Succession Planning

There are issues in a business which are so apparent that you almost fall over them as you walk around.  There are other areas which are not so obvious, those which may creep up and bite you - and these are the ones which can be overlooked.  Without doubt, the whole area of succession planning falls into that category.  Unless an organisation has a logical "catch all" planning process in place, it is unlikely that a formal plan will be implemented and regularly reviewed.

What is a succession plan?

This can neatly be defined as "the plan which is in place to deal with any issues arising from the departure of a key manager in an organisation".

Many will instinctively think of a family company when succession issues are discussed.  Grandfather starts the business, son takes over and so on.  Although a high percentage of succession issues will arise in family businesses, these are by no means the only types of business which can suffer from a lack of adequate planning.

Preparing the plan

The process of preparing a succession plan is in several parts:

Step 1 - Identify the key managers

These will not necessarily all be senior management.  A technical organisation may have one individual in a research or product development department who has much of the critical data in his head.  He  may not be part of the management team, but his sudden departure or transfer to another position could place the business in jeopardy if his role (or at least the data needed to continue with his activity) is not well documented and understood by other individuals.

Step 2 - Brainstorm the issues surrounding each of these managers

They will be different.  A sales manager will have substantial amounts of data about key customers - where is this data stored?  Is the CRM system updated after each interaction with a customer?  Are there at least two individuals involved with the top 20% of customers in order that the relationship may be continued if the lead account manager moves on?

Step 3 - Identify the actions required to protect the business in the event of each manager leaving his post - for whatever reason.  The measures required when a key individual leaves the business under a cloud will be different from those if he is promoted or killed when flying back from a holiday.  Plan for both.

Step 4 - Review the plan at pre-agreed intervals - probably every six months

Circumstances change, job roles change and the required measures which should be in place will also change.

The common issues

The issues which need to be considered - in any business, regardless to some extent of structure or size - can be summarised in a checklist.  An example of a simple checklist would be:

Practical issues

• Day to day management
• Grooming for promotion
• Control of key areas of business - eg customer relationships
• Specific skills and private company information
• Industry knowledge

Financial issues

• KeyMan insurance
• Business liability insurance

Other issues

• Protective measures - individual's service contracts
• Tax planning
• Equity holding and control
• Investigate interim management

Practical issues

Day to day management

It is easy to take the status quo for granted.  When a major change occurs, even in some businesses when the receptionist leaves, this can cause major problems.  Think about how to deal with the departure of each key manager from a practical aspect.  Plan - as far as possible - to deal with the after effects.

Grooming for promotion

The true succession plan will also contain measures to fill all the key positions when they are logically expected to become vacant.  In larger companies, this process will often be automatic, as key managers strive to move upwards in the corporate ladder and their movement can create real issues.  In a smaller concern, attention is often paid primarily to simply running the business, and the "luxury" of training individuals to move into more senior positions, and planning their progress may be something which is put off until later.  The key issues to consider when grooming for promotion will focus on training, management skills and knowledge of that area of the business.

Control of key area of business

It is very common in smaller businesses for an individual to be brought in, as the business grows, to manage a particular area.  It is likely to be an area where the founders are short on skills and the management team needs to be strengthened to enable further growth.  A typical example would be a new sales manager.  It is important to give new managers space and the ability to mark their territory, but it is also vital to ensure that the existing management do not extract themselves completely from that area of the business.  Espionage, dramatic though it sounds, does occur in small businesses, with customer lists being extracted and sales staff suddenly vanishing.  Effective reporting, procedures over recording of prospects and customer dialogue and transactions and anti-competition/confidentiality clauses in service contracts are all measures to help protect a business against this risk.

Specific skills and private company information

Your IT manager (or if you have no IT manager - the only person who knows how to sort out computer problems) has called up and advised that (s)he is going to Nepal to "find him/herself".  (S)he is leaving today and regrettably cannot make it into the office.  A slightly creative example perhaps but these things do happen, and you will usually have no warning.  "Who has the passwords for the system?" you shout across the office.  You are greeted with a sea of blank faces.  Enough said.  This type of issue could also arise with a financial controller, book-keeper, or even financial director.  Make sure that key information, and the procedures for the most common situations are documented, stored safely and updated regularly under a predefined plan.

Industry knowledge

You are the leading manufacturer of metric widgets to the packing industry.  It is a specialist area.  Your widget developer created the blueprints for each new product and you manufacture the widgets from these plans.  The tools and moulds are all set up by the widget developer.  He is knocked down by a bus as he walks to the sandwich shop.  So what happens now?  Hopefully you go to his room and find all the documents filed, labelled and his computer is accessible.  Hopefully.

Financial issues

KeyMan insurance

Investigate the cost and benefit of insuring against losing key managers.  It can be expensive, but is often worthwhile.  The insurance can cover the costs of hiring a replacement and the disruption caused during what can be a difficult period.  A good insurance adviser will have carried out a risk assessment with you, identifying all the areas which could threaten the business.  If that has not happened, consider changing your insurance advisers.

Business liability insurance

Whilst carrying out this exercise, investigate available cover for areas such as non-fulfilment of contracrs due to a key manager not available available.  If you are working on projects where deliverables (products or services) are due at milestone dates, these may be delayed if key individuals are not available.

Other issues

Protective measures - individuals' service contracts

It is difficult to protect the business against all the possible threats, but certain steps can be taken.  Review service contracts for all key individuals and ensure that they are restricted from competing (this can be difficult to enforce), soliciting customers and stealing Intellectual Property.  Check that they are bound by a confidentiality clause for a reasonable period after they leave your business and also whilst they are actually working for you!

Tax planning

A key consideration in smaller businesses where shares are held by family members and passed down to younger managers.  This is a complex subject and not within the scope of this article, but needs to be reviewed regularly.  Passing shares early, or placing shares into trust can mitigate tax liabilities.  Taking advantage of the reliefs will also reduce any tax liability.  Your tax adviser should be considering these matters on your behalf.

Equity holdings and control

Consider the possible scenarios if a major shareholder were to die suddenly.  Where would her shares end up?  Almost certainly with her beneficiaries, which are likely to be her family.  Are they involved in the business - and are they supportive of the remaining management?  Situations caused by imbalance of equity holdings creates countless, sometimes highly antagonistic battles, and the disruption this causes will often damage a business severely.  There are steps  which can be taken to plan for such eventualities, for example, it is possible to insure against the death of a shareholder and plan for her shares to be acquired by the company and her beneficiaries to receive cash in place of the shares.  These types of policies are established and available from most leading insurance companies.

Interim management

Finally, there is another route!  The providers of interim management, temporary managers who step into another's shoes for a predefined period of three or six months, whilst the business deals with the existing issues, are generally effective and have a range of skills on offer.  If insurance is in place to cover this cost then the effect on the business can be minimised as far as possible.

Conclusion

Succession is a key issue for all businesses.  With proper planning, documented procedures and a regular review, every business can put steps in place to ensure continued success, minimum disruption and a (relatively) peaceful life!