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Episode 71: Law Firm Succession Planning: Put a Process in Place Now! with Dave Roberts, CPA & Partner in Charge of Law Firm Services at Armanino LLP

Guest: Dave Roberts, CPA & Partner in Charge of Law Firm Services at Armanino LLP

Episode 71: Law Firm Succession Planning: Put a Process in Place Now!

Sharon: Welcome to the Law Firm Marketing Catalyst podcast. Today, my guest is Dave Roberts, partner in charge of the law firm services group at Armanino LLP, one of the 25 largest independent accounting and business consulting firms in the U.S. Dave has consulted with a significant number of law firms, both large and small, on a wide range of financial and management issues. Today, he’ll give us his perspective on best practices in law firm succession planning. Dave, welcome to the podcast.

Dave:    Sharon, it is great to be here. Thank you.

Sharon: Thank you so much. Tell us about your career. How did you get from being a regular CPA to one that specializes in law firms?

Dave:    I think many of us fall into these niche areas. I worked with Price Waterhouse and joined their consulting group. I was working with Price Waterhouse, became a CPA and found consulting a lot more invigorating than plain old auditing, so I joined their consulting group. They had a consulting arm that just dealt with law firms and that was very interesting for me. I was also an executive director and CFO of a few law firms for about six years, so that gave me some entry experience, which was really helpful. Over the past three decades, that’s all I’ve been doing—a lot of very unique variance in a niche market that has gone through lots and lots of changes. What we’re going to talk about today, succession planning, is certainly one of the significant areas nationally in the market now.

Sharon: Yes, it is definitely an area that, especially with baby boomers, has become a top-of-mind topic for so many law firms. I know you work with a lot of firms in terms of helping them with that. How far in advance of planning to retire should the managing partner or the firm founder be thinking about planning for succession?

Dave:    A great question. There’s a minimum of five years to really start succession planning. If you’re in a small firm—however we define a small firm—it’s a minimum of five years. In larger firms, mid-size firms, succession planning has to be part of the culture of the firm. You’re constantly looking for stars to make your bench more solid. You can’t start looking when you’re planning on retiring in two years. Unfortunately, that’s when many firms start to look, really because of a very insidious issue called their compensation system; how they compensate partners. They reward them for billable hours and origination credit, so they hold onto that as long as they possibly can.

With firms, it’s a minimum of five years if you’re a mid-size or larger firm, and like I said, it has to be part of the institutional culture. You’re looking at people 10 and 15 years down the road to bring them into the loop. It is a long, continuous process rather than a one-time cost. A managing partner or a senior partner might be 62 or 63 and say, “Oh, I’m going retire in four or five years, so who’s going to take over the reins?” It’s usually not a one-person job. These firms have grown. If you’re a 10-lawyer firm, it’s very different than if you’re a 100-lawyer or 300 or 400 or 800-lawyer firm. A smaller firm may be looking for one person to take over. Larger firms have issues, not just from retiring senior partners and trying to retain clients, but your transitioning leadership and management, mentoring and lots of other issues. It’s a long answer for a short question. Sorry about that, Sharon.

Sharon: No, it’s important information. Who should be involved in the process? Should it be the executive committee?

Dave:    Yeah, the very senior leadership of the firm. It has to come from the top down. The executive committee and everybody has to buy into it strongly. Succession planning is such an important thing that is affecting so many firms. One of the major issues across the trade here: as the baby boomers start aging out—baby boomers, number one, were a huge generation, and the generations underneath it are not as big. I think the youngest baby boomer might be in their very late 50s, 58, 59, all the way up to 75 and a little older. The baby boomers’ larger generation has been in power at these law firms for many, many years, and they are retiring at a greater rate right now. You’ve got a number of people, as I say, aging out or looking for a retirement in a period of time, and you have either two ways to do it. You have a bench; there are people at the firm that can take over your practice area or the firm, the leadership, the client transition and help grow the firm. If you don’t, which many firms do not, then it turns into more of a merger and acquisition play.

Sharon: It does happen so often where somebody—there’s panic all of a sudden, two years from retirement or when someone is planning to retire. What are the first steps that they should take if they haven’t been thinking about it?

