What’s Next? Succession Planning in Professional Service Organizations
Perhaps the single most challenging long-term issue for any small professional services firm, whether a law firm, medical practice, or other professional group, is defining its future. Succession planning brings a host of tricky issues as partners age, veer towards retirement, and see their productivity wax and wane. Likewise, retaining top talent as junior professionals develop and transition towards senior roles and ownership offers a related set of issues to navigate. It’s an issue that my partners and I have had to deal with personally, and also one I’ve counseled clients through. I thought it would be useful to articulate the issues and questions surrounding business succession planning.
- Does it make sense to plan for more than a single generation in your professional services firm?
The first question for any professional services firm when it comes to business and succession planning is: do the business owners care if their practice doesn’t last more than a “single generation”? Ten years ago, I regarded the question of whether it was worth planning for a next generation as not even worth considering. I took it for granted that planning for a second generation was essential. Wasn’t it important to have a legacy, to see the practice continue to a next generation, to build a business that a junior person would buy the senior person or people out of?
A decade later, I think it’s actually a legitimate and tough question that deserves much more attention than it often gets. Business succession for professional service firms is inherently difficult. The reality is that most thriving small medical practices and law firms depend on one or a handful of dynamic professionals who generate the clients that make them succeed. The very thing that makes these groups successful – charismatic leadership – does not naturally lead into a next generation. The relationships with clients or patients that drive the practice’s success are often highly personal and don’t transfer naturally or easily. In many cases, the first generation took risks that those who joined later didn’t have to take, and the difference in style around risk is a constraint on business growth. In other cases, second-generation leaders struggle with internal tensions that the first-generation founders did not have to deal with (such as lack of support for their leadership) for the simple reason that the original leadership was a condition to which everyone signed on when they joined. For these and other reasons, it is little surprise that many professional service firms are around for one generation only.
With this mind, it may be smarter to acknowledge upfront that the business is being built for a single-generation lifespan. It helps to clarify strategic priorities and the decisions about where to invest resources. If being around for a second generation is not a shared goal as to which the business owners are united and committed, then the group may be better off preparing for a point when collective existence no longer makes the most sense based on the circumstances of its owners. At that point, the group simply disbands. Its founders retire when they are done. Other professionals create new firms or move on to other ones.
This doesn’t preclude the possibility that a second generation leader won’t emerge internally; only that it won’t be the end of the world if it doesn’t. It simply saves the hand-wringing over who will lead next. My partner and I haven’t chosen this path, and spend time trying to cultivate our junior lawyers not just to develop business, but to be able to lead in the future. At the same time, only time will tell whether our efforts will succeed. It may be safer to accept that it is beyond our control whether one person or a small group will ever get there.
Often, it is not an all-or-nothing question of whether the practice will survive, but simply rather whether it will grow or shrink. I was speaking to a friend a few months ago about the impending retirement of the first-generation founders in his practice over the coming year. He shared with me that he and the rest of the second-generation leadership accounted cumulatively for a sizeably smaller pool of business originations than the retiring partners. I asked whether they were worried about losing clients or thinking of looking for a lateral addition to strengthen their business, and he told me that it wouldn’t be viewed as a tragedy for the firm if it downsized to the “right” number of lawyers for the volume of work the firm could count on going forward. While it would certainly be a hardship for the adversely affected professionals, they would find new homes elsewhere. This attitude may make more sense than trying to preserve a certain size in an era when professionals switch business organizations multiple times over the course of their careers.
Years ago, I was committed to the notion that I needed to build an independent law firm that would survive. While I continue to cherish the independent path because it offers more freedom to innovate and experiment with nontraditional strategies (a topic for another time), I no longer see survival into a second generation as part of the definition of our success. While I enjoy leading the firm (thanks in significant part to an amazing executive director and support team, also a topic for another time), at some point, that is likely to change. If a compelling alternative to my leadership has not emerged internally at that point, then it may very well be the best choice to consider merging into another group that is well managed and has strong leadership. This is one reason why I make it a priority to be in regular and frequent touch with the leader of one national law firm who I respect and who would be my first choice if that decision must be made. Either way, it now strikes me that the decision to remain independent or join forces with another group can only be said to be right or wrong at a particular moment, and not for all time.
