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

28 June 2018

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.

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Turning economic tide requires reassessment of strategic priorities

16 April 2019

Risks of a downturn in Europe continue on the horizon as various risks to (global) growth come together. A new survey of operations managers in Europe shows that around half expect a downturn somewhere in 2019, although few expect a recession. Leaders in financial services are the most pessimistic, while automotive respondents are the most likely to expect a downturn.

The financial crisis, born from a chain of activities on the back of risky lending by banks combined with poor risk governance as well as an inflated real estate market in the US, nearly collapsed the global economy. The decade that followed saw recovery, with recent years seeing sustained economic growth in Europe, booming equities and positive sentiment among companies and investors.

However, stability may be giving way to uncertainty in Europe. Global headwinds from a trade spat between the US and China, fallout from Brexit, as well as the rise of populism – particularly in Italy, Austria and the Netherlands – means that the tide is turning. Changes to monitory policy are also on the cards, with interest rates expected to rise in Europe and in the US. Meanwhile, the Chinese economy is projected to slow, while growth of other fast growing emerging market economies is stagnating.

Economic expectations - Overview

A new report by Roland Berger, titled ‘Operations Efficiency Radar’, highlights the changing sentiment among European business leaders. According to the study, the number of respondents expecting a downturn this year stands at 48%, up from 17% last year. Few, 2%, however expect a recession, comparable to the view last year.

The sentiment comes on the back of worsening key economic indicators, the researchers note. The number of restructuring cases has increased, global stocks fell 10% over 2018, and there are an increasing number of profit warnings across industries. Market volatility is also up, while business confidence and expectations have trended down over 2018. Profit warnings by companies have gone up, in particular in Europe’s largest economy Germany, and further interest rate hikes are looming around the corner.

Different industries have considerably different expectations. The most pessimistic industry is financial services – 11% of its professionals expect a recession this year and 33% a downturn. The automotive industry meanwhile has the highest number of leaders expecting a downturn, at 92%, followed by industrial products, at 56%. The most optimistic industry is chemicals/pharma, with 36% expecting a boom, followed by consumer goods and retail at 33%.

Economic expectations by industry

The changing market conditions are prompting leaders to change some of their strategic planning and priorities going forward. The automotive industry operations leaders are set to focus on production (79%), working capital management (79%), and product portfolios (77%). Aerospace and defence firms are set to focus largely on production (73%) and controlling & finance (66%), followed by procurement (64%) and product portfolios (61%). Industrial products companies are set to focus their operation priorities on product portfolio (75%), production (69%), and procurement (63%).

For four other industries studied – chemicals & pharma, consumer goods & retail, industrial services and financial services – product portfolio, which includes rationalising, optimising and innovating products, is the top strategic priority.

Commenting on the findings, the authors state, “The first consequences of the fragile environment are already visible in a number of indicators. Company leaders should use the results to challenge priorities throughout 2019, review their early warning systems, fine-tune and/or re-assess budgets and investments and consider crisis preparation scenario’s.”

Related: 13 business and technology trends for 2019.