Tag Archives: succession planning

Agency Succession Plans: Do It Now!

Bill was a 40-something-year-old son in his 70-something-year-old father’s agency. I asked about the agency’s succession plan. He said, “Mike, I’m already running the agency by myself. When Dad dies, nothing changes.” He assumed too much…

See also: 3 Ways to Boost Agency Productivity  

With a smile and good intentions, I hit him with reality. I asked simply, “What if you die first?” His stunned look told me that he had never considered that possibility. Here’s reality – it might be easy for Bill to succeed his father. It will not be easy for most fathers to succeed a son or daughter.

Agents manage risk – it’s what they do. But are you managing your own risks? Really?

When an owner dies, becomes disabled, disappears or loses the ability to lead effectively, the best insurance can be a succession plan. A well-thought-out process, planned and reality-checked in advance is mission critical, as these stories show:

  • David was a very close friend whom I hadn’t visited with in years. We spoke by phone for an hour on Wednesday Aug. 3, 1994, and committed to meeting for lunch on Monday of the following week. David was murdered that Friday while hiking in a national forest in Arkansas. What were the odds?
  • The best producer in the agency was assumed to be the most “natural” person to lead in the future. Unfortunately, great producers are often not good leaders or managers, and their best value for the agency is almost always in production and not management.
  • Often a #2 person is great at #2 but not worth a whit on the front lines of #1. But once they “move on up” it may be impossible to move them out.
  • Absent formal succession plans implemented immediately, an owner’s death will invite a swarm of competitors ready, willing and able to consume in months the client base and talent it took you decades to grow!

See also: ‘Agency 2020’: Can You Get There? (Part 1)  

Develop and implement, NOW, a succession plan for death and every other major contingency in your organization. I said NOW!

The Aging Workforce and Succession Plans

In 1969, Neil Armstrong became the first man to set foot on the moon, marking the culmination of a $24 billion NASA space program. Ten years later, NASA sheepishly admitted they could not return to the moon even if they wanted to — they couldn’t remember how.

This is a perfect example of what is referred to as the “knowledge gap”: the loss of critical information when employees leave their place of employment. In the case of NASA, all the key people involved in the original Apollo 11 project had retired…and no one thought to jot down what they knew. To make matters worse, blueprints for Saturn V, the only rocket powerful enough to travel to the moon, were lost.

Even though this NASA fumble took place 30 years ago, the exact scenario is being played out in spades as Baby Boomers (those individuals born between 1946 and 1964) are reaching retirement age. Most employers have made no effort to capture the Boomers’ knowledge before they eventually leave. In the next 20 years, 76 million Boomers will sing the Johnny Paycheck song as they walk out the door, taking with them an entire generation’s worth of knowledge that can never be replaced. There is an inconvenient truth in the potential calamity, and most companies aren’t ready for the aftermath.

Boomers make up more than one third of the nation’s work force. They fill many of its most skilled and senior jobs. Thanks to their near-workaholic habits, they are among the most aggressive, creative and demanding workers in the market today. Economists predict their exit will cause a great, sucking hole in the workplace universe.

Companies need to bear in mind that the coming retirement years are going to be larger than at any other time in U.S. history. With 76 million Boomers leaving the workforce and only 46 million Generation Xers (those born between 1965 and 1980) available to take the newly vacant roles, there will be a deficit of 30 million workers. So while the Millennials (also known as Generation Y — those born between 1981 and 1995) number approximately 100 million, the oldest of them are still too young and inexperienced to step into leadership roles.

A study earlier this decade by the Bureau of Labor Statistics reported that more than 17% of Boomers holding executive and managerial positions are expected to leave their careers by 2010.

While some companies have begun scrambling to hire trainees, and close the potential knowledge gap created by the Boomer exodus, most companies haven’t even taken notice, according to Elizabeth Kearney, founder and president of Kearney & Associates, a nationwide alliance of experts who specialize in this trend.

In fact, according to the Institute for Corporate Productivity (i4cp), only 29% of responding organizations report that they incorporate retirement forecasts into their knowledge transfer practices. Furthermore, i4cp found that only a third add “skills gap analysis” into those forecasts; less than half say they train their managers to identify critical skills; only 23% are educated in critical skills transfer; and most companies admit they do not formally measure the effectiveness of their knowledge transfer practices.

