Succession Planning for e-Commerce

Planning Can Defeat Claims from Investors

The fact that Apple had a succession plan in place may have put it ahead of most firms run by entrepreneurs ' being publicly traded forces firms to respond to succession concerns proactively, to avoid investor claims. Apple was so far ahead of its peers on the succession curve that one author, who has written extensively on Jobs' leadership skills, Carmine Gallo, specifically felt that “5 Succession Planning Lessons from Steve Jobs” provided a model for all firms, not just tech firms (see, http://bit.ly/qDZ7p9). In that study, Gallo identified several business principles that transcend any individual leader:

• Jobs' refusal to compromise his standards on what he considered critical aspects of the company;
• A focus on the customer and user experience; and
• Building a corporate culture that shared his views.

Gallo also praised Jobs' maniacal emphasis on controlling publicity as a way of reducing the potentially negative effects of speculation about succession, and two parts of his plan described in more detail in this article: running a proactive transition gradually over many years, and replacing his own skills rather than trying to clone someone with his own personality.

Writing before Jobs' death, but after his resignation, a human-resources consultant to corporate America, Linda Henman, echoed Gallo in contrasting how well Apple had planned for the post-Jobs era, in marked contrast to other firms' succession failures, even at firms as well regarded as McDonald's, or Coca-Cola (see, http://bit.ly/tyddBT). Those firms had to deal with not only a weak succession plan, but also the need to do it repeatedly in a short period of time, because of unexpected illnesses ' proving the truth and potential cost of the reality that the unexpected is, well, unexpected. She even likened Jobs' choice to be proactive on his succession to his boldness in his business decisions: “In classic entrepreneurial style, Jobs took big risks, showed passion for his products, and pushed technology beyond the expected envelope. He also prepared his successor.”

(Since his death, Jobs' resignation and demise have spawned a wealth of business and legal commentary well beyond the scope of this article on whether his firm's plan will be adequate, and what entrepreneurial firms should do similarly ' or differently, particularly concerning whether Jobs' successors can continue his ability to nurture innovation. See, “Successful Succession Planning at Apple,” from GMI, http://bit.ly/phnL8c, and “Steve Jobs Resigns: Now Apple's Succession Plan to Be Put to Test,” from ZDNet, http://zd.net/mZh2Hc.)

Don't Wait Too Long to Plan

But, as at Apple, good succession planning for any business must start long before it is needed. (According to one report, Jobs pushed his executives and board at “every single meeting, for several years ' (to) cultivate the team that would replace” him (see, Apple Insider, “Apple Board Member Says Steve Jobs Told Team Not to Ask 'What Would Steve Do?'”; http://bit.ly/oDeQ7O). To prove that point, consider how many cases of “succession gone bad” can be easily found, in all types of businesses. For example, Hewlett Packard's soap-opera succession seems to have received far more attention than its continuing product excellence (see, for reference, “Hewlett-Packard Reeling Accelerates CEO Succession Crisis,” Bloomberg.com, http://bloom.bg/r9n4Pa). Such modern real-world examples prove the continuing wisdom of the ancient Chinese proverb: “A person who does not worry about the future will shortly have worries about the present.”

The need for such advance planning was evident in a recent Wall Street Journal report about the difficulties leading e-commerce firms have had in finding those with the right skills for e-commerce, which are not the same as the skills required in traditional retail, or (as in the early days of e-commerce) required to succeed in catalog sales. See, “Wanted: Chief, E-Commerce,” http://on.wsj.com/rp5P6t.

As one seller of upscale goods (Coach) noted, its website “is our single largest store in the world, and it's growing at significant double digits.” When firms as strong as Amazon, Wal-Mart, Target and Kohl's are actively seeking skilled e-commerce executives, firms of any size interested in attracting executives at such a level as part of their own succession planning must realize the competition they must meet or surpass.

Still, Some Companies Wait ' For Some Reason

Yet despite all these reasons to do so, many firms in fact do not plan for succession. A recent study by SoloGig.com of larger IT firms (more than 500 employees) found that over one-third had no executive succession plan in place. See, http://bit.ly/jqvqcl. Perhaps even more troubling was that 56% of IT managers at those firms reported the same lack of planning at operational levels.

