Making the Business Case for Succession Planning

Authors: XpertHR Editorial Team

Introduction

Succession planning has long been a part of HR and business leaders' strategic agenda, but they generally take little thought or action on it until it is too late - after vacancies in key positions arise. Add the complex and significant social and economic challenges facing workplaces everywhere, along with a tight labor market as organizations scramble to hire and retain top talent, and a reactive scramble to fill suddenly vacant key roles has become the story for far too many organizations.

Unfortunately, for many people leaders and executives, unplanned furloughs and layoffs and the unprecedented rate of employee resignations referred to as the Great Resignation are organizational blind spots. The problem is that although many organizations understand what succession planning is, few prioritize it. If these same leaders had prioritized succession planning before these phenomena prevailed, they would not currently be scrambling to plug revenue loss, to stop the loss of key talent or to prevent slowing productivity and innovation.

This guide helps employers understand the essential function of succession planning in an organization's business, people and HR strategies and how it benefits the organization and employees. It also provides information for making a business case that melds data showcasing the costs of ignoring succession planning with people-centric approaches for executing the process.

The Succession Planning Gap

Organizations failing to engage in succession planning is not a new problem and is not expected to go away. In 2020, Harvard Business Review said that 46% of board members reported not having an effective succession plan process for CEO replacement - a problem that they had also reported in 2016. In addition, a 2021 study by the Society for Human Resource Management found that 56% of organizations said they did not have a succession plan in place

And a 2021 report by the Corporate Leadership Council found that 72% of organizations predict an uptick in leadership vacancies over the next three to five years and 76% are "less than confident" about how to fill these positions.

Nor is the failure to engage in succession planning restricted only to US organizations - Continuity Central reported that immediately prior to the pandemic, 46% of UK businesses were without an effective succession plan.

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Defining Succession Planning

To start, it is important to understand what succession planning is - and what it is not.

Succession planning is:

  • A proactive, perpetual and systematic process
  • Where organizations identify key leader and non-leader positions
  • That are integral to the success of the business and
  • Then create a plan to fill those positions with the most capable, skilled, and experienced employees (more than one)
  • Through targeted development.

Test Yourself

Succession Planning is best described as:

  1. An HR program to ensure key positions have planned successors.
  2. An organizational process to identify key leader positions requisite to business success.
  3. A strategic business process to identify all key positions and fill vacancies with high potentials developed for success in that role.
  4. An HR responsibility to ensure critical positions are not left open.
  5. A confidential process to identify high potential talent and develop them to be successors for open positions that are key to business success.

Answers:

  1. Incorrect: Succession planning is not a program with a predefined end date; it is an ongoing process. Nor is succession planning an HR program - it is a business imperative. HR has responsibility for enabling the process, but it is owned by organization leaders.
  2. Incorrect: Succession planning is a process that identifies both leader and non-leader positions that are critical to the success of the business.
  3. Correct: Succession planning is a strategic process that prepares for the future needs and success of the entire organization at all critical levels.
  4. Incorrect: Business leaders own the responsibility for succession planning, and HR leaders have accountability to facilitate the process and provide business leaders with enabling tools.
  5. Incorrect: Done correctly, succession planning is a transparent process. Information is communicated widely and regularly on which positions are considered key; the capabilities, expectations, and skills and experience needed to be successful in a position; and the names of employees who have been identified as high potentials.

Succession planning is the responsibility of organization leaders and is nested within an organization's HR and people strategy, which aligns with the organization's business strategy. Successful planning depends on the full involvement of and collaboration between the various organization leaders and HR leaders.

Identifying high potentials (HiPos), employees who have capabilities, skills, experience, engagement and aspiration to rise to and succeed in a key position (leader or non-leader), is a critical requirement of succession planning. After HiPos are identified, an organization initiates a program of HiPo development, a budgeted and targeted approach to help prepare HiPos to take on a key position.

This can involve upskilling a HiPo to grow or acquire skills needed for their current role (often by leveraging technology and automation) or reskilling the employee with an entirely a new set of skills to prepare them to take on a different role within the organization. Development often will include moves to lateral and/or lattice assignments to gain the requisite experience and skills essential for succession into a targeted role.

HiPo development requires an employer to regularly evaluate an employee's readiness (the degree to which a HiPo's skills and experiences meet the requirements of the targeted succession role or roles for which they have been identified) and career aspirations. The employer also must determine how long before the individual would be considered "ready now" to take on the role. This process helps an organization to build its bench strength with a number of diverse HiPos in the pipeline who are ready now to fill key roles. Ideally, as the process moves forward, the organization will have identified more than one successor for each key role, and at least one of those will be ready now for each key role.

