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Should Your Next CEO be an Outsider? Research Says Maybe.

May 30, 2018

should-your-new-ceo-be-an-outsiderI met with a hospital’s senior team years ago to discuss physician integration strategies. The CEO was only on the job for a month and was still learning. I mean, he was REALLY still learning. He’d never run a hospital before. Actually, he’d never even WORKED in a hospital before. He had recently retired from the Air Force as a senior officer.

The hospital’s Board of Directors wanted to bring a fresh point of view and a unique mix of leadership skills. The CEO had not even been in the medical arm of the Air Force. As I recall, he’d run a large airbase, and the logic was that if he could lead an organization that large and that complex he could lead a single hospital.

I must admit, he seemed incredibly bright, with outstanding executive presence. He asked great questions and seemed to be able to process a great deal of information. Unfortunately, we spent the hour meeting, planned for strategy discussion, getting him up to speed on the basics of the hospital’s relationship with an independent medical staff.

Related: Can You Measure and Develop Executive Presence?

A few months later, he was gone. The Board had, quite possibly, identified the leadership traits they needed in the role, but discounted the importance of specific knowledge and experience – particularly important in healthcare. It’s not uncommon in other industries for a CEO to move from, say, electronics to automobile manufacturing. However, you rarely see people coming from other industries to senior healthcare roles. The complexity of the product, services, the organization, and the market are just too unique. They don’t translate.

Related: Are Healthcare Leadership Skills Different?

This is an extreme example of looking to an “outsider” to lead a hospital, but a recent Harvard Business Review article found that choosing an outsider as a CEO has a more positive impact on hospital performance than promoting an internal leader. 

The authors point out that insiders have the advantage of a wealth of organizational and market knowledge, whereas outsiders often bring different experiential knowledge and are perceived as better at making dramatic changes. Their study examined the impact of CEO succession on hospital productivity and efficiency.

Looking at 490 CEO succession decisions, they concluded that any change resulted in a short term adverse impact on operational efficiency, but choosing an outsider CEO resulted in a marked long-term advantage regarding organizational productivity. (Interestingly, both situations were less productive than hospitals that did NOT change CEOs – pointing out that sometimes, leadership consistency is important.)

Should hospitals target outsiders when replacing senior leaders?

This study contradicts research by Wharton professor Mathew Bidwell showing that organizations end up paying significantly more for outside leaders - they are less likely stay and get lower performance evaluations. This information supports the recent emphasis by health systems on developing leaders internally.

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So, what is the right strategy? We’ve seen both work and it depends on the situation. For instance, don’t get fixated on consistency and organizational knowledge if the next leader in line isn’t well-suited for the role. Similarly, if the current challenges would benefit from consistency and organizational knowledge (i.e., an outsider would cause more angst than it’s worth), then work hard to find the right internal candidate.

What really matters is defining the combination of experience and skills important for the specific situation. The next leader in line might be an absolute superstar but not necessarily suited for the challenges you are facing today. Perhaps they are incredibly talented, but the organization needs a change agent and that’s not their strength. The best approach is to do the work to define what’s needed and then implement a deliberate selection process.

Boards get particularly enamored with charismatic leaders and often fail to think critically about the specific skills and experiences needed for the situation. It’s the role of HR and other senior leaders to add structure to the process:

  1. Identify the organization’s greatest challenges.

  2. What experiences and attributes are most important?

  3. Build a structured, candidate-friendly, efficient hiring process.

  4. Include a structured, object, effective, and predictive interviewing process.

  5. Incorporate a robust executive assessment process to understand the candidate’s behavioral traits and potential derailers.

The research is not conclusive. Your next CEO may be on your team, or an outsider, but you don’t have the luxury of making the wrong decision. To learn more about healthcare’s looming talent crisis:

healthcare leadership

Bryan Warren Bryan Warren was the former Director of Healthcare Solutions at PSI. He was responsible for developing and promoting tools and services designed specifically for the unique challenges faced by healthcare organizations.