What Cash are you Leaving on the Alignment Table?
Quantifying the Cost of Misalignment
Achieving and maintaining strategic alignment is a crucial capability for organizations of all sizes. Teams and individuals need to have radical clarity on what the strategic priorities are. Otherwise, efforts are directed towards redundant projects, time is wasted on double work, and synergies are left untapped. Independent from the current economic climate and turbulence caused by COVID-19, recent research has demonstrated that there is a significant “decay rate of understanding” across all levels of the organization which hinders the ability to achieve business outcomes.
In this research, we take a closer look at the costs of such misalignment and the financial benefits stemming from moving in complete unison. We do this by taking a look at the problem through a few real-world use cases:
Cost of misalignment
Failed strategic transformation projects
Publicly available data and our underlying analysis show that for an organization of 500 people, most of the above use cases each account for losses of potential gains between 2 to 7 million US dollars. We further investigate the root causes and discuss levers for relief: agile steering models, team huddles, and a new perspective on management and leadership communications. This view underlines that misalignment and how to reduce it does not fall in the realm of HR, but should be championed by top management.
The Cost of Misalignment
Every organization’s strategic execution capability is ultimately determined by each individual employee’s ability to contribute – and how they are able to really focus on strategic priorities (or not). Consider a franchise company from the restaurant industry: In the wake of COVID-19, all their dine-in locations had to close, bringing the business to a complete and sudden stop. The company’s top management switched to crisis mode and developed a swift plan for action. How well do you think middle management and other ranks were able to grasp the new reality, localize and execute on that new strategic plan? According to research from the Strategic Agility Project at the MIT Sloan School of Management, a whopping 49% of top team leaders across industries cannot name their company’s top three priorities. And things don’t get better once we look at other parties of the chain of command: Senior Executives: 78%, Middle Managers: 82%, Front line supervisors: 87%. This massive gap severely limits each individual contributor’s capacity to focus on what truly matters.
Every employee has a finite number of work hours at their disposal. If prioritization and focus are so critical, what are the ramifications of strategic misalignment at scale? Let’s assume an organization has 500 employees, with an average annual labor cost per employee of $84,000 (factor of 1.4 * 60,000 average salary) . For every quarter, each employee has 520 working hours (40h/week * 13 weeks) to spend. Among other things, these are allocated to business as usual, meetings, strategic priorities, organizational slack, admin time, etc. What if we were able to increase the time those employees are able to spend in on real strategic priorities by a very conservative 10%? This would leverage and refocus 26,000 work hours per quarter across the organization that would otherwise evaporate in other, less strategically important activities. In accounting terms, that is a cost of $1.1m per quarter of $4.6m per year for such a mid-sized organization.
The shift is more dramatic if we look at the same example from a revenue angle. Let’s assume that very same organization achieves annual sales of $100m. Their average annual revenue per employee would be $200k. We call this an employee’s revenue impact. Assuming a direct correlation between strategic alignment and revenue impact, re-focusing the attention of all employees by 10% would unlock a potential revenue uptick of $2.7m per quarter or $11m per year.
It’s an old joke from management consulting and the corporate world: how much time and money is burnt in unproductive meetings? The numbers put forward by Harvard Business Review in this calculator should make decision makers cry rather then laugh. While meetings continue to be critical for alignment, we believe that there is significant room for improvement. In fact, ineffective and failed meetings are on of the biggest costs of misalignment that a firm incurs. Vice versa, time not spent in non-productive meetings can be allocated to strategic priorities and value generating work.
Let’s take a look at the numbers. Consider the same company with 500 employees in the example above. 35% of employee time is spent in meetings, translating to 182 work hours per quarter per employee. Approximately 67% of all meetings are considered failures. This results in a total burn rate of $2.7m per quarter just from employees wasting their time in failed meetings. Merely reducing the amount of failed meetings from 67% to 50% would net a gain of $691k per quarter or $2.7m per year.
Failed Strategic Transformation Projects
Strategic transformation projects are key to sustain or regain a company’s competitive position. One of the most frequent types of such initiatives are Digital Transportation projects, which we are going to focus on for its current relevance and availability of data. Generally speaking, strategic (vertically and horizotal) misalignment across the organization takes its toll in two ways. On the one hand, by not achieving the full amount of benefits from such an initiative. On the other hand, from a complete failure, which we will now analyze further:
The average company is expected to spend $10m. on digital transformation projects a year. The failure rate of those projects is estimated to be between 50% (low), 70% (average) and 90% (high). This equates to an expected cost of failed projects between $5m and $9m per year. in this scenario, reducing the number of failed projects to a new low of 30% would save the firm $2m to $4m annually.
Managing Employee Turnover
Clarity on strategic priorities and cross-functional alignment are key motivators for staff members across the organization. We assume that employee churn can be therefore be attributed to misalignment as well.
Let’s understand why this matters financially. The turnover rate of employees is approximately 10% per year. The cost of such turnover is about 33% of an average annual salary. Under the same labor cost assumptions as in the previous examples, the cost of employee churn (e.g., re-hiring, re-training, etc) is $1m per year.
Easing Misalignment Pains
As we have seen, strategic misalignment is a quantifiable and very real business challenge. What levers and options for relief do managers have at their disposal?
First of all, companies could hire a consulting firm to create alignment on their behalf. A 12-week strategy project with a McKinsey team would probably be around $1M. However, this would not guarantee alignment after the engagement comes to an end, and it would outsource the majority of work to an outside party.
Second, organizations could hire a Chief of Staff. We have seen this role among many of our clients. Individuals fulfilling this role mediate and orchestrate strategic issues and different teams behind the scenes, and we have seen this role deployed very successfully among many of our clients. Salary data from Indeed.com quantifies the cost for this at an average of $120k annually.
Third, decision makers can opt to adopt agile steering and alignment methods such as Objectives & Key Results. These approaches focus on rallying teams around aspirational goals and measurable success metrics, increasing accountability and alignment across the organization.
Fourth, today’s plethora of IT-based collaboration platforms provide relief through software. While there are numerous enterprise offerings available on the market, managers should evaluate carefully to distinguish between gimmicky tools and true alignment and strategic results platforms.
Conclusion: Know your Costs and Evaluate your Options
What are your true costs of strategic misalignment, and what are the best levers for your company to achieve moving in unison? We invite you to start the discussion below, and we look forward to hearing your comments.
by Bradley Kalgovas and Steven Schepurek