The high cost of doing nothing
Quantifying the impact of leadership on the bottom line
Excerpt of white paper from the Ken Blanchard companies
The average organization forfeits over $1 Million a year in untapped potential.
Most executives know that strong leadership is essential for overall organizational success. However, in most organizations, a lack of urgency to improve leadership skills is driven by a belief that its current leadership capacity — and subsequent performance — is good enough. But is it? Analysis by The Ken Blanchard Companies® shows that the average organization forfeits over $1 million a year in untapped potential because of less than- optimal leadership practices.*
In a recent article “How extraordinary leaders double profits”, Jack Zenger, Joe Folkman, and Scott K. Edinger make the extraordinary claim that enormous potential for organizations to improve their bottom line exists through developing leaders who, for example, inspire people to perform at higher levels and can recognize and remove obstacles to employee productivity. In fact, their research shows that good leaders can double profits.(1)
Not only is strong leadership important to the overall success of an organization, but anything less has significant financial implications. Leadership affects employee productivity, employee turnover, and customer satisfaction.
The connection between leadership practices and employee productivity presents the largest opportunity for most organizations today. Factors that affect employee productivity include selection, performance management, and appraisal processes, as well as such development strategies as training, coaching, and mentoring.(2)
Providing employees with the tools, resources, direction, and the support they need to perform at their best are some of the factors that lead to a high-performance work environment. In addition, leaders need to consider systemic organizational obstacles that might be present in the work environment. When any of these factors are left to default instead of design, the result is generally suboptimal productivity. In fact, many senior executives have assessed that their workforce is operating at only 60% to 65% of their potential. (3)
As surprisingly low as this may sound, it is similar to the results of a large survey of 1,300 private-sector companies conducted by Proudfoot Consulting in 2002. In that survey of companies from seven of the world’s leading economies, Proudfoot found that, on average, only 59% of work time is productive. (4)
What gets in the way of higher employee productivity? According to Proudfoot, the three major causes are:
- Insufficient planning and control (43%)
- Inadequate management (23%)
- Poor working morale (12%)
Tor Dahl, former president of the World Confederation of Productivity Science and a member of the Board of Directors for the American Productivity and Quality Center, explains: “Although most people are working very hard these days, we have found that each individual in an organization can still increase productivity by at least 30%. How can that be? The answer lies in the fact that most workers, often of no fault of their own, are not working on the right things in the right way. The culprits are a variety of organizational ‘ills,’ including lack of clear directions and goals, sub-optimized processes, excessive paperwork and reporting requirements, unproductive meetings, inappropriate systems, and tools, etc.” (5)
What’s Possible with Better Leadership?
Research published by The Ken Blanchard Companies in 2006 identified strategic leadership and operational leadership as two of the factors that most affect employee passion and, subsequently, overall organizational vitality. (6)
From a strategic perspective, this means that leaders need to set the tone and direction for their organizations by creating a strong vision, an empowering culture, and a strong set of strategic imperatives. From an operational leadership standpoint, this means that leaders need to people with the day-to-day direction and support they need to do their best. The maximum benefit occurs when both strategic leadership and organizational management practices are aligned.
While it is unrealistic to expect workers to be 100% productive through every working day, Blanchard believes that most organizations operate with a 5% to 10% productivity loss, which better leadership practices could eliminate. Using data from a Situational Leadership® II implementation involving 300 managers and 1,200 direct reports at a large financial services firm, this study showed that the organization achieved a 5% to 12% increase in productivity among direct reports of managers who attended the leadership development training and became better leaders using the new skills they had learned. (7)
Retaining skilled, motivated, and experienced employees is a continual challenge for most organizations. While economic cycles can temporarily increase or decrease the number of available applicants in the job market, it is always in a company’s best interests to keep skilled and experienced employees after they have joined the firm’s workforce.
Why? There are several costs associated with replacing an experienced employee, including:
- The cost of covering the position while vacant
- The cost of finding a replacement
- The cost of getting a new person up to speed
These costs directly affect a company’s financial performance. The Saratoga Institute, a leading authority on turnover and retention, conducted research through anonymous exit interviews with 19,000 people leaving organizations. They found that people leave organizations for several reasons closely related to leadership competencies, including: (8)
- Lack of respect from or support by supervisor (13%)
- Supervisor’s lack of leadership skills (9%)
- Poor employee relations with a supervisor (4%)
- Lack of recognition (4%)
- Supervisor incompetence (2%)
In a typical organization, the cost of poor leadership and subsequent employee turnover can run well into the hundreds of thousands of dollars, depending on the organization’s current turnover rate and the specific positions being lost. While many models exist for calculating the cost of turnover in an organization, a conservative estimate is 30% of annual salary to replace a lower-skilled entry-level employee to as much as 250% of annual salary to replace a highly specialized or difficult-to-replace position. For organizations looking for a general benchmark to cover employees of all types, Saratoga Institute uses a 100% replacement cost for its calculations.
