Succession Challenges: Lean Management & Silos

Succession Challenges: Lean Management & Silos

by | 'Oct 16, 2017' | Family Business Basics | 0 comments

The Basics

Two of the drivers of success for first generation family businesses can also put them at major risk when it comes to leadership succession:

  • Exceptionally lean management
  • “Siloed” management structures

Lean management

The economy of an early stage business is undeniably tight. Resources are scarce, and the motto of senior management might be, “if it’s working, spend less.”

Family businesses have an enormous advantage in this early stage: they can double down on their investment of human capital because family members who work in the business are willing to put their noses to the grindstone. They work hard, they are often willing to be paid less than market rates, and because they do, they set expectations and build a culture of effort, sacrifice, and lean investment.  For many family businesses, this culture pays off and the business grows and succeeds.

But in such a culture, success can mask real risk: a relentless focus on lean operations may mean that there is little or no redundancy in the managerial ranks.  This translates into maximum profits—administrative costs are very low—but when it’s time for the founding team to retire, there may not be anyone prepared to take over their roles.  This happens because the culture of the business absorbs the notion of “one person–one job,” and develops an extreme allergy to overstaffing.

Silos

Family businesses often manage themselves in ways that can compound the lean management problem.  When multiple family members work in the business and share an ethos of individual control and decision-making, they may choose to divvy up control amongst themselves, whether by functions— “you run sales, you run operations, I run finance and accounting” —or by division or geography, rather than pick one of the group to be President or CEO.  We call these “silos.” Silo leaders run their silos independently, each overseeing their own hiring, firing, and management practices.

Operating in silos can be a very effective strategy for getting on with business, and it has the advantage of being lean and cost-effective. But silos may compound the leadership succession problem, because they multiply and decentralize the succession planning work.

Planning for succession

In a hierarchical structure with a single leader, it is the responsibility of the leader (and the board) to ensure that the business will continue to be managed successfully beyond his (or her) tenure.  The key questions are: is there adequate redundancy to ensure that at least one potential successor is in the pipeline, being trained and groomed, for each role that may become open in the next five years? Should any jobs be divided into multiple jobs?

When the business is managed in silos, the training and grooming process is multiplied by the number of silos.  Because silos are intended to give their leaders a substantial degree of autonomy, the process of training and grooming successors typically occurs out of sight of the board, and often without an agreed-upon process.  Furthermore, while the original siblings (or cousins) who created the silos in the first place may have had a common shared purpose and vision, it is less likely that their successors, trained and groomed in silos, will find that they are in alignment with their fellow silo leaders.

Overcoming the challenges

For family businesses approaching leadership succession, the key task is to embrace the responsibility of identifying, training and grooming successors for key roles.  When management is exceptionally lean, the business will need to invest financial capital in growing and developing its human capital, and do so well in advance of the day the founder or a key leader steps down.

For businesses with siloed leadership structures, leadership succession will need to be a company-wide process, conducted according to procedures accepted by all the silos, and with the oversight of the entire leadership group.  This will require coordination and communication among silo leadership, and a unifying vision, strategy, and process for succession that is acceptable to all. Only then can members can go about the work of identifying successors.

Leadership succession is never an easy task for any organization, and it can be especially difficult for family businesses. Business leaders who recognize that their current leadership structure, while important to their past success, may well threaten their future, stand the best chance for navigating the succession process.