From the November 2012 issue of Investment Advisor • Subscribe!

October 23, 2012

We Get Along Without You Very Well: Employee Departures Can Build a Stronger Business

No one is indispensable—planning for the inevitable departure of employees builds a stronger business

Let’s face it: Whether voluntarily or involuntarily, most employees will leave their current job at some point. As much as we want people to remain loyal to the firm or to live forever, neither is reasonable. Retirement, death, disability, career changes, recruitment by other firms—all will take employees from us at some point. The question is, how effective will the business be in finding a replacement who can perform the role at the same level or better than the previous seat holder?

In the past, my most distressing times as a leader occurred when I had to search outside the firm to replace a departing employee because there was not an obvious candidate internally. My most rewarding moments occurred when I could fill key roles with people already within the business.

This may surprise some who think the highest stress point is when a key person actually tells you he or she is leaving. That’s inevitable. Preparing for that eventuality makes the difference between a great business and an also-ran. Preparing includes developing people within the firm and accepting departures without going into crisis mode.

Of course, it is normal to feel angry and disappointed when employees tells you they are leaving. Often you feel sour because you think they did not appreciate the opportunity you gave them, or embarrassed that they chose someone else over you. Your ire truly rises when you realize the key person did nothing to prepare the firm for their absence. Once you get past the rejection and hurt, and the frustration of being left in the lurch, you should look at staff turnover as an opportunity rather than a setback. At a minimum, use the experience as the catalyst to say “never again” will you be unprepared for someone’s departure.

The ability to replace a departing employee with an obvious internal candidate is a great marker for business maturity. A staffing strategy allows you to create opportunities for existing employees and move the business forward with minimal disruption to culture. Further, it is far less expensive than recruiting from the outside.

The best firms make individual succession plans a key component of their compensation and promotion practices. I often tell our associates that they may miss out on another opportunity in the firm if they have not developed someone to do their current job. This tests their individual leadership and their commitment to the firm mission. Failure to plan ahead and groom their successor may be reason to reduce their bonuses or limit their pay raises until you see behavior change. Every key person has an obligation to their fellow stakeholders in the organization to think about what would happen to the firm if something happened to them.

Ironically, many employees believe that by making the business dependent on them they increase their value to the enterprise. The opposite is true. There is a bright line between occupational blackmail and having the confidence to make you indispensable.

Why Prepare for Individual Succession?

There are five important reasons why every financial services organization should prepare for the inevitable departure of key people:

  1. Business continuity with minimal disruption
  2. Profitability
  3. Opportunities for employee growth
  4. Opportunities to improve the organizational structure
  5. Re-energizing the enterprise

Minimizing Disruption

Fundamentally, the financial advisory business is a “people business.” While technology is the great equalizer, this profession requires individuals who can process work, interpret data, interact with clients, develop business, deliver recommendations and support those who are providing advice. In addition, most advisory firms are relatively small and tend to lack redundancy in key positions.

Leaders performing an internal business assessment typically evaluate if the firm is operating efficiently and managing risk. Many view risk solely through the lens of compliance. In reality, firms create an even greater hazard in not planning for departures of key employees. In a small business, one person leaving the firm can paralyze a process, disturb clients, disrupt quality and undermine morale. Good firm management includes having a succession plan within the firm to mitigate this pain.

You may feel that your business is not large enough to provide staff for every eventuality, but this argument shows why it is important for advisory firms to reach a level of critical mass where the loss of one big client or the loss of one important employee or partner does not materially impact the business. Further, by preparing for transition, you are also investing in the capacity to grow.

Managing Margins

Human resource consultants often say the cost to replace an employee falls somewhere between 150% and 250% of that person’s compensation, calculated in replacement cost, recruiting cost and lost productivity. Obviously, retaining the valuable employees and supervising the turnover of the mediocre helps to manage these costs. Creating an orderly succession plan for each position means your productivity will continue during transitions, giving you time to recruit a replacement for the individual you just promoted to fill the empty slot.

People Development

Most people like to be challenged in their work and given the chance to grow. Growth may be lateral or up, but employee satisfaction involves imparting a clear vision for how individuals can improve their position. Oftentimes switching firms provides the greatest likelihood for upward mobility, especially in a stagnant organization. Putting employees on a path where they can see their next opportunity creates a desire to invest in their own skill set in order to prepare for the advancement of their career.

Organizational Change

As an advisory firm grows, staff members must grow along with the company. Inevitably, certain employees will not keep pace, forcing a decision on whether they can be trained or whether they can adapt to the way the firm leaders want to manage the business. Some employees will leave out of frustration or fear, or they will be urged to depart because they no longer fit into the business model or have not taken the initiative to expand their skills. A deliberate program for training and development makes it much easier to fit people into positions vacated by those who did not evolve with the changing organization.

Lighting a New Fire

As organizations mature, longtime employees may no longer carry their weight, choosing to rely on their legacy. Advisory firm owners are often reluctant to dismiss those whose impact is declining. Meanwhile, more ambitious and eager individuals desire opportunities for growth. Younger staff can see this as a hopeless scenario. Advisory firms that create a new energy, replacing those who are camping out in their roles with individuals focused on improvement, generally experience a pick-up in morale. Hopelessness becomes hopefulness.

Turnover is inevitable. The key is to view succession as a growth strategy, not an exit strategy. Failing to invest in a plan to develop qualified and motivated replacements from within the firm will only lead to greater problems down the road. 

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