John Staniforth, partner and head of professional firms at accountancy firm Kingston Smith, explains the key issues that need to be addressed in succession planning – from developing the future leadership team to planning client transitions.
Law firms rely heavily on their partners – for leadership, client relationships, reputation and for the capital that funds the business. The loss of a partner (or a key employee) can have a dramatic impact. Yet many firms have done little to put in place a succession plan to manage risks and protect the value built up in the firm.
There are plenty of reasons why partners may be reluctant to discuss retirement or other plans they may have for leaving. Partners may not want to give up 'ownership' of key clients, particularly if this also involves loss of income or status. Equally, partners may worry about creating instability in the firm or unsettling clients.
But it's wrong to assume that plans can be worked out nearer the time, or that succession will somehow happen naturally. An effective succession plan needs to address multiple areas and may take several years to put into effect. Raising potentially awkward issues now minimises the risk of far more serious disruption later.
"A clear succession plan reassures new talent and key clients that the firm can offer them the future they want"
Jon Davies, vice president, Travelers
Developing an effective succession plan starts from understanding who the key individuals are in your firm and what the consequences might be if one of them leaves.
Of course, you should look at how you can replace the managing partner and other members of the leadership team – including any equity stake in the firm – but the plan needs to go further than that. You want to look at how you build the firm's future pipeline of potential leaders.
At the same time, you need to consider other key skills you might lose – for example, if a key 'rainmaker' leaves or if someone is the essential source of legal expertise in a particular practice area. If someone is the primary contact for an important client, you will want to minimise the risk that the client leaves too.
Smaller firms will often be at greatest risk, with leadership, client relationships and legal expertise concentrated among fewer people. However, larger firms can be vulnerable too – particularly if partners tend to be drawn from the same generation, if the firm is led by a dominant managing partner, or if the firm is heavily reliant on a small number of heavyweight fee-earners.
Knowing when key individuals will leave can be all but impossible, so it's not good enough to leave planning until someone announces their retirement. Reviewing and updating succession plans should be a core part of the firm's regular strategic planning process.
Wherever possible, agreeing long notice periods of two years or more, and limiting the number of partners that can retire in any one year, can make succession planning significantly easier.
Your firm's structure will also affect the mechanics of how you make changes to ownership and remuneration.
"Think in terms of the proverbial bus. If your leadership team disappeared tomorrow, would the firm survive?"
Andy Poole, partner, accountants Armstrong Watson
In an environment where technology and new competitors are disrupting established business models, law firms' need for effective leadership has never been greater. The leadership team must be able to manage change and have the authority to take the rest of the firm with them.
Too often, the succession process focuses on choosing the successor without first identifying the personal attributes required. Powerful partners – typically those who lead the highest-billing practice areas – may have an outsized influence. The resulting leadership team is drawn from a narrow pool and tends to represent the interests of the partners rather than the firm as a whole.
A better approach involves building a broader consensus on the firm's culture and strategic direction, involving not just the partnership but employees as well. What is it that binds the partners together in the firm, and what will endure as the current leadership retires? How does the firm need to change?
Culture and strategy naturally define the sorts of individual needed, supporting the development of a more diverse – and forward-looking – leadership team. A broad-based team helps reduce the potential for conflict between different generations. The team should gradually evolve as one or two members are replaced each year.
Planning for the next managing partner (or chief executive) is particularly vital. The ideal candidate will have support across the partnership and the firm. Again, the aim should be to build a consensus. Running an election (or splitting the role) risks encouraging the development of rival factions within the firm.
Support from the current managing partner is essential. Agreeing a successor well in advance allows time for the nominee to learn the ropes during a gradual, planned transition. A transition like this gives the new leader time to build credibility before fully taking the reins.
"While technical expertise and the ability to generate work are equally as important, real leadership is making sure you have a personnel pipeline that can deliver both and deliver them consistently – long into the future"
Douglas MacPherson, director, Size 10 ½ Boots
Leave or phase-out?
A retiring lawyer can leave the firm completely, or retain a reduced role. The firm and the individual will need to negotiate what works for both sides on a case-by-case basis.
- There should be a clear break from leadership to avoid the potential for back-seat driving. With the right personalities, the retired leader can remain available as a mentor – offering advice only when asked by the new incumbent.
- There may be a clear role for a particular individual – for example, as an expert adviser in a particular practice area, maintaining social relationships with key clients, or continuing to introduce new clients from his or her personal network.
- Agreed workloads and compensation schemes should include a plan for gradual transition to full retirement.
Leadership succession planning shouldn't be limited to deciding who will join the leadership team. Perhaps even more important is developing the firm's pool of leadership talent. Bringing in lateral hires at partnership level to lead the firm rarely works.
