Planning Ahead

Architectural practices often have only an eight month backlog of work, and could be just months way from possible bankruptcy. Firm leaders are therefore under pressure to secure commissions and tighten operations; succession planning seems to be a distant need and gets relegated to the back burner.

Meanwhile, baby-boomers constitute as much as 25% of senior levels in architectural practices, says John Stieber of the Hagberg Consulting Group, a firm that helps develop leaders and successful organizations. These partners will reach retirement age in five to ten years, so now is the time to get serious about succession planning.

Few firms deny the importance of succession planning. Yet, according to the Business Development Bank of Canada (BDC), only an estimated 20% of all businesses have a succession plan. If its benefits are that obvious, why don’t more firms have one? One reason is the distasteful thought of mortality that accompanies the handing over of one’s practice, the kind of thinking that makes us put off making a will. Teri McEachern of Leadership Intelligence, says, “outgoing partners have an emotional attachment to their practice, their life’s work.” This is not easy to give up. Other reasons are a lack of understanding of the process, and the misconception that a succession plan is needed only when a leader suddenly needs to step down. Shortage of talent is yet another.

“Our number one issue,” says Dan McAlister, Chairman of the Toronto-based architecture and interior design firm, Bregman + Hamann (B+H), “is finding skilled, entrepreneurial individuals who know the difference between working for wages and creating long-term success for shareholders. Another issue is finding qualified, enthusiastic people with the money to buy in.”

Those who do undertake the effort face potential pitfalls. A succession plan is often confused with a contingency plan, which only prepares for a quick transition of ownership at short notice. Without a contingency plan, an unexpected vacancy at the top can result in a reactive response, with new leaders taking over without adequate preparation, staff being promoted prematurely, or positions being filled by outsiders. A contingency plan is certainly necessary, but it should be only one part of a more long-term succession strategy.

Another mistake is preparing a plan without adequate thought to the practice’s future direction of growth and development. Although the successor’s compatibility with the firm’s current vision, culture and infrastructure is important, the successful plan will leave room for the practice to evolve in directions that might not have been anticipated. The process of evolution must be allowed to continue.

To avert these problems, a succession strategy should address at least the four essentials listed in the Canadian Handbook of Practice for Architects: the development of a comprehensive strategic plan integrating all aspects of the practice; identification and development of a talent pool of potential successors; selection of the successors and providing for an orderly transition; and a continuous renewal of the process to adapt to changing circumstances.

Succession planning is often mistakenly restricted to only the ownership level. In reality, the plan must also address the replacement of department heads and other key personnel as they retire. The plan should identify not just one “crown prince” as a single successor, but a pool of staff to be groomed for several replacement positions, including ownership. A pool provides a broad talent base of general leadership skills to respond to changing needs. “Pools of high potential candidates,” notes Rich Hagberg, of the Hagberg Consulting Group, “also create valuable relationships that can benefit pool members far into the future.” Several key staff should be involved, and must buy into the importance of the process which should not be held behind closed doors.

Succession raises several critical questions, such as assessing the financial risks involved, and what-if scenarios. Alan Young-Pugh of OMAF, a Government of Canada business consultant, adds that “whether the value of the firm lies in the relationships the departing partners have with their clients, or in the reputation of the firm as a whole, does the value leave with the departing partner?” The Principal’s Report, a monthly magazine for consulting firm owners, notes that “The intangible value far exceeds the tangible. The intangible is the goodwill of the firm, which the market says approximates as one year’s net fees”.

The successor must accurately gauge the profitability of the practice, and seek expert advice on how long it will take to recoup that sizable investment. “The only way for potential new partners to assess a future in the firm,” says McAlister, “is to make their own comparisons. New partners [at B+H] usually get their initial investment back in two or three years.” The successor needs to quantify and evaluate all of these factors long before preparing to take over the reins. Preparing a strategic plan, developing a succession pool, and “growing” candidates takes from five to 10 years. At B+H, this is a constant activity.

When it’s time for succession, consider incorporating a transition period of three to 12 months to allow for an orderly transferring of ownership responsibilities. During this period, the departing partners remain in an advisory role. “The transition relationship can be seen as a mentoring process. And once the tone has been set, the entire organization can understand and support the process,” says McEachern. A transition period gives both seller and buyer time to cement commitments, and reduces the risk of the groomed successor leaving the practice and becoming an informed competitor.

An architectural practice often represents the departing partners’ lifelong commitment, and its future should not be left to chance. A carefully prepared and well executed succession plan protects that investment and makes a fresh investment in the people who will direct the future of the practice.

Preparing a Succession Plan:

-Align the succession plan with the firm’s corporate culture; integrate the plan with the firm’s strategic objectives.

-Determine which positions need succession planning: owners, department heads?

-Identify key leadership criteria for each: the qualifications that match the firm’s strategic objectives.

-Find the right successors based on qualifications, not emotion.

-Create a sense of ownership: the successor must have a stake in assuming the firm’s leadership.

-Consider business issues: liability, written agreements, financial arrangements. Consult your lawyer and tax advisor.

-Start now: allow five to ten years for selecting and developing the leaders.

-Be prepared to find other successors if the selected ones back out or don’t pan out.

-Consider other solutions: buy-out if your firm doesn’t have suitable candidates.

Satish Rao, AIA is Director of Project Management for Torti Gallas and Partners, a housing/ urban design firm in the Washington, D.C. area.