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Solve the Succession Crisis by Growing Inside-Outside Leaders
Succession is also known as :
Business Sucession Planning,
Business Leadership,
Career Succession Plans,
Career Planning,
Communication skills,
Effective Communication,
Human Resource Management Training,
Leadership Development ,
Leadership Training,
Management Planning,
Staffing Succession Plan,
Strategic Managment,
Sucession Management,
Workforce Planning,
Planning Succession.
Included with this full-text
Harvard Business Review
article:
- Article Summary
- The Idea in Brief-the core idea
- The Idea in Practice-putting the idea to work
- Solve the Succession Crisis by Growing Inside-Outside Leaders
- Further Reading
A list of related materials, with annotations to guide further
exploration of the article's ideas and applications
The Idea in Brief
Should companies needing a new CEO
pick someone from inside or outside? Insiders
know the firm and its people, but
they're often blind to the need for radical
change. Outsiders see the need for change,
but don't know the company well enough
to foster it.
Fortunately, says Bower, firms don't have
to compromise. Companies delivering
superior, sustained performance-P&G,
IBM, GE-have inside-outsiders at the
helm. These CEOs have ascended within
the organization while remaining detached
enough from its cultural norms to
maintain an outsider's objectivity. They
know the firm but also understand how it
will have to change. They're able to look
at the organization as if they just bought
the company.
Growing inside-outsiders takes patience.
Over a decade or more, your firm must
groom high-potential executives through
increasingly challenging assignments and
rigorous mentoring. But the effort pays big
dividends: Your company has access to an
able CEO-whenever it needs one.
The Idea in Practice
HOW COMPANIES GROW INSIDE-OUTSIDER
LEADERS
- Recruit right. Hire from a diverse pool of
individuals who are highly talented in
their area of specialization and who have
general-manager potential. Over time,
they'll become good insiders-learning
to manage in the context of the company's
strategy, systems, and culture.
- Identify insiders blessed with an outside
view. Often, they come from outside the organization's
mainstream; for example, spending
extensive time away from headquarters.
- Example:
Before becoming CEO, Procter & Gamble's
A. G. Lafley spent years in Asia building
P&G's Chinese operation-and working
in beauty products rather than its core
detergent business. His resulting broad
view of P&G's potential likely laid the
foundation for the series of acquisitions
that have substantially expanded P&G's
business' reach.
- Groom potential inside-outsiders. Hand
them increasingly complex assignments
that ready them to manage a whole
business as early as possible. If you're a
one-business company, identify distinct
units-such as geographical regions
with markedly different competitive
conditions-that promising inside-outsiders
can run.
- Mentor. Assign senior managers to oversee
inside-outsiders' development. These
mentors help protégés extract lessons
from each assignment, such as learning
how to ratchet up growth while still delivering
current performance. Mentors also
ensure that there are adequate (but not
excessive) resources for protégés to turn
new ideas into great businesses.
HOW YOU CAN BECOME AN INSIDE-OUTSIDER
- Pick the right employer. Look for companies
that will provide a clear career path,
mentoring, challenging assignments with
enough time to learn from them, early
general management responsibility, and
chances to try out new ideas.
- Prove yourself on the job. Meet your
numbers, help your peers, and develop
your direct reports. When bringing problems
to your boss, also suggest solutions.
Cultivate a group of senior-manager
friends who back your ideas with resources.
- Broaden your view. Network with people
outside your division and company, including
customers, vendors, related organizations,
and union leaders. Expand your
general knowledge beyond your immediate
business through seminars and outof-
mainstream experiences.
- Solicit unvarnished truths. The higher
you rise in your organization, the more
people will tell you only what they think
you want to hear. So cultivate a relationship
with someone-spouse, close
friend, mentor-who tells you the truths
you don't want to hear.
The most successful CEOs, on balance, are those who are developed
inside the company-but manage to retain an outside perspective.
Solve the Succession
Crisis by Growing
Inside-Outside Leaders
I was appalled to learn recently that 60% of
the respondents to a poll of 1,380 HR directors
of large U.S. companies said their firms have
no CEO succession plans in place. As this finding
suggests, too many companies have over
the past two decades ignored the hard work of
building future leaders while senior executives
have focused increasingly on meeting the next
quarter's earnings target. When the time
comes to name a new CEO, more firms look
outside. Yet strong evidence supports the
notion that a well-groomed insider is a key to
sustained company performance. In my analysis
of 1,800 successions, for instance, I found
that company performance was significantly
better when insiders succeeded to the job of
CEO. Other researchers, including Jim Collins
in Good to Great, have come to similar conclusions
working from different data sets.
