Quantifying the Impact of Leadership

Good leadership is critical to organizational success, but research on the long-term financial impact of leadership is still hard to come by. As a result, it can be hard to justify expenditures for building leadership capacity.

That might be changing, though, says David Witt, a senior researcher and program director at The Ken Blanchard Companies. Witt points to data compiled from leaders utilizing the Blanchard Companies’ Cost of Doing Nothing Calculator, which shows how poor leadership practices can cost companies hundreds of thousands—and often millions—of dollars each year by negatively impacting employee retention, customer satisfaction, and overall employee productivity.

With this knowledge, Witt believes practitioners can have more data-driven conversations with senior executives about the financial impact of better leadership practices.

“This is an important breakthrough,” explains Witt. “Intuitively, learning and development professionals know better leadership practices translate into better operational results. Now we have a chance to add some data into the conversation. This allows practitioners to explore and quantify the impact of leadership on employee retention and engagement, customer satisfaction, and employee productivity in the organizations they work with.”

What is Employee Turnover Costing You?

The Blanchard calculator begins by looking at the cost of employee turnover in organizations.

“Our original review of the data in 2011 showed an average turnover rate of 17 percent among respondents, and our latest 2014 review is showing a rate of 21 percent,” says Witt.

“Next, we ask respondents to identify the number of employees in their organization along with an estimate of the average salary overall. This is a rough measurement, but it serves the calculator’s purpose of generating a number to begin a discussion.”

In all cases, the same formula is used to calculate the costs: Current Voluntary Turnover x Average Salary x 50% Replacement Cost = Annual Cost of Turnover.

Note that the Blanchard model utilizes a 50 percent replacement cost to generate turnover costs, which Witt believes is a reasonable place to start.

“There are many models for calculating the cost of turnover in an organization. I have seen conservative estimates go from 30 percent of annual salary to replace an entry level employee with fewer skills to as much as 250 percent of annual salary to replace someone in a highly specialized position that may be more difficult to fill.”

In looking at ways organizations can lower their turnover costs, Witt points to research by PricewaterhouseCoopers and also that highlighted in the book The 7 Hidden Reasons Employees Leave by Leigh Branham.1

Of the top ten reasons identified by Branham, Witt believes five are within the control of managers:

  • Lack of respect or support from supervisor (13%)
  • Supervisor’s lack of leadership skills (9%)
  • Poor employee relations with supervisor (4%)
  • Lack of recognition (4%)
  • Supervisor incompetence (2%)

According to Witt, at least 9 percent and possibly as much as 32 percent of voluntary turnover could be addressed by better leadership practices. Depending on the severity of retention issues in any particular organization and the cost of attracting, interviewing, selecting, and training new employees, the amount saved can run from tens to hundreds of thousands of dollars in this one area alone.

The Cost of Poor Customer Retention

Suboptimal customer satisfaction scores are the second area reviewed by the Blanchard calculator. Generally speaking, customer retention represents an even greater cost to organizations than does employee retention.

Witt explains. “In our initial 2011 analysis, respondents identified they were, on average, experiencing a 14-point gap between where they currently stood in customer satisfaction—75 percent—and where they wanted to be—89 percent. Our 2014 analysis shows a slightly larger 15-point gap in this area.”

The Blanchard online calculator assigns a dollar amount to this gap by using a formula first published in a 1998 article in Harvard Business Review titled “The Employee-Customer-Profit Chain at Sears.” In the article, Sears executives Anthony Rucci, Steven Kirn, and Richard Quinn stated that every 1.3 percent increase in customer satisfaction scores corresponded with a subsequent 0.5 percent increase in revenue growth.2

Since that time, several other studies have found a similar connection—for example, the Net Promoter Score first pioneered by Fred Reichheld, a Fellow of global management consultancy Bain & Company. In Reichheld’s model, customers are asked: “On a zero-to-ten scale, how likely is it that you would recommend this company to a friend or colleague?” Companies then sort their customers into promoters (nines and tens), passives (sevens and eights), and detractors (sixes and below).