Cornerstone OnDemand has released a whitepaper finding that most organizations, particularly larger ones, are not ready for the pending talent shortage caused by the looming retirement of Boomers. The paper, titled, “Managing Talent in the Face of Workforce Retirement,” summarizes key findings of Knowledge Infusion’s “2010 Talent Readiness Assessment,” which indicates, among other things that:

  • Organizations with more than 2,500 employees indicated that approximately one in five workers are over the age of 55;
  • More than 50% of respondents said the retiring workforce will cause a knowledge/skill gap; and yet,
  • Less than 30% of organizations that responded had a knowledge retention plan in place.

David DeLong, author of the book Lost Knowledge: Confronting the Threat of an Aging Workforce, recently pointed out that there are direct and indirect costs associated with lost knowledge.

Direct costs occur through the loss of workers with specific knowledge through retirement and attrition. When these experts are no longer around, it accentuates the indirect costs of knowledge loss: poor documentation and storage.

A holistic approach is necessary to deal with an aging workforce and knowledge retention problems, according to DeLong. The approach combines effective knowledge transfer practices, knowledge recovery initiatives, strong knowledge management technologies and finally, more effective HR processes and practices to deal with the problem on a more systemic level.

Here are three things DeLong recommends companies should be doing to deal with aging workforce problems:

  • Harvest critical information now and make it available at point-of-need. Companies should begin by identifying where they are most at risk from the loss of knowledge and experience. This involves, in part, establishing performance management and career development processes that identify employees with the most critical knowledge and expertise. For example, to sustain business after the 9/11 attacks, Delta Air Lines was forced to make workforce cuts to remain competitive. This meant that Delta had less than two months to identify which of the 11,000 laid-off employees had jobs for which no backups or replacements had been trained, and then capture that knowledge before it walked out the door. Supervisors worked with a team from Delta’s learning services unit to narrow the list down to those veterans whose departure would represent a critical job loss. Once these outstanding performers were identified, they were interviewed about their roles at the company. This way, Delta retained as much critical knowledge as possible on very short notice.
  • Use real-time collaboration tools to enable workers to interact with colleagues. As collaboration and knowledge management have grown, relevant technologies and tools have become increasingly sophisticated. Things like workspace portals are revolutionizing knowledge management and collaboration solutions by giving workers access to enterprise data and applications, productivity and virtual collaboration tools, and documented knowledge, all of it personalized.
  • Use advanced e-learning techniques. Performance simulation gives employees the opportunity to practice, in real time, the key skills and competencies they must acquire to address knowledge drain.
  • Employ better workforce planning and targeted knowledge retention initiatives to address the brain drain that now threatens entire industries.

“Companies need to proactively assess their organizations and determine a plan of action before this threat becomes a reality,” said Adam Miller, president and CEO, Cornerstone OnDemand. “Understanding the overall goals of the organization and which employees are key to achieving these goals including their role, skills and level within the company is important to implementing a retention plan.”

Not all employers are ignoring the inevitable. The i4cp study found that there are a number of up-and-coming practices in use or under consideration. “Communities of practice” are utilized by a third of all responding companies to transfer knowledge, and the use of Webcasts and services such as “Lunch and Learn” and “SharePoint” are on the rise.

Harvesting the knowledge is only part of the equation. The captured knowledge must then be reformatted into a usable database with easy access by the employer. It does no good to house the data in a three-ring binder and then place it on a dusty shelf, never to be seen again.

Northrop Grumman has been on the forefront of knowledge management for many years. In 1997, with the Cold War behind them, thousands of NG engineers, who had helped design and maintain the B-2 bomber, were asked to leave the integrated systems sector. In a short period, 12,000 workers filed out the door, leaving only 1,200 from an original staff of 13,000 employees, to help maintain the current fleet of bombers. The 12,000 took with them years of experience and in-depth knowledge about what was the most complex aircraft ever built. Without appropriate measures, this could have been a disaster of epic proportion. Instead, before the exodus, NG formed a “Knowledge Management Team” who identified the top experts and videotaped interviews with them.

