1 Insight paper Succession Management: Assessment report
2 Understanding the business impact of career and succession management To support your career and succession planning, this concise report presents facts, figures and background from independent research, Lumesse extensive experience and our customers own organisational best practices to illustrate the business impact of optimal career and succession planning. If you haven t yet taken this valuable assessment, visit Succession planning the process of identifying and preparing successors for critical positions within your organisation is identified as one of the top three focus areas for today s HR departments. But succession planning is also among the most difficult aspects of talent management to implement and measure. As a result, many organisations either ignore it or simply fail to implement it. One recent survey shows that 60% of organisations have no process for succession planning. 1 The same survey revealed that fewer than 12% have enterprise-wide succession planning that is tightly aligned with their business strategy or is integrated with other talent management processes. 2 1 Center for Creative Leadership and Bersin & Associates, April 2009, High-Impact Succession Management: Best Practices, Models and Case Studies in Organizational Talent Mobility.
3 Well-considered and effectively implemented succession planning: Creates a flexible and sustainable business. Protects the present strengths of your company and builds for its future. Reduces risk and optimises your organisation s needs. Helps to more easily identify the specific skills technical and professional necessary to shape your organisation s future. Pinpoints the aspirations of individual employees to help them achieve their goals and improves retention. On the other hand, the failure to implement career and succession planning can put your organisation at a distinct disadvantage, especially with today s labour market being so competitive. Still, having career and succession planning isn t enough. It s equally critical for an organisation to ensure that its career and succession planning is integrated with a talent management strategy; career and succession management should not only focus on filling the most senior positions but on developing executives, managers, specialists and team leaders at all levels. Supporting the concept of enterprise-wide career and succession planning is a shift away from viewing succession planning as a secretive affair for top-tier executives. Today, successful organisations build cultures of leadership and development through the entire company, and they involve the individual in the process. This enables employees to register their career aspirations, their hopes to move up the ladder, and any other future plans they may have or opportunities they wish to take advantage of, such as overseas assignments or specialist project roles. 3
4 Eighty-five percent of our identified successors will be ready within one year. Karl-Heinz Duchardt Bayer AG Why it s crucial to have a succession management process organisation-wide Ample evidence exists to show that succession management not only has a positive impact on the overall performance of an organisation but that it may in fact be critical to an organisation s survival. One recent study found that organisations that lack effective succession management are five times more likely to go out of business than organisations with established and robust practices. 2 Companies with established succession management also experience less downsizing and lower turnover. 3 Lumesse believes a formalised succession management process will reduce at least three areas of risk: 1. Business risk (by minimising the risk of having key positions vacant). 2. The risk of unprepared key successors. 3. The risk inherent in transition situations. Best practices indicate you should be able to staff more than 80% of your key executive positions with internal talent. In addition, at least 50% of those candidates should be fully prepared to step into their new roles within 12 months. Eighty-five percent of our identified successors will be ready within one year, says Karl-Heinz Duchardt of German chemical and pharmaceutical giant Bayer AG, a Lumesse customer. Implementing succession management requires cooperation at many levels within the organisation, but support and engagement must begin at the top. Top-level executives must be educated about the business impact of a formalised succession management programme. To reduce the ad hoc element in placement decisions, the programme must be established at the top three levels of the organisation. Consistency in succession planning is also essential to ensure: 1. Candidates are identified and developed based on the same criteria across all units, and manager and employee expectations are being set appropriately. 2. Transfers across divisions and departments are fostered, ensuring a sense of unity across the organisation. 3. Greater potential for building leaders with broadened business knowledge. 4. The company s employer branding message is strengthened. 4 2 AM Azure, 2008, Ten Years On: The Impact of Succession Management. 3 Bersin & Associates, 2009 Talent Management Factbook.