Excuses Won't Matter When Disaster Strikes

Certainly, the reasons often cited for such an oversight seem reasonable against the day-to-day pressure to win and retain business ' the lack of personnel due to downsizing induced by the recession, the lack of a formal planning process, and an insufficient level of investment in employee training and development. But with 20/20 hindsight, none of those reasons will matter should a crisis actually arrive.

For example, a Harvard Business School study of the succession histories of 202 Internet firms found that:

Past research has also indicated that Founder-CEO succession may be the most critical succession event in the life of most firms: 'After the starting difficulties have been overcome, the most likely causes of business failure are the problems encountered in the transition from a one-person, entrepreneurial style of management to a functionally organized, professional management team,' and the departure of a founder has an disproportionate negative impact on the likelihood of organizational survival. [Citations omitted.]

“Founder-CEO Succession and the Paradox of Entrepreneurial Success,” Organization Science, Vol. 14, No. 2, p. 151, March-April 2003, http://bit.ly/qdqSVD.

Validating that prior research, the study found that for the firms in its sample, those that had passed one of two “real world” tests, “the completion of product development and the raising of each round of financing from outside investors,” were much more likely to survive the challenges of finding a successor to the founder. Of particular concern for the e-commerce entrepreneur, the same study quoted prior research this way: “After the starting difficulties have been overcome, the most likely causes of business failure are the problems encountered in the transition from a one-person, entrepreneurial style of management to a functionally organized, professional management team.”

e-Firms Need Planning More Than Other Kinds

Such reasons explain why succession planning is critical for any business, but even more so for even a typical tech firm. In a brutally competitive environment, customers and vendors have to feel comfortable that they can do business with a firm that will survive long enough to support long-term investments in technology and marketing. Absent that comfort, top executives who can choose where they work will seek more stable positions. Lenders and investors will ask the same question and, in my experience, require that a succession plan be in place before providing new funding to the firm. Even worse, failure to plan may lead not only to paralysis should disaster occur, but also may incite shareholder litigation for breach of fiduciary duty, if succession uncertainty affects the stock value (of a public company).

Act Out Some Scenarios and See What Happens

As a useful exercise, perhaps a board and senior executives should role play what would happen if the founder/CEO were suddenly disabled or injured, or killed in an accident ' succession challenges don't always come with the long-term warning of a slowly progressing disease, as was the case with Jobs and the Apple's board. (Many resources on succession planning are readily available online, e.g., “Learn From HP's Errors ' A Checklist for Designing an Effective Succession Plan” from ere.net, http://bit.ly/b7o3Wd, and “Why Exit Strategy Planning Is Important,” from Practical eCommerce.com, http://bit.ly/eafTDq.)

In e-Commerce, the CEO Isn't
Always the Most Important Player

In fact, for e-commerce firms, the critical succession planning may not be at the CEO level, but further down the line ' particularly as the Baby Boom Generation ages. If the senior line managers who keep the company running day-to-day suddenly leave, will the firm's institutional memory be lost? Therefore, technical succession planning ' in contrast to managerial succession planning ' may be even more important than replacing the CEO. See, “Introducing Technical (Not Managerial) Succession Planning,” from the Gale Group, http://bit.ly/stFwo4. “Capturing and transmitting the knowledge from the heads of veteran performers to less-experienced workers may sound like an abstract issue, but I assure you it is practical problem,” says one manager of engineers. According to the report's author, firms must “isolate relevant knowledge, distill it, preserve it and find practical ways to transmit it in useful forms to those needing it when they need it, and in forms they can use.” To preserve such knowledge, she recommends that firms “avoid taking experienced workers for granted. They have the know-how to get the work done.”

Self-preservation Cuts Both Ways

But there is a potential trap, for employers and employees, in accomplishing succession planning below the level of executives with generous retirement packages, as the Gale study notes: “(H)ow do you sidestep concerns from the people who possess that knowledge that capturing it will not be used against them to replace them or eliminate the need for them?” Similarly, publicly reward those who share information internally ' “workers should know that having a trained backup increases their ability to be promoted.”

