Succession planning is a critical process that ensures organizations have the right people in place to fill key leadership roles when they become vacant. Despite its importance, many organizations neglect to plan for succession. A study by the National Center for the Middle Market found that only 29% of middle-market firms have a formal succession plan in place. The rest have insufficient succession planning, or no succession planning process at all. This widespread lack of planning can lead to costly consequences, both in financial terms and in terms of overall organizational health. Let’s explore some of the most significant expenses, both direct and indirect, incurred by organizations that fail to plan for leadership changes.
The Direct Costs of Insufficient Succession Planning
Failing to plan for leadership succession can have serious financial consequences for organizations. These direct costs can include expenses related to recruiting and training new leaders, lost productivity and revenue, and increased risk of legal liability. In this section, we will examine some of the direct costs associated with insufficient succession planning.
Increased Recruitment, Training, and Overtime Costs
Without a succession plan, organizations may need to spend more time and money on recruitment and hiring to fill key positions. Recruitment costs can include job postings, agency fees, resume screening, conducting interviews and background checks, and negotiating salaries and benefits. Training costs can include onboarding, coaching, and mentoring. The cost of lost productivity during the transition period can also be substantial, especially if the departing employee leaves abruptly.
The cost of hiring a new employee can be higher than retaining an existing one. A report by the Society for Human Resource Management revealed that the cost of replacing a highly skilled employee can exceed 200% of their annual salary.[ii] This means that if a CEO earning $500,000 per year were to leave unexpectedly, the direct costs of replacing them could exceed $1 million.
Additionally, when a key employee leaves and there is no one to fill their position, other employees may have to work overtime to cover the workload. This can lead to increased overtime costs, which can be a significant expense for the organization.
Legal Fees and Penalties
In some cases, the absence of a succession plan can lead to legal fees and penalties. For example, if a key employee leaves and their position is left unfilled for an extended period of time, the organization may be in violation of labor laws or contractual agreements. This can result in legal fees and penalties that can be costly for the organization.
Loss of Business Continuity
When a key executive or leader suddenly departs, it can cause significant disruptions in business operations. This disruption can lead to a loss of revenue, decreased employee morale, and damaged customer relationships. Key employees often have strong relationships with customers and stakeholders. When they leave without a replacement, the organization may lose those relationships, which can have a negative impact on customer loyalty, customer retention, and revenue.
The Indirect Costs of Insufficient Succession Planning
While the direct costs of failing to plan for leadership succession are easy to quantify and understand, the indirect costs can be just as damaging to an organization. Indirect costs refer to the less obvious but no less impactful ways in which the absence of a succession plan can negatively affect an organization. Indirect costs can include lower employee engagement, decreased morale, and reduced productivity, all of which can have a ripple effect throughout an organization. In this section, we will explore some of the indirect costs of overlooking succession planning.
A lack of succession planning can stifle innovation within an organization.[iii] Without a clear plan for leadership development, employees may feel that their career advancement opportunities are limited, leading them to seek out opportunities elsewhere. This can result in an exodus of talent, leaving the organization with fewer innovative and creative employees.[iv]
Negative Impact on Organizational Culture
The sudden departure of a key leader can create uncertainty and anxiety among employees, leading to a negative impact on company culture. Employees may feel that the company doesn’t value their contributions or that their future with the organization is uncertain. This can lead to decreased morale, lower productivity, and an overall decline in organizational performance.
Loss of Institutional Knowledge
Institutional knowledge refers to the collective knowledge, skills, and experience that an organization has accumulated over time. When key employees leave without a replacement, this institutional knowledge can be lost, making it difficult for the organization to adapt to changes in the industry or market. This can lead to a loss of competitive advantage and decreased organizational performance. Additionally, the organization may have to spend a significant amount of time and resources to train and develop a new employee to fill the knowledge gap.
The Importance of Succession Planning for Long-Term Organizations
Effective succession planning is a critical component of long-term organizational success. By investing in leadership development and planning for future vacancies, organizations can ensure that they have the right people in place to drive the organization forward.
Research has shown that companies with effective succession plans are more likely to outperform their competitors. According to a study by Deloitte, organizations with strong succession planning are 2.2 times more likely to outperform their peers in terms of revenue growth and 1.5 times more likely to outperform their peers in terms of profitability.[v]
Overlooking succession planning can have significant direct and indirect costs for organizations. By failing to plan for leadership transitions, organizations risk losing top talent, damaging their reputation, and incurring substantial recruitment and training costs.
Whether you’re a human resources professional or a C-suite executive, make sure you have a plan in place for leadership transitions. The benefits of effective succession planning are well worth the effort.
Looking for More?
If you’re ready to start your succession planning process, explore SIGMA’s Succession Planning Launch. We offer flexible in-person and online services that will bring your leadership team together to create a plan that works for you. Our consultants can help you get six months of work done in only six hours. By the end of the session, you will know how to launch a robust succession planning process and have a customized 12-month succession plan for each member of your leadership team. Contact us for more information or reach out to our consulting team below. We’re always happy to chat.
Glen Harrison is an organizational transformation consultant and succession planning expert. Over the course of his career, Glen has worked with one-third of the Fortune 500 list and with every level of government in Canada and the United States. Having worked with numerous clients to build robust succession plans from the ground up, Glen has extensive experience in the application of SIGMA’s products and services to help organizations realize their people potential. If you are interested in learning more about SIGMA’s succession planning services, send Glen an email or give him a call. He’d love to chat with you.
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[i] National Center for the Middle Market. (2015). Succession Planning for the Middle Market. Retrieved from https://www.middlemarketcenter.org/sites/default/files/research-reports/Middle%20Market%20Succession%20Planning_0.pdf
[ii] Society for Human Resource Management. (2016). The high cost of a bad hire. Retrieved from https://www.shrm.org/hr-today/trends-and-forecasting/research-and-surveys/pages/the-high-cost-of-a-bad-hire.aspx
[iii] Cascio, W. F. (2018). Managing human resources: Productivity, quality of work life, profits. McGraw-Hill Education.
[iv] Cascio, W. F. (2018). Managing human resources: Productivity, quality of work life, profits. McGraw-Hill Education.
[v] Deloitte. (2019). 2019 Deloitte global human capital trends: Leading the social enterprise – Reinvent with a human focus. Retrieved from https://www2.deloitte.com/content/dam/Deloitte/global/Documents/About-Deloitte/gx-2019-human-capital-trends-accessible.pdf