Within the next decade—perhaps within the next few years—organizations in nearly every business sector will begin to feel the impact of a phenomenon that is both troubling and inevitable. Baby Boomers, the generation that hatched many of today's current leaders, will exit the workforce, leaving the less populous younger generation to fill the ranks.
In fact, one in five top management positions and nearly one in four middle management positions could be vacant by 2005, according to a recent Development Dimensions International study of succession management practices. At one major U.S. government agency, for example, 60 to 70 percent of executives will be eligible for retirement by 2010.
Unfortunately, the lack of preparedness of tomorrow's leaders compounds the issue. Some 40 percent of organizations rated their approach to leadership development low or very low, according to another ddi study, which surveyed managers, nonmanagers and human resource executives in 52 organizations.
In short, there are too few leaders, and those coming through the pipeline won't be prepared when the time comes for them to step up to the plate. Recruiting leadership talent from outside the company is no longer a viable option for many organizations (see sidebar, page 100). The solution? Succession planning.
There are a variety of benefits that make succession planning—a talent identification system paired with a formal, ongoing program for leadership development—the most effective remedy to the leadership drought.
For starters, it's less risky. Generally, organizations have more and better information about internal candidates than external ones. In addition, organizations that offer learning and growth opportunities have more satisfied employees, thereby increasing retention rates. ddi's most recent leadership forecast study shows that the successful, high-performing organizations—in terms of revenue growth, profitability and market share—are more likely to have high-quality leadership development programs. Finally, succession planning builds "bench strength," or internally developed leaders who foster the preservation and continuity of corporate culture.
Despite the numerous advantages, leadership development programs on average account for only one-fifth of total organizational training budgets. Yet adequate funding is only one factor that influences a program's effectiveness. A sound leadership development strategy is symbolized by many "best practices" that contribute to and characterize its success. These best practices include:
Support from the top. Like most successful organizational best practices, support must come from the top. It is imperative that ceos allot the resources needed to develop leaders, but their involvement shouldn't stop there. They also must champion leadership development within the organization by gaining buy-in from the organization's senior managers. The ceos most committed to the process, it seems, get personally involved.
Jack Welch, General Electric's widely respected ceo, estimates that he spends 50 percent of his time on development activities. He also takes a strong, hands-on interest in GE's management training center, spending time with 1,000 or so managers who go through the center each year.
Alignment with business strategy. One of the most critical factors determining the success of a program is its alignment with business strategy. Unfortunately, few organizations take this long-term approach when implementing development programs.
Organizations hoping to expand into foreign markets commonly find a dearth of strong leaders possessing the competencies necessary for success in the international business realm. And then there are the companies that must become viable players on the Web but lack leaders who combine technical knowledge with strong managerial skills.
One large professional services firm conducted a week-long senior management development conference during which partner-track senior managers were assessed for development needs and received one-on-one mentoring from current partners. The conference focused on "The Challenge of Leadership" by identifying specific challenges as they related to the partners' responsibilities and the firm's long-term strategy.
Identified competencies. Once a business strategy is developed, the next step is to identify the competencies that define the behaviors necessary to carry it out. For example, if the strategy is to expand globally, then leaders must be developed who can be effective in making the expansion possible. This is why competencies should be the foundation of any leadership development program—and why they must be defined across the entire organization.
Gillette recently identified 12 competencies to serve as a global leadership model across the organization and defined a global code of conduct for the company's 2,500 senior leaders. These 12 competencies were also the basis for a four-day training program that was conducted at locations in the United States, Singapore, Europe, Mexico and Latin America. By basing the program on competencies, Gillette was able to craft a development program that can be applied across geographic boundaries.
Use of multiple assessment methodologies. An effective leadership development program should also address competencies relevant to business strategy. One of the most accurate ways to diagnose development needs is through multiple assessment methodologies, including simulations, written tests and exercises, 360-degree feedback and interviews.
Assessment also provides a risk-free way to predict an individual's performance in future leadership positions, while providing personal insight into his or her current strengths and development needs—the basis of an effective personal development plan. In addition, assessment can indicate the collective level and distribution of leadership talent across an organization and pinpoint areas where training should be targeted.
But one of the primary functions of assessment in a succession management program is its inherent ability to identify leadership candidates. Some companies have begun to use assessments to help accelerate the development of high-potential managers as well as to support the accuracy of the executive selection decisions.
Alignment with all HR systems. Ideally, leadership development programs should be linked to all HR systems, including selection and compensation. But perhaps the most important link is between leadership development and performance management.
When these two systems are linked, both the organization and the individual benefit, according to ddi's Succession Management Practices Survey. The organization can identify and develop the best candidates, plan for the strategic development of internal talent, and plan career paths for high-potential individuals. Candidates, meanwhile, can become actively involved in their own career development by outlining specific short-, intermediate- and long-term career goals and by tailoring a personal development plan that meets their particular needs. For performance management and leadership development to work effectively together, performance appraisals must simultaneously address two key areas: performance in the current job and development for future roles.
By adopting this approach, a major soft drink manufacturer globally deployed a performance management system that enhances current organizational performance, which, at the same time, serves to develop future leaders.
Effective development. What's the best way to develop future leaders? Put simply: It depends on the individual and his or her place within the organizational structure.
Training will fall into one of three categories: transition programs that provide specific job-related training, such as retail management trainee programs; prescriptive programs that address needs diagnosed through assessment; and special high-intensity programs for high-potential leadership candidates.
These high-intensity initiatives can include orientation programs that introduce potential leaders to the demands of more senior roles. DaimlerChrysler, for one, has its rising senior executive stars take part in a week-long experience designed to indoctrinate them into the working culture at the highest level of the company.
But whatever the category or form of training, whether it's a job assignment, special learning experience, formal training program or executive coaching, the leadership development program must meet three key criteria in order to be effective.
First, specific development needs must be addressed. As detailed above, if a leadership development program is not tied to specific development needs, it will not be effective. Second, multiple approaches should be used. Not everyone learns the same way (see sidebar, page 102), and no single approach to training is always appropriate.
For example, time spent with visiting representatives from overseas is probably more valuable than a classroom learning experience on foreign cultures. On the other hand, reading about the principles of finance might prove more illuminating than time spent shadowing a financial manager. Finally, participants need to be set up for success. Leadership development programs produce the greatest results when participants understand the learning objectives. In other words, the participants must not only grasp how the "learning" will affect them, but also how to implement what they learn.
Support for long-term development and success. Senior management must provide a supporting framework and environment for individual development. This support includes helping participants set clear, realistic and measurable performance objectives, giving precise feedback on progress, and providing mentoring and coaching.
An excellent example of this level of support in action can be found at Whirlpool, the Benton Harbor, Mich.-based home appliance manufacturer. Through a program called Protégé, future Whirlpool leaders embark on a highly individualized development process including 360-degree feedback, assessments, and several personality and business skill-focused inventories. This intensive program has established a pipeline of qualified candidates for key executive positions.
In reality, no organization will be able to fill all of its leadership positions from within—some "free agent signings" will likely be mandatory. The key is to integrate selection, retention and succession management systems thereby ensuring that the organization brings in the best people, keeps them around and adequately prepares them to assume future leadership roles.