5 Reasons Smart Companies Have Succession Plans ... and What Can Happen If They Don't

Unexpected Exits

I recently received a call from a desperate CEO of a $28 million company. His company’s Controller unexpectedly resigned three weeks earlier. Then, two weeks after the Controller resigned, the CFO resigned. Additionally, his Accounting department, due to a retirement, was already short by one person. To make matters worse, the company was underperforming and its bank was requiring increased financial reporting and a plan of action. After a nervous rant, the CEO exclaimed, “We need to provide financials to our bank by the end of the week. If we don’t, they’re going to freeze our line of credit. If they do, we won’t be able to make payroll on Friday. Worse yet, I don’t have anyone in Accounting that knows how to finalize and print the requested reports.”

It seems like this situation is extreme; however, Murphy’s Law has an amazing track record of ensuring critical departures occur at the worst possible time. Unfortunately, these events can be costly, and even catastrophic for some companies. For this company, we were able to provide two financial consultants to assess the situation, close their monthly financials, create the necessary reports, then work with the bank.

Costly Changes

Unfortunately, our financial consultants cost the company over $12,000. Additionally, we had to locate an interim CFO to assist during the vacancy. Her rates were high and the additional fees for her services were in excess of $10,000. Lastly, the remaining accounting staff was called upon to work significant overtime. These costs alone were over $5,000. In total, the measurable cost of this event was over $27,000! Had the company developed a clear succession plan, along with back-up systems and cross-trained personnel, the cost may have been minimal.

Situations similar to this story happen every day. In cases where the company has an active succession planning program, the business disruption and associated costs are minimal. Unfortunately, in most cases, companies don’t have active succession planning programs. For these companies, the business disruptions can be severe, and the costs can be extremely high.

If your company doesn’t have a formal succession planning program, here are five reasons it should:

1. Cost Minimization - When companies aren’t prepared for departures, it can cost them a fortune in overtime costs, lost revenues, quality costs, expedited training costs, recruiting costs, and the like.
2. Risk Reduction - Key personnel losses can put customer relationships, employee morale, quality, customer service levels, profitability and even safety at risk.
3. Business Disruption Avoidance - When one or more key individuals leave, other employees scramble to cover the loss. In some cases, key business activities don’t happen or are completed late or erroneously.
4. Morale Maintenance - Significant and/or frequent disruptions due to employee losses have a proven negative impact on employee morale. Minimizing these disruptions minimizes events that will negatively impact morale.
5. Improved Strategic Thinking - Succession planning helps executives see the organizational “big picture.” It also helps identify areas of high risk that require organizational attention and planning.

Sometimes starting a succession plan from scratch seems like a daunting task. Although it will take effort, it is not overly complex, and the effort will pay significant dividends for years to come.

Here’s a basic road map to get you started:

1. Ensure you have a completed, finalized organizational chart.
2. Document all positions with complete job descriptions.
3. Identify high risk positions that require immediate attention. Remember, high risk positions can be found in all levels of the organization.
4. Conduct knowledge retention interviews with key personnel. These interviews should cover all aspects of institutional knowledge that will go away when the employee leaves the organization.
5. Document the knowledge captured during these interviews in a usable format.
6. Identify successors for high risk positions.
7. Once identified, create a detailed training plan for the successor. If these individuals do not exist in your organization, create a time-phased recruiting plan to attract required personnel at the required time.
8. Create an implementation plan to conduct training and hiring.
9. Once high-risk position succession planning is completed, repeat the processes for all remaining essential positions within the organization.
10. Maintain and update the succession plan on an ongoing basis.

Proactive companies have rigorous succession planning programs in place. Once you have yours, you’ll be prepared for whatever organizational departures occur.