Three ways to ease succession planning
Address common challenges with ownership transition.
As the baby boomer generation continues to move toward retirement age, ownership transition has become an increasingly important issue for which engineering firms need to address and plan. According to the Pew Research Center, roughly 10,000 baby boomers will turn 65 today and every day during the next 14 years. Many firms simply aren't equipped to handle the challenges that come with retirement and ownership transition, including having capable leaders to take over the business.
According to a 2013 survey by FMI, only 44% of firms said they have a formal plan in place to transition themselves out of managing the business. When I started my employment with RMF Engineering, our firm wasn't one of them.
When I became president and CEO of RMF 18 years ago, it became apparent to me rather quickly how critical it is to plan for the next generation of leadership. There was an overwhelming need to set clear goals and expectations for employees as they transitioned into owners and partners and moved toward retirement. The firm has developed a strategy that has since helped successfully transition a number of owners. Here are three important things to address in order to ease the succession planning process:
1. Defining a trigger event for retirement. Reaching ownership or principal status is a point of pride for any engineer. As such, it can be hard to embrace retirement when the time comes. But retirement of owners is a critical component to any ownership-transition plan. If owners continue to work past retirement, there isn't room for new owners to come in and take leadership roles, which is necessary to sustain the growth of the firm. Allowing owners to work through retirement also gives a perception to younger leaders that there isn't an opportunity to become a partner, which may encourage them to seek employment elsewhere. Included in any ownership-transition plan should be a defined trigger event, such as the formal retirement age as defined by the Social Security Administration. These provisions can be complex, with a range of qualifiers; all of which must be outlined in a formal shareholder's agreement.
2. Cultivating leaders. Employees are an engineering firm's No. 1 asset. Having the right leaders in place is key to successful business development—and cultivating those leaders is the firm's responsibility and should be a component of the transition strategy. At RMF, we created a Leadership Development Program, a 20-month educational program designed to transfer lessons to our next generation of leaders. The program gives mid- and senior-level managers a chance to strengthen professional bonds, helps younger leaders hone the skills needed to become partners, and circumvents the problem many firms face when senior leadership leaves—which is grooming younger leaders too late. Clients also like to see younger generations being prepared for ownership; it shows that the firm cares about long-term sustainability and has the team in place to keep the firm running at the same level of excellence.
3. Choosing the right successors at the right time. The ultimate goal of an ownership-transition plan is to maintain a firm's culture and values for decades to come while growing the business. That's why choosing the right owners is vital and should be based on a clearly defined set of criteria. Nominees should actively embody your firm's principles, be committed to a long-term position at your firm, demonstrate strong leadership abilities, and have proven that they can grow the firm in their area of expertise. Nominating new owners also must be done at a strategic time when it fits, not because of internal politics. Before a nomination is considered, the following questions should be answered:
- Does this individual meet the established criteria to become a stockholder?
- Does the current business climate and client needs justify a new stockholder?
- Will additional ownership enhance and support the ability of the firm to meet its goals and objectives?
- Is additional ownership fiscally responsible at this time, considering the firm's current financial performance, recent growth, and state of the industry?
The plan we put in place 15 years ago has successfully tackled these challenges and more, helping us transition a number of owners without conflict. Everyone knows, follows, and respects the rules—making for a seamless transition and promising growth.
Duane Pinnix is the president and CEO of RMF Engineering. He is responsible for the general oversight of RMF and executive management of its branch offices.