Succession management: filling the leadership pipeline; Succession management ranks high on CEOs' priority lists, yet many companies have no formal program in place. Here's how to turn talk into action--and competitive advantage.

A few years ago, executives at the University of Pittsburgh Medical Center recognized that a rapidly evolving business would require some changes in their ranks--and they set out to do something about it. "When you look at the changes in patients, providers, information technology and medical technology, we're talking about an industry that will be 180 degrees different tomorrow from what it is today," says Gail Wolf, senior vice president and chief nursing officer of UPMC Health System.

The health system wanted leaders who could help guide its 37,000 employees through those changes. "It became obvious to us very quickly that we can't solve tomorrow's problems with yesterday's or even today's thinking," Wolf says. "We needed a whole different dimension to our leadership."

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To secure that future leadership, UPMC created a comprehensive succession management program that finds and cultivates potential leaders within the organization and actively works to develop them into senior-level executives. The program, which features future-oriented content, mentoring and cross-organizational experience, not only has given the center a solid vehicle for ensuring that it has a steady stream of leadership candidates, but also provides a model for a new approach to developing leaders for the entire health care industry. And it has quickly produced tangible bottom-line results for the center, showing a 450 percent return on investment in its first two years. "In every regard," says Wolf, "the program is seen as a great asset to our system."

UPMC's concerns about tomorrow's leadership should sound familiar to most CEOs, judging from the results of a recent succession management survey of more than 1,200 Chief Executive readers sponsored by Development Dimensions International, the Pittsburgh-based human resources consultancy. In an uncertain, fast-moving and increasingly competitive world, having a steady, reliable supply of leaders in the pipeline is considered key. In the survey, two out of three respondents said that succession management is highly important to their organization's success, while an additional 25 percent said it was moderately important.

At the same time, the survey shows a disconnect between what executives think and what is put into practice. "The results show a disparity between the importance companies place on succession practices and the effectiveness of their practices," says Matthew Paese, Ph.D., vice president of succession management at DDI and co-author of Grow Your Own Leaders. Indeed, only 18 percent of respondents were highly satisfied with their internal succession management processes, and 33 percent expressed doubt about those processes. In addition, 39 percent reported that they don't even have a succession management program to fill senior leadership positions.

In short, there seems to be room for improvement in the way succession management is handled at many companies, and there are compelling reasons to improve. "Wall Street is paying more attention to leadership in assessing a company's potential, and there appears to be significant interest from boards as well," says Paese. Indeed, 96 percent of the chairmen surveyed ranked succession management as moderately to highly important to the success of the organization. And well they should, adds Paese, because "organizations reporting highly effective succession management practices were also significantly more likely to report that they outperform their competitors."

Process and Teamwork Produce Results

While the DDI survey highlights some gaps between concept and reality, it also points the way to potential solutions. For example, more than one-third of respondents cited the lack of a clear approach to succession management as a key constraint limiting their ability to develop senior leadership talent--often leaving executives who are trying to cultivate future leaders "flying blind." For example:

* Seventy-three percent of respondents believed that using a process for the early identification of leadership potential is highly or moderately important. But only 17 percent said their own process was highly effective.

* Sixty-four percent said that being able to define the skills, experience and attributes required for senior leadership is highly important, and another 20 percent said it was moderately important. But only 19 percent felt that their own process for doing so was highly effective.

* Respondents said that boards place moderate to high value on receiving succession management information, but significant proportions of organizations don't provide such information to their board. Most commonly lacking: information about the organization's leadership bench strength in comparison to its competitors.

* Seventy-six percent of respondents thought that gathering good data on the strengths and weaknesses of current and future leaders relative to business needs was highly or moderately important. But only 18 percent said that their own process for doing so was highly effective, and only 35 percent believed it was even moderately effective.

"Basically, many companies simply don't have a systematic, disciplined process in place to find and develop leaders," says Paese. In setting up such a process, he explains, the key is to move beyond the grooming of individuals for specific jobs and instead create a talent pool of high-potential candidates. The people in that pool can then be tracked and given proactive, targeted development opportunities that accelerate their preparation for senior management positions in general.

The CEO's involvement in the succession management process is critical, experts say. The survey agrees, with organizations reporting a high level of senior management involvement also being more likely to report greater effectiveness of succession management processes and higher levels of confidence in the organization's supply of leadership.

