Assessing the Cost of Leadership

Abstract

Assessing the cost of leadership is emerging as a major concern for organizations operating in different sectors of the economy. In the GCC region, companies in the energy sectors are making heavy investments to empower their managers to ensure that they can deliver the best outcome in their assigned tasks. It is becoming increasingly evident that the ability of a firm to achieve success depends on the quality of its leaders. It explains why large corporations in this sector are investing heavily in promoting leadership at different levels. It has become necessary for these companies to have effective ways of assessing the cost of leadership. The outcome of such an assessment helps in determining when it is appropriate to make such investment at specific stages of operation. This study has developed a framework for such an assessment based on four premises. They include the cost of hiring new leadership with ambitions and plans, cost of internal training of employees to positions of power, cost of maintaining employees, and the opportunity cost of creating an effective leadership within an organization.

Introduction

The systematic development of highly effective leaders should be one of the fundamental goals of organizations in the current competitive business environment. The ability of a company to overcome the numerous challenges in the external environment significantly depends on the skills and capabilities of its leaders in developing and implementing relevant management strategies. According to some recent studies, leadership development should be a continuous process that focuses on empowering the current workforce [1]. However, it is important to note that this process comes with some costs in terms of the financial investment needed to enhance leadership and the time that it takes. It has become increasingly evident that highly effective leaders are made, unlike the previous assumptions that such individuals are born with unique traits that make them good managers.

Individuals who are given the position of power must understand the issue of internal and external diversity, market trends, emerging internal and external issues, and how to create a perfect environment for employees to deliver the best output. Leaders must be creative when handling various tasks and dynamic enough to identity and embrace change as and when necessary. A company must invest in creative such individuals who are capable of guiding their subordinates effectively towards the realization of the vision and objectives in the market. The focus of this paper is to analyze the cost of developing such effective leaders in the energy sector and to design a framework that can be used to assess their value in an organizational setting.

Literature Review

Successful organizations have learned the importance of having a highly effective management structure. They regularly train their leaders so that they can develop effective frameworks for undertaking various tasks. Studies have shown that some of the largest and highly successful global corporations have developed a culture of regularly educating their employees on leadership, including those who are yet to assume positions of power [2]. It is important to review the literature on this topic to determine what other scholars have found out.

The Concept of Total Quality Management

The concept of total quality management has gained massive popularity in modern organizations as they continue to face the pressure of managing market competition and various other challenges. TQM refers to “company-wide effort to create a permanent climate that allows employees to achieve continuously improvement of their ability to offer on-demand products that customers will find of particular value” [3]. It emphasizes on consistent improvement in all departments of an organization as a way of enhancing its sustainability. Given the fact that the performance of each department depends on the productivity of its workers, this model of management encourages the need to enhance skills these employees in their respective workplaces. Regular drill is needed to ensure that they understand their role, challenges that may affect their performance, and the expectations that the company and customers have of them. As Sullivan notes, TQM is based on eight primary elements [4]. They include recognition, ethics, communication, integrity, trust, training, teamwork, and leadership, as shown in figure 1 below [5]. The central focus of this paper is leadership, which is one of the most critical elements of this model of management.

Leadership as an Element of TQM

Leadership has been identified as one of the aspects of total quality management. It is important to understand that leadership is not about assuming a position of power and giving instructions that subordinates have to follow [6]. To the contrary, it is about understanding both internal and external environment, determining the goal that an institutions should achieve, developing the right vision and strategy that is needed to achieve these goals, and working alongside the subordinates to ensure that they understand the vision, the goal, and strategy. Instead of being the boss, a leader must embrace the idea of serving the subordinates and making them to outperform their current capabilities through constant motivation and improvement of their qualities.

Total quality management emphasizes the need to maintain continuous improvement at all departments within an organization. That goal can only be realized when the leadership of the entity understands the relevance and approaches needed. It is also important for organizations to encourage their leaders to appreciate the need to empower their subordinates. The changing environmental forces brought about by technological advances, diversity, and globalization must be effectively understood and managed by those trusted with positions of power [7].

Advantages and Disadvantages of TQM in Leadership in the Energy Sector

The Cooperation Council for the Arab States of the Gulf, popularly known as the Gulf Cooperation Council or simply the GCC, has gained massive economic relevance over the recent past because of oil exportation [8]. The global society relies on the region for the supply of oil and gas, and the United Arab Emirates is one of the major exporters of this product. Companies operating in the energy sector must understand the need to maintain high levels of efficiency as a way of lowering the overall cost of operation, improving profits, and managing various threats in the market, including competition.

