As Published in Business2Business, August 2010

Lapses in Leadership Development Leaves Innovation Limping

Leadership development and training is not an expense.

By Ira S Wolfe, Success Performance Solutions

Did management miss a once-in-a-lifetime opportunity to do things differently during the most recent recession? There’s a growing body of research that indicates that might be the case.

Today, companies around the world stand at the intersection between recession and recovery. Many executives have begun evaluating their business plans and revising their strategies. But despite their best intentions, many companies are finding their contingent of current leaders unable to unravel the complexity and to keep pace with change. A lack of qualified leaders in the pipeline is compromising innovation and execution.

Many senior executives and business owners believe that leadership development is optional and non-consequential. That’s too bad considering that great changes are often born of crisis, rather than in better times when apparent predictability breeds satisfaction and complacency. Ironically, a recession presents an opportunity for companies to modify and develop leadership behaviors that directly support the CEO and management’s current and future strategies.

Apparently a lot of companies didn’t get this message. If you survey senior executives, most would agree that developing leaders is one of the most critical business needs in the modern workplace, and having the right people in place to lead your organization through tough periods of fast growth and economic downturns is critical. But implementation of development programs has often been filled with more rhetoric than commitment and budget. Instead of investing in development over the past two years, many responded just like they did in the past - when business slows, put leadership training and development on hiatus.

The time for them however may have come to pay the piper. Management may have gone to the well one time too many times when cutting the training and development line item. “Companies who just slashed and burned training and development programs,” Tom Samson says, “will pay the price big time.” Samson is President of Teamwork Dynamics, Inc., a consulting firm in Dallas, Texas that works with Fortune senior leadership teams.

Faced with unprecedented headwinds going into an economic recovery, nearly 60% of companies, according to a recent study published in the May issue of Harvard Business Review, recognized they are facing significant leadership talent shortages, which in turn is now impeding their performance. And another 31% expect a lack of leadership talent to impede their performance in the next several years.

One cause of this shortage was predicted nearly a decade ago. It’s the result of a convergence of shifting demographics, globalization, and technology (See “The Eye of the Perfect Labor Storm, January 2007.). Another cause, mentioned earlier, is the failure of many companies to treat leadership development as an investment and not an expense. Unfortunately senior management is now discovering that they didn’t just cut out the fat when they trimmed expenses. They removed bone too.

That wasn’t the case for Michael Walmer. Walmer, CEO and President of Electron Energy Corporation, credits his company’s sustainability during very tough economic times to his investment in developing his management team prior to and during the recession. As one example, Walmer “maintained membership in Vistage (See sidebar "What is Vistage?") for three key employees plus himself despite a downturn in business. That’s no small chunk of change, more than $40,000 per year, for any business. Nevertheless while many other local CEOs discontinued membership and cut back spending, Walmer didn’t. He believes a strong recovery and renewed growth would only result from his continuous investment in developing people from top to bottom. As EEC enters the second half of 2010, Walmer’s commitment is already paying off.

Sebastian Triscari is another local CEO who made the decision to invest in his own development just as the recession was beginning to take hold. He too joined Vistage. But for Triscari, CEO and president of The Triscari Group, training and development isn’t something you do…it’s something you live and breathe. “Great companies are made only one way – investment in people,” he shares passionately and confidently.

At The Triscari Group, employees at all levels continued to go to classes and workshops throughout the recession. In addition, he worked with many Central PA businesses to enhance their employee development programs. For one large employer client in the area, he helped them “take leadership development out of the boardroom down to the front-line supervisors.”

The problem for many companies however doesn’t seem to be the result of a complete lack of interest or investment in developing leaders. In 2009, U.S. companies spent an estimated $12 billion (24% of their overall training budgets) on leadership development programs and services. It’s apparent that what many companies are currently doing to grow and develop future leaders is not working.

Fixing What’s Wrong with Leadership Development

“It is time to rethink the approach,” writes Scott Anthony on a blog post for Harvard Business Review Online. Leaders have to be ready for "black swan" events, sudden shifts in the basis of competition in your industry, competitors springing up around the globe, and more.

