A ten-minute introduction to the trends, difficulties and objections surrounding succession planning; a launch pad to a rewarding plan; and the pivotal role of technology.
The partner landscape
In Australia, the legal profession generates revenue of over $20 billion. In comparison, advertising has barely one-tenth the revenue, yet many more businesses are publicly listed.
In the USA and UK, law firms are regulated and unable to list on the stock exchange. However, here in Australia, that isn’t the case.
The outcome is that an extraordinary amount of wealth is tied up with law firm partners.
Baby boomer retirement
For most professional service firms, the equity of the business resides in a number of areas – the brand, processes/operations, client lists, IP, IT infrastructure, and of course, people.
A law firm’s equity is intrinsic to its partners. They are very often the brand and are strongly linked to the clients.
As such, it’s imperative that partners have a succession plan in place –whether they’re looking at a successor; choosing to sell, acquire or merge the business; or if they’re suddenly unable to work.
Yet, according to Macquarie Bank’s recent Legal Benchmarking report, only 54% of owners have succession plans in place. While this may seem low considering the nature of law firms, this has in fact increased from 28% in 2011.
Worse still, Bentley’s Voice of Australian Business Survey (which includes all professional service firms), found similar rates of succession planning, and that only 19% of firms have a written plan.
On top of this, by 2009 the number solicitors over the age of 50 increased by 11.6%, while those over 60 increased by 50%. Unsurprisingly, the number of firms with one owner planning to retire in the next three years grew from 20% to 27% between 2013 and 2015.
Making plans to make plans
So if effective succession is so important to ensuring long-term business continuity, what’s stopping people?
In a Lawyers Weekly article, Warrick McLean, then General Manager of Coleman Greig Lawyers and vice president of ALPMA said, “It’s quite common, particularly for partners, to get really busy doing what they’re doing and [fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”][forget] to look at the bigger picture.”
Macquarie Bank’s Legal Benchmarking Report found similar results. They asked why partners don’t have a succession plan and received the following answers:
- 42% – Isn’t the right time
- 27% – Don’t have a successor
- 23% – Not a priority
- 16% – Too busy working
In my experience, succession planning is an emotive process. Many lawyers don’t like mixing their personal and business life, and end up sticking their head in the sand.
Craig Holland, former Tax Partner at Deloitte, sums it up well. “Management-succession planning requires contemplation of one’s own mortality which is unpleasant, leading to many business owners choosing to do very little formal planning when it actually comes to selecting and grooming successors”
Get started. Now.
The truth is, there’s nothing morbid about developing a succession plan. In fact, a succession plan can act as a brilliant method to measure the health of your business.
You can then use the plan should a partner decide to retire, sell or merge your business (and yes, if they’re no longer able to work).
The first thing to do is to confront your partners to discuss and plan their succession. It takes time and money to develop a satisfactory plan, so manage everyone’s expectations accordingly.
Individual plans will depend greatly on your circumstances, but here are a few starting points:
• When do you plan on exiting the business?
• Take a look at your business – where are you now and where do you want to be?
• Will your successor be internal or external? Do you have a business model that will attract the right talent?
• Is selling, acquiring or merging the business the right option? If so, see a broker and talk to other solicitors who have taken this option.
Improving your succession plan with technology
No matter your situation, new technology can bolster your succession plan in a number of ways.
Technology and process
If one of your partners were to leave the business without warning, would other staff be able to continue their work?
A number of partners take shortcuts on process – the details are kept (often very accurately) in their heads. This is understandable due to the time-sensitive nature of their role. Without an effective practice management system they often don’t have time to take notes or name files correctly.
The right technology can streamline these processes, ensuring they’re properly followed and recorded. For example, a good practice management system will:
- Eliminate double entries and ensure time is correctly recorded
- Consolidate client information – including billings, trust, time, documents and more
- Create management or accounting reports with budgets and KPIs
By making these processes ‘concrete’, you’re essentially transferring equity from your individual partners to the firm as a whole. This will not only ensure workflow remains consistent during succession, but makes the planning phase much more straightforward.
Technology and talent
If you aren’t planning on selling, merging or acquiring your business, it is even more important to attract and retain the best available talent.
The ILTA’s recent ‘Legal Technology Future Horizons’ report found technology is increasingly becoming a key factor in staff satisfaction.
“A key issue here is accommodating the technology and support expectations of new graduates coming into the workforce. New graduates typically arrive with a high level of IT literacy and familiarity with personalised tools through which they have run their lives and completed their education to date.
The “born-digital” generation will increasingly judge firms on the quality of the IT support provided and the ease with which routine tasks can be conducted.
Generation Z and those that follow them are used to applying their talents to problem solving and creative tasks, leveraging technology to find and present information. They may not be as willing to spend as much time or effort working on search and basic document review tasks that were traditionally seen as part of a junior lawyer’s training.”
Without the right technology you could struggle to find proficient successors, either internally or externally.
Technology and clients
Important client relationships are often the sole responsibility of partners. While technology can’t and won’t replace this, the increase of client-facing IT solutions can help your firm develop a relationship with clients outside of your partners.
Future Horizons revealed that there is a “clear expectation that the decade ahead in legal will be shaped in part by developments that enhance mobility, personalisation and ease of use”.
Of course, you should still continue to groom successors by including them in client relationships. However, by providing your clients with tools such as access to their matters, reports and documents – either online or via a mobile app – you will make the transition a little smoother for them.
Again, this transfers some of the equity of your client relationships from your partners to your law firm – ensuring workflow remains smooth and simplifying your succession planning.
Technology and value
Regardless of your approach to succession planning, technology (particularly your practice management system) is the foundation to any changes you’re looking to make.
Macquarie Bank’s 2015 Legal Benchmarking survey found that high performing firms are more likely to have invested heavily in technology or plan a significant investment in the future. 47% of high performing firms expect to invest in their practice management system in comparison to 36% of low performing firms.
A good practice management system will ensure a straightforward succession by creating transparent firm performance. For example, ensure your practice management system should be able to:
- Create a client report to see their total exposure, e.g. all commercial clients’ matters and their financial status
- Review staff performance, manage expectations and identify areas of concern, e.g. not enough work
- Analyse your creditor/debtor exposures and P/L with real-time data
If you’re considering succession in the near future, you should also evaluate how different practice management systems could improve the efficiency of your firm and viability of a smoother succession plan.
If a 5-solicitor firm increases their productivity by 2 units a day at $350 per hour, additional potential earnings of nearly $80,000 a year is possible. That will add a tidy sum to the valuation of your business (and to your retirement or next business venture).
Summary
A law firm’s equity is intrinsic to its partners. Over the next 5 to 10 years this value will change hands at an increasing rate due to the age concentration of partners.
While many partners believe they’re too busy to put together an effective plan, not having a succession plan is a serious liability to the business.
You should ensure all your partners are aware of this issue and take the time to talk to the right people – whether you’re considering internal/external succession, sale, acquisition or a merger.
Implementing the right technology can assist your succession plan in a number of ways.
- By transferring the equity of established processes from partner to law firm and maintaining consistent workflow during periods of change
- By attracting and retaining quality staff, ensuring an adequate successor can be chosen (either internally or externally)
- By transferring the equity of established client relationships from partner to law firm and ensuring clients remain well serviced during periods of change
- By improving and accurately measuring the value of your firm
Succession planning is ongoing – so plan for success and start today. FilePro is pleased to provide a comprehensive Due Diligence checklist to ensure your next decision regarding new technology strategically and tactically maximises the effectiveness of your succession plan – just click here.[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]
