UPS founder Jim Casey, who retired in 1962, is ever present in the black-and-white photos that hang on the company's boardroom walls. An even more lasting legacy, however, has been his insistence on promoting executives from within, a practice that is still zealously followed today. CEO Mike Eskew climbed the ranks over some 33 years, CIO Ken Lacy over 37 years. Now the next generation is taking its place at the shipping giant: On Christmas Eve 2004, Dave Barnes was ushered into the boardroom and given the CIO reins after 28 years at the company as a finance manager, technologist, executive and leader.\nBarnes's coronation as just the third CIO in \n\n\t\n UPS's\n \n 98-year history was actually quite low-key, the way the unassuming Casey would have preferred it. Eskew did most of the talking, explaining to Barnes the dual requirements that came with his new job: on one level, as the CIO and head of IT; on the other, as a member of the company's management committee. "Of course, my heart was pounding," Barnes recalls. "Up to that point, it wasn't a lock that I got the job."\n\n\n\n\nBarnes hadn't been the only candidate for the CIO spot. "I had two or three people in the pipe," says Lacy, who retired in February. But during the previous two years, Barnes distanced himself from the others. He had everything Eskew was looking for: leadership, innovation and execution skills. "You don't do the things that Dave has been able to do if you can't lead or you can't execute," Eskew says. "It's not like taking a chance on someone from the outside."\nOf course, it's become commonplace for American companies to do precisely that when looking for an executive. UPS's policy of promoting from within seems as old-fashioned as lifetime employment and pension plans. Recruiting company \n\n\t\n Heidrick & Struggles\n \n says that nearly 60 percent of the Fortune 250 go outside to hire at the enterprise or divisional levels. The percentage is probably higher at companies in the next tiers of revenue, which tend to have difficulty maintaining a deep bench of executive talent.\n\n\n\n\nYet succession planning is good for companies, because it creates a proven leadership model, preserves institutional memories, smooths business continuity and builds staff morale. And succession planning is good for CIOs and other executives, especially when accompanied by development programs that broaden leadership skills, because it helps them look beyond their current position. The risks of having no executive succession plan are increasing, according to Bill Rothwell, author of three books on succession planning. He points to a couple of reasons: an aging U.S. workforce that thins companies' executive talent as senior employees retire and, perhaps surprisingly, the threat of terrorism (172 corporate VPs lost their lives in the 9\/11 attacks on New York, he says).\nThere are specific elements of a successful succession plan\u2014including formal and informal procedures to groom the next generation, and CEO- and board-level support.\nHere's how UPS does it.\n\nA Culture and Program of In-House Development\nThe training and development process that propelled Eskew to the CEO suite started just one year into his employment at UPS, which was also his first job out of college. That's not unusual, he says. Long-term development is a longtime part of UPS's culture and is reinforced from Eskew on down. That, say succession planning experts, is one of the keys to success: boardroom backing of workforce development from top to bottom.\n"You have to look at how the CEO and the board reward executives for talent development," says Rothwell, a professor of workforce education and development at Penn State University. He says many executives and board members fall back on a familiar excuse when it comes to succession planning: "In good times we're too busy, in bad times we can't afford it."\nUPS, in fact, doesn't give its managers extra incentives for succession planning and employee development. It's an expected piece of every manager's job, "not just an HR thing," says Lea Soupata, senior vice president of HR (who joined UPS in 1969). She credits UPS's culture of in-house development with keeping turnover of full-time management at less than 7 percent annually. "The ability we have to give people opportunities makes people want to stay," she says. \nThe first step in UPS's succession planning process is a formal talent identification program. Oftentimes, this begins with workers from warehouses, where many of the company's top executives started their careers. Talent identification has four phases: functional managers identifying good candidates for advancement; an assessment of a candidate's financial acumen, business process knowledge and leadership profile; an evaluation of how the candidate executes on the job, which receives more weight than anything else; and a management development committee review of what additional internal or external training a candidate needs. "It's not a one-size-fits-all process," Soupata says. "It's pretty much tailored to enhancing that person's job portfolio."\nHR tracks the development of candidates within the talent identification program. Soupata chairs the management development committee, which (along with employees' individual managers) has the responsibility to make sure candidates are getting the individual training and development they need\u2014such as attending executive education courses or public speaking classes.\nEvery year, each of the 12 members of UPS's management committee has to draw up a list of people within the talent identification program who he thinks can fulfill the executive jobs within his jurisdiction. On a rotating basis at each month's management committee meeting, the members give an update about their pool of successors. For the CIO position, for instance, "we looked at who were the likely candidates who could be Ken's replacement many years ago," Eskew says. "By the time [the candidates] get to the management committee, we know these people and know what they can do."