According to the International Institute for Management Development (IMD), succession planning is the “process of identifying and internally developing talent with the specific objective of replacing key business leadership positions in the company.” This definition highlights a necessary requirement for effective succession planning: the importance of leadership development in identifying internal talent.
According to Deloitte Insights, 86 per cent of leaders believe that succession planning is an important priority; however, only 14 per cent conduct it well. The same is true with leadership development, as 79 per cent of leaders believe that identifying high-potential leaders is a high priority, but only 16 per cent have a formal process, according to Harvard Business Review (HBR).
This detachment between strategy and execution “leads to excessive turnover at the top and destroys a significant amount of value — close to $1 trillion a year among the S&P 1500” (HBR). Specifically, this loss in value is attributed to a combination of “loss of C-suite intellectual capital and ill-prepared internally promoted executives” (HBR), all a consequence of poor succession planning.
Challenges with Succession Planning and Leadership Development
Developing a succession plan for a business can pose a challenge. While small- and medium-sized firms have a limited pool of internal talent to identify potential candidates, a leading issue is that businesses simply do not have the time. Focusing on managing and growing the business, acquiring new customers, keeping employees motivated, and avoiding risks can easily consume a business’ time.
Companies also tend to view succession planning as solely related to CEO or senior executive positions. However, the risk of losing key employees also exists at other levels of the organization with employees who have acquired years of corporate knowledge or developed influential relationships with customers and suppliers.
Another challenge relates to the pay-back period (i.e., the amount of time required to recover the investment of time, money, and effort). Effective succession planning and leadership development can take months or years to establish, and the return is only realized after a key leadership person leaves the organization, which may not occur until years later.
Businesses need to reframe how they look at these challenges. Succession planning and leadership development are risk mitigation and business continuity measures. These actions ensure that a business continues to operate if there is a loss of key personnel. According to a 2022 Mercer report, a lack of succession planning creates blind spots for enterprises, which “can have a negative impact an organization’s ability to attract and retain talent, potentially limit growth and productivity, and have adverse long-term implications.”
Risks of Not Creating a Succession Plan or Focusing on Leadership Development
The risks associated with the absence of succession planning and leadership development are related to the dilemma of the pay-back period. While the pay-back period has a longer horizon compared to other investments, the potential and the magnitude of the risks are real:
- Loss of key talent and corporate knowledge due to retirement or unexpected departures (e.g., disability or health related issues)
- Deterioration of business performance and possible loss of employment for employees
- Lower business valuation due to uncertainty of the business’ future if the business is being sold
- Damage to the business’ reputation which can impact customer and supplier relationships
- Impairment to future revenue streams, which serve as a source of retirement or generational income
How To Create a Succession Plan and Leadership Development Program
According to Forbes, talking with other businesses, through trade or business associations, that are in the process of succession planning, or have implemented their succession plans, is an effective approach to gather insights of how similar businesses have addressed this need and understand the resource requirements.
The business also needs to consider the amount of time it can dedicate to building and managing an effective program. The needs of each business are different, and the amount of time a business can commit will vary. A minimum, yet appropriate, amount of time needs to be allocated to this strategy.
- Anchor accountability with an executive. This is typically associated with human resources and can involve engaging third parties with expertise in succession planning and leadership development, especially if the business does not have internal capabilities. Identify Key Success Factors (KSFs) that can be used to evaluate the effectiveness of the program.
- Remove bias by assessing potential candidates on a defined set of criteria and by communicating leadership development opportunities to all employees. According to HBR, this helps to uncover hidden talent in a business, especially when the future needs deviate from the current needs (e.g., transformation, international expansion, or acquisitions).
- Develop candidates through a curriculum that includes both technical and behavioural training, delivered virtually and in-person, which allows them to learn new skills and apply the learnings through job-rotations, stretch assignments, and other developmental opportunities. Ensure that appropriate feedback and coaching is part of the program.
- Assess the progress and ongoing eligibility of candidates at defined milestones, which sets expectations for when learning goals need to be achieved and allows the business to recalibrate its succession planning and leadership development strategy as the needs of the business evolve. The milestones also serve as interim returns on the businesses’ investment.
- Semi-annually evaluate the effectiveness of the succession planning and leadership development program. Confirm that it is meeting the business’ objectives or KSFs. Identify gaps that may need to be addressed (e.g., the need for third party expertise), and capitalize on the opportunities (e.g., increase the options for on-the-job application of the learnings).
Succession planning and leadership development may not be on the top of the agenda for a business compared to growing revenue, reducing costs, and increasing profitability while operating in an uncertain and unstable environment. Discounting or delaying action to avoid risks with critical systems of a business can be detrimental. As the saying goes, if you fail to plan, you plan to fail.
Nigel Taklalsingh |Contributing Writer