I was recently at a conference of elite trial lawyers where I presented with Dr. Maura Grossman and was on a panel session where we demonstrated how Generative AI could be practically used. But perhaps the most enlightening time was spent outside of the conference in networking conversations which is, of course, typical.
One of those times was when I had a chance to chat with John Trimble. I have known John for several years. He is not only an outstanding lawyer and frequent consultant to small and mid-size law firms but also a thought leader in law practice management.
Standing in the Food Line
While in line to get food (always a good time to chat), I asked John what he thought was the most frequent challenge to law firms he works with as a consultant. I expected him to say something about selecting and implementing technology, adopting generative AI adoption, or even dealing with remote work desires. His answer surprised me. Not only were my three assumed challenges not at the top, but they also weren’t even among the top two.
His top one: succession issues. In particular, how to get older partners to get out of the way; how to get them to stop drawing compensation beyond their value; and, in general, give up their seats of control. His second choice is more typical. He noted that lawyers are by and large poor businesspeople. Lawyers at all levels, but particularly in firm management, lack a fundamental understanding of basic business and financial principles. John notes, “Many firms don’t even bother to prepare and follow an annual budget”
Neither of these challenges has anything to do with tech.
100-year-old firms that are dying because the 70-80 year old partners still draw full compensations and receive full perks
The Old Man in the Corner Office
John told me he frequently sees “100-year-old firms that are dying because the 70-80 year old partners still draw full compensations and receive full perks”. By doing so, says John, they deprive younger partners of compensation and involvement in the firm. The result: younger partners, often the firm’s dynamic lifeblood, leave. The attitude of the older partners seems too often to be, “I built this firm, my name is on the door, and I am entitled.” Often lockstep compensation exacerbates the problem.
These firms usually do not have funded buyout plans for retiring or deceased partners. So, when a senior partner retires or dies, payment of the partner’s interest depends on funding out of law firm profit. This, in turn, reduces the compensation of the remaining law firm partners. Many younger partners will leave rather than face the possibility of having to pay large sums of profit to departing or deceased partners.
Sadly, says John, many older partners have not saved for retirement. They are counting on continued draws or capital payments to survive in the manner to which they were previously accustomed. The result is that they resist any changes, changes that could increase the overall firm’s financial viability and they refuse to retire.
I have written before about law firms’ need for succession planning. But I mainly focused on how origination credit rules that award credits for life hurt younger partners and firm financial health. Jordan Furlong, on the other hand, recently wrote about what perhaps needed to be changed in law firms and asked, “Will senior partners still presumptively maintain their positions in the firm as long as they like and on whatever terms they wish?” At first, I wasn’t sure he was right. But after talking to John, I see the problem, particularly for smaller firms.
Just because you are a rainmaker doesn’t mean you know how to run a business
What, Me, Worry About Finances?
The second most frequent problem for law firms, says John, is the lack of business sense, particularly among law firm leadership, but also among even younger lawyers. All too often, the partner with the most significant book of business becomes the managing partner. But just because you are a rainmaker doesn’t mean you know how to run a business. It’s often just the opposite: the skills that enable you to woo clients aren’t the same intuitive skills required to run and manage a business.
Add to this lawyer hubris: the attitude is often one of “I’m a damn good lawyer, and I already know how to run my firm.”
The truth, of course, is that law firms are businesses. Running a successful business or even running your own practice within a firm requires understanding business principles. It means reading and understanding sometimes complicated financial statements. Very few lawyers take the time to read financial statements. Even fewer know what they mean.
It’s hard to run a successful business in today’s world without business acumen. But that is what too many lawyers think.
What Can Be Done?
So, what can be done about these two significant problems that are hobbling so many firms? Here are some thoughts, some John’s, some mine:
- Hire a third-party consultant to have hard conversations with older partners. For most older and even younger lawyers, practicing law isn’t just what they do; it’s who they are. And they consider the firm to be in a real sense, their firm. As John observes, these are often partners with their name on the doors. They have a long history with the firm, which they sometimes single-handedly (in their minds, if not in actuality) built. It is like asking your grandmother to not only stop driving but also to give up her car. It’s not an easy conversation. Often, it’s easier for third parties, like neutral mediators or strategic planners, to have those conversations.
- According to John, “Firms should be rigorous in managing the capital accounts of partners. Make sure that the partner agreement specifies how a partner’s capital interest is calculated. Further, the partner agreement should require that a partner’s capital interest be paid in installments over time in the event of retirement or death so that the firm is not suddenly saddled with a large unfunded obligation. Some firms may also choose to pay down a partner’s capital interest for a period of years prior to retirement. “
- John believes it is wise in your partnership agreement to set a firm retirement date and stick to it. 70 is the most common age for a partner to cease to be an equity partner. That doesn’t mean you show older partners the door. It does mean they have to turn over the reins and are no longer equity partners. It also requires that they have to agree to a new compensation plan that is in line with what they are doing for the firm.
- Deal with origination credit rules that handicap younger lawyers and deprive them of incentives. The old “origination credit for life,” in particular, needs to go to free up opportunities for younger lawyers. Where’s the best chance to get new matters? From existing clients. Why disincentivize younger lawyers from seeking this new work?
- Don’t let lawyers with no business training and skills run the financial end of the firm. Hire someone who might not be a lawyer but is business savvy to handle the business side of the firm. Most businesses have Chief Financial Officers for a reason. And, at a minimum, the firm should have a budget that can be followed.
- Require training for every lawyer (and, for that matter, legal professionals) on how to read and understand financial statements. And what they mean.
- Plan for the future. Create a culture that focuses on long-term financial health. Be fair to older lawyers: the firm would not be what it is without their efforts and contributions. But create a culture that incentivizes younger lawyers who often have families to feed and student loans to pay off. According to John, firms should do all that they can to dispel any fears in younger lawyers that they will be working forever to support unproductive senior lawyers.
All too often, lawyers devote time and energy to the practice side and ignore the business side. All the tech in the world won’t cure that problem
A Firm for the Future
It’s often said that there is a practice side to a law firm, and then there is a business side. All too often, lawyers devote time and energy to the practice side and ignore the business side. All the tech in the world won’t cure that problem. Want a healthy and viable firm for the future? Treat the business side as if it were as important as the practice side.
