Planning for Succession

Succession planning in law firms is an issue that has long preoccupied senior and managing partners, and it is something with which all firms have had to contend, but the implications – especially for smaller firms – are becoming ever more important for management to address and mitigate.

An aggregate analysis of the age profile of partners in small and medium sized UK firms is not currently available (as far as we are aware), but Legal Week has recently examined the ages of partners in the top firms, and the results are instructive (available here to subscribers). In the top 10 firms, where it is far more likely that partners will have been in a position to retire early or move onto other careers (voluntarily or otherwise), the mean age is 46, but the figures show that more than 80% of partners are above 40, and 25% above 50.

Senior Partners - Senior Earners

Our (anecdotal) experience working with smaller firms is that the distribution is far more skewed, with a far greater proportion of partners older than 50, and many indeed being well into their 60s. This is supported by evidence from Australia showing that not only are partners in SME firms more likely to be of advanced age, but they are also likely to bring in a disproportionately high amount of the firm’s revenue. This graphic from an article by David Goener illustrates this situation perfectly:

Image removed.

(Source: Beaton Capital)

As the old saying goes, “a picture tells a thousand words”. If that picture is true (and the provenance is good) then over half of many firms’ revenues are generated by Partners over the age of 55. How sustainable is that?

This situation is borne out in our experience in the UK – the more senior partners, who have more experience and have built up large networks of contacts in their fields, hold the most significant client relationships, in terms both of quantity and value. This is entirely understandable, but this reliance on older partners for business development and income generation poses a serious risk for business continuity on retirement.

We should also ask why the 50-55 year old partners seemingly under-deliver. Have they been shielded from the rigours of Business Development by their more entrepreneurial senior colleagues? Or have they been kept at arms’ length to maintain the indispensability of the elders?

Moreover, does this mean that succession plans need to skip a generation and be focused on those in their 40’s, and what would that do for Partner relationships?

Replacing Leaders and Replacing Equity

Succession is an issue because firms must not only make decisions on replacing their most senior and valuable people, many of whom often occupy leadership positions in the firm, by promoting from within or hiring externally, but they must also find ways to deal with the financial consequences of partner retirement – and the numbers suggest that cases of multiple partners retiring within a very short time of each other will become more frequent.

Partner retirement poses a threat because payouts will often be necessary, and firms will need to find partners to acquire their own retiring partners’ equity. These issues will hit cash flow hard, and most SME firms are not dealing with this from a position of financial strength, while lending relationships may already be strained because of excessive use of overdraft facilities.

There are no easy answers to these issues, but what is clear is that the earlier firms start to consider how they will deal with their own succession challenges, the more likely they are to find workable solutions. Ignoring the problem is not one of those solutions.