Dave:    The first step is to start thinking about it. I hate to say to convene a committee because committees are just bad words. They tend not to do much, but you need to start having the conversation and putting in the process. It is not a technically difficult process. It is an emotional and culturally conflictual process. You have to start facing that conversation, and the conversation is, “If I’m a senior partner, what are you going to do about my compensation? How am I compensated?” Many people are compensated, like I said, based on how hard they work and how much business they bring in, and they become very, very important and very highly compensated. If I’ve got to pass that off to one of my more junior partners, am I losing compensation, and if I’m going to lose compensation, why am I doing that? The process is starting to figure out how a senior partner transitions to a more junior partner.

You’ve got to have enough time in there so you can make mistakes, because if you’re a smaller firm and you only have one person in sight, if that person doesn’t work out or skins their knee, has a couple of missteps along the way, you can’t do that in one or two years. You’ve got to help them transition, and the longer you have, the better and easier it is by getting these junior partners on committees. It’s very important. Why is it important? So you can see how they act and how they react in certain situations. It’s getting them involved in all the different areas of firm management, leadership, client pitches, client relationships and the strategy and future of the firm. It’s helping them be seen as a leader. We talk about leadership a lot, and succession means you’re a leader in a client relationship; you’re a leader within the firm. Leaders need followers, and we rely on that a lot. A short transition doesn’t allow that comfort level with everybody in the firm and the clients. You’ve got to allow some period of time to do that. You’ve got to sit down and, like I said, convene a committee, talk about the process that is unique to your firm of going through the transition, talk about your compensation methods and how that’s going to be done. If you’re not going to compensate your senior partner for transitioning, you might as well not even start, because if you continue the compensation as origination and work and all these other things aside from transitioning, the individual is just not going to transition. It’s been proven over and over again.

Sharon: I was just thinking about some of the challenges of getting people to let go. We understand the ownership and they’ve built it from perhaps nothing.

Dave:    It’s the ownership. It’s the ego investment. It could be, “If I’m the name on the door and I’ve built this for the past 40 years, I’ve got a lot of emotion tied up in my baby,” if you will. The very large firms, certainly Am Law 100 firms—I don’t want to name names, but everybody knows them. The firms have been around over a hundred years. The names are not there anymore. They’ve long passed on and they’ve gone through multiple transitions, and they’re pretty good at it. They know how to—we call it aligning the stars. They know how to identify their stars and keep their stars and promote their stars and plan for this process. It’s all institutionalized within the firm. It’s these mid-sized firms that may just now be going to a second generation. The senior partners have all been there for the past 20, 30, 40 years, and they’re having to pass the baton for the first time. The first time at anything is difficult, but when we talk about leadership and client relationships—don’t forget these partners probably have a significant amount of business generation and client relationship in their hands that they’ve kept, and it’s been their identity and their compensation.

Transitioning it takes a while and you have to put that together with everything happening in the legal marketplace today, not just baby boomers aging out, because this has been going on for four years and it was a little easier 15 years ago. Now, we’re in a time of really high volatility, high change within the legal industry. Volatility is not just that there are more and more people, baby boomers, retiring or looking to retire. You’ve got tremendous fee pressure from clients; you’ve got client loyalty that you didn’t have 20 years ago; you’ve got tremendous fee sensitivity. Technology is crazy, with business intelligence and artificial intelligence and more and faster technology along with the fee sensitivity. The costs are continuing to rise. You have cybersecurity issues. You have new law firm structures and new delivery methods. You have pricing directors in the large law firms, things that law firms even 10, certainly 20 years ago didn’t have to think of. Now with this transition, you’re not just transitioning the old world; you’re in a brand new world. People that transition have to have a bigger, broader skill set, along with the normal client origination, client relationship skill set.

Sharon: What’s your role? I’m sure you talk about all the hard issues, the financial and the dollars and cents, but in terms of getting people to communicate with each other, what is your role?