5 At RWE, succession planning covers all executive management roles. Now, we are beginning to extend this to the rest of the organisation, starting this year with the non-executive roles. Claudia Venzke Head of Group Talent Management at RWE AG Top-level succession management is critical, but it s only the first step Although planning for change at the top is essential, organisations must apply succession planning at all levels. They need to ensure that key individuals from firstline supervisors upward are prepared to move up or move horizontally to more than one role. As important as this strategy is, it s often neglected. Fewer than 40% of survey respondents said their succession planning includes mid-level managers and skilled professionals. Even fewer 11% said their planning included first-line supervisors. 4 When an organisation implements a proactive programme to prepare individuals for more than one role, it helps build talent pools in mission-critical and strategic roles and develops a stockpile of potential candidates at all necessary levels, including upper management. This enables management to tap into a group of ready individuals rather than focusing on one person, and it motivates and engages mid-level managers, because they are included in the organisation s succession programme. This approach makes the entire company more flexible and gives mid-level management a stake in the organisation s future. But preparation is the key. Three important steps in identifying and planning for roles critical to the future of your organisation are: Forecasting the demand for those critical roles. Identifying the appropriate internal talent for those critical roles. Developing talent to close any potential gaps. At RWE, succession planning covers all executive management roles, says Claudia Venzke, head of Group Talent Management at RWE AG, Germany s largest electricity producer and the third largest in the U.K. Now, we are beginning to extend this to the rest of the organisation, starting this year with the non-executive roles. 4 Center for Creative Leadership and Bersin & Associates. 5
6 The importance of having bench strength Depth, or bench strength, is crucial in any organisation. Without bench strength, the entire company can find itself lacking when a key employee leaves with little or no warning. That is why it is important that more than one employee be ready and have the necessary skills to assume each of the key organisational roles. Succession management that develops bench strength also reduces an organisation s reliance on the external market by being proactive rather than reactive when changes in leadership occur. One study showed that companies with above-average bench strength were four times more likely to outperform their industry peers with above average revenue growth over 36 months. 5 Succession planning should include a bench metric that identifies potential successors in key positions and will track whether those successors are ready to move into that role. A study of strategy-to-performance gap found that without the right resources in position to replace departing leaders, there was an average shortfall or performance loss of 37%. 6 Most of our executive positions have more than one identified successor, says RWE AG s Venzke. As a result, we are more able to execute quickly on internal placements. Discontinuities are almost nonexistent and therefore reduce the risk of having vacancies left open. It s only effective planning if your successors fill their intended roles In top companies, proposed successors assume their intended positions a key indicator of the success of an organisation s succession planning. More than 90% of executive positions are staffed by an internal successor, says Duchardt of Bayer AG. Failure to follow through and hire from within can have a significant financial impact. One study of French corporations found that companies using external succession saw a large drop in their share prices from two weeks before until well after the announcement of the change in executives Corporate Leadership Council, 2003, The Business Case for Succession Management. 6 Mankins, M., and Steele, R. undated, Turning Great Strategy into Great Performance. 7 Dherment-Ferere, Isabelle and Luc Renneboog, 2000, Share Price Reactions to CEO Resignations and Large Shareholder Monitoring in Listed French Companies (August 2000).
7 A high rate of internationally experienced employees strengthens the ability to take on global challenges. Karl-Heinz Duchardt Bayer AG Internal succession also creates more successful executives, because they have the ability to develop the necessary skills more quickly than external candidates. Another study showed that 64% of new executives hired from outside of a company fail at their new jobs 8, a huge waste of money, when you consider that external candidates usually garner higher salaries than those promoted internally. If a pattern emerges of failing to hire from among internal candidates identified as successors, your organisation should take a hard look internally and review its process for identifying and developing successors, with an eye toward making sure that successors are both developing the right skills and developing them quickly enough. If you fail to take this step, you risk losing your key people to competitors. Don t forget retention strategies as you manage for succession A true succession plan also engenders retention. Without retention strategies, you may lose key people within your organisation, which carries not only a financial cost but may also negatively affect your company s morale. Career development heightens employee engagement. Organisations with higher employee engagement can expect an increase of up to 20% in performance and an 87% reduction in employees probability of departure, according to one report. 9 Succession planning also should not lead to disappointment, which can happen if a previously identified candidate perceives his or her designation for promotion as a promise but is not selected for the position. The challenge is to set the employee s expectations honestly and openly. When an employee is earmarked for a higher-level position, they need to be aware that it is a recognition that the employee has the skills and talent for the job but that is not a guarantee that the job will be his or hers, and in fact, several other people may be equally or more qualified when the time comes to fill the position. 8 Ciampa, Dan and Michael Watkins, Harvard Business School Press, 1999, Right from the Start. 9 Corporate Leadership Council, April 2007, Solutions to Discuss One of the Key Engagement Drivers at the 5th Annual NY HR Week Conference - New Roadmap to Engagement. 7
8 Ensuring accountability for career development reduces the vacancy cost for discontinuity and for external hires. It also motivates talent to achieve top performance. Claudia Venzke Head of Group Talent Management at RWE AG Here are seven key steps an organisation should take to combine retention strategies with career and succession planning: 1. Create a framework to consider the full cost of employee turnover, with particular focus on key positions and highperformer turnover. 2. Start conducting exit interviews to gather critical information on why employees leave the organisation. 3. Determine the factors that keep top performers engaged. 4. Agree to a budget for retention activities. 5. Highlight the full cost of employee retention turnover to business units and managers with limited interest in managing retention risk. 6. Initiate a programme focusing on retention of incumbents in key positions and high performers in the short term. 7. Use technology to consistently manage retention risk and to profile and highlight at-risk employees, especially high potentials and top performers. The value in empowering managers and holding them accountable Many organisations put significant effort and attention into the planning process, but they do considerably less to hold managers accountable for developing their workforce. Holding managers accountable is essential to achieving the optimal outcome for succession planning and developing. From the CEO down, it is instrumental to emphasise active engagement in talent management. Holding managers accountable for development of employees for succession planning results in stronger bench strength and increased readiness to fill key roles. All of our managers with leadership responsibility are responsible and accountable for developing the careers of their direct reports, especially key talent, says Bayer AG s Duchardt. These practices also ensure continued success in revenue growth, customer satisfaction and operational effectiveness, and they forge an organisation s overall capability for future competitiveness. Ensuring accountability for career development reduces the vacancy cost for discontinuity and for external hires, says RWE s Venzke. It also motivates talent to achieve top performance. 8
