It’s Just Not In The Budget…
Having recently worked through The Lasting Impact of Positive Leadership, and what that can mean in the lives of team members we’re responsible for, I can’t imagine you’re reading this right now if you’re not convinced of the value… That said, no one magically becomes an amazing leader. I remember hearing John Maxwell tell the story of someone asking him if leaders are born or if leaders are made. In true John fashion, he replied, “I’ve never met a leader who wasn’t born. That would be weird! But no one starts out as a leader, if that’s what you’re asking. Leadership is something that’s developed over time.”
That certainly makes sense in theory, but how does that happen?
For more than two decades, Cindy and I have invested heavily into honing our own leadership ability. I can’t say that every dime of that investment came out of our own pockets, but I promise you the vast majority of it did - and a lot of that investment was at a time when we were so broke we could barely pay attention! One life lesson that taught me was that each of us will figure out how to do whatever it is that we believe is important!
Over the last 30 years or so, I’ve worked for big companies and for small companies, in addition to being self-employed for a few years now. Regardless of the size of the business, I’ve never seen a time where you didn’t have to pay at least some attention to the budget - but then again, I’ve never worked in the pharmaceutical industry or for the government… With that in mind, I completely understand how critical it is to make sure every investment yields a measurable return. Since I’ve been so focused on return on investment in every role I’ve had, prioritizing spending is also something I’m pretty familiar with!
One of the most interesting things I hear though is when a business owner or key decision maker in an organization says “there’s nothing in their budget for developing their leaders.” In fact, I’ve been told variations of that in two separate conversations recently - both times from people I truly care about in organizations that I genuinely want to see succeed!
Before I move on, I’ll address the proverbial elephant in the room... Wes, you have a vested interest in those people paying for leadership development - that’s what you do… True enough, but if I’m not 100% certain I deliver measurable results in doing what I do, I shouldn’t be doing it. And by the way, remind me how much I’m charging you right now as you read this…
In one of those conversations recently, the one where I have a fairly strong friendship with the individual who told me they didn’t have leadership development in the budget, I lovingly replied that they clearly have plenty in their turnover budget… I know it stung a bit, but the sting was from the accuracy of the statement...
Whether it’s the 5 Reasons to Invest in a Leadership Development Program that were detailed in a post from BMA Group or any of the things listed in the LinkedIn article I found called Poor Leadership Can Sink Any Ship, I can’t point to a single organization that’s not paying for leadership development. Unfortunately, far too many are paying a significantly higher price than they need to simply because they’re not being intentional about developing their leaders than they ever would by doing so through a very strategic approach!
Moving forward, we’ll take a look at just a few of those costs so we have a better foundation for determining whether or not there’s anything in the budget for leadership development…
That’s Just the Way It Goes…?
Think about the snarky response I gave my friend when they said there wasn’t any money in their company’s budget for developing the people in roles with leadership responsibility, telling him that he seemed to have plenty in the budget for turnover… Truth be told, I’ve rarely seen companies actually track turnover. And the few I have seen gather enough detail to determine what their annual voluntary turnover rate is, still don’t dig deep enough to have a grasp on how much it’s actually costing them or what’s driving it… In most cases, regardless of the size of the company, decision makers tend to think, “that’s just the way it goes…”
Don’t get me wrong, I’m not throwing stones here! Gathering data for either of those things can be incredibly hard. Calculating the complete cost of replacing a tenured employee requires far more information than adding the cost of advertising the open position to the wages for the time involved in the recruiting process. And as much as I wish this weren’t the case, I can’t say that I’ve seen groundbreaking information come to light through exit interviews… Now couple both of those challenges with the fact that a manager or owner of any business is probably running ragged even without the extras they have to pick up when a key position needs to be filled, getting a clear picture of those costs becomes even more unlikely!
Let’s think about it again, money for leadership development just isn’t in the budget… Or is it?
