Introduction

Succession planning and replacement hiring are two distinct approaches companies use to fill key roles when employees leave. Succession planning involves proactively identifying and developing internal talent to take over leadership positions in the future^[1]. In contrast, replacement hiring reactively fills an immediate need by hiring externally or promoting an employee who may not have been groomed for the role^[1].

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As baby boomers retire and younger generations frequently change jobs, having a solid plan for personnel changes is critical for business continuity. Whether an organization should invest in succession planning or rely on replacement hiring depends on many factors. This article will explore the pros, cons, and financial impacts of each approach, supported by research and case studies.

Succession Planning

Pros of Succession Planning

Succession planning offers several advantages for employers and employees:

• Smoother transitions: Having a succession plan in place allows for seamless leadership transitions. Successors can be trained and mentored by the exiting leader, minimizing operational disruption^[2].
• Improved morale and retention: Employees are more engaged and loyal when they see opportunities for advancement. 71% of organizations have a leadership bench for continuity, but only 30% have multiple options^[1]. Providing growth pathways boosts morale and retention.
• Cost savings: While succession planning requires upfront investment, it saves money in the long run. Recruiting, onboarding, and training new external hires is expensive. Promoting from within is estimated to cost 18% less^[3].
• Maintains institutional knowledge: Succession planning keeps valuable company knowledge and relationships intact. Successors are already familiar with the organization's culture, processes, and stakeholders^[4].
• Objective decisions: A formal succession planning process uses objective assessments to select candidates based on the role requirements and their ability to meet them, rather than favoritism^[1].

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Cons of Succession Planning

Succession planning also has potential drawbacks to consider:

• Time and resource intensive: Effective succession planning requires significant time, effort, and resources to implement. Identifying potential successors, providing development opportunities, and regularly assessing the talent pipeline is an ongoing process^[5].

• Lack of fresh perspectives: Continuously promoting from within may limit the injection of new ideas and diverse thinking that external hires can bring. This is especially relevant in industries undergoing disruption or transformation[6].

• Entitlement mentality: If not managed properly, succession planning may lead to an entitlement mentality among employees who feel they are "next in line" for a role. This can result in unhealthy competition or disengagement if they are passed ove^r[4].

• Potential loss of high-potentials: High-potential employees who are not selected for succession may feel overlooked and choose to leave the organization for opportunities elsewhere^[5].

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Replacement Hiring
Pros of Replacement Hiring

Replacement hiring offers some benefits, particularly for filling roles quickly:

• Wider talent pool: Hiring externally provides access to a broader pool of talent. This is advantageous when the skills and experience needed are not available internally or when the company wants to bring in fresh perspectives^[1].
• Faster to fill roles: In situations where a role needs to be filled immediately, such as an unexpected departure, replacement hiring can be quicker than developing an internal successor^[7]. 
• Opportunity for change: Bringing in external talent can be a catalyst for change in organizations that are stagnant or need to shake up the status quo^[6].

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Cons of Replacement Hiring

However, replacement hiring also has significant disadvantages:

• Higher costs: Recruiting externally is more expensive due to advertising, interviewing, onboarding, and training costs. Estimates suggest it can cost 50-60% of an employee's annual salary to hire a replacement^[8].
• Cultural fit risks: External hires may struggle to adapt to the company culture, leading to poor fit and turnover. 40% of externally hired executives fail within 18 months^[9].
• Steep learning curve: New hires take time to learn the organization's processes, systems, and relationships. Productivity can suffer during this ramp-up period.
• Negative impact on morale: Repeatedly filling roles externally can discourage internal talent and make them feel overlooked for advancement. This can lead to disengagement and turnover^[7].

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Financial Impacts

The choice between succession planning and replacement hiring has significant financial implications. Some key considerations:

• Cost of vacancies: Unfilled positions can be incredibly costly. For senior roles, vacancies can cost up to $7,000 per day in lost productivity^[10]. Having a succession plan minimizes the time roles are left open.
• Cost of turnover: Turnover is expensive, especially for critical roles. The total cost of losing an employee can range from tens of thousands of dollars to twice their annual salary[8]. Effective succession planning improves retention and reduces turnover costs.
• Return on development investment: While investing in employee development for succession has upfront costs, studies show a 10-30% higher retention rate for organizations with strong talent management^[11]. This delivers long-term ROI.
• Recruitment cost savings: The average cost per hire is over $4,000^[12]. Promoting from within through succession planning avoids these recurring external recruitment expenses.
• Productivity gains: Research shows internally promoted leaders reach competence in a new role 34% faster than external hires. Faster ramp-up times mean quicker returns to full productivity.

