The High Cost of Poor Leadership
Updated: Dec 4, 2018
Over the past century, developed countries have witnessed significant transformations; the industrial economy (making tangible goods) has largely been superseded by the service economy (delivering knowledge solutions). In Australia over 73 percent of the workforce is employed in knowledge intensive services (Boedker, Binney, and Guthrie, 2007). When people and their knowledge, rather than machines, are your “production engine” then effective leadership is critical.
Poor leadership is the primary cause of low team performance (Society for Human Resource Management, 2005). Effective leadership delivers 25% higher productivity and 65% higher returns on capital (Bloom Lemos, Sadun, Scur, and Van Reenin 2014). Your managers hold the key to unlocking the rapid performance improvements you want. In fact, your managers are the ones who are directly responsible for the state of sales, operations, safety or service you’ve got right now. It’s not your frontline staff who are at fault.
Sales teams being led by world class leaders generate six times more than teams with the worst managers (Folkman, Sherwin, Steel, and Zenger, 2012), and almost double that of teams with average managers (Bassi, L. and McMurrer, D, 2007; Edinger, Folkman, and Zenger, 2009; Weinberg, 2015). Turning your managers into world class leaders is the way increase growth rate and to rapidly more than double profits.
For service delivery, poor managers lead to low service levels (Edmonds SC. 2012; Wilson, Bitner, Gremler, and Zeithaml 2012; Cheng, Chiu, Hui, Tse, and Yu, 2007). When discussing barriers to performance most senior executives concede that their workforce is operating at only 60% to 65% of their potential (Blanchard, K 2004 and 2009). Turn your managers into world class leaders and you’ll rapidly increase productivity, service delivery, and net promoter scores.
Managers are responsible for at least 70% of the variance in employee engagement scores across business units (Gallup, 2015 and Huselid, 1995). Hence the famous quote, “People join organisations and leave their managers.” (Buckingham M and Coffman C, 1999). When your managers become world class, engagement will quickly increase too.
Assessing a Realistic Total Cost of Poor Leadership
Development Dimensions International (DDI), a reputable researcher, suggest the annual cost of one poor leader is more than $126K. They attribute this to low team productivity, high turnover and dissension in the leader’s team. Lighthouse, a leadership blog website, show calculations to support a claim the cost of a bad manager is $192K per annum (Evanish, 2015).
I’ve estimated the cost of three consequences of poor front-line leadership; low productivity, high turnover, and lost revenue. My calculations show these numbers are overly conservative and a more realistic annual cost of one poor leader is around $350K. And in key sales / production / service roles the cost of poor leadership can easily exceed $1M per leader per year.
There is also an unacceptable human cost to poor leadership, my cost estimate did not address it. That said, wellbeing, including workplace stress and anxiety, collectively cost the Australian economy $190 billion annually, equal to 12% of GDP (Boedker, Binney, and Guthrie, 2007). It causes the loss of nine million working days every year. According to the South Australian Health and Medical Research Institute (SAHMRI), human wellbeing is the single most important issue for our population, economy and way of life.
I’ve also excluded discussion and estimates for the cost of poor senior managers because the group is small; and in these roles one delayed decision, or wrong decision, usually costs millions, or tens of millions. No one disputes the cost of poor senior leadership - it can break the company.