A team of Bain researchers studying affluent banking customers found significant differences in profit-driving behaviors among these three customer groups. Their research reveals that promoters give their primary bank almost 45 percent more of their household deposit balances than do detractors. Promoters buy, on average, 25 percent more products from the bank than detractors, and their mix of products skews toward more profitable checking and savings accounts. Attrition rates among promoters average only one-third of those for detractors. Finally, Bain research determines that promoters make nearly seven times as many positive referrals as detractors.3

Rob Markey, a partner at Bain, corroborates the connection the Sears executives discovered. “Direct supervisors who set their teams up for success, observe them in action, ask for feedback, identify the root causes of employee concerns, and then follow through with meaningful improvements have happier, more engaged employees,” says Markey. Markey states that in his experience, “It’s difficult for employees to be truly engaged if they don’t like or trust their bosses. Netsurvey’s data shows 87 percent of employee promoters of their companies also give their direct supervisors high ratings.”4

The Cost of Lowered Employee Productivity

The connection between leadership practices and employee productivity is similarly well documented. It also represents the largest opportunity for most organizations today, says Witt.

“Regarding productivity, respondents using the Blanchard Cost-of-Doing-Nothing Calculator on average felt their employees were operating at 70 percent of potential productivity versus a desired rate of 86 percent. Looking at productivity as a percentage of sales, even in a small organization with $2 million dollars in annual sales this 16-point gap can represent a productivity loss equal to $100,000 in sales revenue.”

While acknowledging that every organization will have to identify what improved productivity looks like for their specific workforce, Witt believes most companies are operating with a 5 to 10 percent productivity loss that better leadership practices could eliminate.

As an example, using data from a Situational Leadership® II implementation involving 300 managers and 1,200 direct reports at a large financial services firm, Witt points out the organization achieved a 5 to 12 percent 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.5

Leadership Impacts the Bottom Line

Creating a successful and effective organization is an inside-out proposition. The quality of the culture, the quality of management practices, and the alignment of these practices to key strategic initiatives rests with leadership.

Even though change such as a leadership development initiative can be disruptive, difficult, and financially challenging, taking no action is often the most expensive option of all. Organizations need to make sure they are getting the best out of their people by providing strong, consistent, and inspiring leadership.


Would you like to learn more about making the business case for leadership development? Then join us for a free webinar!

Leadership Development: The High Cost of Poor Leadership

Wednesday, September 23, 2015, 9:00 a.m. Pacific Time

Poor leadership practices cost companies millions of dollars each year by negatively impacting employee retention, engagement, and overall employee productivity. In this webinar, Blanchard program director David Witt takes a look at the effect leadership has on each of these three areas and what you can do to improve performance.

You’ll learn:

  • Suboptimal leadership practices cost the typical organization an amount equal to as much as 7 percent of their total annual sales
  • At least 9 percent and possibly as much as 32 percent of an organization’s voluntary turnover can be avoided through better leadership skills.
  • Better leadership can generate a 3 to 4 percent improvement in customer satisfaction scores and a corresponding 1.5 percent increase in revenue growth.
  • Most organizations are operating with a 5 to 10 percent productivity drag that better leadership practices could eliminate.

Drawing on proprietary original research, we will show you which management techniques generate the best results. We will also look at some of the common cultural roadblocks that keep companies from implementing these techniques. You’ll learn how to overcome these obstacles and make the shift from knowing to doing.

Organizations need to make sure they are getting the best out of their people by providing strong, consistent, and inspiring leadership. Don’t miss this opportunity to learn how to evaluate and improve leadership practices throughout your organization.

View On-demand


References:

(1) Branham, L. (2005). The 7 Hidden Reasons Employees Leave. New York: American Management Association

( 2) Rucci, A., Kirn, S., & Quinn, R., (1998). “The Employee-Customer-Profit Chain at Sears” Harvard Business Review

(3) “The Economics of Loyalty” available online at: http://www.bain.com/publications/articles/the-economics-of-loyalty.aspx

(4) “The Four Secrets to Employee Engagement” available online at: http://blogs.hbr.org/2014/01/the-four-secrets-to-employee-engagement/

(5) Leone, P. (2008) “Take your ROI to Level 6” Training Industry Quarterly