We are an Oklahoma City law firm of seventeen attorneys – ten of which are partners. Our firm does a little of everything. We have a three-member management committee of which I am a member. The firm was founded by four of the present partners twenty-two years ago. For many years the firms was very successful, however for the last five years financially we have been hard pressed and we have been stagnant. We have been discussing what to do about the situation. One of our partners suggested marketing and another suggested that we needed a new strategy. We do not have a marketing plan and I didn’t know we even had a strategy. I would appreciate your thoughts.
A strategy is the firm’s decision on what services to sell, to whom to sell these services, and on what basis to sell these services. In other words a law firm must determine what legal services to be provided, to which clients and in what geographic locations, and how these services will be differentiated from those provided by other law firms. Law firms can choose a broad or narrow range of clients. Law firms can compete either on the basis of price, quality of service, or expertise. Firms compete on price by charging lower fees than their competitors. If the firm’s clients perceive that the firm has unique advantages over its competitors in the way services are provided, then the firm is competing on the basis of quality of service. If the firm offers its clients a superior knowledge base, it is competing on expertise.
Your strategy or lack of a strategy has been broad. A narrower strategy is appropriate in today’s competitive legal marketplace.
Here are a few suggestions for narrowing your strategy:
I suggest that you study up on the strategic planning process and engage all of your partners in the process and comes to terms with an appropriate strategy for your firm. Then develop a strategic plan and use as your roadmap for getting there.
John W. Olmstead, MBA, Ph.D, CMC
I am an equity partner in a thirty-six attorney firm in Miami. We have seven equity partners, eight non-equity partners, and twenty one associates. Our practice limited to civil litigation defense and our clients are institutional clients consisting of business firms, governmental agencies, and insurance companies. The ages of our equity-partners are: 64 62, 60, 58, 54, 48, and 44. The firm does not have a succession plan for the senior partners and has not even discussed the matter. I am not sure what the partnership agreement provides. I am concerned about our future if we don’t start addressing this. I would appreciate your thoughts.
With three members already in their sixties you are going to have some retirement bunching issues before long and I agree that you should start planning and deal with this sooner than later.
The partners as a group need to start talking and the senior partners should begin sharing their ideas and plans concerning their retirement goals. There should be an ongoing dialog with your senior partners. Review the firm’s partnership/operating/shareholder agreement. After reviewing these documents, determine how the firm’s policy regarding retirement, if there is one, will affect various partner’s retirement timelines, compensation, and payout. Does the policy require mandatory retirement at a certain age? Ascertain whether the policy provides for phase-down. How does the phase-down handle management and client transition? Is there an “Of Counsel” provision after retirement? The firm needs to reach an agreement with its senior partners nearing retirement concerning their retirement timelines, client and management transition, and retirement payout or return on invested capital.
The initial challenge in a larger firm is to determine who the successor or successors will be to transition clients and management responsibilities. This may be no easy task especially if the firm is in first generation and the retiring partner is one of the founders.
In firms your size, clients are more likely to be large sophisticated clients, possibly Fortune 500 companies, which refer many matters to the firm during the course of a year. Often such clients may be both a blessing and a curse for the firm. A blessing in that their business provides the firm with huge legal fees during the course of a year. A curse in that their business represents a large percent of the firm’s annual fee collections and a significant business risk if the firm were to lose the client. An effective client transition is critical, takes time, and must be well planned.
Successful client transition – moving clients from one generation to the next – is a major challenge for larger firms. Shifting clients is not an individual responsibility but a firm responsibility. To effectively transition clients the individual lawyer, with clients, must work together with the firm to insure the clients receive quality legal services throughout the transition process. Both the individual lawyer and the firm must be committed to keeping clients in the firm when the senior attorneys retire. Potential obstacles include:
In larger firms, partners may have management responsibilities as well as client responsibilities. A retiring partner may be a managing partner, executive committee chair or member, or serve as a chair or member on other firm committees. Retiring partners will have to transition these responsibilities to other partners in the firm.
Transitioning client relationships and management responsibilities effectively can and where possible should take a number of years – preferably five years – typically not less than three years. For this reason, many firms use five-year phasedown programs for retiring partners. These plans provide detailed timelines and action steps for transitioning client relationships and management responsibilities.
John W. Olmstead, MBA, Ph.D, CMC
I am a partner in a twelve attorney firm in Rockville, Maryland. We are a corporate transactional and litigation firm. We are a first generation firm. The firm was founded by the present four equity partners twelve years ago. We have been very successful over the years and this is borne out by out by our excellent financial performance. While we have done well in our core practice areas we have been considering diversifying our practice into government sector work due to our proximity to Washington D.C. and we have been considering merging with a six attorney (three partner) firm in D.C. that is totally focused on such work. Can you share with us any pitfalls that we should look out for.
