The Business Case for Succession Management Capabilities

Evidence-based Strategies for Developing Talent and Sustaining Leadership Continuity

A fundamental issue for executive teams, boards, and human resource (HR) professionals alike—irrespective of industry or sector—is articulating the business case for investment in succession management capabilities. While executive teams and boards are often aware of the unique challenges presented by the unprecedented changes in workforce demographics and the expected surge in executive retirements, any formal investment in succession management capabilities demands a compelling, evidence-based business case.

Across industries, sectors, and organization sizes, executives are increasingly demanding hard evidence that talent development and succession planning practices impact business performance outcomes. These trends are particularly acute for our nation’s $2.9 trillion healthcare industry, as hospitals and health systems face the twin challenges of sharply rising demand for healthcare services along with diminishing pools of leadership talent. Healthcare executives are confronted with the ongoing rollout of the Affordable Care Act (ACA), reimbursement degradation and shrinking margins, the viability of accountable care organizations, and the imminent wave of executive retirements. One particularly alarming trend is the expected surge in CEO and senior leadership team turnover due to the retiring Baby Boomer generation. The financial losses and disruptions to leadership team continuity in healthcare organizations will be incredibly high, as the estimated cost of CEO turnover at a single hospital is $1.5 million[1] while approximately 75 percent of healthcare CEOs anticipate retiring in the next 10 years.[2]

To effectively prepare for the unprecedented departure of leadership talent in the healthcare industry, hospitals and health systems must develop succession management capabilities—the talent management and succession planning practices that enhance bench strength in critical leadership positions, ensure smooth transitions in executive roles, and cultivate leadership talent across the organization.[3] Fortunately, growing research indicates that many healthcare organizations are now reaping the benefits of proactively investing in the development of succession management capabilities. Drawing on recent research findings, this article presents a series of evidence-based strategies for developing leadership talent and sustaining leadership continuity.

Best Practices from the Field

Recent research findings from national benchmarking surveys,[4] case studies of exemplary organizations,[5] and analyses of succession planning practices and outcomes,[6] illustrate a remarkably common set of success factors or hallmarks that distinguish organizations with strong performance outcomes. For organizations seeking to enhance an existing succession management system or those in the nascent phase of building such capabilities, adoption of the following best practices or “lessons learned” from industry leaders is an effective strategy.

  1. Elevate the Strategic Priority of Succession Management

Best practice organizations create a sense of urgency amongst the board and senior executive teams by elevating and clearly articulating the strategic priority of talent development and succession planning practices. For healthcare executive teams, raising the strategic priority demands greater awareness of the impact of succession management capabilities on both clinical quality and cost containment.[7] Hospital organizations with strategic initiatives aimed at enhancing clinical quality metrics, specifically those assessed as part of the Affordable Care Act’s value-based purchasing program, should be integrated with the development of targeted succession management practices.

Findings from the 2015 Healthcare Talent Management Survey indicate that succession management capabilities impact a range of hospital performance outcomes, including clinical quality, cost containment, nursing turnover, leadership bench strength, and executive team gender and ethnic diversity.[8] For example, hospitals utilizing succession management best practices receive 11 percent higher overall patient satisfaction scores than organizations with underdeveloped succession management capabilities (see Figure 1). For best practice hospitals, 71 percent of patients rated their experience as high quality via the Hospital Consumer Assessment of Healthcare Providers and Systems Survey (HCAHPS) compared to only 64 percent for hospitals lacking in succession management capabilities.

These findings demonstrate the direct link between a hospital’s talent management capabilities and the patient experience. These results are also financially significant to hospital organizations as reimbursement rates for healthcare services provided via federal government programs (Medicare and Medicaid) are partially driven by patient satisfaction scores. Data from the same study show that hospital organizations with highly developed succession management capabilities are also far more effective with cost containment, another important driver of hospital reimbursement rates for healthcare services. Illustrated in Figure 2, healthcare organizations with strong succession management practices report an average spending of $17,493 per Medicare beneficiary compared to $20,706 for hospitals with underdeveloped talent management practices (18.4 percent difference).

