From the archive: Because it's worth it
One of the benefits of being a TJ subscriber is full access to our decades-long archive of content - here we look back to a piece on leadership from March 2013.
Stephen Archer asks whether companies can measure the return on investment of developing their future leaders.
A report last year from the Department of Business, Innovation and Skills suggests that a lack of leadership and managerial skills are hindering the UK's recovery from the recession.
The report - Leadership & Management in the UK: The Key to Sustainable Growth1 - found that nearly three quarters of UK employers are reporting a deficit of management and leadership skills management, with 43 per cent of employees regarding their line manager as ineffective. The report estimates that ineffective management is costing UK businesses more than £19bn per year in lost working hours and that incompetence or bad management by company directors causes 56 per cent of corporate failures.
It makes sense, then, that more companies are waking up to the fact that they need to invest in their future leaders now to reap the benefits in the future. However, many can be cautious about investing in leadership development because they are unsure how it can be measured and whether it delivers a return on investment.
Financial results, sales projections, quality and compliance audits, and employee assessments can all be used to measure an organisation's 'health' but can investing in leadership really be measured in the same way?
The question I address in this article, then, is: Is an ROI assessment possible on investment in developing leadership skills?
Can leadership competence be measured?
The answer, I believe, is an emphatic 'yes', despite the fact that a minority of organisations of any size attempt to do so. When I talk to or work with organisations, I am often asked what is the pay off? to which is often added when? Although suitable questions, they are rarely followed through because, in reality, most organisations that invest in leadership development do so from a perspective of 'distress' or with a strong instinct that it is worthwhile. I think there is a place for this type of justification of investment but let's examine how useful some other forms of assessment might be.
There is scope for measuring leadership competence with a balanced scorecard type method. For example, how well do leaders understand the reality of the current organisational situation? How clear are they on the business mission and the strategies that will fulfil it? And, finally, do they communicate and engage others with consistency and clarity? These capabilities can be measured, and often are, using internal feedback tools. While this type of assessment can be quite commonplace, criticism of senior leadership by middle management is still seen as taboo.
But assessment can be a combination of views from above, peers and subordinates. There may be, and usually is, some measurable improvement in performance resulting from hearing others' perspectives - but what of improved financial performance and, indeed, other, less tangible commercial or operational improvements? It depends on the function and sphere of influence that the leaders exercise, of course; the measures will change with the function, be it sales, legal, HR, operations or R&D.
A study in the US by The Leadership Challenge demonstrated that profits generated by individuals and the groups they were leading significantly increased with no other variables changing significantly2. In the study, the correlation between leadership development and financial performance was clear: four leaders made a 31 per cent profit increase over the previous year; a fifth person delivered process improvements valued at nearly $400,000. The leaders in question also noted how their behaviours (and habits) had changed: they felt more like they were leading and noticed greater innovation, initiative and risk-taking in people around them. Also increased were collaboration, self-confidence, and shared values.
In my own experience, the most obvious manifestation of ROI is in the area of sales leadership. When leadership skills are enhanced and there is a culture of leadership, the sales teams outperform both their previous periods and other divisions in which there was no investment in leadership. This change can be marked in the extreme. I have seen this happen repeatedly.
Sadly, I have also seen the reverse effect, namely an improved team that then acquires an autocratic or, worse still, a divide-and-rule leader. In this situation, the performances go into reverse, sometimes quite quickly and not least because staff turnover also usually increases.
Functions and their measurement
Beyond the 'hard metrics', what are the other aspects of business that leaders have to get right - and therefore lend themselves to assessment following a development initiative? It's important to consider this because these critical criteria will be assessed by investors and the governing board.
