By Bridget McCrea
In this series tED magazine explores the "new rules" of succession planning and outlines the key strategies that distributors should be using to prepare for the next generation of ownership now.
Ownership transfer isn't an easy subject for electrical distribution firms that know they should be thinking about the next generation of ownership, but that don't always have the time or motivation to start getting a plan of action down on paper. Whether they think they're going to live forever, work until they drop, or hold onto the reins for as long as physically possible, owners of small to mid-sized companies as a whole tend to have a tough time when it comes to succession planning.
Electrical distributors are no different. And while there is no "one sizes fits all" answer to the problem, there are some viable strategies to consider when it's time to successfully hand over your company's ownership to the next generation.
Family-run firms have a particularly difficult time with succession planning. According to the Family Business Institute's most recent surveys, 88 percent of current family business owners believe the same family or families will control their business in five years, yet actual succession statistics undermine this belief. For example, just 30 percent of family-owned businesses survive into the second generation, 12 percent are still viable into the third generation, and only about 3 percent of all family businesses operate into the fourth generation or beyond.
"There is a disconnect between the optimistic belief of today's family business owners and the reality of the massive failure of family companies to survive through the generations," the Family Business Institute points out. "Research indicates that failures can essentially be traced to one factor: an unfortunate lack of family business succession planning."
A Critical Function or Waste of Time?
The stark realities of poor succession planning are particularly acute in today's business environment, where the baby boomer population is making its way into retirement just as the millennials are joining—or, are on the brink of joining—the workforce. When they come together, these two issues make the issue of ownership transfer acute for distributors. And it's not just the ownership itself that's at stake here; succession planning is also closely tied to employee recruiting, retention, and engagement.
According to Software Advice, a HRIS software consultancy, succession planning also plays a critical role in successful talent management and organizational growth. In a recent survey, for example, the firm found that:
- 62 percent of employees would be "significantly more engaged" at work if their company had a succession plan.
- 94 percent of employers say having a succession plan positively impacts their employees' engagement levels.
- Over 90 of younger workers (age 18 to 34) say that working at a company with a clear succession plan would "improve" their level of engagement.
- 79 of employers surveyed note they have succession plans in place for mid-level manager positions.
But even with these statistics staring them in the face, the majority of companies put succession planning on the backburner. According to Nationwide's latest Small Business Survey, for example, almost half of companies with fewer than 300 workers are operating with no succession plan. When asked why they don't have such plans in place, survey respondents said:
- It's not necessary (47 percent)
- They don't want to give up one's life work (14 percent)
- They don't know when to create a plan (11 percent) or who to work with (11 percent)
- They don't have time to develop a plan (11 percent)
- They've overwhelmed with government regulations (8 percent)
"Business owners function at such a rapid pace to remain competitive, its no wonder that developing their exit plan and replacement doesn't seem like today's priority," noted Kirt Walker, president & COO of Nationwide Financial, in the Nationwide press release. "Yet, there isn't a more critical component of an operational plan than a solid business succession plan for providing seamless continuity in a time of crisis or transition."
Taking the First Steps
Succession planning is not just about replacing specific individuals in specific positions, it is also about developing and maximizing the potential and performance of everyone in the organization. "This succession mindset is an important aspect of leadership roles at all levels," says Kim Turnage, Ph.D., senior leadership consultant with Talent Plus, Inc., in Lincoln, Neb., "it's the heart and soul of the 'people piece' of leadership.
According to Turnage, it's not enough to simply pick a successor and hope beyond hope that he or she is capable and in it for the long haul. A good succession plan takes an objective, systematic look at both the performance and potential of internal candidates, she says, noting that promoting leaders from within has a success rate of 70-80 percent, while success rates drop to 50-55 percent for external leadership hires. "That increased turnover comes at a significant cost," she says, "both financial and organizational."
To distributors that want to kick off the succession planning process or dust off an old plan and make it new again, Turnage says the best first step is to switch the conversation from "performance" to "potential." In other words, look not at the best performers within your organization (e.g., your top outside sales representatives for the last 12 months), but at the folks who show true longevity and potential. "The fact that someone is performing well in his or her job today," says Turnage, "tells you that he or she is really good at that job. It doesn't say anything about where that person will be five years from now."
To ferret out the best candidates, Turnage advises distributors to start by identifying potential successors internally, assessing their interest level and potential, and then developing a plan to help shepherd that person (or persons) from their current roles and down a successful leadership path. "Think about what you have to do between now and then (i.e., your target retirement date) to get that senior leader ready to take over," says Turnage.
Ideally, this process should take place about 10 years before current company leaders are ready to retire. That's because the planning itself can take a year or more, not to mention the training and grooming necessary to get the new guard in place and ready to take over when the time comes. The good news is that when done right, succession planning will not only guarantee continuity for your company in the future, but it helps ensure good decision making, improves employee engagement, and enhances employee retention.
McCrea is a Florida-based writer who covers business, industrial, and educational topics for a variety of magazines and journals. You can reach her at firstname.lastname@example.org or visit her website at www.expertghostwriter.net.