Taking the leadership leap Developing an effective executive pipeline for India s future

Transcription

1 Taking the leadership leap Developing an effective executive pipeline for India s future

2 Contacts About the authors Delhi Gaurav Moda Principal London Viren Doshi Senior Partner Mumbai Jai Sinha Partner Viren Doshi is a senior partner at Strategy& operating across London, Mumbai, and Paris. He has more than 30 years of industry experience in the global energy sector. Jai Sinha is a partner at Strategy& based in Mumbai. He co-leads the India business and has more than 20 years of experience advising companies in a variety of industries. Gaurav Moda is a principal with Strategy& based in New Delhi. He leads the firm s organization, change, and leadership efforts in India. Anshu Nahar is a principal with Strategy& based in Mumbai. He focuses on strategy and organization within the financial services industry. This report was originally published by Booz & Company in Strategy&

3 Executive summary Indian companies have experienced explosive growth over the past two decades, overseen by a generation of top leaders who are nearing retirement. Unfortunately, there are not enough qualified successors to keep pace with the country s growth. Although the future expansion of Indian business has been ensured, its effective stewardship has not, leaving a leadership gap that companies will need to fill in innovative ways. A more participative approach, attuned to the needs of the next generation, is rightly gaining traction but only in companies whose leaders endorse the approach wholeheartedly, and where it can become ingrained in the company s culture. This approach starts with a clearer understanding of the causes of the leadership deficit. To continue fueling India s economic growth and fulfill the plans of individual companies, a better approach to managing the talent pipeline at all levels is required. Symptoms of the leadership deficit include the dearth of potential candidates; the lack of breadth of experience among those candidates (who have largely been functional rather than general managers); and the bidding war that has ensued over the few, talented managers. Corporate India s emphasis on technical excellence and rapid growth has been incredibly successful, but it has dominated at the expense of the systematic development of future leaders. By making top management more effective, cultivating a strong set of middle managers, creating advancement opportunities for technical specialists, identifying high-potential employees, and building stronger cadres at the junior level, executives can establish a leadership pipeline that will sustain itself into the future. This change in focus toward nurturing and developing talent will go a long way toward ensuring a strong future for any Indian company. Strategy& 3

4 Talent at the top The greatest deficit facing companies in India today is leadership. The country s explosive growth since the early 1990s has allowed many Indian companies to expand their activities exponentially. Unfortunately, however, the development of leadership talent, particularly in the group just below the top tier, has not kept pace. Upper-level managers throughout the corporate world in India are aging and ready for retirement, often without having enough experienced next-generation executives ready to take their place. There are simply not enough senior leaders for the future. It is no surprise, then, that in one major survey of executives of leading Indian companies (conducted by Harvard Business Publishing in 2010), 88 percent of the respondents cited gaps in [their] leadership practice as their top challenge. The problem is exacerbated for many companies because of the decentralized nature of their management. Traditionally, Indian companies have operated in a markedly top-down manner; the person with the corner office made the final decisions, while members of senior management oversaw their specific silos. That chief executive centric model, which proved itself useful in marshaling resources for growing businesses, is giving way to a more participative approach, one more resonant with the younger generation of business managers. But companies now find themselves without enough experienced senior managers to take over the larger number of decision-making roles that are required in participative management. When the next tier of leaders rises to the top, they are limited by a lack of a wider breadth of experience. Having focused on their particular segment of the business to great effect, many are insufficiently prepared to take over biggerpicture executive duties from the retiring generation. And as that generation ages, companies are finding themselves without equally experienced senior managers to take over. 4 Strategy&

5 C-level executives in India recognize this gap, but it is not always clear what concrete steps they can take to fill it. Indeed, few companies have managed to produce the leadership pipeline they need. But it is possible to overcome this hurdle. By cultivating younger leaders, and taking a more holistic and targeted approach to their development and career path, companies can fill their immediate gaps while building the enterprise capabilities necessary to ensure that they thrive in the long run. Strategy& 5

