Forward Planning – Performance management and succession planning by Mark Briegal

15 Jan 2015

Printed in PI Focus, November 2014

It was all so easy in the old days. You started as an articled clerk, qualified, became an associate and then, after a few years, were made a partner. You paid in some capital, took drawings and then, on your 65th birthday, were given a gold clock and had your capital repaid. As the partners at Meerkats LLP might say, ‘Simples’! But life has moved on and become more complex; law is more competitive and business models have changed. We are seeing more and more cases where partners want to retire but are finding it hard to do so. 

The young bloods are nervous of partnership, and nervous of investing in traditional firms when there is structural change taking place in the market. This is particularly true of personal injury firms. Some blame can be put on the retiring partners. In the heady days of the noughties before the crash, there was good money to be made and super-profits to be had. It was tempting not to admit the young blood into equity as, by restricting the ownership, there was more money for the owners. Add to this the prospect of a trade sale, something that had never been seen in legal markets, and the temptation to hang onto ownership was strong. This model worked well for the few who were able to sell to new entrants or acquisitive consolidators, but for many it was unsustainable and the crash, coupled with the Legal Services Act, scuppered the exit plan. The good young partners who were not offered equity upped and left, or stayed but became disillusioned. When the time came for retirement, there was no one in place to buy the owners out. The junior partners felt they did not have the skills to take over, and the retiring partners were concerned about the continuation of the firm to get their capital out. The bank would not lend to inexperienced owners. Add to this a collapse in profitability, and it had become a lot harder to get capital out and retire. 

Great expectations

One further difficulty arises in the expectation of the value of a law firm. Traditionally, partners did not expect to get a payment for goodwill on retirement. Their capital was put in when they became a partner, funded the business, and was withdrawn on retirement. Partners now often want to be paid goodwill on retiring. We have a number of matters on at present where this is a bone of contention. The key question is whether there is goodwill in a law firm. In many cases the answer is simple – no. Goodwill is the value of a business over and above the value of its assets. Some law firms do have goodwill, as evidenced by the consolidation in the market. Many others do not. We have seen law firms given away on retirement as there is no value – the partners just want there to be a successor practice so they do not have the costs of runoff insurance cover and redundancy. On a strict accounting basis, partners are only entitled to their capital back if the continuing partners (or a trade buyer) pays it out. If the firm is worth less than when they put in capital, they may not get it all back – it is working capital and it is at risk, whether in a partnership or an LLP. In a limited company, the owners’ shares may be worth less than when they bought them.

Managing performance

So what has all this got to do with performance management and succession planning? Well, if a partner wants to retire, they need to get their capital back; possibly with some goodwill. This needs to be paid by the continuing partners or by a trade buyer. In both cases, the underlying issue is the same – what is the business worth? This is not an article on valuing law firms, but future income stream is key to any valuation method. Will the business continue to generate profits to justify the investment from the new owners? Key to the business being a success going forward is the ability of those at the helm to run it well, and to make a profit. This is where succession planning comes in. If you want to get a good price for your business when you come to retire, you need a business that someone wants to buy for the price you want to sell at. The best way to do that is to develop people to replace you. They will have the skills and the confidence to run the business and the desire to do it. The retiring partners will be able to feel that their capital is safe during the payout period. 

Succession planning is not just looking at who will replace you when you retire; it is looking at who can do a range of jobs across the practice, should someone leave, or fall under the metaphorical bus. In a standard law firm there are assistants, associates and partners. People want to progress, and the firm should want them to do so. If an associate leaves and there is not an assistant ready to be promoted to replace them, that is a problem. Similarly, if a partner leaves, is there an associate ready to move up? If not, you have to go into the market to recruit someone you do not know, who will need training in the firm’s systems, processes and culture. You may have to pay a hefty fee to a recruiter. You then have a time lag before they can join you, and all the fun of dealing with their restrictive covenants. Worse still is the message it sends to the assistants, who think there is no chance of promotion, and the only way they can make associate is to leave. That is how you lose your good people. If you think that they do not have the skills they need to be an associate, that is where performance management comes in.

I advocate this process strongly, but some doubters have raised the objection that if they train people, they only leave. This may be true, but a highly skilled and motivated person who leaves after three years and acts as an advocate for your firm must be better than someone who is less good and stays. As the old adage goes, the response to ‘What if I train them and they leave?’ is ‘What if you don’t, and they stay?’.

In most organisations, there are fewer senior positions, but having a pool of talented people available to fill them is not a problem. They may even grow the firm to create more senior positions.

Succession planning

If I have managed to persuade you that succession planning is key, the next point is how to achieve it. All law firms state somewhere that ‘our people are our greatest asset’. This is true; without the people you have no business. The process of recruitment, development, career progression and planned exit is a continuous one, and performance management is a key part of this.

Appraisal is the process of reviewing performance and planning the future. The trouble is that the word can have negative connotations. Once somebody has been taken into a small room, given a metaphorical kicking and told they are not getting a pay rise, they tend to think that ‘appraisal’ is not something they want to be involved with again.

I prefer the term performance management. It is wider than appraisal and certainly cannot be something bolted on once a year because HR sends round some forms. As a manager, it is your role to ensure that all your staff have the skills, knowledge, experience, behaviours, systems and tools to deliver the outcomes that delight your clients. The best way to ensure this is to talk to them regularly. Make an opportunity to review progress. Tell them when they do something well. Discuss with them when they do something less well or make a mistake, and focus on how to stop it happening again. Do not confuse appraisal with discipline. You will have disciplinary procedures, and use these for disciplinary matters. Appraisal is the process of taking time away from the daily deadlines and talking about the big picture with a focus on the future, but using the past as a means of discussing performance, either good or bad.

My key rule for appraisals is this – no surprises. If either of you say something that comes as a surprise to the other, then you have a problem with your ongoing management. You should have discussed the successes and failures as they happened. The focus of appraisal must be on the future.

The second key rule is – it is about the discussion, not the form. The aim is not to get a completed form back to Admin by a set date (although that is important), but to have a discussion and end up with a team member who knows what is expected of them and how they will achieve it. Much of the discussion should be on the future, looking to balance what the firm needs with what the individual wants. You will only know that if you talk to them. I think the ‘where do you want to be in five years’ time?’ question is a bit lame in job interviews, but is rather good in appraisals, especially if followed up with ‘what skills, knowledge, experience and behaviours will you need to get there?’. It does not matter whether the answer is senior partner or their current junior role.

This is where succession planning fits into performance management. The output should be an agreed training plan, and not one that just focuses on the hard legal skills. How can you get your junior partners more involved in the running of the firm, developing their commercial awareness and management skills, so that they are ready to buy the business from you when you want to retire?

A manager’s job is easier when they have a team of highly skilled and motivated people around them; they can focus on growing the business rather than firefighting. They can go on holiday without worrying, and be confident that they will leave behind a successful business from which they can easily extract their capital when they retire. A manager’s jobis to manage, and these are key aspects of it.

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Mark Briegal heads the Professional Practices and Partnership team at Aaron & Partners LLP;

mark.briegal@aaronandpartners.com