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Case Studies

General Electric: A Succession Planning Pioneer

GE is renowned for its disciplined succession planning process. For decades, the company has maintained a robust leadership pipeline by identifying high-potential talent early and investing significantly in their development. 

GE's "Session C" review, in which top executives meet for five days to assess talent and build succession plans, is a model studied by other organizations. This commitment to succession at all levels has enabled smooth CEO transitions and a track record of insider promotions.

As a result, GE has enjoyed stability and continuity in its leadership ranks. The company's focus on developing deep bench strength has also created a leadership factory, with numerous GE executives going on to lead other major corporations.

Apple: Failing to Plan for Succession

In contrast, Apple offers a cautionary tale of inadequate succession planning. When visionary founder Steve Jobs passed away in 2011, the company had no clear succession plan in place. 

While Tim Cook, then COO, assumed the CEO role, concerns about Apple's future without Jobs' innovation leadership loomed large. The lack of a feasible successor to Jobs created uncertainty among investors and customers.

In the following years, Apple's market share and stock price growth slowed as the company struggled to replicate the breakthrough products of the Jobs era. Analysts questioned whether 

Apple had the internal talent to drive the next wave of innovation.

Apple's experience highlights the risks of relying too heavily on individual leaders without a robust succession pipeline. The company has since taken steps to deepen its executive bench, but playing succession catch-up is challenging.

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Conclusion

In today's fast-paced business environment, having the right talent in place is essential for success. Succession planning and replacement hiring are two strategies companies use to fill critical roles, but each has distinct pros and cons.

Succession planning enables smooth transitions, boosts retention, and saves on recruitment costs. However, it requires significant investment and may limit fresh perspectives. Replacement hiring provides access to a wider talent pool and can drive change but is costly and risks cultural misfit.

Ultimately, the best approach depends on an organization's unique needs and culture. Forward-thinking companies will likely use a mix of both, proactively developing internal talent while opportunistically hiring external stars. 

Regardless of the path chosen, having a deliberate plan for managing talent transitions is crucial. As the GE and Apple case studies show, effective succession planning can provide stability and continuity, while lack of planning can lead to uncertainty and stagnation.

By weighing the pros, cons, and financial impacts of succession planning and replacement hiring, organizations can make informed decisions to secure the right talent for long-term success. With a strategic approach to talent management, companies can build strong leadership pipelines and navigate even the most challenging transitions with confidence.

Material prepared herein has been created for informational purposes only and should not be considered investment advice or a recommendation.  Information was obtained from sources believed to be reliable but was not verified for accuracy.  It is important to note that federal tax laws under the Internal Revenue Code (IRC) of the United States are subject to change, therefore it is the responsibility of taxpayers to verify their taxation obligations.

Savvy Wealth Inc. is a technology company.  Savvy Advisors, Inc. is an SEC registered investment advisor. For purposes of this article, Savvy Wealth and Savvy Advisors together are referred to as “Savvy”.  All advisory services are offered through Savvy Advisors, while technology is offered through Savvy Wealth.  The views and opinions expressed herein are those of the speakers and authors and do not necessarily reflect the views or positions of Savvy Advisors.

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Citations:

[1] https://www.sigmaassessmentsystems.com/succession-planning-vs-replacement-hiring/

[2] https://leadersexcellence.com/succession-replacement-planning/

[3] https://www.investopedia.com/terms/s/succession-planning.asp

[4] https://talenteam.com/blog/succession-planning-advantages-disadvantages/

[5] https://www.wallstreetmojo.com/succession-planning/

[6] https://www.peoplekeep.com/blog/employee-retention-the-real-cost-of-losing-an-employee

[7] https://www.linkedin.com/pulse/succession-planning-case-study-related-problems-human-wisecup

[8] https://scholarworks.waldenu.edu/cgi/viewcontent.cgi?article=2993&context=dissertations

[9] https://www.linkedin.com/pulse/advantages-disadvantages-internal-hiring-replace-outgoing-kelly-burke

[10] https://gprjournals.org/journals/index.php/JLG/article/download/155/188

[11] https://testlify.com/top-case-studies-of-successful-succession-planning/

[12] https://www.ere.net/articles/a-case-study-of-a-messed-up-hiring-process-improved

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Succession Planning - Deloitte

GE's Succession Planning - HBR

GE's Succession Planning Process - Ivey Business Journal

Apple After Steve Jobs: The Succession Plan - Forbes

Apple's Succession Plan: Tim Cook - The New York Times

Apple's Succession Problem - The Motley Fool

Apple's Succession Scramble - The Information

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