Total quality management has various benefits in leadership in the energy sector. As mentioned above, it enhances efficiency in the overall operations of a firm. Recent reports have demonstrated that the energy sector is highly volatile and requires a leadership that is highly dynamic [9]. TQM also promotes creativity and innovativeness based on the premise of continuous improvement. Another major challenge when using this policy is that it requires time. An organization must be willing to set some time off the normal schedule for the employees and managers to get the relevant training [10].

Measuring Leadership Cost

Achieving effective leadership is a costly process and it requires a firm to be willing to make the necessary investment. It may not be easy to have an accurate measurement of the cost of leadership in an organizational setting [11]. Sometimes an organization may poach an already accomplished leader from a rival company. However, even in such cases the company must be ready to offer them a more attractive remuneration and improved workplace environment as an incentive to make the transition. Many scholars and industry experts have a consensus that time and financial resources put in educating employees are two of the most effective ways of measuring leadership costs.

Time is a cost that a company has to pay to create leaders among its employees. Once recruitment is completed, the next step is to always align skills and competencies of employees with actual tasks that they have to undertake. Then there is the need to ensure that there is a regular learning that they have to go through to ensure that they understand emerging trends and practices [12]. Many companies have to sacrifice time that otherwise would have been used in production and sales activities. The more an individual employee is educated, gains experience, and rises in the management ladder, the more the company will be spending financial resources on them [13]. It is not possible to avoid these costs if a firm seeks to create a pool of highly talented management team in various departments and at the top leadership.

Crisis in the Decision on How to Quantify and Measure Leadership Cost

In an organizational setting, it is always necessary to have a clear measure of the cost of leadership. It makes it easy for the firm to know what it is investing and the output. Such a comparative assessment makes it easy to determine whether it is worth investing in empowering of employees. However, the approach to quantify and measure the cost of leadership still raises many controversies in organizations. The crisis arises because of the lack of a proper framework that can be used to assess the cost. For instance, although it may be easy to determine the actual financial investment that a firm has put on an individual leader over the years, sometimes the outcome of the investment varies from an individual to another [14].

It is not possible to state that if this specific amount of money is spent on a given individual, such a level of improvement will be realized. There is also the issue of individuals who are hired when they have already gone through some form of training in their previous organizations. They come to hold high positions of power without the employer having to spend on their on-job learning. The only cost that would have to be incurred is to offer them a higher remuneration. In this paper, the researcher seeks to develop a framework that can be used to assess such costs to help eliminate the crisis that often emerge when organizations try to quantify the value of investment made in such processes.

How the Performance of the Leadership Effects the Cost and How It Is Calculated

When an organization makes the decision to invest in leadership, the expectations is always to achieve improved growth. In the current dynamic workplace environment, it is critical to have managers who are capable of understanding the emerging changes and responding to them adequately. Globalization has led to a situation where many workplace environments are highly diversified. Leaders have to understand how to manage the diversity in a way that creates unity through a common vision [15]. Then there is the issue of emerging technologies and how they impact the normal operations of a firm. The only way through which a firm can overcome these external forces is to invest in leadership creation. It means that training is the best way of enhancing the productivity of leaders.

In this case however, the focus is to assess how the performance of the leadership affects the cost. Once a considerable investment has been made on empowering leaders, it is expected that their performance will improve. They should be capable of enabling the company to overcome the numerous challenges in the market through effective management strategies [11]. It is only when such positive outcomes are realized that the management will be willing to spend more on enhancing leadership. It will become evident that the cost incurred is accruing equivalent benefits for the firm. However, the challenge remains to be the approach that needs to be used in calculating the cost. Determining how to calculate the cost may vary depending on the organization in question. However, this study seeks to develop a common framework that companies in the energy sector within GCC countries can use to assess these costs.

Methodology

Understanding the cost of leadership has remained an elusive concept for both practicing managers and academic experts in this field. It is easier to measure the outcome of the process of promoting effective leadership. Factors such as improved communication, coordination, and the overall performance of a company are easy to measure. However, when it comes to assessing the cost of creating such a leadership, some of the factors involved are not easily measurable. For instance, there is the issue of opportunity cost. Supposing that the company did not spend money and time on promoting continuous learning among a section of its workers to be effective leaders, where would it have invested these resources. Another major question would be that if such an alternative investment were to be made, what would be its financial benefits. Having an accurate answer to these questions is not easy, which is why it is difficult to have an accurate determination of the cost of leadership.

It is necessary to develop a framework that can be used to assess the cost of leadership. Figure 2 above identifies six leadership cost factors that can assist in developing the framework. There are six leadership cost factors that can assist in developing the framework [7]. They include change, organizational culture, experience, commitment, innovation, and quality. They are the major areas of improvement that one should exhibit after going through leadership empowerment process. Each of these factors, and their sub-factors, are explained in table 1 below. Every time an organization makes an investment to educate its employees, these are some of the main expectations that they have of these leaders.

