Your complete guide to succession planning

Succession planning is a crucial aspect of business management that involves preparing potential successors for key roles. Whether you’re a small family business owner or the CEO of a multinational corporation, having a well-thought-out succession plan in place is essential for the long-term success and sustainability of your company.

Most business owners will have come across the term ‘succession planning’ before. Skills shortages and shrinking talent pools, particularly during periods of macroeconomic uncertainty, often exacerbate the need for robust workforce planning, and succession planning is an important part of the process. And yet, 46% of company board members claim they don’t have an effective CEO succession plan in place.

Effective succession plans take time to develop and often involve multiple stakeholders, including Human Resources (HR), Talent Management or People teams.

Read on to learn how to carry out the succession planning process, why it’s important for growing businesses, and where to access additional support.

What is succession planning?

Succession planning is an ongoing process to identify and fill critical roles in a business, most commonly referring to senior leadership positions.

Succession planning vs succession management

Both succession planning and succession management can be central to the long-term success of a business. While succession planning focuses on identifying potential successors for specific key roles, succession management is a broader de-risking strategy for talent pipelines across an organisation.

Succession management can involve everything from workforce restructuring and performance management to employee retention and recruitment strategies. It also typically takes into account wider business objectives, such as international expansion plans.

What is the purpose of succession planning?

Succession plans enable organisations to remain agile and react quickly to unexpected changes in management teams or critical business functions. Long-term succession planning can also be used to implement more gradual change, such as a shift in company strategy or product offering, or preparation for an exit event.

Different approaches to succession planning

The succession process will vary depending on the size and type of organisation, and on individual business goals. For family-run businesses, for instance, succession planning often involves preparing the next generation of the family members to take the reins.

An effective succession planning strategy will also differ between critical roles. Succession plans for senior leaders will look different to those for key employees in specialist technical roles. Meanwhile, some succession plans may focus on individuals, while others will look at whole functions or talent pools.

Why is business succession planning important?

Lacking a strong succession plan can have a detrimental effect on business performance — more than half of executives reportedly fail within 18 months of being placed in new leadership positions due to lack of preparation. Similarly, McKinsey found that four in five global leaders believe they’re unprepared for their new roles.

Developing potential successors over time, through structured training and mentoring opportunities, should lead to better outcomes. But the benefits of succession planning aren’t limited to executive performance.

Benefits of succession planning

For businesses of all sizes, from early-stage startups to multinational firms, there are numerous advantages of effective succession planning for leadership roles and critical positions. These include:

Risk management

Succession planning can help your business mitigate risks associated with the departure of key leaders. In case of sudden, unforeseen events such as illness or dismissal, an effective succession plan can help minimise business disruption, customer dissatisfaction and potential financial losses.

Strengthen talent benches

Long-term workforce planning can be a great support to your human resources (HR) team. It can help avoid talent shortages and fill vacancies for business-critical roles faster, by preparing potential candidates in advance. This minimises any impact on product delivery or customer service, without rushing the hiring process, so that you can appoint the best people for the job.

Build stakeholder trust

Business continuity planning can help make your business more agile during uncertain times. Increasing stability will build trust between business owners and shareholders, senior management, your board of directors, and current employees.

Exit planning

Effective succession planning signals to potential buyers that your business is well-prepared for the future, with a strong pipeline of leadership. This can increase your company’s valuation, and also reduce some of the stress and uncertainty associated with an exit event, by ensuring a smooth transition or handover.

Achieve EDI goals

Succession planning also provides an opportunity to incorporate your equality, diversity and inclusion (EDI) strategy into your hiring processes. It may help you improve diversity among c-suite and senior leaders, and in other key positions across the business.

Create costs efficiencies

Succession planning gives you the opportunity to streamline your talent development process, and reduce recruitment, onboarding and training costs, by sourcing internal candidates for key roles.

Increase employee engagement

Having clearly defined career development plans, goals and incentives for high-potential employees helps motivate them in their day-to-day tasks. Investing in their progression also helps them to feel valued by the company, increasing overall job satisfaction.

Foster strong working relationships

Including your team in strategic planning and being transparent throughout the succession planning process can increase trust within your team. Certain stages of the process, such as training and mentorship, will also help build stronger relationships between senior executives and key employees.

Build confidence

By giving team members sufficient time to prepare, learn from mistakes, and take part in leadership development programmes, they will feel more confident and perform better in their future roles. They’re also more likely to bring fresh perspectives and ideas, fostering a culture of innovation and growth.

And of course, any benefits to employees will also have a knock-on effect for the business; for instance, increasing productivity, reducing staff turnover, and improving wider company culture and morale.

Succession planning for startups

The cost savings associated with effective succession planning will be an attractive proposition for entrepreneurs just starting out. On top of this, small businesses will also benefit from:

Recruiting and retaining top talent

Most startups won’t be able to compete with the salaries and employee benefits offered by larger organisations. But fast progression and strong career development plans can help SMEs attract ambitious and high-performing applicants. It will also help nurture their talent pools and improve retention, which is particularly important for those with relatively young teams (that typically have higher churn rates).

Improving internal processes

Succession planning provides a good opportunity for startups to formalise their hiring and onboarding processes, and to improve any existing talent management strategies. Developing a succession planning strategy will also provide the chance to review your business objectives and determine the roles you see as being critical to future operations.

Skills development

By focusing professional development programmes on multidisciplinary training and your long-term business objectives, future leaders can broaden their skill sets and competencies. This again reduces business risk, by making your startup more agile.

Succession planning for family-owned businesses

In 2018, it was reported that more than half of family-run businesses in the UK had no kind of succession plan in place.

