You may be happy to stay on as CEO, but is your company grooming your successors, especially to meet the new demands of convergence? Fewer than half are doing so, says Paul DiPaola, a vice president of Bain & Company.

In this era of convergence, telecom firms need leaders with an unprecedented breadth of skills and knowledge. Yet those leaders are increasingly difficult and expensive to find on the outside, and most firms are woefully unprepared to cultivate internally and train the leaders they need.

This has led to some strange—and strained—employee-employer dynamics.

In the optical fibre sector, for instance, some companies are getting court orders to stop employees from working for a rival. Ciena, Lucent, Nortel and Alcatel have all used the courts to hold onto talent.

How did things become so dire that telecoms companies find it necessary to go to court to keep their employees?

Two obvious reasons are the rapid growth in the sector and the changing job descriptions that convergence brings. A less obvious but even more fundamental reason is the lack of "leadership supply systems"—corporate programmes to identify and cultivate high-potential leaders.

Over the last several years, we at Bain & Company have conducted in-depth interviews with senior personnel at more than 50 high-performing corporations, including a number of telecoms companies, in a search for the best practices that drive successful leadership supply programmes.

We have also worked closely with several clients to address their leadership shortages and help them implement new leadership supply programmes.

Of the 50 companies we studied, fewer than half had any element of a systematic programme to identify high-potential, top performers and put them on the fast track.

SERIOUS FAILING

It is a potentially serious failing. As Motorola learned in the late 1990s, the lack of a leadership supply system can hinder a companyÆs ability to adapt to the powerful forces altering the business landscape. By recognizing this shortcoming and addressing it, Motorola demonstrated the power of a well-designed and executed leadership supply programme.

A leader in the technology boom of the 1990s, as the millennium approached Motorola found itself out of step with the rapid changes occurring in the telecommunications and wireless world. The rapid convergence of wireless, paging, cellular, and internet markets had rendered obsolete MotorolaÆs practice of having separate and sometimes competing business units—internally known as "warring tribes"—for each product family.

To correct this, in early 1998 senior executives decided to create a new division, communication enterprises, that would combine all of MotorolaÆs wireless businesses under one roof.

Seven of Motorola's most senior executives, including Sandy Ogg, now a corporate vice president and the director of Motorola's office of leadership, began meeting to determine the structure and staffing of the new division.

They quickly discovered they had little or no performance data on most candidates.

That was just the beginning of the staffing problems. The demand for leaders far exceeded their supply, and everyone wanted the same handful of stars. What's more, many jobs required a breadth of skills unprecedented at Motorola. There were people with expertise in devices, others with expertise in infrastructure, and still others with software expertise, but none with all three.

"By combining all these divisions, we created a business that would be responsible for producing wireless handsets - all of them: cellphones, pagers, two way radios, and so on," says Ogg.

"The forecast volume was close to 15 million units per quarter. We needed someone to run the supply chain for this, get all the parts, and handle the distribution. But we just didn't have anyone who could handle that kind of volume and complexity." Or if they did, no one at Motorola was aware of it.

There simply was no system for identifying, cultivating, and rewarding leaders within the organization, no objective way to rank individuals and compare their performance against others. And there was little room in the system to reward those who were deemed high-potential top performers: promotions were few and far between, even for high performers; opportunities were rarely created for people to move from one division to another; training programmes were essentially the same for everybody; compensation typically varied only 1-2% between top and bottom performers; and except for the grossest infractions, nobody was ever fired from Motorola.

As a result, people who were deemed high performers were rarely informed of it. What was the point, since they were unlikely to receive any incremental reward?

Finally, in the absence of firm data on performance, promotions were highly influenced by politicking.

To address this, Motorola's chairman of the board and chief executive officer, Chris Galvin, formally introduced a leadership supply programme at an officer's business meeting.

The company's subsequent experience demonstrates some of the benefits—and challenges—of implementing a new leadership supply programme.

Motorola undertook an ambitious initiative to rate, rank, and cross-calibrate all of their management-level employees, starting with the top 500 executives in the company.

Senior executives are now rated quantitatively according to a set of leadership standards called "the four Es"—envision, energize, edge, and execute—and also on their business performance—in other words, their ability to make the numbers.

These scores are consolidated, and each of the 500 senior managers is ranked. Then the most senior executives meet to calibrate the rankings and resolve any inconsistencies.

This ranking creates three tiers of leaders: high-potential top performers—the top 15%—who are slated for differential investment; the bottom 15%, who will be out-placed from the company; and everybody else, the remaining 70%, who will be invested in normally.

Rankings are revised quarterly, and each individual receives a quarterly review of their performance pointing out areas of excellence and areas of improvement.

It is important to point out that the top bucket includes only those people who are top performers and are deemed to have high potential to excel. Some "high performers" are either too senior to merit differential investment or have reached the limits of their growth trajectories.

The most senior top talent in the company is then pooled into a corporate-wide portfolio available to all business units. As the need arises, and if it's the right career move for an individual, high performers may move from one division to another.