6 Identifying the challenges The leadership deficit in Indian business is widely recognized, but few companies have successfully addressed it. That s because the requisite solutions, including the development of a strong leadership pipeline, require immediate and focused efforts in Indian companies. This challenge manifests itself on three levels. First, there is a quantity deficit: Many Indian companies simply find it difficult to fill all their available positions with qualified applicants. Second, an experience deficit exacerbates the problem: Today s senior and middle managers have not had sufficiently broad or well-developed careers. Finally, the talent war adds complexity: Competition over high-quality executive talent is intensifying, and companies are willing to pay top dollar for the right people. Conversations with our clients suggest that these three gaps pose the most significant challenges to the future growth of their companies. The quantity deficit Employers difficulty with filling vacancies is sector agnostic. In the 2012 Manpower Talent Shortage Survey, a global survey of employers, 48 percent of the respondents based in India reported difficulty in finding qualified candidates for their managerial positions. Nearly 17 percent reported a complete lack of candidates for these positions, qualified or not. Although talent shortages are seen among all skilled workers, the gaps at the middle and senior management levels relate to both the number of candidates and the skills they offer. Given the current state of leadership development at Indian companies, and with continued economic growth in mind, our estimates suggest that the top management deficit may range between 10 and 18 percent over the next five to 10 years (see Exhibit 1, next page). This gap leads to delays in readying growth opportunities, and can also put existing business operations at risk. Because of the lack of qualified successors, senior leaders are not retiring when they should. Instead of developing and executing a clear 6 Strategy&

7 Exhibit 1 Estimated demand-supply gap for top management in India Gap 20% 18% 15% 11% 15% 13% 10% 9% 11% 5% Leadership shortfall range for ET500 (top 500 Indian companies) Source: Strategy& analysis, drawing on data from RBI, the Indian government, Indiastat, and Prowess succession plan, executives have become more comfortable extending their tenure, lacking confidence that the next level of management is up to the task of leading. But executives cannot stay in their roles forever, as much as they might think they have to. Even as boards continue to prolong their tenure, many chief executives are aging past the point at which they can postpone retirement. Without a forward-looking plan, companies may find themselves foundering. People have been so focused on growth that they have not invested in developing the next rung [of the leadership ladder], said one senior human resources (HR) manager from a large private-sector conglomerate. There is a strong circle of top leadership in our businesses, but no tag team. Until now, businesses that are closely aligned to the public sector have been less affected by this problem; the large workforce, grown through the ranks, has so far shielded state-run companies. But as a public-sector bank CEO noted, The pressure is beginning to mount. He added that this was a serious problem for the company: More than 30 percent of our senior and middle managers will retire in the next three years. This will leave a large numerical and capabilities gap. Strategy& 7

8 The experience deficit The experience deficit plays out differently across different sectors of the economy and at different levels of leadership. In the rapidly growing New Economy industries in particular, such as those driven by digitization, too few people have been working long enough to develop a leader s perspective. For example, the telecom boom over the past decade has resulted in a flurry of flourishing mobile phone brands in the country. But each of these firms has had to draw upon its existing pool of players to build its senior team. The growth of that talent pool has not kept pace with those of the brands. Moreover, most Indian companies today lack an effective in-house leadership development program. Although they rely on young leaders to take on senior positions, they fail to provide those leaders with on-the-job guidance and mentoring, which is necessary to prepare them for greater responsibility. Thus, many young, inexperienced managers have found themselves launched into senior positions without having had enough training in the complexities of strategy or managing people. As one regional sales head for a mobile handset company put it: Eight to 10 years ago, there were only three to four handset brands in the country. Today, there are over 60. Relatively younger managers have had to step up to take on top roles in these companies. Old economy industries are also affected by this challenge. Although there may be highly experienced leaders at the top, they are struggling to find experienced middle managers, let alone senior managers, to take their place once they retire. Moreover, many top-level executives at public-sector and private-sector companies face challenges because of limited quality and a lack of breadth of experience. Without a strong leadership pipeline in place, star functional managers have been promoted to top roles. These individuals may have a background within only one or two specialized domains, and may not have had the opportunity to develop a broader perspective or set of skills. As one chief human resources officer for a large private-sector conglomerate put it, We have many technical [or] functional experts but have not invested in helping them make the transition to top positions. Without that investment, and the development of a strong leadership pipeline that produces new batches of top talent, Indian companies are vulnerable to the next major challenge: the talent war. 8 Strategy&

