Succession Planning for SMEs in IT Industry

Succession Planning for SMEs in IT Industry Purpose This thesis is based on an investigation into succession planning in small to medium-size organisations within the Information Technology (IT) industry. The main area of research is centred on whether these organisations develop employees sufficiently to move into pivotal roles or whether they must continue to rely on external recruitment for senior positions. An additional question raised by the report is whether operating within the IT industry brings its own peculiarities. Methodology A survey, by means of postal questionnaire, was chosen as the means of collection of primary data. This questionnaire was distributed to human resource managers and officers operating within the IT industry. In addition to this data collection, use was made also of secondary archive survey data. Findings The findings of this report quite clearly show that, despite statements to the contrary, true succession planning exists in very few organisations. Succession planning theory and best practice are ignored to the extent that real top level commitment is hard to find and very little HR participation exists other than at operational level. Findings show that little has changed over the years in that whatever succession planning exists in organisations, it remain in the authority of senior management, operated by and for them. There is little evidence to show that this has been widened to include more junior levels within organisations. Notwithstanding the fact that succession planning exists within the senior ranks, there is little evidence to show that it actually works. External recruitment continues to be the norm and retention rates of senior personnel do not show any real benefit. The specific problems of lack of opportunity and resource, faced by small to medium-sized organisations, are exacerbated within the IT industry, which brings its own issues of employee high expectation and impatience. Introduction Succession Planning What is it? Definition: Succession planning is making sure that the organisation develops and keeps the right people for key jobs. .. More successfully, it defines the competencies needed for the future and develops them in everyone who has the capability. This provides a pool of talent from which successors to important jobs can be drawn. The Industrial Society (April 1997)[1] Staff turnover dictates that all organisations have a need to fill employee vacancies; key roles not excluded. Forward-looking organisations look beyond a basic recruitment process and understand the value of a system that identifies high potential in current employees, as well as recognising leadership gaps in the organisation. Having acknowledged these requirements, good organisations put in place a development structure that seeks to answer these needs. This complete process is known as Succession Planning. Of course, where such a process is part and parcel of everyday life in an organisation, most likely it is not restricted to the hierarchy of the company. An expected consequence of this situation is a culture of ongoing development of employees from top to bottom, leading to a continuous process of succession planning throughout the organisation. Succession Planning Why is it important? The brief that good leadership has a direct affect on organisational performance lies at the heart of the move towards succession planning. We live today in a fast-moving, high pressured, competitive society, where the slightest advantage may give a company a valuable aggressive edge. If a company is to grow and expand into new areas and markets, it is important that the organisation is built on a strong foundation. The best and strongest foundation for an organisation is a pool of capable, talented individuals, who have grown with the organisation; absorbing its knowledge and its culture, ready to move up through the company into pivotal leadership roles. Organisations that do not provide this home grown talent, and possibly lose valuable knowledge and expertise along the way, may have to seek replacements from outside; with this course of action runs the risk of recruiting the wrong person. This latter occurrence could be a disaster, particularly when a wrong choice is made at a senior level. This situation could lead to serious disruption in an organisation and, depending on the importance of the employee concerned, the result could be terminal decline. Research Aim Succession planning is seen as a crucial process by most major employing organisations (Hirsch 2000, p.ix)[2] The aim of this research is to establish whether, despite the perceived benefits of succession planning, most small to medium-sized organisations fail to nurture sufficient home-grown talent and have to look outside their own organisations to fill key senior positions. An alternative, but equally worrying situation is the appointment of individuals on the basis of class, length of service, family history, etc., without the developmental support. This situation certainly exists within the authors organisation at the present time. There is little, if any, work being done among the senior management team to develop the leadership skills of the successors to the principal roles; although it does appear that in the case of the primary position, the choice has been made! More importantly, this situation continues down throughout the organisation and, in many departments, it is difficult to see which individuals would have the qualities necessary to be able to stem into senior roles if the need arose. This state of affairs creates serious concerns for the direction and future of the organisation. All this exists in an organisation, which claims that a culture of development exists and, if questioned superficially, would be of the opinion that succession planning occurred. Strategy The research method chosen was data collection by means of postal questionnaires to be sent out to the HR Officers / Managers in small to medium-sized high tech companies / organisations in the UK and India private sector. Where necessary, the postal questionnaires are to be followed up with telephone reminders and completed via telephone