Each year, FTSE 350 companies risk losing billions in market value due to weak succession planning, with many firms failing to prioritise smooth leadership transitions.
In contrast, organisations with strong succession planning are 2.2 times more likely to outperform their peers in terms of revenue growth and 1.5 times more in terms of profitability. Although succession planning attention has historically been focused at the top, leading organisations are recognising the value to be gained from strengthening mid-to senior level leadership succession planning. Leaders at this level are the critical lynchpin connecting the vision from the top into reality ‘in the field’, and so their impact on your people and operations is significant. This makes ineffective practices in identifying individuals with the potential to be effective senior leaders in future very costly, on a number of levels. Here are three key reasons why investing more attention in mid-to senior level leadership succession planning can pay off.
1. Ineffective mid-to senior leadership succession hits business’ performance hard
Evidence shows that having a pipeline of effective senior managers and leaders in place is critical for business success. This is because leaders at this level play an essential role in unlocking the value of employees, translating those resources into competitive advantage, and engaging your people in strategic change. Succession planning at the mid-to-senior leadership level is critical to ensure continuous delivery of effective performance, and neglecting it can prove very costly.
It is a common assumption that leaders who have been effective in the past are your best bets for the future. However, whilst past performance is one predictor of future performance, its importance is often overestimated since past performance does not accurately predict future success in significantly different leadership situations. In other words, just because a leader has been effective in the past doesn’t guarantee that they will be effective in the future. Leadership derailment research has demonstrated how executives derail because they over-rely on strategies that have enabled them to succeed in the past but fail to adapt to new situations or demands.
The world of work has changed significantly over the past few years and, as illustrated by our Future of Leadership research, what it takes to be an effective leader has changed with it. Today, it’s more about agility and problem-solving than expertise, and being able to connect with, engage and inspire people. People expect and need different qualities from their leaders, and this will continue to change as we move forward. Therefore, succession planning shouldn’t simply be based on identifying the highest performing leaders now, but instead those who have the potential to excel in the areas that will matter in terms of effective leadership in the future.
2. Increased costs and risks of externally recruiting leaders
A second pain point from poor succession planning at the mid-to-senior leadership level is that external hires typically cost more but perform less well than internal successors and are likely to need additional time to understand the business before they can start delivering value. For instance, for a HR leader, the average cost of a replacement is £35,565 which includes recruitment fees, spending on induction and training and any welcome bonuses – compared to £6,458 for training an existing employee: a saving of 82%. On top of this, there are increased risks associated with external leadership appointments. Evidence shows that only a minority of leaders that have been successful in one organisation are able to repeat this success in another organisation.
Not only this, but employee development is a key driver of employee engagement and retention, so not only might your expensive external hires not deliver the level of performance you were hoping for, costing you more, but in the process, you may also disengage or worse, lose your overlooked leaders at the level below.
3. Impact on diversity, equity and inclusion progress
Research suggests that organisational decision-makers overestimate the validity of intuitive judgement in personnel decision-making and undervalue the validity of more formal, structured methods such as psychometric tests and assessment centres. This puts leadership succession decision-making at increased risk of bias and prejudicial attitudes regarding the most suitable successors and potentially, therefore, producing decisions which perpetuate current inequalities. Significant bias is known to influence the processes involved in the hiring and promotion of leaders, resulting in women and people of colour being systematically, although not necessarily consciously, screened out. This can result in significant direct costs arising from legal claims for discrimination, but also many indirect costs in terms of reputation, disengagement and turnover of overlooked staff with high potential, missed performance benefits of greater diversity, and performance costs due to failing to identify the people who would perform most effectively in the role.
By making past experience in senior leadership roles the main, or even, only criteria for appointment, you exclude those who may possess the potential to be effective leaders, who haven’t previously been given the opportunity. In the absence of reliable data regarding leadership capability and potential, decision-makers are more likely to rely upon biases such as confirmation bias (the tendency to interpret new data in ways that reinforce existing opinions or to ignore data that conflict with them), in-group or similar-to-me bias (a preference for people who are similar to ourselves), and halo or horns effect/ bias (attributing an overly positive or negative impression to a candidate based on a small detail, rather than a nuanced picture based on data specific to different, relevant dimensions).
Inappropriate methods may lead to decision outcomes which are systematically biased, sub-optimal, or both. Formal, independent assessment reduces the potential for bias, by focusing judgements on relevant criteria only, providing a more objective assessment of an individual’s capability against those criteria, to inform those succession plans. Consequently, integrating formal, independent assessment into succession planning also promotes the upward mobility of a diverse workforce.
Conclusion
Identifying internal candidates with the potential to step up into more senior roles in future, rather than over-relying on external appointments, is a very attractive proposition for strengthening employee retention and organisational commitment. Effective succession planning at this level also ensures continuous delivery of effective performance at this critical level and mitigates the risk that external hires cost more but perform less well than internal successors. What’s more, the importance of effective succession planning at this level is expected to become even more substantial in the near future in light of the latest market trends, for instance, the retirement of the baby boomer generation, increasing competition to attract young talent, and changes in aspiring leaders’ career aspirations following Covid. Need we say more? The business case for strengthening mid-to senior level leadership succession planning is strong.