When you own a design firm, “there are two exit strategies: death and quitting.” That’s what Rob Girling, co-founder of the design consultancy Artefact, recently wrote in a blog post for Fast Company’s Co.Design. But Girling omits the third, far more preferable strategy, which is a well-handled leadership succession.
Most firms don’t adequately prepare for succession, says Ray Kogan, AIA, president of Arlington, Va.–based consulting firm Kogan & Company. They’d better get started: In a wave of baby boomer retirements, more than a quarter-million Americans turn 65 every month. Many design industry leaders are also reaching that milestone (the average age of AIA members is 54). “It’s a huge, huge number of firms, and firm principals,” says Kogan, who adds that he’s been fielding more inquiries about succession from clients.
ARCHITECT talked to Kogan and three firm leaders about tips for confronting this challenging, and often delicate, process.
Start Early: “I honestly think four or five years before a key individual in the firm is planning on stepping out of their role” is the time to start talking about succession, Kogan says. Indeed, it takes years to identify and groom a potential successor, or ideally more than one. “Things happen—unpredictable things,” Kogan notes.
Mark Ripple, AIA, and his colleagues at New Orleans–based Eskew+Dumez+Ripple weathered the worst kind of unpredictable event last year, when founding partner Allen Eskew died suddenly. Ripple, a partner and the director of operations, credits Eskew’s own foresightedness with enabling the firm’s recovery from the loss. In 2000, Eskew expanded his sole ownership of the firm to six colleagues—including Ripple and Steve Dumez, FAIA. He worked with consultants on long-term planning and devolved many leadership duties to Dumez and Ripple. By the time of his death, “Allen was intimately involved [in the firm], but we had gone from this sole practitioner model to something much, much more diversified,” Ripple says.
Groom the Next Generation to be Strategic Leaders, Not Project Managers: Firm owners, especially if they founded the business, tend not to delegate the most important or sensitive duties. They may assume no one else can maintain key client relationships or understand the finances as well as they do.
That has the effect of turning the firm’s second tier of leadership into project managers, cutting them off from any strategic role. Do-it-all owners “hire managers rather than leaders,” Ripple says. Instead, they should “bring in people that have contrasting skill sets that complement theirs.”
Establish Good Governance: When an owner’s personal identity is wrapped up with the firm, a good governance system can ensure that big decisions aren’t made by a select few. Kogan says more firms are letting an involved board of directors steer them through transitions.
It’s also wise to be prescriptive about the financial implications of as many scenarios as possible. A buy–sell agreement lays out all the terms for purchasing and selling shares in the firm. Partners of Chicago-based Skidmore, Owings & Merrill (SOM), for example, agree that they will retire (and sell their shares) within the fiscal year that they turn 65. This clarifies the time frame and makes mentorship of the next generation not just desirable, but essential.
“You cannot stay. You have to leave. You can’t sort of … [run] your practice like you would if you were a sole provider,” says SOM managing partner Richard F. Tomlinson II, FAIA. “Your responsibility is to mentor those you’re working with.”
Consider an Employee Stock Ownership Plan (ESOP): Broadening ownership is a common strategy for successions, and more firms are taking it a step further by becoming employee-owned. When Ed Jerdonek, AIA, was named president of Louisville, Ky.–based Luckett & Farley in 2005, it was partly employee-owned; the ESOP trust acquired the rest of the equity over time and now holds 100 percent of it.
“There is no financial nut to have to crack,” Jerdonek says. Any future transition will be “a pure leadership transition,” since there is no ownership change. Separating leadership and ownership can avoid succession conflicts, and more holders of stock means more people have a vested interest in the firm’s future.
The flip side? Unlike in a traditionally structured firm, leaders don’t have to assume a lot of debt (by buying an ownership stake). Without that debt hanging over them, leaders can lose what is perhaps their greatest spur to success, Jerdonek believes.
Instead, their commitment to the firm’s culture becomes key. “Culture trumps everything,” Jerdonek says. “So what we need to do is to find individuals who … can be stewards, and growers of our culture.” With the next generation of leaders meeting that criterion, the future is bound to be bright.