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4 Hidden Costs of Poor Succession Planning (Or Not Having One At All)

Deferring or putting succession planning in the back burner is an easy thing to do, especially when there are other pressing priorities. However, one cannot hope that the best employees never leave, and that finding replacements is going to be easy while the impact to business will be quite low. The failure or lack of succession planning is often due to boards and stakeholders allowing it to fall off their priority / agenda, as well as many other challenges such as the lack of a structured process, ambiguity of accountability for succession planning, decision-making based on gut feel over objective data, and so on.

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Failing a succession plan or not having one at all comes with several costs and risks for the organisation, particularly for mission-critical positions. Companies that underwent forced transitions/successions (i.e. unseating an incumbent and/or hiring externally) could have generated USD112 billion more in market value in the year before and after the turnover, had the succession been planned.

Companies that underwent forced transitions/successions could have generated USD112 billion more in market value in the year before and after the turnover, had the succession been planned.

In general, organisations with good succession planning practices perform better financially compared to organisations who have poor succession practices*.  Hence, the question then is not “What does succession planning cost?” and instead is “What is the cost of not putting in place a strategic succession plan?”   

Hence, the question then is not “What does succession planning cost?” and instead is “What is the cost of not putting in place a strategic succession plan?”   

Hidden Cost 1: Financial Risks for the Business 

The impact of a sudden departure or crisis for a key leadership role or mission-critical position is significant and could cause disruption to the business. Some impact of business disruption includes issues such as suspended initiatives, disrupted third-party/partner relationships, loss of revenue or shares and so on. There is a lot of uncertainty and turbulence posed from a sudden vacancy/departure of a key position within the organisation. Studies show that companies without a proper succession plan forgo an average of $1.8 billion in shareholder value compared with companies that succession plan, regardless of whether the replacement is an insider or outsider**. For example, shares for Hewlett Packard took an 8.3% plunge after the CEO stepped down in 2010***. However, this could be avoided if organisations have solid and effective succession planning in place. 

Studies show that companies without a proper succession plan forgo an average of $1.8 billion in shareholder value compared with companies that succession plan, regardless of whether the replacement is an insider or outsider.

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Selecting the Wrong Candidate

Hidden Cost 2: Selecting the Wrong Candidate

When there is no structured process or success profile in place to determine what good looks like and selection is based on subjectivity or one-sided factors, whether hiring from internally or externally, there is always the risk of selecting the wrong candidate, someone who is not fully qualified, for a role. This happens even more so when there is an urgency to fill a vacancy quickly. The lack of a role fit, be it behaviourally, culturally or skill-wise, would negatively influence the effectiveness and performance of someone in the role. According to the U.S. Department of Labor, the cost of a wrong hire is at least 30% of the employee’s first-year earnings****, and this is an estimate of hard figures. There is also the element of morale and productivity of other employees that could potentially be affected on top of the quantifiable financial impact****.

The lack of a role fit, be it behaviourally, culturally or skill-wise, would negatively influence the effectiveness and performance of someone in the role.

Lost Knowledge and Expertise

Hidden Cost 3: Lost Knowledge and Expertise

When a top talent leaves the company/role without a successor, the employee leaves taking with them all the knowledge and skillsets they have gained while in the role, in addition to relationships built with stakeholders and how that could be leveraged to yield business results. For example, while hiring someone externally may fill the knowledge gap for the industry, but they require time to understand the dynamics and politics of the organisation. The cost to replace a highly trained employee is expensive and could exceed 200% of their salary*****. Losing skilled employees in highly niche roles also increases the difficulty in finding replacements externally due to the lack of talents in the market. Without someone to receive that knowledge transfer and to succeed in that role under the former incumbents’ guidance, that knowledge and expertise are lost and will not be passed down. As a result, significant effort and cost are required to retrain a new incumbent.

The cost to replace a highly trained employee is expensive and could exceed 200% of their salary

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Hidden Cost 4: Losing Internal Talents

It is significantly cheaper for internal talents to succeed a role, as the organisation can save on time and recruitment fees. Furthermore, internal talents already come with institutional knowledge, as well as other relevant data that can be factored into the decision-making such as a performance track record, 360 feedback and assessment data. Promoting/Hiring internal talents as part of career development and advancement opportunities can motivate and retain employees. As a result, this would strengthen their engagement and commitment to the organisation, thereby increasing employee performance and talent retention. In contrast, organisations will lose out on these when there is no succession plan in place as it can be easy to overlook internal talents who are highly interested or suitable for a key position for external hires instead.

Ultimately, there is an undeniable cost to the organisation when succession planning is done poorly, or not done at all. Not only would organisations’ businesses be affected financially, the people element (e.g. employee engagement, talent retention, capability) is also impacted. There is no doubt how critical a priority it is to get succession planning right. Therefore, organisations need to invest in resources and tools to build a solid and steady talent pipeline for business continuity and success.

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References

* https://www.strategyand.pwc.com/gx/en/insights/ceo-success.html

** https://www.strategy-business.com/article/00327?gko=a813e

***https://www.wsj.com/articles/SB10001424052748704268004575417682006400508

****https://www.forbes.com/sites/falonfatemi/2016/09/28/the-true-cost-of-a-bad-hire-its-more-than-you-think/#76cd5cf64aa4

***** https://blog.bonus.ly/10-surprising-employee-retention-statistics-you-need-to-know

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