Anthony believes that current theories of leadership assume organizations are mostly stable, and that the environment and the people within them are predictable. When attention is paid to what to do in crisis, it’s treated as a singular event, with an expectation to return to the norm. But the world today is highly unpredictable, and rapid and significant change is the norm. Our leaders must be flexible and adaptive. They must be able to handle ambiguity and complexity.

To correct what’s wrong with leadership development, senior managers might to want to take a look at an article titled How to Keep Your Top Talent (Harvard Business Review). The authors recommend avoiding these 6 common leadership development mistakes:

Don’t:

1. Assume that high potentials are highly engaged.
2. Equate current high performance with future potential.
3. Delegate down the management of top talent.
4. Shield rising stars from early derailment.
5. Expect star employees to share the pain.
6. Fail to link your stars to your corporate strategy.

For companies that fail to heed the advice, the authors report some staggering statistics based on their research - that nearly 40% of home-grown “high potential” leaders end in failure within the first 18 months. The costs of these leadership selection mistakes amounts to losses of hundreds of thousands of dollars. The chances that a new executive will quit or be fired within the first three years jumps to greater than 50 percent. (See Sidebar: High Cost of Replacing a Failed Executive).

The past few years of economic and financial crisis should make it obvious that the experience of managing a business in today’s environment has undeniable similarities to navigating a river with "permanent whitewater." Management today, and into the unforeseeable future, must be able to complete a lot of important work in a short time under harrowing conditions, on the basis of only a few hunches and a lot of instinct, none of them precise. The journey will be turbulent no matter what. But without an effective selection process and targeted development program for current and future leaders, the trip down the river of opportunity may turn ugly.

Recently, a group of authors in the Harvard Business Review wrote, “When the economy recovers, things won’t return to normal — and a different mode of leadership will be required.” The bottom line: what got you here won’t get you there.

Effective leadership therefore plays a vital role in navigating this permanent whitewater. When the marketplace is predictable, sticking with the tried-and-true works. But when market conditions include constant change and turbulence, the role of a leader differs dramatically from the role a leader plays in more stable environments. As Albert Einstein said, "there is nothing that is a more certain sign of insanity than to do the same thing over and over again and expect the results to be different."

What are you doing differently to ensure your current team and future pipeline are ready for whatever the marketplace throws at them?

Wanted: Leadership Skills

Anthony, the Managing Director of Innosight Ventures and the author of three books on innovation, wonders if businesses may be approaching leadership development the wrong way. He recently wrote, “tomorrow's leaders need the ability to face the "new normal" of constant change. It is no longer enough to be an operator that can master today's complexity. You have to be prepared to deal with tomorrow's complexity.”

John Dame agrees. “The ability to innovate,” says Dame, owner of Dame Management Strategies, “is certainly one skill that leaders in the “new normal” will need to exhibit.”

Organizations that did not innovate for the past two years may find themselves waking up in an unfamiliar world.

The recession exposed the fact that many employees really don’t know how a business works, says Don Schmincke, a best-selling author and founder at The Saga Leadership Institute. “When forced into surviving a recession, a lot of CEOs were caught short.”

Richard Dennis was one of those CEOs. When the owner of Die-Tech found himself “in the midst of the most bitter recession that Die-Tech ever faced,” he decided it was time to take the plunge and invest in his own development. “Our planning was weak and conversations consisted mostly about how we didn’t have any money.”

That’s when he met Oneida DeLuca, a partner at Birchwood Consulting. Oneida was a new chair with Vistage and Dennis joined her group. That’s where he participated in “the first finance course that made sense to me. It was easily transferrable to my staff too. Within two weeks we had a different perspective and new tools. As a result, Dennis expects to see significant decreases in inventory, accounts payable, credit lines, and increases in cash-on-hand during a ramp-up – not typical for our company in the past.”

But businesses focusing only on financial literacy training may find it does little, if anything, to improve the business behavior of their people, according to Perth Leadership Institute. It’s not financial literacy that will affect change, but business acumen.

Dame, also a Vistage Chair in Central PA, sees it this way: “business acumen is a must.” In other words, the ability to read and understand a financial statement does not give a person the business judgment to make money.

