From a business operations standpoint, succession planning is crucial for all sizes of companies, whether a one- or two-person organization or a multinational corporation.
“It’s been estimated that only half of public and private companies have a succession plan in place for key members of management,” says Steven Y. Patler, JD, CPA, managing director with The Prosperitas Group LLC in Bloomfield Hills. “The departure of key employees for expected or unexpected reasons can remove knowledge, leadership and even an organizational icon. Consider the retirement of Bill Gates from Microsoft. Careful planning is essential to ensure business operations can continue.”
Smart Business asked Patler how companies develop a succession plan that identifies future leaders.
What is the most important factor to consider prior to developing the plan?
The company’s future needs. While the existing needs are important, focus on the strategic direction of the organization. If a person in a key position leaves, it may or may not be ideal to replace him or her with someone with the same skill sets. Taking into account the company’s strategic direction is critical, as is identifying the desired qualities of future leaders long before there is an actual need.
For the succession plan to make sense, a broad base of representatives should be involved; for example, members of the board, the CEO, vice presidents, general counsel and human resources personnel. There is no cookie-cutter formula for a succession plan. Each company has its own strengths and weaknesses, which can be more easily identified if myriad people are involved with the process.
How can a company evaluate current personnel to identify successors?
In some companies, the most pressing need is to identify a successor to lead the company. But for most companies, there are several key people who are essential for survival. So there may be many positions that need a plan. You need to study and identify what positions and people are most critical. You have to evaluate their abilities in the context of the position.
After crucial people and positions are identified, the next step is to determine available sources of replacement. It is not always existing personnel. You may need to look externally. For example, say your marketing director has been with the company for many years and handles all the marketing functions, and no one else at the company knows his or her job in as great of depth. In that type of situation, you have to consider how easy or difficult it would be to identify a replacement from outside.
When considering replacements, it’s important that potential candidates are a good fit for the culture of the organization, or be ready for a long process to change that culture. Some people fit better in certain types of companies, and others fit well in certain roles within a company. Some don’t even want to be managers. There are sophisticated tools available to determine what types of positions people are best suited for or to help employees identify their strengths and weaknesses to pinpoint areas they need to improve upon in order to move up successfully to different positions.
How can a company ‘develop’ its potential successors?
Once you identify candidates, there needs to be mentoring and education. Job rotation is helpful, as well, to see how all the positions relate to each other. Equally important is to have an evaluation process to see how the person is progressing and performing. Is he or she, indeed, the good candidate you thought he or she would be?
Are there any special considerations?
In some situations, succession planning can get political. For example, look at the large brokerage firms that had to hire new external CEOs because of poor past performance. Shareholders demanded new talent, even if there were good, developed candidates on staff. So, sometimes, there are external forces beyond your control.
Another consideration is that you really need two types of succession plans: the long-term development plan, plus a contingency plan. Positions don’t just open due to planned retirement. Things happen. Or the CEO or other key personnel might change companies, leaving at the prime of their careers. Contingency plans are essential to maintain operations even in the sudden absence of a CEO or other key employee.
This brings us to a final point: Both internal and external factors can render a succession plan null and void. You can’t just have a plan; top management and the board must be committed to it and resolved to revisiting it at least annually and updating it on a continual basis.