When I started consulting, I met with an old friend who had been consulting for more than two decades. “You need to communicate the cost of doing nothing,” he advised me. “If firms understood the high cost of not investing in leaders, they will be more likely to start a leadership development program.”
Easier said than done.
Intuitively, managing partners know that investing in the development of practice group leaders, new and mid-level partners and the C-suite pays off in more effective client service, expanded business development, more engaged associates and teams, and improved communication throughout the firm.
But by how much? Is it worth it?
What is the ROI of leadership development?
As it turns out, there is a model for figuring out the ROI of leadership development. In the August 2010 issue of The Leadership Quarterly, the academic journal for leadership studies, researchers Bruce Avolio, James Avery and David Quisenberry ()used an adaptation of the traditional ROI of capital investment formula to calculate the “Return on Development Investment”, or RODI.
RODI is a function of:
N = number of participants in a development program
T = Expected time duration of change (in years)
D = Effect size of the intervention, or the average difference in outcomes between those who participate in the program vs. untrained counterparts. This factor was determined by research of companies in the USA (meta-analysis of 133 studies). (average is 0.52)
Sdy = Standard deviation of the dollar value of job performance among untrained employees (or, the contribution of one’s salary to the firm in terms of value)
C = the total cost of training (including sacrificed production time).
RODI = NTdSdy – C
For example, for an Amlaw 100 firm that put 24 people through a three-day on-site leadership development program, expecting an improvement over a two-year period, with participants averaging compensation of $1,000,000 each and a program cost of $150,000, the RODI would be $9.5 million.
Same example, but the partners make $700,000, the RODI would be $6.5 million.
Reduce the participant size to 18 people, the RODI would be $4.9 million.
The RODI model is dependent on a number of factors:
- Cost of training – in this example, we assume a three-day training program and participants bill at an average of $500 per hour, for a total of $288,000 “lost productivity” cost. However, most firms do not reduce billable hour expectancy for those who participate in training and coaching, so this cost could arguably be added to the RODI. You can see that the program delivery cost is a fraction of the lost productivity cost, and total cost is very small compared to the RODI.
- Training venue – Holding training on-site is less expensive than off-site, therefore the RODI is slightly higher for on-site training.
- Level of leader – RODI is slightly higher for mid-level leaders (practice group leaders, committee chairs, mid-level partners) than upper level leaders, largely because the cost to train upper level leaders is more expensive. The outcome is about the same.
- Top performers – the effect size (d) is more than twice that for top performers than average performers. No surprise here. The examples above reflect average performers. Double the RODI for a cohort of all-high performers (like most firm’s practice or industry group leaders).
- Length of training – RODI was higher for a three-day program over a 1.5 day program.
- Number of participants is a force multiplier.
So, what’s the cost of doing nothing in terms of RODI?
Regardless how you do the math, the answer is in the millions of dollars.
Even if the model is flawed, think about the impact on your firm. We intuitively know that leadership development in law firms:
- Increases self-awareness and provides leaders tools to overcome blind spots and roadblocks to management effectiveness.
- Increases engagement and satisfaction for those working on client and project teams led by trained leaders.
- Improves the ability to lead change in a dynamic marketplace, specifically how we serve clients, gain client loyalty and lead internal teams and groups.
- Improves retention of women and diverse attorneys.
- Improves retention of costly lateral hires.
- Improves innovation and creativity to use data, technology and process improvement to advance client service and profitability.
- Results in a more sustainable, profitable and competitive
What is the cost of doing nothing?
Maybe now we have an answer.