Such quantitative research on CEO succession
confirms but does not explain why more
outsiders are being hired, why qualified insider
leadership correlates with better company
performance, or what relationship exists
between those two trends. These ambiguities
have prompted me to consider what I could
add to the data-centered research from a
qualitative review of a decade of my own and
others' case studies and interviews, as well as
from my experience managing successions as
an outside director. That review made one
thing unambiguously clear to me: A critical
difference between companies that manage
succession well and those that don't is the
understanding that succession is a process,
not an event. The process begins years before
the event. Something else was clear: Both
insider and outsider CEOs have strengths and
weaknesses when they begin. Insiders know
the company and its people but are often
blind to the need for radical change-they've
drunk the Kool-Aid. Outsiders see the need
for a new approach but can't foster change
because they don't know the company or
industry sector well enough. What organizations
need, then, is to find a way to nurture
what I call inside-outsiders-that is, internal
candidates who have outside perspective.
For some companies, that may look like
mission impossible. But the succession crisis
will only get worse if companies don't tackle
the problem.
The CEO Does Matter
Recently, there's been a reaction against focusing
too much on the CEO-with some
justification. Top teams, as much as CEOs
themselves, are crucial to the execution of a
great strategy. Nonetheless, strong CEOs are
worth studying. They wield enormous
power. And as stewards of the corporate
purpose, their ability to make sense of the
business environment and to craft and articulate
the mission and the strategy are central to
long-term success.
Nothing illustrates the point better than
the last 35 years of succession at General Electric.
Reginald Jones took the helm at GE in
1972. He developed the strategic-planning system
he inherited from his predecessors into
the model for companies everywhere. He made
huge changes in GE's portfolio, exiting the
computer business and acquiring the giant inflation
hedge, Utah International. Jones's GE
regularly outperformed the U.S. GDP by more
than 25%. Recognizing the dawn of a very
different environment in 1981, successor Jack
Welch proceeded in two or three years to
dismantle much of the planning and organizational
structure Jones had put in place.
Welch sold Utah, acquired RCA, and built a
huge financial services business. Entire levels
of middle management and staff disappeared.
In the second decade of his tenure, GE's market
capitalization grew more than 1,000%.
Welch's successor, Jeff Immelt, is changing GE
once again. He is making major investments
in biosciences, water, security, and platforms
for infrastructure growth in emerging countries.
The stock market is giving him the same
cool reception it gave Welch in his first decade,
but GE is growing both revenues and profits
as it changes.
What GE's CEOs exemplify is the ability to
perform four seemingly contradictory tasks (a
near-impossible quadrafecta):
- Produce good short-term performance
regardless of how the markets and competitors
buffet the company they've inherited.
- Deploy resources so that organizational
capabilities improve in the medium term.
- Align the talents and energies of hundreds
of thousands of employees with clear
strategic objectives.
- Develop and modify those objectives over
the long term so that strategy adjusts to the
changing business environment.
This is a feat that simply cannot be done by a
team. It can be pulled off only by an individual
with a clear vision.
The job is inherently difficult-and becoming
more so. CEO turnover is on the rise globally,
and studies show that the proportion that
can be traced to inadequate performance is
steadily trending upward. Why should the job
be harder now than in the past? I see two
reasons. First, arguably, market conditions are
making the task of getting good results
harder. Hypercompetition, changing technology,
and a raft of emerging players from every
corner of the globe are pressuring companies
to keep changing their game, and a lot of
firms are just not doing it very well. When I
took a look at the performance of U.S. firms
over the last five years and discounted the
top two firms from any industry, the rest, on
average, failed to earn their cost of capital.
Second, owner expectations have changed
radically. In a world where markets are growing
5% annually, the stock market is looking for
15% returns. Institutions count for an increasing
share of ownership, and their holding
period is getting shorter-under a year is now
typical. These are not owners so much as
speculators in for the short ride.
Outsiders, Insiders, and Hybrids
When company performance disappoints,
boards of directors tend to seek a white knight
from the outside to come in and change everything.
Most of the time, the only way to
change things fast is to cut costs-which is
exactly what someone unfamiliar with the
specifics of an industry and its markets, or
the company and its people, is likely to do first.