9 The talent war As they struggle with the quantity and experience deficits, human resources departments have had to rely on external hiring to build their teams. The demand for capable leaders continues to rise, and the competition for them has intensified. This has led to an accelerating talent war among companies. Those companies that invest in a leadership pipeline are aware that a rival company could hire the senior managers they cultivate at any time. We have gone the buy route [hiring seasoned senior leaders from outside], said a senior HR manager at a major Indian conglomerate. We have infused external talent to support our growth. The professionalization of family-run businesses, the continued entry of global corporations into India, and the emergence of new sectors are further fueling this race for talent. We have been hiring aggressively at entry levels to build our talent pipeline, said the chief operating officer of a public-sector bank. However, we see an attrition [rate] of around 25 to 30 percent among these new hires. Once trained, they are picked up by private-sector banks at significantly higher salaries. The demand for capable leaders continues to rise, and the competition for them has intensified. This has led to an accelerating talent war among companies. But there are more holistic ways to develop and nurture top talent ways that breed loyalty and provide incentives to young leaders not to jump at the first outside offer they receive. Determining what is causing the leadership deficit will go a long way toward not only retaining more versatile employees, but also decreasing the need to rely on them in the first place. Strategy& 9

10 Understanding the root causes The challenges that Indian companies face with talent and leadership have three underlying causes. The first two Indian demographics and the booming Indian economy are well known. The third, India s prevailing technological mind-set, is less obvious to many people, but may provide more leverage for change. Each of the three is worth a brief explanation. Indian demographics It is no secret that India is a young nation. The country s relative youth its median age is 26 is one of the driving forces behind its growth, and an oft-cited reason for its emergence as an economic superpower. Given that around 65 percent of India s 1.2 billion people are between 15 and 64 years old, and that 30 percent of the population is younger than 15, India will continue to be a young nation for several decades more (see Exhibit 2, next page). The opportunities presented by that young demographic to Indian companies, as both a consumer class and a workforce, are immense, but there is also a massive downside. India s workforce remains overwhelmingly in need of more skills to match the growing workplace requirements. As Indian companies continue to expand, they must rely on less-experienced leaders who require more development and training, which is often not a current priority. The booming economy The country s unique demographics coupled with the economic reforms of 1991 and an overall surge in globalization have produced a remarkable decade for corporate India, one of rapid expansion and exponential growth. The pace of that growth has, as discussed, placed significant demand on the short supply of talent across junior, middle, and senior levels. The economy is growing at a faster pace than the rate [at] which our leadership is aging, said the CEO of one large privatesector financial-services company. Without robust internal leadership development programs, many companies will be left to costly external recruitment. 10 Strategy&

11 Exhibit 2 India s population by age, Age Majority (~60%) of population younger than (Millions of people) (Millions of people) Source: The Economist Intelligence Unit (EIU); Strategy& analysis Strategy& 11

12 A technological mind-set The first two underlying causes India s young demographics and booming economy are obvious contributors to the current leadership deficit. Perhaps that s why few Indian companies have systematically addressed this challenge; they perceive that they have no power over the root causes, and they wouldn t want to change them even if they could. But this subtler third cause also signals where executives can exert the most power. Historically, Indian business leaders have focused on developing technology rather than people. In the same way that the country s demographic and economic strengths offered Indian companies great advantages in expansion but led to gaps in the leadership pipeline, those companies emphasis on technical excellence and rapid growth came at the expense of employee development. As a senior manager at a large Indian conglomerate put it, We have quality technical experts, but can t convert them into business leaders. Evidence for this dynamic can be found in practices prevalent throughout Indian companies. For example: No place for HR at the table: Few companies have provided HR a seat on executive management committees. As a result, the HR department often takes a backseat in the strategic planning process, leading to a lack of focus on people matters. Need for more breadth of experience at the top: As noted earlier, senior team members have often risen through functional ranks by excelling in their specialized tasks, but with a limited variety of experience. This is not a problem just for Indian companies; it is endemic to corporate structures in many geographies. But while many global companies compensate through in-depth training at the top, bringing senior executives together to help develop their complementary capabilities, Indian companies have not invested as much in this type of executive education. A lack of structured leadership development in the middle: There is also a shortage of broad-based leadership development and succession planning programs for those in middle management. Furthermore, limited development opportunities exist for technical specialists. When specialists are forced to take on general management roles, they are typically neither well prepared nor motivated to handle them. 12 Strategy&