Table 1: Factors That Influence Cost Leadership.

It is necessary to develop a framework that assesses leadership cost from a 360 degrees angle. It means that the cost should be measured from as many perspective as possible to determine what it takes to achieve goals indicated in the table above. The research has identified four main premises upon which the cost of leadership can be assessed. They include the cost of hiring new leadership with ambitions and plans, the cost of internal training of employees to leadership positions, the cost of maintaining leaders in an organization, and the opportunity cost of creating an effective leadership.

Analysis of Results

Measuring the cost of leadership is becoming a major concern for many organizations around the world. It has become evident that the ability of a firm to achieve success depends on the capacity of its leaders to develop clear visions, set effective strategies, and guide employees towards achieving success. Corporations are spending significant amounts of money to empower their leaders. The benefits of such efforts are clear, as discussed in table 1 above. However, proper mechanisms are yet to be developed that can assist these organizations in measuring the actual cost of these initiatives.

Measuring the Leadership Cost from Different Angels: 360 Degrees Assessment

The research conducted has identified various approaches that can help in measuring the value of investment that an organization puts in place to empower its managers. This study proposes a 360 degrees assessment of the cost of leadership. It involves identifying every possible investment and sacrifices that such an entity makes to ensure that effective leadership is achieved. The following are the major cost factors that should be considered by any firm when trying the measure the cost of leadership.

The Cost of Hiring New Leadership with Ambitions and Plans

One of the most important premises that one has to consider in this 360 degrees assessment is the cost of hiring a new leadership with ambitions and plans. In this case, the company will be targeting accomplished leaders who are working for other companies and offering them incentives that will convince them to leave their firms and join the company. In this case, the biggest cost will be an attractive remuneration package [4]. They can only leave their current employer if the new company is offering a better career growth and salary.

The Cost of Internal Training of Employees to Top Leadership Positions

The cost of internal training of employees to the top leadership position is another possible angle of assessment. In this case, instead of poaching excellent leaders from other firms, the company will focus on empowering its own employees through regular drill and assignment of responsibilities to ensure that they become successful leaders. The cost will be incurred to train these individuals regularly at various stages of governance. There will also be the cost of mistakes that these individuals will make as they try new roles and responsibilities.

Cost of Maintaining the Leaders in the Organization

The assessment has to include the cost of maintaining leaders within an organization. One has to understand that there is the risk of losing talented young leaders to rival companies that promises them better opportunities. It means that it is essential for organization to offer these potential leaders growth opportunities and attractive remuneration [1]. These incentives will make them avoid the temptation of joining other companies after they are equipped with management skills. The cost will be the increased salaries that they have to be paid to ensure that they remain within the firm.

The Opportunity Cost of Creating Effective Leadership

The last premise in this assessment is the cost opportunity cost of creating an effective leadership within an organization. Every time a company makes financial and time investments into a leadership program, there is always another development project that will have to be ignored. It may be the expansion of the production unit, increased advertisement, or improving the transport infrastructure within the firm. It is necessary to assess the cost of these lost opportunities when a company has to engage in leadership programs [9]. In all the four cases, it is possible to conduct a mathematical assessment to determine what the company losses every time it has to invest in leadership empowerment programs.

How Leaders’ Decision Can Be Calculated Toward the Cost

Cost of leadership can also be calculated based on the decisions that a leader makes both for operational and strategic plans. When an organization is facing challenges such as the current COVID-19 pandemic, it is often expected that the leader will make important decisions that can help it overcome them. During this period, some companies have experienced a boom in their sales while others are on the brink of bankruptcy [5]. Many companies in the aviation sector have been struggling after many countries closed their airspace as a way of dealing with the problem. Air Italy, Atlas Global, Virgin Australia, Air Mauritius, Miami Air International, and City Jet are some of the few airlines that have been pushed to bankruptcy by the COVID-19 pandemic. On the other hand, Emirates Airways has managed to find a way of turning around its fortunes during these difficult times.

It has managed to expand its cargo fright to help compensate for the lost opportunities in passenger segment of the market. It has also struck strategic deal with major suppliers of medical equipment and pharmaceutical companies to facilitate movements of these products from one parts of the world to the other. The strategy has enabled the company to ensure that its operations are sustainable at a time when other companies around the world are pushed out of the market. It is a clear demonstration that the decision of a leader can be a costly process depending on their ability to steer the firm towards success despite the existence of various challenges [3]. Firms that had weak leadership paid the cost of bankruptcy and they had to stop operations. Those that understood and appropriately responded to the changing market forces have remained successful and are assured of continued growth after the pandemic.