Yet a study by Booz Allen reports that outsider
CEOs who make a quick mark by cutting
costs generally fail to succeed in the long
run: After two or three early years of squeezing
more to the bottom line, the CEO leaves or
sells the company. This short-term orientation
destroys value in the medium and long
terms. The seeds of growth are eliminated
along with overhead.
When a board looks inside for future leaders,
all too often it sees men and women who
don't seem to have the stature and vision to
lead. In the board's view, they are good operators,
but they lack a strategic sense: They
have never run a business in anything like
the circumstances that loom on the horizon.
And where no systematic effort has been
made to build future leaders, that perception
may be correct.
But there's no better way to reverse the
long-term destruction of shareholder value
than for companies to commit themselves
to growing executives from inside the company
who are prepared to lead through good
times and bad. Simple? No. The right thing
to do? Absolutely.
Consider the four skills that a new CEO
needs to drive a company forward and produce
the results cited above:
- Judge where the world and the company's
markets are headed, and frame a vision of how
the company should reposition itself.
- Identify (and if needed recruit) the talent
that can turn this vision into reality.
- Understand, in a deep and substantive
way, the problems the company faces.
- Know, comprehensively, how the company
really works-in other words, be
plugged into its administrative inheritance
and know key players well.
True, carrying out these tasks requires a
clear outside perspective. Industries are
regularly transformed by changes that disrupt
traditional economic relationships. That's
what the Internet did to the world of personal
computers and minimills did to the
big, integrated steel producers. It's what
high-quality, low-cost Asian manufacturers
did to a whole set of businesses based in Europe
and the United States. Individuals with
an outside perspective can see such trends as
they're happening.
But three of these four leadership skills
require extensive inside knowledge. Executives
who successfully lead large corporations
to new heights usually have accumulated a
body of knowledge over a long span of time,
much of which is specific to the company
they're leading and the industry it's a part of.
They can assess the talents of their colleagues
relative to the skills needed to compete in a
new situation. When, in response to a change
initiative, colleagues declaim, "We can do
that," insiders can distinguish wishful thinking
from an accurate recognition of vital, new
But three of these four leadership skills
require extensive inside knowledge. Executives
who successfully lead large corporations
to new heights usually have accumulated a
body of knowledge over a long span of time,
much of which is specific to the company
they're leading and the industry it's a part of.
They can assess the talents of their colleagues
relative to the skills needed to compete in a
new situation. When, in response to a change
initiative, colleagues declaim, "We can do
that," insiders can distinguish wishful thinking
from an accurate recognition of vital, new
internal capabilities-and they can do so
early on. It's hard to overstate how important
it is to understand, when competing in a new
field, the true value of recognizing a winning
versus a wannabe capability.
My research suggests that as a rule the best
leaders are, therefore, people from inside the
company who have somehow maintained
enough detachment from the local traditions,
ideology, and shibboleths to maintain the
objectivity of an outsider. They know the
traditions and the people of the company but
also know how those will have to change.
They know what best-in-class looks like as
well as how the class will change. They're
able to look at the organization's administrative
heritage as if they had just bought
the company.
How do they preserve that view? Often
they come from outside the mainstream of
the organization. They've spent more of
their time away from headquarters living
with new opportunities and threats. If you've
been living in modern Shanghai, for instance,
you're aware that the threat from
China is not cheap labor.
Am I advocating the elevation of eccentrics
and misfits? Of course not. Procter &
Gamble's A.G. Lafley spent the years before
becoming CEO in Asia building the Chinese
operation-in beauty products rather than
the core and very mature P&G detergent
business. His resulting broad view of P&G's
potential may have laid the basis for the
series of major acquisitions that have substantially
widened the domain of the company's
businesses. IBM's Sam Palmisano was
a champion of software and open systems
at a time when Big Blue was essentially a
closed-system, hardware-oriented company.
Again, his broader view of how IBM should
compete appears to have shaped the company's
progress as a systems and services solution
provider. What Jack Welch built into a
world leader was GE Plastics-not engines,
lighting, or appliances (which were GE's core
at the time). Welch once told me, "One of the
things that I was lucky about in my early
days in GE: I got good businesses and I saw
bad businesses. I was managing diamonds-
industrial diamonds-and semiconductors. So
one of the advantages of being in a business
with a 50% margin and moving to a business
with a 4% margin is that you can tell the
difference between the two, and you want to
get rid of [the 4%] and keep [the 50%.]"
