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June 11th, 2020
As a performance psychologist working with some of the world’s elite in sport and business, how we predict and then improve performance has been my life’s work and a subject that intrigues me. In the next six weeks, Drax will release three pieces around leadership and the challenge of how companies can measure, and thus predict, the impact that leaders are going to have on the performance of the company.
This first article highlights the difficulty inherent in quantifying and predicting what leadership is. Many companies have a big resource of leadership development and lots of data that allow them to measure how well they are doing with sales, productivity, customer satisfaction and employee engagement; however, few companies bring this information together. The key questions are how to link leadership behaviours to performance outcomes and business results; furthermore, how to predict this in your leadership before it happens?
In recent years, Private Equity investors have learned that defining the market value of a firm cannot just be based on finances. Financial outcomes have been found to predict only about 50% of a firm’s market value. For investors to gain more insights, they look at the strategy, brand, systems, innovation and leadership. Therefore, how do you analyse leadership effectiveness?
In our 2019 Insights report, we have found evidence that there is a challenge in predicting performance in leaders. Furthermore, there is a huge cost associated with getting it wrong by looking at the high volume of leaders that were changed (high cost in time, cultural shift and associated expense in the re-hiring processes) in a senior leadership team in 2018/19. Our research is specific to PE backed environments:
Some HBR research has found that investors allocate only about 30% of their decision-making based on the quality of the leadership, and they have much less confidence in their ability to assess leadership than in their assessments of financial performance. As a result, assessments need to go beyond isolated observations to a more rigorous and set evaluation method. There is one step beyond assessing what type of leader they are, and the possible style and culture that they will develop in the organisation; it’s predicting the potential financial performance impact they will have.
Interestingly in my experience of developing elite sports men and women, I have found that selection decisions are mostly based on overall impressions of scouts and trainers (clinical judgement), whereas assessing using explicit decision rules (actuarial judgement) often leads to better performance predictions. The consistent application of a decision rule alone already improves predictions and decision-making, because it decreases the likelihood of biased judgements.
Furthermore, in trying to assess a leader’s performance, people focus heavily on past behaviour rather than future potential. For example, Smith 1989’s mantra behind competency-based assessment is ‘the best predictor of future behaviour is past behaviour.’
People also seem to take a particular view on leaders, with a frame of reference no wider than one’s own experience. Kahneman & Tversky in 1973 previously explored the idea that people predict by similarity, not by statistical likelihood. They find that intuitive predictions and personal judgments can often lead to incorrect errors, in contrast to statistical predictions of those based on data.
In a world now exploding with potential, the power of data-led insight is revolutionising business decisions. The way organisations embrace people analytics, including predictive capabilities, and the huge opportunities it captures will be of great importance. People analytics allow organisations to understand what’s working and what isn’t, and they are increasing their use of AI and analytics in every aspect of business, including in people decisions.
Currently, with new possibilities over the last decade, and the ever-expanding amounts of information about leaders, how do we determine success? This is where the psychology combined with data insights, can look at accurately projecting the impact of the leadership team in a business environment, and analytic tools like drxDATA can predict the value of every leader in PE.
So how do you predict leadership impact? We would love to hear from you: firstname.lastname@example.org
In our next piece we will cover how different industries in different geographies tackle this issue, we’ll see what is already in flight and what insights and accuracy they produce.
Partner and Head of Leadership
 Freed, A., & Ulrich, D., (2015) [ONLINE]. <https://hbr.org/2015/04/calculating-the-market-value-of-leadership>
 Kahneman D. & Tversky A. (1973) On the Psychology of Prediction. Psychological Review. VOL. 80, No. 4.
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