Dave:    It’s a big question, besides just scaring them to death. Our role usually is to help them with the process, help them with the conversations to institute a top-to-bottom success plan. Like I said, in the smaller firms, sometimes you have one or two or three partners that are in their late 50s or very early 60s, and they look like they have a five-year time horizon. We’ll go in and help with not only putting in the plan, but helping put in metrics and timelines for people to judge their progress. We hire additional advisors, business development people and coaches that are so necessary for the junior partners to take over, because they’re taking over a big part of the business generation. We usually help in putting together teams to get them through the transition process. If they have a five-year timeline and they’re first generation, then at the end of those five years, you’ve got a partner or a group of partners who want to retire. There might be a buyout attached to it, so you need a pretty strong program in place to make sure these junior partners have what it takes to take over the helm of the firm. Like I said, we’ll help them put together the plan, the process, the timelines, the metrics and the team of advisors to help them through that. In lots of firms, we hire the business development people and the coaches to help these younger partners in their business origination. That usually takes a period to get these people on track. You need a good two, three years to get them in that business of generation, origination mode. That’s some of the stuff that we do.

Sharon: You should be called in earlier rather than later, it sounds like.

Dave:    Yeah. We get called in and one of the first questions we ask is, “What’s your timeline?” If they say its 12 months or less, it’s not a conversation about succession; it’s a conversation about merger or acquisition. Normally, unless they’ve already started the process, unless they have a really, really strong bench and somebody to take it over in place, then it’s usually the alternative, which is a merger or an acquisition.

Sharon: That must be heartbreaking. I’ve been thinking of somebody who’s founded the firm and grown it with their own sweat.

Dave:    Yeah, it’s usually hard, but it’s interesting. We talk about succession here, but a huge strategy of the larger firms—and who knows what’s a larger firm? If you’re in a 10-lawyer firm, a 100-lawyer firm is larger. If you’re a 100-lawyer firm, a 500-lawyer firm is larger. Larger is larger than you are. These larger firms, their key strategy across the country is scouring their geographic strategies or focus areas and targeting firms that have older partner groups. You can find that out fairly easily. These firms will make cold calls to these firms and try to get a conversation going at, as I call it, a Starbucks date. We get a lot of calls from these smaller firms that say, “Wow, you won’t believe what happened to me. I got a call from (fill in the blank), a prestigious firm, and the chairman or the managing partner is going to be in my city next month and they want to have dinner with me. Wow!” We call those drive-bys, and we know very well what they’re looking for. They’re just looking for a firm that doesn’t have that bench and is looking to have their senior partners retire in two to four years. They want the clients and they want the senior partners to retire. It’s a pretty big risk for these firms that don’t have succession plans in place and are too close to get them in place.

Sharon: Wow, interesting! You must have seen a lot of these. What are some of the mistakes you’ve seen firms make, besides not allowing enough of a ramp-up or runway? What usually prevents a firm from getting the succession planning process straight? Holding on too tightly? You’ve probably seen it all.

Dave:    I think over the past few decades, I’ve seen a lot of surprises. It seems like there’s something new around the corner. Besides not having the ramp-up, its things just not working out, people not taking it seriously. Folks that have not done the long-term planning always feel like, “I’m going to have two conversations and it’s done.” It’s not. This is a long process that needs to be followed up on. It’s sort of like raising a child, almost anything long-term. Some of the mistakes people make are, if they identify a junior partner, a senior associate that might look like they have the wherewithal to take it over, they usually need mentoring, and if they don’t get it, they’re not going to be ready. It’s kind of like driver’s education but for years. They’re not going to be ready to take over the firm. What firms really need to do is survey. It’s not an exact science, but they need to survey the partner group and say, “Hey folks, when do you think you’ll be retiring? Are you retiring in two years or less, two to five, more than five years?” Get the demographics in there, and then you’ve got to plan for that.

If you have your stars—I call them junior partners—that you think are going to take over, and you don’t treat them, train them, mentor them, compensate them well enough, if they leave, what are you left with? A much more brittle situation. That’s a huge mistake. If you don’t compensate properly the senior partner that is transitioning out, that’s such a big area because it’s not just about money; it’s about focus. You’ve taken somebody who has spent decades and decades doing one thing or a few things very, very well and they have risen to the top, and now they have to do something brand new. They’ve got to transition and they’ve never been through that before. You’re trying to take the proverbial old dog and teach them new tricks. Somebody who’s great at client relationships and great at getting business and at the top of their game and knows that they’re in the marketplace, you’re saying to them, “Now you have to learn a new skill.” If you don’t help them with that through compensation and focus—their primary focus has to be this transition, and that is very important. When you have senior partners whose self-worth has been built on, “I’ve brought in $5 million this year or $20 million. I’ve billed 2,500 hours and I’m beating my chest. Aren’t I great?” That’s a whole different mantra. If those senior partners aren’t willing to continue to do that, then you’re losing a tremendous amount of value in that transition, because you’re losing time. When you refocus them onto training stars and working with the stars and making them the stars, that’s the high-value stuff. The compensation system has to follow that clearly, along with the conversation, along with the culture, along with the kudos.