Being outside the mainstream does two
things for a high-potential manager: It allows
a certain detachment from the conventional
wisdom to develop, and it keeps the manager
from being cowed by a powerful CEO. As one
CEO said to me, "Acorns don't grow well in
the shadow of great oaks."
Being outside the
mainstream allows for a
certain detachment from
the conventional wisdom
and prevents managers
from being cowed by a
powerful CEO.
Growing Leaders
How do you build a pipeline of future leaders
that includes inside-outsiders? It begins with
recruiting from a diverse pool of individuals
who are both highly talented in their area of
specialization and have the potential to be
general managers. Over time, they will learn
to manage effectively in the context of the
company's strategy, systems, and culture-
they will become good insiders. The best of them
will also see the potential for radical improvement,
and that vision may ultimately
match up with the sense the board and the
departing leaders have of where the world is
headed. Grooming that kind of insider-the
one blessed with an outside view-should be
the fundamental goal of the executive development
process. If building the skills these
managers need takes a decade or more-and if
they are to assume leadership positions while
they still have at least a decade of service
ahead of them-they need to be on board and
identified for grooming by the time they are 30.
"Grooming" may be a bad word for the
development process, as it sounds more cosmetic
than it really is. What high-potentials
need is to be handed a series of increasingly
complex assignments that give them the
chance to manage a whole business as early
as possible. That means the company has to
be organized into more than one business
unit-even if it is basically a one-business
company. Sometimes regions are distinct
enough to benefit from different managers.
Western and Eastern Europe are like that today:
One market is mature, highly developed,
and very competitive; the other is growing
rapidly under rapidly changing conditions.
Thus managing them is quite genuinely two
different jobs.
Becoming an Inside-Outside Leader
If you want to become a company leader-
and especially if you want to be an insideoutside
CEO-you need to manage your
own development from the start. These
questions can help you keep the big picture
in mind.
At recruitment
- Why are you being hired?
Is it just for a
job today, or is there a career path?
- Is this a company where talented people
stay for many years?
If not, will the
experience it provides make you attractive
to future employers?
- How will the company help you grow?
What pattern of assignments will you
get? Will you have time to learn?
- What kind of mentoring will you receive?
- What kind of training is offered?
What
is done in-house? What is done through
outside programs?
- How soon can you run a business?
If
you don't get general management responsibility
early, you can't learn the job.
- Is this a cookie-cutter program, or are
young people given the chance to try
out new ideas?
Now that you're on the job
- Do you meet your numbers?
- Do you help others?
Are
you
developing
their talent?
- What do you do for your peers?
Are you
just their in-house competitor?
- When you manage up, do you bring
problems-or problems with possible
solutions?
- Are you transparent?
Managers who get
a reputation for spinning events gradually
lose the trust of peers and superiors.
- Are you developing a group of seniormanager
friends who know you and
are willing to back your original ideas
with resources?
Developing yourself
- Is your network expanding outside
your division?
What about outside the
company? Have you visited with customers,
vendors, and related organizations?If you have a union, have you ever talked
with its leaders?
- Do you know individuals in your community
who aren't businesspeople?
You can learn more about what you don't
know from them than from people just
like you.
- Do you attend seminars or expand
your general knowledge beyond your
immediate business?
- Are you involved with the community
in some way?
You can develop many
leadership skills by working with an outside
organization.
Living a balanced life
- Are you there for your family?
Managing
can be lonely-support of family can
be invaluable.
- Have you cultivated a relationship
with someone-spouse, close friend,
mentor-who tells you the truths you
don't want to hear?
The higher you rise
in your organization, the more your colleagues
will tell you what they think you
want to hear.
If leaders need a decade
to develop and need to
take the helm with a
decade of service still
ahead of them, they
need to be identified by
the time they are 30.
As high-potentials move through this series
of increasingly complex assignments,
performance evaluation is critical. They must
be held accountable and learn how to deliver,
but they must not be abused by arbitrarily
imposed goals. When young managers stumble,
they should be mentored by talented senior
managers. This mentoring is part of the senior
manager's path to further growth as well.
Senior managers who are overseeing the development
of talented junior managers should
pay special attention to planning, budgeting,
performance evaluation, and compensation-
and to how these different processes are
linked. When managed well, planning and
budgeting present an endless series of development
opportunities: learning how to present
deliverable plans so that they are not arbitrarily
raised to meet some corporate aspiration;
learning how to ratchet up growth while
still delivering current performance; learning
how to present new ideas in such a way that
they are not underfunded. These challenges involve,
on the one hand, being held accountable
for deliverables and, on the other, being given
space to nurture new activities.
