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Building a Better Pipeline

At many large companies, succession planning is receiving renewed attention as leaders realize the existing processes are insufficient.

Tuesday, February 11, 2014
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At PricewaterhouseCoopers, the world's second-largest professional company, clients often come seeking advice on one of the most vexing corporate problems of the 21st century: succession planning, not only to ensure a smooth transition to the next CEO but also to guarantee a steady flow of talent into key positions.

That's just one more reason PwC, with U.S. headquarters in New York and 180,000 employees worldwide, makes sure that its own house is in order when it comes to succession planning. Terri McClements, U.S. human capital leader for the professional-services powerhouse, says PwC -- like other large companies trying to be out front in managing its upward talent flow -- has moved to make its succession planning much more than a once-a-year review. (See the chart of the 100 largest companies in the United States by employees.)

"It's talent review -- we don't stick to a cycle that has a fixed time," says McClements in describing how the firm tries to keep a running dialogue with its rising executives, to ensure their aspirations are met and that they'll be ready for fast-changing business conditions. "We're constantly thinking as business evolves -- how do we move people around in a flow, so that they'll develop."

Bob Moritz, U.S. chairman of PwC, says succession-planning is a top priority for the organization.

"As a professional-services firm, our people are our most valuable asset," he says. "Our ability to develop talent to its full extent is directly tied to the PwC brand . . . and the long-term sustainability of PwC."

But not every firm sees itself as on the cutting edge. Increasingly, chief human resource officers and experts see a huge disconnect in what is universally seen as the critical area of succession planning. While finding the firm's next top leaders is now most often identified as the No. 1 issue by CHROs, many of them believe the current approaches to managing succession aren't working well.

Critics of current practices in succession and talent management say too many firms are looking too narrowly for a small, fixed list of C-suite replacements, rather than shaping the next generation of talent that will be equipped to deal with fast-changing business conditions. In their opinion, that's because the pipeline of future leaders is still too constricted and it can easily get clogged -- discouraging (and possibly driving away) talented executives right at the stage in their career when they have the most to contribute.

"The pipeline approach is not working -- the construction of the pipeline is too static," says Jean Martin, the executive director of the human resource practice at CEB, the Arlington, Va.-based member-supported advisory firm. CEB recently prepared a major white paper for its clients -- Succession Strategies for the New Work Environment -- that found this disconnect is a critical problem because for most HR leaders, succession is becoming the top priority, not only for them but for their bosses.

Indeed, the CEB paper highlights its survey findings that reveal 63 percent of HR leaders (out of 329 who were questioned) say succession is a bigger issue at their firm than it was five years ago, while just 21 percent disagreed. A smaller group of 80 executives reported that when it comes to talent issues, succession management is the one that, by far, matters most to their board of directors, as identified by 61 percent.

Clearly, the upheavals of the last five years following the economic crisis of 2008 have demonstrated to CEOs that having the right people -- flexible enough to deal with the rapid changes in market conditions -- is critical to a firm's success and even survival. This has been backed up by data: For example, a 2007 study of large corporations by Indiana University and the firm A.T. Kearney identified succession planning -- specifically, grooming and training the next CEO internally -- as the key deciding factor in long-term profitability, with companies that felt compelled to hire a new chief from outside substantially underperforming.

This knowledge has changed the way corporations view succession. One CHRO whose firm is considered a leader in succession planning -- Rich Floersch, the senior vice president and chief human resource officer at McDonald's -- says the Wall Street analysts who follow the top firms now increasingly want to know about their planning for future leadership, which is helping to drive the obsession.

"They're asking more questions -- making the link between the development of talent and a company's ability to sustain profits," says Floersch, adding that those queries then get passed from the CEO down to the HR leaders. Experts also say there is a virtuous cycle at work here, because today's CEOs themselves tend to be products of a more rigorous succession process -- which makes the boss more plugged-in to readying the next generation.

