Unlike the first option, which places the obligation to compensate retiring partners on the firm, equity valuation places the burden on continuing partners. Under this model, each partner holds shares in the firm and these get revalued any time a partner joins or leaves. Continuing partners then purchase shares on an individual basis from retiring partners. The model is increasingly being applied with variation, among others to deal with the problem of fixed points of purchase or sale.

The “naked-in-naked-out” model is another approach that has become popular with firms in Europe. New partners contribute fixed capital which they get back on retirement. The sum may attract interest. Apart from the tangible assets in the balance sheet, the firm in a “naked-in-naked-out” approach is considered to have no value and no assets. The accounts determine goodwill. As in unlimited companies, the partnerships created only carry the right to share in profits and losses. A limited liability partnership may also issue deferred/founder shares to its founding partners as a reward for their commitment. Though they carry benefits such as a right to residual profits when other shareholders have been paid, many founders prefer preferential shares which are cumulative and participating in nature. Founder shares are held at the partner’s discretion. They do not defer on retirement.

Unfortunately, most firms, especially in Kenya, are not nearly as profitable enough as to employ some of these methods; neither is revenue guaranteed or predictable to make a firm, like a public limited company capable of attracting public equity.

Counselling and monitoring transition

Some firms have also actively taken up counselling. Others have taken more drastic action such as issuing hand-over notes and other material in monitoring transition preparedness. Responding to an interview question by The Lawyer on the most significant areas of assistance firms had introduced in recent years, a leading firm noted:

“We created a collection of documents which are issued to all our partners considering retirement in the next two years. The documents include a retirement handbook which covers a range of practical advice and support for personal and professional considerations when approaching retirement, and retirement form templates for the partner to complete.

The latter detail: the matters on which partners are involved to help the partner conclude them in an organised and methodical way; suggestions of tasks that should be considered ahead of retirement, matter-related and non-matter related; at what stage before retirement the transfer of leadership roles should happen and the way this is undertaken; and the transfer of key relationships to others in the team, training and mentoring responsibilities.

In implementing the use of the forms we invite the relevant departmental managing partner, HR and the individual to meet to agree the information that will formulate the pre-retirement plan.”

Other methods, as the research revealed, included holding candid conversations with partners on potential retirement times and commencing plans by reducing working days and workloads over an agreed period of time. Retired partners also continued to feature in firms’ social engagements such as partner retirement dinners. (