To this day, the company uses a variety of tools to retain and transfer knowledge from its engineers — before they retire. The company has implemented document management systems, as well as common work spaces to record how an engineer did her job for future reference. NG also brings together mature and young engineers across the country to exchange information via e-mail or in-person about technical problems.

No company wants to be in the position in which NASA found itself — having to explain why it can’t recreate the single greatest event in modern history. If employers don’t plug the knowledge gap prior to the great Boomer exodus, it’s going to be more than just Houston that has a problem.

Who's Next? CIO Succession Planning

With apologies to Pete Townsend and the Who, the name of one of their iconic albums seems a fitting place to start when it comes to an important question for a CIO: Who’s next?

That question is not a small matter, given the ubiquitous importance of technology in the insurance industry, so it’s all the more curious that most organizations and CIOs give short shrift to succession planning for this critical position. 

In my time as a CIO, I was more concerned about hanging onto the job myself, and the last thing I wanted to do was groom a successor and give my boss any good options for replacing me. However, once I learned to stop looking over my shoulder and to focus on the best interests of the organization, I could think in terms of my own career mortality.

It probably helped that my tenure was during the era of the human capital planning frenzy. That phase turned out to be an insidiously clever way for consulting firms to make big bucks by delivering long-term plans that kept insurance carrier human resources departments busy but drove everybody else crazy with assessments and ratings. But the frenzy did manage to obligate organizations to think about succession planning in a more holistic and enterprise-level manner. On balance this was a good thing, although it did include the painful process of ruthlessly rating the future potential of people and focusing the resources of the organization on the chosen ones. 

As it turns out, the one position that most organizations struggled with as they thought about succession planning was the CIO position. That was true of my own experience. 

There are several reasons for this.    

First, unlike other executive positions, the precise definition of what a CIO does is still a moving target. Yes, the CIO is responsible for overall technology strategy, execution, budget, etc., but that’s not all of it. In today’s rapidly changing technology landscape, many CIOs are expected to be the technology prognosticators, somehow magically peering into their crystal balls to predict the technology future. On the other end of that spectrum, many CIOs are still viewed as the chief “techie” guy, the one everybody looks toward when somebody’s presentation isn’t working at the board meeting. 

The truth, of course, is somewhere in the middle of those two extremes.

Second, like many other executive-level positions, CIOs are more often than not extremely time-constrained and don’t make the time to focus on developing the next levels of IT leadership.  Most CIOs juggle many balls, and, even if they are blessed with a talented team of lieutenants, it’s difficult to carve out the team to focus on the kinds of leadership development that lead to succession planning. 

It may also be that the next level of IT leadership is extremely strong technically but do not have the innate characteristics and skills required to become a CIO. That’s a common Catch-22 for CIOs – the need for high-quality technical expertise at the next level of leadership can almost exclude the kinds of raw executive skill sets that might one day lead to the CIO’s office.       

Third, more borne from self-preservation than anything else, the CIO position has not historically been the most stable of executive positions. One need only look at the average tenures of CIOs compared with other executive positions to understand why some CIOs may be a little reluctant to purposefully groom their replacement. 

After all, once that hand-picked replacement is ready, doesn’t that make the boss expendable? 

CIO succession planning still lags as compared with other executive positions across the industry: The question is, what can be done about the problem? 

First and foremost, the CIO, whether he is on firm organizational footing or just hanging by a thread, must take a professional approach to succession planning that, done well, benefits the company. 

Besides, CIOS owe their direct reports the developmental exercises and opportunities that go with succession planning, because many may aspire to become a CIO one day. 

Finally, CIOs owe it to themselves. For CIOs who aspire to excellence in their role, and who may even aspire to another corner office in the company, succession planning is one of the many things that simply go with the territory.

Reflecting back on my own experiences, I can honestly admit that I had some trepidation about succession planning. It wasn’t something that came naturally, and it did seem to acknowledge some sort of built-in obsolescence – kind of like when the new purchase warranty ran out on something. 

However, I did come to understand the importance of planning, and it provided me the opportunity to work with some very talented IT people who aspired to higher leadership levels. 

I was the one who gained a lot from that, and the benefits are still with me today.