It sounds like this might be an opportunity if the cultures and people are compatible, the practice area makes sense for your firm, there are no conflicts, the billing rates, and other factors are in line. Start getting to know the firm and its people. Then move to conflicts checks and ask for five year’s of financial statements and tax returns, internal financial reports, attorney and staff compensation data, partnership agreement and other partnership documents, schedule of billing rates, client lists, copy of building and equipment leases, and malpractice applications. Assess the stability of the revenue stream, repetitive ongoing clients, client dependency, etc. Make sure there are no pending malpractice claims or other liability issues.
Obviously you will want to do all the due diligence that you can. Initially examine and make the following calculations:
Examine the balance sheet items such as bank debt, large tapped out credit lines, equipment leases and other liabilities. Take a look at the partner capital accounts. Then examine the items that are not recorded on the balance sheet – namely unfunded partner retirement buyouts and long term real estate leases. What are the ages of the partners in the candidate firm and are there partners close to retirement? What are their provisions for retirement of these partners? These are often major deal breakers in mergers and scare away potential merger partners.
Keep in mind that the financials are only part of the equation – the other part your gut feel. Does the potential deal make sense? Will one plus one equal three – will a synergy result? Do you feel comfortable with the people (partners) in the other firm? Do you share common vision and philosophies and will you make good partners?
John W. Olmstead, MBA, Ph.D, CMC
I am a partner in a firm in Los Angeles. We have nine attorneys – four partners and five associates. We are a young firm in that we have only been in business for four years. The four partners started the firm together, we are equal partners, and we split the profits equally. When we started the firm we each made equal capital contributions. We do not have a partnership agreement. We are thinking about bringing in two associates as equity partners and are trying to think through the mechanics and one of our questions is whether there should be a buy-in and if so how should we determine it. We would appreciate your thoughts.
Law firms have different viewpoints on this subject. I have worked with some larger firms that are in second generation or later that do not require a capital contribution at all. They use end of the year distribution hold backs and credit lines to fund their working capital requirements. Other firms do require capital contributions upon being admitted as a partner and additional contributions over time when additional capital is needed or when partners acquire additional capital interests.
Smaller firms tend to require new partners/shareholders to pay for their interest in the firm. The buy-in can provide additional capital for the firm or can be used to compensate the existing partners/shareholders for their investment and sweat equity in creating the law firm or in growing it to its present size. One approach that some firms use it to include in the partnership/shareholder agreement the formula for determining the value of the firm, to which the new partner’s/shareholder’s percentage interest can be applied. This could include non cash-based assets such as accounts receivable, unbilled work in process, and goodwill. Another approach is to base the buy-in or capital contribution upon a the cash-based capital based upon the number of ownership shares a partner receives. Most firms allow for a buy-in over several years. Firms that do have a buy-in provision also typically provide for a payment to partners/shareholders upon departure for the value of their capital account. In recent years, an increasing number of large firms have adopted a free buy-in. Under that approach, there are no payments to departing partners/shareholders.
I believe that you should require at least a capital buy-in based upon the cash-based capital on the books and the number of ownership offered. This assumes that the partners still have capital accounts on the books. I also think you might consider them buying into the accounts receivable and unbilled work in process as well or be excluded from participating in compensation from those receipts. You should also get a partnership agreement in place as well.
John W. Olmstead, MBA, Ph.D, CMC
I am a partner in a four attorney personal injury plaintiff in downstate Illinois. Three of us are partners and we have one associate attorney. We handle run of the mill slip and fall, vehicle and premises accidents, and products liability cases as well as workers’ compensation cases. We have a very aggressive advertising and marketing program. We are having issues with reduced case flow and dwindling and diminishing profits and earnings. For the past year the partners have been living off our credit line. We believe that we need to be thinking about doing something different and are not sure as to what that should be. However, we have agreed to start doing some long term planning. We would appreciate your thoughts.
I believe that the very process of developing a strategic plan would be very helpful, beneficial, and enlightening. Strategic planning does not need to be the involved and complicated process that sometimes it becomes. It a nutshell it is nothing more than a series of logical steps. The process is often more important than the written plan. Most workable strategic plans are put in writing at the end of the process, and then often in summary or outline form. Generally, the steps include:
Your first step will be the mission statement – you should take a hard look at who are you as a firm and who are you serving as clients? Many of our personal injury law firm clients across the country are facing similar problems that you are and they have been forced to take a hard look at their their practice and geographic area segments. Some firm’s have tried to balance the cash flow ups and downs of contingency fee work by adding time billing practice areas that provide consistent cash flow such as employment, family law, criminal, and bankruptcy. Other firms are extending their geographical reach through additional offices and some are getting involved in mass-tort cases.
I think this is the most important step if you don’t do anything else. You may have to consider expanding and diversifying your practice.
John W. Olmstead, MBA, Ph.D, CMC