Firms make the transition to the next generation

By Bob Yates

About eight years ago, when Michael Shelist, one of the name partners at Much Shelist, was in his early 60s, he took it upon himself to name a new managing partner.

Unlike the stereotype of the older lawyer who can’t let go, Shelist was ready to give up his power and usher in a new generation of lawyers to continue the firm. He chose David Brown, then only 37, to be the next managing partner of the firm. And the transition of Much Shelist began.

“There has been a change in the practice of law,” Brown said. “Not that long ago, equity partners were able to cut back around 55 and still retain full partnership. That’s no longer the case - equity partners work at least as hard as everyone else. And, about 10 years ago, some of the founding partners didn’t want to work as hard.

“Making a transition is a hard thing to do,” Brown said. “The older partners have to be willing to let go. But the partners here wanted the firm to exist when they were done practicing, so they did it. There was apprehension, but everyone had the same goal: We were not going to let clients walk out the door.” And let go they did.

Two years after Shelist, who founded the firm in 1970 along with four other lawyers, stepped down as managing partner, he was no longer on the management committee. That was part of the firm’s succession plan, which, over a period of six years, transferred the running of the firm from the founding partners to the firm’s new generation.

“The founding partners wanted the second generation to take over,” Brown said. “We probably could have gotten here without the succession planning and the transition period, but it wouldn’t have been pretty.”

Succession planning is the law firm equivalent of estate planning and - probably for that reason - is always something the firm puts off doing. It’s difficult, it’s highly charged emotionally, and it’s time-consuming.

So difficult, in fact, that a 2006 survey by Robert Half Legal found that only 41 percent of the nation’s 1,000 largest law firms and ­corporate legal departments had a formal ­succession plan. But succession is going to happen, whether the firm plans for it or not.

“Why do people not have a will together?” said E. Michael Ciesla, a partner at Ciesla & Ciesla in Northbrook who does succession planning for businesses. “Succession planning forces you to concentrate on something that’s not profitable, and you’re facing your own mortality by doing it. You always think there’s plenty of time, and then your biggest rainmaker has health problems, or decides to step down, then it becomes an emergency.”

“It gets done one way or the other, either ad hoc or planned,” said David Gustman, a partner at Freeborn & Peters. “Most firms don’t adequately plan - it’s not unique to small firms. I think it’s human nature that prevents people from thinking about the end of what they’ve worked so hard all their lives to achieve.

“Putting a transition plan into place is hard, it takes time to do it, you need to get consensus among people, there are a lot of difficult issues,” Gustman said. “I’m chairman of executive committee. We’ve been engaged in forming a transition plan for the better part of a year, and we’re still working on it. But the time to do it is when you’re relatively young, rather than waiting until everybody is at the traditional retirement age, and asking what does everybody think.”

The stereotype of law firm succession - not the planning part - is the older partner who refuses to give up power, hoarding clients, and hanging on to his full partnership share. There is truth in that stereotype, but, as Gustman said, at some point the law firm is going to change, period. And the consequences of not mapping out the future of the firm can bring the firm down.

“There are a lot of firms with a great history and cool stories that didn’t work out,” said Don Hershman, a partner at Much Shelist.

Succession planning is a particularly acute issue for mid-sized firms like Much Shelist and Freeborn & Peters. Especially in mid-sized firms, the client base is not institutionalized.

“Commonwealth Edison is always going to be a Sidley client,” Hershman said, “but I think Mike Shelist’s clients looked at Mike Shelist as their lawyer, not Much Shelist. We’re ­dealing with the mentality that you hire the lawyer, not the firm, but that’s never the case, there’s always a support team of lawyers, and you need to let the client know that.”

“We have some great institutional clients,” said Thomas Fahey, managing partner at ­Ungaretti & Harris, “but we don’t have the luxury of sitting back and waiting for our ­institutional clients to call us. We need to continue to have our partners really constantly enhance their visibility and their client development skills.”

In order for this transition to happen, the firm’s leaders have to step up and take on the issue of succession. It’s a transfer of power and money, but, ultimately, it’s about money.

“You don’t get to anything unless you get to dealing with the older partner,” said Lewis Schneider, a partner at Pretzel & Stouffer. “How do you get somebody to give up control? You make it financially feasible. You want to make sure the partner is not financially threatened by giving up control. You fully fund his retirement plan, make sure his insurance is paid, provide for deferred compensation based on his book of business, or a percentage of fees collected, or a formula based on prior earnings.”