Yet somewhat surprisingly, the growing consensus within the C-suite on the importance of succession planning hasn't always resulted in a process that gets positive results -- or one that either HR leaders or their bosses are happy with. In the CEB study, strikingly, respondents say only 28 percent of their company's current leaders had been pre-identified in a succession plan. That would explain why so many of them (38 percent of HR leaders, and 36 percent of senior leaders) say they're not happy with their current plan.

A Pipeline to Nowhere?

What, exactly, is the problem? To outside experts such as CEB's Martin, the main issue is that broken "pipeline" model, a vertical construct that tends to position a narrow band of a few executives -- replacements, in essence -- below the corporate leader they've been groomed to replace. Critics say there are several huge flaws with that traditional model; in addition to its narrowness and tendency to become clogged (with the result that top talent becomes stuck in place and begins exploring outside opportunities), it also, they contend, grows rusty. In other words, leaders become unhappy with the candidates in the pipeline, often because of fast-changing strategies.

"Many times, it's a pipeline to nowhere," says Martin, who says successful companies that break out of this rut are the ones that look more broadly -- not only identifying additional candidates for each position, but also finding new kinds of opportunities for them within the firm. He says this will not only broaden their knowledge outside of their own silo-like specialty, but possibly help that candidate develop new leadership skills as well.

"You focus so much time and energy on a narrow group that sometimes you forget about the rest of the organization," says Jay Jamrog, senior vice president of research at the Seattle-based Institute for Corporate Productivity, or i4cp.

He says firms with constricted pipelines that focus too narrowly on the CEO and a few top positions may neglect and ultimately lose top talent, such as engineers or technology experts, who may not be headed for the C-suite but who drive productivity and profits. Jamrog even has his own term for executives lost in systems that focus on too few "high-potentials," or "high-pos"; he calls those who get left out "po-po's" -- for "passed over, pissed off."

Despite the often negative outlook, some top companies are often praised as trendsetters in succession planning -- largely because of their innovative processes that reach more deeply into the company and provide constant feedback as well as transparency for up-and-coming executives -- while presenting a wider menu of choices for their bosses.

For Sumeet Salwan, the senior vice president of human resources at Unilever North America, moving away from pipeline-style succession planning is one of his top priorities at the global consumer-goods giant, which has its U.S. headquarters in Englewood Cliffs, N.J. The problem, as Salwan sees it, is one of scale -- how to ensure that rising leaders are in place not just for the CEO and a few others in the C-suite, but at the firm's key product lines, international offices and other key divisions.

"To me, the most important part is to have talent pools, and not just candidate pools," Salwan says. Because the business world has grown more chaotic and unpredictable, job titles and descriptions are frequently changing in line with shifts in corporate strategy, he says. At Unilever, Salwan has asked executives and managers down the line to expand their list of top jobs and also develop a list of the top 25 percent of future leaders to be singled out for more intensive training and development.

"I known that 25 percent is a big piece," says Salwan, adding that it's why he's worked to create development programs that can be scaled up in size and replicated on the lower rungs of the corporate ladder.

McDonald's has won widespread praise for both the way that it handled a stunning succession crisis in 2004 -- when its newly installed CEO at the global fast-food giant succumbed to a heart attack and his replacement was diagnosed with terminal cancer and resigned two months later -- and also for its broader succession and talent programs.

The company has hardly rested on its laurels since then.  These days, Floersch and his HR team are intensely focused on making sure the right people are in line for what he says are "pivot" sections of the company -- the areas that will most affect the restaurant giant's growth and its bottom line over the next three-to-five years. Currently, he says, pivot areas include the menu group, digital marketing and international franchising, as McDonald's plans its largest-ever overseas expansion effort.

Complementing its historically strong record of developing its leaders from the inside, the company has recently launched an active effort to look more closely at outside leaders, not only as potential recruits but also to get some new ideas.  

"Because you do a good job benchmarking your talent, you don't want to lose sight of a standard for a job that could be higher," Floersch says, adding that executives are now encouraged to network and scout for talent outside McDonald's. He even scours LinkedIn, in part to get a sense of how rivals are moving up their talent and what types of positions they are creating.