Whilst many owners of family businesses have informal plans to pass their companies onto their children, it’s important to establish a clear process for doing so. A lack of preparedness when leadership changes arise won’t just affect family members, but also your employees, customers, and other key stakeholders.

Why is succession planning important for family-run businesses in particular? Having a formal succession plan enables current leaders to retire or take a step back one day, without the uncertainty of what will happen to the business.

It’s also a good opportunity to resolve any conflict around who will take over, and gives the next generation time to learn and determine whether it’s the right career path for them.

Meanwhile, a tax-efficient succession plan that takes inheritance tax and capital gains tax into consideration can help to protect family wealth.

What should an effective plan include?

According to research by Deloitte, 86% of business leaders view succession planning as an urgent priority, yet just 14% believe they do it effectively.

The succession planning process should start long before someone resigns or retires. Succession plans should also be frequently reviewed and updated over time, and while they’ll likely include leadership development and mentoring programmes for future leaders, they shouldn’t be limited to the C-suite.

There is no one-size-fits-all approach to succession planning, nor a perfect succession planning template for your business. There are, however, certain points that nearly all successful succession plans will cover:

1. Identify critical roles in the organisation

Critical roles tend to be the most senior in a business, like board members and department heads. Succession planning for other leadership roles, however, such as senior managers and technical experts, is also becoming increasingly common in larger organisations. In addition, you should identify any new roles that will be required in the future.

2. Determine the skill set required in these key roles

You should ensure you have a good understanding of the competencies required in each critical role in the business, both now and in the future, and if there are currently any gaps. This will help you to decide which individuals are best placed to fill these roles, and what training is needed to upskill staff.

3. Find potential candidates to fill those roles

Identify successors for key roles, whether they’re internal candidates or new recruits where there are vacancies or skills gaps that can’t be filled through training and development. Many businesses will appoint both immediate and longer-term successors to help streamline this process.

4. Prepare successors for the job

It’s important to start preparing internal candidates in advance to ensure they have the necessary technical knowledge and/or leadership skills to carry out their job effectively when the time comes. These preparations may take the shape of formal, structured development plans and skills training, job shadowing, or a gradual handover process where successors start to take on additional responsibilities.

An increasing number of organisations are also incorporating equality, diversity and inclusion (EDI) goals into their succession planning strategies. Embedding EDI into succession planning is a crucial but often overlooked process; in a recent Gartner survey, 88% of EDI leaders stated that promotions and succession plans are “one of the talent processes most susceptible to bias”, despite diversity having a proven positive impact on performance outcomes.

What common mistakes do businesses make when succession planning?

Not communicating your plans with all parties

It’s important to explain to successors why they’ve been chosen to take on a critical role in the organisation, as well as any next steps. Make sure they’re engaged in the process. Equally, be sure to include incumbents when selecting and training successors, as they will have valuable insight into the job itself.

Sticking to succession plans too rigidly

Effective succession plans are flexible. They can be adapted as individuals come and go, business goals change, and lessons are learnt. It’s also important to make sure successors know that these plans aren’t guaranteed. This can help avoid any conflict or disappointment down the line.

Forgetting about yourself

Maybe you’re a senior HR leader or maybe you’re a business owner; either way, be sure to create your succession plan as well. You may not have plans to leave just yet, but it’s as important to prepare for your own departure as it is someone else’s.

Leaving it too late

The worst thing you can do in succession planning is not have a plan. Don’t wait until someone leaves to appoint a successor or to start training them for the role. It can be easy to fall into this trap when business is good and your company culture seems strong, but change is inevitable so it’s best to be prepared.

Succession planning support

Given its overlap with talent management and professional development, the role of HR in the succession planning process is clear. HR teams will help to ensure the process is carried out fairly and in line with wider business objectives.

For smaller businesses without an established HR function, consultancy firms and business continuity experts can offer succession planning support.

Your board and investors, for those that have them, should also be able to provide support. At BGF, we provide our portfolio of SMEs across the UK and Ireland with growth capital and ongoing value creation support. This includes expert guidance on their growth strategies, from succession planning and business acquisitions to global expansion and ESG.

Join the long list of companies we’ve supported with succession planning and further growth plans, including e-commerce retailer Direct Online Services (DOS), beauty brand incubator SLG, and leading life sciences company Arcinova.

Frequently asked questions

What’s the difference between succession planning and succession management?

Succession planning is the process of identifying and preparing successors for a select group of key employees, while succession management refers to the development of talent pipelines more broadly across a business.

How important is succession planning?

Succession planning allows businesses to adapt to changes in leadership teams or critical roles. As well as acting as a contingency plan, succession planning provides greater transparency and career development opportunities within businesses, increasing employee engagement, productivity and retention. It can also help in building confidence amongst stakeholders and board members.

What are the risks of not having a succession plan?

Failure to create effective succession plans can lead to a loss of expertise and knowledge, leadership gaps, employee burnout and increased churn, or a breakdown in client relationships, among other risks—all of which can have a significant impact on business performance.

When should succession planning begin?

It’s never too soon to start succession planning and it’s important to review succession plans on an ongoing basis, to ensure you remain agile.

Who is responsible for succession planning?

The succession planning process involves a number of different stakeholders, including employees, but the responsibility of developing and delivering a successful strategy falls primarily to CEOs, boards of directors, and HR teams.

What support is available for succession planning?

HR teams can provide extensive support to CEOs and business owners looking to carry out succession planning, as well as specialist consultants and advisers.

 

The information contained in this article is for general information and use. It does not constitute any form of advice and is not intended to be relied upon in making any investment decision. Independent advice should always be sought as to whether a particular transaction is suitable having regard to your personal and financial circumstances.