Dame works with many companies in Central PA and beyond to identify potential leaders and current leadership gaps. “The companies that I work with are requiring leaders at all levels to have mentors.” Samson too sees more one-to-one mentoring programs being developed as companies pulled back from sending people away for training and MBAs.

Many times the mentor comes from within the organization itself. Others seek to hone their skills by joining a CEO peer group like Vistage. Still others contract with a firm to bring a formalized program in-house. Regardless of the method, “because of the events over the past 36 months, many companies learned their lesson.”

Hit hard by the recession, Kalas Manufacturing had every reason to cut back on training and leadership development. The provider of wire and engineered cable was clobbered by slowdowns in the automotive, boating, and manufacturing sectors. “In all honesty, we pulled back,” says Scott Smith, Vice-President of Human Resources. But Smith was proud of several programs that started or continued in spite of the recession.

First, Smith joined one of Deluca’s Vistage Key Member groups. Like EEC, Kalas committed to developing members of its senior leadership team and Smith is proof that some companies walk the talk. But training didn’t stop at the top. Kalas leveraged relationships with several workforce consortiums to share training dollars. Most recently they put supervisors through a Millersville University sponsored program and sent 4 senior leaders to a 6-month program sponsored by the Iacocca Institute at Lehigh University.

Samson also sees more businesses starting to schedule brown bag discussions, webinars, and business book review sessions. “One group meets the 1st Friday each month. One person creates a synopsis of the book and the group discusses it. What is different and unique for this company is that the topic must be focused on solving a problem or creating a strategy at the company.” The program has become so successful that the company is now carrying the process throughout the company.

While there are plenty of programs out there, Samson offers clients this one piece of advice – regardless what you do when developing leaders, “you need to have continuity.”

So here we are, standing at the intersection of recession and recovery. We are in new territory, not visited before. What worked for leaders in the past is not working today, because the world has changed. We need leaders to close the door on the past, change the rules of the game, and redefine the future.

How ready is your leadership team and future pipeline to meet the future?

High Cost of Replacing a Failed Executive

The cost of replacing a new leader could be anywhere from three to five times that executive’s salary. And replacing a failed executive carries a much bigger cost than just salary and benefits. When you include lost opportunity, the cost of a failed leader skyrockets. In Aon Consulting’s 2008 Benefits and Talent Survey, 25% of companies reported a reduced ability to deliver desired customer service skills; 20% reported a reduced ability to meet revenue growth goals; and 18% the reduced ability to innovate.

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World-class Companies See the World Differently

A few organizations appear to have a different view of the world.

Companies that described their leadership programs as world class appear to be on a talent offensive, positioning themselves to take advantage of the opportunities brought on by an improving economy:

• Two-thirds (66%) are increasing compensation.
• More than half (53%) are opening up new career path opportunities.
• Nearly six in ten (59%) are expanding training and development programs for high-potential employees.
• Strong majorities boast robust senior leadership (85%) and emerging leadership (66%) pipelines.

In addition to their internal development efforts, these firms are constantly searching the market for the best talent available, with 69% reporting they plan to step up recruitment of critical talent.

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1 in 3 Emerging Leaders Disengaged

Failed leadership talent management doesn’t just start, however, after a high-potential candidate is promoted. In a September 2009 survey by the Corporate Executive Board, one in three emerging stars reported feeling disengaged from his or her company and 25% of them intend to jump ship within the year. For those who remain, one in three admits to not putting all his effort into his job. It’s no wonder companies end up with a shortfall in their leadership pipeline and surplus of missed expectations

What is Vistage?

Vistage International and its affiliates have 14,000 members in 15 countries, representing the world’s leading chief executive organization. Vistage offers a combination of resources for accelerating CEO and key executive business performance, including monthly problem-solving peer group meetings; one-to-one executive coaching sessions; expert resource speaker workshops; an online best practices library; regional and international conferences; and access to a global online network of business leaders.

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About the author

As president of Success Performance Solutions, Ira S Wolfe helps organizations find and hire the right employees and identify high-potential leaders. He speaks nationwide on hiring, workforce trends, managing the generations in a presentation titled Geeks, Geezers, and Googlization. He is also the author of Perfect Labor Storm 2.0: Trends That Will Change the Way You Do Business.