Succession Planning is a Business Imperative

It is helpful to first understand the relationship between an organization's business strategy, people strategy and HR strategy, and then identify where succession planning fits within that framework.

To start, an organization maps a business strategy designed to execute its plan for meeting its goals and objectives. The business strategy then drives the people strategy for maximizing the potential of its employees to execute and accelerate toward the organization goals, which in turn drives the strategy necessary for HR to facilitate the people strategy. Once the HR strategy is in place, it will enable the people strategy, which then enables the business strategy.

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Succession planning is aligned first with an organization's business strategy, and next with an organization's HR strategy (see left image). Along with talent acquisition, learning and development, and performance management, among other functions, succession planning is an integral element of an organization's talent management strategy, which is a key element addressed by the HR strategy.

As seen from the image on the right, leading practice succession planning has several elements, including:

  • Determining the current and future bench strength;
  • Identifying critical roles and skills;
  • Assessing all employees' skills and experiences; and
  • Regular talent reviews to identify which employees are HiPos.

Given the level of input and involvement required from every area of an organization, succession planning is clearly a business imperative and not merely an HR initiative or assignment to be checked off. Effective succession planning includes enterprise-wide communication about which roles and which employees are high potential, as well as establishing the dedicated budget necessary for targeted HiPo development so that the bench strength - current and future - for the organization's critical roles stays strong.

Succession Planning Drivers

Key to successful succession planning is to do it before it becomes a need, yet all too often organization leaders do not make it the priority it should be. To make the business case for succession planning, help people leaders recognize and understand core challenges that drive the need for planning and the risks of failing to address them.

  1. The top driver for succession planning is CEO turnover, through retirement (the median age of S&P executives is 58 years) or as a normal part of executive churn (the average tenure of a CEO is five years). There is also the possibility of a crisis that requires the quick replacement of a CEO (e.g., a sudden death or scandal).
  2. The loss of an CEO is likely to cause a negative impact on an organization, including:

    • A severe risk to business continuity;
    • An anticipated stock price dip; and
    • Compromised business targets.
  3. A related challenge is the turnover of HiPos and other top talent in key positions. Lack of development opportunities and low employee morale often contribute to these employees leaving an organization and impacting business continuity. The cost of replacing these key employees can average 150% to 200% of the employees' salary and may take several months. Any loss or delay in filling such positions can contribute to a critical skills gap. This can disrupt business continuity and result in missed business targets.
  4. Disengagement of HiPo employees is another important challenge that succession planning can address. A disengaged employee can cost an organization approximately $3,400 for every $10,000 in annual salary. Furthermore, these employees' work quality may be marginal, and their morale may be low. These are red flags of a higher risk for turnover by key employees.
  5. The impact of disengaged HiPo employees also is reflected in declining productivity levels. Estimates of the cost of lost productivity due to disengaged employees are upwards of $7.8 trillion per year globally and more than $350 billion per year in the US economy. The long productivity cycle contributes to the loss of potential sales. And, in a tight labor market, an organization cannot easily hire additional workers. To counter this, HR and people leaders need to ask themselves what data points inform average productivity rates among HiPos and how to improve actions to galvanize the productivity of top performers.

Benefits of Succession Planning

There are at least three measurable benefits of succession planning for organizations and employees each.

For the Employer:

Protects against business interruption. Succession planning prepares a workforce for inevitable departures, retirements and promotions by providing a process through which an employer can identify and develop internal staff with the potential to step into key leadership and other critical roles. By engaging in succession planning, an employer better ensures business continuity, which allows long-term growth planning, while providing advancement opportunities for current employees.

Minimizes unnecessary and expensive recruitment costs (especially unnecessary, expensive costs related to sudden vacancies). Succession planning also reduces employee turnover (with the cost of replacing each employee running from one-half to two times each employee's salary), with a 2019 LinkedIn survey finding that 94% of employees said they would stay longer with their employer if it invested in their learning and development.

Fosters an agile, people-centric culture. A positive and supportive workplace culture is essential for attracting and retaining top talent. This requires HR and people leaders to understand how to address the human needs of the organization. The core competencies and skills required in HiPos should include those that help build and strengthen such a culture, such as emotional intelligence and empathy, change agility and resiliency, and strong communication skills. In addition, succession planning should include intentional and strategic efforts to include or increase a focus on diversity, equity and inclusion in the process.