calls or emails. Outline Structure Literature Review History of Succession Planning Historically, succession planning systems were the sole province of the upper echelons of male, class-dominated society. Whether or not this served society well is an arguable point; the fact that it existed in a class-ridden paternalistic age is not up for debate. The traditional model of succession planning, as identified in The Industrial Society (1997), is for the Board of identify, secretly, a list of two or three potential successors for the senior roles. According to Holbech, no more than two or three per cent of the workforce were deemed to have management or executive potential (Holbech, 2003)[3]. There are considerable, well-documented, drawbacks associated with this process for example, management may continue to choose clones of themselves, perpetuating a culture with a reluctance to change. Without fresh blood, bringing new ideas, organisations may begin to stagnate. The disadvantages brought about by this traditional model may be distilled down to two arguments; the organisation risks losing exceptional talent (with the associated consequences) and employees miss out on development and fail to fulfil their potential. Chris Watkin of Hay Group maintains that the roots of talent management can be found in the outsourcing of the pervious decade. (Carrington 2004)[4] The reduction of graduate recruitment schemes in the early 1990s meant organisations often did not have the right employees in place to move into the senior positions. This situation was fine for a while but, long-term, it proved to be very expensive and not to successful. (2004, p.26) Watkin also says that the recruitment slow-down that had occurred over the past couple of years has highlighted further the need for organisations to make more of their current employee talent. (ibid p.26) Certainly, within the authors industry (IT), the lack of available talent during this period has been a serious (and costly) concern. Definitely, it is cheaper to develop current employees than to buy-in expensive candidates with great potential but little knowledge of the Companys products and specific technologies. The CIPD (2004, p.1)[5] support this view by suggesting that maybe it was better to develop loyal employees who understood the organisation and its culture. According to Rothwell (2001, p.5)[6], one of the first writers to appreciate the need to plan was Henri Fayol (1916), whose fourteen points of management indicate that management has a responsibility to ensure the stability of tenure of personnel. Fayol also said that if the need were ignored, key positions would end up being filled by ill prepared people. The world is now a much different place than in Fayols time but the basic tenets of his thinking remain. According to the Corporate Leadership Council (CLC)[7], from 2000 to 2002, many organisations struggled in the difficult economic climate. Despite this, a number of companies continued to excel, sometimes surpassing their earnings expectations. The CLC believe that the reason for this was the quality of their senior executives; they were successful in creating a steady supply of talent at a time when others were failing to keep up. The CLC go on to say that this differentiation may hold the key to organisational success. (2004)[8] The situation prevailing within corporate management today, not surprisingly, puts Board management succession in the limelight. According to Carey and Ogden in Berger Berger, directors, as guardians of the interests of shareholders, naturally are concerned with the ongoing health and success of the corporate enterprise. Capable leadership is vital to this objective, which means that succession must be considered first and foremost and fundamentally a responsibility of the board. (2004 p.243) Despite this, the CLC found that only 20% of responding HR executives were satisfied with their top-management succession processes. Ram Charan thinks that this is simply inexcusable and goes on to say that a board that has been in place for six or seven years but does not have a pool of qualified candidates and a robust succession process is a failure. (2005, p.74)[9] Build Talent throughout the Organisation If an organisation is to be in a position to provide a continuous pool of talented employees from which the leaders of tomorrow must be chosen, it is important that the succession management process is not restricted to the senior level. There is a need to identify and coach potential throughout the organisation. Sisson and Storey thinks that training and development were the building blocks of a learning organisation and, according to many, the real key to developing competitive advantage. (2000, p.147)[10] According to Carey and Ogden, the familiar view of succession is around changing leadership at the top, one CEO[11] moves out of the corner office and other moves in. In reality, this is only a fraction of the whole organisational development picture. The most vital features of the leadership-development process take place beneath the top level, often not visible to people outside the organisation. (ibid, p.247) Obviously, a long-term goal of an organisation may be to extend the succession planning/ management process down through the organisational layers. Hirsch talk about devolved succession planning where local or functional managers are pro-active with regard to the development of successors for roles within their control. This may be extended in a more deliberate way with a result that although the corporate centre considers only the top levels, the bulk of the organisation follows suit. (2000, p.12)[12] A former Vice-President at General Electric commented, The act of creating a mentality of development within a company makes for more effective operations, even before the change takes place. People function better in a developmental mode. (ibid, p.248) Conger and Fulmer were of the opinion that succession planning and leadership development ought to be two sides of the same coin. They went on to ask that, if this were the case, why do many companies handle them as if they were completely separate issue? (2003, p.76)[13] Identifying possible successors, without