Planning ahead

By Sylvie St-Onge
Illustration: John Sapsford

Effective succession and talent management planning will ensurea company’s survival as well as enhance its value

A succession planning program is a deliberate and systematic effort by an organization to ensure leadership continuity in key positions and encourage individual advancement. The planning process typically involves identifying and defining required positions and selecting employees to fill them in the future. Although succession planning is a traditional component of many organizations, environmental factors have now made it crucial to the success of organizations of all sizes. One of these factors is an aging population, leading to a flood of retirements and a severe shortage of qualified successors.

Another factor is recruiting and retaining high-potential employees in a tight labour market, when their values and expectations are different. And we cannot ignore the fast pace of business growth and the number of mergers and acquisitions requiring rapid training of leaders with recognized competencies. In today’s world, the absence of succession planning can delay or even kill initiatives that are key to a firm’s success.

Moreover, major strategic changes organizations often have to implement in order to survive have created pressure to hire senior executives capable of mobilizing employees toward a specific objective. Lastly, increasing numbers of investment analysts now take the institution of an official succession plan into consideration when valuing a company’s market potential.

According to a study by the Canadian Federation of Independent Business, only one-third of Canadian small and medium enterprise (SME) owners (35%) between the ages of 55 and 64 have implemented a succession plan, most of which are informal. Only 28% of those who have chosen their successor have discussed the issue with that person. With 70% of SME owners in Canada planning to retire in the next 10 years, these figures are alarming. More specifically, half of the 41% who want to retire within five years have spent no time preparing their succession. In Quebec, these figures are surprising given that 80% of Quebec businesses are family-run and account for 55% of all wages paid province-wide. What’s more, in 2005, 70,000 business managers in Quebec were aged 50-plus.

As SME owners retire, billions of dollars in assets will change hands and millions of employees will feel threatened. The older they get, the less realistic a transfer of ownership becomes for entrepreneurs who do not have a succession plan. Many will have to resign themselves to selling their businesses to strangers, mainly Americans. Entrepreneurs may have spent their lives driving the regional economy, but the purchasers won’t necessarily have the same concerns. A purchaser may even be a competitor who simply wants to buy the entrepreneur’s market share and close down the business.

Any business succession planning process addresses a range of issues. Human, financial, legal and tax considerations specific to each enterprise have to be taken into account. In the eyes of current SME owners, the main barriers to preparing and implementing a succession plan are financing the successor (46% of respondents); finding a suitable purchaser/manager (42%); the amount of time and energy to be invested (39%); the valuation of their business (32%); conflict with the family’s vision (13%); and access to cost-effective advice (12%).
Ideally, entrepreneurs should start thinking about succession at age 50. They should discuss the issue with potential successors, ensure the successors acquire the appropriate competencies and agree on the method for transferring powers and ownership. If they don’t take the time to do this, they may find themselves in a bind at the last minute.

One survey shows that 75% of sellers who developed a succession plan felt that it yielded benefits, both by improving the SME’s stability and financial results (as lenders are often less apprehensive) and by reducing future tax liabilities related to capital gains.

In February 2005, after six years as CEO of Hewlett-Packard, Carly Fiorina had to step down because the company’s shares had lost a third of their value. Two years after Douglas Ivester took over as CEO of Coca-Cola, following Robert Goizueta’s sudden death, he resigned amidst criticism for his lack of leadership skills. Such examples show why employee succession management is increasingly considered a source of competitive advantage, given its impact on the performance of organizations of all sizes. In fact, talent management has become a key asset for large organizations for a number of reasons:

• it is useful in developing the organization’s strategic plan and facilitates the adoption and implementation of a new business strategy. The required leaders must be in place to drive business growth and complete mergers and acquisitions;
• it enhances the pool of talent available to fill key positions by identifying current staff-replacement needs and developing training and development programs;
• it minimizes the risks and problems associated with hiring outside candidates;
• it ensures full access to intellectual capital, i.e., employee potential, by encouraging the development and advancement of different employee groups;
• it gives employees appropriate opportunities to progress and attain career goals;
• it accelerates staff development and improves retention of competent employees;
• it meets the higher expectations of institutional investors regarding the establishment of succession plans.

Succession and talent management planning is an excellent source of added value for a firm, but it may vary over time and according to employee category.

Experience and research have shown that an effective succession management process is contingent on success conditions related to managers, senior executives, workforce managers such as human resource specialists, the controller, etc., and outside consultants. These conditions are explained below:

• the succession planning process is management driven. Although human resource professionals may be better placed to supervise the process, senior managers are responsible for its implementation;
• the talent management process is tied to the business strategy and business needs, as well as the organization’s values, culture and management style. If an organization’s strategy and goals change, the succession plan must be adjusted accordingly so employees can be recruited and developed to meet future challenges;
• professionals and senior executives are assigned to design the talent identification and development process. They can enlist outside consultants to help do the job;
• employee development and succession management should not be supervised in silos. Managers and senior executives are responsible for training high-potential employees, who must receive the training and development they need. Many companies tend to promote their highest performing engineers, sales reps or programmers. They make two mistakes here: they lose their best employees and assign them to a role for which they may not be qualified. A good succession plan must generate opportunities for candidates who are prepared to take them on;
• human resource professionals facilitate the identification and development of talent within the organization and its business units, as applicable. The identification of talent must follow both a top-down approach based on management’s perceptions and a more open and transparent bottom-up approach reflecting the perceptions of subordinates and colleagues;
• a list of talent identification criteria, such as leadership for example, is compiled, and employees are evaluated accordingly;
• jobs, career opportunities and work experience available within the organization are analyzed and employees are informed so as to optimize their development and retention. Employees with a clear picture of career and advancement opportunities are less tempted to leave their employer;
• compensation and performance appraisal must be fair and related to business requirements in order to retain the best employees and align their efforts with the business strategy;
• information technologies can be useful for compiling the huge variety of employee data required in a succession planning process. In assessing the available software, it is advisable to consider system completeness, integration or compatibility with any other HR software, user-friendliness, adaptability, availability of technical assistance from the supplier and reputation.

Sylvie St-Onge, PhD, CHRP, is a principal at Mercer Human Resources Consulting

Technical editor: Carolyn Cohen, CA, MSW, Training and Human Resources Consulting