Coaching and Mentoring
Getting a Positive Return on Executive Coaching Intervention
Many business leaders are happy to accept the fact that executive coaching often helps individuals to grow as professionals and contribute more fully to the success of an organization. We also usually readily accept that if it is done well, it can significantly leverage individual performance and help to bring about much greater collaboration and alignment (an outcome that ultimately benefits everyone). Executive coaching is therefore offered and taken up very much as an investment that an organization makes in developing its key people for the long-term benefit of the enterprise. However, its deployment and use is considered to make a contribution in a general or loose way and often not so much as a process through which we can gain direct or measurable return on investment or achieve a tangible contribution to the bottom line. One of the reasons why this occurs is because so much of the benefit is “soft” or more about changes in input attitude, knowledge, behaviors, or skills, all of which do not (in an of themselves) have exact and measurable payoffs. However, perhaps we can do a better job of quantifying these so-called “soft” input benefits and in this brief article, we make an attempt to do so, based on our experience in the field is using executive coaching in one commercial enterprise (and the RESULTS coaching® approach in particular).
Although every organization is unique in terms of its size (as measured by revenues, profits made, numbers of employees etc). It is possible to develop some interesting ratios that can help to point the way in terms of the kind of “hard” returns that can be gained from executive coaching interventions. In order to do this, in 2009, the Results Coaching part of the WCOD management consulting business analyzed some broad data in a relatively large organization operating in the Publishing and Media industry to see whether we could make some reasonable estimates about the contribution of an executive coaching program at the senior managerial level. Some basic financial and other facts about this company are shown on the left-hand side of the table below and the ratios they lead to are shown on the right.
Medium to large sized Publishing and Media Company: 2007 published data
|Core Facts||Ratio Data|
In late 2008 coaching program was made available to the top 225 managers in this company. This excluded the CEO and direct reports but included the entire next tier of management. This group represented 2.5% of total employee population.
Of the 225 managers, 211 received some coaching during the year and 176 of these (or 78% of the entire population at this level) received at least 4 sessions of 90 minutes or more (with an average of six sessions for the group).
Results for the same organization in this particular year were published and were as follows:
|Core Facts||Ratio Data|
If we compare these two sets of results we get the following data table:
|Op ex (million)||427.3||415.4||97.2%|
|Rev per employee||99989||103379||103.4%|
|Profit per employee||7272||7976||109.7%|
|Opex as a % of rev||45.8||43.6||95.2%|
|Paybill as % of rev||34.2||33.7||98.5%|
In other words, apart from paybill as a percentage of revenue (which is up only 0.7%) all indicators show a better result. Revenues are up 2% or £19.1 million and profits are up £5.6 million. In addition operating expenses fell by £11.9 million year on year.
It is obviously not the case that the coaching program alone made the greatest contribution to these figures. However, we can make some reasonable assumptions based on the fact that the two years of 2007 and 2008 were seen to be relatively stable in market terms. In other words, there were no “special” external factors that either helped or hindered revenue or profits and therefore changes were considered to be more about internal performance of company employees. The other factor that cannot be assumed to be wholly explanatory is that the managers receiving coaching were the major contributor to performance change. However, it is reasonable to assume (on a Pareto type principle) that the people at the top of an organization make the most influence on bottom line results (even where we have a large employee population). In discussing this with the organization, their view was that the top 237 managers (the 225 “tier 3 managers plus the CEO and 11 direct reports at tier 2) made a 65% contribution to the bottom line). For the purposes of the subsequent analysis, the 176 managers who received coaching were assumed to have made 60% of this contribution and the coaching experience made a 25% contribution to their behavior and decisions. This conservative estimate of contribution was supported by the senior executive team or the organization.
The coaching program itself (and development programs that resulted from it) cost this particular organization a total of £525,000 over the 12 month period in question. If we apply all of the above data and assumptions, the following picture emerges in terms of the return on this investment as it relates to profitability from year to year.
The incremental profit gain was £5.6 million. By assuming that 65% of this performance change was due to the top managerial population (the first 3 tiers), their contribution was £3.64 million. Of this population, given that we then assume that those senior managers who received coaching made a 60% contribution, this would be £2.84 million. Finally, if the coaching interventions made a 25% contribution to the changes in behavior (a conservative estimate according to the managers themselves) this makes for a direct contribution in one year profits of £546,000 (representing a direct profit in the year of £21,000).
Of course, although this represents positive payback in one year, the profit increments are recurrent (at least as they are reflected in incremental revenues and reduced expenses). Hence, although the market may move these up or down in subsequent years, it is reasonable to assume at least 3 years of recurrent financial gain to determine the full return on investment. This means that the total 3-year gain is £1.638 million and thereby represents a return of a net £1.13 million on the coaching investment or 312%.
Although bottom line profits are what matters most to a commercial enterprise, many may feel that profits are much too volatile to use as the basis to make a return on investment calculation like this one (being very sensitive to external environmental and competitive factors for instance). As a result, some may feel that it is fairer to look at expense reduction as a more accurate indicator of return on management intervention effort. This would be highly appropriate in this instance because overall market share in 2008 was actually similar (in fact slightly higher) in 2008 over 2007, with both revenues and profits up, while expenses went down. If we therefore apply the same assumptions as we did with the profit-based change calculation, based on the fact that annual expenses were actually reduced by £11.9 million, the net impact of the coaching intervention could be stated to be £1.16 million or a profit on the exercise in one year of £625,000. Over three years this would be £3.48 million and a 662% return overall.
Clearly, the above results are far from definitive, as there are still several assumptions that have been made. However, they demonstrate an attempt to calculate the “harder” returns that can be achieved in one organization and point the way for similar calculations to be performed in other organizations of all sizes and types using a similar methodology.