Great managers: Why do they matter and how do they impact a company’s financials?
A lever helps you lift more weight than you can with your hands alone. Skilled, creative managers help organizations do more in the same way. But how? And — a question I often need to answer for CFOs, CEOs and boards when putting together the business case for investment in manager development programs — why exactly does it matter?
I see 4 main kinds of managerial leverage, and this is how I see them each contributing to the business and financials:
Great managers bolster strategic clarity across the organization. Strategic clarity means ‘I know where we’re going as an organization and why.’ In repeated research, it has been directly tied to EBITDA, TRS, and even customer satisfaction and NPS. Town hall presentations and drive-bys with the CEO or leadership team are great, but not enough. People need to hear from their managers to trust, understand, and absorb information about the company direction — especially if there is a big change in direction that is nuanced to explain. Great managers (equipped with the right materials and messages from great People teams, Comms teams, and the CEO or chief of staff) cascade information about the company direction and are able to make the information meaningful and relevant to their team. If I’m talking to someone who values great cultures but wants a financial explanation, I put it like this: the more each person and team understands the overall company objectives, the lower their non-productive time will be. They will waste less time on things that don’t matter. The quicker, also, the company’s ability to change direction will be. Often companies pursue change but don’t explain it enough to the whole organization. The top of the company embarks on a change journey and everyone else is confused. Great managers, empowered with the right materials and support, can be the trusted lever for changing organizations team by team.
Great managers upskill their teams and it increases margins. Teams with a manager who has strong relevant expertise can punch above their weight. If I’m talking to the CFO, I’m talking about how this drives higher gross margin in aggregate because it allows us to invest in hiring and developing a targeted pool of expert managers to lead a much larger group of less experienced employees to success — i.e. pay less overall for headcount than you would if you hired experienced and proven experts up and down the organization (e.g. the NY Yankees “all stars” approach, which is expensive!). The gross margin argument is powerful in SaaS in particular because the customer services, implementation & production teams are usually significant proportions of the overall organizational HC — and also a significant budgetary focus area as the company scales and aims to hit gross margin targets to please investors and the market.
Great managers lead more effective and efficient teams. EBITDA EBITDA EBITDA. Teams that are organized do more with less (because they are more focused, less noisy, and more able to work together well). This creates better deliverables and financial outcomes for the organization at large. I have countless examples of this, and of the reverse (big teams that were poorly organized and costly, that were burned out and did not deliver!). There is some great writing and research out there that complements this view by looking at the specific mechanisms that allow teams to thrive and outperform: David Deming’s work on how a team’s social skills are linked to team performance; The more famous Aristotle project at Google. At scale, great managers are the key to fostering these mechanisms in their teams through how they select talent, define roles, connect team members, and organize work & assignments.
Great managers drive employee stickiness. We want employees to want us. We especially want our most critical talent and our performers and high performers to want to stay with us. Great managers build 1-to-1 relationships with their people, and get them excited about being part of the team/company/customer account/mission. If I’m talking to the CFO I’m talking about lower employee replacement costs (less organizational churn and instability that leads to less productivity). I’m also talking about higher discretionary effort from those employees. This is a cost management and productivity play.