Why succession planning is difficult – and how to get it right

By Penny de Valk, Associate Director, Equiteq

One thing you need to assure future owners of when preparing for an exit is leadership capability and stability, as well as the continued positive effect of this on profitability and growth. Ownership succession generally involves management succession and because buyers buy people and great leadership, it is natural for them to want to assess the quality of bench strength, as well as the planning that has gone into ensuring the right people are in the right roles. Your management succession plans throughout the company are an aspect of good governance that you can expect to have evaluated in due diligence. And CEO succession in particular will be critical. It is a key responsibility of the Board and is central to good governance.

Why the lack of planning?

So why do so many companies not prepare well on this front? Often succession planning is mistakenly just not seen as a priority against the immediate operational requirements of getting the company to grow and become profitable.

Sometimes this lack of focus relates to the size of the business. Even in some mid-size organizations, without a big HR function, there are few resources to manage succession compared to the formal talent programs enjoyed by larger organizations. Yet being a smaller organization makes it even more important, as not only is the company very exposed to key talent leaving, but those firms can also have a shallow pool of talent to draw from and are unlikely to have the rotational assignment opportunities that allow people to build their skills and experience.

Sometimes firms feel that planning around succession can be distracting for the individuals and the company and create a political tone in senior management that isn’t helpful.

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Principles of Maximizing Profitability

There may not be a more fundamentally important topic for consulting firms than improving profits.

Shareholders ultimately want a return on their investment and buyers are looking for evidence of healthy growth, while strong profitability is required to sustain growth and equity realization.

The levers that need to be pulled to improve margin – revenue and cost – might be well understood, but the combination of activities required are often more nuanced.

We’ve identified the top strategies firms can use to start improving profits now:

  1. The leadership team must make profitability an ongoing focus

Profitability has to become embedded in the leadership team’s mindset for sustainable margin improvement to be successful.

Achieving this requires strong communication around accountabilities, clear success measures being established and tactical activities – such as margin exception reporting, resource management, and utilization forecasting – becoming integrated into regular business updates.

Once a shared understanding of what success looks like is established within this team, firms can create strategic work streams – such as market expansion or IP development – and make people accountable.

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Does your leadership team work ‘on’ or ‘in’ the business?

Management quality cropped

Management quality can be a big problem for consulting firms. However as one of our 8 levers of growth, it is worth exploring why it’s so important to a firm’s equity growth.

Financial investors say they invest in management teams first, firms second. An investor wants to see a balanced, experienced leadership team with a track record of delivering results; working in an environment where they spend more time working ‘on’ the business rather than in it. If this is happening then the firm is likely to be innovative, focused, and tightly managed with good KPI measurement and financial control.

Why is management quality so difficult for consulting firms to get right?

Very often consulting firms are founded by people that have great technical expertise but rarely the experience of having built and grown a company before. Running a consulting firm requires different skills to delivering consultancy. Business management consulting firms can be the exception to this general rule, but it is often the reason why management is a big challenge for firms.

When you are a small firm you can get away with a lack of business management experience in the team but as you grow and approach your first glass ceiling – around the $2.5m mark – having the right skillsets in place is essential if you want to build a business with real equity value.

What management skillsets does a consulting firm need?

Assessing what skillsets you have on your management team is a good place to start answering this question. Although it’s not just a case of what your management team can do but what they should be doing to optimally run and grow your firm.

For example, an experienced finance director would be the first valuable addition to a consulting firm’s management team. It would free up a managing director from overseeing the financials of the business to focus on building revenue. Finance expertise is particularly important for a firm if it is approaching a sale process.

There comes a time – before entering the sales process – that having a chief operating officer becomes critical. Typically overseeing the firm’s infrastructure and providing metrics to drive the business forward, an operations director or COO can be invaluable in helping a firm anticipate issues and drive efficiency.
Finally, consulting firms can benefit from having non-executive directors on their board to act as advisors. We’ve covered what sort of advisors can be helpful to firms in Who should you trust?

Do you have a unified board with a clear vision and strategy?

No consultancy should get to a reasonable size and not have a board unified in the vision for the firm and what the exit strategy looks like. That’s not to say the same exit strategy will apply to each founder or partner. Founders can often have different motivations for setting up and running their own business, so being clear on who will want what and when, is important.

It is also down to the management team to define and nurture the culture of the business. Again, this becomes more important once the company starts to scale and employs more than 15-20 people. Strong leadership is key to attracting, retaining and motivating talent.

In conclusion, assess the skills you have at the top of the business and invest in good finance and operations management. Be crystal clear on your vision and strategy for your firm and ensure you’re all unified behind this as a team. Communicate results and empower all to improve the performance of the business. Finally, as a founder or senior team member think about how you balance working ‘on’ and ‘in’ the business.