I recently attended a breakfast round table conference of HR leaders organized by SHRM on the topic of ‘How investment in HR technology could impact the organization bottom line’. As interesting as the topic was, the discussion was equally engaging. The session was nicely moderated through a series of questions that kept the ideas flowing. One question in particular stuck a chord with most, the kind of mixed views it generated prompted me to write this post. The question was about ‘How does spend on people initiatives & technology get approved in each company - does it need a business case or are HR leaders able to decide without ROI considerations?’
I believe for HR leaders this question or dilemma is not new, whenever posed to a group it would generate multiple perspectives. Although very few would disagree that if the investment request for any initiative is supported by a business case, it is more likely that the discussion with stakeholders will be constructive and the outcome fruitful. The challenge within HR though is that the ROI on people initiatives is not all tangible. It is hard to measure positive impact on culture change, motivation, capability improvement, leadership quotient among similar such aspects that HR initiatives influence. But what is getting more and more possible through HR analytics is that the outcomes resulting from improvements in these intangibles can be measured.
Leadership Capability Development is one such intangible area where we believe investments are worthwhile but then there isn't a straight forward way to show the ROI. As a result some companies may see their leadership development and training initiatives fizzle out as feel good incentives or rewards for work well done. A case in point is mentioned in the HBR article "The great training robbery". In 2012 U.S corporations spent $164.2 billion on training and education and to show for it most companies did not see any discernible changes in individual and organization behavior or any improved financial performance. Not a good scenario for justifying investment in training and development
Taking a contrary point of view to above, the 2013 Gallup study on Employee Engagement revealed that only 30% of employees in US are engaged. Of the rest, 50% are neutral and 20% are disengaged. The cost of disengagement as per Gallup is $500B. Whilst this is a huge productivity loss, it presents a great opportunity to do something to improve engagement and reduce disengagement
The point from the above scenarios is that without a business case one group may see the glass half full whilst the other may see the glass as half empty. A business case even if it is not tight allows to create a sketch on the canvas that can then be filled with colors that bring the picture to life.
Now coming back to the point if we are to justify investment in leadership then how do we go about creating a business case in support of it?
Several surveys (e.g Global leadership forecast) continue to show that developing leaders across the organization levels is among the top most challenge of many a CEO's. Whilst it may seem that leadership development should be a focus area for you too but to justify it as a priority for your organization, applying a global cookie cutter approach may not work. It could help to get initial positive reactions but it would not buy you the support required for a longer term conviction into the initiative. The case for it would need to emerge from the issues troubling your organizations. I have mentioned a few scenarios which I believe can help in establishing a case for having a sustained leadership development program included as part of your organization growth strategy
Leadership Development - Measuring Scale
Go through the statements below and see if you are facing some of these challenges. In case you are, then I would say you have a clear business rationale for having a more focused approach to leadership development than what you would currently have in place. But if none of these make you feel uneasy, then you probably have a good leadership development process in place that you should sustain and share the success mantras
a) We do not have a pool of successors identified for the leadership positions in our Business units
b) We plan for business initiatives and then solve for people who should execute them, rather than looking at our pipeline of leaders and solving for the initiatives they should drive
c) Our engagement scores lag industry benchmarks, more so the gap in the scores varies significantly across business units and managers
d) We face a challenge in retaining high performers and attrition is increasing (or is high)
e) Promotions are based upon performance in current role. Not enough emphasis is laid on discussing readiness for next role, areas for development and potential derailers to success
What a SUCCESSFUL Leadership Development Program Can Deliver
A well planned and executed Leadership Development Program would help in resolving the above problems. If we can measure the loss happening from above issues and also measure the additional value that leadership development will generate, it will create a compelling case. In the following points I have tried to show how to measure the impact from leadership development in resolving the above issues taken in the same order
- Absence of a strong succession planning process means you are hiring your backfills primarily from talent market. It is not to say hiring of leadership roles from outside is incorrect but if steady BAU roles are being hired from outside then that's an avoidable situation. Estimates suggest that the cost of backfilling from outside is anywhere between 70% – 200% of the incumbent salary. And if the incumbent does not perform to expectations the costs go even higher and more so for leadership roles. Succession planning is at the core of leadership development. It helps to retain talent, reduces risks of unknown, saves hiring costs and reduces time & uncertainty in transition. With the help of analytics a cost-benefit analysis of build (develop) vs buy (hire) can be worked out (Mckinsey Articles "The CEO's guide to competing through HR" and "linking Talent to Value" provide some helpful reading on this area) to create a hard measure in favour of investment for having a leadership development program
- Taking a cue from the classic book written by Ram Charan and Larry Bossidy - Execution – the authors make a point that 70% of strategic failures are due to poor execution by leadership and rarely is it for lack of strategy. The path from strategy to success depends upon leadership ability to execute, an essential skill for all leaders and where lacking it needs to be the top most development priority. To check for execution discipline/ gap in your organization, I would say if you are able to map the various initiatives being driven by leaders in your business on a simple 2x2 grid that has ‘value & impact generated’ vs ‘time and effort spend’ as quadrants using a high-low scale, the result should give what you want to be looking for in creating your case for leadership development
- We know that low people engagement leads to lack of productivity, low performance and it negatively impacts team work. Gallup studies have provided some helpful metrics to measure the impact of disengagement. As per Gallup, the cost of disengagement is equivalent of 33% of the employee salary. Engaged employee on the other hand is twice as productive. Research also suggest that manager/ leadership capability is the biggest factor that impacts people engagement. This means that if you have to reduce the costs of disengagement you need to develop leaders who can create a more engaging work environment. Most companies do engagement surveys and the score for engagement and disengagement can help you decide on the priority that you need to place on leadership development
- In the HBR article ‘People Before Strategy’, the authors (Ram Charan, Dominic Barton and Dennis Carey) suggest that 2% of the employees drive 98% of the impact. Steve jobs had remarked that the difference between a good and a great software engineer is 1 to 50. This would not be true for all professions but what these numbers suggest is that retaining your best people is what eventually matters, finding them is not easy but losing them is. Finding, nurturing, inspiring and retaining top talent is what leaders need to be really good at. These leadership skills are not easy and need to be developed and honed over time. If you are facing attrition of talent then it is ripe time to focus on leadership development and you have attrition data to back yourself with
- It was almost 50 years ago that Peter Principle was first published, but it may still be playing its part in many companies – ‘People get promoted to their level of incompetence’. With hierarchies getting flatter the competence gap between one layer and the next is becoming higher. Promoting people when they are not ready is akin to setting them up for failure. In ‘Good to Great’, Jim Collins illustrates the path to level 5 leadership and performing at each level requires different capabilities. Evaluating the success rate of the promotions in your organizations will give you an answer whether the Peter Principle is playing its part or not. If yes, you need to have a program in place to develop leaders for a successful transition into new roles
Well I will rest my thoughts here and I hope you find them helpful. I will love to hear your views and inputs on this topic