Groom the leader for the throne

MUMBAI: Succession planning has for long been a foreign concept for most Indian companies, more so in the case of small and medium enterprises (SMEs). But the times are changing and for the better. Several of these SMEs are not only getting aggressive, but also building up scale and presence on a national level. Consequently, there is a growing awareness to put in systems and processes that would be enablers in the growth process.

Professionalising the business and grooming a team to take the company to the next phase of growth is a serious focus area for most companies. The good news is that a growing number of firms are now aware of the need to plan and ensure smooth succession.

Most SMEs are only beginning to realise that succession planning can be as much part of a growth strategy as diversifying into new markets or new products. “Companies are more open to succession planning now as they see substantial gain in doing so,” points out senior industry consultant, Jagdeep Kapoor of Samsika Marketing Consultants.

According to industry estimates, less than 40% of companies have a planned approach for succession in the SME segment, which is an extremely low percentage. At times, some entrepreneurs equate putting in place a succession plan with a loss of control over their companies. Hence they fail to share critical information about the company to others in the company.

The main reason for the lack of a succession plan is the casual attitude to the subject. “Merely ensuring that the business will be passed on to the children is not succession planning. One has to equip them and train them to take charge,” said a top industry official.

Most entrepreneurs would rather attend to other pressing matters and put the subject of succession planning on the back burner. They have the time and the resources, but they do not understand the importance of the subject. But entrepreneurs would do well to remember the phrase: One’s attitude determines one’s altitude.

Companies that do not plan for the future, continue to remain small and moribund with a bleak future, especially in the absence of the entrepreneur for any reason. It is to gauge the sustainability of the enterprise over the long term that credit rating agencies look at succession planning of the enterprise at the time of rating.

After all, investors putting in money into any venture want an assurance that the company continues to not just sustain but grow and create wealth over the long term.

“Companies need to invest not just in capex and technology but also in human capital either by way of acquisition of managerial and technical skills or through training and development of existing employees,” says an SME entrepreneur.

Nowadays, an increasing number of SMEs are planning and preparing for a second line of command that can run the company in the absence of the chieftain. “By ’10, about 60% of SMEs will have put in place a succession plan,” predicts a hopeful Mr Kapoor.

Of course, even among those companies who do have succession planning, usually it involves family members. “Professionals are hired only if they need a particular skill set or if no family member is available,” says an official working with an SME.

Most entrepreneurs do eventually hope to see their children succeed them. To that extent, they do have a plan. The children are groomed keeping in mind that they will be manning the key positions in future. Thankfully, nowadays, the second generation of the entrepreneur is well educated with the required technical or management degrees and skills and is well poised to take on the reins of the company.

“In our case, our (mine and my partner’s) children will succeed us. We will train and groom them by ensuring that their future studies will be related to the business. For instance, we are into electrical items.

Thus, the children will study electrical engineering or some related subject,” says a young first generation entrepreneur who expects his 14-year-old son to join him in the next 8-10 years.

However, there is a future for professionals too, especially those that have been associated with the company for a long time. “We are diversifying into new products and starting new companies. The professionals who have been with me for long will be given charge of these companies,” adds the entrepreneur.

Many entrepreneurs avoid the succession planning issue since it could end up hurting some or the other. But, it is just a matter of delaying the pain, rather than ensuring that a solution is found in the present. Companies can create new markets, new divisions or new companies to ensure that family members are accommodated.

This subject has elicited several studies that show that, regardless of their size, it is important for family-owned businesses to develop a formal plan for succession, communicate the identity of the successor, and provide training/mentoring to the incumbent CEO.

The CEO selected should be capable of being the driving force behind the company and should have the ability to turnaround the fortunes of the company or take it to a higher plane.

The importance of succession planning cannot be overemphasised. It is a very strong strategic move for various reasons. The personal involvement of the first generation needs to be carried forward. “The skills and experiences need to be handed down to the next generation. Due to competitive pressures, there is a need to ensure continuity of the organisation,” says Mr Kapoor.

Like in relay races, it is important for the first generation entrepreneur to pass on the baton to the next generation as smoothly as possible in order to avoid unnecessary delays. Having a succession plan in place can ensure that the company’s growth does not slow down, especially given the opportunities in India today.