“With succession planning issues, you have to look at the financial ramifications, because, inevitably, everyone wants to know what’s in it for me,” Ciesla said. “The older partners are relinquishing power, so, what are they getting in return? And the people ascending want to know what it’s going to cost them.

“And I think there’s an emotional component that you have to be sensitive to,” Ciesla said. “If an older partner is looking to step down, he’s probably going through some emotional stuff. You have to learn to let go of the control aspect, going from head of the firm to of counsel. To go from being in charge for a long time, to having no power, it’s an emotional process, and the younger attorneys ascending have to be sensitive to that.”

A succession plan
Those are the two poles - the old and the young - and for the firm to work its way through the egos and fears and ambitions, there has to be a fundamental agreement on what the firm is and what it’s going to be. Until the firm reaches agreement on that, there’s no real basis for the planning.

There are two aspects to the planning, and, ultimately, they both run together: financial and the vision of the firm - what Brown of Much Shelist calls “the sense of firm.” And, if the elders of the firm won’t cede power, then nothing happens. Succession planning, and the succession itself, requires buy-in from the firm, because this isn’t an isolated event - it affects the entire firm, and for a long time.

“Our sense of firm is that you have people who enjoy practicing law the way we practice,” said Hershman of Much Shelist. “You might make a little less money here than at an institutional firm, but you’re controlling your own destiny. We wanted this firm to continue. It is buy-in and commitment to the firm to keep the firm as it is now and getting better.”

If that sense, that desire for the firm to continue as its founders intended, beyond their departures, exists, then the succession of the firm can take place in an orderly and satisfactory way - one that rewards the retiring partners financially and emotionally, one that gives the younger lawyers the opportunity to become the new leaders of the firm, and to make more money, and, most importantly, it keeps the firm strong, cohesive, and vibrant for the another generation of lawyers.

“You need to get the clients and the management of the firm to the next generation,” Brown said. “It impacts the entire firm. But it’s a hard thing to do - you want to avoid hard feelings - you want to approach it so everyone wins. Our vision was, this can work, so everyone had to check their egos at the door.”

“We are literally confronting the issue of transition, just starting to experience senior partners at a stage in their careers and lives where they’re looking to downshift in firm life,” Fahey said. “It’s gone very appropriately and peaceably in terms of working with them so the firm can continue to take advantage of their skills, leadership, perspective on things while giving them a meaningful home while relationships get transitioned. It has happened here as a natural process rather than as a forced one.”

“Compensation during transition perhaps is the most difficult issue,” Gustman said. “The single biggest issue is the personal financial plan of the partner who is in an economic ­position to transition - if the partner is able to transition rather than hanging on because they need to work.

“You find lawyers who would like to transition but can’t because of their financial ­condition, and lawyers who haven’t thought about retirement - they have nothing to do except come to the office.

That’s not unique to lawyers, but you have to start thinking about the second half of your life.”

The touchy part of the transition is finding a way to move the clients from the older ­generation to the younger generation while compensating the older partner for fostering a relationship with the younger partners, and figuring out where credit for the client relationship properly goes.

“There are only so many dollars to go around, so you take from one person and give to another in order to recognize that a transition is going on,” Schneider said. “A lot depends on the compensation system the firm has - in most cases, it’s productivity, billable hours, source credit and credit for managing the business.

“Most likely it’s going to be continuing to give the senior partner some credit for sourcing even after he’s made the transition and also for managing the client,” he said. “You play with variables and you want it to be satisfactory and motivational - it has to be in the partner’s interest.

“Fear of someone jumping ship is one of the barriers. Some partners are reluctant to transition the client unless they’re certain the partner is going to be in the firm as long as they’re in retirement, so you have to come up with ways to keep the younger lawyers - give them a date certain when they’re going to have clients and management responsibility,” Schneider said. “They have to know they have more to lose by leaving and more to gain by staying.”

“Who gets credit for client relationships is an important issue,” Fahey said, “and we work with senior partners to make sure credit also gets to the younger partners working with the client. It’s a bit of a challenge to decide who gets rewarded for that process. We probably have situations where the senior and younger partners were feeling they weren’t properly rewarded on a case-by-case situation, but it’s worked well overall.

