LEADERSHIP

6 Reasons Bad Leadership Skills Are Costing Your Company Money

MARCH 1, 2021 | BRENDA VAN CAMP

Let me ask you something. Would you fly with an untrained pilot? Would you give an untrained person a scalpel to do surgery on you? Of course not. Why then, do we think it is acceptable to put people in charge of teams and departments without having received any training on how to effectively lead, influence, and impact people to accomplish organizational goals?

Maybe, you say, they get trained as soon as they are promoted. No, that’s not the case either: Research by Zenger/Folkman found that employees in leadership roles typically experience a 7 to 10-year training gap between when they become leaders and when they receive their first leadership training. That’s a lot of time during which they have to just “figure it out” and likely make many mistakes.

So then why? When we ask those at the top that question, they usually tell us that leadership training is expensive, and they don’t want to waste it on junior-level people who are more likely to leave for opportunities elsewhere.

Sounds reasonable, maybe on first blush, but it is a miscalculation of the greatest order. Poor management and leadership by untrained managers cost companies as much as 10%+ in wasted cost each year.
How? Below I have highlighted 6 ways in which untrained leaders hurt a company’s bottom line:

Not knowing how to motivate

For a leader, their people are their most valuable asset. Without them and their willingness to apply their talents each day they come to work, precious little gets done. Unfortunately, untrained leaders tend to wrongly think about motivation in a pretty transactional way. They think their people should be willing to perform in return for their compensation. While that may well be enough to get people to show up to work, it’s rarely enough to get the best performance from them. External rewards, such as salary and bonus, are not drivers of people’s intrinsic motivation to do their best thinking and have their best ideas. Instead, for a leader to know how to get the best from their people, they need to learn about the 3 basic psychological needs that drive motivation: need for autonomy, need for competence and need for relatedness. They must then explore how their behavior and management practices can either help or hinder their people’s motivation to do something.

Failing to train leaders on how to proactively motivate their people comes at a great cost. It is estimated that lack of motivation costs an average company about 25% of annual payroll. Take a moment to let that sink in:

They’re not getting any effort back for 25% of your payroll. And given that payroll typically makes up about 25% of a company’s total cost base, they’re at risk of wasting 6.25% of their total expenses.

Not knowing how to make effective decisions

Managers and leaders are tasked to make many decisions, big and small - hiring decisions, purchasing decisions, budgeting decisions, work planning decisions, etc. And organizations obviously want them to make the best possible decision each time.

Many untrained leaders, however, struggle with decision making. Some fail to make timely decisions because they’re holding out for the perfect decision. Others make bad decisions because they rely too much on their intuition or mistakenly assume they are expected to make decisions unilaterally. And most are completely unaware of the potential negative impact of the many biases that can influence their decision making.

Now think about how many operational decisions your organization makes every year. Not those big strategic business decisions made by the executive team, but the many small operational decisions made by entry-level and mid-level leaders across your organization.

They make 100s if not 1000s of operational decisions, and they impact every aspect of an organization. Therefore, not training them in how to make better decisions comes at a serious cost to the organization’s bottom line. In fact, a study by Gartner in 2018 found that such poor everyday operational decisions cost companies upwards of 3% of profits.

Not knowing how to run effective meetings

Meetings are a leaders’ essential tool to communicate and align on what needs to get done. They spend their days scheduling and hosting meetings left, right and center. In fact, a survey of 2000 business leaders by Harrison-Hofstra found that an average employee spends about 90 hours per month in meetings. That is 52% of their total working hours per month! However, that same research also suggests that approximately a third of that meeting time is deemed unproductive and even wasted. Why is that? Because running a meeting is about more than just getting it scheduled, showing up, and perhaps taking some notes. To run effective meetings, leaders need to develop facilitation skills to engage and solicit input from every person in the meeting as well as learn how to engage others in constructive conflict to develop the best possible solutions. When leaders lack those skills, meetings become very inefficient. They frequently fail to fully address issues, with little or no input from attendees, often failing to generate new insights and no explicit action afterward. As a result, more time is required for follow-up meetings to clarify and sort things out fully.

So ineffective meetings are squandering organizations’ most precious resource: time. And using the data from the above-quoted research, one can calculate that this amounts to roughly 4% of total cost. Or to make it more real, an estimated $7,500 per employee per year.