Don't Forget the Importance of Leadership

Another website on planning emphasizes that in the e-conomy, leadership planning is more important than succession planning (see, “Succession Development Planning,” e-Commerce and Online Stores News, http://bit.ly/tFGnra). In other words, rather than focus just on the top of the organization chart, prepare instead to “hav(e) many well trained, developed, qualified persons prepared to replace any management position that becomes open.”

e-Commerce Firms Must Adjust and Adapt

Unlike traditional businesses, moreover, e-commerce firms may be particularly well suited to successful succession planning. If nothing else, the relatively short history of e-commerce shows that the ability to manage through fundamental change has been critical to the survival of these firms. With technology and business models in constant flux, successful e-commerce managers are those who have been able to adjust to a world where the only constant is change ' so they should be able to adapt to it in the executive suite, and among the rank and file. Therefore, looking at their own company with an eye to changes that may be required should not be difficult.

Cash Flow and Employee Competence

Another planning concern for firms built by a dynamic founder is the effect of his or her departure on the firm's cash flow and its level of employee competence. A founder who wants to cash out at some point must plan well in advance for how the company will generate that cash, or hope that a third-party buyer will be interested at the moment he or she is ready to sell. Otherwise, the firm may be saddled with large buyout payments, or debt that will cripple its ability to compete and, as a result, possibly tarnish the founder's legacy.

And from an operational perspective, a founder who wants to leave the business must have recruited a “bench” of executives able to fill his or her shoes, and to have done so without presenting the possibility or beginning the actuality of diminishing the company's performance. In the competitive hiring environment for skilled e-commerce leaders described in The Wall Street Journal article cited earlier in this column, those replacements may simply not be available, or affordable, or both, when the founder wants to move on.

Yet, as the Harvard Business School study cited above shows, in reality, such firms often have not done such planning (albeit in a now dated sample) ' often because of a reluctance, or inability, to see the firm as existing, much less thriving, without their founder's full-time, personal involvement. Cultivating such maturity of leadership, and a well-stocked “executive bench,” may be one of the hardest parts of an entrepreneur confronting his or her own mortality, in business and in life (see, “Punk Rock and the Sale of Your e-Business,” in the January 2007 edition of e-Commerce Law & Strategy, at http://bit.ly/tHTWGO).

Perhaps the crucial insight for e-preneurs, then, is not the recognition that change is inevitable, but rather, accepting that such change will affect them, personally, and require changes in ownership and management, as well as in the business itself. It is difficult to plan succession at a firm whose founder and principal owner describes his long-term strategy as “don't die” (in a true case in my office).

Take a New Look

In fact, Jobs, ahead of the curve in this area of leadership as in most others, specifically advised his successor not to look to what he would have done. According to Tim Cook: “Among his last advice he had for me, and for all of you, was to never ask what he would do. 'Just do what's right.'” (See, “Apple's Jobs Told Cook Not to Ask 'What Would Steve Do?'”, Bloomberg Business Week, http://buswk.co/vwt1Rs and http://bloom.bg/rVAsOX.)

According to Cook, Jobs wanted Apple to avoid the financial and operational breakdowns that befell the Walt Disney Co. after its founder's passing, where “everyone spent all their time thinking and talking about what Walt would do.”

That advice highlights another key aspect of succession planning: Not only must a firm plan for change, but it must also recognize that such plans themselves must be reevaluated and changed as the company and markets change. While the broad strategy should not flip-flop from quarter to quarter, the company's board should periodically re-evaluate whether its succession plan makes sense in light of the firm's personnel and business, or whether tweaking is in order. After several years, of course, a complete reevaluation may be in order. No one wants to be forced to do crisis planning, whether due to a failure to plan in the first place, or to be forced to rely on a plan that has become outdated.

Everyone in the tech economy mourned the recent passing of Apple cofounder Steve Jobs. Even in an era of sweeping technological change, his innovations disrupted many business models well beyond Apple's own product markets. His biographer, Walter Isaacson, listed six in his eulogy of Jobs (http://bit.ly/tuy59O):

• Personal computers;
• Animated movies;
• Music;
• Phones;
• Tablet computing; and
• Digital publishing.

Of greater relevance to readers of this publication is that others have also included retailing and e-commerce in that list because of the way Apple's devices have changed the way people shop.

But only time will tell if he properly handled a challenge that faces every entrepreneur: succession. In other words, what happens to the business after the founder decides that 20-hour days have to end, and the staff has to be responsible to run the business when the founder or most significant leader moves on ' or, as in Jobs' case, when that decision is made for him by an illness that his millions of dollars could not beat?

