The growing worker shortage and ongoing consolidation story have placed distribution at a crossroads, and only the companies that adequately groom the next generation of C-suite executives will flourish. This article examines the challenges companies face regarding developing a succession plan and first steps to overcoming those hurdles.
Part 2 will look at how distributors have made succession planning a part of the company culture.
As the second-generation owner of the manufacturing business her father founded in 1950, Pamela Kan understands the conflicted feelings that parents experience when passing a company down to a son or daughter. Though they want to preserve their legacy and see their creation endure, they are so attached to the company that transferring it to descendants can feel like “handing off your child to another one of your children,” says Kan, president of Bishop-Wisecarver Group, Pittsburg, CA.
“Succession in a family business is very emotional; it’s really personal,” she says. “The problem for most families is they tend to think only about the impact to the people in the family. They forget about the impact to the rest of the company.”
Succession planning is the process of determining who will own and/or run a business following any one of multiple scenarios, such as a sudden death, early retirement or even a planned departure. And it impacts every company, whether private or public, large or small, family-owned or otherwise. When a business doesn’t properly groom the next generation of leadership to take over, it risks falling behind in an already competitive marketplace, and then fading into irrelevancy as customers leave and valuations sink.
Businesses in all industries must plan for their succession to ensure survival, but because distributors and manufacturers already face a talent shortage and a growing number of baby boomer executives on the brink of retirement, those that operate without a plan have a greater chance of stagnation and decline.
“Companies that don’t prepare the next generation of leaders will not have the people they need properly trained and ready to move their enterprises forward,” says Bob Mucciarone, COO, F.W. Webb Co., Bedford, MA. “Investing in your people on an ongoing basis is a long-term growth strategy.”
Create a Vision, Form a Strategy
Strategy is the foundation of succession planning, which can include passing the business down to a family member, actively acquiring and retaining talent, creating an employee stock-ownership plan (ESOP), forming an aggressive management-training program to prepare future leaders, selling to a competitor – or some combination of these.
But even before mapping out its long-term growth strategy, a company must have a vision, says Skip DeVilling of DeVilling & Associates, a recruiting and consulting firm for industrial companies.
DeVilling, who is constantly on the search for high-level executives to place at the distributors and manufacturers that hire him, sees firsthand that too many companies have no idea where they hope to be with regard to revenue or employee numbers or locations in five, 10 or 20 years. Executives retire before sharing institutional knowledge down the ranks. Owners don’t know who will replace them or other executives, and if they do, they don’t adequately train their successors.
Without vision, status quo creeps in and companies wither.
“They do what they did before and that’s not good enough today,” DeVilling says. “You only know what you know, so if all of a sudden there’s a change in management, whether it be succession or a person retiring, those positions have changed dramatically over the years. The mistake people make is they don’t recognize the change and they don’t recognize where they want to go.”
Once a vision is established, the next step is creating a strategic plan for the entire business, one that details each department and position – its duties, its requisite skills and education, its salary range – yet can evolve over time as the company grows and its needs change. This living document outlines strengths, weaknesses, opportunities and threats in all facets of the company, making it easier
to recruit should the need arise for finding a salesperson or CFO.
“Everyone needs to get comfortable with the fact that this is a continuous process,” says Tom Roberts, president, cfm Distributors, Kansas City, MO. “All of the succession components should continue to run throughout the life of the organization, as generations of leaders will come and go. The sooner you make the essential components of succession planning a part of your organizational culture, the more the natural evolution and growth of the organization becomes a part of daily life. We are all one day closer to retirement every day.”
DeVilling says this process isn’t easy in distribution, an industry with many traditional family-owned companies that have operated a certain way for decades and continue to do so, even as innovation drastically alters the landscape.
But a vision and a strategic plan sometimes aren’t enough. Sometimes companies need outside help. “No one should go through a succession plan with people just in the organization,” DeVilling says. “There always should be a mediator, there always should be somebody bringing in new thoughts and rounding out this process.”
Whether that means hiring a third-party consultant or seeking family business planning advice from places like the Kellogg School of Management’s Center for Family Enterprises – where Kan went for assistance when it was time to take over Bishop-Wisecarver from her father, Bud Wisecarver – getting a different perspective is critical for the process.
Outside help is especially crucial for family-owned businesses, which face an array of challenges from determining if offspring has the skill set and the desire to take over the company to deciding which children (if there are more than one) should have which responsibilities. But no matter how many or how few parents and children are discussing the fate of business’ future, Kan reiterates the need for open communication when it comes to forming the vision and creating the strategy to achieve it.