Not leading with integrity

Trust is THE foundation of leadership. To get things done as a manager or leader, people need to follow their lead willingly. For that to happen, people first need to trust the leader. Lacking the foundation of trust, the leader needs to use approvals, punishments, and micromanagement to make them do the right things, at the right time, and in the right way, thereby slowing everything down. While being a trustworthy leader may sound like a straightforward thing, it clearly isn’t. Why not? Because leading with integrity is a demanding quality to sustain within the everyday context of a leader’s reality. A leader with integrity doesn’t tell little white lies just for the expediency of the moment. They don’t over-promise and then under-deliver and don’t put a spin on things to make them look better or worse. Nor do they ignore opposing views or additional information, even when that complicates the decision-making process. Unfortunately, despite their best intentions, many untrained leaders engage frequently and unwittingly in trust-destroying behaviors as they struggle with the pressures of meeting after meeting, difficult colleagues, pressing deadlines, and stakeholders with different and often opposing expectations. They falter because they are unclear about their values and how to enact and embody them in their everyday leadership. They also lack the ability to maintain the necessary level of mindfulness, self-awareness, and self-control, especially when under stress, to put the organization’s needs ahead of their own ego and have the strength of character to do what is right. Only dedicated training and practice can help a manager develop that ability.

Not investing in training and coaching to guide managers and leaders to lead with integrity comes at a high price for any organization. Research by Ernst & Young found that less than half of employees trust those working above or alongside them!

And this lack of trust is hindering output. In fact, research carried out by Sheffield University’s Department of Economics found that those organizations that do focus on establishing a high level of trust between employees and their managers saw productivity rise to around 5% above the industry average.

Lack of financial understanding

Every first-year business student knows that “cash is king.” Yet according to a U.S. bank study, 82% of business failures are due to cash flow problems. Why is that? One major issue is that most managers and leaders making daily operational decisions have not been trained to understand how their decisions will impact revenue, costs, overhead, and cash flow. This isn’t to say that operational leaders need to know how to run financial analyses or how to pull together a cash flow statement from scratch. But they should be taught how, for example, their decision to create more product variations increases the amount of cash needed to build and maintain inventory. Or, that when they decide to extend longer credit than usual to a customer to close a sale, it causes a delay in the inflow of cash.

Developing the financial acumen of non-financial managers and leaders can significantly benefit an organization because when a leader can make decisions understanding the financial repercussions of those decisions, more cash is made available, for example, to pursue revenue-generating growth strategies or pay down debt, thus lowering interest and other financing-related costs.

Not knowing how to delegate effectively

As a leader advances, they are typically held responsible for more things than they can personally deliver. As such, they need to delegate effectively in order to deliver on all their goals. Delegation is a manager’s rocket fuel because it enables them to get much more done. In effect, it multiplies their capacity. Despite the apparent importance of delegation, most managers and leaders are wrongly expected to intuitively understand how to delegate. As a result, according to a study by the Institute for Corporate Productivity, 46% of companies have concerns about their managers’ and leaders’ delegation skills.

Why is that a big deal? Well, when managers and leaders don’t know how to delegate, they deliver suboptimal results or worse, drop the ball entirely on some of their responsibilities, ultimately resulting in the failure to achieve one or more company goals.

In conclusion

These are just six examples of why organizations cannot afford to underestimate the importance of adequately training its managers and leaders across all levels. Even this brief run-through already added up to a total of 13% in potentially wasted costs and a 5% decrease in productivity.

So the damage done by poor management and leadership skills of untrained managers and leaders costs organizations 20 -30 times more than the 0.5% - 0.75% of costs that organizations currently spend on just training their more senior leaders.

And that is even without adding the increased rehiring cost resulting from increased employee turnover due to bad managers and leaders. Nor have we added-in the negative impact on an organization’s performance when managers don’t know how to provide effective feedback, don’t know how to hold others accountable, don’t know how to manage risk, or lack many other essential leadership skills. So that’s why we’re so passionate about helping organizations create better leaders.

Investing in training managers and leaders across every level of an organization is not a perk. It's a must - unless you don't care about your bottom line.