By: Helios on January 23rd, 2014

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How Much Does Poor Leadership Cost an Organization?

Business Management & Strategy | Employee Relations

Finding the right leader for your organization can mean double digit profits or shutting your doors forever. While this is certainly an extreme example of what can happen, we all look for exceptional leaders that can lead our organizations to new and exceptional heights. During my time as a Business Partner for Helios HR, I have had the pleasure of working with both exceptional and mediocre leaders.  Some of these exceptional leaders have embodied the following characteristics as described in Kouzes and Posner’s famous work “The Leadership Challenge:

  1. Having the ability to clarify personal values
  2. Setting an example by aligning actions with shared values
  3. Envisioning the future by imagining exciting and ennobling possibilities
  4. Enlisting others in common vision by appealing to shared aspirations
  5. Searching for opportunities by seeking innovative ways to change, grow, and improve
  6. Experimenting and taking risks by constantly generating small wins and learning from mistakes
  7. Fostering collaboration by promoting cooperative goals and building trust
  8. Strengthening others by sharing power and discretion
  9. Recognizing contributions by showing appreciation for individual excellence
  10. Celebrating the values and victories by creating a spirit of community

If your organization is not currently filled with leaders who are not embodying the characteristics outlined above, what is it costing from a bottom line perspective? As I mentioned above, research has confirmed that good leaders can double profits while poor leadership can cost your organization $1 million a year in untapped potential.  To help your organization identify its own costs of poor leadership, I have developed a list of four common traits that tend to increase costs.

Blown Deadlines: Managers are placed in a supervisory position to help employees manage a project from beginning to end. When a project is not completed on time or on budget, there are other projects, deadlines and resources that have to be re-calculated to complete the first project. To stem the tide of this happening on a consistent basis, senior level managers, need to remain connected with their lower level reports. While it’s not advisable for a senior level manager to get too involved in the details of each project carried out by a direct report, the senior manager needs to understand the progress of each project. Providing continuous updates and providing feedback to lower level managers will allow for more accurate timelines, expectations and budgets. A good senior level manager should be able to provide encouragement, feedback and support to ensure their direct reports are completing assigned work on time and to the best of their abilities.

Decreased efficiency: When an employee is unsure of what the goals, mission and expectations of a firm, department or team is, the employee may not be working up to their full potential. The results of a large survey of 1,300 private-sector companies found that on average only 59% of work time was productive. Employees not fully engaged in their work not only cost the organization on any current projects assigned to the employee, but also future work  that could have been generated by the employee or firm as a whole.

Missed opportunities: As a follow up to the second point, the third cost, missed opportunity costs, may not be noticeable in the short term, but can be quite harmful to an organization in the long run. If your employees are not working to their highest potential, it is possible your firm could be missing out on follow up work that could be generated from a current client, other clients in the same industry, or other firms outside your current social network. A good leader will explain to his direct reports why it’s important to think long term regarding the work currently tasked. If your managers aren’t doing this already, ensure your company or department goals are easily understood and tied back to the mission and vision of the organization. Aligning the goals of the employee and the future state of the organization is what your leaders should be striving for.

Decreased employee morale and increased turnover: Nothing slows a department or firm from reaching its potential like decreased employee morale. Organizations face a plethora of internal and external reasons for a decrease in morale, but poor leadership could be the easiest one to address. If your organization does not address employee morale it could lead to increased employee turnover.

There are three significant costs associated with replacing an experienced employee:

  1. the cost of covering the position while it is vacant;
  2. the cost of finding a replacement;
  3. the cost of getting a new person up to speed.

Together, these three costs, combined, could run into hundreds of thousands, if not millions of dollars, depending on your organization’s current turnover rate and specific positions being lost. Further, “a conservative estimate is 30% annual salary to replace a lower-skilled, entry-level employee, to as much as 250% of an annual salary to replace a highly specialized or difficult-to-replace position”.With this information in mind, it is important for your firm to address and fix any employee morale and turnover issues you are experiencing due to poor leadership.

Prosperous organizations are successful because they have business leaders that understand how to attract, motivate and retain employees.  Selecting the right leader, for the right position, at the right time is imperative to your firm’s success. Many times, this is easier said than done.  Yet, as I outlined above, the potential for your organization and the success it can yield are too important to ignore. At the same time, installing the wrong leader could be quite costly to your organization – a cost you may or may not recover from.

Zenger, J., Folkman, J., & Edinger, S.K. (2009). How Extraordinary Leaders Double Profits. Chief Learning Officer

Proudfoot Consulting. (2002). Untapped Potential – The Barriers to Optimal Corporate Productivity.

Ken Blanchard. (2009) The High Cost of Doing Nothing