Developing business and leadership skills should be part of managing every lawyer's career with the firm, from recruitment onwards. This not only builds the leaders of the future, but also helps the firm attract and retain talent.
Firms with strong leadership and client networking skills are often tempted to recruit lawyers primarily for their technical skills, to help handle legal matters. Instead, recruitment should look at broader requirements – including, for example, new skills in areas such as digital that are becoming increasingly important and the sort of entrepreneurial personality needed to lead the firm.
At the same time, it's worth reviewing the legal skills the firm may need in future. In smaller firms and firms with specialist practice areas, there may not always be someone with the right expertise to take over when a lawyer leaves.
Exposure to management opportunities helps each lawyer develop new skills and demonstrate aptitude for future leadership. For example, a lawyer might join the team dealing with a particular issue (eg recruitment or marketing) and be given responsibility for managing more junior employees.
From an early stage, all lawyers should be involved in opportunities to attend client meetings and networking events. Each lawyer should also be given a mentor from within the partnership to help guide their development.
Both partners and the lawyers they manage should be incentivised to make this process work. Compensation schemes should be designed to recognise the importance of activities other than billable hours and encourage partners to share development opportunities. Make management activities, training and development a core part of each lawyer's personal reviews.
When appropriate, lawyers should be invited into the partnership. A two-tier partnership model of equity partners and salaried partners allows this to be done more flexibly. There is an understandable temptation to limit equity partnerships in order to maximise existing partners' income, but that risks creating a firm that has difficulty attracting and retaining the right talent for succession.
"Use partners in ways that suit their personalities and priorities. Some are natural mentors, others not so much!"
Viv Williams, consulting director, Symphony Legal
If clients 'buy the lawyer', there is a high risk of losing them when their primary contact leaves the firm. Client transition plans are vital to reduce the risk. Prioritise high-value clients and the lawyers who own the relationships.
Start by reviewing the firm's clients and identifying the lead lawyer for each of them. Even where there is a client team, it's usually clear who the primary contact is – for example, the lawyer who originally introduced the client, the lawyer whose practice area generates the highest share of billings, or the lawyer who the client tends to call and invite to events.
At the same time, it's worth identifying which individual lawyers control the largest value of client relationships. High-value clients – and high-value lawyers – are the priorities for transition planning.
Every high-value client should have a client team – to ensure that there is continuity of service when a lawyer is ill, for example. For larger corporate clients, the aim should be to establish multiple relationships between the firm and the client. Encourage direct contact between junior lawyers and client staff, both for work and where appropriate at social occasions.
Individual partners have a strong self-interest in retaining control of their clients. The firm must take the lead in ensuring that client teams and transition plans are put in place. Aim to create a culture where information is shared (for example, through the firm's CRM system) and partners are encouraged to collaborate on cross-selling opportunities.
Where possible – for example, when a partner has announced retirement plans - a successor should be introduced to work alongside the existing partner and attend client meetings. The ideal successor will share common ground with the client – typically because of the practice area or industry sector. A lengthy transition period gives time for personal chemistry to develop.
Ideally, this can be presented as an addition to the client service team – adding value for the client – rather than just a (potentially unsettling) future replacement. You will need to decide whether this added value is billable, or if the extra costs of involving another partner should be absorbed by the firm.
Careful thought needs to be given to how partners and other lawyers are incentivised to make the process work. Partners need to be incentivised to build the value of the firm rather than maximising current profit shares.
- What share of billable fees does the primary contact retain when work is delegated to other lawyers? Are partners credited for cross-sales to their clients?
- How will original and successor partners be compensated as a client is transitioned? Is this an opportunity to increase the share of income retained by the firm rather than compensating the partner who has been 'given' the client at the same level as the original rainmaker?
- How will a retiring partner's equity be valued – and how will any buy-out be funded? How can the interests of retiring partners and new entrants to the partnership be balanced?
- Should a retiring partner retain any compensation and/or perks (eg invitations to social engagements)? This can incentivise the partner to ensure the future success of the client relationship, both during transition and after retirement.
"Firms without transition plans often lose a quarter (or more) of the departing partner's clients"
Andy Harris, partner, accountants Hazlewoods
Succession planning top ten
- Start planning now – you cannot know when a key individual might leave or be unable to continue working.
- Identify the key individuals in the firm and the potential impact of a departure.
- Identify the leadership skills and personality the firm needs for the future.
- Don't leave leadership selection in the hands of a few senior partners – take soundings across the firm.
- Avoid concentrating leadership in a single generation – include more junior partners.
- Make the best use of retired partners – but watch out for back-seat drivers.
- Give junior lawyers opportunities to develop business and leadership skills.
- Create client teams for all key clients.
- Devise compensation schemes that encourage delegation and cross-selling.
- Review succession plans annually as part of the firm's strategic planning process.