How to Reduce Talent Risks with Succession Plans

CEOs leave organizations for many reasons. Often it takes boards a year to find a permanent replacement. This delay is irresponsible. The news of a CEO’s departure highlights the danger of organizations failing to have succession plans in place when an unforeseen event happens. It is rare to have a chief executive who has the self-confidence to put the question of his or her departure on the board agenda. The board should include this duty in the CEO’s employment contract. The board needs to review the succession plans at least annually.

Graveyards are full of indispensable people.

Life must go on, even after the irreplaceable have departed. So, organizations should be ready to continue when essential figures leave. However, most businesses fail to grasp it happens regularly.

Most Organization Do Not Have Succession Plans

About 10% to 15% of corporations appoint a new CEO each year due to retirement, resignation, dismissal, or ill health. Despite this known turnover rate, most boards are unprepared to replace their chief executives. A Stanford University survey revealed that only 54% of boards were grooming a specific successor. Also, if the need arose, 39% of companies did not have a viable internal candidate who could immediately replace the CEO.

A sudden vacancy in the company’s leadership causes uncertainty. Investors scare easily and react to a change at the top by assuming the worst. So, uncertainty causes financial damage. The board has total control over the CEO—and their failure to plan for the CEO leaving comes at a high cost to shareholders.

• Hewlett Packard’s CEO stepped down in 2010; share value immediately dropped by 8.3%.
• A study of the world’s 2,500 largest public companies shows that companies that scramble to find replacements for departing CEOs forgo an average of $1.8 billion in shareholder value.

Some companies recover from this setback. However, some never do. You can avoid the situation with a solid succession plan. You need to have leadership candidates groomed and ready within the company.

Impact of No Succession Plan

One of the things we often miss in succession planning is that it should be gradual and thoughtful, with lots of sharing of information and knowledge and perspective, so that it's almost a non-event when it happens. — Anne M. Mulcahy

In today’s fast-paced world, producing succession plans has not been a priority. There are many reasons why senior executives fail to prepare adequately for their departure. These include,

• Exercising power has an intoxicating effect on some leaders. They may form an exaggerated sense both of their competence and their indispensability – and then fail to detect much merit in anyone else around them.
• Having worked hard to get to the top, the last thing that they will want to think about is their successor.
• Furthering the careers of potential rivals may not seem like a good idea in an uncertain world.

Perhaps these CEOs end up staying too long in their post as a result.

Deferring succession planning is easy to do. However, hoping that your high performing employees never leave is wishful thinking. The average tenure in a position is three years. A company has unnecessary risk exposure without succession plans in place.

In some organizations, creating succession plans is a topic that is off-limits.

There is a fear that the exercise will raise the spectre of awkward conversations. In other organizations the subject is taboo. This thinking is irresponsible and needless. The impact of a lack of succession planning can be quite significant. I advocate that your succession plans be updated as soon as you hire someone in any position.

Leadership development is all about getting leaders ready. Good leaders are important for organizations to stay competitive. They enable that through strong vision and staying focused through difficult times for the organization. Good leaders do improve team performance. When there is no succession planning, organizations find it hard to replace a leader with a good leader. There is increased unrest in organizations and in times of organizational changes to have stability at the top is critical.” — Dr. Ines Wichert, Talup

Loss of skills, knowledge and specialized employees

Unfilled positions or individuals in acting roles happen from top to bottom in organizations. The average tenure in a post is just over three years. A study from Bersin by Deloitte found that it takes an average of 52 days to fill an opening. Can you afford missing vital people for two months?

When a top performer leaves the company, they take away with them the wealth of knowledge about the systems, processes, and politics of how the office works. They also exit with the knowledge they have gained from working with your customers. Regardless of their role in the company, each employee has an idea of what customers need. They know how serving that need turns into profit for the business. After a sudden departure, all that knowledge is lost and can not be passed on to the successor.

Negative Emotional and Cultural Impacts

When a leader leaves, there is a gap to fill. Without clear succession plans, employees compete for the position. There is a power struggle to take the vacant spot. These power struggles can cause a volatile work environment leaving other employees and their teams feeling unmotivated to do their jobs.

Customer Service Slips

When an employee suddenly exits a company, remaining employees find themselves with a significantly increased workload. The departure may create some resentment or a lack of motivation. The quality of customer service also suffers. If response times slip or customer service dips many customers may decide to take their business elsewhere.

Floodgates May Open

When an employee leaves the company, there is always the risk that others will follow them, if no clear structure or order is in place. This migration is especially true if a top performer or someone in a leadership role suddenly leaves. The employees who are left wondering why they decided to go and if there are some shifting policies or a problem within the company. Others are concerned with the pathways to promotion and wonder if staying in the company is the right decision for their career.

Mistakes Happen When You Fill Position Too Quickly

When a position suddenly becomes vacant, the need to immediately fill that position often leads to choosing the wrong candidate for the role. I have written about the importance of hiring slowly and firing quickly. Whether they are recruited from outside the company or promoted from within, hiring someone who is not the best fit for the position is costly. The urgency to hire someone creates:

• financial risk — hiring the wrong person
• talent risk — the new hire does not fit in the role and with the company
• additional costs — recruiting and engaging new candidates
• loss of revenue — the position not productive for a period
• internal equity risk — providing a more substantial salary and benefits package for filling the role quickly

Neglect Internal Candidates — They'll Take Their Talents Elsewhere

You may overlook excellent internal candidates who may be interested in a leadership role without a clear succession plan. These candidates are often a significant investment as they are already in the company and understand the business. Even worse, they may leave if they view your external hire is less competent than them.

