Every few months, I run head-on into a discussion with someone (usually a prospective client) about how to value the return from investments in leadership development.  The question is not asked as a means of qualifying my services, but rather as a genuine practitioner-to-practitioner inquiry, not dissimilar to what two MDs might talk about with respect to the latest treatment results for an experimental drug program.  The person asking knows as well as I do that Return on Leadership Development continues to be an elusive issue that no one has substantively put to rest, and that our best answers are no stronger than impassioned, qualitative opinions. 

The venerable consulting firm, McKinsey & Company in their latest issue of The McKinsey Quarterly (2008, Number 4) offers some exciting results showing: “the relationship between financial performance as measured by profit per employee and ten dimensions of global management talent.”  Their findings: “Companies scoring in the top third of the survey (when all ten dimensions were combined” earned significantly higher profit per employee than those in the bottom third."

The McKinsey results showed strong correlations in three specific areas:

  • The creation of globally consistent talent evaluation processes
  • The management of cultural diversity
  • The mobility of global leaders.

McKinsey indicated that the firms scoring top-third in any of these three areas had a 70% chance of scoring in top-third for financial performance.  Alternatively, companies scoring poorly on these practices had a strong chance of ending up in the bottom third for financial performance.

This is exciting information for anyone and everyone interested in gauging the impact of leadership development initiatives on corporate performance, however, before we consider this case closed, it is important to note McKinsey’s own comment that, "the study results do not show any true evidence of causality, but rather that the results, strengthen our belief that these are important areas on which businesses and HR leaders should focus their attention.”  It always comes down to belief.  Welcome to my conversations, McKinsey.

Should it Be Return on Expectations?

Another interesting thought comes from Professor Albert Vicere who describes his experience facilitating a group of executives through a discussion on how to calculate a return on leadership development:

“Discussion on how to calculate a return on leadership development and learning investments were frustrating until we saw the light, stopped talking about return on investment (ROI), and began talking about return on expectations (ROE).  Participants agreed that due to all sorts of complications we may never be able to calculate a clear financial return on learning initiatives, but if we’re clear on what we’re trying to accomplish through leadership development and learning and if we measure our results against those expectations, we may have the data we need to prove the value of our investments.”

OK, at least this group is giving us a reason to accept that valuing leadership development is a tough task. It is good to know that a bunch of smart people sat around thinking about this dilemma and the best that they could come up with was looking at from a different perspective.  They may be right, and the careful expectation setting and measurement around very specific leadership development initiatives may just yield the elusive data that we’ve been seeking.

Is it time to sharpen Occam’s Razor?

More often than not,the rough translation of  Occam’s Razor: “All things being equal, the simplest solution is the best,” proves true.  My non-statistically significant, can’t prove causality hunch is that effective leadership development practices are part of a whole system and that attempting to value them independent of the other components, while intellectually stimulating, is essentially valueless.  This is perhaps like attempting to value the worth of having a healthy heart in a cancer ravaged body or a healthy body carrying an artery-clogged heart.  No matter how you look at it, the body and organizations function as complex systems and a problem in any one part can adversely impact issues across the entire system. 

Aren't These The True Measures of Leadership Development's Value:

•    Quality
•    Financial health and performance (company and versus industry)
•    Innovation
•    Ability to Execute on Strategy
•    Employee Satisfaction
•    Customer Satisfaction
•    Growth versus industry participants
•    Retention and advancement of the right people and elimination of others
•    Fulfillment of mission
•    Growing contribution to community and society

The Bottom-Line for Now

If these items are generally accepted and desirable outcomes of a well-functioning organization, then executives looking at their talent development programs should quit focusing on the search for discrete ROI measures, and instead focus on identifying those practices that are likely to contribute the most to the above.  We may not prove causality, but just like McKinsey, it is my belief that focusing on becoming great at the right few talent and leadership development practices will yield higher performance than not focusing on these issues.  My vote says focus on: individual development planning, feedback and widespread involvement in strategy creation and execution, and the results will come and the other leadership development pieces will naturally fall into place.  Oh, and the decision on how to invest in development activities is a management team decision, not just an HR call.  Leadership Development is everyone’s business.