But that involvement does not need to extend to operational responsibility. A CEO partnership with the human resources group--which is typically already involved in talent development--is especially effective. "HR is in a position to put a process in place, to arm you with the right tools and good data about people, and run the process with the discipline needed to make the system work over and over again," says Paese. Not surprisingly, perhaps, survey respondents who reported better financial performance were also more likely to report that HR adds significant value to succession management efforts.

Nevertheless, the survey suggests that CEOs are not taking full advantage of HR. Anywhere from 35 percent to 48 percent of respondents said HR was not involved in succession management, depending on the part of the process in question. In addition, executives were almost equally divided as to whether HR should play a more active role in leading succession management practices.

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The problem may be in the way that executives perceive HR's role. Executives felt that insufficient knowledge, resource constraints and a lack of understanding of executive challenges impaired HR's ability to help with succession management. In essence, says Paese, those problems stem from HR not being seen as a strategic partner in the process--which means it gets neither the investment nor the time with senior management that it needs to work effectively. "HR can make it happen if they are at the table, right up front, with the CEO's team," he says. "That way, they can understand the strategy behind the process. They can go back and handle the day-to-day, and make sure that the day-to-day is supporting the strategic goals." Yet there is a lot that senior executives can do to help the process work effectively. For example, says Paese, the CEO is in a position to ensure that the talent pool is truly a corporate resource. "You don't want to have silos of talent isolated out there in business units and functional areas," he explains. "The CEO is the one who can say, 'We've identified these 20 people in whom we're going to invest, and that talent is now the property of the corporation--not the marketing department, not eastern seaboard operation, not any other unit.' That goes a long way toward eliminating talent hoarding in those silos."

The details of a succession management process will vary from company to company, but DDI recommends four key steps (see box below). In each of these steps, there are certain best practices for the CEO to keep in mind. For example, in the identification stage, he or she should make sure that executives are casting a wide net and looking beyond the familiar faces and high-profile performers to uncover a diversity of potential leaders. The CEO should also make sure that the organization is using criteria that look at candidates' potential rather than their past performance. "It's important to focus on the abilities that people will need for the executive job they'll eventually have, rather than their track record in a given functional area," says Paese. "Moving from an operational job to a strategic-level executive position requires vastly different skills."

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In the diagnosis stage, the CEO can make sure that the organization is making full use of today's sophisticated tools, such as assessment centers that put candidates through highly realistic simulations of the kinds of challenges they will encounter as executives. When used correctly, such tools can provide clear data about the individual's strengths and weaknesses in terms of skills, knowledge of the organization and range of experience.

Assessing "Potential Derailers"

They can also provide insight into the personality of the individual. "It's a common mistake to overlook that in an assessment," says Paese. "You want to look for what we call 'potential derailers'--things like being unperceptive, arrogant, volatile, self-promoting--so that they can be addressed. Those derailers can be discovered through a good assessment process."

Ultimately, any diagnosis should be comprehensive and broad enough to uncover potential weaknesses as well as strengths. "A senior leader can't rely on his or her strengths alone," says Paese. "They have to address their weaknesses, because once they get to the senior level, some of those previously unnoticed blind spots can really come back to bite them."

In the prescription step, the CEO should play a hands-on role by coaching and mentoring one or two talent pool members and by carving out time to participate in learning sessions and off-site retreats with candidates. This involvement underscores the program's importance and gives the CEO a solid grasp of the talent that is in the pipeline. It also gives him or her an opportunity to help shape assignments for individual candidates--and ensure that those assignments benefit both the individual and the company.

To that end, effective programs often tap into their talent pool to tackle real-world business challenges. For example, the University of Pittsburgh Medical Center's development program assigned several talent pool members to examine operations in key areas such as recruitment, retention and patient satisfaction--initiatives that crossed organizational boundaries. "We wanted them to learn things like, How do you influence people over whom you have no direct control? How do you create change that sticks? How do you get people to move from A to B when they don't want to? How do you do it fast?" says Wolf. "They learn those skills situationally."

The result is broadened knowledge and abilities for the pool members, many of whom have described the program as "probably the greatest management experience they've ever gone through," says Wolf. At the same time, the center benefits from the efforts of these high-potential candidates. In the first two years, program members came up with initiatives that led to actual savings of more than $500,000, and identified another $38 million of potential savings that the center is now working on.

In the final step of a succession management process--measuring and monitoring--the CEO should provide "process tension" to ensure that executives are accountable for following through on the succession management process. "When a CEO is developing the performance management plans for his or her executive team, part of the criteria for measuring performance should be the degree to which they are developing talent, just as much as it is the degree to which they are, say, meeting their sales numbers or cost targets," says Paese.