Previously, Motorola employees typically stayed within one business unit for their entire careers. Now, Ogg chairs a bi-weekly conference call with business unit heads that seeks to match open positions with available top talent from all over the company. This "free market" for talent stretches the individual's capabilities and brings a different but valuable skill-set to new areas of the organization.

Ogg is convinced the new system works, for top performers, under-performers, and the company as a whole.

As evidence, he offers the story of one of the company's most senior executives. An acknowledged high-potential star, this executive recently moved out of the general manager job in a business unit in which he felt the company chronically under-invested. He had been stagnating in the position and was clearly unhappy. Now he is the head of strategy for a new division and the general manager for three of its businesses; he is revitalized.

The system works the other way, too, exposing under-performers. One executive, whom we'll call Jim, was a highly ambitious manager with a strong reputation. Under the old system he was promoted to head up an overseas business unit. The unit promptly posted huge losses in Jim's first year of stewardship.

When confronted, Jim protested that it was an anomaly; his performance in his old job, he said, proved he was a star.
He still expected to be promoted to a general manager's job when he returned to the US, and under the old system, itÆs likely this would have happened.

But around this time, Motorola began rating and ranking its senior employees. When Jim was rated along the 4Es, a surprising result emerged: Jim was not a top performer. In fact, he was closer to the bottom of the group.

Jim challenged the rating, and even complained to the CEO's office. But because everyone had participated in rating and ranking Jim, the response was consistent at every stop: Jim was an under-performer.
Eventually Jim left the company, as there was no way that the career path available to him at Motorola could meet his exceedingly high expectations.

RESISTANCE TO CULTURAL SHIFT

The leadership supply system at Motorola is young, and predictably, has encountered some resistance. The cultural shift was hard to swallow for some employees, who preferred the job security and stability of MotorolaÆs former system.

Some employees have found it hard to tell a friend and colleague that they are under-performing, or worse, that they should leave the company. These can be emotionally wrenching conversations that test individual loyalty and friendships.

Additionally, when stars are promoted, the colleagues left behind can feel resentful. But according to Ogg, clear success stories are helping to cement support for the system.

For instance, the chief financial officer of a division recently resigned. Because of the rate/rank system, Ogg was immediately able to identify from the 500 most senior executives the three finance people who were consensus top 15% performers.

These three were contacted and interviewed, an offer was made, and within 10 days of the CFO's resignation, the new CFO was in the job.
Even better, there was no dissension about the choice. Everyone was working with the same facts, and everyone agreed that those were the three candidates. It was a far cry from the old days, says Ogg, where reputation and politics were the primary decision data.

The leadership supply system is now widely viewed as a success at Motorola, and plans are moving forward to expand it. After the initial rollout at the most senior levels of the company, the system is being pushed down into individual divisions.

Eventually the performance groups will be more finely divided, splitting the "middle 70%" into two or three groups. This should increase the pipeline of talent that Motorola has available to it as it continues to grow and expand into new business spaces.
Of course, the ultimate tests of the system are whether the individual excels at the job and whether the corporation performs better. But in the short term, says Ogg, the system has been dramatically effective.

"To fill a job that senior in 10 days with a highly qualified candidate and with no disagreement - that never would have happened in the old days."

NATURAL TENSIONS

Implementing and managing a leadership supply programme is not easy. The issues are complex, and rating and ranking people will always highlight, and often strain, the natural tensions between professional and personal relationships.

But there are practices that can help. In the course of our work with clients, we have identified four keys to a successful leadership supply programme:

Quantitatively rate and rank all senior employees. Rate and rank all relevant employees on a consistent, qualified set of criteria gauging performance and potential. Ratings and rankings should be reviewed and calibrated by a group of senior executives. Divide employees into groups based on rankings (top bucket, bottom bucket, etc.). Conduct evaluations, ratings, and rankings regularly, usually quarterly or semi-annually, and give employees timely reviews of each rating and ranking.

DIFFERENTIAL INVESTMENT

Differentially invest in high-potential top performers. High-potential top performers should receive substantially more investment than other employees. Investment can be in the form of training, career opportunities, exposure to senior personnel, and of course, compensation. To be effective, these differential investments must be substantial and tangible, not merely "lip service rewards".

Manage senior top performers as a corporate portfolio of talent. In the best leadership supply companies, high-potential top performers are considered part of a corporate-wide pool of talent that can be called upon to fill open positions throughout the company. This serves the corporation's interests and provides more career opportunities for individuals.

Let line managers drive the process, not human resources. Line managers are in the best position to evaluate and manage their employees. Human resources, which typically has no direct experience with the employee, can support the leadership supply system in its usual functions—recruiting, compensation, outplacement, training, and so on—but the fundamental rating, ranking, and career management system must be driven by line managers.

Through its leadership supply programme, Motorola has found a way to hold onto its best employees—and without resorting to the courts.
And though every company's approach to leadership supply will be its own, Motorola's experience provides some valuable lessons for other companies facing similar challenges.

Convergence and rapid change are here to stay in telecoms—it's up to management to make sure their stars are, too.