Survey says leadership impacts the bottom line
by Jeanne Urich and Dave Hofferberth, SPI Research
Are you sick of hearing about economic gloom and doom? Are you looking for some good news that won’t cost billions of dollars? Good news is right in front us. Even better, it’s something we can put into action immediately, and it won’t mortgage our children’s future. For a project and people-oriented business like professional services (PS), effective leadership is the best and most affordable economic stimulus package available.
Intuitively, we know that best-in-class professional service organizations (PSOs) are based on exceptional consultants. We also know that it takes strong leadership to inspire organizations to achieve greatness. But what we haven’t known until now is the direct impact of PS leadership on the bottom line. We think you will be as astounded as we were to discover that great or poor leadership permeates every facet of PSO performance.
In the 2008 PS Maturity Survey, we asked a series of questions regarding various aspects of professional services vision, strategy and leadership including confidence, clarity and alignment. Strategic decisions set the direction and tone for the PSO and affect all functions because strategy dictates the goals and objectives for the organization, the types of clients to pursue, the types of services to offer and the interrelationship between functions.
In 4th quarter 2008, 170 survey respondents, representing small to large, embedded and independent PS providers were asked how well various aspects of their organization operated (using a 1 to 10 scale: 1, “not very well” to 10, “very well”). Survey results show how various aspects of leadership impact key performance throughout the organization.
Confidence in leadership
Respondents answered whether they had confidence in PS leadership. Two-thirds of the 170 respondents said they had confidence in PS leadership (rated 8 or higher), whereas only 5 percent stated that they didn’t have confidence (rated 4 or less). As confidence in leadership improves, so do most key performance measurements:
- Year over year, revenue growth was 16 percent when confidence in leadership is high, as opposed to only 11 percent when it is low.
- The contribution margin was over twice as high (23 percent vs. 10 percent), when comparing high versus low confidence.
- Annualized employee attrition was almost four times lower (5.5 percent vs. 20 percent) when confidence is high.
- Project on-time delivery was nearly twice as high (76 percent vs. 44 percent) when confidence is high.
We discovered every critical key performance measurement worsens as confidence in leadership diminishes. According to survey results, no other factor has the same profound impact on the overall health and well-being of the service organization. Poor leadership creates a negative spiral effect — poor human capital results (high attrition, low morale, poor employee satisfaction) — which in turn leads to poorer financial performance and low levels of client satisfaction.
Because PSOs rely on the quality and commitment of the consulting staff, poor leadership produces an immediate and long-lasting negative effect. Fortunately, positive changes in leadership can also produce immediate improvements because PSOs exhibit resiliency and are able to heal and regenerate themselves rapidly. Unlike product-based organizations, extremely rapid turnarounds are possible in people-based PS organizations.
Organizational vision, mission and strategy clarity
The survey asked, “Is the vision, mission and strategy of the PS organization well-understood and clearly communicated?” Alignment and clarity are critical success factors in terms of how the organization maximizes its people, processes and capital.
The results were similar to those of “confidence in leadership,” in that PSOs that provided high levels (rated 7 or more) of clarity around their organizational vision, mission and strategy performed at much higher levels than those that did not (rated 4 or less). For instance, when comparing high levels of clarity to low levels, we found that revenue growth (17 percent vs. 11 percent), contribution margin (24 percent vs. 14 percent), and attrition (7 percent vs. 9 percent), were superior when the vision and strategy of the organization were clear.
Clear leadership direction and effective bi-directional communication are critical success factors. Employees who lack an understanding of the service mission, vision and strategy have no ability to work toward achieving it. For embedded service organizations within product companies, the service mission is often schizophrenic. Embedded service organizations must continually walk a mission tight rope, trying to balance product revenue, customer requirements, partner demands and service profit. In worst case scenarios, the service organization is set up to fail because these objectives become mutually exclusive.
Goal and measurement alignment
Another survey question asked, “Are goals and measurements in alignment for the service organization?” Alignment speaks to focusing the organization around core values, reinforcing its purpose and stimulating action to achieve its goals.
Alignment or lack of alignment also has a significant impact on bottom-line performance. Lack of alignment comes from conflicting or too many priorities and is characterized by low levels of empowerment and functional silos or factions. The highest performing service organizations exhibit clarity of purpose and alignment around a succinct set of core values. Effective measurements and compensation reinforce those values.
While the results were not as statistically significant compared to confidence in leadership or clarity of organizational vision, mission and strategy, they were still impressive. We found improvements in terms of revenue growth (17 percent vs. 13 percent), contribution margin (23 percent vs. 19 percent), and employee attrition (6 percent vs. 9 percent), as the organization aligned its goals and measurement systems.
Alignment highlights the importance for PS executives to get a seat at the cross-functional leadership table to ensure the entire corporation understands and supports the role of the service organization. A clear strategy and charter provides a compass for performance and provides the foundation for employee achievement.
Superior PS leaders operate as valued cross-functional team members. They transcend the role of delivering tactical projects and quarterly financial results to become the voice of the customer for the executive team. In turn, the executive team recognizes and acknowledges the true value of exceptional customer service and does not tolerate closing deals that throw the service organization under the bus due to impossible timelines, functionality or cost.
Leadership failure is at the core of the current economic crisis. Early signs of economic recovery, like spring daffodils, are starting to emerge. Renewed confidence in leadership and policy alignment will fuel the turnaround.
The tools for effective leadership, clarity of purpose and alignment exist within all service organizations. By investing in these critical aspects, service organizations can create their own economic stimulus plan.