What Is The Cost of Ineffective Leadership?

What is the Cost of Ineffective Leadership?

What is the cost of ineffective leadership? It probably depends on your definition of the words “cost, ineffective and leadership.”

Let’s attempt to break this question down, starting with “leadership.” For the sake of this discussion, let’s go with this definition: “The action of leading a group of people to sustainably produce, high quality, desired results.” This is hopefully robust enough to capture the essence of the idea.

Next, “ineffective.” Let’s go with Google which says: “Not producing any significant or desired effect.”

What about “cost?” According to Google, cost is defined as, “An amount that has to be paid or spent to buy or obtain something.” Let’s make a distinction here. The cost I’m referring to has nothing to do with the myriad of financially impactful decisions managers make every day while they run their businesses. I’m referring to the hidden costs resulting from the human reaction to ineffective leadership. This could include anything from subtle reduction of productivity all the way to outright resignation.

While it is difficult to precisely quantify the “reduction in productivity,” there are some statistics (subjective though they may be) that attempt to make a case. The Ken Blanchard Companies suggest that the cost of poor leadership is the equivalent of 7% of a company’s annual sales. In 2013, Gallup reported that lost productivity due to unhappy workers costs between $450 and $550 billion annually. Good & Co. states that 80% of people who are dissatisfied with their direct manager are disengaged. According to a 2012 Forbes article, replacing the boss was almost twice as important as receiving a raise.

How well do these numbers help define the problem? Other than illustrating the stunning size of the prize, I’m not sure they do. Yet if these numbers alone are not sufficient to cause businesses to take a look at improving their leadership, then what is?

How do 21st-century companies measure and address ineffective leadership? We are not likely to see a line item in the budget called “Ineffective Leadership.” Oh, if it were only that easy. Is it measured in lost market share or lost stock valuation, which is perhaps the most quantifiable strategic measure we currently have? Is it measured in employee turnover (If so, do we always make the connection between which leader causes the turnover?)? Is it measured in lost productivity? What about the level of morale? How accurately could you measure any of those variables then connect the dots back to the source of the ineffective leader(s)?

The difficulty in nailing down a precise answer to this question might suggest the reason that we don’t frequently ask the question in the first place – because we find it to be a complicated and difficult question to ask, let alone to answer. Some might find it impossible to answer. Could this question be too big? Could it be too complicated or too difficult? Could it be that the problem is too big to solve? The optimist in me hopes not. I’m hoping that if the question is that big, then the size and value of the solution will be at least as large.

But is this even the right question to ask? Perhaps the right question is something like, “How do we optimize the effectiveness of leaders as they are today?” Fair enough as the tone in this question suggests a growth mindset approach. It is a kinder, gentler question but it doesn’t pack quite the same punch does it? It skirts the point that each one of us, at some point in our lives, have been negatively impacted by ineffective leadership (If we were honest, every single person who has had a leader has complained about an ineffective one at least once in their lives.). It also skirts the point that the impact of ineffective leadership has a cost-based detrimental effect on productivity, morale, teamwork, innovation, employee retention, discretionary effort, and countless other areas that are equally difficult to quantify.

We have already considered the dollar value in this implication. But how much money is your company really leaving on the table due to ineffective leadership? Can we even quantify it? Don’t you think that if companies could count it they would do just that? Companies count everything! But we don’t seem to have the awareness, the vision, the courage, or the methodology to see the value in counting the cost of ineffective leadership. So it persists.

There is no easy answer forthcoming in this article. If our accounting practices and social mechanisms cannot isolate and decrease the cost of ineffective leadership, then we are likely left with a grassroots solution. That solution is neither easy (this is a huge question, after-all) nor inexpensive, even for those who have the will to consider the question.

That organic solution starts with deciding if we have the courage or see any value in asking the question in the first place. If you are willing to concede that your organization suffers from ineffective leadership at some level, then ask the question. Or if you are willing to admit that ineffective leadership could be costing you money, then don’t put off the discussion. Moving forward consists of learning to define, identify, measure, and promote effective leadership in your organization. Leadership behaviors that don’t fit that definition will probably be examples of ineffective leadership. Learn to identify the difference and courageously deal with the variance in real-time.

Then you count your increased profits.

For more on the notion of leadership, contact Dave Cain of Cain Consulting LLC.