"Solve the Succession Crisis by Growing Inside-Outside Leaders"

Harvard Business Review, Nov. 2007

Summary & Analysis of Article Written by Joseph Bower

In his article, “Solve the Succession Crises by Growing Inside-Outside Leaders,” Joseph Bower uses General Electric’s situation as an example of smooth succession: the CEO’s ability to perform four seemingly contradictory tasks (a “quadrafecta,” as Bower calls it) greatly aided General Electric’s succession process.

The four key tasks identified by Bower as having helped General Electric’s CEO lead the company to a successful transition are as follows:

1. Produce good short-term performance regardless of how the markets and competitors buffet the company you’ve inherited.
2. Deploy resources so that organizational capabilities improve in the medium term.
3. Align the talents and energies of hundreds of thousands of employees with clear strategic objectives.
4. Develop and modify those objectives over the long-term so that strategy adjusts to the changing business.

While on a smaller scale than General Electric, I may offer some personal examples of a painless succession. Upon moving to Houston in 2004, I purchased an accounting practice in Cypress, TX from an individual who built it up organically. This individual was concerned that her clients would be upset that she was selling to a third party, and she was anxious that there would be some attrition. I, however, selected an experienced and competent CPA to run the Cypress office, and consequently, we’ve had fantastic results. As a matter of fact, we managed to grow the Cypress accounting practice by 100% over four years.

In 2007, my business partner in Dallas and I decided to sell our Dallas accounting practice. We found a competent group of CPAs to purchase the practice, and it was transferred to their firm name. Our former clients were properly serviced and there was very little pushback. We were able to assist with a sound transition whereby the clients felt that we placed them in the hands of likeminded CPAs.

While I have thus far provided positive examples of succession, we must not overlook that poor succession planning can have adverse results. Bower writes about certain shortcuts that, if taken, can be disastrous. For example:

…outsider CEOs who make a quick mark by cutting costs generally fail to succeed in the long run: After two or three 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 the overhead.

In the case of a small business, this could mean the possibility of future bankruptcy.

It is worth noting that Bower’s preferred method of solving the succession crisis is to grow inside-outside leaders. He suggests transferring your business to an insider with an outsider’s perspective. According to Bower, it has been found that “qualified insider leadership correlates with better company performance.” Yet insiders, Bower suggests, do not have the innovation or forward-mindedness than an outsider would have. Thus, the best solution, according to his article, is to blend the two strengths by succeeding your business to an insider who knows the company and the industry well, yet who is not afraid of radical change. Bower councils mentorship as a possible solution.

However you choose to transfer your business, and whomever you choose to transfer it to, Bower points to four skills that a new CEO needs to drive a company forward and produce desired results:

1. Judge where the world and the company’s markets are headed and frame a vision of how the company can re-position itself.
2. Identify and, if needed, recruit talent that can turn this vision into reality.
3. Understand in a deep, substantive way the problems the company faces.
4. Know comprehensively how the company really works. In other words, be plugged into its administrative inheritance and know key players well.

These qualities ought to be carefully considered when selecting the individual (or individuals) to whom you will transfer your business.

In conclusion, companies need time to look inside and ascertain how they will succeed in the future, whether it be to seek an outsider, an insider, or sell the company to employees of potential through employee stock ownership (ESOP). Through careful and thoughtful planning ahead of time, the succession process can be more painless than it at first may seem.

Make sure to check out our previous post: Roadmap to Understanding Succession Planning