How Successful Companies Set Up a Succession of Leaders

eWEEK NEWS ANALYSIS: Why it is important to give credit to a departing CEO while we anticipate the positive changes of the incoming CEO.

Nadella.Ballmer,Microsoft

By “set up,” I don’t mean a bad thing, but it struck me that we often point to a departing CEO as bad and the incoming CEO as good. This is often done for good reason, for out of the thousands of CEOs replaced every year a significant number have been losing their jobs for misogyny and abuse of power.

That wasn’t the case in this instance. But it struck me that without Steve Ballmer, we never would have seen Satya Nadella take over at Microsoft, and that for IBM, without Ginni Rometty, we would have never gotten Arvind Krishna, who is similar in skill to Nadella and should be able to execute as Nadella did.

Let’s talk about CEO replacements this week and why it is important to give credit to the departing CEO while we anticipate the positive changes of the incoming CEO.

The Phases of a Company

Back when I was at the university, I took a business class that talked about the CEO skill set, and the textbook author argued that companies typically go through three phases: startup, transition and then, finally, sustaining. If the firm needs a turnaround, it is back into a transition phase; the author also argued that the skill sets were very different, and that it was very rare for a human to be good at all three phases.

For Microsoft and IBM, they were in turnaround modes when Ballmer and Rometty took over. Both firms had lost their way, and, as a result, both firms effectively got a generalist CEO that was supposed to figure out the direction the company needed to then pivot to and, once on a new track, the following CEO could be selected for his or her specialty.

IBM’s Path To Arvind Krishna

It wouldn’t, for instance, do either company any good to hire a hardware specialty CEO if the firms weren’t going to be focused on hardware going forward. That is what IBM almost did when it was going to promote Bob Moffett to CEO. I’ve often thought Bob got a raw deal, because he was seduced by a professional, and she mined him for information that the SEC finally arrested him for providing; this cost him his reputation, career and much of his wealth. You could argue he should have known better, but one thing we don’t train executives to do is how to avoid being seduced by pros. When you have power and information worth millions, you can become a target, yet we do a poor job in the States helping executives fully understand the implications of becoming a target for people who want to gain illicit financial advantages.  

So, Moffett didn’t get the job, and if he had, he’d likely have made IBM double down on hardware, because that was his skill set. Had that happened, it is unlikely IBM would have bought SoftLayer or advanced to pass Google as the No. 3-ranked cloud services vendor in the U.S.

Most people don’t realize this happened, but IBM’s reported cloud revenues (which appears to include hybrid-cloud, the dominant enterprise form of cloud deployment) wasere $6.8 billion for the quarter and $21.2 billion for the year. and Google’s just-announced cloud revenue was $2.8 billion for the quarter and $8.9 billion for the year, well behind IBM. Everyone assumed Google was in third place until it revealed its cloud revenue numbers.

So, because of both Ballmer and Rometty, their respective companies pivoted to the cloud (IBM bought SoftLayer and Red Hat), and the result was that it then made sense for them for the firms to replace the transition CEOs, Ballmer and Rometty, with cloud subject matter experts Nadella and Krishna. IBM should now follow Microsoft’s successful example.

But what shouldn’t be lost is that without Ballmer and Rometty, we’d not have Nadella or Krishna. The firms needed a specialty before the type of specialist could be determined.

Wrapping Up

We often forget the contributions of CEOs who worked during transition periods, particularly turnarounds, because they must make hard decisions regarding layoffs as they try to stabilize their respective firms and provide a foundation for success. Once that foundation is built and a direction is determined, it then makes sense to replace them with a more appropriate CEO, but, had that earlier work not been done, the latter success would not be possible.

These last few years, we’ve often had to deal with top executives who abused their power and behaved inappropriately, and those executives should be forgotten. But we often also forget transition CEOs who worked their butts off so that that their replacements could be identified and were instrumental to their firm’s later success, and that is both unfair and damaging. It is damaging because without the credit for doing a job that needed doing, others may not emulate these transition CEOs, and the result will be more company failures. 

So, this is my way of saying thanks to the transition CEOs such as Ballmer and Rometty because, without them, we’d never have the high-profile successes that followed.

Rob Enderle is a principal at Enderle Group. He is a nationally recognized analyst and a longtime contributor to QuinStreet publications and Pund-IT.