Framework/Model to Measure Cost of Leadership

The proposed framework seeks to integrate the four factors discussed above in defining the cost of leadership in an organizational setting. Using this model requires one to assess the cost of leadership from four main angles. The first angle is the cost of recruiting new leadership with ambitions and plans. It occurs when a firm hires individuals who have been holding management positions in other companies. They bring in their skills and experience, but the receiving company must be ready to give something in exchange, as discussed in the section above. The second factor is the cost of internal training of workers to leadership.

In this case the firm has to empower its own employees to the level where they can be trusted with positions of power. There is the cost of maintaining leaders within the organization to ensure that they are not poached by rival companies. The last factor is the opportunity cost, which looks at what was lost when the company decided to invest in the leadership empowerment program [14]. Each of these costs are discussed extensively in the section above. Factoring in all these costs will help the management of a given company to determine the cost of leadership. It is important to note that the framework can be adjusted depending on the environmental forces that a given company is facing.

Table 1: Assessment of the Cost of Leadership.

The information is summarized in the framework shown in figure 3 below:

Conclusion

Over the past few decades, the idea of leadership has drawn the interest of numerous academics. It has become clear that although some individuals are born with some traits that put them in better positions to lead, it is essential for one to learn about this concept and understand how they can effectively guide others towards success. Benefits of creating effective leadership are relatively clear because it has received a considerable attention from scholars. However, the aspect of leadership cost is relatively a new knowledge field that still needs further research. In this study, the researcher has developed a framework that organizations can use to measure the cost of leadership. It is based on four main issues that define the potential costs of such initiatives. They include the cost of hiring a new leadership with ambitions and plans, the cost of internal empowerment of employees to the top leadership positions, the opportunity cost of creating an effective leadership, and cost of maintaining leaders in the organization.

Recommendations on Future Opportunities for Improvement

Determining the cost of leadership is essential because it enables the management to have an understanding of how much it is investing and what it is getting in return. In many cases, the focus is always on return without paying a close attention to all the costs that are involved. The assessment can help the management to understand what to expect when making such an investment and when it is necessary to do so. The model developed above can help in such a process. The following recommendations should be considered in case it is necessary to improve it:

• Organizations should consider improving the model above based on the unique forces in their internal and external environment;
• When improving on the proposed model, emphasis should be placed on expanding it instead of reducing the factors;
• It is advisable to involve as many stakeholders as possible, including experts in the field of leadership, when planning to improve the framework.

Survey Questions to Future Data Collection

A detailed review of the literature conducted in this field reveal that this is still a grey area in the field of leadership. Scholars are yet to conduct extensive studies that can help explain how to measure the cost of leadership. There are limited resources that one can use to determine this cost because of the limited research. As such, it is still necessary to have further research in this field to help develop more frameworks/models that companies can use to assess the value of investments they make to improve skills of employees. The following research questions can help in the collection of data to facilitate further studies in this field and to identify both positive and negative costs of leadership in an organizational setting:

1. What is your understanding of the concept of ‘Cost of Leadership’ in an organizational setting? Kindly explain.

__________________________________________________________________________________________

2. Do you believe that it is necessary for organizations to regularly conduct an assessment of cost of leadership?

1. 1. Strongly agree
   2. Agree
   3. Not sure
   4. Disagree
   5. Strongly disagree

3. Do you believe that the concept of leadership cost is adequately understood by stakeholders in your industry?

1. 1. Strongly agree
   2. Agree
   3. Not sure
   4. Disagree
   5. Strongly disagree

4. Do you believe that there are positive and negative costs of leadership in an organization?

1. 1. Strongly agree
   2. Agree
   3. Not sure
   4. Disagree
   5. Strongly disagree

5. If you believe that there are both positive and negative costs of leadership, kindly identify them.

1. 1. Positive costs _______________________________
   2. Negative costs ______________________________

6. Which approaches do you believe are effective in assessing the cost of leadership in a given firm? Kindly explain.

__________________________________________________________________________________________________

7. Identify some of the factors that you believe should be considered when assessing the cost of leadership

1. 1. _____
   2. _____
   3. _____
   4. _____
   5. _____

8. How often should an organization assess the cost of leadership?

1. 1. Quarterly
   2. Bi-annually
   3. Annually
   4. After every two years
   5. When the management considers it necessary

9. Who should be involved in the assessment of the cost of leadership?

1. 1. The top management
   2. Top and mid managers
   3. Top, mid, and low-level managers
   4. The entire management and non-managerial employees
   5. Shareholders and all employees of the firm from different cadre

Thank you very much for participating in this survey.

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