In the high-stakes world of investing in the right leaders to lead the company into the future, far too many companies are losing their shirts.
Over the last 15 to 20 years, many companies have relied heavily on a high-potential strategy, which involves making targeted investments in identifying and developing a small group of people who are deemed most likely to be able to step into future leadership roles.
According to DDI’s “Global Leadership Forecast (GLF) 2018” research (http://www.ddiworld.com/glf2018), produced in partnership with The Conference Board and EY, 65 percent of companies have adopted high-potential initiatives, yet two-thirds say their programs are not very effective. Similarly, research from Gartner reveals that 73 percent of high-potential programs show no return on investment (ROI).
This lack of return often causes business leaders to question their high-potential initiatives. The problem, however, is not high-potential programs themselves, but the strategy and approach that sit behind them. Too often, organizations have viewed these programs as a quick win, like trying to pick the winner in a horse race.
Instead, they should be viewing their programs as a long-term investment strategy, applying the wisdom behind financial investing to their high-potential strategy. To start, here are five lessons from the financial industry that, when applied to high-potential programs, can have a significant impact on ROI.
DON’T PUT ALL YOUR EGGS IN ONE BASKET
For some time, the prevailing view has been that high-potential pools should account for approximately 3 to 5 percent of the leadership population. But investing in a small group of leaders is like trying to pick a couple of winning stocks—a common rookie mistake. While it might pay off big, one poor decision can produce devastating results. For that reason, experienced investors spread their risk by investing in a broader range of stocks.
In terms of high-potential programs, the results can be similar. In a small group, even a few people who underperform or leave can decimate the program. As with investing, a broader pool helps to ensure better results. According to the GLF 2018, larger pools, including as much as 32 percent of an organization’s total leader population, tend to be more effective. Additionally, organizations that extend development of high-potential talent below senior levels are 4.2 times more likely to outperform those that don’t.
Investment tip: Expand the portfolio of leaders who have access to high-potential initiatives and programs. Don’t limit involvement to a small group of individuals, and invest across the full pipeline of leadership.
TIME IN, NOT TIMING
There are always stories of incredible timing, such as buying stock in Apple for cheap in the late 1990s. But while you can get lucky with a well-timed investment, they are impossible to predict. High-performing investment strategies depend on staying in the market and growing accounts over a long period of time, rather than trying to bet big in specific moments.
Organizations often fall into the timing trap by putting all their efforts into periodically identifying high-potential leaders but losing focus on the true purpose of high-potential programs: accelerated development, which requires time and focus.
Unfortunately, 55 percent of high-potential leaders never complete their development plans, according to research by CEB/Gartner. In short, organizations are basing the success of their high-potential programs on making a few well-timed choices, rather than focusing on long-term development goals, which is a major gamble.
Investment tip: Don’t let identification be the beginning and end of your high-potential initiative, leaving developing to chance. Put focus, energy, and time into development to ensure leaders are truly growing at an accelerated rate.
DIVERSIFY YOUR PORTFOLIO
Different investment options suit different conditions, so astute investors often will build a diversified portfolio made up of multiples asset classes, such as stocks, real estate, and bonds, all of which meet different investment needs.
In today’s business environment, different business conditions often demand different types of leadership. The one-size-fits-all notion of leadership is increasingly less relevant. Further, much of the research and literature on leadership potential is based on characteristics and attributes that made leaders successful in a business and leadership landscape that is very different from the one leaders will face in the future. Limiting your definition of potential may limit your opportunities.
Investment tip: Expand your definition of potential to go beyond those who are destined for the C-suite. Create acceleration pools for a variety of leadership needs, such as pools for subject matter experts whose knowledge is critical to the business strategy.
LOOK FOR HIDDEN GEMS
Humans by nature are risk averse. In investment, avoiding risk might mean restricting investments to low-yield bonds or established “blue-chip” stocks, which leads to missing out on hidden gem investment opportunities that deliver huge results.
When it comes to identifying people who have leadership potential, the “safe” option is to pick people who look, act, and have backgrounds similar to the organization’s current and past leaders. Whether we do this consciously or unconsciously, it represents a bias that causes us to overlook tremendous talent—people who may bring new and valuable approaches to leadership.
Many studies prove the value of having diverse leadership. In the GLF 2018, we found that companies with more women leaders were 1.7 times more likely to excel financially than companies with less diverse leadership, yet only 24 percent of leaders in high-potential pools are women. But it’s not just diversity of gender, race, or other demographics that matters. Organizations also need cognitive diversity, which is based on having different perspectives, mindsets, and experiences. Investing in both demographic and cognitive diversity is critical to compete in a rapidly changing business environment.
Investment tip: Equip managers with tools, insights, and skills to look for leadership potential from a broad range of people. Also, consider using objective leadership assessments that can surface high-potential people who otherwise may be overlooked. On a larger scale, you also might create initiatives that raise the profile of groups that are underrepresented in leadership.
MANAGE YOUR PORTFOLIO
Properly managing a financial portfolio depends on re-evaluating it regularly—perhaps quarterly or annually—and adjusting investments based on performance and your changing needs. The same is true for high-potential initiatives to ensure they continue to meet your goals. For example, you might have to alter your approach if you see some of the following issues start to develop:
- The pool starts to resemble an exclusive club rather than an accelerated development experience.
- Pool members become attached to their identity as a “high potential,” which causes them to be reluctant to leave the pool even when they have maximized their development opportunity.
- High-potential pools convey a sense of arrival (i.e., participation in the pool itself represents the destination).
Investment tip: Devote the necessary time and resources to manage and adjust your high-potential pool just like you would manage any other critical business asset. This means:
- Clarifying the goals of your high-potential initiative
- Communicating clear expectations for all stakeholders
- Measuring the progress of your initiative to benchmark progress against goals
- Constantly reviewing the status of your pools and making adjustments in line with your business strategy and talent goals
Like the extraordinary power of compound interest, the cumulative impact of these five strategies can deliver tremendous and competitive advantage for organizations. Isn’t that the kind of return on investment you are looking for?
Mark Busine is vice president, Product Management, for global leadership consulting firm DDI. An expert on a broad range of leadership and talent practices across international markets, Busine advises both multinational and regional companies on assessment, development, and succession management for leaders.