Employee Retention Benchmark
While it may not be possible to retain 100% of the skilled and experienced people your organization would like to keep, Blanchard believes that the average organization could reduce turnover by about 9% by improving the levels of respect, recognition, direction, and support that supervisors and managers provide to direct reports.
Improving leadership practices can also improve customer satisfaction scores and reduce the negative financial impact that lower scores cause. Best-in-class service providers typically achieve customer satisfaction ratings of about 85%, according to the American Customer Satisfaction Index, while average providers score closer to 75%.(9)
For the typical organization, this gap between average and exceptional satisfaction levels translates into a 3.8% reduction in revenue growth, resulting in hundreds of thousands of dollars of potential revenue loss for any organization generating $10 million or more in annual revenue.10
Anthony Rucci, Steven Kirn, and Richard Quinn first quantified this connection in the late 1990s when they identified that every 1.3% increase in customer satisfaction scores corresponded with a subsequent 0.5% increase in revenue growth. In an article originally published in the Harvard Business Review “The employee-customer-profit chain at Sears”, the authors concluded that leadership practices that lead to higher employee satisfaction scores translated into higher customer satisfaction scores and subsequently into bottom-line impact.(10)
In looking at the specific, quantifiable impact that good management practices can have on improving customer satisfaction scores, The Ken Blanchard Companies believe that better leadership can generate a 3% to 4% improvement in customer satisfaction scores and a corresponding 1.5% increase in revenue growth. This is based on the results of an impact study evaluating the results of a Situational Leadership® II initiative with over 700 managers of a major retailer. The managers were trained and later evaluated by follow-up associate opinion surveys conducted with over 10,000 direct reports. The retailer also conducted customer satisfaction surveys after the implementation to evaluate the initiative’s impact on the customer experience.
As predicted, direct reports perceived leadership skill improvements in all areas including their manager’s ability to delegate, provide feedback, provide support, and provide directive behaviour. Most important, the customer satisfaction survey showed a 3.8% improvement in overall customer satisfaction.(11)
Leadership Affects the Bottom Line
In any economic cycle, the basics apply: You have to have a good business plan; you have to take care of your customers, and you have to take care of your people. Leaders are an important part of that process. After all, it is leaders who help employees set goals; make sure that those goals are in alignment with overall corporate strategy; and take responsibility for providing the direction and support that employees need to succeed at work on a daily basis.
Even though change — like a leadership development initiative — can be disruptive, difficult, and financially challenging, taking no action is often the most expensive option of all. Looking at the impact that less-than-optimal leadership practices have on an organization, The Ken Blanchard Companies estimate that the average organization leaves hundreds of thousands and even millions of dollars on the table each year in three key areas — employee productivity, employee turnover, and less-than-satisfactory customer satisfaction scores.
One challenge that all organizations must address is the invisible drag on performance known as maintaining the status quo, the belief that conditions are good enough just as they stand. This is a serious deception that causes otherwise good companies to settle for less-than-optimal performance.
In any economy, organizations need to make sure that they are getting the best out of their people by providing strong, consistent, and inspiring leadership. In today’s economy, the need to satisfy customers, create innovative solutions, and get the most out of every dollar is crucial. By evaluating and improving leadership practices throughout their organization, executives can remove a persistent drain on financial performance to allow their organization to grow and thrive.
White paper excerpt reprinted with the permission of The Ken Blanchard Companies, 2010. (www.kenblanchard.com)* Based on initial results of participants using Blanchard's Cost of Doing Nothing Calculator (www.costofdoingnothing.com)References:
- Zenger J, Folkman J, Edinger SK (2009) How extraordinary leaders double profits. Chief Learning Officer
- Huselid MA (1995) The impact of human resource management practices on turnover, productivity, and corporate financial performance. Academy of Management Journal. 38(3): 635 –72.
- The Ken Blanchard Companies (2004) The Impact of Leadership on the Bottom Line.
- Proudfoot Consulting (2002) Untapped Potential — The Barriers to Optimal Corporate Productivity. Available online at www.proudfootconsulting.com
- Dahl T. Principles of Productivity. Available online at www.tordahl.com/principles.html
- Zigarmi D, Blanchard S, Essary V, Houson D (2006) The Leadership-Profit Chain. Escondido, California. The Ken Blanchard Companies.
- Leone P (2008) Take your ROI to Level 6. Training Industry Quarterly
- Branham L (2005) The Seven Hidden Reasons Why Employees Leave. New York: American Management Association
- The American Customer Satisfaction Index. Available online at www.theacsi.org
- Rucci A, Kirn S, Quinn R (1998) The employee-customer profit chain at Sears. The Harvard Business Review
- The Ken Blanchard Companies (2002). Impact Study: The LensCrafters Vision