When I talk about timelines and metrics, metrics are not just numbers. The metrics are things to do and the timeline is obvious. We usually measure things on a quarterly basis so it doesn’t get away from us. If a partner is transitioning, there are things they need to do and things they need to work on with junior partners. We monitor that on a quarterly basis. We get everybody at a roundtable, all the necessary people, and we say, “How are you doing?” Senior partners, not only are they being compensated, but they get the cultural kudos for doing the right things. We’re really trying to change behavior, and that is the hardest thing in the world to do. That’s why we do it on a quarterly basis, because doing it on a semiannual or, god forbid, an annual basis, or really god forbid, on no basis will have a much higher probability of not working out.

Sharon: Do you stay after the transition? It seems like a lot of hands would need holding or there would need to be a lot of calming of the nerves. You work through it and it happens, and then do you usually stay for a little bit?

Dave:    It really depends. It’s so situational. We usually try not to. The training and the process, once it gets in place, it should work. If it’s not working, then we need to recalibrate. Once you start getting some success, it starts to take on a life of its own and starts to work. We try and make sure there is a champion or two within the firm. Consultants have their place, and they have to understand what it is. We’re outsiders, and as an outsider, you can come in and say things that maybe an insider can’t. You can be a little more in front of it. You can help, direct or redirect people, but what you really want is this to take hold within the firm. We’re looking for champions within the firm. We’re looking to get them trained and to take over and own the process.

Sharon: That makes a lot of sense. At some point you’re going to have to exit, and at some point they’re probably saying, “O.K., thanks very much for your help, but we can handle this ourselves.”

Dave:    Hopefully, yeah.

Sharon: For people listening who are in legal marketing and business development, what role can they play, and what role does recruiting play in all of this?

Dave:    Another great question. Again, this is a significant issue. They obviously have a huge role in recruiting the right people, and the right people are huge stars. It is such a tough market out there. Everybody is looking for the stars, so finding them and painting the picture of why our firm is better is huge. The business development and coaches play a critical role in helping identify and train people. I think whether they’re inside development people or outside consulting—if the firm is using an outside consultant or if they have a strategy team within the firm, it’s teaming up with them and understanding the strategy of the firm. If they don’t have succession planning built into their strategy, it means raising their hand and saying, “Hey guys and gals, I think we really need to look at this and start having a voice in the process.” If you have a process, whether you’re internal or external, and you’re not part of that process, I think you should raise your hand and say, “I think we can help as a part of this process.” Let’s face it; developing a business is the lifeblood of a firm. We can put in processes; we can put in all these fancy things and timelines and talk about mentoring, coaching and everything, and we can have these meetings and put together this great plan. But if you can’t originate business, everything else goes to hell. You have to have a strong business development focus in any kind of succession plan.

Sharon: Dave, thank you so much for giving us your take on this. I know so many firms we talk to, a lot of times we’re called in because it’s like, “Oh gosh, I’d better start marketing the firm and give these other people a foundation when I leave.” It is something that’s such a prevalent topic today among law firms and among professional services firms in general. Thank you so much for your thoughts.

Dave: It is my pleasure, Sharon. Thank you so much. It has been so enjoyable.

Sharon: So glad to have you. To everyone listening, that wraps up another episode of the Law Firm Marketing Catalyst. If you’d like to contact Dave, we’ll his information in the show notes. If you like what you heard and you would like to hear more, you can subscribe on iTunes or wherever you download you podcasts, and please rate us. We’ll be back next time with another thought-provoking guest who can help you move your firm forward. Thank you so much for listening.


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