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    The Cost of Poor Management

    Poor management style comes in many guises from the ministrations of the overly controlling micromanager to the bombastic squawking of Mr or Ms Angry with many variations in between. Are the poor managers the chicken to the egg of corporate culture? Either way people know what poor looks and feels like even if they can’t easily describe good. Sometimes the issues spill over to make an entire company culture toxic but often it remains as areas or pockets within a firm.

    In the past, we always knew there was a cost to poor management and/or a poor working environment. We might use attrition rates as an identifier and a guide to the financial impact but as we enter an era of skill shortages we can build a more accurate view of the impact of toxic culture.

    As a firm that hires a lot of specific skill sets, we have a pretty good handle on the fair-value price for those skills in various geographies. It helps that we can classify these skills with reasonable accuracy using the SFIA framework, so we are talking like for like. This gives us confidence that our view of the employment market is pretty accurate.

    We can see, through our interaction with candidates and our own people getting approached that there are a group of firms out there who consistently over pay for their people to the tune of between 30 and 40%. That same group of firms typically also suffer from high attrition rates which goes to show that money only goes so far in getting people to ‘put up’ with a poor working environment. Talent acquisition is not free so where attrition is high firms will be paying more in ‘transaction fees’ just to keep the headcount reasonably stable.

    If you assume that the cost of hiring someone is around 10% of their starting salary and that with high attrition rates you might need to replace this person every other year, the cost profile really starts to build up. If the firm is regularly paying, let’s call it 35% over the market rate and having to replace everyone every 2 years, it is not unreasonable to suggest this additional expense could be upwards 40% a year. That is a substantial premium that the firm is having to pay simply because of the culture individual managers have allowed to prevail.

    There is no reason why this premium stops here, I would suggest it has been growing over time and there is no real ceiling to it. As the employment market gets tighter, the worst employers are going to have to pay even more; it might be 40% today but it could easily be 60% tomorrow.

    Those are the costs that are more easily identifiable but there are others – high attrition threatens the loss of IP or corporate know-how, in normal BAU activities this may be of little consequence but you really notice it when there are problems. Constant shortages along with lost IP have the capacity to create serious business and regulatory risk.

    Not dealing with the issues created by poor management has a significant financial impact as well as creating operational risk; this will become more acute as the skills shortage tightens.

    David Collins
    Managing Director
    I like change; the application of new technology, innovation of new services, helping companies get out of a rut, alter their image or transform their approach to their markets.

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