As Published in Business 2 Business, November 2002

Down A Black Hole
Repulsive Arithmetic: The loss load of a bungling manager
By Ira S. Wolfe

It`s well documented that a manager has more impact upon the retention of an employee than any other individual or any benefits has within an organization. In fact, survey after survey confirms that employees leave more jobs due to the ineffectiveness of a manager rather than to the benefits of an organization.

A great place to work always has great managers – not by accident but by design. An okay place to work can keep afloat with great managers – until the manager leaves. But an organization with great benefits and compensation and poorly trained supervisors has a fatal black hole. 

Let’s peer into this black hole but please be careful. Don’t get sucked in. You are about to see what happens when a supervisor can’t communicate effectively, can’t coach or mentor, and who views loyalty as obedience. It’s not a pretty picture.

The following is an actual case study from a real company.  Unfortunately, this situation is being repeated over and over again and organizations are throwing hundreds of thousands of dollars into the black hole of bad front-line management, from manufacturing to health care.

What is the cost of an ineffective or “mal-effective” supervisor or manager? 

Harold (not his real name), the supervisor, refuses to talk to his employees and one in particular. Harold’s an introvert and from the old school. Harold doesn’t believe that employees should be recognized for doing things they were hired to do in the first place. Nonetheless, Harold’s attended numerous supervisory training programs to learn how to communicate effectively. Harold’s tried it. He mumbled “nice job” to an employee and the employee uttered back, “What? I guess you want me to do overtime again?” Harold never tried again.

When it comes to negative feedback, the situation is even worse. Harold’s method is mumbling a few words under his breath about work ethics and how he just can’t find good help anymore. In some circles, Harold is referred to as the “cage and feed” manager. You cage him up and keep him away from the employees.

Harold doesn’t like Jim (also not his real name), the employee, and Jim doesn’t like Harold.  Harold has been employed by the same company for over ten years while Jim was hired a little over two years ago. Harold was promoted into the supervisory position because … well, he’d been there longer than anyone else. He “earned” it according to his superiors. He was a “good soldier” and stuck with the company through “thick and thin”. The company line to new employees on the Harold-Jim battlefield is “Oh just ignore Harold and Jim. They’ve been going at it since the day we put them together.” Senior management felt that Jim, who is younger, more innovative and ambitious, could learn the ropes from Harold. They hoped Harold would help groom Jim for a management promotion when another vacancy opened up.

What management has failed to realize is the cost of promoting and keeping Harold in his position regardless of his experience or loyalty.

Our first step was to track the indirect costs of Harold the supervisor.

This isn’t brain surgery. Dissatisfied workers aren’t working 100 percent of the time. They may be getting paid but they are not working. Even if they are working, they definitely are not 100 percent productive. The cost of this dissatisfaction in the workplace can easily be calculated as follow:

(Annual Salary)  x  (# of employees) x (% of time dissatisfied) x (% decrease in productivity when employee dissatisfied) = Salary Paid Out with No return

Jim and his co-workers under the direct supervision of Harold are each being paid $35,000.  We estimated – conservatively I might add – that these employees are dissatisfied in their jobs at least 40 percent of the time and that their productivity falls 30 percent when they are unhappy.

 $35,000 x 6 x 30% x 40% = $25,200 paid out in salary with no return

If Jim was an introvert, the lost productivity might be localized to him.  But Jim is an extrovert with a lot of work friends. Jim broadcasts his feelings, “No matter what we do, no one cares” and “They don’t pay me enough to work for this guy.” One by one, anyone in earshot of Jim hears Jim’s story. One by one, the productivity of everyone on the team is affected.

If Jim has six co-workers, each making $35,000, and their productivity is decreased by as little as 10% while listening to Jim, the additional non-producing salaries paid out amounts to $ 21,000 ($35,000 x10%x6 employees). Note: When Jim is sharing his “woe is me” story with his co-workers, work for all intent and purpose stops.

The total so far? $76,200.

As morale sinks, not only is productivity affected, but the likelihood of a production mistake increases. Each mistake has at least two effects on the bottom line. First, hard (materials) and soft (salaries) resources are spent on a product that ends up in the dumpster. Second, if the product has to be re-made or the service re-delivered, duplicate resources are used.  

The company estimated that it costs $500 to produce one widget. (To protect the anonymity of the company, I’ll refer to their product as widgets.) They estimated that Harold’s team has a 9 % error rate which accounts for approximately 240 mistakes per year. The rest of the organization has a 3 % error rate. Harold blames the errors on the quality of his employees. Management blames bad hiring practices. The employees blame Harold. Regardless of the cause, the cost of these mistakes:

240 mistakes x $500 = $120,000 x 2 (to remake each mistake) = $240,000

The total so far?  $286,200.

But these are just costs. How many dollars need to be generated to pay for these costs and still meet the company goal of a 20% profit?

Total Revenues needed to replace the lost salaries and faulty products = $1,325,000   (Total Revenues = Costs / 20%)

Unfortunately not all of these mistakes are caught before they leave the plant. So now the company has a few dozen dissatisfied customers. The cost of replacing the faulty product is minimal compared to the customer who has leaves for the competition. The company knows about one such former customer.

I asked the president of the company if he could estimate the lifetime value of this customer. Over the last 5 years, the customer had purchased nearly $42,000 worth of equipment. Even if the customer remained a customer for only one more year, the lost revenues resulting indirectly from Harold were $42,000.

The total so far?  $1,632,200.

The customer that discontinued doing business was also very active in the national trade association. Based on well-published studies, one satisfied customer tells one to three other people but dissatisfied customers tell between nine and twenty-seven. Even being conservative and assuming that the former customer tells only nine other customers like himself, the lost opportunity cost are:

$42,000 x 9 = $378,000.

The total lost revenues now exceeds $2,010,200.

You can add to this the cost of recruiting, hiring, and training new hires (estimated at one-half to one-and-one-half time annual salary) because Harold recently lost two more long-term employees to the competition. In their exit interview, both cited Harold as the reason.  

A ridiculous scenario? One manager costing a company over $2 million dollars in additional costs and lost revenues? 

Even with the best manager, mistakes happen, employees quit and every employee does not love his job. But many of the situations experienced by this one company are being repeated over and over and over again in other organizations every day and senior management is ignoring a real cause of declining profits – ineffective frontline management. Even if the numbers seem exaggerated, no one can argue that there are hard costs – mostly not recoverable – that are the result of the inability of supervisors to effectively manage the soft side of the business. Whatever the costs, they are too high in today’s lean and mean operating environment.

When “ I’ve been here longer than you are” managers are challenged by “if you don’t treat me the way I want to be treated, I’ll leave” employees AND your managers don’t have the skills to effectively deal with them, your organization loses every time.

Note: Harold just received an award for 11 years of continuous and loyal service. The competition is applauding the award and hoping Harold continues in his same capacity for another 11 years.

Ira S. Wolfe is founder of Success Performance Solutions. He is the developer of CriteriaOne®, the Whole Person Approach to matching, managing and motivating employees. Ira provides and trains the Lancaster Chamber of Commerce’s Managing to Excel Supervisory Training Program. Subscribe to his free weekly e- newsletter The Total View here. 
For more information about CriteriaOne or Managing to Excel, contact Ira at 717.656.4632, or email him.