Jobs himself recognized this issue in one of his final public announcements, his resignation as Chairman of Apple:

I have always said if there ever came a day when I could no longer meet my duties and expectations as Apple's CEO, I would be the first to let you know. Unfortunately, that day has come. I hereby resign as CEO of Apple. I would like to serve, if the Board sees fit, as Chairman of the Board, director and Apple employee. As far as my successor goes, I strongly recommend that we execute our succession plan and name Tim Cook as CEO of Apple. (Emphasis added.)
(See, http://themacurl.wordpress.com/tag/stevejobs.)

However, his planning had begun long before that, when Tim Cook was anointed as Chief Operating Officer, and became the company's public face at business events (although Jobs had kept a firm grip on the product announcements he relished as long as he was healthy enough to present them. See, Apple Insider, “Steve Jobs Resignation Letter Mocks Idea That Board Had No Succession Plan,” http://bit.ly/nBwo2P).

Planning Can Defeat Claims from Investors

The fact that Apple had a succession plan in place may have put it ahead of most firms run by entrepreneurs ' being publicly traded forces firms to respond to succession concerns proactively, to avoid investor claims. Apple was so far ahead of its peers on the succession curve that one author, who has written extensively on Jobs' leadership skills, Carmine Gallo, specifically felt that “5 Succession Planning Lessons from Steve Jobs” provided a model for all firms, not just tech firms (see, http://bit.ly/qDZ7p9). In that study, Gallo identified several business principles that transcend any individual leader:

• Jobs' refusal to compromise his standards on what he considered critical aspects of the company;
• A focus on the customer and user experience; and
• Building a corporate culture that shared his views.

Gallo also praised Jobs' maniacal emphasis on controlling publicity as a way of reducing the potentially negative effects of speculation about succession, and two parts of his plan described in more detail in this article: running a proactive transition gradually over many years, and replacing his own skills rather than trying to clone someone with his own personality.

Writing before Jobs' death, but after his resignation, a human-resources consultant to corporate America, Linda Henman, echoed Gallo in contrasting how well Apple had planned for the post-Jobs era, in marked contrast to other firms' succession failures, even at firms as well regarded as McDonald's, or Coca-Cola (see, http://bit.ly/tyddBT). Those firms had to deal with not only a weak succession plan, but also the need to do it repeatedly in a short period of time, because of unexpected illnesses ' proving the truth and potential cost of the reality that the unexpected is, well, unexpected. She even likened Jobs' choice to be proactive on his succession to his boldness in his business decisions: “In classic entrepreneurial style, Jobs took big risks, showed passion for his products, and pushed technology beyond the expected envelope. He also prepared his successor.”

(Since his death, Jobs' resignation and demise have spawned a wealth of business and legal commentary well beyond the scope of this article on whether his firm's plan will be adequate, and what entrepreneurial firms should do similarly ' or differently, particularly concerning whether Jobs' successors can continue his ability to nurture innovation. See, “Successful Succession Planning at Apple,” from GMI, http://bit.ly/phnL8c, and “Steve Jobs Resigns: Now Apple's Succession Plan to Be Put to Test,” from ZDNet, http://zd.net/mZh2Hc.)

Don't Wait Too Long to Plan

But, as at Apple, good succession planning for any business must start long before it is needed. (According to one report, Jobs pushed his executives and board at “every single meeting, for several years ' (to) cultivate the team that would replace” him (see, Apple Insider, “Apple Board Member Says Steve Jobs Told Team Not to Ask 'What Would Steve Do?'”; http://bit.ly/oDeQ7O). To prove that point, consider how many cases of “succession gone bad” can be easily found, in all types of businesses. For example, Hewlett Packard's soap-opera succession seems to have received far more attention than its continuing product excellence (see, for reference, “Hewlett-Packard Reeling Accelerates CEO Succession Crisis,” Bloomberg.com, http://bloom.bg/r9n4Pa). Such modern real-world examples prove the continuing wisdom of the ancient Chinese proverb: “A person who does not worry about the future will shortly have worries about the present.”

The need for such advance planning was evident in a recent Wall Street Journal report about the difficulties leading e-commerce firms have had in finding those with the right skills for e-commerce, which are not the same as the skills required in traditional retail, or (as in the early days of e-commerce) required to succeed in catalog sales. See, “Wanted: Chief, E-Commerce,” http://on.wsj.com/rp5P6t.