Figure 1: Talent Management (TM) Best Practices & Overall Patient Satisfaction Scores

Note: Patient satisfaction is assessed by scores on the Hospital Consumer Assessment of Healthcare Providers and Systems Survey (HCAHPS), as reported by the Centers for Medicare and Medicaid Services (CMS). Hospital organizations that scored at least one standard deviation above the sample mean across each best practice are presented in orange (“High”); hospital organizations that scored at least one standard deviation below the sample mean across each best practice are presented in blue (“Low”).

 

Figure 2: Talent Management (TM) Best Practices & Mean Spending per Beneficiary (MSPB-1 Performance Rate)

Note: Hospital organizations that scored at least one standard deviation above the sample mean across each best practice are presented in orange (“High”); hospital organizations that scored at least one standard deviation below the sample mean across each best practice are presented in blue (“Low”).

 

  1. Illustrate the Looming Retirement Wave

Organizations effectively sharpen the business case for investing in succession management capabilities by conducting forecasting analyses that depict anticipated retirements and leadership bench strength across critical leadership positions. Without a data-driven argument concerning workforce demographics, HR professionals may fail to establish a clear business case for investing the necessary resources to build a best-in-class succession management system. A common refrain from executives concerning the business case for succession management is the clear practical need for “leadership stability” in critical leadership roles. Of the many benefits of succession management capabilities, the single advantage that holds the attention of many executives is the ability to maintain stability in key leadership roles and to avoid the massive disruptions associated with unexpected retirements or exits.

A critical best practice is annually assembling the necessary workforce demographic data to illustrate the coming “retirement wave” across management levels and key leadership roles. Best practice organizations conduct annual retirement forecasts that plot employees in leadership positions (supervisor, manager, director, executive) across key age groups (< 30, 30-34, 35-39, 40-44, 45-49, etc.). For each leadership position, the following metrics are consistently reported and discussed with executive teams and board members: (a) the overall percentage of leaders who are 55 years or older, and (b) the percentage of leadership positions that have at least one “ready now” candidate (leadership bench strength). Armed with a graphic illustration of the relative mix age groups across critical leadership roles, best practice organizations are equipped to make the necessary investments in accelerated leadership development for positions or divisions that are most vulnerable to instability due to unexpected retirements or exits.

  1. Conduct Annual Talent Reviews that Assess Strategic Talent Pools

As a powerful supplement to comprehensive retirement forecasts, best practice organizations conduct annual talent reviews of strategic talent pools that include the development of “talent profiles” identifying the potential risks and costs of vacancies in critical leadership roles. For many organizations, these positions include C-suite roles—CEO, COO, and CFO, while an increasing number of healthcare organizations seeking greater alignment with clinical quality initiatives are assessing Chief Nursing Officer, Chief Medical Officer, Clinical Integration, and other key clinical leadership positions. This practice is consistent with leading companies across industries and sectors for ensuring that the resources devoted to succession management activities are strongly aligned with the talent pools that have the greatest strategic impact.[9]

At Sutter Health, a 24-hospital health system based in Northern California, the annual talent review is a standardized, data-driven process across its affiliates (hospitals) and management levels. Sutter Health’s leadership talent is reviewed sequentially, beginning at the affiliate level and proceeding through the organization’s regions and concluding at the health system’s headquarters. Importantly, the goal of the talent review process is not replacement planning—the identification of the most likely direct report to replace an incumbent leader—but to cultivate strong succession plans for strategically critical positions and create a central, searchable repository of leadership talent. Highly effective talent reviews are full-day sessions facilitated by HR professionals in whom management teams assess their direct reports, calibrate ratings across team members, and discuss personalized development plans for employees rated as high potentials and high performers. HR leaders work diligently to demonstrate the value of requiring leadership teams to assess the leadership potential of their direct reports, and then utilize such data to populate 9-box tools that plot employees according to job performance and leadership potential. At Sutter Health, the benefits of a highly developed succession management process were realized when the board’s highly effective succession management process selected COO Sarah Krevans to replace the retiring CEO Pat Fry in January, 2016.

