Recruiting industry’s little secret

A secret the healthcare recruiting industry keeps from its clients is that succession planning works. The reason why the industry keeps this a secret is because the current business model is quite lucrative for the recruiting companies, and unknowingly costly for healthcare organizations.

Here are some facts to support this position:

- Hospital CEO turnover increased to 20% in 2013 (ACHE) which was the highest rate since 1981.
- Retained search firms are paid a percent of executive salaries. Medium independent hospital CEO salary in 2013 was $380,000, and the medium independent health system CEO salary is approximately $750,000 (Becker's Hospital Review- October 13th 2013).
- The medium tenure for a hospital CEO is just less than 4 years.
- One half of an executive team will turnover within 18 months of the start date of the new CEO.

Given these statistics, one now can better understand why the healthcare recruiting industry has become so lucrative and competitive. One reality is that the recruiting firm that places the CEO will be looked upon with great favor, and likely will be selected to fill other executive positions within the organization. Talk about repeat business. In addition, some recruiting firms will continue to place the same individuals into new roles mainly because of a previous relationship with the firm, even though they may not a good fit for the organization.

There are 4 main reasons why an external CEO candidate may be brought into an organization (significant shift in strategy, cultural, financial, or to address an ethical concern). But in most other cases, I believe much more focus and attention ought to be placed upon the development and successful implementation of leadership succession plans. Here are some points in support of this position:

- The organization will take a huge financial hit when it goes through a protracted search for a new CEO. The costs are at least 4 times the CEO salary ($380,000 X 4 = $1,520,000) + 4 times each executive salary that departs once the new CEO arrives ($200,000 X 4 salary X 4 positions= $3,200,000). The total cost equals $4,720,000! That cost is never budgeted or considered when a CEO search is initiated.
- In research conducted by Matthew Bidwell at the University of Pennsylvania's Wharton School of Business, the cost to recruit someone from the outside was found to be as much as 20% higher than would be paid to an internal candidate.
- In the same research, Bidwell found external recruits will often get lower performance reviews during the first 24 months in the new job
- Executives that are developed and promoted from within have more of an immediate impact, since they already know the culture of the organization and can gain traction quicker with moving the organization forward. Someone recruited from the outside will often need the first 12 to 24 months to figure things out, put a plan together and then begin to implement the plan.
- I concur with the statistic provided by the Hay Group that up to 70% of the organization's culture is driven off of the CEO. If the organizational culture is in good shape, then promoting someone from inside will increase the chances of cultural success while going through a CEO transition.
- Over the past several months I have had the pleasure of speaking in front of several State Hospital association executive and board audiences, and I asked those in attendance how many had an active succession plan. By my rough estimate, less than 20% responded positively compared to an industry wide statistic of approximately 40%. In fact, I learned from one CEO that in the state of Kansas over the next 3 to 5 years, approximately 70% of rural hospital CEOs will be retiring.

Next Steps for the Board
Here are several steps the Board Chair and the rest of the Board ought to consider to address this need:

- Work with the CEO to develop a leadership succession plan, which will include the CEO, other executive positions and eventually include all the director/ manager positions. CEO's will often not initiate this on their own either because they are too busy "running the place" or they do not like to think about their own "executive mortality".
- Do NOT use an outside firm to develop the Succession Plan, because then the CEO and the rest of the organization will not "own" the process and plan. Often when an outside firm is brought in to develop the entire plan, it eventually becomes known as S.P.O.T.S. (Succession Plan on the Shelf). Either develop the plan internally, or utilize an outside firm to provide the structure as to how the plan should be developed, and to assist with the many interviews that will need to be completed. Resources internal to the organization should be responsible for pulling the final plan together.
- Once the plan is developed, make sure it is being implemented and brought back to the Board for quarterly updates. That is one way to make sure the plan is being followed and not sitting on a shelf (remember S.P.O.T.S.).
- Make sure the fact that the organization has a succession plan is included in all recruitment and retention activities. Having such a plan will definitely help recruit and retain talented individuals.
- When a leadership position is filled by someone in the succession plan, make sure that is included in the announcement. Many will not believe the organization is serious about succession planning until they actually see someone internally promoted into a vacant leadership position.

The ability to successfully develop and implement a leadership succession plan may make the difference between an organization succeeding during healthcare reform, or closing its doors. Leadership development is one of the four main responsibilities of the Board (the other three are strategy, Overall Governance, and Managing Risk). The time is now to begin the process of developing and implementing a succession plan before it is too late. Don't let this recruiting industry's "little secret" prevent your organization from succeeding when there is a need to deal with a leadership transition.

Daniel J. Sinnott brings 33 years of diverse leadership experience to his role as CEO of Sinnott Executive Consulting. Sinnott Executive Consulting is a leadership development company that specializes in developing the business and leadership skills of leaders preparing for or already in the C- Suite. Prior to starting his firm, Dan was an executive in healthcare for 24 years, nine of which were as a CEO of community hospitals, an academic medical center and a member of a national healthcare executive team.

 

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