the structured leadership development in place may lead to failure for the selected candidate and disaster for the organisation. More and more organisations, including very successful High Street retailers such as Tesco and Asda in UK and Pantaloon, K Raheja Group in India have a policy of promoting from within. According to Zneimer in Human Resources Magazine, Asda grooms its brightest talent for the time when they will step into the shoes of those currently sitting on the board or in the management tier just below. They are encouraged to enter a development programme that taps into the skills of external coaches and internal mentors. This ethos is encapsulated in Asdas Accelerated International Management (AIM) initiative, whereby those deemed to be ready are given top jobs abroad. (2004, p.34)[14] Surely, it cannot be an accident that successful companies have home-grown CEOs:- Tesco Sir Terry Leahy 25 years GlaxoSmithKline J P Carnier 14 years AstraZeneca Sir Tom McKillop 34 years BP Lord Browne 38 years Pantaloon India Kishore Biyani 22 years Source: Management Today, December 2003 (updated) in Zneimer (2004, p.37)[15] As Zneimer points out, the succession policies of Asda and Tesco contrast greatly with that of Marks Spencer, which has gone awry in recent years. Instead of continuing to grow their own, they have been spending a fortune on a revolving door CEO succession policy, which has resulted in a couple of very high profile failures. (2004, p.34)[16] This difference in fortunes highlights very well the benefits of a good succession management process. Ram Charan points out in the Harvard Business Review that, in Europe, 70% of outside CEOs, who departed in 2003 were forced to resign by their boards, as compared to 55% of insiders. In the US, these figures were 55% and 34%, respectively. (2005, p.74)[17] Management Commitments All of the theory and best practice covered in this report will come to nought if management commitment is not secured and followed through. Rothwell makes the point that a programme will be effective only when it has the support of its stakeholders; they must perform as well and own the process. (2001, p.116)[18] Lucy McGee quoted in People Management, the European head of HR at Matsushita observed, Without support from the CEO, you might as well not bother. (2004, p.49)[19] The DDI Study, Succession Management Practices, found that effective succession management systems are more likely to be found in organisations which, among other things, involve the CEO; have the support of senior management and involve line management in identifying candidates. The McKinsey study of the war for talent in corporate America, cited by Hirsch in Succession Planning Demystified, contends that with talent comes business success: You can win the war for talent but first you must elevate talent management to a burning corporate priority. According to a survey conducted by Consultancy Fairplace, as cited in Human Resources Magazine, talent management is not getting the funding it needs. In Human Resources Magazines opinion, this suggests a lack of commitment to talent management. (2004)[20] It is recognised that not all organisations, particularly those in the sector forming the target of this report, are able to fund succession management programmes along the lines of those underway at companies such as Asda and Tesco. Succession management, however, really need not cost a great deal of money. In fact, lack of support for this issue is not generally based on lack of budget but more a function of time. Without priority given to this issue, management keeps its focus on customer demands and is too busy reacting to business crises to give the necessary attention to the succession management process. A great deal of management fails to realise that by always focusing on the urgent (not on the important) instead of delegating, they are missing out on an important development process. Of course, there are numerous ways that a succession planning process may be set up and it is not necessary to include such expensive techniques as external executive coaching. Indeed, small to medium-sized companies may still manage to instil a culture of development without recourse to such methods. Combating The Lack of Support: Obtaining management commitment to a succession management programme will not come easily or quickly. HR professionals must be prepared to give time and effort to the task if they are to be successful. In order to succeed, it is important to demonstrate a need and develop a business case for succession management. Rothwell believes that a succession management programme will be successful only when it has the support of its stakeholders; indeed, in order for it to work they must own the process. (2001, p.116)[21] According to the Corporate Leadership Council, there are increased internal and external business trends, which are forcing companies to focus attention on succession management. Fig. 1 outlines current business trends that may be used to make a case for a succession management process. Where top management support is difficult to obtain, Rothwell suggests that the best strategy is to win over idea champions to support the cause. Ideally, such champions come from well-respected top managers who, possibly, have experienced work-related problems as a result of the lack of a successor to a critical role. (ibid, p.69) The Role of Human Resources If HR really is to contribute at a strategic level and take its place at the top table, it must rise to the challenge. Lance Richards, writing in Personnel Today, suggests this is the challenge of delivering the right people in the right place at the right time and at the right cost and goes on to say that HRs ability to do this could be the key to future organisational success. (2004, p.15)[22] Certainly, much has been written on the contribution that HR is able to make to business. Lucy McGee believes that HR must educate its organisations leaders to understand that business plans for growth and change simply dont stand up without a serious commitment of their time and energy to developing people. (2004, p.48)[23] The overwhelming considered opinion about the role of HR seems to be as