\nIn addition, at a combined UPS board meeting and leadership conference held once a year, all executives review the top 200 candidates moving through the leadership identification program, with particular attention paid to the 50 people closest to actual succession. This offsite, says Soupata, is a great way for the board members to get to know the candidates. That's important, because the Heidrick & Struggles survey found that just 27 percent of board members at large companies felt they had an excellent level of assurance that companies have the right leaders in place.\nSuccession planning expert Rothwell calls this type of event a talent show and says they are fairly common at large companies. One important element of a talent show, he says, is the nature of the discussion among executives and some preplanning about what they will discuss. He advises that HR should meet with executives beforehand to talk about key reports so that the executives can (if necessary) share their frustrations with their employees privately, rather than airing the dirty laundry in a public setting. HR, in turn, can council the executive on how to help groom, for example, a high-potential technology person who may not have good interpersonal skills. \nAt UPS, executives use the term "constructive dissatisfaction" to describe how employees are supposed to look for process improvements in everything they do. Barnes says constructive dissatisfaction is present throughout each employee's succession planning process, but it is utilized to stretch that person's abilities and connect his aspirations with management's long-term goals for him, not as a negative assessment of an employee's weaknesses. "If we only challenge people for their current job and we don't look down the road at what the next job is, we're probably going to fall short of getting the person ready," Barnes says.\nEskew, who makes the final decision on all executive successors, says he measured Barnes's ability to handle the stretch responsibilities of the CIO position along four dimensions: leadership, execution, innovation and UPS's culture. "Dave really ran at some point or another the customer relationship part and the operating parts\u2014be that air or ground\u2014and was involved with international [operations] and with the supply chain," Eskew says. "We've watched Dave do that. And it's not like he's done it for [only] six months or two years."\n\nDave Barnes's Road to Success\nIn 1977, Barnes, a junior at the University of Missouri, took a job in St. Louis at a company he had never heard of as a part-time package loader. The hours were flexible and the pay was good: $8 an hour. Now in 2005, one needs a playbook to keep track of his movements within UPS's various departments and U.S. and foreign offices. Barnes himself has trouble remembering all of his positions and the exact dates of each.\nA part of UPS's culture is a constant shifting of employees' jobs, which expands the skills of high-potential candidates by thrusting them into different and difficult assignments. "We push them beyond their comfort zone and see how they react," says Eskew.\nNot surprisingly, some candidates can't cut it. "I've had two or three situations where high-level managers were working in the IT organization for a long time, doing a great job in what they're doing, and I took them out for a year and gave them another assignment. And they failed," Lacy says. "With other people, they've eaten it up. You just never know."\nRothwell, who has done research on management rotations, says they can be an excellent method of identifying top employees, raising the visibility of possible successors and improving their skills, if managed correctly. A rotation program is not managed correctly when executives fail to tell employees why they are moving, what skills they need from the new assignment and what their performance expectations are.\nBarnes did not fail. Each successful assignment led to another with an increased responsibility\u2014from corporate internal audit manager to the startup team of UPS Airlines to leading the international shipments processing system to the international financial systems controller role. Lacy first noticed Barnes as he was moving up the ladder on the finance and accounting side in the '90s. "But they had a deep bench in finance and accounting," Lacy recalls. So with the encouragement of Barnes's boss, Lacy asked Barnes to join his IS staff in 1998 to head up the UPS customer information management function. "I talked to Dave and said there were no guarantees," Lacy says, "but he has the aptitude and abilities to do this job, and I'd like to bring him over here on my side." Barnes accepted on the spot.\nThat kind of simple, straightforward offertelling candidates they have potential but that there are no guaranteesis a crucial piece of succession planning, says Jory Marino, managing partner at Heidrick & Struggles. A good manager tells an up-and-comer, "You're one of three people on the list. Don't screw anything up, and you have a chance of getting there," says Marino. "The bad manager says to all of them, 'You're my guy.'"\nLacy made no assurances to any of his CIO candidates. "I don't think anyone perceived Dave as the successor," he says. But he didn't wait long to see how much Barnes could take, giving him several high-profile pieces of the IS portfolio. "What I was doing was giving Dave the pieces that I thought were the most complicated and the most interactive with the business so that along the way with delivering the projects, he also was delivering a reputation and a relationship with the business units," Lacy says.\nLacy can't point to one thing Barnes did during the next six years that cinched him for the CIO job. "It was an evolution," he says. But Lacy is quick to point out that Barnes was never given special treatment. In fact, it appears that Lacy invoked a "tough love" approach. "I never threw [Barnes] to the wolves," he says, "but I gave him all of the challenging stuff, just as Frank [Erbrick, Lacy's predecessor] did to me."\nFor example, Lacy charged Barnes with overhauling the UPS website in 2002. The site serves more than 200 countries and receives up to 15 million package-tracking requests daily. Barnes's challenge was to re-architect all of the customer applications running on the site (such as shipping and reference-number tracking), and repurpose the existing infrastructure and without disrupting any of the services. Barnes and his team completed the project, from concept to global rollout, in less than 24 months. "He took it from thought process and continued to grow it and be successful," Lacy says.