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The Business Case for Succession Planning

April 11, 2019

In April 2004, McDonald’s CEO Jim Cantalupo died suddenly of a heart attack after what many on Wall Street considered to be a successful 16-month run as the company’s Chief Executive. Within six hours of Mr. Cantalupo's death, 43-year-old Charlie Bell was voted into the CEO position by McDonald’s board. While McDonald’s had been grooming Mr. Bell to eventually succeed Mr. Cantalupo, circumstances warranted quick action. Within weeks of accepting the position, Mr. Bell was diagnosed with colon cancer. His illness forced him to resign in late 2004 and he passed away in January 2005. While these deaths hit McDonald’s hard, the company had the foresight to plan for succession in advance of these catastrophic events. Jim Skinner, who had also been in the pipeline for the company’s top job, took over when it became clear that Mr. Bell could not continue. Jim Skinner, who had also been in the pipeline for the company’s top job, took over when it became clear that Mr. Bell would not continue. Mr. Skinner then led as McDonald’s CEO until 2012. Among his many accolades, Mr. Skinner was named the "2009 CEO of the Year” by Chief Executive Magazine. How was McDonald’s able to respond so quickly to these tragic, unforeseen events? Succession planning. Every leader at McDonald’s is expected to have at least two people they are grooming for their positions.

While the death of two CEO’s in one year is rare, this series of events brought the importance of succession planning to the forefront of many companies’ talent strategies. While most companies understand the importance of succession planning, only 21 percent have sufficiently prepared for viable successors and succession planned for key positions, according to Towers Watson Strategies for Growth Study.

Why don’t leaders plan for succession?

Some leaders say they don’t have time for succession planning. They view the processes associated with talent reviews, development planning, and mentoring as time consuming and outside of the scope of their “real” jobs. These leaders dismiss succession planning as a Human Resources function rather than a core and strategic component of their role. Other leaders view succession planning as important but lack the tools, processes, or support needed to benefit from succession planning. Commonly noted factors that limit succession planning include:

  • Successors leave. High potentials often have strong, active networks and can be recruited away.
  • Incumbents in key roles stay. Well-performing incumbents remain in business critical roles, depriving junior talent of the learning experiences associated with those roles. This limits the business’ pipeline and ability to develop its future leaders.
  • Leaders make gut level, past-based decisions rather than engaging in future-focused, process driven-decisions. When deciding on developmental opportunities, leaders may assume they know what people need or want without undertaking a rigorous approach to development planning that serves the business’ future while considering peoples’ career aspirations when planning.
  • Low quality development plans. Far too often, leaders accept development plans that list “take a course” or “read a book” without specific connections between activities, competencies developed, and benefits to the business. Many employees will recycle the same plan year after year because the development planning is a mechanical, check-the-box process with no accountability, follow-up, or link between development and business results.
  • Poor or lacking follow-up and metrics. Building on the points above, managers are not held accountable by executives for ensuring that developmental activities have been completed and provided tangible value to the business, and thus, managers don’t hold their people accountable for completing learning activities.
  • Some companies bite off more than they can chew. While the examples listed above fall under the umbrella of doing too little, some companies try to do too much. They adopt cumbersome, time-consuming processes that don’t deliver value to the business.

Start with business critical positions instead of people

In a 2005 Harvard Business Review article, Mark Huselid and his colleagues offered leaders a different way to think about succession planning. Rather than start by focusing on top talent, they recommended that leaders start by focusing on business critical positions. To identify these positions, leaders must be clear about the company’s strategy to determine which positions are most crucial in driving the strategy. The authors suggest that only 20% of the jobs in a company are likely to be “business critical” and these roles are not defined by hierarchy. While there is no doubt every company should have a viable plan for its top offices such as CEO, CFO, etc., the company’s strategy will determine which positions are business critical. An organization that differentiates itself based on service quality might focus on its service representatives or sales people, while a company focused on efficiency and low prices might focus on jobs associated with logistics management and purchasing. Roles are not inherently more or less strategic. To determine whether a role has critical significance, it must create value by driving the company’s strategy. This is not to undervalue positions that support and contribute to a company’s success but rather, to offer a starting point for succession planning. The authors note that companies should focus their more rigorous planning efforts on business critical or “A” positions, but also have talent strategies for B and C positions that serve as “feeders” to business critical positions.

According to a structured development plan, for business critical positions, succession plans should go at least two people deep. At least one “Ready Now” successor and one that is being groomed, either in 1-3 years of the job, meaning, they are 1-2 jobs away from the focal role. While two successors is typically considered the minimum, more is better. Identifying junior talent in B or C positions who have the potential 3-5 years (or 2-3 jobs away from) key positions should be counted among every leader’s business objectives and part of his or her annual evaluation.

Next, identify top talent

Without using getting overly complicated, leaders need to determine the criteria that define success for A positions. While many companies identify multiple competencies they view as critical for positions, having too many compe­tencies leads to the cumbersome review process that leaders dread (and thus, don’t do). Instead, focus on a handful of core competencies with well-developed behavioral bench­marks that truly differentiate top performers from the rest. Consider competencies needed to drive business strategy today and those that will become increasingly important in the next 3-5 years.

When leaders measure people against success criteria, they are looking backward. That is, performance reviews evaluate people based on the prior review period’s perfor­mance. That’s why most talent reviews also include evalu­ations of people’s potential – that is, what are people capable of in the future? Popularly used processes such as 9-box ratings consider both past performance and future potential in assessing individuals and their place in succession plans for key positions.

Invest in development

Most companies invest considerable time and energy into devel­oping actionable business plans, supported by budgets that enable plans to be executed. Leaders meet on a regular basis (weekly, monthly, and/or quarterly) to discuss plans, evaluate progress against milestones, adjust actions as needed, and measure individuals against their targets. Interestingly, few leaders invest similar energy in devel­oping the people who drive business plans.

Developmental planning, if done at all, typically consists of one liners such as “attend a communications course” or “shadow a colleague in the Operations Department” without any linkages between actions, competencies to be developed, and benefit to the business—even when planning forms include those categories. Few businesses would thrive if their business planning processes mirrored their development planning processes.

As the 70-20-10 model of development suggests, the best learning comes from doing. Seventy percent of a person’s development plan should be action learning based on doing work that builds on strengths, closes gaps, and/or develops skills that will be needed for the future. The Center for Creative Leadership’s “Developmental Assignments: Creating Learning Experiences without Changing Jobs” is an excellent resources for managers seeking to identify assign­ments that develop people while accomplishing business objectives. Successful developmental planning does not necessarily add burden to people’s already full jobs. Instead, assignments are undertaken with the intention of developing a competency that supports a person in their current and future roles.

According to the model, 20 percent of a person’s development should focus on building developmental relationships. While working with a mentor is an obvious resource to satisfy this developmental action, colleagues in other work groups can also provide learning for individuals. Lastly, 10 percent of a person’s development should come from what most people think of when they write their plans: Courses, books, seminars, online education, or completing their degrees. Well-planned coursework and training provides infor­mation and a foundation for growth, but it’s only when the “rubber meets the road” in real-life challenges that people and companies derive tangible value from education.

Conclusion

When it comes to talent reviews and development planning, keep it focused, simple, and business-related. Be ready and make sure you have at least two people groomed to take on the business critical role just as McDonalds ’ did. Make the time to succession plan; find the resources and tools; focus on business critical roles; use rigorous evaluation and planning processes for top talent, which includes using the 70-20-10 rule of development planning – and, just like you’d do for business plans ... monitor, adjust, and hold people accountable for their development plans.