The Great Recession And My Business

For many closely-held and family business owners, 2008 and 2009 was a stressful period. The volatile market followed by the Great Recession often produced

  • a contraction of business revenue;
  • the loss of profitability;
  • the reduction in value of their companies;
  • the aggressive and often not rapid enough implementation of business and personal cost-cutting measures;
  • the layoffs of far more employees than these companies imagined might be necessary;
  • the reduction of personal asset values;
  • the reduction of owner pay and employee pay levels;
  • the liquidating of owner personal assets to capitalize the business;
  • the development of tenuous relations with their banks;
  • a need to reinvent their business offerings in the marketplace; and,
  • the concern about being able to meet their future financial goals.

Plus, the stress of all the previous mentioned events produced the most burdensome time of our business and personal lives. I, in fact, can say there were several occasions in 2009 when I called to reach a business owner client mid-workday to find that I reached them at home while they were nursing a stiff drink. To compound all this, while most baby boomers do not own businesses, most of our clients who own businesses are baby boomers, and the age in relation to retirement, personal savings, and lifestyle spend factors that make retirement a challenge for most baby boomers are often compounded for our business owners.

I had many a conversation with an owner who confided in me that they built their company, and would build its value again, but they were tired. Because the recession induced exhaustion, they felt that they only had the energy to build it one more time. As a result, they wanted to be very proactive and intentional about planning to maximize the business' value and minimize taxes upon their transition out of the business. It is in this regard that the development of a Business Transition Plan is of paramount importance. The development of a Business Transition Plan involves multiple steps:

  1. Identifying the owner's financial and timing objective for the transition out of the business.
  2. Assessing the business and personal resources available to help contribute to the owner's objectives.
  3. Developing and implementing strategies that will contribute to maximizing and protecting the value of the business.
  4. Evaluating the opportunities for ownership transition of the business to third parties.
  5. Evaluating the opportunities for ownership transition of the business to inside parties.
  6. Developing business continuity measures to protect the business and the owner's family from the loss of a key owner or employee.
  7. Developing a post-transition plan for the owner that aligns with their Legacy objectives, including lifestyle objectives, estate planning, philanthropy and family relationship enjoyment.

Let's look at each of these in greater detail.

Identifying the owner's financial and timing objectives for the transition out of the business: For most business owners, the transition out of their business will be the single, most significant, financial event of their life. Identifying when and how much the owner desires is the first step in the planning process.

Assessing the business and personal resources available to help contribute to the owner's objectives: In order to evaluate if the owner will be able to meet his or her financial objectives, we believe we must start by developing a personal financial plan for the owner(s). This plan takes into account the reality that both business value upon transition and personal wealth accumulated during the operation of the business, combined, will together finance the lifestyle of the retiring owner. The more efficiently a person manages their non-business wealth prior to exiting the business, the less pressure it places on the value obtained from the business upon exiting.

Developing and implementing strategies that will contribute to maximizing and protecting the value of the business: In my many discussions with business owners, I often conclude that the owner believes their business is worth more than it really is. One of the most beneficial things a business owner can do to maximize and protect business value is operate in a constant state of planning and operations as if their business is “For Sale.” By evaluating all of your company's planning and operations in alignment with this premise, an owner can proactively manage the investment in their business. These planning and operational strategies often include:

  • Development of non-owner management.
  • Implementation of Buy-Sell Arrangements between owners helps protect owners, and their heirs, from the termination of employment, death, disability, or divorce of an owner. Though not every risk in a business can be insured for, death and disability can and often should have insurance policies implemented to finance the buy-sell.
  • Business Dashboard Metrics of sales and profitability.
  • Task functionality planning within the business.
  • Maintaining sufficient capitalization within the company for growth and banking purposes.
  • Maintaining appropriate amounts of key-person insurance on valuable company personnel to protect the company from the loss of an owner, or key-employee, and the financial burden that can result. Examples of this burden can include loss of revenue, reduction in profitability, cost of hiring a replacement, or default of or risk to credit facilities. In the midst of a crisis, I don't believe it's possible to have too much cash.
  • Formalizing appropriate compensation agreements with executive management, including golden-handcuff incentive compensation plans.
  • Maintaining a certain level of outside audits of the company's financials.
  • Recognizing when family should not be running the business and hiring professional outside management.
  • Consistently reviewing customer contracts to maintain the most favorable terms for your company.
  • Maximizing tax reduction planning opportunities on corporate profit, and at the time of a business ownership transition.

