There is no specific definition of an SME. However, Confederation of Indian Industry (CII) an independent agency in India has recognized a firm with an investment of ₹1 Cr (₹10 Million) as an SME. In India, particularly the SME sector is considered as the backbone of the Indian economy contributing to nearly 45% of the industrial output, 40% of Exports, employing 60 million people, creating 1.3 million jobs every year and producing more than 8000 quality products for the Indian and International markets.
One of the biggest challenges that are being faced by SME’s is that an SME’s workforce is critical to its overarching success, yet many SMEs don’t have a clear plan for replacing critical talent if they suddenly leave. Succession planning is necessary and critical, yet many are unsure of a clear definition. Succession planning is the process of identifying and developing potential future leaders or senior managers, as well as individuals to fill other business-critical positions, either in the short term the long term. Whilst succession planning is an important aspect for any business if the business is to survive in the long term, it’s particularly important for SMEs as they are often reliant on the know-how of individual staff due to their size of operations. Whether it’s their technical knowledge or the relationships with key clients, when pivotal talent walks out the door unexpectedly, it can leave your company in a sticky situation.
A recent survey cited that as many as 79 percent of businesses recognize that succession planning will be a major issue for their organization in the next five to ten years. Yet, when it comes to succession planning, it’s an exercise that often takes the back burner. This is akin to a personal retirement planning, where one feels that there is plenty of time in hand, whereas in reality, time flies.
Change is constant and growth is dynamic. It is the law of Nature that growth is imminent and therefore the challenges that come with growth become more and more complex as the situations change. And this is no different for SME’s for the challenges that they face are immense, and in spite of the challenges, they have a choice either grow or perish. A typical case is that of today’s Reliance Industries which was once an SME in the early 70’s with operations being carried out through a single room in a chawl in Mumbai’s Kalbadevi district. Today, it is one of the Fortune 500 Companies. The only difference is that it is driven by growth.
Apart from Capital, Human Resources is one of the factors that affect the growth and the performance of any Industry, where it is an SME or a Large Scale Enterprise. Management is one of the most critical factors because proper management and the skills of the manager are what propels the Industry.
Why Should an SME have a Succession Plan??
There are 2 Primary Reasons for having a Succession Plan in place
Business Reasons.
Personal Reasons
Business Reasons:
The primary reason for succession planning is the replacement of key employees. In a country like India, the cost of Human Resources is one of the highest since many of the industries are still not technologically advanced and depend on human skilled labor. Besides, the cost of attrition is very high, particularly in certain sectors like Technology, Insurance, Banking and Telecommunications.
The cost of attrition of a skilled employee can have a very negative impact on the growth of the business apart from other challenges. For e.g. in the case of an SME, which is a family run business, one of the partners or the family members who are in charge of maybe production or finance, suddenly leaves the business or dies. The business suffers till a replacement till the time that a suitable replacement is found, due to the loss of a key person.
This is particularly true in the case of every family run business where the day to day operations are managed by the members of a joint family. Any big business today was set up as a family run business and later started appointing professional managers, whether it is the Tata’s, Birlas, the Bajaj’s or Godrej or for that matter even Walmart, Microsoft or Google.
The biggest difference in the case of those that made it big is that these companies is that these companies and the force behind these companies, understood the importance of a succession plan very early in their growth phase and appointed professional managers to run their business, leaving the major control and the decision making powers with the family members. That is the reason for their phenomenal success. The Tata’s, Birla’s and Godrej are more than a century old and have a solid succession plan in place, which keeps changing from time to time.
For the perpetual continuation of a business, a succession plan is a must, whether it is Microsoft or Google or Apple. As a company grows, responsibilities for key talent often grow in parallel, yet, as we all know, any human resource is finite. As time goes on, additional talent is needed to support growth, whether it in terms of monetary growth or technological growth. SMEs should look to both internal and external talent to meet their anticipated needs. Internal talent, particularly in the case of family-run businesses should be identified early and developed where possible through training, secondments or shadowing. However, with the changing times and the technology, additionally, external talent networks should be maintained and nurtured to ensure that new talent can be brought in when needed.
Personal Reasons.
Even kings in ancient days used to appoint their successors before they died with the hope that the successor will run the kingdom and that their soul can depart the world in peace. In the case of a business also, personal reasons play a more important role where succession planning is concerned, as one has to take care of the members of the family as it is the primary source of their wealth. And where succession planning is not done for personal reasons it has a disastrous impact on the business, the most famous case being that of the Reliance Empire in recent times where brothers fought over the wealth of billions!! Just because the first generation did not have a personal succession plan in place!!
Tips for Succession Planning:
Great things in Business are never done by one person. They’re done by a team of people. – Steve Jobs.
With succession planning, it’s essential that you look to your business plan and its objectives to guide your succession plan and keeping up the changing times. Some of the critical questions that need to be answered before putting in a succession plan in place:
Does the business have a clear set of values?
What are your anticipated areas for growth in the business?
Are you supporting the development of your internal talent?
What are the Strengths and the Weaknesses of the talent which is being developed?
How do you identify the talent that should be nurtured?
Do you have a recruitment strategy in place for sourcing the right external candidates for the right positions?
Do you as an Employer have Leadership Qualities and Skills that show you as a dynamic employer?
Do you have attrition measures in place to retain your best talent as per industry standards?
What is the vehicle being used for a succession plan? Is it a Trust, Family Office, etc.
Is the succession plan forward-looking in nature?
Is it taking care of the generational needs of the business?
Is the Succession Plan well diversified in terms of the successive Talent?
In Conclusion, as SME’s move through various stages in their life cycle, the issues of leadership and succession become more and more critical. Succession Planning is an organizational process that involves people and the recruitment and development of people or employees to fill each key role within the organization. Notwithstanding the importance of succession planning, business enterprises are continually bogged down by more tangible and visible issues in the present rather than the future. Thus, business enterprises today are increasingly in need of planned succession to steer the organization in the right direction for the future which in turn will collectively and eventually lead the nation’s growth and the growth of society as a whole.
Article By: Chirag Nanavati. He is a Certified Financial Planner and has been working in the field of Investment and Portfolio Management for the past 15 years.