To that end, the CEO has to define the outcomes expected from the program, such as being able to fill a certain number of positions internally or to reduce leadership replacement costs by a certain amount. He or she also needs to make sure that there are metrics in place to track results and drive those outcomes. Otherwise, says Paese, "it's just leadership development in a vacuum, without any way to look back and determine how you're improving or helping the business."

Reaping Benefits from Talent Information

Overall, the establishment of a solid succession management process delivers the same benefit that any good process provides: the ability to complete given tasks efficiently and effectively, and to use accurate data to make decisions and identify areas for improvement.

For the CEO, that means being able to ensure that the organization has a ready supply of up-and-coming leaders to run the business. It also means being able to demonstrate to shareholders and boards where the company stands in terms of leadership. "When the chairman asks, you can tell them who those potential leaders are, what is being done to ensure that they will be ready for their next position and why it is being done," says Paese.

Executives can use that information to make sure that the leadership pipeline stays in step with the changing needs of the organization. "The CEO can know not only where the talent is, but also where the talent gaps are and where those might turn into land mines down the road as they execute their business strategies." With that foresight, the CEO can make adjustments to ensure that the succession management program is focusing on the people and the skills that will enable the company to meet those future challenges.

Ultimately, a sound succession management program gives the company an objective and largely transparent process for bringing new leaders along. That, in turn, makes it easier to ensure that potential leaders are not passed by, and that talented people have a clear line of sight forward. "It helps you retain and encourage your high-potential leaders, with a process that everyone--from employees to shareholders to the board--can see is fair and effective," says Paese. "That's good for the individual, it's good for the CEO, and it's good for the company's future."

RELATED ARTICLE: NEED TO QUICKLY ELEVATE EXECUTIVE BENCH STRENGTH IN YOUR ORGANIZATION?

Learn how in a special one-hour Web seminar on April 16 from 1:00 to 2:00 p.m. (EST).

Bill Holstein, Editor-in-Chief of Chief Executive, and Matt Paese, Vice President of Succession Management at DDI, will provide tips and techniques to get your plan into action.

Call 1-800-933-4463 to register.

RELATED ARTICLE: 4 Key Steps to Growing Your Own Leaders

IDENTIFICATION -- finding high-potential leadership candidates in the organization by using consistent criteria rather than executives' gut feelings about individuals

DIAGNOSIS -- assessing the strengths and weaknesses of candidates in light of the future needs of the company

PRESCRIPTION -- providing the development, learning and experiences needed to fill the gaps identified during the diagnosis stage

MONITORING AND MEASURING -- ensuring that the succession management process continues to develop leaders over time

RELATED ARTICLE: The 6 Don'ts of Succession Management

Although executives recognize the importance of succession management, such programs often fall flat--largely because of six common mistakes.

MISTAKE 1 Focusing development on a specific job. The old "replacement planning" approach, in which executives pick their own replacements, burns up large amounts of management time and makes it difficult to tie development to overall business strategy. Instead, establish a central succession/talent pool to groom a group of high-potential candidates for executive jobs in general.

MISTAKE 2 Inaccurate identification of potential leaders. Relying on personal relationships and experiences to identify leadership candidates only strengthens the "good old boy" network and overlooks talented but less-visible line managers. The right way: Develop a uniform set of criteria for identifying candidates across the organization.

MISTAKE 3 Poor diagnosis of development needs. Companies often focus only on a potential leader's current capabilities. Instead, they should define what type of leadership the company will require in the future, and use acceleration/assessment centers, 360-degree ratings and behavior-based interviews to assess candidates against those needs.

MISTAKE 4 Having a limited range of development solutions. Too often, development actions lack impact. Companies should involve top management in setting up creative development options, such as putting candidates on task forces or assigning them to various jobs that provide broad experience.

MISTAKE 5 Development plans are never put into action. It's not unusual for companies to set up development plans and then stall out in the execution of those plans because of daily job pressures. To avoid that, the candidate's immediate supervisor should be involved in the development planning process, so that regular job responsibilities and development activities are in sync.

MISTAKE 6 Lack of ongoing support by senior management. Senior managers can get distracted by their own job responsibilities, leading the succession management effort to crumble. To keep on track, CEOs need to define performance goals for the executive team and be involved in mentoring and teaching.