What Happens When Leaders Leave? The Cost of Poor Succession Planning

A leader's departure marks a pivotal moment of change for any organization. Leaders play a crucial role in shaping a company's culture and establishing essential processes. When they leave, organizations may experience several challenges, disruptions, cultural shifts, potential financial setbacks, turnovers, and even losses in business performance. So, how do companies ensure stability and sustainability when their top leaders prepare to move on? The key is effective leadership succession planning.

Succession planning is the systematic process of identifying and honing potential internal talent for key organizational leadership positions to ensure business continuity. It is a strategic plan for businesses to prevent skill gaps and operational failures in the face of planned or unexpected departures due to retirement, career change, or other transitions. By investing in nurturing potential successors, organizations can ensure their strategic vision and culture are passed on to future leaders.

Effective succession planning in organizations allows the timely transfer of institutional knowledge, enables new leaders to step into their roles, protects companies from legal risks, and ensures productivity and employee engagement during the transition. Poor succession planning, on the other hand, can slow down decision-making, cause innovation to suffer, and destabilize an organization's internal functions. Furthermore, a lack of clarity in transitions can strain client, investor, and partner relationships, diminishing their confidence in a company's abilities.

This article explores the cost of poor succession planning and discusses strategies to address it.

Cost of Poor Succession Planning

Here are the top 5 associated risks of not having a structured succession plan:

1. Loss of institutional knowledge and insights

Long-term employees who leave without a successor may take the valuable knowledge and expertise they've gained during their tenure at the company. This can result in losing institutional insights, a deep understanding of company dynamics, and stakeholder relationships that could otherwise be leveraged to yield desired business outcomes.

    2. Legal and financial impact of leadership turnover

When employees leave/retire from a key leadership role in an organization, it may open the business to unavoidable legal, financial, and compliance risks. It can create an environment of uncertainty and disruption, which may affect a company's relationships with investors/third-party partners, lead to the suspension of key projects, and ultimately result in revenue loss and compliance issues.

    3. Organizational stability and leadership gaps

Without effective leadership succession planning, organizations risk leaving mission-critical positions vacant. They might hastily fill the role without properly nurturing the successor, which can further complicate the company's decision-making processes and lead to operational stability. The impact of leadership vacancies can bring down stakeholder confidence and market value, threatening business continuity.

    4. Employee morale and leadership changes

Ineffective succession planning makes promotion decisions unpredictable, conveying that the company lacks strategic vision. This can affect employee morale and drive distrust in the organization’s commitment to developing its workforce. A lack of leadership succession planning can often lead to turnover, as high-performing employees might disengage and seek career advancement opportunities elsewhere. 

    5. Substantial recruitment costs

The recruitment, onboarding, and training of outside hires may cost companies significantly more than promoting an internal candidate. Companies may also offer higher compensation packages for external hires, as multiple firms may compete for the same talent.

Also Read: Did You Know Succession Planning Can Shape Future Leaders?

Action Plan for Effective Leadership Succession Planning

Here is what an effective leadership succession planning strategy includes:

1. Identifying critical positions: Companies should identify key positions that, if left vacant, might threaten the business’s operational efficiency and sustainability. They may then identify the capabilities and competencies each position demands and assess potential candidates against them.

2. Deciding on internal or external hire: Recruiting internal vs. external leaders by effectively preparing potential candidates for leadership roles from within can help organizations significantly cut down recruitment costs. However, when skill gaps cannot be closed even by training and development of internal talent, organizations may consider an outside hire. 

3. Evaluating potential candidates: Organizations should closely evaluate employees whose existing skills could be honed and developed to fill vacant positions within the required time frame. However, this means ensuring that a likely successor is a leadership and cultural fit. Hiring managers and leaders may conduct assessments through project trials, case studies, and interviews before moving forward.

4. Investing in development: Companies should prepare for imminent leadership vacancies by incorporating training, development, and mentorship programs in employees’ learning trajectories. Employees designated to leave/retire should be encouraged to share corporate knowledge and expertise to ensure business continuity.

5. Measuring effectiveness: Company leaders can monitor the effectiveness of succession plans by determining if the company has a pipeline of diverse leaders, how quickly key positions are getting filled, and whether employees transitioning into new positions are performing as expected. Depending on the pace of growth, companies may conduct succession planning sessions yearly or in five-year increments to ensure a steady growth trajectory.

Businesses that fail at leadership succession planning often do so because they fail to prioritize it or lack a structured process for nurturing and developing talent to assume key leadership roles.

Companies, especially their executives and leaders, must proactively plan for leadership shifts by investing in talent pipeline development where potential successors are nurtured and developed, given access to the board, and allowed to showcase their leadership fit.

Also Read: Succession Planning and Employee Development: Creating Pathways for Future Leaders in India

Building Future Leaders: The Strategic Imperative of Succession Planning