Many trends are now buffeting the legal industry and threaten to reshape it. For one, sixty-six percent of companies say they are bringing more legal work in-house and growing the general counsel’s office, thus depriving law firms of work. Also, the median age for a lawyer today is 46 years, up from 39 in 1980, and one in five lawyers under 40 are choosing to leave the profession.

Meanwhile, tech law services are looking to cannibalize billable activities. In 2023, Thomson Reuters spent $650 million acquiring Casetext, a legal AI research assistant that reviews documents, prepares depositions, and analyzes and compares contracts.

As a result, law firms will need to adapt. But many find themselves structurally or attitudinally opposed to doing so. The partners there may be running an excellent practice, but they also might not realize that this is not the same as running a sound business. To meet the above change, they will need healthier margins, a greater understanding of which cases made money and more.

In this article, we explore ways law firms can explore the matter of succession or lateral moves long before they are needed, so all goes according to plan.

Succession is inevitable—executing it gracefully is not

The demographic shift, and the fact that many law partners will soon retire, means firms must consider what will happen next. If those partners will not be the ones to meet this new change, they must know who will. Because that individual will need to begin preparing.

Firms that don’t plan for succession may lose the ability to control the firm’s succession. Today, few firms have this plan in place with written consensus from all the stakeholders. This makes it far more difficult and contentious to negotiate and can jeopardize the firm as a going concern.

One significant consideration regarding succession is whether or not it will require a new infusion of capital. If so, has the firm prepared for that? Partners must think through scheduling payments, sources of capital, and how they’ll manage a “lateral” merger without losing money. This requires them to model cash flow and plan for scenarios.

Succession planning goes beyond financial considerations for the firm. It extends to all aspects of the business and the attorneys. Any planning committee will need to understand and consider the expectations of the equity and non-equity partners, their abilities, their contributions to the firm — including who brings in new business —, expected time to retirement, and who has retirement plans.

Thing is even if aging partners plan to continue with the firm, their peer referral sources may retire, and referrals will dwindle. Partners may resist lowering their pay, even though they may have to sacrifice some earnings in the transition. So, the earlier your firm has these conversations, the better.

Firms must also consider who will be the next managing partner. The managing partner role should be in planning at least five years out, which allows enough time to cultivate the talent capable of growing into that position. To start, consider expanding the executive committee now to give younger partners a seat, and begin the search.

Action: Begin building that partner talent pipeline now

Partner talent is not unlike a farm system in baseball, where pro teams watch “feeder” teams for up-and-coming talent. Law firms that create a plan to actively recruit and groom talent are more likely to attract a future star early, at a base-level salary.

Action: Engage outside help for succession planning

An unbiased third party can often guide your firm through a succession process more smoothly than someone internally. They can bring insights from other firm successions and offer a method to arrive at a succession plan that is consistent with those of best-in-class peer firms.

Succession options:

• Internal succession: Sell or transfer the business to one or more partners or key attorneys.
• External succession: Sell to a third party, merge with another firm, or seek outside investment.

Build a succession plan now before it is needed

Every firm has the opportunity now to chart a strong financial course into the future. Beyond succession planning, there are many other matters they can address, such as revisiting their tax strategy, deploying analytics to understand underperforming service lines, and using technology to craft new offerings.

But no opportunity stands as such a stark risk, nor offers so much potential, as figuring out who will be the next managing partner, five years ahead of time.

For more opportunities for law firms, read our 2024 Law Firm Opportunities Report.