  1. Communicate the ROI of Succession Management Capabilities

For many executive teams, the most important driver of their support for talent development and succession planning is clear evidence of the ROI of such practices. Recent research findings indicate that organizations adopting succession management best practices report a 45.7 percent leadership bench strength, which is a common succession management metric defined as the percentage of critical leadership positions with at least one “ready now” successor.[10] Meanwhile, organizations with little or no emphasis on succession management capabilities report an average leadership bench strength of 7.7 percent (see Figure 3). Similarly, Figure 4 illustrates a 67.7 percent internal executive placement rate for best practice organizations, indicating that a high percentage of open executive positions (VP or higher) are sourced by internal candidates. By comparison, organizations with minimal emphasis on succession management practices reported an internal executive replacement ratio of only 21 percent.

Given the high costs of executive search activities, as well as the corrosive impact of excessive external hires on morale and productivity,[11] the benefits of highly developed talent assessment activities easily exceed the investment. At Sutter Health, the investment in a best-in-class talent assessment process has realized clear performance outcomes. For 2015, the health system achieved a 79 percent internal executive placement rate while six of seven hospital CEO positions were filled with internal talent. As a strong indicator of sustained excellence in talent assessment and succession management, Sutter Health has achieved a mean internal executive placement rate of 68 percent from 2011 through 2015.

Figure 3: Talent Management (TM) Best Practices & Leadership Bench Strength

Note: Hospital organizations that scored at least one standard deviation above the sample mean across each best practice are presented in orange (“High”); hospital organizations that scored at least one standard deviation below the sample mean across each best practice are presented in blue (“Low”).

 

Figure 4: Talent Management (TM) Best Practices & Internal Placement Rate

Note: Hospital organizations that scored at least one standard deviation above the sample mean across each best practice are presented in orange (“High”); hospital organizations that scored at least one standard deviation below the sample mean across each best practice are presented in blue (“Low”).

 

One of the most pressing challenges associated with succession management in healthcare organizations is the high cost of nursing turnover, which is exacerbated given the current retirement trajectories of nursing leadership teams across hospitals and health systems. For many healthcare organizations, the challenges associated with aging nurse management teams are compounded with a startling lack of accelerated leadership development opportunities for emergent nurse leaders. In short, many early-career nurses are placed into leadership roles without the requisite development experiences, which greatly increases the risk of burnout and subsequent turnover. The financial cost of turnover for a single nurse is substantial—approximately twice the nurse’s annual pay while each percentage increase in nurse turnover is estimated to cost the average hospital about $300,000 per year.[12] Recent research indicates that hospitals with highly developed succession management capabilities reported an annual nursing turnover rate of 8.74 percent compared to 13.61 percent for organizations with low emphasis on succession management practices[13] (see Figure 5).

Across all succession management capabilities, selection and onboarding practices represent the most powerful drivers of low nursing turnover. Overall, HR leaders at best practice organizations engage their senior leadership team colleagues in an evidence-based discussion of the ROI of succession management capabilities, particularly those that directly impact the organization’s “pain points,” key development areas, or strategic initiatives.

Figure 5: Talent Management (TM) Best Practices & Annual Nursing Turnover

Note: Hospital organizations that scored at least one standard deviation above the sample mean across each best practice are presented in orange (“High”); hospital organizations that scored at least one standard deviation below the sample mean across each best practice are presented in blue (“Low”).

