Written by Derek Lusk, Ph.D., Dave Gloss, and Ryan Daly.
Investing in your leaders now is the key to weathering the storm and winning in a post-COVID-19 economy
With the coronavirus still spreading across the globe, many of us are struggling to cope with the change and uncertainty of the present moment. Even as they navigate the current crisis, business leaders are looking ahead and struggling to understand how a moment of this magnitude will change the business landscape in the years to come.
Although some instinctively move to cut costs across the board, including on HR and talent development, longitudinal studies show that companies that invest in targeted selection and leadership development are better equipped to weather an economic downturn, recover faster, and come out more profitable in the long term.
The Storm at Hand and the Storm Ahead
The world has experienced profound change in the past month. Billions of people around the globe are sheltering in place. In the U.S., those who can are working from home. Millions of others are unemployed, and the jobless rate could reach as high as 20%.
As individuals navigate the current crisis, businesses and their leaders are looking at the crisis ahead. Goldman Sachs is forecasting a 24% decline in economic activity for the U.S. next quarter. And after a period of unprecedented economic expansion, the threat of recession is real. Bloomberg Economics now rates the chance of a recession within the next year at 53%, the highest reading since the U.S. exited the Great Recession in June 2009.
HR and Talent Development Budgets are on the Chopping Block
As they struggle to remain solvent, many companies are slashing budgets across the board. And in the aftermath of the most recent comparable economic disruption, the 2007 financial crisis, HR and talent development budgets took a massive hit.
Although HR and talent development have been early targets for cuts in past crises, a Gartner report indicates that “investing in these areas can have a long-term impact on an organization’s performance.”
Drastic Cuts Make a Bad Situation Worse
In the wake of the 2007 financial crisis, the Harvard Business Review published a study of 4,700 public companies during three global recessions in the periods between 1980-2002.
The results are not what you’d expect. Companies that made the first and deepest cuts were the least likely to succeed post-recession, and many failed to recover their pre-recession value. Companies that invested too aggressively fared similarly badly.
The nine percent of companies that came out of each slowdown stronger than they went in were those that mastered “the delicate balance between cutting costs to survive today and investing to grow tomorrow.” At the end of each recession, these companies not only outperformed their own pre-recession financial metrics, but bested their rivals by at least 10% in terms of sales and profit growth.
Investing in Leadership Selection and Development is Critical During and After a Crisis
Leadership matters, never more than now. The strength of an organization’s leaders has an outsized impact on a myriad of outcomes, from employee engagement to productivity, customer satisfaction, sales, revenue, and the company’s ability to outperform its competition. Selecting the right leaders for your organization and providing them the development and support they need to succeed is absolutely critical for your company to remain competitive during and after this crisis.
A longitudinal study of 359 public companies examined the relationship between selection, development, and financial performance before, during, and after the 2007 financial crisis. As seen in Figure 1 and Figure 2 below, firms with more rigorous selection and leadership development practices not only performed better pre-recession but recovered faster and outperformed their competitors when the recession was over. This study controlled for external variables, allowing the researchers to pinpoint the effect of these investments even after accounting for factors like company size, industry, and location.
In the years before the financial crisis, the data show that leadership selection and development contributed to profit growth by enhancing productivity and creating resource slack that helped firms weather the storm. In the years after the crisis, investing in building a bench of high-quality leaders helped firms adapt and prosper.
Figure 1 – Investment in Leadership Selection Effect on Recovery and Profit Growth
Figure 2 – Investment in Leadership Development Effect on Recovery and Profit Growth
Balancing Investing in Development with Operational Efficiency
How can companies balance operational efficiency with investing in the future? By investing in the selection and development of their leaders.
Leader selection is critical. The cost of replacing a failed leader is 10x his or her salary, even excluding those executives awarded “golden parachute” severance packages, and the 2007 financial crisis made clear the true cost of poor quality leadership in a crisis.
In terms of development, the ROI of executive coaching is well documented. Studies have shown that coaching can produce an 88% increase in individual productivity. Additionally, the mean ROI for companies investing in coaching is 7x their initial investment, with more than 25% of companies reporting ROI between 10 to 49 times their initial investment.
Unfortunately, for every executive coach creating value for their clients, there are scores of unaccredited, inexperienced coaches doing the opposite.
Maximize the ROI of selection and development investments by focusing on providers with the necessary experience and infrastructure to help organizations navigate this tumultuous time. And, make sure you’re working with a provider that allows you to demonstrate results.
Into the Unknown
In the days, weeks, and months to come, the impact of COVID-19 will unfold in ways we cannot imagine. The uncertainty of the present makes it exceptionally difficult to look ahead. But as past crises have shown us, looking ahead is more important now than ever. And companies that do will emerge better and more competitive than they were before.