Succession planning for law firms
From travels around the country working with law firms of all shapes and sizes, it is apparent to the author that succession is a key issue for many law firms, the sole practitioners and partnerships who still account for half the firms in England and Wales [i.e. around 5000 out of 10000]. If an issue affects the very existence of the firm or its profitability, then it is strategic. Succession certainly fails within that definition. Unfortunately, so many issues discussed in law firm management are operational. Effective succession planning must be strategic and consider the bigger picture rather than the day-to-day operation of the firm. If succession planning is to be effective and successful [not the same thing], the current owners/managers must think creatively and flexibility, in order words, differently. Succession planning needs to start sooner rather than later and hopefully avoid surprises. A shock departure can have a destabilizing effect on any business especially if the leaver is a key part of the success of the firm. Of course, succession planning is also personal and in the case of a sole practitioner, very personal! Past president of the Law Society, Nicholas Fluck said recently: “Any succession planning process will go better if you start with an organised functioning efficient business with a sound strategy and a good business plan delivering it.”
All businesses need a business plan. It may be called a forward plan or a strategic plan but it will be a plan for the future and will provide a vision and direction for the business. The SRA, indemnity insurers and the banks, amongst others, will expect to see a well thought out and presented plan for the future. The plan cannot afford to dwell too much on the past or the baggage that might come with it. We need know where we have come from but it is more relevant to the reader to know where the firm is going. Succession must be part of that planning for the future. Setting aside the age discrimination issue, the senior people in a law firm tend to be the older members of the firm. As they advance in years, they will be thinking about retirement or at least winding down. They may not have the energy, health or motivation to carry on at the pace that got them to where they are in the firm. They may want to wind down but not retire just yet [e.g. continue as a consultant for a fixed period]. Succession is a complex issue because the needs and ambitions of the firm must be balanced against the needs and ambitions of those being succeeded. They may not be the same.
For the last 5 years, our regulator has been focusing on outcomes for our clients, as have we. In succession planning we must focus not only on outcomes for our clients but also for our business, staff and the person being succeeded who may not necessarily be retiring but for the purposes of this article is exiting the business i.e. leaving to do other things. Our planning should be considering the following:
Succession planning outcomes, in no particular order:
- Continuity of service to clients
- Financial stability of the firm
- Ensure staff welfare
- Flexibility for the desired exit
- Maximise the value received on exit
The plan must consider each of these and reconcile them with the overall objectives for the business. Many plans nowadays consider a 3-year timeframe. Is it possible to plan further ahead, we might wonder, but is 3 years long enough to plan for the succession of a key member of the firm? Of course, this depends upon the particular circumstances of a given succession issue. Let us now consider the person we are planning to replace.
In a traditional law firm that is either a sole practitioner or partnership of solicitors, the leaders of the firm perform 5 main functions within the business. These are:
- Owner of the business
- Manager of the business
- Supervisor of people within the business
- Leading technician – income generator [fee earner]
- Rainmaker – creating new business [attracting new clients and work]
In different times, perhaps not that long ago, it was possible for one person to fulfil all of these roles in a firm. Of course, in a sole practitioner situation, there is no choice but it is a tough call to expect one person to fulfil all of these functions and perform well in each of them. The dilemma for a busy practitioner [now read “technician”] is juggling priorities and invariably the technician function comes first i.e. looking after clients and doing the legal [fee earning] work. When Michael Gerber first wrote about the E-myth Principle in 1985 he talked about the leader of the business working in the businessrather than on the business. Succession planning involves working on the business when many leaders spend most, if not all, of their time working in their business. The strategy for succession planning must be the achievement of the 5 Outcomes [and possibly others] identified above. Planning and tactics for achieving those outcomes will be aimed at the 5 main functions [and possibly others] listed above. Can we replace the 5 functions with one person or do we need several or more creative solutions? Consider the qualities required of a person who is effective in each of these functions. Are they the same or different? If you are the one being succeeded, this consideration might require some honest soul searching! We should also factor in that the next generation may not want to succeed their seniors and if they do, they may wish to work and be rewarded more flexibly and creatively that their seniors.
The “Owner of the business” function clearly has financial considerations if the leaver has capital that will be withdrawn upon their leaving. How will this money be drawn out and will it unbalance the balance sheet? What arrangements have been made in the Partnership Deed or Membership Agreement? Indeed, is there a Deed or Agreement?! If the capital withdrawn is to be replaced, will the replacement owner be a solicitor partner with funds to make a capital injection or might you consider a re-structure e.g. ABS to bring in non-partners and/or external investment. In any event, you might consider a restructure to ensure that you are structured and financed in a way that is appropriate for your strategy and the future.
The “Manager of the Business” is an often neglected function in smaller firms where the manager is a chief technician and working in the business. However, law firms do not manage themselves and must be actively not passively managed. Is there someone within the firm you can nurture and coach to fulfil this function? If yes, this will take time. Management skills and knowledge will need to be acquired. Otherwise, we will need to recruit either a readymade manager or someone with management capability or at least, potential. In a partnership situation, consideration may be given to reallocating management responsibilities to the remaining partners but only if they have the required skills and capacity to take on particular responsibilities.
Everyone in a law firm needs to be supervised, even the partners. This is a key risk management function. Supervisors need to know what is going in within their team or department. The COLP needs to know what is going on within the firm generally. So, the “Supervision of the people in the business” is a key function and must be more than “we have an open door policy and an annual appraisal”. Is there someone in the firm who can take on the supervisory responsibilities of the exiting partner?