 

  1. Align Talent Management Practices with Diversity Initiatives

Many organizations adopt workforce diversity initiatives that represent system-wide efforts to enhance the gender and ethnic diversity of management teams across levels. The persistent underrepresentation of women and ethnic minorities on healthcare executive teams has driven the American Hospital Association to adopt the elimination of such disparities as a core advocacy issue.[14] Regrettably, the disproportionate number of women and ethnic minorities in top executive roles is not unique to the healthcare industry, as the paltry 4 percent of women CEOs of Fortune 500 companies in 2016 attests.[15] However, the predominance of women throughout the ranks of healthcare organizations and particularly in clinical roles suggests that the career advancement and leadership development practices of our nation’s hospitals and health systems stand much to gain from identifying and developing high-potential women and minority leaders.

Healthcare organizations that adopt succession management best practices accelerate workforce diversity initiatives by seeking consistency and transparency with talent review practices, specifically the process for assessing high-potential leaders. Ensuring that employees are assessed using a validated, standardized assessment of high-potential leadership is critical for enhancing diversity metrics across management levels. Best practice organizations avoid assessing leadership potential with simple categories (e.g., “high potential,” “solid performer,” etc.) and the greater likelihood of rater errors and biases that accompany such approaches.

Highly effective talent review practices utilize validated leadership potential assessments that measure the traits and leadership competencies associated with performance in future leadership roles. While there are several popular off-the-shelf instruments that may be used for assessing leadership potential, including surveys developed by the Corporate Executive Board and Korn Ferry,[16] many organizations are electing to develop and validate their own tools for greater sensitivity and impact on the talent review process. When consistently applied over time, these practices cultivate a more diverse pipeline of leadership talent that can effectively accelerate an organization’s diversity initiative. As evidence of these best practices, recent research findings indicate that organizations with highly-developed succession management practices reported that 52.4 percent and 42.5 percent of C-Suite positions were occupied by women and ethnic minorities, respectively (see Figure 6). By comparison, organizations with underdeveloped succession management capabilities reported that far fewer women (23.7 percent) and ethnic minorities (11.6 percent) occupied C-Suite positions. Not surprisingly, the strongest driver of leadership diversity metrics across all capabilities was the level and consistency of top management team support for succession management practices.

Figure 6: Talent Management (TM) Best Practices & Leadership Diversity Metrics

Note: Hospital organizations that scored at least one standard deviation above the sample mean across each best practice are presented in orange (“High”); hospital organizations that scored at least one standard deviation below the sample mean across each best practice are presented in blue (“Low”).

 

Conclusion

Overall, compelling research evidence and several alarming industry trends have greatly intensified the business case for succession management capabilities. The depth and consistency of senior management team engagement in talent development and succession management practices clearly distinguish high-performance organizations. While the current business environment poses many formidable challenges, the succession management capabilities presented in this article provide executive teams and boards with invaluable tools for overcoming the extraordinary workforce demographic changes and the expected surge in executive turnover.

 

[1] Thrall, T. (2008). Finding your next CEO. Hospitals & Health Networks, 82 (12), 24-37.

[2] Darnell, V., & Noland, K. (2012). Growing tomorrow’s talent today: Succession planning a critical strategy in healthcare. B. E. Smith. Accessed June 1, 2015 at https://www.besmith.com/sites/default/files/Growing%20Tomorrow%27s%20Talent%20Today-Succession%20Planning%20a%20Critical%20Strategy%20in%20Healthcare_web.pdf.

[3] Silzer, R., & Dowell, B. E. (2010). Strategic talent management matters. In Strategy-driven talent management: A leadership imperative (pp. 3-72). San Francisco: Jossey-Bass.

[4] Kevin S. Groves (2015). Impact of Talent Management Practices on Financial, Workforce, and Value-Based Purchasing Metrics. Pepperdine University & Groves Consulting Group. Accessed on August 1, 2015 at www.grovesconsultinggroup.com/index.php/research/.

[5] Kevin S. Groves (2011). Talent Management Best Practices: How Exemplary Health Care Organizations Create Value in a Down Economy. Health Care Management Review, Volume 36, No. 3, pp. 227-240.

