Succession Planning – Challenges in Family Businesses

Business Excellence Series Title – 10

(Succession Planning – 4/4)

While succession planning is one of the major challenges for most organizations, but it becomes even more critical in case of family businesses. In all family run businesses, when baton is to be transferred to next generation, the complexity becomes multifold due to various internal family issues as well as organization dynamics, that need to be addressed in amiable manner for a smooth transition.

Organizations groom successors for key roles, to ensure continuity and avoid any disruption in smooth functioning during transitions. Succession planning is not only extremely critical for sustainability and success of organizations, it is also immensely complex, with high chances of going wrong. There are innumerable cases globally, where organizations have successfully implemented it for multiple successions, but at the same time there are cases where inappropriate succession planning caused significant damage to business as well as reputation. Read my earlier article on succession planning https://www.unleashpotential.in/post/succession-planning-benchmarking-with-the-best

In one of the organizations where I was leading Human Resource function, we implemented the succession planning process for senior leadership team in very effective manner, but not without innumerable hurdles. By collectively overcoming those challenges, we were able to achieve remarkable outcomes. The external hiring of leaders decreased from 80% to less than 35% in 3 years, leading to increased motivation of employees witnessing immense internal growth opportunities, reduced transition time during change of incumbent in leadership roles and significant cost savings. Read my earlier article elaborating on the process followed by us in that organization https://www.unleashpotential.in/post/succession-planning-model-for-success

Although Succession Planning is a well-known intervention with well understood importance, but still scarcely implemented because of complex and unique threats emerging during the process, that are more related to “How” rather than “What” and may significantly vary from organization to organization. Read my article sharing insights on softer aspects that were handled to achieve stated objectives, by agile interventions and timely maneuvering

https://www.unleashpotential.in/post/succession-planning-critical-softer-aspects

In all family run businesses, where the baton is to be transferred to next generation family person, the complexity of succession further gets enhanced, and need to be planned and handled in much more sensitive manner. Studies reveal that less than 50% businesses successfully get transitioned to next generation and slightly over 10% are able to go to third generation. There could be varied reasons for this, which can be largely addressed through systematic planning and execution of succession.

While there are numerous issues, which need to be addressed much in advance for a successful transition, some of the key ones’ based on my personal experience while implementing it in some organizations, have been discussed in this blog –

When to start Succession Planning process?

There is a stage when promoter or the current owner is successfully leading the organization with enviable profitability and growth, beating the competition year after year. In this scenario, he doesn’t realize the need for initiating succession process, as he feels himself fit and fine, capable of continuing leading the organization for long. In most cases, it so happens that when the trigger happens in his mind, it is quite late in time. As we know, succession is not an event, it’s a journey, which needs to be carried out over a period of 3 to 5 years.

Do it now...Sometimes later becomes never

In fact, when everything is going fine for some time, it is time to initiate succession process, not only at promoter level but also at all other key positions in the organization. That process should go on, irrespective of position falling vacant or not. This must be seen as an organizational priority and the expense incurred as business investment, for long term sustainability of the enterprise.

Successor from family or non-family

There is a popular dilemma that whether it is better to have a successor from the family or from outside? It is felt that family successor will be perceived by professionals as a practice of promoting nepotism, and their commitment may go down. However, several studies have concluded on the contrary to this conventional view.

The research shows that non-family employees working in a family enterprise, prefer family successors over outside professional, as they are used to family-like culture experienced in the organization. They feel uncomfortable of change in culture that will come if an external professional takes over the reins.

It is therefore reasonably clear that there is absolutely no harm in having a family successor, which also is an aim of the business owner and natural expectation of the next generation. However, there are few key challenges which owner must address judiciously for a successful transition –

1. Identification of right person(s) as successor form the family from among more than one claimant

2. Ensure proactive resolution of disputes within the family, if any

3. Systematic grooming of successor over time in a planned manner

The first two challenges need to be addressed by the owner himself, as this involves good understanding and handling of internal family dynamics. In more complex situations, external help of experts can also be obtained for using more structured approach to amicably handle the issues.

In next part of this blog, we will be deliberating on seven key aspects involved in addressing the third challenge, related to systematic grooming and positioning of next generation of family leadership, for achieving larger acceptability in the organization and smooth transitioning, picked up from the learnings gathered in implementation of succession planning in family enterprises, during my career.

Succession is a process not event

Succession must be seen as a process, rather than a one-off event of handing over the reins and announcing it to all employees as just another communication. In view of this the promoter family need to start this journey long before the time when the heirs step up to their new roles. Also, this transition needs to be planned as a multi-stage process that happens over years preferably 3 to 5 years.