Interestingly, Generation Z is predisposed to role hopping within an organization rather than job hopping, like previous generations. Thus, maintaining thoughtful succession plans will be even more critical for this generation.

In most cases, it is cheaper to promote within the company than it is to hire outside of it. This fact is especially true for executive and leadership roles. Developing internal talent strengthens its commitment to the company. It protects the company from losing any skills or business knowledge that would be lost if they left. All these benefits can be missed if you do not have succession plans and must hire to fill an urgent gap.

Succession Plan — Investment or Expense?

A goal of the talent acquisition process is to fill vacant positions promptly with people who can meet or exceed expectations. The longer it takes to fill a job, the more it costs. You spend on the hiring process and lose the revenue that would have been brought in from the position.

Succession planning is concerned with identifying business-critical roles. Roles that if unfilled for a prolonged period could leave a business vulnerable.

When linked with a talent management program, these potential risks can be mitigated by identifying and developing longer-term successors as well as short-term replacements. Each talent pool should be considerably larger than the range of posts it covers.” — Ally Weeks, Chartered Institute of Personnel and Development

Get the best people into the most critical functions

It’s vital to have succession plans in place for top performers and those in business-critical roles. It requires a disciplined, evidence-based look at where the organization creates value. You need to understand how your high performers contribute to the bottom-line. I have written how to link talent to value.

A lack of succession planning leads to uncertainty, which has a negative impact on companies of all sizes. Whether it’s a negative impact on company culture, a loss of knowledge of the quality of output that effects client satisfaction or financial damage due to scared investors—a lack of succession planning opens companies up to risk.” — Tom Moran, Addison Group

If leaders aren’t ready to assume the mantle of leadership, then there is an increased risk of derailment.

The business environment is volatile, and there is increased risk of digital disruption. In a volatile business world, you need leaders ready for unforeseen circumstances such as mergers and acquisitions and digital disruption.” — Ines Wichert

Companies that develop robust succession plans can keep their talented staff after a departure and eliminate the risk of a costly, lousy hire in a time of urgency.

Succession planning allows organizations to identify and develop those rising stars within the organization who will be capable of stepping up in the event of turnover.” — Tom Moran

Good succession plans mean that organizations have leaders ready.

Leaders are there to talk up their role. It’s a better quality of a leader that the organization gets. Leaders need to experience different situations and challenges and work in various operational environments. It means that you have a deeper leadership pipeline.

Who creates succession plans?

Several players should be involved in the development and implementation of succession plans. However, this will vary based on the size of the company and its structure. In addition to executive leadership, the departments that are often involved in this type of work are HR, learning and development, and internal recruiting.

At the senior level of the organization, leaders can support succession planning by keeping certain roles open for developmental practices. At the very top of the organization, it’s important that the CEO keeps some roles open just for development so emerging leaders can learn about challenges.” — Tom Moran

Not all organizations have formal succession plans. However, there are other ways to aid the process. The approaches include training, cross-training, job shadowing, career pathing and mentorship programs.

Succession Plans Present Challenges

Organizations need to make sure that some of its people have the potential to go to the top. You can derail the development process if you push emerging leaders too much. There is a danger of burn-out. An effective talent management strategy is ongoing — developing people at a reasonable pace — ensuring they are ready for the next step. It is essential that potential leaders have behavioural competencies required for leadership roles. Otherwise, they will be stressed continuously.

One of the challenges associated with succession plans involves the expectation that high performers. They must think beyond their current involvement with an organization and plan for a future in which they are no longer there. Open, honest conversations about the importance of succession planning help mitigate this issue. You need to ensure that employees feel valued for their current contributions and are part of planning for the future.

Another major challenge is the selection of successors.

While promotions are often viewed as rewards for hard work, it’s important to choose successors who will be the most successful in the position as opposed to those who are best in their current role. Planning for an event that has not happened poses its fair share of challenges but having a solid, well-documented strategy will at the very least eliminate ambiguity and allow for a more scientific approach to succession planning for all involved.” — Tom Moran

There are still issues over the lack of diversity around succession plans.

It’s still a very masculine description when you describe a good leader. An emerging realization for lots of organizations is that the succession pipeline and view of talent don’t go far enough in the organization and is only from mid-level upwards. That is where the pool of talent is important, and that will feed into the succession plan.” — Ines Wichert

Final Thoughts

Maintaining succession plans is a vital part of your talent management process. It starts with recruiting, shapes development, and moves all the way to how you manage employee performance. Having a robust process helps you to hire high performing employees. Our procedures recognize the staff’s potential for leadership and identify the specific areas for the development of their knowledge and skills. We prepare them for promotions.

SuccessFinder gracefully extends from the individual or team to the organization. Our elegant solution creates a platform for making decisions across the employee lifecycle, from recruiting to development, performance, and succession. Also, our powerful talent analytics can help drive the initiatives you care about.

The absence of a clear succession plan is a severe risk to businesses. However, taking the time to create thoughtful succession plans to reduce this risk pays big dividends. To see the progress you want in your company, develop your current employees and take the time to hire the talent you need. Use our ladder of leadership to guide your leadership development effort. Set up a mentorship program for leadership roles. Candidates learn the necessary skills for leadership roles. It provides you with a backup plan for sudden vacancies.

Curious to learn more about our streamlined process to integrate development plans and succession planning?  Contact our experts. We offer our services worldwide.

In the case of business continuity, preparation is the best policy.