BOTTOM LINE:
We think the average organization could see as much as a 25% increase in results if they could create a culture that was perfectly aligned with success.
- True perfection may not be attainable, but there are tremendous gains to be realized from improving your culture, even a little.
- This is why you should have a culture budget, and should continuously be doing culture design and culture change.
THE DETAILS:
Figuring out the return-on-investment (ROI) for improving your workplace culture is no easy task. When you Google it, you’ll find a huge range of conclusions, from a 1992 study claiming culture drove a 756% growth in income over an 11 year period, to others that conclude it doesn’t exist, or that it’s impossible to calculate.
The truth is, organizations are complex, and so is workplace culture, so the ROI of culture work is not a simple calculation. The trick is making a solid connection between culture and organizational results. Here’s how we think it works.
If you zoom way out, there are two primary factors behind organizational results: strategy and execution. You choose a strategy, then you execute on it, and that produces results. The better you are at doing those two things, the more success you will have (profit, impact, etc.). If you could hypothetically be 100% perfect in your strategic moves and 100% perfect in your core execution capacity, then you would be getting your maximum possible results.
Or so you think, because there is another factor: culture. Culture is the water in which both strategy and execution swim. Even if your strategic moves and execution capacity were perfect, an imperfect culture could be slowing both sides down, which means you’re NOT getting your maximum possible results. If your culture is misaligned, then the results you are getting today are lower than they should be. You’re leaving money on the table.
Think of it like the physics concept of “drag.” A culture that is perfectly aligned would create zero drag, and your strategy and execution would be swimming as if they were above the water—no resistance at all. But if your culture is off—misaligned with what makes you successful—the drag is higher, and it might feel like you’re trying to swim through an oil slick. You still get results in the oil slick scenario, by the way, you’re just falling short of your potential, year after year, because of the drag.
The drag comes in the form of things like:
- higher turnover,
- lower engagement,
- more conflict,
- less productivity,
- missed opportunities,
- frustrated customers,
- poor decisions
- lower quality
- unnecessary delays, and
- wasted effort.
All that adds up, both in hard costs and opportunity costs. Thus to calculate the ROI of improving your culture, you need to understand exactly how much drag your culture is creating.
To use a math metaphor, that means identifying a value for the drag coefficient of culture. Your current results (Rc) equal your potential results (Rp) multiplied by the culture drag coefficient (Cdc).
Rc = Rp * Cdc
For the record, I know this is not how real drag coefficients work, but in this metaphor, the culture drag coefficient is a number between 0 and 1. If it’s 1, then your culture is perfectly aligned and is creating no drag, thus Rc would be equal to Rp—you’re achieving your full potential. But that’s extremely rare, if not impossible. Those culture drag items listed above are incredibly common, and they all clearly negatively impact results, which means most organizations have a coefficient that is less than 1, making the current results fractionally less than the potential results.
We’re not done with our research on this, but our initial (and we think conservative) estimate is that the average organization sits at about a 0.80 culture drag coefficient. Whatever results you’re getting right now (revenue, growth, etc.), you could probably be doing about 25% better if your culture was not producing drag. A more aligned culture will reduce your unwanted turnover and increase employee engagement, which will improve productivity and save real expenses (particularly the turnover part—there’s a lot of research on that). It can also reduce customer churn, lower your costs of goods sold, and improve efficiency. All that produces measurable returns.
Of course you’re not going to move your coefficient from a .80 to a 1.0 in the blink of an eye, and perfection (1.0) may not literally be attainable, but that doesn’t matter. You don’t have to be perfect—you just need to reduce the drag. If a $10 million organization moved its coefficient from a .80 to a .85, it could see a return of more than $600,000 annually.
This is why we think every organization should have a culture budget. I realize that is self-serving, since they would use that budget to pay for consultants like us, but I swear that’s not the point here. You need that budget to pay for software, training, other consultants (DEI, project management, etc.) and staff time to implement the internal changes that will improve your culture (we call those culture plays). This is the “I” part of ROI, and if you want the “R” (returns), then you must invest.
We will continue to build out the specifics of this ROI model, but we’re confident in the core structure. Invest in improving culture, and you will see meaningful and measurable results.