As one seller of upscale goods (Coach) noted, its website “is our single largest store in the world, and it's growing at significant double digits.” When firms as strong as Amazon, Wal-Mart, Target and Kohl's are actively seeking skilled e-commerce executives, firms of any size interested in attracting executives at such a level as part of their own succession planning must realize the competition they must meet or surpass.

Still, Some Companies Wait ' For Some Reason

Yet despite all these reasons to do so, many firms in fact do not plan for succession. A recent study by SoloGig.com of larger IT firms (more than 500 employees) found that over one-third had no executive succession plan in place. See, http://bit.ly/jqvqcl. Perhaps even more troubling was that 56% of IT managers at those firms reported the same lack of planning at operational levels.

Excuses Won't Matter When Disaster Strikes

Certainly, the reasons often cited for such an oversight seem reasonable against the day-to-day pressure to win and retain business ' the lack of personnel due to downsizing induced by the recession, the lack of a formal planning process, and an insufficient level of investment in employee training and development. But with 20/20 hindsight, none of those reasons will matter should a crisis actually arrive.

For example, a Harvard Business School study of the succession histories of 202 Internet firms found that:

Past research has also indicated that Founder-CEO succession may be the most critical succession event in the life of most firms: 'After the starting difficulties have been overcome, the most likely causes of business failure are the problems encountered in the transition from a one-person, entrepreneurial style of management to a functionally organized, professional management team,' and the departure of a founder has an disproportionate negative impact on the likelihood of organizational survival. [Citations omitted.]

“Founder-CEO Succession and the Paradox of Entrepreneurial Success,” Organization Science, Vol. 14, No. 2, p. 151, March-April 2003, http://bit.ly/qdqSVD.

Validating that prior research, the study found that for the firms in its sample, those that had passed one of two “real world” tests, “the completion of product development and the raising of each round of financing from outside investors,” were much more likely to survive the challenges of finding a successor to the founder. Of particular concern for the e-commerce entrepreneur, the same study quoted prior research this way: “After the starting difficulties have been overcome, the most likely causes of business failure are the problems encountered in the transition from a one-person, entrepreneurial style of management to a functionally organized, professional management team.”

e-Firms Need Planning More Than Other Kinds

Such reasons explain why succession planning is critical for any business, but even more so for even a typical tech firm. In a brutally competitive environment, customers and vendors have to feel comfortable that they can do business with a firm that will survive long enough to support long-term investments in technology and marketing. Absent that comfort, top executives who can choose where they work will seek more stable positions. Lenders and investors will ask the same question and, in my experience, require that a succession plan be in place before providing new funding to the firm. Even worse, failure to plan may lead not only to paralysis should disaster occur, but also may incite shareholder litigation for breach of fiduciary duty, if succession uncertainty affects the stock value (of a public company).

Act Out Some Scenarios and See What Happens

As a useful exercise, perhaps a board and senior executives should role play what would happen if the founder/CEO were suddenly disabled or injured, or killed in an accident ' succession challenges don't always come with the long-term warning of a slowly progressing disease, as was the case with Jobs and the Apple's board. (Many resources on succession planning are readily available online, e.g., “Learn From HP's Errors ' A Checklist for Designing an Effective Succession Plan” from ere.net, http://bit.ly/b7o3Wd, and “Why Exit Strategy Planning Is Important,” from Practical eCommerce.com, http://bit.ly/eafTDq.)

In e-Commerce, the CEO Isn't
Always the Most Important Player

In fact, for e-commerce firms, the critical succession planning may not be at the CEO level, but further down the line ' particularly as the Baby Boom Generation ages. If the senior line managers who keep the company running day-to-day suddenly leave, will the firm's institutional memory be lost? Therefore, technical succession planning ' in contrast to managerial succession planning ' may be even more important than replacing the CEO. See, “Introducing Technical (Not Managerial) Succession Planning,” from the Gale Group, http://bit.ly/stFwo4. “Capturing and transmitting the knowledge from the heads of veteran performers to less-experienced workers may sound like an abstract issue, but I assure you it is practical problem,” says one manager of engineers. According to the report's author, firms must “isolate relevant knowledge, distill it, preserve it and find practical ways to transmit it in useful forms to those needing it when they need it, and in forms they can use.” To preserve such knowledge, she recommends that firms “avoid taking experienced workers for granted. They have the know-how to get the work done.”

