Poor Succession Planning: Risks and Impacts

To avoid being caught off guard by departures of key employees, it is crucial that there is a succession plan in place. It is a top priority for CEO’s and must not be put on the back burner.

The primary risk that arises from lack of succession planning is that the business can go downhill really fast. If something happens to the current key employee, the business will suffer, leading to low productivity, lost work, and lower quality of work. Since succession planning is a matter of avoiding risks, you must know what the impacts of not having it are.

Deferring or putting succession planning in the back burner is an easy thing to do, especially when there are other pressing priorities.

However, senior executives should not hope that the best employees will never leave, and that finding replacement is going to be easy while the impact on 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.

Failing at 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 USD 112 billion more in market value in the year before and after the turnover, had the succession been planned.

You can gain an in-depth understanding of succession planning by visiting our guide on succession planning.

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.

The approach to succession planning should be based on a company’s culture.

In general, organisations with good succession planning practices perform better financially compared to organisations who have poor succession planning.

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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?”

Poor Succession Planning Leads to 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, poor financial performance, loss of revenue or shares, and so on. There is a lot of uncertainty and turbulence posed by 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

Poor Succession Planning Process Results in Selecting the Wrong Candidate

When there is no structured succession planning process or success profile or potential successor in place to determine what a good successor looks like, there is always the risk of selecting a wrong successor — both internal and external.

When selection is based on subjectivity or one-sided factors, the risk of selecting potential successors who are not fully qualified for a role. This is true whether hiring internally or externally. 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.

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Poor Succession Planning Causes Loss of Knowledge and Expertise

When top talent leaves the company/role without a successor, the employee takes with them all the knowledge and skillsets they have gained while in the role. In addition to it, they also take all the relationships built with stakeholders and how that could be leveraged to yield business results.

For example, while hiring external candidates may fill the knowledge gap for the industry, but they require time to understand the dynamics and politics of the organisation.

Learn More: Poor Succession Planning: Risks and Impacts