[6] Garman, A., & Tyler, J. (2007). Succession planning practices and outcomes in U.S. hospital systems: Final report. American College of Healthcare Executives. Accessed on August 1, 2015 at http://www.ache.org/pubs/research/succession_planning.pdf. American College of Healthcare Executives (2011). Improving leadership stability in healthcare organizations. Chicago, IL: Division of Member Services and Research. Accessed June 1, 2015 at http://www.ache.org/pubs/research/pdf/CEO-White-Paper-2011.pdf.

[7] Kevin S. Groves (2015). Impact of Talent Management Practices on Financial, Workforce, and Value-Based Purchasing Metrics. Pepperdine University & Groves Consulting Group. Accessed on August 1, 2015 at www.grovesconsultinggroup.com/index.php/research/.

[8] Kevin S. Groves (2015). Impact of Talent Management Practices on Financial, Workforce, and Value-Based Purchasing Metrics. Pepperdine University & Groves Consulting Group. Accessed on August 1, 2015 at www.grovesconsultinggroup.com/index.php/research/.

[9] Huselid, M. A. (1995). The impact of human resource management practices on turnover, productivity, and corporate financial performance. Academy of Management Journal, 38 (3), 635-672.

[10] Kevin S. Groves (2015). “Impact of Talent Management Practices on Financial, Workforce, and Value-Based Purchasing Metrics”. Pepperdine University & Groves Consulting Group. Accessed on August 1, 2015 at www.grovesconsultinggroup.com/index.php/research/.

[11] Khaliq, A., Walston, S., & Thompson, D. (2006). The impact of hospital CEO turnover in U.S. hospitals: Final Report. American College of Healthcare Executives. Accessed June 1, 2015 at http://www.ache.org/pubs/research/pdf/hospital_ceo_turnover_06.pdf.

[12] Atencio, B., Cohen, J., & Gorenberg, B. (2003). Nurse retention: Is it worth it? Nursing Economics, 21 (6): 262-268.

[13] Kevin S. Groves (2015). Impact of Talent Management Practices on Financial, Workforce, and Value-Based Purchasing Metrics. Pepperdine University & Groves Consulting Group. Accessed on August 1, 2015 at www.grovesconsultinggroup.com/index.php/research/.

[14] American Hospital Association (2016). Advocacy issues: Eliminating racial and ethnic disparities. Accessed June 1, 2016 at http://www.aha.org/advocacy-issues/disparities/index.shtml.

[15] Fortune.com Accessed August 1, 2016 at http://fortune.com/2016/06/06/women-ceos-fortune-500-2016/?iid=sr-link1

[16] Validated high-potential leadership assessments may be found via the Corporate Executive Board (https://www.cebglobal.com/talent-management/high-potential.html), Korn Ferry (http://www.kornferry.com/products/assessments-overview), and other reputable professional service firms.

Author of the article
Kevin Groves, PhD
Kevin Groves, PhD, , is an Associate Professor of Management at Pepperdine University’s Graziadio School of Business and Management; and President of Groves Consulting Group, which supports businesses, non-profit organizations, and government agencies with leadership and organization development solutions, including 360-degree assessment, executive development, and succession planning. He teaches a range courses at the Graziadio School, including leadership competency development, organization design, and organizational change. Dr. Groves primarily teaches in the Graziadio School’s full-time and part-time MBA programs at the Malibu and West Los Angeles campuses. An active leadership scholar, Dr. Groves’ research is currently focused on talent management and succession planning practices and the ROI of leadership development practices. He is widely published in business management and leadership journals, including the Health Care Management Review, Journal of Management, Journal of Business Ethics, Journal of Leadership and Organizational Studies, Academy of Management Learning & Education, Group & Organization Management, Human Resource Development Quarterly, and Journal of Management Development. Groves is currently completing a book project that examines the clinical, financial, and workforce performance outcomes of talent management and succession planning best practices in hospitals and national healthcare systems. Published by Second River Healthcare Press, the book (Winning Strategies: Building a Sustainable Leadership Pipeline through Talent Management and Succession Planning) will be available in May 2017.
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