13 A dearth of integrated training at the bottom: Cadre-building programs have often been ad hoc, run in isolation or as one-off initiatives. In addition, many Indian companies struggle with MBA hiring programs. Often, the MBA class is not integrated well enough into the broader workforce, and companies put too much hope too early in these young managers. Meanwhile, rotation programs meant to train the new recruits are often ill-conceived and seen as an intrusion into daily work by line managers. Corporate has assigned two MBAs to my department for rotation I don t know what to do with them, said a department head at one midsized company. My people are already overworked with their routine work we do not have the time to train these overpaid young recruits. Changing the culture of a company to one that will incorporate a sound leadership pipeline is no small task. But with a well-developed plan, it can be achieved. Such a plan will imbue managers with an understanding that training such young recruits is an essential part of their routine, and will provide the incentives for them to contribute. In order to establish this type of plan, and to reap the benefits of a betterprepared managerial workforce, companies will have to undertake a comprehensive overhaul of how they approach leadership development. This is an important, and wholly achievable, goal. Failure to devote time and attention to it will cause more leadership problems and promote a vicious circle in which short-term fixes, such as recruiting disproportionately from outside and promoting more people to positions they can t handle, will further aggravate overall leadership problems. Changing the culture of a company to one that will incorporate a sound leadership pipeline is no small task. But with a well-developed plan, it can be achieved. Strategy& 13

14 Taking the leadership leap What does it mean for Indian businesses to take a holistic view of the entire leadership pipeline and systematically build leaders from the bottom up? It means making talent management identifying, nurturing, and elevating high-potential employees a key component of HR strategy. This involves five main steps: 1. Invest in senior management effectiveness: Creating an effective senior team begins with setting clear objectives, selecting the right people, defining clear roles for team members, and promoting productive interaction and dialogue among members. This type of structured teamwork will also encourage better development of strategies, which can then be more precisely interpreted and more rapidly implemented. The stronger the team at the top, the more confident the rest of the company, customers, and stakeholders can be of its strategy. Key insights on how to make top management more effective: Encourage collective decision making at the top level to mitigate the risks of overlooking certain issues and to ensure that a wellinformed choice is made. Create forums for discussion in order to align the overall strategy among top management. Transparently define the big-picture responsibilities of top managers, in addition to their segment duties. The stronger the team at the top, the more confident the rest of the company, customers, and stakeholders can be of its strategy. Assign executive coaches who have business experience and an appreciation for the company s specific context to work closely with top managers and provide advice on issues related to their individual leadership style, development, and performance. 2. Set up feeder roles and successor pools among the next tier of leaders under the top team: For each key position in an organization, multiple feeder roles must be identified. Feeder roles are the next line of roles in the same division as a critical role; these can be set up to ensure 14 Strategy&

15 employees develop the required competencies. These roles must be chosen carefully and, together, must encompass all the duties of the considered position. Management must then identify potential successors from across these feeder roles and create a pool of ideal candidates. Potential successors should have the opportunity to take on a variety of feeder roles to prepare them to embrace broader responsibilities at the next level, resulting in a well-rounded next generation of upper management. Key insights on how to develop feeder roles and successor pools: Set up feeder roles to undergird critical positions wherein the departure of an incumbent can cause business disruption. This may mostly involve senior leadership positions, but can also include critical middle management positions. Identify at least two successors for each critical role, selected from those occupying feeder roles or with relevant job experience. Select successors based on consistent performance, future potential, long-term cultural fit, and commitment to the organization. Provide members of the successor pools with individual development plans, close involvement from a top leader through mentoring or coaching, and short-term leadership roles, building readiness for leadership within a 12-to-36-month timeframe. 3. Manage the technical ladder: Although it is important to develop business leaders, it is equally vital to develop technical leaders. Companies should adopt parallel leadership tracks that allow highpotential technical staff members to rise to a level of leadership in their chosen technical field without being forced to take on significant people responsibilities. This allows fast-track growth opportunities to optimize the progress of high-potential employees who do not wish to move completely to business management (see Exhibit 3, page 16). Key insights on how to develop a technical leadership pipeline: Identify key technical positions on the basis of their importance to business continuity and how they add value. Establish a separate technical leadership pipeline for these positions. Define technical career ladders, separate from those of general management. Allow these highly skilled specialists to flourish in Strategy& 15