\nBy the last half of 2004, Barnes was running 60 percent of the IS organization and was in on all of Lacy's major people and process decisions. But both knew that Lacy couldn't approve Barnes for the CIO spot. That would be up to Eskew and the management committee. "I'll get you ready," Lacy recalls telling Barnes. "But the people on this floor [where the executives sit], the ones you interact with, are the ones who are going to have to say yes." \nOne sticky point in succession planning is how early executives should let a likely successor know that he is the chosen one, and whether they make it public knowledge. Rothwell says companies usually don't tell successors early because they want to avoid the "crowned prince" syndrome. "Companies worry [the successor] will kick up his feet and relax," Rothwell says. Also, if a headhunter gets wind that a successor has been named, the competition "is going to go crazy trying to hire that person away, and they'll bid up his wages," he says. Executive recruiter Marino confirms that. "You're an A-player, and that makes you attractive to other companies," he says.\nYet if executives don't tell their successors, then they risk losing the star players. "The real question is, How do we tell them without making it sound like a verbal contract regardless of business conditions?" Rothwell says. He advises that companies do a preemptive strike against talent loss by giving those people plenty of reasons to stay\u2014without promising them a promotion.\nBarnes says he didn't know for certain who the other CIO candidates were or that he got the job until the Christmas Eve meeting with Eskew. "You know you are at a company where they are grooming a certain number of people for a job," Barnes says. "But there's never a person for a job."\nLacy says he gave the other candidates opportunities too. "The understanding is that you always have more than one person; you never put all your eggs in one basket," he says. Whether to tell or not to tell did concern him. "You struggle on both sides of the equation because if something caused you to feel that you made a mistake [with a successor], and you've already made it public knowledge, do you go through with it? Or do you say, I made a mistake, and back up?" Lacy asks.\n\nWhen Succession Planning Doesn't Work\nThere are plenty of cautionary tales of companies that hired an outsider executive who couldn't fit the company culture\u2014as Exhibit A, see Hewlett-Packard and Carly Fiorina. Tales from succession planning failures are harder to come by, but there are mistakes to avoid. The cloning syndrome is one of the most obvious. "It's a well-known bias that we tend to pick people who are like ourselves," says Rothwell. "The clone of the incumbent may be a mistake because the company needs to move in a new direction." \nBarnes and Lacy, in fact, do overlap in their management skills and adherence to UPS business principles\u2014by about 50 percent, in their mutual estimation. But that's where the comparisons end. "He's not a clone of me," Lacy says. Their personality differences are easy to spot. Lacy was a finance person first and a technologist second, and a "law and order" manager uncomfortable with public speaking. He was known for getting the job done. Barnes is more comfortable in the technology area (though he does have some finance chops). Lacy calls Barnes more of a visionary and a bit more polished. For example, he doesn't mind talking to the media.\nBut as Soupata points out, UPS avoids cloning primarily because it puts the most stake in what Eskew and the management committee have to say about a candidate whom they have watched for many years. "The person who is retiring should almost have the least amount of input because he's not going to be here," she says. Adds Lacy: "The crown comes because \nAnother famous mistake in succession planning, says Rothwell, is to assume that a good track record at one level will guarantee a good outcome at the next level. Rothwell advises that companies study the competencies and personality characteristics required of job roles at each level. But because such studies are time-consuming and expensive, they are often rushed and done incorrectly, he says.\nFor his part, Eskew doesn't seem concerned that Barnes won't be able to handle the CIO job. "In Dave's case, the technology piece\u2014he's done all that. The leadership\u2014he's done all that. It is the management committee that is new to him," Eskew says. "But you take your bets and put Dave in place."\nThere are cases when companies should actively venture outside for new executives, says Heidrick & Struggles' Marino. "When companies are changing their business model in a dramatic way, they may want to look to other industries," he says. For example, companies that are concerned about supply chain issues, product flow or distribution\u2014but don't have that expertise in-house\u2014should look outside for new hires.\nUPS doesn't often feel the need to recruit elsewhere at the executive level because of its ingrained succession processes and demanding culture. "Occasionally we ask ourselves, Is there reason to go outside?" Eskew says. Soupata says that UPS has recently made more midlevel hires from outside the company, especially in IT. "We have more disciplines now, and we need more expertise," she says. But at the boardroom level, not much has changed, nor probably will. Of the top 12 executives at UPS, 11 of them have been wearing brown their entire careers, and the one who did come from outside (CFO D. Scott Davis) joined when UPS acquired his company in 1986.\nA final key to UPS's succession planning success is the impression that UPS executives like to have of themselves as typical, everyday workers. "This is not a company of superstars," Eskew says. Succession planning, say UPSers, is a key element of being able to discover who the next nonsuperstar leader is going to be. As Barnes settles into his new office on the fourth floor, he doesn't have much time to sit back and appreciate his new digs. Just a month after his appointment, it was already time to start thinking about his own succession plan. "It never stops," he says.