a champion of the process, guiding rather than taking ownership. This view is in accord with the CIPD, which feels that, although succession planning needs to be owned by managers, led by the CEO, HR has a critical role in supporting and facilitating the process. (2004, p.5)[24] Conger and Fulmer are of the opinion that, although in most companies, HR is the primary owner of the succession planning and leadership development process, this is a mistake. They believe that, in order to be successful, these processes need multiple owners. It is only by active commitment from the top and not just gratuitous support which managers will sense this is a fundamental activity, which must be taken seriously. (2003, p.83)[25] Conger and fulmar also says that it is not realistic or desirable for the CEO and their executive teams to have sole responsibility. HR needs to be involved in order to bring with it the necessary time and expertise. (ibid, p.83) Certainly, Hirsch found that, although the general role of HR could be described as facilitator, the term really did not do justice to the range of activities carried out. Hirsch also says that a project conducted by the Careers Research Forum qualified facilitator in this context as shown in figure 2. HR as Facilitator Process designer: Advising on how information should be collected and collated. Framing agendas and questions. Process Manager / Facilitator: Direct personal involvement in making sure meetings happen and, on occasion, acting as referee in ensuring the discussion is wide-ranging and objective. Good and conscience: Looking further to the future; asking seriously difficult; questions; highlighting problems that executives may prefer not to see. Direct personal intervention as broker: Knowing people well enough to be able to suggest successors, candidates for vacancies; development opportunities for individuals and influencing executives to take these suggestions on board. Counsellor: Trusted to help executives talk through their issues and to help individuals work out their career directions. Information support: Maintaining quality information, which delivers a direct service when internal candidate search is required or more general questions are asked. Despite this general agreement concerning the important role of HR within the succession management process, the CMI survey found that it is rare for HR directors to have board-level influence. At the end of 2004, only 11 companies in the FTSE 100 had HR directors on their Boards. (CMI, 2005) A large number of organisations are looking now to management tools, some web-based, to assist in their succession management programmes and there is a plethora of talent management software systems on the market. Lance Richards argues, however, that we should pay no heed to the software salesman who offers elaborate, expensive packages they are nice but not required. HR should start the succession planning process, if only in a simple paper and pencil format sometimes, the first step is both the simplest and the hardest to make. Richards advice is not to dumb-down succession planning but to show that it can be done simply and without spending the GDP of Denmark in the process. (2004, p.15)[26] Succession Management Process So, where does all this opinion and theory brings us? Almost without exception, good practice points towards a formal succession planning process, at the heart of which lies leadership / employee development. According to Hirsch, succession planning sits inside a much wider set of resourcing and development processes, called succession management. Succession management encompasses links to business strategy, resourcing supply and demand, skills analysis, hiring processes and management development (including graduate and high-flyer programmes). (2000 p.ix)[27] Michael Liebeman in Rothwell supports this view; he feels that succession planning should not stand alone but should be paired with succession management, which assumes a more dynamic business environment. (2001, p.31)[28] For this view of succession management to be truly successful, it is vital that it be engrained in the culture of the organisation and functioning at all levels. Conger and Fulmer see this as a file-rule process, with the four subordinate rules resting on the fundamental rule of development. They believed that succession planning and leadership development are natural allies that share a fundament goal of getting the right skills in the right place. (2003, p79)[29] Implementing the Process Having secured management commitment, arguably the most difficult task of all, the next step is to implement the process. Identification When looking at a succession planning / management system for the first time, it is vital to establish the positions that the organisation wishes to include in the process. The selection of individuals may be linked to particular key posts or identified as having high potential. Conger and Fulmer suggested that by merging succession planning and leadership development into a single system, companies are able to take a long-term view of the process of preparing middle managers, even those below the director level, to become general managers. They suggested that these systems should focus on linchpin positions-roles that are essential to the long-term health of the organisation. (ibid, p79) Whatever the criteria, it is important that the process is tied in to business strategy and the risk posed by the loss of an incumbent is considered when reaching a decision. Composition of Team It is imperative that the composition of the succession planning / management team is such that sufficient weight is attached to the process to ensure its success. In addition to regular team members, most likely the CEO / MD, senior executives / managers and, preferably, HR, it may be a good idea from time to time to second interested parties. Not only will this provide valuable input into selection of candidates but also secure the assist in spreading commitment to the process throughout the organisation. Top level / company commitment and HR involvement are explored in more details in other areas of this report. Measure for Success Once the succession planning / management