Self-preservation Cuts Both Ways

But there is a potential trap, for employers and employees, in accomplishing succession planning below the level of executives with generous retirement packages, as the Gale study notes: “(H)ow do you sidestep concerns from the people who possess that knowledge that capturing it will not be used against them to replace them or eliminate the need for them?” Similarly, publicly reward those who share information internally ' “workers should know that having a trained backup increases their ability to be promoted.”

Don't Forget the Importance of Leadership

Another website on planning emphasizes that in the e-conomy, leadership planning is more important than succession planning (see, “Succession Development Planning,” e-Commerce and Online Stores News, http://bit.ly/tFGnra). In other words, rather than focus just on the top of the organization chart, prepare instead to “hav(e) many well trained, developed, qualified persons prepared to replace any management position that becomes open.”

e-Commerce Firms Must Adjust and Adapt

Unlike traditional businesses, moreover, e-commerce firms may be particularly well suited to successful succession planning. If nothing else, the relatively short history of e-commerce shows that the ability to manage through fundamental change has been critical to the survival of these firms. With technology and business models in constant flux, successful e-commerce managers are those who have been able to adjust to a world where the only constant is change ' so they should be able to adapt to it in the executive suite, and among the rank and file. Therefore, looking at their own company with an eye to changes that may be required should not be difficult.

Cash Flow and Employee Competence

Another planning concern for firms built by a dynamic founder is the effect of his or her departure on the firm's cash flow and its level of employee competence. A founder who wants to cash out at some point must plan well in advance for how the company will generate that cash, or hope that a third-party buyer will be interested at the moment he or she is ready to sell. Otherwise, the firm may be saddled with large buyout payments, or debt that will cripple its ability to compete and, as a result, possibly tarnish the founder's legacy.

And from an operational perspective, a founder who wants to leave the business must have recruited a “bench” of executives able to fill his or her shoes, and to have done so without presenting the possibility or beginning the actuality of diminishing the company's performance. In the competitive hiring environment for skilled e-commerce leaders described in The Wall Street Journal article cited earlier in this column, those replacements may simply not be available, or affordable, or both, when the founder wants to move on.

Yet, as the Harvard Business School study cited above shows, in reality, such firms often have not done such planning (albeit in a now dated sample) ' often because of a reluctance, or inability, to see the firm as existing, much less thriving, without their founder's full-time, personal involvement. Cultivating such maturity of leadership, and a well-stocked “executive bench,” may be one of the hardest parts of an entrepreneur confronting his or her own mortality, in business and in life (see, “Punk Rock and the Sale of Your e-Business,” in the January 2007 edition of e-Commerce Law & Strategy, at http://bit.ly/tHTWGO).

Perhaps the crucial insight for e-preneurs, then, is not the recognition that change is inevitable, but rather, accepting that such change will affect them, personally, and require changes in ownership and management, as well as in the business itself. It is difficult to plan succession at a firm whose founder and principal owner describes his long-term strategy as “don't die” (in a true case in my office).

Take a New Look

In fact, Jobs, ahead of the curve in this area of leadership as in most others, specifically advised his successor not to look to what he would have done. According to Tim Cook: “Among his last advice he had for me, and for all of you, was to never ask what he would do. 'Just do what's right.'” (See, “Apple's Jobs Told Cook Not to Ask 'What Would Steve Do?'”, Bloomberg Business Week, http://buswk.co/vwt1Rs and http://bloom.bg/rVAsOX.)

According to Cook, Jobs wanted Apple to avoid the financial and operational breakdowns that befell the Walt Disney Co. after its founder's passing, where “everyone spent all their time thinking and talking about what Walt would do.”

That advice highlights another key aspect of succession planning: Not only must a firm plan for change, but it must also recognize that such plans themselves must be reevaluated and changed as the company and markets change. While the broad strategy should not flip-flop from quarter to quarter, the company's board should periodically re-evaluate whether its succession plan makes sense in light of the firm's personnel and business, or whether tweaking is in order. After several years, of course, a complete reevaluation may be in order. No one wants to be forced to do crisis planning, whether due to a failure to plan in the first place, or to be forced to rely on a plan that has become outdated.