Notwithstanding the challenges of building for a second generation, I remain a believer in doing so. In part, I find the mercenary mentality that has taken hold in professional services unpalatable. In-demand lawyers jump from firm to firm every few years in search of the best deal, with concepts like loyalty and long-term investment in people — things that are core to our culture — coming to seem old-fashioned and outdated.
But there is a more practical reason for building for a second generation: the cost of losing professionals after the significant investment that goes into their training. This is particularly true in a specialized firm like ours. The same things that keep everyone invested in the firm for purposes of a second generation existence (including healthy profits, a strong culture, a compelling vision for the future, and an effective compensation system) also translate into effective retention in the interim.
- The Need to Talk about the Future
The hardest part of business succession planning is not how to integrate junior people or develop them into next generation leaders, but how to treat aging senior professionals. The departure of a senior partner, whether through termination, death, disability, or retirement is a major event not only for the person affected, but for the organization itself. When a partner with significant productivity is lost, the organization may face a significant challenge to its ability to replace the clients and billings and to survive.
Anecdotally, I have encountered relatively few first-generation organizations that have taken planning around aging partners head-on. Most small professional organizations wait as long as possible to tackle the challenge of a senior professional who is no longer performing at his or her historic level. The strategy of avoidance is understandable, given that the topic is awkward and can feel scary for the aging partner who has to contemplate relinquishing control. On the other hand, the failure to address declining performance can pose a threat to the firm.
The single biggest mistake that business owners make is not talking about succession planning and the future, either among themselves or with their junior professionals. No matter how old or what stage of his or her career, each of us thinks about what’s ahead. We can’t help it. At 47 years old, I think differently about this than I did at 27 or 37, but at each phase, the question of what was ahead was never far from my thoughts. At 27, I would worry about what my prospects for partnership were. A few years later, once I had become a partner in my former firm in Chicago, I obsessed about what it actually meant; how much take-home pay could I expect? By 37, I had moved to California and co-founded our firm, but was feeling more financial pressure to pay for my kids’ private school and a major home renovation, and began wondering how to reach a higher level of earnings. At 47, I find myself increasingly thinking about investing and saving more, in order to support my kids and be able to make choices ahead, in particular the ability to generate income from passive sources. I have sat with financial advisers talking about how I see my work life at 60, an age that once seemed far off and is now only 13 years off.
While it is easy to have these conversations with ourselves or with our spouses, it’s much harder to have them with our business partners. It’s hard to acknowledge to junior lawyers that we want to slow down or shift roles as we age. It’s even harder for junior colleagues to talk about what they see or how they experience senior colleagues aging. The topics are hard, and it’s too easy for the conversations to go off the rails.
The problem is that not having these conversations doesn’t make the issues go away. It just means the conversation continues in silos, with the key players not talking to each other. We each tell ourselves stories about what we are entitled to, with increasing risk that our perceptions don’t align with those of colleagues. Fellow partners and junior colleagues continue to think and wonder about what aging partners want. It gets particularly awkward when colleagues and clients are aware of inevitable changes in aging professionals, but afraid to talk about them. Even worse than the lack of communication is the anger and frustration that builds up from not expressing ourselves.
I have encountered some terrific mediators and conflict resolution facilitators who deal with these issues and can facilitate conversations in a way that feels safe for all involved, but I believe outside experts will not be enough if the foundation has not been laid in how the firm communicates. In other words, unless professional service groups are able to have open and frank conversations across a broad range of topics, they stand little chance of taking on this most difficult of all topics productively.
On the other hand, by developing a culture of trust, transparency, and respect over time by having the dialogue necessary to tackle tough issues, firms can set the stage for healthy conversations about succession planning and about what both junior and aging partners want and need. Ideally, these issues are not addressed on an ad hoc basis, but rather in a unified and strategic manner that enables planning by the current owners, improve the chances for retention for the most promising junior attorneys, and establish a stable foundation for the firm to endure.
I’m curious what you think about when it comes to your own organization. Are you planning for a next generation? What are you doing to develop and retain talent? How are you planning for succession? I’d love to hear from you.