In Leadership Gold, John Maxwell shares that “Some sources estimate that as many as 65% of people leaving companies do so because of their managers… The ‘company’ doesn’t do anything negative to them. People do. Sometimes coworkers cause the problems that prompt people to leave. But often the people who alienate employees are their direct supervisors.” Based on what I’ve seen over the last 25 years, I think John nailed it! However, this isn’t just about the supervisor or manager hurting someone’s feelings. In many cases, there’s an issue between two team members that goes unaddressed because the individual in the leadership role doesn’t know how to effectively deal with the situation. In complete transparency though, there are certainly way too many scenarios where the lead, supervisor, manager, or whatever we call them, is just miserable to work for…
If John’s numbers are correct, that’s a big deal even without having a complete perspective of just how much it costs! Since few companies have the time or resources to capture those, let’s use these numbers from a Gallup study to get our heads around it:
“The U.S. Bureau of Labor Statistics has found that the U.S. voluntary turnover rate is 23.4% annually. It's generally estimated that replacing an employee costs a business one-half to five times that employee's annual salary. So, if 25% of a business' workforce leaves and the average pay is $35,000, it could cost a 100-person firm between $438,000 and $4 million a year to replace employees.”
Given the significant increase in minimum wage over the last year or so, and the impact that’s had on wages on most every other position in an organization, I have to believe that turnover is far more costly now since the average pay of $35k translates to less than $17/hr. If Sheetz and Walmart are paying close to that for entry level positions, I doubt many companies have that as an average wage today!
That’s just one of the areas Cindy and I are helping a facility we’ve been working with focus on, and we’ll look at a few more soon… If they’re able to decrease turnover by just a third, based on the lowest numbers shown in the Gallup survey (adjusted for their site’s total headcount), they will recognize a 25x return on investment before considering any other factor.
We don’t have to believe that’s just the way it goes when it comes to turnover, but we will have to be intentional about the steps we take to address it - and reallocating some of that expense to an investment in leadership development gets that ball rolling. When we do, there’s even more ROI we can capture!
One last thing on turnover… Notice I suggested reducing it by just a third. Eliminating it completely isn’t going to happen. People are going to retire, and sometimes it’s necessary to help a disengaged team member find a better fit because their disengagement might be costing us more than replacing them!
Discretionary Effort & Individual Performance
But Wes, you’re not hearing me… It’s just not in the budget and that’s just the way it goes with turnover, we’ve got to keep our focus on doing the work that pays the bills! I know that feeling all too well… Heck, that was the reality I lived with every day of the nineteen years I worked in manufacturing! Even during the 15 or so years that I worked in safety and human resources, there was always an expectation that any initiative we implemented to train supervisors or improve safety would make a direct and positive impact on the facility’s overall productivity. And as tough as that was to accomplish at times, I understood because that’s what kept the doors open…
With all that in mind though, I believe it only increases the importance of being intentional about investing time and resources into developing our leaders; it just costs way too much not to! Remember that 25x ROI that I just referenced? You know, the one that used the lowest numbers possible based on the Gallup study… What if we considered the hit that productivity takes when we have high turnover, as well as all the other indirect costs, and used the higher numbers? Even at the average of $35k per year, that same facility could already be spending $4 million per year on turnover alone - and that doesn’t even touch the impact leadership (good or bad) has on employee engagement!
I’ve done several full lessons in our Leading At The Next Level program on the reasons engagement matters to a company’s bottom line so I won’t go into all that here. For the sake of time, let’s just look at how much profit we’re missing when the folks on our teams who are in roles with leadership responsibility haven’t been developed so they can earn buy-in and engagement from the people reporting to them. Buy-in and engagement don’t just happen, but when earned, they lead to significant measurable results! Don’t take my word for it, here’s what the Harvard Business Review shared from a global survey showing the total financial impact engagement can have:
“Company leaders won’t be surprised that employee engagement—the extent to which workers commit to something or someone in their organizations—influences performance and retention. But they may be surprised by how much engagement matters. Increased commitment can lead to a 57% improvement in discretionary effort—that is, employees’ willingness to exceed duty’s call. That greater effort produces, on average, a 20% individual performance improvement and an 87% reduction in the desire to pull up stakes.”
Since we already have some numbers in place for the cost of turnover, let’s ignore the “87% reduction in the desire to pull up stakes” when our leaders can effectively earn engagement from their team members and just focus on the “57% improvement in discretionary effort” and the “20% individual performance improvement.”
