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If you can't invest in culture because of budget, yet revenue is driven by performance which is significantly driven by culture, what comes first? The chicken or the egg?

I hear it more often than I would like. Well-meaning business leaders trying to play the financial discipline card when it comes to culture change. “We just don’t have the budget for that…,” is the most common line. To be fair, we are not talking about ridiculous costs in the grand scheme of things. And, the biggest factor that is ignored is this – your culture is already costing you a lot more than the cost of fixing the problem.

 

Let’s just take a few factors…

 

The cost of employee turnover alone is enough to make the argument. In organisations with under-performing cultures, turnover is nearly always higher than desired. The cost of turnover is estimated at between half and three times that person’s annual salary, depending on how senior they are. (Think recruitment costs, downtime as they are leaving, role empty in between incumbents, then the time to get a new person up to full speed.) So, for example, in an organisation of 100 employees, a mediocre turnover rate of 20% costs the organisation at least $1,000,000 p.a.

 

(The exceptions to the poor culture = higher turnover equation are a tight job economy, or an organisation that’s regionally isolated. This creates a worse problem, which is unhappy, unproductive employees NOT leaving for fear of not getting another job.)

 

Then, let’s add the cost of under-performing leaders. If you take an honest look at your top leadership layers, what percentage of them are genuinely high-performing leaders? I’m not talking about high-performing individual contributors. That’s a different story. If they are paid to lead, then their top required competency is leadership! The cost of underperforming leaders is felt on so many levels. The leader is the lid on the team’s success. And, more and more research shows that people join an organisation, but leave a boss (adding to the point on turnover above). Research from Ken Blanchard has shown that every year of delaying leadership development costs an organisation an amount equal to 7% of its annual sales.

 

Let’s throw in one last one – ineffective meetings. How much time is wasted in your organisation by meetings that people feel get in the way of doing their job rather than accelerate doing their job? Simply take the average hourly rate of each person in the room and multiply it by the number of people in the room, and there is the cost of that meeting. Multiply that by the number of useless or unproductive meetings in a year and you will end up with a disconcertingly large figure.

 

The biggest problem with these three factors is most of their costs are not quickly visible on the organisation’s profit & loss statement. Then, because the cost of leadership and culture development DOES appear on the P&L, the cost is felt as too high by leaders who are not enlightened enough to look deeper than their P&L. These leaders, in effect, are saying no to spending $100,000 to fix a $1,000,000 per year problem.

 

Put simply, most leaders who say that changing culture and developing leaders costs too much, are blind to the fact that their prevailing culture and leadership capability is already costing them much more than they are willing to pay. And, every time you say “we’ll do that next year”, you have just added 7% of your annual sales to the cost.

 

So what are you waiting for?

 

Author, Tim Ferris, Senior Consultant Dattner Grant