Successful leadership transition is crucial for a firm's business and financials

28 June 2018 3 min. read
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According to a new report from McKinsey & Company, getting a personnel transition at the executive level right is an integral part of the business development process. Successful transitions could boost revenues by up to 5% in two years, while poor handovers could cost the company as much as 15% in foregone revenues.

A change in leadership creates considerable uncertainties for staff throughout an organisation, as a new direction has the potential to upend long-standing ways of working. Such transitions can consequently put the health of an organisation at risk, particularly if the former leadership has been forced out for a particular reason – as revealed in a recent study of unplanned changes in Private Equity firms.

A new McKinsey & Company report titled ‘Successfully transitioning to new leadership roles’ describes how a change in leadership affects business in general. In many instances, new leadership is selected very seriously, but little attention is paid to the transition process itself, with support for the new personnel often proving inadequate.New leadership challengesAmong a range of challenges, a high level of cost is a major source of concern during a transition process, in addition to the expenditure involved in the search process itself. Total outlays for the replacement of a senior executive average at around 218% of his/her salary, excluding indirect costs such as time expended. An unsuccessful change can therefore be a substantial blow for an organisation.

The report finds that executive transitions are increasing in frequency, with changes at the CEO level up from 11.6% in 2010 to 16.6% in 2015. As it stands, between 27% and 46% of leadership changes are deemed to have failed within two years of the handover.Attending to transitionTo break it down, if a transition is successful, there is a 90% higher likelihood that the team will meet their 3-year performance goals, while risk of attrition comes in at 13%. Revenue and profit is up to 5% higher in this case. On the other hand, if the succession is unsuccessful, the loss of engagement stands at 20% on average, while the company’s performance can suffer by up to 15%.

A successful transition involves a comprehensive understanding of the firm’s current situation, which requires the new CEO to take stock across five key pillars: business or function, culture, team, his/her own position, and that other stakeholders. Nevertheless, a balance must be attained, and each action thereafter must remain context-dependent.100 day not sufficientThe process should involve a clear set of goals, with clear prioritisation of things that need direct attention over those that can wait. The firm also notes that so called 100-day assessments can be highly restrictive, given the fact that the first 100 days are often the least productive in terms of enacting change. 92% of external appointments and 72% of internal ones take more than 90 days to reach full productivity.

Full productivity for external appointments usually remains to be achieved even six months after handover. The report also notes the various time requirements for different processes. For instance, developing a strategic vision requires eight months, while winning the support of employees can take around nine months. Building the right team takes more than a year to achieve, while increasing share price and turning a company around can take up to 19 and 21 months respectively.