For the Employee:

Boosts morale. Succession planning helps boost employee organizational loyalty and increase employee retention. Employees have a more optimistic view of their future at an organization which establishes succession plans and highlights growth possibilities, encouraging employees to achieve more. As a result, they are more inclined to stay for the long haul, thereby reducing the need for talent replacement. It also significantly reduces the time to replace a key position by having a successor in place, cutting the talent acquisition costs associated with a long talent search.

Amplifies engagement. Succession planning leads to employee engagement. In fact, a study by Software Advice found that 94% of employers said that succession planning positively impacts their employees' engagement levels, and more than 90% said that younger workers (18 to 34 years old) report that working at a company with a clear succession plan would improve their levels of engagement. Succession planning enables an organization to remedy low engagement by:

  • Letting employees know that they are HiPos;
  • Creating development specifically targeted for HiPos; and
  • Using an internal talent marketplace to provide development opportunities for HiPos.

Improves productivity. While it is true, an engaged workforce is productive and contributes to a healthy workplace environment, succession planning goes further. Succession planning provides HiPos with training and development opportunities that align with their career aspirations. This includes upskilling and reskilling, enabling them to improve their performance and productivity in their current roles, and preparing them to quickly meet the challenges and changing needs in future roles.

Who's Doing It Right?

Case-in-Point #1: McCormick & Co.

About the Company:

  • McCormick & Co., based in Hunt Valley, Maryland, manufactures, markets and distributes spices, seasoning mixes, condiments and other flavor products
  • Founded: 1889, incorporated 1903 and reincorporated 1915
  • Revenue: $6.3 billion (2021)
  • Chief Executive Officer: Lawrence Kurzius
  • Scope of Service: Global food industry in approximately 150 countries and territories
  • Employees: 12,000

Challenge:

In late January 2009, then-CEO Robert Lawless announced his retirement, to take place just four weeks later.

Solution:

  • McCormick's leadership had invested time and resources to develop a robust succession plan that included development strategies for all senior executive positions, not just the CEO slot.
  • Younger team members were part of the planning process.
  • Candidates were continually monitored and guided over the years to encourage growth and development in many areas.
  • Business and HR leaders worked with the Board to keep the succession process transparent and realistic.

Result:

  • Alan Wilson took over as CEO in March of 2009 (meeting the four-week deadline).
  • Lawless noted that it is important for CEOs to:
    • Avoid becoming too consumed with their work;
    • Avoid letting egos prevent CEOs from seeing anyone else as capable of the job; and
    • Commit to the process well ahead of when it would become a need.
  • The McCormick succession plan has proven successful for the organization. in fact, they used the same approach to succession planning in 2016 to produce their current CEO, Lawrence Kurzius, and again in 2022 when they appointed Brendan Foley as President and COO in July.

Case-in-Point #2: Ofwat

About the Company:

  • Ofwat is an economic regulator of water and wastewater services in England and Wales
  • Founded: 1989
  • Moody's Rating: AAA
  • Funding source: the licence fees paid by the companies they regulate
  • Chief Executive Officer: David Black
  • Scope of Service: 55 million people
  • Employees: 226

Challenge:

Develop a thick pipeline of highly skilled leaders "ready now" to build on Ofwat's capacity to serve their stakeholders, communities, and employees and deliver better outcomes at the time of need.

Solution:

  • Develop and execute a leadership succession strategy to improve service delivery, and address current employee dissatisfaction with career development and visibility of key internal opportunities.
  • Assign ownership of succession planning to senior leadership to ensure it is treated as the business imperative it is; it is owned by David Black, CEO.
  • Execute on workforce planning to define the skills in place now and those needed going forward to inform the succession planning process.
  • Offer matrixed work opportunities to allow top performers to immerse in meaningful and interesting work while closing targeted skills gaps to accelerate ready-now status.

Result:

  • Increased number and caliber of candidates in the pipeline
  • Design and release of a Leaders Program for HiPos
  • Improved succession planning to enable the right in-house skills and reduce use of external specialists, temporary employees and contractors
  • Improved customer and investor confidence ratings and employee engagement scores
  • Reduced costs to the customers because of improved service capability of skilled leaders and other key positions

Additional Resources

How to Develop a Succession Plan

Succession Planning Checklist

Model Succession Plan Form

Succession Planning Assessment and Readiness Survey Form