Have you thought about how much it costs to fix a problem after the fact vs. preventing it from happening in the first place? In a February 2011 McKinsey report one of the companies interviewed for the article had a struggling executive team. McKinsey reported about the executive team and their company: “Fewer than one in five of its members thought it was highly respected or shared a common vision for the future, and only one in three thought it made a valuable contribution to corporate performance. The company’s customers were very dissatisfied — they rated its cost, quality, and service delivery at only 2.3 on a 7-point scale — and the team couldn’t even agree on the root causes.” Ouch! That smarts.
Here’s a team and company way out of alignment, and it realizes it. It was unable to agree on the causes of their problems, which is very unfortunate. I wonder how many of them may be thinking about running for the door? Do you think they’ve considered what it has cost them thus far in time, dollars, and productivity to have issues so detrimental to the health of their organization? Why aren’t they discussing how to fix the problem? Given my experience, I’d assert they are just so overwhelmed with the idea of fixing their problems that they’re paralyzed.
Companies can take a proactive approach making the time and spending money to build their organizations the right way the first time.
The proactive approach will save them considerable time and money in the short and long run. Or, companies can take a reactive approach after they’ve lost time and money with turnover and processes that don’t work. Generally, companies that take a reactive approach in business have many reasons as to why they didn’t work proactively in the first place. Sometimes they say they didn’t want to spend the money up front. There was one case where the company knew their churn was costing them a fortune, but they were making money in spite of that and weren’t in enough pain yet to take steps to correct their issues.
In a perfect world every startup would take the proactive approach and build their company from the beginning by identifying not only mission, vision, values, goals, objectives, etc., but will determine where they want to go in the short- and long-term and build a holistic, aligned organization beginning at the founder level where they can attract, hire, and retain the top talent to get them where they want to go. They will revisit these items on an as-needed basis to ensure alignment and health, and tweak when and where necessary. But we don’t live in a perfect world so taking the reactive road to correct your issues is a lot better than sinking further into an abyss you may not be able to pull out of. As I always say, better late than never!
Let’s take a look at two cases where companies lost employees for different reasons, and the associated costs.
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The first case was a director of learning and organizational development at a Fortune 500. She was with this organization only a year before being let go. They said she wasn’t a fit with the company. Her total comp over that year was $225,000 ($180,000 + $45,000 bonus). When we added up the exit, severance, onboarding, interview, relocation, T&E, and search costs, these expenses came to just over $179,000. Add this to salary and bonus, and the loss to the company becomes $404,000! Yes, they lost over $400,000. Could this have been avoided? I would assert they could have, and would have, if the company had the vision to align its executive team and then build a talent strategy around this.
The second example is the case of a sales rep who achieved 96% quota in his first year with the company and quit for another opportunity. He had issues with company management, and particularly his direct manager. Salary, commission, bonus, and non-recoverable draw added up to him earning $229,530. He sold $1.25 million, of which $100,000 was services. When we consider all the other involved expenses, which include exit costs, lost revenue for three months without a rep covering the territory full time, initial onboarding and recruiting expenses, etc., the company earned $483,000. You may be thinking that this isn’t such a bad profit considering the guy quit. But remember that sales is the only direct revenue-producing part of a company. All other positions are a debt on the company and it is the sales division’s responsibility to generate enough revenue to compensate for all the non-revenue positions. Remember that Profit = Gross Revenue – Cost of goods – Cost of operations – Cost of sales.
Something else to consider is the importance of not weighing one qualification too heavily over another. For example, many companies focus on skills and abilities and don’t give enough thought to cultural fit. There are many pieces to your approach to business and talent; carefully consider each. One study found that almost half of employees will fail within the first 18 months of employment. It’s never just one thing. It’s a multitude of items that are either not considered and/or not considered and worked through carefully enough.
Lastly, smaller companies have considerably more to lose than large companies with the same issues. It can be devastating to a small company when it loses key people, not only from a morale standpoint but from a financial standpoint. I know that fixing problems takes time, effort, commitment, and even struggle. What I can tell you is that once you’re on the other side it’s like a huge weight lifted off your shoulders. The work is worth it. You’ll see this when you look back on the process you went through to become a healthy, desirable, and successful organization.