Topgrading

WHAT IS THE ROI OF TOPGRADING?

You would like to know the ROI of Topgrading.  The CEO of one company pointed out to the 100 managers that if just one of them avoided one typical, $3 million, mis-hire, the Topgrading workshop would be paid for 30 times over.  He pointed out that if every manager avoided 2 mis-hires in the next 2 years … let’s do the math… 2 X $3 million X 100 = $600 million savings for the companies.

When companies Topgrade, they naturally want to know what the Return on Investment is apt to be.  Optimistic and perhaps immodest, we Topgrading professionals have tossed out some numbers that we think are true and conservative, but … we can and should do better.  Can you help us?  What sort of ROI measurements would be most compelling?

Well, here’s what we have for now …

1.   CEO Testimonials. Dozens of CEOs say unequivocally that their companies’ overall success is due to a significant degree to Topgrading.  Anonymous testimonials are worthless, but all the case studies mentioned in our books are approved by CEOs who give their name and the company name.  For example, in my 650-page tome Topgrading:  How Companies Win by Hiring, Coaching, and Keeping the Best People, Chapter 5 has more than a dozen case studies with companies named, and the CEO and head of HR had to swear to the accuracy and integrity of all the rather impressive stats presented.  With companies improving their hiring success from 25% to 90%, we’re not talking about a little better talent, but replacement of mediocre managers with true A players. Examples of quotes from the past:

Bill McGill, CEO MarineMax:   “As a result of Topgrading, which we implemented 3 years ago, we have taken our company from $280 million to $762 million. There’s nothing that’s done more for our company than Topgrading.”

Cass Wheeler, CEO American Heart Association:  “Topgrading helped us to raise $50 million more … Topgrading saves lives … we’ve improved from 20% A players to 60%, and we’re just getting started.”

Jon Boscia, CEO Lincoln Financial:  “Topgrading is the single most important business book I’ve read … as a result of Topgrading we’ve become a talent magnet…”

Ken Griffin, CEO Citadel:  “With over $70 billion in assets … Topgrading is key to our strategies, and … the strategies that have generated the majority of our profits would not have been possible without Topgrading.”

2.   Workshop Costs. Suppose a Topgrading workshop costs $20,000.  We ask the managers in the room to estimate the percent managers they’ve hired who turned out to be the high performers they expected and paid for, with mis-hires as the only other category.  The typical stat for companies large and small is:  25% - 30% of the managers they hire turn out to be high performers.  That’s 70% – 75% mis-hires.

Then we ask them to calculate the average cost of a mis-hire, using our Cost of Mis-Hires Form.  In our research the average cost of mis-hires is 10 times base salary for managers earning a base salary of $100,000, so the average cost of an average mis-hire is $1 million.

Okay, if just one manager in the workshop avoids just one managerial mis-hire costing $1 million, the ROI is $1 million/$20,000 = 50%, right?  But every manager should avoid many mis-hires over time, so ROIs are in the stratosphere.

3.   Chief Executive Magazine Weighs In. The December, 2008 issue has an article entitled “The Costs of CEO Failure.”  The author quotes me and uses my Cost of Mis-Hires Form, juicing up the numbers for CEO mis-hires.  Bottom line, the average costs the authors calculated were $52.5 million for large companies (over $4.5 billion), $22.1 million for mid-sized companies, and $12.6 million for small companies ($300 million - $1 billion).

4.   A Sales Representative Model: Grow Market Cap $44 million.  My co-author for Topgrading for Sales, Greg Alexander, put quite an elaborate ROI model together.  Clients have plenty of data showing improved hiring, but Greg did such an elaborate analysis, we made it a separate appendix (E).

Here’s one part of the analysis, edited a bit for brevity.  Let’s take a hypothetical company’s income statement:

*The source of the  financial ratio data is the 541 companies according to Yahoo Finance that are in the Information Technology sector with revenues greater than $100M based on 2006 financial performance.

Assuming the typical mis-hire rate of sales reps of 40%, and the average cost of a mis-hire to be $563,000 (Greg’s study), assume the company cuts its mis-hire rate in half, to 20% … quite a conservative Topgrading assumption.

Okay, there is $17 million more revenue, $17 million lower costs, so the Cost of Sales as a percentage of revenue shrinks from 20% to 19.5%.  Not much, you say?  But look at this – the company’s profitability grows 10%, from 5% to 5.5%.  With 10 million shares outstanding, EPS grows from $1.00 to $1.20 and if the PE of this technology company remains at 22, the share price increases from $22 to $26.40 and the market cap increases $44 million, from $220 million to $264 million.

Did you get lost in the numbers?  It’s easy to do.  You have to generate your own numbers to make them really meaningful (that’s why we do this in workshops).

5.   University of Chicago Research. I’m not the only one trying to get a handle on ROIs of Topgrading.  Kaplan et. al. studied 313 CEO candidates for portfolio companies owned by private equity firms.  They looked at the Topgrading assessments (by ghSmart & Co.) before the CEOs were hired, and looked at the financial results four years later.  One hundred percent of the CEO candidates given an A or A+ rating later turned out to have achieved or exceeded financial goals, but only 50% of those  given B or lower ratings achieved financial goals.  The article points to “expensive” interviews by Topgrading professionals, but we (slightly biased) say the $6,000 - $8,000 is … oh, you know what we think!

RECOMMENDATIONS:

1. RUN YOUR OWN NUMBERS – ESTIMATE YOUR PERCENT MIS-HIRES AND THE AVERAGE COSTS OF YOUR MIS-HIRES.
2. INSERT THESE NUMBERS INTO YOUR OWN ROI MODEL.

We all know, “if it’s worth doing, it’s worth measuring.”  I’m hoping for a robust dialog on this topic and welcome your comments.

Recommended Resource: Consider our Topgrading Assessments and Coaching some (or all) of your team.  In this problematic economy, who are your likely high performers… and who should be replaced?  Margaret (847-265-7415) would be happy to arrange a call with me.