“It’s really no different than running a business,” she says. “If there’s not good communication in the business and there’s not good communication in the family, succession is going to be tough and it will be emotional and it will be hard on the company and hard on the family.”
Kan also says succession must include the option of saying “I’m going to blow this up” and treat the second-generation business as a startup. It’s a challenge, but necessary for growth amid the disruptions of changing market trends.
“If you want your company to survive, you’ve got to put people in place to lead the company, that can not just manage through that change but exploit that change for the good of the company,” Kan says. “That can be hard to do within a family’s skill set. Sometimes it’s in your best interest as a business to bring someone in from the outside to run the business.”
Find, Develop, Retain Talent
Bringing in people from outside is something national distributors do frequently. Talent acquisition is a priority not only for immediate job fulfillment but also for long-term succession, and distributors seek highly qualified employees with hopes of grooming them through management track or leadership development programs for top-level positions.
At Arrow Electronics, Englewood, CO, the company holds annual talent workshops where managers discuss employees’ performances during the year and dissect their potential, says Donna Tikkanen-Davis, the company’s vice president, human resources, global employee capability.
Tikkanen-Davis outlined Arrow’s three categories for evaluating employees based on their succession preparedness for various roles. “Ready now” means they could serve as a replacement immediately; “ready soon” means they could be prepared to serve as a replacement in six to 18 months; and “ready later” means they could serve as a successor in roughly two years. This process avoids key positions going unfulfilled and keeps Arrow focused on finding and promoting talent throughout its ranks.
“We hold our managers accountable for developing people,” Tikkanen-Davis says. “They’re required to put development plans in place for the top 15 percent of their team. They have to identify the time frame someone will develop as well as the specific action, and that could be
job rotation, it could be a special assignment, it could be a lateral move. We’re really monitoring and supporting and tracking what’s happening at various levels of the organization regarding talent development and talent movement.”
F.W. Webb takes a similar approach to grooming current employees for promotion, fostering what Mucciarone calls a “pathway to growth for everyone with the motivation and talent to take on more responsibility.”
“We encourage our employees to seek new opportunities within the company, and we support their ambitions with training to prepare them for current and future openings,” he says. “Ingrained in our culture is the expectation that our managers will continually identify Webb people with talent and ambition for leadership positions.”
Associations are stressing the importance of talent to members, as well.Emily Saving, vice president of professional and program development for Heating, Air-conditioning & Refrigeration Distributors International, says the association in the last few years began talking about succession planning with its members and will continue doing so – not just for C-suite positions but for all roles within an organization.
“Talent and how you identify, retain and utilize your talent is the most important differentiator between a good company and a great company,” Saving says. “It’s crucial that our members start paying attention and really start using some of the tools and resources to better position themselves as leaders of talent.”
One resource HARDI provides members is its Emerging Leaders program, which the organization launched a year and a half ago. Open to employees of member companies who have been targeted for upper management positions, the program is focused on grooming talent and providing networking opportunities, and its popularity has seen it double recently from 40 people to 80 people.
“It ensures that their current talent is going to also grow into their future talent, that their skill sets aren’t going to become stagnant and they’re not going to become irrelevant,” Saving says.
Succession planning might seem overwhelming for a company owner focused on pricing, e-commerce capabilities, finding new customers and expanding to different markets. That’s why John Salveson of Salveson Stetson Group, which helps companies search for talent inside or outside their ranks, says it is imperative for distributors to empower their human resources departments with the task of recruiting and developing talent. While the HR role has traditionally been administrative and transactional – making sure benefits are in place, payroll is accurate, employment applications are filled out – Salveson argues for shifting the HR model to one that is transformational.
“(HR professionals) are really good at finding and attracting talent. They’re really good at developing executives and organizational plans. They understand how the business works. They should be the CEO’s right-hand person on these issues,” Salveson says. “My experience is, many wholesale distributors haven’t made the transition in HR from the traditional transactional position to the much more strategic transformational role. That’s a simple thing they can do.”
Starting with a simple task can pay huge dividends. Because failing to plan for a company’s succession could spell disaster if a COO suddenly jumps ship or a longtime owner unexpectedly dies.
“This is a ticking time bomb,” Salveson says. “You’ve got to get serious about this if you’re not already.”
Look for Part 2 in the Feb. 25 issue, which will examine how some distributors have made succession planning part of their corporate culture.