All businesses are facing a lot of change right now (the Brexit vote notwithstanding). As new opportunities arise or old ones fade, those firms that are the fastest to adapt will profit. But change is happening at an unprecedented rate in the world’s markets – for goods, capital, and labor – and this means that companies need to almost constantly realign strategy and modify business models.
However change isn’t just limited to the markets which companies operate in, there is also near constant change taking place internally as leaders’ roles diversify and evolve. In an environment where there is an increasing dependency on cross-departmental collaboration to accomplish nearly any project, the effect of senior leaders leaving their role can put a significant drag on business performance.
After executive compensation, succession planning is the most talked about topic between heads of HR and the board, according to CEB data, and there is increasing concern about the readiness of potential candidates in current succession plans.
As companies struggle to respond to all this change faster and better than competitors, a properly functioning succession pipeline will be crucial. Unfortunately, many senior executives feel their current succession initiatives are not good enough.
Succession Pipelines are Broken
While almost all companies have some type of succession planning program, 36% of senior executives believe that the elimination of their current succession process would not affect the quality of their leaders at all.
Their pessimism seems to be justified by CEB data that show only one-in-four leaders currently in seat have been pre-identified by a succession plan. In the current work environment, there are four main reasons why succession strategies are breaking down (see chart 1).
Chart 1: Breaks in the succession pipeline Source: CEB analysis
The Portfolio Approach to Succession Planning
The more forward-thinking HR teams are starting to take a different approach and handle succession planning more like an investor might manage a financial portfolio.
This involves applying the same objective analysis and external benchmarking used in financial management to talent management. And it seems to be working: CEB’s analysis of over 3,700 leaders at more than 50 organizations shows that portfolio strategies for managing succession are twice as effective at increasing the strength of their “leadership bench” (the cohort of managers earmarked to take on leadership roles in the future). In addition, companies using these strategies are seeing an extra 2% growth in year-on-year revenue and profit.
Heads of HR that want to take a portfolio approach should make four shifts to their succession planning processes.
Demand-driven planning: Similar to determining financial goals, the best companies set goals for the type of leadership bench they want in the future. They try and anticipate which new leadership roles will appear and which will disappear.
HR leaders should partner with the company’s strategy team to understand corporate strategic priorities and critical focus areas for the future. By looking beyond simply filling leadership vacancies, this kind of demand-driven approach is twice as effective at improving leadership bench strength than the current supply-driven succession planning process.
Broad sourcing: Just like picking from a wide range of possible financial investments, companies must cast a wide net beyond high-potential employees when looking for leadership potential. 55% of HIPOs are likely to fall out of their development program, which means most companies are directing their resources, training and career opportunities to employees who are unlikely to be successful in senior positions.
By not limiting possible successor candidates to HIPOs, firms can build leadership bench strength three times more effectively.
Deliberate diversification: Every financial portfolio needs to be diversified. The same is true for succession planning. In an environment of constant and hard-to-predict change, the best organizations prepare successors for multiple but still carefully targeted leadership roles to hedge against uncertainty and improve successor versatility.
They provide opportunities for leaders to adapt to unfamiliar situations and equip successors with an extended support system of peers throughout their careers. But they look to avoid building overly general skills to prepare leaders for almost any position. This approach leaves successors equally unprepared for every role and is no more effective than preparing leaders for just one role.
Leadership team rebalancing: Succession management does not end once successors move into roles. In fact, nearly one-third of HR leaders would change members of their senior leadership team if given the opportunity.
Leading companies rebalance – a common tactic in financial management – to assess leader performance and fit with changing strategic goals. By redeploying leaders, they improve the strength of their leadership pipeline by up to 9%.