Earning and learning require different approaches
to evaluation and compensation.
Both entail accountability, but one set of
targets and measures is pretty clear, while the
other is often more ambiguous. Rewards need
to reflect each in a way that is understandable.
An individual might be promoted for
success in building an operation over a number
of years, for instance, but at the same
time be denied a bonus based on a formula
related to short-term earnings.
Oftentimes, the inside-outsiders appear to
present a special challenge. They seem like
mavericks to the extent that they do see outside
the box. What this comes down to is that
most people think some of their ideas are really
weird. Indeed, these unusual ideas may
not be sound until they're worked through.
Inside-outsiders need encouragement, as well
as protection from old-timers who might be
inclined to teach them a lesson. That is the
job of the mentor.
The critical moment is when the young
high-potential shows up with something new
that just might be important. That is when
the investment of a mentor's time is most important.
It may take numerous meetings and
a long walk or two to help the high-potential
think through what it means to develop an
idea in the context of the company. More
often than not, the mentor will be at least as
skeptical as the old-timer. The trick is to give
the young manager the time and leeway
to turn a new idea into a great business without
giving him the rope to hang himself. The
mentor must make sure resources are adequate
but not excessive, dole them out stage
by stage, and then wait and see. The mentor,
in other words, is a kind of venture capitalist,
teaching potential leaders how to make
new ideas work.
It takes world-class quality and cost control for
any company to stay in the game. It takes fastto-
market innovation to sustain industry leadership.
Those dual (and dueling) priorities
have put great pressure on the men and
women at the top. They must drive efficient
operations and creative change at the same
time, even though from a management perspective
those tasks are nearly contradictory.
For both the company leadership and
those who seek to become leaders, that
means balancing the need to meet shortterm
expectations with the need to invest
over the long term in the development of the
organization's people. For management, development
involves giving potential leaders
jobs with increasing responsibility. Helping
them maintain their unique perspective
takes hours of mentoring; protecting them
from the consequences of their mistakes
requires careful intervention. Those who
want to be chosen as leaders must build a
track record of delivering in the short term
while building for the long term. Both challenges
are tough, but both must be met if we
are to restore our companies to long-term
competitive health.
Further Reading
ARTICLES
Changing Leaders: The Board's Role in
CEO Succession
by Jay W. Lorsch and Rakesh Khurana
Harvard Business Review
May 1999
Product no. 99308
A company's board of directors can play an
active role in cultivating inside-outsider
candidates for the CEO role. How? Establish
a management-development program focusing
on the top three managerial tiers.
Through this program, track candidates' assignments,
identify their development
needs, and define career paths preparing
them for higher responsibility. Four years
before the current CEO's expected departure,
review and challenge his or her plans for
the process throughout that period, with the
goal of developing several strong candidates-
not just the one the current chief favors. And
get to know the candidates: Ask them to
make presentations at board meetings and
assess how they relate to peers.
Ending the CEO Succession Crisis
by Ram Charan
Harvard Business Review
February 2005
Product no. 8851
Long-term leadership development is essential
to cultivating inside-outsider CEO candidates.
To bolster your firm's development program,
spot promising candidates early, then nurture
them with the right on-the-job experiences.
Move candidates through positions requiring
responsibility for steadily larger, more complex
P&L centers. If your company's not configured
to provide such opportunities, create jobs-
large projects, small internal organizations-
that exercise a candidate's P&L muscle. One
large company identified the head of its smallest
division as the next CEO. Though brilliant
and articulate, he had no experience running
big businesses. The board created a deputy
position in its largest division for him and
made the current division head his coach-
granting the coach a bonus based on his
protégé's success.
How Leaders Create and Use Networks
by Herminia Ibarra and Mark Hunter
Harvard Business Review
January 2007
Product no. 1727
Leaders who aspire to a CEO position need
varied networks. Ibarra and Hunter detail
three main types: Operational networking is
geared toward cultivating stronger relationships
with colleagues who will help you get
tasks done. Personal networking engages
kindred spirits from outside an organization
in an individual's efforts to learn and find
opportunities for personal advancement.
Perhaps most important for the insideoutside
leader is strategic networking to
develop relationships with people who can
help uncover and capitalize on new opportunities
for the company. When choosing an
employer, look for companies that teach
strategic networking skills as part of their
leadership development programs.