Ready for Prime Time?

You might go through succession planning exercises, segmenting your talent into “ready now” or “wait 1-3 years,” etc. I’d like to provoke you to think about the “what if,” when a leadership position opens and the people in the succession plan are not immediately ready to take the helm. At first blush, the obvious solution is to go outside for leadership talent. That’s the path in over 70% of positions filled. If only it were so simple!

Look Before you Leap
Going outside involves a search, which can take six months to complete, at a cost of $100K. The newly hired candidate generally comes in at a salary that is 20% higher than what is typical of promoting internally. If the newly hired executive is male, and the internal candidate is female, you have a potential gender equity issue on hand.

Add the time it takes to get the newly hired executive up to speed and making the anticipated impact. A study by Egon Zehnder reported that 57% of new leaders felt they have very little impact before six months on the job; for 20%, it might take up to 9 months to make a significant contribution. And, on the way to creating an impact, the new executive needs to develop a sufficient understanding of the culture, peers, subordinates and the relationship with their superior to set themselves up for long-term success.

The risk of a failed executive hire from the outside is 50% in the first 18 months. It is far greater if the external hire is actually being promoted into this role, i.e., they do not have experience with this level of seniority before. 

The hard costs associated with a failure include the initial search and a second search, comp and benefits for the time on the job and a severance package… all told, about 3 times salary. There are soft costs worth considering. Did this hire result in talent leaving the organization? Did the exec’s style lose business? What about management time involved in two searches, due diligence in a decision to terminate, legal costs, etc.? It’s easy for the soft costs of a failed hire to reach 10 times salary. So, if you are bringing in an executive at a salary of $300K, it is even money that things won’t work out and that this adventure can cost you up to $3M.

How about promoting the internal candidate who is not considered ready? There is no search and its associated costs, unless you run one simultaneously to considering internal choices. The internal promotion carries less risk from cultural misalignment, because there already is familiarity with your formal and informal processes. The familiarity with the customer base, the industry and other stakeholders are major advantages that the internal candidate has. And in an era of full employment, your competitors are interviewing those in your succession plan for equivalent positions to the one you have open!

Consider the Time to Impact
It seems to me that the comparison between the unknown executive from the outside and the not-quite-ready internal candidate misses a key component. Yes, your current employee may not be ready now, but how will they do a year from now, when you can expect the outside exec is beginning to make an impact? If you coached your inside option up, where might they be in six, nine or twelve months? If you have reason to believe they can be making a similar contribution, shouldn’t you consider a lower risk option?

Here is a graphic look at the options. 

The blue line represents an inexperienced internal promotion. The employee could be promoted and coached or coached prior to getting the promotion. In either case, they have a gradual improvement in impact, until they are meeting expectations around Month 8. Once they have reached an acceptable level of managerial competence, they can leverage their organizational knowledge and continue to grow.

The red lines show potential paths of an external hire. For six months, there is no impact, as you have a vacant position until they are hired. Once in, there is the learning curve per Egon Zehnder. At this point, I suggest three scenarios. The lower dotted line, in about 50% of cases, has the external leader failing, either leaving the company or just limping along. Two other scenarios are more promising, with the external hire matching or surpassing the internally promoted leader. 
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The key takeaway from these scenarios is that an internal candidate is a better short-term choice and, as often as not, superior in the long run as well. A couple other variables: 

• Hiring outside may lead your valued internal resource who is deemed not ready to seek opportunities elsewhere. 
• An internal promotion can be a valuable reinforcement of organizational culture, demonstrating that your way of doing things leads to success. Hiring from the outside leaves junior team members wondering if there is anything they can do to get ahead.

When Buying Beats Building
I have stated my bias for home-grown solutions. There are times when an external hire is absolutely the right thing to do. Here are few of those situations, and the actions you might take:

• When you have no internal candidates who can be projected to perform adequately, even after a year or more of coaching. If something is too big a stretch, don’t contemplate it. But alarms should be going off to develop your bench strength. Don’t just name somebody as a potential successor. Put programs in place to prepare them for assuming the role.
• When you face a situation in which problems are better handled by a fresh perspective, or where the diversity that comes from an outside voice is worth the risk of failure. Hire somebody from the outside who can provide a different direction. But be sure to marry that selection with legacy knowledge, so new strategies can be activated smoothly.
• When there is a specific candidate outside of the organization who is known, familiar with current leaders, has experience in the vacant role and can be expected to make an accelerated impact. A new CEO will often bring in people they have worked with in the past. This may be the best way to get a new vision realized. But be careful not to overwhelm the culture with a Mafia from another company. A C-suite full of Googlers won’t replicate Google, but it might destroy your company’s own identity.
• It might be consistent with your culture to use external benchmarking for product quality, internal processes and talent selection.  If your business units have freedom to buy from an outside vendor instead of from your own manufacturing, there is consistency with testing the market for talent. Even if there is a successor identified internally, the way the organization works might demand the due diligence of an external search. If an external candidate wins out, be true to your values and hire them.

A Closing Controversy
If you ask a team member to fill a leadership role for months and you are considering them for the position permanently, give them an interim title. 

Even if you are conducting an external search, the interim title acknowledges your employee is under consideration for the position. It reflects the level of work they are doing. If they don’t get the big job, they revert to their former title, and it’s clear that you believe somebody else is more qualified. 

Meanwhile, they will have the interim title on their resume, which makes them more marketable, inside or out. The value of that enhanced external marketability does not add to the risk of flight. Rather, it is an expression of the trust and value that you place in your employee, which can enhance retention.