Walker Clark Worldview

Business succession and generational transition are no longer just theoretical issues or problems to be deferred until sometime in the future. By our estimates, a majority of the law firms in the world — perhaps as many as 75% of them — are now or within the next ten years will be, confronting the need to pass leadership, management, and fee-producing responsibilities from the older generation of partners to the younger generation.

Moreover, they will be doing this for the first time.

These firms are past the point for succession planning.  They need succession management.

As many of these firms are already discovering, succession in a law firm involves much more than redistributing the departing partner’s files and filling an empty office. There are some subtle and very difficult issues that my colleagues and I have observed as otherwise well-managed firms deal with succession.

• Should we have a mandatory retirement age?
• If not, how will we know when it is time for a partner to retire?
• Can we continue to handle retirements on a case-by-case basis?  Is this wise flexibility or crisis-to-crisis improvisation?
• How do we calculate the amount of money that we owe the retiring partner?
• How can we manage the buy-out of a retiring partner without jeopardizing the incomes of the partners who remain in the firm?
• What do we do about partners who are no longer fully productive, but are reluctant to leave?
• What do we do about partners who want to remain affiliated with the firm in some way?
• What do we do about younger partners who are reluctant to assume management duties being given up by the older partners?
• When is the right time to “pass the torch” of ownership control and management responsibility to the next generation?
• What should we do about a partner compensation system that rewards financial performance but also discourages partners from transitioning to retirement?

Interestingly — but not surprisingly — the law firms that have the most difficulty with transition issues and succession management are those with partnership agreements that are vague or even silent on the subject. (I use the term partnership agreements in a generic sense, to include shareholders agreements, operating agreements, and other corporate “constitutions.”) This is why, for law firms with partners who are over age 50, one of the most important first steps toward successful succession planning and management is to review the firm’s corporate documents to ensure that the policies and rules governing partner retirement are clear, support the long-term business and financial interests of all partners, and are consistent with the professional culture of the firm.

Norman Clark

Prague

Last Friday we launched our new Central Europe Group, to deliver global experience and local expertise to law firms practicing in five dynamic legal markets in Central Europe:  the Czech Republic, Hungary, Poland, Romania, and Slovakia.

The Central Europe Group originated from suggestions and comments by Walker Clark clients, as well as professional friends in the region, who are seeking a multidisciplinary approach to business strategy, management, and operations, that is not readily available from traditional consulting firms at a reasonable cost.

The Central Europe Group delivers country-specific services in:

• Strategic planning and implementation
• Profitability analysis and improvement
• Establishing clear competitive advantages
• Evaluation of mergers, networks, and other growth opportunities
• Improving the marketing performance of the firm and each of its lawyers
• Building the firm’s national and international visibility
• Law firm governance and partnership structures
• Compensation systems
• Performance management to get the best results from each person in the firm

The Central Europe Group has also published a series of country pages with up-to-date news and analysis of the major business and economic trends affecting the business of law firms in each of the five countries. We are also publishing a series of in-depth Background Papers on each legal market. The first of these, Foundations of the Modern Czech Republic, by Daniel E. Miller, Ph.D., one of the coordinators of the Central Europe Group, was published this past weekend and is available for download from www.walkerclark.com.

If you would like a complementary consultation about how the Central Europe Group can assist your law firm, please contact me by e-mail or by telephone at +1.239.466.8370.

Norman Clark

The Wharton Business School of the University of Pennsylvania has recently published a very interesting article “Family Firms in the Middle East:  The New Rules of Engagement.”

A significant number of Walker Clark clients are “family” law firms in emerging legal markets. We have observed how the strategic management of such a law firm sometimes requires a thoughtful balance between:

• A compelling business need to complete a transition from what has been essentially a “family business” to a modern “institutional” law firm; and
• The continuing strengths provided by close family relationships, “traditional” workplace values, and the visibility and reputation of the family in the legal market and business community.

The Wharton article points out several important changes that family businesses in the Middle East are now undertaking.

• Creation and documentation of a formal system of governance, to replace informal ad hoc decision-making by family members
• Introduction of contemporary management structures, such as management boards, audit boards, and independent advisory boards
• A better definition of the relationship between the family and the business, with a clear segregation of ownership of the business from the operation and management of it

These changes are similar to those that Walker Clark, LLC, has helped family law firms to introduce and manage in emerging legal markets in Africa, the Middle East, and Latin America. If you practice in a family law firm, the Wharton article could be quick, but interesting and potentially valuable, reading for you and your colleagues.

Norman Clark

As my colleagues and I advise law firms on governance issues, such as managing the growth of the partnership, partner compensation, or capital requirements, we and our clients sometimes discover that it has been many years since the partnership agreement, partnership deed, by-laws, or other corporate “constitution” has been reviewed.

Although signing the partnership agreement is a time-honored ritual of becoming a partner, we have actually seen partnership agreements that do not bear the signature of any current partner.  In a very few cases, the partners have been unable even to locate any copy of their partnership agreement.

I hasten to point out that these law firms are not bunches of  bumbling incompetents.  Almost all of them are otherwise well-managed and reasonably successful. With all the demands on partners’ time, sometimes the basic foundations of law firm governance are overlooked, assumed by the partners to remain solid despite the passage of time.

This assumption ignores a fundamental risk in business. Past success guarantees nothing in today’s legal markets.  The fact that your law firm has done well in the past does not mean that your governance system will be able to respond appropriately and efficiently to future challenges.

Should your law firm review and update your partnership agreement or other corporate documents? Here is a quick and very reliable diagnostic checklist:

1. Has it been more than 10 years since you wrote or last revised your agreement?
2. Has your partnership grown by more than 30% since then?
3. Are any of your partners over 50 years old?
4. Are your younger partners unhappy with their compensation?
5. Are you thinking about a merger with, or acquisition of, another firm?
6. Is is harder to make decisions now than before?

If you answer “yes” to any of these questions, now is good time to review your partnership agreement to see whether it might need to be updated.

Norman Clark