Manage-Wise

Great leaders make a great difference

In our research, we found conclusive evidence that leaders with poor leadership skills generate poor results. That finding will not come as a shock to anyone. It is quite intuitive to anyone who has worked in an organization for more than a few weeks. And our research is equally clear about the fact that good leaders tend to produce good results for their organizations.

What’s more, most individuals do not need sophisticated measurement tools to tell the difference between good leaders and bad leaders. They feel the difference. They have experienced the effects at a very personal level. In general, good leaders are more effective than bad leaders in almost every dimension, including improving productivity, reducing turnover, enhancing customer service, and creating high levels of employee commitment.

Great versus good leaders

Our research, however, shows that there is another, even more dramatic, level of difference between good and extraordinary leaders. We had failed to appreciate fully just what a significant difference there is between “ordinary” and “extraordinary.”

In examining the relationship between leadership effectiveness and desirable outcomes, the consistent finding in all our research was the impact of the best and worst leaders on achieving bottom-line results. Leaders have a dramatic impact as they move from “bad” to “good.” Poor leaders have an adverse impact on the groups they attempt to lead.

The results of several other studies demonstrate the relationship between leadership effectiveness and additional desirable outcomes.

From measures on subordinate commitment to the organization, we now turn to measures of financial performance. At a mortgage bank, we collected data on its measure of profitability, or net profits, for a series of leaders.

What we found in this study was that the poor leaders actually lost money for the company. Their performance was so ineffective that it appeared to drive customers away. The good leaders, on the other hand, made a reasonable profit for the company. Their performance, compared with that of the bad leaders, represented a substantial change. However, the extraordinary leaders nearly doubled the profit generated for the company by the good leaders. Imagine the impact of transitioning 10% or 20% of leaders from the “good” to the “extraordinary” category. It would add 10% to 20% to the bottom line of the entire company.

Impact of employees’ behaviors

In a related study, Rucci, Kim, and Quinn found what they called “the employee-customer-profit chain” at Sears. Their study found that employee behaviors affected customer behaviors, which in turn affected company financial performance. When customers enter a store where employees are frustrated and unmotivated, it affects their buying habits and their willingness to return and purchase more items. Pleasant, considerate, and knowledgeable sales associates had a positive effect on customers. These sales associates encouraged customers to buy more and to come back. In their research, Rucci et al. found that a five-point improvement in employee attitudes resulted in a 1.3% improvement in customer satisfaction, which in turn increased revenue growth 0.5 %.

The implications of our research are that another link needs to be added to the chain; for example, it should be “the leaders-employee-customer-profit chain.”

One should also keep in mind that the additional insight this research adds to the profits chain of events is that great leaders have even more impact on employees, who affect customers and therefore create even greater profits for the organization.

Turnover costs companies millions of dollars every year. John Sullivan, chief talent officer at Agilent Technologies in Palo Alto, California, put the cost of turnover for a software engineer at $200,000 to $250,000 per departing employee. He went on to say that, “One firm I work with just calculated the cost of an engineer vacancy in lost revenue at $7,000 per day.” Although there are many reasons for turnover, our research consistently bears out that the relationship an employee has with his or her manager substantially influences the employee’s decision to stay with a company or move on.

Some study findings

In another example, leadership effectiveness has been determined and matched up with yearly turnover rates within each leader’s group. In this study, higher turnover (19% per year) was created by leaders in the bottom third in terms of their leadership ability as seen by their subordinates and peers. These leaders presumably did nothing to force people to leave, but their style and approach did not encourage them to stay.

Better achievement came from good leaders, who experienced 14% turnover. However, extraordinary leaders cut the average turnover rate in their groups by another 5%. Reduced turnover had a direct impact on profitability, customer satisfaction, and claim-resolution speed.

In another study conducted with over 7,000 leaders from hundreds of different organizations, we looked at the relationship between leadership effectiveness and intention to stay with or leave the company. In this study, high scores indicated a greater intention to leave, whereas low scores indicated a greater intention to stay.

In another study done with a high-tech communications company, we looked at the relationship between leadership ability and customer satisfaction. Once again, extraordinary leaders have substantially better ratings on customer satisfaction. In this study, high scores indicate higher customer satisfaction.

Again, we assume that the leader does not have direct contact with most customers, but it is the leader’s influence on the level of commitment of the front-line employees that makes the dramatic differences in customer satisfaction.

In a related study conducted by our colleague Larry Senn, he was asked by a retail client to change the behavior of store employees to be more customer service oriented.

The company began an intensive program aimed at changing the behavior of store employees. After months of work, it became apparent that some stores were being successful in creating a more customer-friendly atmosphere, whereas other stores were not.

Excerpt from ‘The Extraordinary Leader’ by John H Zenger & Joseph R Folkman. Reproduced with permission © 2009, Tata McGraw-Hill Publishing Company Limited. Price: Rs 350. Vishwanath_Ghanekar@mcgraw-hill.com