strategy is in place, it is important that the organisation puts measures in place in order to ensure that the system is operating efficiently and also to highlight any opportunities for improvement. Conger and Fulmer found that succession management systems were effective only when they reacted to changing requirements. They went on to say that none of the best-practice companies in their study expected that their succession management system would be able operate without modification for more than a year. (2003, p.84)[30] An additional important reason for monitoring the system is to demonstrate any success and, thereby, provide information to sustain management commitment. Retention Once an organisation has found its high performers and leaders of the future, it is important to retain these employees and to ensure not only that their aspirations are fulfilled but also that their talents are used to the best advantage of the organisation. Remember that just as organisations are interested in high performers, high performers are keen to be associated with organisations with a strong reputation. In the field of IT in particular, this reputation extends to cutting-edge technology and product development. Organisations need to hold the interest of these individuals if they are not to be lost to more attractive competitors. In addition to the attraction of personal development, one issue of major importance is the subject of recognition / reward and organisations need to give significant consideration to rewarding high performers. It may be necessary to look at alternative / additional methods of compensation, for example, stock options; performance-related bonus schemes; financial support for professional development. What is important is that high performers feel recognised and rewarded in relation to their perceived worth and at levels that are viewed as competitive in the marketplace. According to Susanna Mitterer of TMI, writing in People Management, Pay attention to how your incentive and bonus schemes are designed, making sure all means of reward are fair, consistent and transparent. (2004)[31] Time has moved on but the expectancy theory of Victor Vroom and notions of fairness expounded by Jacques and Adams still ring true today. Turnover Although it may be argued that some turnover is acceptable, even desirable, quite clearly excessive turnover is to be avoided. The cost to the organisation may be seen on many fronts and, in many cases, may not be recognised or considered. In addition to the oft-championed areas of recruitment, training, temporary / contractors costs, there are issues such as lost productivity, customer dissatisfaction and management time, as well as the very important area of loss of skills and knowledge, both explicit and tacit. This final issue, which is of particular significance in this report, is of vital importance to technology organisations, operating as they do in such a knowledge-rich environment. There are many reasons for voluntary turnover in an organisation and according to the CIPD survey, lack of development or career opportunities accounted for 37% of voluntary terminations in the UK. Additionally, 41% highlighted increased learning and development opportunities as a step taken specifically to address staff retention. Make it transparent It is important that the whole process is as transparent as possible. Conger and Fulmer were of the opinion that, although this was a sensitive issue to manage, it was the right view to take. They believed that, if employees knew what was expected of them to reach a particular level, they would be able to take the necessary action. Not making the process transparent and the criteria for inclusion absolutely clear, leads to misunderstandings, feelings of inequality and discontent. Lucy McGee, writing in People Management, believes that there is a genuine urgency at the moment for succession planning and that every manager must become a talent agent spotting, nurturing and lobbying for people with leadership potential and offers her 12-point guide. (2004, pp.48-49)[32] The Small / Medium-Size Business Viewpoint Although, as mentioned previously in this report, the smaller organisations often cannot afford to implement such practices as, for example, executive coaching, the basic principles of succession management remain open to all. Having said this, there are certain restrictions facing the smaller organisations. In addition to the likely limitations on cost, there are the obvious limited developmental opportunities, which could lead to possible difficulties in retention of able and ambitious employees. A consequence of this is the reduced pool of talent from which potential leaders may be drawn. The smaller organisation may also find its senior staff stretched in many different directions, which could lead to difficulty in obtaining commitment to the issue of succession management. Obtaining this commitment, and finding ways to mitigate the particular problems highlighted above, is a role to be embraced by HR. According to the Corporate Leadership Council, there are a number of imperatives and practices that the smaller organisation may consider to improve the situation, as shown in Figure 3. Although, quite clearly, these actions are to be advised in all situations, with regard to small organisations they become all the more relevant. The IT Viewpoint The IT industry in general is a very young, fast-moving and dynamic industry. A low average age, coupled with technical expertise, brings with it developmental and career aspirations that need to be satisfied and will wait for no man. It is important that Companies recognise this and form policies accordingly, in order that they are able to sustain the requirements for technical and career advancement. For this reason, a culture of ongoing development, whilst important and extremely desirable in all industries, takes on a more critical role in high technology organisations. It may be that the particular problems facing the smaller company are exacerbated when the company affected sits within the IT sector. Additionally, it could be argued that turnover rate within the IT industry takes on a slightly different hue. Turnover