We have assumed that the person being succeeded is a partner and more than likely one of the main fee earners in the firm and therefore a chief technician. How will their fee earning be replaced? Is there capacity for their type of work within the firm or do we need to recruit to replace that capacity? Do we need to recruit a partner to replace that capacity?
Law firms need “rainmakers” who bring in work for themselves and others in the firm. Traditionally, they have been networkers and ambassadors for the firm. Do we need to replace this function? Will our future clients and work come to us in this way? In any event, there must be a business development function within the firm and the leaders/managers will have a key role in ensuring that the firm attracts the right type of clients and work in the future.
The questions above are only some of those that might be asked when considering what we need to replace when a senior member of the firm leaves or retires. Of course, this is significantly simplified in a sole practitioner where the options are more straightforward. The functions are the same but the options for achieving the desired outcomes are more limited: Recruit a straight replacement, merge/sell the practice, closedown, other? In a partnership situation, another option suggested above is to absorb functional responsibilities within existing resources.
The flip side of these considerations is an evaluation of the contribution being made by the person who is exiting the business. How do they perform in each of the 5 main functions? What contribution are they making to the profitability of the business? If their fee income is unprofitable or likely to be in the future, do we need to replace it? Is this an opportunity to pull out of an unprofitable area of work? Does the work need senior fee earner input or could it be reallocated to a more cost effective level? An evaluation of contribution should inform the detail of the succession plan for the person concerned in terms of how and when they relinquish their functional responsibilities.
This article is perhaps posing more questions than providing answers but is hopefully prompting the reader to think more strategically about their business and planning for succession, perhaps their own retirement. We have come full circle. Succession planning must be an integral part of the overall strategic plan for the business. They inform each other. Most strategies are concerned with the continuity of the business and in the case of succession, managing the changes associated with the departure of a key person. If the decision is to close down the business, there is still the obligation to organise an orderly closure and ensure that clients are looked after following closure. There is also the matter of run off cover to be considered where the premium could be the equivalent of 3-4 times the indemnity insurance premium.
If the strategy is for continuity of the business, in whatever form, the classic business planning process should be followed and start with “where are we now [i.e. what shape are we in”] and “where do we want to be in 3 years?” The plan will describe how we are going to get there. In any event, we are looking for an “investor” whether it be an internal appointment [promotion] to take on some or all of the 5 main functions, an external investor e.g. individual recruitment or non-lawyer investor or a merger/takeover partner [firm]. We are looking for someone to invest in our business. What does our business need to look like for it to be investable? Even if we are not going to sell the business, what does it need to look like for it to be saleable? Whatever the strategy, these questions need to be answered. If we are looking for a new partner, we need to think about the rewards we can offer the individual candidates. If we are looking for an external investor, what return can we offer them on their investment and when?
- Concentrate on areas where you are really good.
- Do not try to be all things to all men.
- Be clear on what differentiates you from your competition.
- Make sure you have good control on lock-up and cash flow.
- Actively manage unprofitable fee earners, clients and work.
All of these things will make you an attractive proposition for an internal or external investor. Your succession planning will fail if you are an unattractive proposition or if it succeeds, it may lead to failure further down the line e.g. due to lack of due diligence by you and/or the “investor”, which will not be in the best interests of your clients. Of course, the attractiveness of the business to an “investor” will have a bearing on the fifth outcome referred to above: “Maximizing the value of the benefit on exit”. This will be determined by the shape the firm is in including its financial wellbeing. The “investor” will want their reward in the short term which might mean that a recruit [internal or external] will want to be paid more than you hoped to pay or an external investor will want to invest less on the business and/or demand a higher share of the business than you hoped for.
When a succession plan is being developed it should include a realistic timeframe that ensures the desired outcomes are achieved. There are recruitment and financial considerations as well as possible re-structure or merger related issues that will have a bearing on a realistic timeframe. However, the one area that cannot be forgotten is the transition of clients and work from the person exiting the business to those taking over. Client relationship management is a key area of law firm management and clearly, the relationship with clients who have established relationships with a person who is leaving must be handled carefully and over a period of time. A letter to the client on the day of departure will not work and run the real risk of a lost client and business. This is a driver for retiring partners staying on as consultants for a fixed period to ensure the smooth handover of the client relationship. However, this should happen before the partner retires. There should be no “my client” attitude. Clients are clients of the firm. Therefore, transition must be actively managed and not left to the person exiting the business.
The former managing partner of Eversheds, Peter Scott has said recently: “….unless firms openly and frankly discuss issues relating to retirement with partners they will not be able to arrive at mutually acceptable retirement arrangements which will work for both the partner and the firm”. This is easier in a sole practitioner situation where we are having an open and frank discussion with ourselves! It is more difficult in a long established partnership situation where partners are colleagues and friends but the discussion is nevertheless necessary. Solicitors are not typically professional managers or strategic thinkers/planners so should seek independent expert advice on many of the issues raised above, certainly in the areas of financial performance analysis, potential restructuring and/or merger/takeover considerations.
A final thought. Clive Woodward, head coach of the England Rugby World Cup winners in his book “Winning” talks of the “sappers” and “energisers” in the team. Your firm is a team and you should be looking to maximise the number of energisers in the team, those who think positively and bring energy and enthusiasm to the team and minimise [even eliminate] the “sappers” who think negatively, have low energy themselves and sap the energy from those around them. Clive Woodward’s England team won the world cup with a team full of energisers!