One Leader-to Go, Please

Jan 24, 2019

If only we could order up an executive as easily as we can our morning coffee: one top exec, please, strategy-minded but charismatic, analytical but compassionate, seasoned but with fresh enthusiasm. Alas, such a to-go order is likely to come with a designer price tag. Which is why many organizations are doing what they can to brew executive talent from within.

The Whys and Why Nots of Growing Your Own
Certainly, the logic behind developing leadership talent from a crop of high potentials makes sense. The organization has more time to select and groom future leaders, and leadership candidates are already entrenched in the corporate culture. Relationships, trust, and credibility are established through the years as experience is strengthened. The existing executive team is available for mentoring and passing down tacit knowledge that may be hard to come by otherwise. What’s more, annual studies of the world’s 2,500 largest companies from Booz Allen Hamilton find that internally appointed CEOs have delivered better shareholder returns than those appointed from outside—1.9 percentage points higher per year over the past seven years (Gandossy and Verma 2006).

But developing future leaders from within may cause an organization to miss out on the best talent match for the challenges at hand. Murray Dalziel, group managing director for global practices at HayGroup, warns that too much homogeneity creates “a tendency toward inward-thinking over time” (Holstein 2005). Sometimes, an infusion of new energy and ideas is exactly what is needed.

The Whys and Why Nots of Carry-Out Talent
New blood may be considered lifesaving for organizations in need of a turnaround, especially if the new leader faced similar challenges at his or her previous organization. Researchers at Harvard Business School found that strategic skills gained through experience with business growth, cyclical markets and cost-cutting may well be transferable to another firm, as are general resource management, leadership and decision-making skills (Groysberg, McLean, & Nohria, 2006). Industry skills and know-how, such as an understanding of the regulatory environment and familiarity with the customer base and vendors, are also readily usable within similar industries.

But not all of a leader’s skills are as easily transferred to a new environment. Company-specific skills, for example, such as familiarity with processes, structure, and culture, are the least-portable skills on the continuum, say the Harvard researchers. Relationship skills, such as those built with colleagues and team members at the previous organization, will be put to the test all over again in a new firm. And since the development of trust and relationships is a gradual process, their absence may well impede an executive’s ability to hit the ground running.

The Temptations and Perils of “Lift-Outs”
One interesting way to preserve the benefits of well-established relationships is through so-called lift-outs. This occurs when multiple employees are hired and move to a new company together, allowing previously formed productive relationships to stay intact (Groysberg, McLean, and Nohria 2006). Plucking an entire team from the competition can be a risky endeavor, but such lift-outs can also bring rewards if the courtship and integration are handled well, according to the authors of a Harvard Business Review article. Boris Groysberg and Robin Abrahams assert that a well-orchestrated lift-out “can even inflict financial or competitive damage on a rival.” Bringing on a full team with existing relationships avoids long ramp-up times as well as the stress and complications of a full acquisition.

But organizations considering a “plug-and-play” acquisition of an entire team need to be mindful of potential legal problems, cultural fit, incentives, and integration issues, cautions a BusinessWeek article (McGregor, 2006). Recruiting an entire team may be one way to acquire the human capital assets an organization wants without taking on the complexities of a full acquisition, but it can behoove the firm to get legal counsel. Topics such as noncompete agreements, confidentiality, unfair competition, and trade secrets may become issues in such lift-outs of multiple employees. Leaders also need to consider if the group will mesh with the firm’s culture, not just bring needed skills. Negotiations can be dicey, too, since the individuals in the group may already be well paid. There is also the possibility of the group’s negotiating as a unit even after they have come on board. Likewise, a tight-knit group raises the possibility of losing them all as easily as they were acquired. And leaders must also ensure that current employees are reassured during this unusual hiring activity.

Groysberg and Abrahams explain how a lift-out transpires: During the courtship phase, the leader of the acquiring company meets with the team leader to discuss the opportunities and viability of such a move. Then the team leader explores migration interest with the team members. After the lift-out, the team leader facilitates team integration, first within the culture of the new firm, then within the operational structure, ensuring that the necessary resources are available. In the final integration phase, the new team’s credibility serves to earn trust and extend relationships within the organization. The authors write, “Ideally, the lifted-out team will start by working with the same or similar clients, vendors and industry standards.” Such lift-outs are becoming more commonplace in professional-services industries (Groysberg and Abrahams 2006).

The Perfect Blend
Regardless of where leadership talent originates, there are certain combinations of skills that firms should be trying to attain, suggests one study. In fact, it found that the most effective approach to organizational leadership may be the “inside-outside” approach. David G. Thomson, author of Blueprint to a Billion: 7 Essentials to Achieve Exponential Growth, studied the 5% of U.S. companies with revenues of $1 billion and suggests that a key factor influencing the success of these “Blueprint Companies” may be a leadership team that pairs one executive who excels at focusing externally (such as on sales and marketing) with one who excels at focusing internally (on operations, for example). These “dynamic duos”—teams such as Yahoo’s Jeff Mallett and Tim Koogle, eBay’s Maynard Webb and Margaret Whitman and Starbucks’ Orin Smith and Howard Schultz – are examples that Thomson cites. In addition to separate areas of expertise, these pairs must also exhibit mutual trust and respect and work well together to continuously innovate, make quick decisions and correct errors (Thomson 2006).

This strong blend of complementary leadership skills may be exactly what it takes to deliver a jolt of satisfaction to an organization’s shareholders.