By Simon Mitchell, European Marketing Director and UK General Manager, talent management consultancy DDI

Succession management is too often viewed as crisis management; a key person has left the business, and there is no one to replace them with. Today many organisations are especially focused on the short-term which only exacerbates the problem. The most effective organisations however have a view that is three to five years in the future – as well as having an eye on the present – and plan their succession management strategically. With the huge changes and legislative constraints in the financial services industry right now it can be tempting to side-line long-term planning to focus on the here and now, however this will have a negative impact on business continuity and even viability.

Executives have a key role to play here. The best businesses ensure that all leaders throughout the organisation have the development of talent as a key part of their focus (and measure their success in these terms). Too often businesses see succession as an HR function when it is in fact a business function.

So why do so many companies end up having to frantically hunt externally to replace a departing executive? One of the frequent causes of not having enough talent internally is simply a lack of foresight. Companies look only at the present rather than the future when it comes to succession planning. A business ought to have a pool of skilled people that it is looking to develop for the future at all times. It is not enough to simply be grooming one person for the job the next rung up the ladder and there should be range of people in the business who have been identified as having the potential to step up to more senior levels.

Recruiting externally, while sometimes necessary if looking for a new skill set or fresh ideas, is on the whole more expensive than promoting internally and brings with it different hazards. Numerous studies have shown that internal promotions have a greater success level. One study found that senior executives fail on the whole 34 per cent of the time when hired externally and 24 per cent of the time when hired internally¹. Another found that organisations that rely on external candidates to fill middle-management positions (more than 25 per cent from external sources) have almost double the turnover of organisations that rely on internal promotions².

And the cost of a failed leader can be considerable. The Corporate Leadership Council used a hypothetical example to find the cost of derailment of a senior executive and found it could be as high as US$275,000 not including indirect costs. Typical costs of derailment include search firm fees, assessment costs, signing bonus, relocation costs, training and severance package. This does not include the indirect costs of lost productivity and lowered morale.

Can the critical requirements of the role you’re planning succession for be developed in others already in the business or might it be necessary to be sourced from outside? As a general rule, there should be a pool of potential candidates because when it comes to promotion some may leave, some may not be ready when needed and others may decline for personal reasons.

Once suitable internal candidates have been identified it is necessary to develop a plan to fill in any gaps that are apparent. Using the agreed success profile for the role different candidates’ development needs can be identified. For example, if asset management experience is necessary and one candidate doesn’t have that, it is obvious that this should be built into their development plan. Candidates should be stretched and provided with opportunities for development as part of the succession programme.

Companies should also consider how to best keep their talent pool engaged and motivated until a suitable position becomes available. This might be through long-term assignments, professional development or job rotation.

One of the most difficult things when looking at whether someone is ready for promotion is trying to gauge how they will behave in their new role. Assessment is often focused on what people have done in the past, or what they are capable of.

More and more organisations are using simulation-based assessment to get a more rounded picture of how a candidate is likely to perform in a role. By putting a candidate through a simulation of what a day in the life of their role would be like, organisations are better able to judge a candidate’s suitability. Following the simulation, any weaknesses found can then be addressed in the development plan, giving the candidate time to address these areas before they are ready to step up into a more senior role. And assessment can’t start soon enough. Habits begin early, which is why it’s also important for first time managers to have training to set them up for success in later business life.

Planning and foresight in succession planning really does show clear dividends. By identifying people within the organisation who have the potential to become leaders and then working with them to fill any gaps in their skills, your organisation will be able to build a strong bench of talent. This will put you in the position of being able to choose the best person for the role, rather than hoping for the perfect applicant’s CV to land serendipitously on your desk.

1 Kelly-Radford, 2001
2 Bernthal & Wellins, 2001