“You have to recognize the historical relationships and at the same time move credits to the younger partners,” he said. “Clients have been very copasetic - that part has been seamless, because the clients are used to being serviced by teams, so it’s okay that the more senior lawyer is not on matters day-to-day, but is available when needed.”

Here’s what Much Shelist did. For the ­partners who were ready to step back, the firm created a “senior status program.” If the partner bills under 1,400 hours for two ­consecutive years, he or she is retired to the senior status program.

At that point, the senior partners begin the process of transitioning their clients to younger lawyers. Part of their job - for which they ­received billing credit - is to transition the clients of the firm.

“They are paid for the hours they work and for transitioning the client,” Brown said.

The senior status program started eight years ago, and nearly all the clients were successfully transitioned to the younger lawyers. The transition took place over six years, and, during that time, the younger partners didn’t get paid as the clients were transitioned to them.

The transition was not without its bumps. But, Brown said, the firm leaders kept a close eye on what was working and what wasn’t. When younger partners selected to take over certain clients didn’t work well, the assignments were changed.

And, in the process, Brown noticed that a further transition was happening: the younger lawyers began to feel empowered.

“The challenge was, can you keep this client?” Brown said. “The younger lawyers matured in their understanding of the client; we saw service attorneys get a little more confidence as they learned what you can do to help clients. They grew their practices, increased their skills.”

Management and power
Giving up power is difficult for the older lawyers, but it’s equally difficult for the firm to identify those in the next generation who have the interest and talent for managing the firm.

The transition time is, Ciesla said, “an open invitation to the younger attorneys to say, “Now we can do things the way we want. Take the best of what there was and infuse new ideas.”

“If a person has pride in the firm and cares about it,” Schneider said, “they’re going to want to make sure that the person who takes their place is someone they know and developed taking over responsibility in management and client relationships, whatever the partner is giving up.

“In my experience it’s the younger partners taking ownership, seeing holes in the leadership and stepping up, having an appetite,” Schneider said. “You need to identify the right people with the skills, talent, and desire to get involved in firm management - people who can take over at earliest possible moment - and you need to provide training and ­recognize you may have made a mistake.”

“One of the goals of our transition plan is to make sure younger partners are in management training roles,” Gustman said. “That’s generally working on committees so that lawyers are encouraged to transition to the junior lawyers management as well as client responsibility. One of the legs of our transition plan is going to be a process of bringing lawyers in their 40s into management roles, even when the senior lawyers are still managing well.”

The more a firm deals with succession planning, the more apparent it is that it’s actually a way to address many firm issues.

“Is there a strategic plan in place? A succession plan is a piece of a larger strategic plan,” Schneider said. “I would posit that you can’t have succession plan if you don’t have a strategic plan. These decisions have to be made 10 years before someone retires.”

“There are milestones in a lawyer’s career,” Gustman said.

“At partner age, say, 50, as part of the yearly review process, dialogue should begin of how the partner will eventually transition, and at what point that will happen. The partner would be required to present a ­financial plan to the firm as part of the overall review process. Many people wait until 60, they’re too busy, like the doctor who never treats his family or takes care of himself.

“Some firms agree to pay a lawyer for five years as a transition, but we always made it pretty clear when we formed the firm, six or seven of us, that the firm would not be ­responsible for financial retirement, and we created a 401k plan. Those firms that have a defined compensation plan to pay retired partner for five years, with many firms that’s a millstone around the necks of the younger partners or the firm. That’s why we didn’t do it.”

“Usually,” Ciesla said, “a transition can cause short-term financial problems. It’s going to hurt a little or a lot financially, the firm might have to take out loans or drain the cash. That’s another reason to plan to absorb a hit.”

At Much Shelist, retirement age doesn’t necessarily translate to retirement - the ­senior status is not based strictly on age. At 69, Morrie Much, one of the founding partners, is still working full-time, still a full equity partner; his last five years have been ­high-producing years. “It’s not age,” Brown said, “it’s what you want. Morrie Much stepped up his game.”

“God love you if you want to bill 2,000 hours at 70 years old,” said David Gustman from Freeborn & Peters. “I’m happy to have you as my partner.”