16 Exhibit 3 Pathways to senior management Top management C-suite executives Successors Successors Middle management Junior level High-potential individuals Cadre pool Technical leader Management leader High-potential individuals Cadre pool Leadership pipeline Source: Strategy& 16 Strategy&

17 aspirational career paths that do not require them to take managerial positions with people-oriented responsibilities. Look for candidates on the technical career ladder with managerial potential. Provide them with short-term job rotations perhaps supplemented with external training so they may gain the basic skills that are mandatory for senior roles. 4. Identify and promote high-potential employees: As we ve said, the lack of a leadership pipeline is not a uniquely Indian phenomenon. Less than half of the world s organizations take the time to identify highpotential employees, and as recently as two years ago even fewer (around 39 percent) had programs to accelerate development. But it is a uniquely Indian problem to have so much raw talent available, with such a huge proportion of it remaining undeveloped. Talent management systems need to be redesigned to focus on potential as much as on performance. Objective measures must be put in place to gauge leadership potential. Top performers must be identified as high potential only if they also have great managerial or technical leadership potential, measured against specific criteria. Key insights on how to develop high-potential employees: Identify employees who have the potential to take on roles that are two to three levels above their current role not just the next higher role they would move to in due course of time. Don t mistake performance as a proxy for potential; performance ratings reflect an individual s ability to deliver on expectations from their current role and not the potential to take on greater responsibilities. Rate high-potential employees on the basis of whether they display the ability, mobility, engagement, and aspiration needed to take on more senior roles. Employ a variety of tools to assess potential, such as 360-degree assessments, psychometric tests, and assessment centers. (These tools are useful, but they are not a substitute for real talent discussions; talent review processes need to be owned by the business leaders.) 5. Build quality cadres at the junior level: The cadre level is an ocean from which future leaders will emerge, so special attention needs to be given to it. First, the organization must determine the optimal mix of cadres recruited directly from universities and entry-level hires from the job market. Within the former, the organization Strategy& 17

18 must carefully select which undergraduate and postgraduate schools it plans to hire from and the initiatives taken at those schools to promote the company. The organization also needs to develop a structured, integrated internship program to attract outstanding students early on. Finally, as with all other development programs, it is critical that these programs not be run in isolation. Key insights on how to develop a quality cadre pool: Select technical and management institutes in line with the company s skill expectations and compensation levels it s advisable to choose a targeted approach, focused on a small set of institutions whose graduates fit the company s needs, rather than casting a wide net. Ensure that there are sufficient on-campus initiatives to promote the organization as a desirable recruiter. Evaluate the success of campus recruiting over a few years in terms of attrition rate and quality of employees; add and drop recruitment campuses according to the results. Institutionalize a standout summer internship program as a default route to full-time hires; many companies make the mistake of not taking summer internships seriously enough, and interns do not get the right kind of assignments and oversight. As a result, companies lose the important opportunity to conduct an extended interview process to evaluate candidates. 18 Strategy&

19 The long-term opportunity We ve presented the talent shortfall as corporate India s greatest challenge more difficult to master than growth, expansion, technological advancement, or business strategy. But talent is also the country s greatest opportunity. As more Indian companies compete on a global scale, as their external ambition grows, senior executives will be drawn to think more effectively about people. India has one distinctive cultural asset in this regard: It has a tradition of taking the long view. People need time and discipline if they are to develop, and if Indian companies are willing to apply that long-term outlook, they may be able to leap past other nations companies in their approach to human capital. Before the country s top business leaders retire, they should put their full attention on the care and development of people coming up behind them. That will allow them to retire with confidence, knowing that they are leaving their business in good hands not just immediately, but long into the future. By building the right, integrated capabilities, and instituting a holistic leadership development program, they can ensure strong leadership for generations to come. We ve presented the talent shortfall as corporate India s greatest challenge. But talent is also the country s greatest opportunity. Strategy& 19

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