One of the critical things for succession planning is that it should be gradual and thoughtful with lot of information, knowledge and perspective shared, so that it becomes a non-event when it happens – Anne M Melcahy

Planning career of potential successor

The process of career planning for potential successor in the family should start at an early stage of life. The schools they are sent and qualifications they acquire needs to be aligned with the pre-determined requirements of the successor. At the same time, these should not be thrusted on the young child, but explained to him/her with a larger picture, to ensure their acceptability.

Family businesses are stronger due to complementary skills of the members – Bernard Kliska

It would be of great value in long run, if certain complementary skills (to current owner) are made part of their development plan. It helps because the current owner’s skills are probably well ingrained in the organization over time. For example, if the owner is expert in Sales or Finance, he is able to strengthen that stream so much over his long tenure that starts running on its own, with continued efficiency. So, if the child is groomed in some other skill like Operations or Supply Chain, then he can bring in further value-add to the organization as he takes over.

Get outside experience

To smoothly manage succession, the next generation should be prepared not just through the right education and development but often through gaining their early experience elsewhere.

In one of the organizations, where we planned transition to next generation, after focused deliberation with the promoter and as part of overall succession plan, the successor was made to work in US with an organization in same industry. He was placed as EA to CEO after completing his studies, before bringing him in an existing open role in our organization.

When the successor works in other organization, gain professional experience, make certain meaningful contributions before joining the family business, he arrives as a manager in his own right, with skills and experience, and is not viewed as a ‘kid with silver spoon in his mouth’.

This prior external experience not only widened his perspective and provided increased confidence, but also helped in generating respect in the organization’s team, as he was now viewed as experienced professional rather than a novice taking over as their boss.

Hire into existing job

It is always possible to create a position for the family successor and design new structure around him/her for assigning independent function/ business unit responsibility. But it has been seen that this approach creates avoidable disruptions in organizational functioning, which may lead to certain dis-satisfaction among impacted employees.

It is however better that when the next generation is brought in the organization after acquiring required qualification and external experience, they are initially hired into existing roles, without disrupting the organization structure or reporting relationships. This is much smoother way of implanting the successor in a senior role and then expand the role in systematic manner.

In above mentioned transition, after working for 18 months in overseas organization, the successor was brought into an open position of Business head of one vertical where he worked for around one year and then moved to another open position at that time, of Head - Strategic planning group. These placements created remarkable acceptability of the next generation in the organization.

Start with Mentors not Parents

Any family successor taking up a senior role, should be assigned a Mentor. Normally the promoter/ owner guides the successor in his own way, sharing his experiences and his views about different leaders in the organization. This hinders independent understanding and development of family successor, as his mind-set gets biased with historical inputs.

Several case studies have shown that it turns out to be more effective, if during initial period of the successor taking up a role, an internal respected professional leader in the organization is assigned as a Mentor. While, the mentor helps, guides, hand-holds and grooms the successor on-the-job, this approach also helps in better acceptability of the decisions being taken by the successor, among team members, as they seem to be coming under aegis of the mentor. Slowly the mentor can withdraw and successor can start driving as he acquires more confidence and acceptability.

Parents connect with the foundations

While on work front the professional mentor is a better idea but parents also have an important role to play in effective induction of the successor into the organization. They need to provide the next generation an in-depth understanding of the historical, cultural and strategic foundations of the business. It’s very important for the successor to be aware of the firm’s underlying principles that hold the enterprise together, to ensure continuity of cultural ethos and sustainability of value system.

In most of the firms we worked on this transition, parents consciously focused on transferring insights and values to the successor, for continuing smooth functioning and sustainability.

Let go

It has been observed that one of the very common reason for failure of next generation effectively taking over reins is reluctance of current owner to leave the steering wheel. Even if they take courage to leave it, back-seat driving provides them relief as they lack confidence in younger one to take critical decisions. This not only demotivates the successor but also creates confusion among larger team, as they do not know who will be taking the final decision.

It is important to let-go the control and watch from distance as the successor makes his own decisions and embarks on a journey of his own making. While one must avoid interfering every now and then, one may provide advise on strategic issues, only to leave it to successor to decide.

By clearly communicating family succession intentions, initiating a visible succession planning process in advance, and proving capability of next generation leaders, family firms can achieve effective buy-in from their nonfamily leadership team and employees. Not only will this make for a smooth leadership transition, but create confidence across organization in terms of long-term sustainability, creating a more productive and satisfied workforce that propels the firm for years to come.

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