Insider CEO or outsider?

For many companies, going outside the firm to hire the CEO implies a serious drawback in its succession plan. But for many others, hiring an external CEO can lead to corporate changes when the timing is right. As Infosys Ltd, India's second-largest IT services exporter, picks an outsider - Vishal Sikka, a former member of executive board at German software company SAP AG - as CEO, we ask experts to lay down the pros and cons of hiring an outsider as CEO

Hiring a CEO internally boosts the morale of a company: Nishchae Suri

The challenges of leadership have become complex with the emerging need for CEOs to lead 'complete organisations' - entities that not only excel in financial performance and high quality goods/ services, but are also socially responsible, culturally superior, technologically advanced and do more than just what it states as its business. KPMG India's Talent Risk Survey conducted in 2013 identifies development and succession planning as one of the topmost priorities for organisations. Eighty per cent of the survey respondents ranked "insufficient pipeline of future leaders" as a risk directly impacting the overall capability of an organisation.

  In their attempt to bring change or make a mark quickly, leaders hired from outside tend to initiate dramatic programmes often focused at short-term gain. These interventions very often pay lesser attention to sensitive people issues. A similar action, however, by an internally promoted CEO is likely to be less dramatic - focused on the longer term while creating a higher acceptance with employees. Though external candidates often have superior technical competencies in comparison to internal candidates, organisations, however, struggle to find the 'right fit' from outside when it comes to understanding the culture and values.

The "in-group versus out-group" phenomenon poses a problem too. It is visible with a new leader taking charge. Seen as 'the other' - someone who does not understand the deep-rooted issues in an organisation - this reaction is further exacerbated if there exists a feeling of perceived injustice in those who believe they were not given a chance to prove themselves. When organisations are faced with sudden resignations, or the new leader faces acceptance issues, it becomes tough to maintain high employee morale.

What is perhaps the most significant advantage of having an internal candidate promoted to the CEO's role is the positive signal the organisation gives to its employees. Fewer disruptions to business - fewer employee exits - becomes an advantage and this ensures that the business is de-risked. Then, in the case of selecting an internal CEO, the Board knows the candidate very well and, therefore, sets expectations considering the strengths the individual brings to the table. All of this rides on one simple truth - the organisation has in its best judgment selected the deserving internal candidate.

Is an internal candidate better or an external hire? The answer is always contextual - but organisations must give deserving internal candidates a fair chance of being considered for the top job.

Nishchae Suri
Partner & head, people and change, KPMG India

The outsider CEO can be an effective change agent: Raveendra Chittoor

Like most questions on strategy, there is no straight answer to the question whether organisations should prefer insiders or outsiders for the CEO position. Research does not point out to any significant performance difference between outsider and insider CEOs but there is evidence to suggest that an outsider CEO can make a positive difference when significant organisational change is needed. By virtue of being seen as a change agent, an outsider CEO is likely to bring in a fresh perspective without being bogged down by the old ways of doing things in the company.

Former IBM CEO Lou Gerstner is a classic case in point. Nothing short of a transformation was needed by IBM in 1993 for its survival, and Lou Gerstner brought in the necessary open-minded perspective to its strategy and execution.

Infosys, which now sees a change of guard into the hands of an outsider, as Vishal Sikka takes over as the company's CEO, is also in need of a transformation; though it is not exactly in a crisis as IBM was when Gerstner took over. Since its early years, Infosys positioned itself as a premium player compared to its Indian peers in the IT services industry. Till a couple of years ago, Infosys maintained superior net profit margins of 25-30 per cent while Wipro's net margins hovered around 20 per cent and Cognizant's around 15-17 per cent. But this is no longer true and with other players, particularly TCS, catching up with Infosys, the latter needs to move up the value chain urgently.

An outsider such as Sikka could facilitate and accelerate the process of moving up the value chain that Infosys is so critically in need of. His experience in product organisations such as SAP and developing new products such as HANA will be very valuable for Infosys as it embarks on a strategy to develop higher value added products and services.

The stepping down of Narayana Murthy and his son and the disengagement of founders from active management is a big positive in this respect, which should allow Sikka the necessary freedom. The exit of many long-timers among the senior management also facilitates building a new team from scratch. Given the critical juncture at which Infosys currently finds itself in and its need to reinvent itself, bringing in an outsider CEO seems like just what the doctor ordered.

Raveendra Chittoor
Assistant Professor of Strategy, Indian School of Business

An external CEO applies sacred learnings of various industries: Vikram Raizada

An outsider CEO can make an impact and bring in a lot of fresh perspective vital for the success of a company. I believe that hiring externally works better because it allows changes to take place in a sector that wouldn't otherwise move beyond the tried and tested.

But the secret is how to do it right. You can't just take one industry's learning and simply recreate it for another. A good leader will 'transcreate'; this is something that an insider CEO might find tough to implement simply because he will go with the tried and tested ways of functioning. The biggest strength that an outsider, therefore, brings is that he is dispassionate and is not immediately emotionally invested with the company. Eventually there is an attachment but in the beginning, the strength of the external CEO lies in questioning why things function the way they do in an organisation. This questioning is what brings in objectivity and eventually a break from the staid practices that need overhauling.

Yes, the external CEO does face more challenges - settling down in the new company; boosting the morale of employees; winning their trust and quickly turning around the fortunes of the company. But a good external hire will go with the knowledge that such challenges have to be met and won over. A good CEO who has been hired from outside will know that the trick in transforming the fortunes for a company is in understanding how to apply the learnings of several previous sectors or industries. How one injects the sacred learnings of previous industries is what makes or breaks the success saga of the CEO hired externally.

Vikram Raizada
Executive director & CEO, retail, Tara Jewels