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Hospitals that look externally to hire a new CEO may have more long-term success than those that hire from within, Eric Ford, a professor at University of Alabama at Birmingham's School of Public Health, and colleagues write for the Harvard Business Review.

Learn more: How to ensure seamless leadership transitions

"One of the most important and challenging decisions faced by corporate directors is whether to promote a new CEO from within or to hire new talent when a CEO leaves the company," the authors write. Past research has shown both options "have advantages," they write, noting, "Inside candidates, often groomed by their predecessors, bring firm-, market-, and industry-specific knowledge that outsiders might take years to acquire. In contrast, outsiders bring different experiential knowledge to the strategic decision-making position and are often seen as able to make dramatic changes that an insider might not consider."

However, they note that methodologies used in past studies often fall short. "First, analysis of firms' inputs and outputs are not independent because purposeful decision-making to change one measure based on the other causes problems when drawing statistical inferences. Second, the fit between theoretical descriptions of competitive advantage and commonly used organizational outcome measures is inadequate."

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Analysis details

For the analysis, Ford along with Kevin Lowe, a professor in leadership at the University of Sydney, and Timothy Huerta, a professor in family medicine and biomedical informatics at The Ohio State University, sought to overcome those limitations and examine the "impact of CEO succession on productivity and efficiency." To do so they compared 490 CEO successions with a control group of 1,150 firms within the health sector.

Of the 490 CEO successions, 82 involved an internal C-level officer becoming CEO, while the remaining 408 involved an outsider becoming CEO.

Findings

After reviewing hospital performance data for the five years after the succession occurred, the researchers found that the hospitals that hired outside CEOs were initially less competitive and had a brief decline in efficiency, but ultimately outperformed the hospitals that hired insiders.

However, both groups fell behind hospitals that had not changed CEOs during that same timespan.

The researchers write that any corporation in the United States should "consider that any change has a negative impact in the short term and that more patience might be warranted." However, they conclude, "If a new CEO must be found, then recruiters may want to look outside rather than in" (Ford et. al., Harvard Business Review, 5/8).

Advisory Board's Take

By Craig Pirner, Managing Director, Talent Development

More and more health systems are getting serious about planning for changes in their executive suites—and asking questions like the one posed by these researchers: When a CEO leaves, should we look internally or externally to fill the position?

What struck us most about the study's results: Over the study's five-year period, hospitals that experienced a change at the top were all worse off, by the study's metrics of success, than hospitals without a change in CEO. This shows how disruptive leadership change can be. But since leadership transitions are inevitable, organizations would be well served to build their readiness for leadership transition now.

Here's some of our advice on making your organization ready for leadership transition at all levels:

• Aim to enhance your organization's adaptability. Rigid organizations resist change, and when an external impetus requires it, they often shift into "crisis mode." Adaptable organizations do not rely exclusively on external impetuses to change. Rather, they remain in a constant state of change, building their leaders' familiarity and comfort with uncertainty.
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• Train your leaders now. Think about how you are equipping leaders throughout your organization with key skills. Leaders should learn how to lead distinct changes skillfully, manage multiple changes simultaneously, increase their comfort with uncertainty, and handle the stress that comes with the conditions facing health care right now. If these skills are not built early, their absence will be felt during times of major leadership transition.
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• Watch for evolving roles. The circumstances that organizations' leaders must confront—and the organizations themselves—are changing rapidly. Are your succession plans keeping up with those changes? When developing succession plans for specific roles, consider how the purview of that role, the expertise required, and the performance standards are shifting.
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• Pair your succession plan with clear successor development strategies. Identifying successors is not enough. These successors must then be groomed, using a mix of cohort-based and individual strategies. Consider a mix of strategies including external coaching, mentoring, exposure to the board, shadowing, lateral job movements, project work, and classroom training.

We spoke with an array of HR executives and discovered eight key insights your organization can use to build a strong, diverse executive team ready to meet current and future challenges. To learn more, read our briefing about how to ensure seamless leadership transitions.

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