Evaluating the opportunities for ownership transition of the business to third parties: Many businesses are good candidates for a sale to a third party. These third parties often come in the form of a Strategic or Financial Buyer. The Strategic Buyer is often a competitor, or non-competitor that desires to enter your geographic market or industry, and sees your company as a lower cost or more rapid pathway to entry. The Financial Buyer typically comes in the form of a private equity group that owns another company that, when combined with some aspect of your company's offering or value, can acquire or joint venture with your company's offering to multiply the value of both companies within the private equity group's portfolio.

Either of these alternatives can produce an excellent financial transition windfall to a selling business owner, assuming the selling owner's company is clean. When an acquirer performs its due diligence, if it finds that the company hasn't been operationally managing itself in a professional manner as mentioned, hasn't applied consistent accounting principles, doesn't have a deep management bench, or depends upon the owners for ongoing revenue or profitability, the value it will pay in a transaction plummets.

Evaluating the opportunities for ownership transition of the business to inside parties: Whether your transition intentions are to transfer ownership to heirs, key employees, or the employees as a whole through an Employee Stock Ownership Plan (ESOP), assessing the skills and leadership capabilities of your successors is as important as the development of your ownership transition plan.

A successful transition plan requires the implementation of both Leadership Succession Planning and Ownership Transition Planning. One without the other greatly increases the potential for a failed transition. Once both have been designed, it is then important to evaluate what ongoing role the current owners will maintain through the transition, and the timetable of the transition.

Unlike a 3rd party sale, with an internal transition, the owner's gradual departure often helps facilitate the smoothest transition of Leadership Succession, while the owner can ease into retirement with the benefit of continuing to receive compensation during the transition, distributions of profits, implement gifting strategies, receive seller-financed note payments, or benefit from other strategies, thus lightening the burden on the owner's personal financial assets post departure.

Developing business continuity measures to protect the business and the owner's family from the loss of a key owner or employee: Despite the implementation of intentional planning, life can bring surprises. The premature death of an owner or key-employee, a disability or incapacity, the recruitment of a key employee by a competitor, can all derail the good planning, revenue stability, or corporate profitability.

Every good transition plan should address the need for Buy-Sell Agreements to protect owner personal finances, cash out the family of key-employee minority owners, permit the next generation to purchase the company from the previous owner at its current value before it grows further, reap the benefit of any Step-Up in Basis deceased owner's estates receive at the time of death, and benefit from the income and estate tax-free liquidity that properly designed and owned life insurance policies can provide the business and its family owners.

This planning can also present an excellent opportunity to utilize life insurance liquidity to fund the buyout of next generation family heirs who may not desire to stay in the family business, but otherwise the business might not have the funds to initiate these realignments of ownership.

Developing a post-transition plan for the owner that provides for their post exit Income and Wealth Management needs, and aligns with their Legacy objectives, including lifestyle objectives, estate planning, philanthropy and family relationship enjoyment: For many owners, their lifestyle, hobbies, net worth, and self-esteem is wrapped up in the business. The transition out of the business can be a stressful one.

Many of our clients find this transition to be an opportunity to develop a new personal life mission statement, having experienced great success in life, now focusing on what they desire their Legacy to be. This Legacy planning may involve an increased participation in philanthropy, spending more time with family, possibly even stepping into a new “missional” career. This change in life focus is only possible if post retirement Wealth Management provides for ongoing stable income, which we believe is more important in creating financial independence than a client's net worth.

However, the long-term potential threat of inflation, current low interest rates, increasing U.S. Federal debt, deficit spending and stimulus spending can present major obstacles for the retiree to generate sufficient income when developing a “traditional” post-retirement wealth portfolio. It is for this reason that we approach personal financial planning from a “non-traditional” perspective as we evaluate and recommend investment options beyond stocks, bonds, mutual funds and ETFs and also focus on the tax-efficiency of Wealth Management as it is not “how much you make,” as much as it is “how much you keep.”