Keeping Them Involved

Like McDonald's, Unilever's Salwan says his firm has recently placed a renewed emphasis on looking in a more systematic way for talent outside the company. He says Unilever now goes to top executives in its most strategically important areas and asks them to develop lists of five top external candidates -- again, a response to the notion that fast-changing business conditions may quickly alter their talent needs. Salwan says managers try to make contact with these outside candidates, such as inviting them to meet for coffee, sometimes with the CEO. "People get excited," he says.

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Kevin Wilde, the chief learning officer for General Mills, says the Minneapolis-based food conglomerate is often singled out as a leader in succession planning because it works hard to make the process seamless -- that is, integrating long-range talent development with the firm's business strategy, and also by making leadership development a routine event and not merely a once-a-year review meeting.

"I facilitate our business strategy planning sessions, which allows me to be in the room when the senior business team is having the overall strategy discussion," says Wilde, who notes that such involvement helps him and his HR team identify and develop leaders who will fit best with where General Mills is heading.

In addition, General Mills does several things to keep rising executives deeply involved in leadership development. For one thing, says Wilde, executives who've undergone training typically turn around and run sessions for other employees, expanding the succession web while strengthening networks within the company. Not long ago, he says, top General Mills officials from Latin America were sent to Shanghai to help train high-potential executives in China. A short time later, Wilde saw the Latin American president at a meeting with some of the Chinese executives, and they had formed close bonds. "They knew each other," he says. "They had spent time together."

Although General Mills is not averse to using online learning and evaluation tools, Wilde is known as a big believer in what he calls "belly-to-belly" learning -- corporate leaders shaping the next generation through one-on-one contact and mentoring. In addition to an annual review, future leaders hold a second meeting with their immediate superiors to talk about their development -- their career needs and future goals. "Most companies try to do too much" in a traditional annual review meeting, Wilde says, which is why General Mills looks to stress personal development in these separate breakout sessions.

The Benefits of Going Sideways

Lorraine Stomski, the head of Aon Hewitt's leadership practice, says the practice of multiple conversations about succession, as at General Mills, is increasingly common these days. "This traditionally had been a once a year big deal -- now, we're seeing that the top CEOs are doing multiple conversations a year," she says.

Marie Holmstrom, director of talent management and organizational alignment at New York-based Towers Watson, says the 2008 financial crisis placed additional stress on the succession-management process in several ways. Not only did job movement and retirements decrease in the ensuing recession, but CEOs began to look for more in their top lieutenants and potential replacements -- added skills in areas such as digital marketing and global business practices. Says Holmstrom: "You need to look much further in the future to understand the profile you need."

"Horizontal or lateral movement is definitely becoming the norm," says Tonushree Mondal, a partner specializing in leadership development at Mercer's Philadelphia office. These sideways maneuvers within the company are increasingly just as important as moving vertically up the career ladder. That's because many firms, she says, are not only striving to identify leadership candidates much earlier in their careers but are then finding assignments to help them develop new skill sets.

Interestingly, a number of experts say demographic trends are also causing companies to re-think how they approach succession planning. Right now, the large number of baby boomers remaining in the workforce may be an indirect cause of the clogged pipelines identified in the CEB report. Many older workers deferred retirement after the 2008 crash, but now, in an improving economy, the pace of turnover is likely to increase dramatically, and that is leading to more pressure to have their successors ready to move in.

PwC's McClements says members of the youngest generation in the workforce, the millennials, are shaking up the traditional succession silos. "Our studies show millennials want expertise and they want engagement," she says. "In return, they want to feel a part of the organization."

PwC is, in turn, emphasizing flexibility as it works to engage and develop millennials, says Moritz.

"[Millennials] have learned to work anywhere and everywhere," he says. "So, as a firm, we are working to . . . make sure that, whenever possible, 'work is a thing and not a place.' "

Yet despite the heavy emphasis among CHROs on succession planning, Unilever's Salwan says he believes the current business environment that he and others have labeled as VUCA -- volatility, uncertainty, complexity and ambiguity -- has rendered moot the notion of having short lists of candidates for fixed titles on an organization chart.

"That template has run its course," says Salwan, who believes the key is training promising leaders to be nimble as new business opportunities arise.

 

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