9 The mastery of talent mobility: A trait of dominant companies in the 21st century In the last decade, the number of employees on international assignments increased by 25%, a number predicted to grow to 50% by 2020, according to one study. 10 The same report indicated that global organisations placed employees in an average of 13 locations in 1998, a number that increased to 22 by 2009 and is predicted to grow to 33 by Yet 29% of Fortune 500 companies surveyed said they have nowhere near enough global leaders, and 56% said they have fewer than we need. 11 Additionally, 67% responded that their current executives do not have the global leadership capabilities that they need. For an organisation to become or remain successful, this disconnect must change. Employees with international experience have had the greatest business impact on areas such as development of client relationships and sales growth. 12 To master talent mobility and dominate markets in the 21st century, an organisation needs to take four key steps: 1. Acquire the best talent, regardless of geography. 2. Deploy the best people from the global talent pool against the best business opportunities. 3. Create roles and responsibilities for communication between assignees and their home managers or sponsors. 4. Develop leaders with the global insight and experience to manage across cultural and geographic barriers. A high rate of internationally experienced employees strengthens the ability to take on global challenges, says Duchardt. Talent mobility also allows employees to develop their skills in additional business lines, functions or cultures, and also makes them better-rounded. This, in turn, helps prepare them to take on more demanding and expanded roles within the organisation. A high level of diversity in the workforce will be very important as we march into a new decade. Many successful organisations also transfer employees globally to ensure a certain level of performance from their overseas investments. For example, they may want employees with international experience to introduce a product in a new region or manage a project that is similar to one completed in another region. Or, an organisation may simply want globally minded people in place to support international customers. 10 PricewaterhouseCoopers, 2010, Talent Mobility 2020 Report. 11 Black, Stewart and Allen Morrison and Hal Gregersen, undated, Global Explorers London. 12 Mercer International, 2008, Mercer International Assignments Survey,
10 Avoid the Mini-Me syndrome: Strive for diversity to ensure global strength The Mini-Me syndrome is the result of senior management filling key organisational roles with people similar to their predecessors, based on a range of factors, including age, education, leadership style, experience, race and gender. When an organisation fails to plan for and promote diversity, it risks losing pace with the increasing diversity of the global market. A succession plan that recognises the value of diversity enables your organisation to move beyond antiquated notions and better prepare for the future. Among the benefits of a strategic move toward diversity are: Developing a better understanding of, and increasing market share among, multicultural customers. Creating a corporate reputation as a socially responsible enterprise. Enhancing the organisation s reputation as an employer of choice among a wider population. Encouraging the diversity of thought and perspective among the workforce, thus driving innovation in products and services. Summary In the Lumesse research, 75% of respondents say that among their talent management initiatives, career and succession management at all levels has the greatest positive impact on their organisation. From this view, it is imperative for organisations to develop a clear strategy for career and succession planning tied to a total talent management programme. This strategy is essential to the ultimate success of your talent initiatives. The time and effort involved in bringing the right stakeholders together to develop a vision, direction and clear set of priorities on which to focus your efforts and resources is time well spent. 10
11 The lack of career and succession planning can, meanwhile, put a company at a distinct competitive disadvantage. With high rates of unemployment, the labour market is very competitive. The lack of proper succession management makes it difficult to retain valuable employees and will hamper an organisation s ability to act quickly and effectively to changes in leadership or business direction. It is critical to integrate career and succession planning with a talent management strategy, and it s important also to focus on all positions within the organisation, not just upper management. Successful talent management organisations integrate HR, the lines of succession and other functional stakeholders to develop the future state of their talent delivery model. The successful and effective talent strategy aligns HR initiatives and processes to the goals of the organisation and in so doing, supports an organisation s ability to meet its business targets. This is an area of rapid development as HR organisations transform their capabilities and capacity to meet their growing talent demands. Additionally, succession planning should no longer be a discrete, insular activity. Instead, it should be about building a culture of leadership and development throughout the organisation. 11
12 About Lumesse is the only global company making talent management solutions work locally. We help customers around the world to implement successful local talent management initiatives that identify, nurture and develop the right people, in the right place, at the right time. Our multi-cultural background and presence means we understand how to deliver talent solutions that work the way our customers work, as individuals and as teams, because no two people, organisations or cultures are the same. We regard differences as strengths, not as obstacles. 1,700 customers work with us in over 70 countries because they recognise that commitment, innovation and value only come from people. We help customers to unlock and inspire that human potential in their businesses. Our integrated talent management solutions are comprehensive, intuitive, secure and fully internationalised into over 50 languages. We have Lumesse offices and partners in more than 40 countries, covering EMEA, the Americas and Asia-Pacific. To find your nearest office and talk to someone who speaks your language, visit: /get-in-touch Lumesse AS All rights reserved. Unless explicitly permitted by Lumesse AS or by applicable copyright law, no part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or otherwise.