The High Cost of Doing Nothing: Quantifying The Impact of Leadership On The Bottom Line
The High Cost of Doing Nothing: Quantifying The Impact of Leadership On The Bottom Line
The High Cost of Doing Nothing: Quantifying The Impact of Leadership On The Bottom Line
Most executives instinctively know that strong leadership is essential for overall
organizational success. However, in most organizations, there is a lack of urgency to improve
leadership skills driven by a belief that an organization’s current leadership capacity—and
subsequent performance—is good enough. But is it? Analysis by The Ken Blanchard
Companies® shows that the average organization is forfeiting over $1 million per year in
untapped potential because of less-than-optimal leadership practices.*
In a recent article titled, “How Extraordinary Leaders Double Profits,” authors Jack Zenger,
Joe Folkman, and Scott K. Edinger make the extraordinary claim that there is enormous
potential for organizations to improve their bottom lines by developing leaders who, for
example, inspire people to perform at higher levels and who can recognize and remove
obstacles to employee productivity. In fact, their research shows that good leaders can
double profits.1
Similarly, Laurie Bassi, cofounder of McBassi & Company and a former professor of
The average organization economics at Georgetown University, has shown that organizations whose leaders
is forfeiting over eliminate barriers, provide feedback, inspire confidence, share information, and
welcome new ideas outperform those that don’t. In comparing the average three-
$1 million per year year compound annual growth rate in income for high versus low sales offices in a
major business, Bassi found that the growth rate for the higher-scoring offices ranged
in untapped potential. from 60% to 130% higher than the growth rate for offices with low human capital
management scores.2
Strong leadership is not only important to the overall success of an organization; anything
less has significant financial implications. In this white paper we will explore the impact that
leadership has on employee productivity, employee turnover, and customer satisfaction. By
looking at the effect that leadership has in each of these three areas, we believe it is possible
for executives to begin to recognize and quantify the impact of average versus best-practice
leadership in their organizations.
E M PLOYE E PR OD U CTIVITY
The connection between leadership practices and employee productivity is well documented
and presents the largest opportunity for most organizations today. In a 1995 study of nearly
1,000 firms, Mark Huselid of Rutgers University found a statistically significant correlation
between high-performance work practices and intermediate employee outcomes such as
turnover, productivity, and overall corporate financial performance. The factors that impact
employee productivity include selection, performance management and appraisal processes,
as well as development strategies that include training, coaching, and mentoring.3
* Based on results reported by organizations with 500 or more employees using Blanchard’s Cost of
Doing Nothing Calculator (www.costofdoingnothing.com)
Providing employees with the tools, resources, direction, and support they need to
perform at their best are just 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 less than optimal productivity. In fact,
in discussing these barriers to employee development and their subsequent impact on
productivity with senior executives around the world, most senior executives have
assessed that their workforce is operating at only 60% to 65% of their potential.4
As surprisingly low as this may sound, it is very similar to the results of a
large survey of 1,300 private-sector companies conducted by Proudfoot
Most senior executives Consulting in 2002. In that survey, conducted with companies from seven
have assessed that their of the world’s leading economies, Proudfoot found that, on average, only
workforce is operating at only 59% of work time is productive.5 What gets in the way of higher employee
productivity? According to Proudfoot, there are three major causes:
60% to 65% • Insufficient planning and control (43%)
of their potential. • Inadequate management (23%)
• Poor working morale (12%)
As 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.”6
MK0684 102109 The High Cost of Doing Nothing © 2009 The Ken Blanchard Companies. All rights reserved. Do not duplicate.
that 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%-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.8
MK0684 102109 The High Cost of Doing Nothing © 2009 The Ken Blanchard Companies. All rights reserved. Do not duplicate.
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.
MK0684 102109 The High Cost of Doing Nothing © 2009 The Ken Blanchard Companies. All rights reserved. Do not duplicate.
In looking at the specific, quantifiable impact that good management practices can have
on improving customer satisfaction scores, The Ken Blanchard Companies believes that
better leadership can generate a 3-4% 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
behavior. Most importantly, the customer satisfaction survey showed a 3.8% improvement in
overall customer satisfaction.15
MK0684 102109 The High Cost of Doing Nothing © 2009 The Ken Blanchard Companies. All rights reserved. Do not duplicate.
References:
1
Zenger, J., Folkman, J., & Edinger, S. K. (2009). How Extraordinary Leaders Double Profits. Chief Learning Officer
2
Bassi, L. & McMurrer, D. (2007). Maximizing your Return on People. Harvard Business Review
3
Huselid, M., A. (1995). The Impact of Human Resource Management Practices on Turnover, Productivity, and
Corporate Financial Performance. Academy of Management Journal. Volume 38 Number 3, pp. 635-672.
4
The Ken Blanchard Companies (2004). The Impact of Leadership on the Bottom Line.
5
Proudfoot Consulting. (2002). Untapped Potential-The Barriers to Optimal Corporate Productivity. Available online at
www.proudfootconsulting.com
6
Dahl, T. Principles of Productivity. Available online at http://www.tordahl.com/principles.html
7
Zigarmi, D., Blanchard, S., Essary, V. & Houson, D. (2006). The Leadership-Profit Chain. Escondido, California. The
Ken Blanchard Companies.
8
Leone, P. (2008) Take your ROI to Level 6. Training Industry Quarterly
9
Nextera Research Study. (2000). Employee Turnover Depresses Earnings in Four High Turnover Industries.
Available online at: http://www.highbeam.com/doc/1G1-63938237.html
10
Branham, L. (2005). The Seven Hidden Reasons Why Employees Leave. New York: American Management
Association
11
US Department of Labor, Bureau of Labor Statistics, Available online at www.bls.gov
12
The American Customer Satisfaction Index. Available online at www.theacsi.org
13
Rucci, A., Kirn, S., & Quinn, R., (1998). The Employee-Customer-Profit Chain at Sears. The Harvard Business
Review
14
Zigarmi, D., Blanchard, S., Essary, V., & Houson, D. (2006). The Leadership-Profit Chain. Escondido, California. The
Ken Blanchard Companies.
15
The Ken Blanchard Companies (2002). Impact Study: The LensCrafters Vision
MK0684 102109 The High Cost of Doing Nothing © 2009 The Ken Blanchard Companies. All rights reserved. Do not duplicate.