Discretionary effort is an interesting thing for any of us to consider. Most organizations have metrics in place to evaluate performance, detailing what’s necessary for any given employee to accomplish on a routine basis. While we’d all like to think everyone on our teams gives it all they’ve got every single day, that’s just not reality! For the sake of simplicity, let’s disregard the ones who are actively disengaged. They’re more likely to fall into the “good turnover” category than they are to have a complete attitude change. Let’s just consider the ones that typically fall somewhere in the middle, the ones studies refer to as “neither actively engaged or actively disengaged.” In case you’ve never seen the stats on this, that tends to be about 50% of any workforce… Since 100% is all anyone can truly ever give at once, a 57% increase in discretionary effort means that they were previously only contributing around 64% of their potential effort - and that’s assuming the 57% increase takes them to the 100% mark…
I don't have any trouble at all seeing where earning engagement from a team member could easily result in a 20% individual performance improvement, but I know we can’t reasonably expect this from everyone at once. I also can’t put numbers out there for what that 20% improvement looks like in every industry. Here’s what I’ll challenge you to consider though… How much additional revenue would your company see if just 10% of your workforce (rather than the entire 50% that’s typically somewhere between disengaged and engaged) were impacted positively when you developed your leaders and increased their individual performance by 20%?
I’d love to chat through the numbers with you one on one because I have no doubt whatsoever that this would show just as much ROI from the investment in developing your leaders as the turnover decrease did before! But there’s still one more place where money is already being spent so let’s look at that now…
A Simple Misunderstanding?
Lower turnover… Increased productivity… Both sound great, but what if we still just can’t find anything in the budget for leadership development? I mean, what if we’re not able to actually capture real dollars even if we do have improvements in both the areas we’ve looked at to this point?
Let me be very candid with you here: I have an utter disdain for getting bogged down in details, especially when there’s a high amount of pressure to get something done. That said, failing to track and/or capture the metrics that impact my company’s bottom line is irresponsible at best and business suicide at worst. There’s no rule that says I have to like any of it; it still needs to be done! The same applies to any organization. If we’re not tracking the real impact any given individual we have in a role with leadership responsibility has on the profitability of the team they're overseeing, we’re dropping the ball - and we’re not doing them, or anyone else on our team, any favors in the process.
With all that in mind, let’s pretend for just a few minutes that capturing and tracking those details really is too difficult. (Sarcasm is tough to convey in text but hopefully you still sensed it…) There’s at least one more thing that’s costing us significantly on a routine basis if we haven’t been able to find a way to invest in developing the leaders on our teams.
Nearly every time Cindy and I talk with organization’s about the importance of communication in their overall culture, I reference a study done by Salesforce.com that surveyed more than 1,400 executives and found that “86% cited lack of collaboration and ineffective communication as the primary reasons for workplace failures.” That’s certainly an attention grabber but it doesn’t give me any hard numbers for how it impacts the bottom line… But a study by SIS International Research helps put that into perspective by sharing this:
“The cumulative cost per year due to productivity losses resulting from communication barriers is more than $26,000 per employee. Not only that, the study found that a business with 100 employees spends an average downtime of 17 hours a week clarifying communications. Translated into dollars, that’s more than $530,000 a year.”
That’s not referring to the team members who left the company and there’s no variable for whether or not the employees are engaged; it’s just data… I shared those same statistics in a session we did not so long ago with supervisors and managers from more than a half a dozen organizations locally. To a person, across all the different industries represented in that group, every single participant said they believed their companies had similar productivity losses resulting from communication barriers. In fact, one of them said he thought the study’s numbers were lower than what he was experiencing!
OK, Wes… Communication matters… But you’ve been talking about leadership development up to this point. Why the midstream switch?
No switch at all! If someone in a leadership role doesn’t communicate effectively, they’ll never earn authentic influence with their team. Without that influence, they’ll never achieve high levels of engagement or the kind of buy-in that yields increased discretionary effort. Quite frankly, I’ve even seen poor communication lead to more turnover than any other thing. But even without any of that, there’s still a ton of time and energy lost or wasted when team members aren’t clear on what’s expected of them or they completely misunderstand instructions. Those misunderstandings lead to downtime and have a direct impact on productivity. If we’re not productive, we’re not profitable. And if we’re not profitable, we’re not in business - at least in the private sector…
Now that we see where we could probably reallocate some budget from, we still need to make sure we’re using it wisely rather than throwing that money at some random training blindly with hopes that we’ll see a complete transformation. It doesn’t work that way for addressing a technical issue and it won’t work that way with leadership development either, so we’ll look at how we can make sure any development we do is really worth it as we move forward… Stay tuned!