Private equity is more competitive than ever, and investment teams are becoming increasingly creative in the levers they will pull to achieve outsized growth in their portfolio. It’s therefore surprising that succession planning is so frequently overlooked as a value creation lever. Done well, it’s the glue that holds everything else together, while providing the depth and quality of talent, and enabling agility, and responsiveness that businesses need to scale.
M&A. Digitisation. Internationalisation. Operational effectiveness. There are a whole host of ways for private equity teams to drive value in a high-growth business. Yet none of these strategies will be as effective as they could be – if at all - if the leadership team isn’t right.
We speak a lot at Drax about the tendency of investment teams and high-growth businesses to delay conversations about leadership change, and the damaging impact this can have on value creation. Our 2021 Leadership Insights Report found that best-performing businesses are more likely to make Leadership change, make more change, and make change sooner.
And the cost of unplanned change can be high. Every month’s delay in a CEO change leads to, on average, an additional 3 weeks on the investment cycle. Yet there is a significant difference between planned and unplanned change and the impact it drives.
So what if leadership change had already been mapped out, with future leaders nurtured and developed within an internal structure, and ready to take the reins when the time comes? So, the key question isn’t what, who, or how change will happen, but rather just a case of when? That’s the real value of succession planning.
Planning for rapid change
Succession planning is important to any organisation, particularly for those looking to grow at scale. In high-growth businesses, the needs of every single area of the business, from marketing to IT to operations, can change drastically in just a six-month or 12-month period. In this context, the sustainability of leadership in the business, and its ability to support and deliver the needs of the business is a key concern.
Leadership demands can be further complicated by M&A activity, which at once increases the size and capabilities of a business, while also bringing in a wealth of new talent. This kind of change can only be managed, and the opportunities maximized, if companies proactively seek out high-potential individuals, and have visibility of their leadership pipeline so that the best people can move into key roles - not just at the C-Suite but beyond and into the business - as and when needed.
Not to mention, companies also need to prepare for the potential loss of a key executive, particularly a CEO, at short notice – whatever the reason. There have been various cases where a company CEO has had to move on with little warning and, with no succession plan in place, the business has been left floundering, facing a leadership vacuum, and with growth plans and vision on hold.
A sign of a well-run business
Aside from these more practical and risk management considerations, prioritising succession planning also brings valuable strategic advantages.
Just as investors will look at the quality of earnings, low customer concentration and recurring revenue as signs of a low-risk high potential business, so too are they increasingly concerned with the quality, concentration, and sustainability of leadership within an organisation.
For companies looking for private equity investment, it can be a strong selling point, sending a clear message around the depth of leadership talent within a business, the culture of people and development, as well as displaying the reality of backing a business for the longer term.
It also has substantial benefits for employee engagement and retention, opening up career progression and development opportunities, and ensuring employees feel valued and motivated to succeed. It ensures that the most qualified individuals are in roles where they can excel and ensures the healthy movement of skills and perspectives around an organisation – both horizontally and vertically. Delayed leadership decision-making not only means that you lose opportunities; it also means you lose good people.
A value-creation lever
Succession planning done well is a key value creation lever that is frequently overlooked. As well as ensuring business continuity, it is an enabler for business growth, by ensuring that an organisation doesn’t outgrow its leaders, as investment and other value-creation levers drive constant change. There is no such thing as timing with succession planning, it should be happening continuously. And contrary to popular belief, it isn’t about replacing leaders, but maximising the forward value of the leadership capital within the business. Doing so not only safeguards a company’s future but also ensures it stays one step ahead.
Next week we will follow up on how to make a success out of succession planning when Samuel Robberts Chief product officer of Leadership Dynamics.io offers his insights on Data led succession planning