This is not an exhaustive list but here are seven major areas of responsibility and value creation in an organisation with accountability lying with various leaders and their teams:
- commercial metrics The key metrics such as turnover, profit, balance-sheet value, debt and growth/retention of customers are changes that are easy to measure and monitor. But the reasons and the leadership traits that enable the metrics to perform well come through as a result of some of the headings below
- financial information and control The provision of accurate and timely information on the financial condition and health of the business at any time. This should be easy to measure too but then along came Enron in the US and Connaught in the UK: though steered by well-educated people, the capacity for huge error and obscured misdemeanour still existed. How companies measure themselves and report on their standing remains a grey area despite the regulations around it. Quality of leadership matters so much here and yet dependence on the data to measure leadership may not be enough - even when an auditor raises a red flag
- operational efficiency The efficiency with which materials are sourced and products are made, stored, delivered and supported. This is another relatively easy area to measure but also a very complex one, with many extraneous factors able to get in the way. Nonetheless, it is widely and deeply measurable
- products and service innovation Every business needs a fresh product portfolio to maintain strength in its markets. It takes a particular style of leadership in this area to keep up with the James Dysons of the world. Innovation may come from within or be contracted in or acquired. Whatever the methods, the activity is measurable in relation to leadership competencies
- staff quality and retention It always surprises me how little this area gets measured, given its importance. Two UK companies serve as examples: Comet will not be remembered by its customers for the general quality of its staff, yet B&Q is now lauded for the helpfulness of its employees. Businesses need a good brand to attract staff and good staff to build a strong brand, so this is an area with critical measurables
- stability Companies need to change to adapt and evolve but, when they have a number of new leaders come in, excessive change tends to follow. But for a business to operate well, it needs a degree of stability too. Continual change in structures and people creates fatigue and confusion
- brand value When all of the above components measure up well, the brand value also rises. Brand value is now evaluated as goodwill once was - businesses such as Coca Cola are almost solely defined by their brand value. The value of organisations may be defined by brand but brand value can only be delivered by people and their leadership, as G4S in the run-up to the London 2012 Olympics found to its cost. Great brand value is behind great leaders - not great logos. So great leadership can be priced in some accordance with brand value.
All of these areas of delivery can be traced back to leadership. This is done when we fully understand the components of leadership and how each one plays to deliver performance. This applies to the CEO, the board and the middle-management leaders throughout the organisation.
Given, then, that most organisations feel they know which leadership behaviours will drive performance, it is surprising that leadership development interventions are not looked at and measured far more closely, and indeed financially assessed with forensic attention.
Alternative assessments on leadership investment value
Entrepreneurial activity Of course, opportunity cost must be looked at as must the cost of doing nothing to develop leadership. It's a truism that continuing change and adaptation are not choices but necessities for organisations today. Therefore, static organisations cannot exploit profitable growth opportunities without leaders prepared to enable staff and gain from opportunities. Doing nothing to develop leadership is therefore not an option. I would argue that the entrepreneurial activity level is a performance measure of good leadership in many organisations.
Mergers and acquisitions It is worth considering too that the nature of M&As is such that they suffer a high failure rate in relation to promises and expectations. But M&As do succeed when the quality of leadership on one side, or ideally both sides, of the deal is very high. It requires only a few people to make a deal work - or fail. The cost of failure is immense in most cases. The acquirer has a duty to assess the leadership quality in the target company and yet even this is often glossed over with assessments based on anecdotes and faith.
Motivation People's motivation and energy in organisations is critical to commercial effectiveness. We have all been in organisations that feel energised and, conversely, those that feel dead. These conditions can be ascribed to the quality of leadership and yet poor leadership is masked by continual reorganisation and, perversely, by overstaffing to make up for the lack of energy applied.
Absenteeism Well led organisations feel inspired, energised, valued and confident. They also perform to higher levels across the board. So productivity is a measure but so too is employee contentment - it has a huge value. A content workforce also has less absenteeism and sickness. Absenteeism costs the UK economy £32bn in the UK3 and $153bn in the USA4 per year. The public sector suffers the highest levels of absenteeism - what does this say about the leadership?
Engagement Financially, these organisations gain through the emotional response of individuals and the cultural strength that accompanies this. Such conditions are measureable with some ease and financially quantifiable too.
It's not always easy to show absolute cause and effect of leadership in organisations. There are always a number of other variables that are hard to isolate and account for. Much is rightly attributed to the simple belief in the importance of leadership. But good leadership makes a difference: it inspires people to outperform. Courageous leaders are needed to advance organisations during times of uncertainty and stress so commitment to developing leadership capability is worth the investment to increase the probability of success.
What we see is that leadership does show through quite measurably in a number of ways and many of these are measures that are already there. When a CEO gets removed for poor performance, the justification is usually poor financials; the reality is more often shareholder concern about the effectiveness of the leadership.
The recession has meant budget cuts and less investment in people, however the people in the organisation are the business and there is only so long a business can go without developing them. Developing strong leadership skills is therefore crucial if companies want to stand the best chance of success in the future.
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