Organizational culture effects sales growth, customer satisfaction, ROA and many other measures.
What is your culture costing you? A recent study looks at the effects organizational culture has on plant safety in 85 manufacturing plants in North America. The plants are members of three organizations that deploy safety programs across the plants -- with varied results. Taking both direct and indirect costs associated with the number of lost time accident (LTA) cases as well as the number of recordable incidents, the plants with the higher performing cultures in the study had more plants with zero LTAs and zero recordable cases than the plants with the lower performing cultures. In fact, the plants with the high performing cultures had 50% of the plants without either an LTA or recordable case, as opposed to the lower performing plants which only had one single plant without an LTA or recordable.
The study of eighty-five manufacturing plants was divided into four groups by how they scored on the Denison Organizational Culture Survey. Group one scored in the bottom 25% of the Denison benchmark database (a database of 1000+ organizations who have conducted the culture survey). Group two scored between the 26th and 50th percentile. Group three scored between 51st to 75th and group four were all the plants scoring in the 76th percentile and above. Basically, group one and two would be cultures who scored below average and group three and four would be those plants who scored above average.
The results show that for group four, the plants with the higher culture scores, fifty percent of the plants had zero lost time accident cases and zero recordables, while group one had one single plant that had zero LTAs and zero recordables. When you compare the culture scores to the recordable rate by plant, the results show a correlation of -.4082. (sig. 0.0007). This means as culture scores for the plant rise, the recordable rate falls.
Figure One: Culture Scores to Recordable Rate
When we applied both the direct and indirect costs for both the LTAs and the recordables for each plant and then calculate a total cost for each plant, the correlation of the total costs to culture was -.3693 (sig. 0.0003). Once again, the plants with the higher culture scores incur fewer costs. The figure below shows the plants in the group with a ranking of 75th percentile or greater was more than a third of the cost per plant of the groups that were below the 50th percentile.
Figure Two: Culture Rankings of Plants by Percentile
What this research points out is the numerical value of culture and the impact it has on safety and ultimately costs, which comes straight off the bottom line. It is understood to develop a safe environment an organization needs to create a "safety culture." Except, most of the organizations in the study of eighty-five had fantastic safety programs in place, yet there were still accidents in some and not others. Therefore, it can be argued, the issues are much deeper than a safety culture, but just simply cultural. So, how do you measure culture?
The culture of an organization can be measured in multiple ways. The assessment used in this study was the Denison Organizational Culture Survey, a valid and reliable instrument used by thousands of companies around the world. It is a great way to get a good snapshot of an organization's culture and provides some great actionable steps for moving forward. Usually, the organization will need to go deeper with some focus groups and management interviews to compliment the Denison survey. But, upon completion, the organization will have a pretty comprehensive view of their culture and a good idea of the strengths and weaknesses they, as an organization, bring to the table.
From that point, it is all up to the leadership. They, in the end, decide the fate of the cultural process. They have to lead the change. This isn't just at the executive level, but the plant level as well. When analyzing the open-ended comments of many of these plants, the big differences coming to the forefront are how the leadership engages the employees in the safety process. They also act as role models. They don't tell employees safety is "number one," then set it aside when production numbers need to be met. The safety of the plant becomes a core value. As one employee of the higher performing plants put it, "Safety is not a priority, it is a core value. Priorities change, values do not."
What this describes is a culture of consistency -- not only in safety, but where management is open and honest with employees. Management practices what they preach. If you have an organization where a large communication gap exists between management and the workforce, you probably have an organization with a culture which is less than par. Don't tolerate it. It costs you money.
Here is an example, let's assume there is a manufacturing plant with $20 million in annual revenues. They operate on a profit margin of five percent. Now, assume during the year there are six lost time accident cases and 30 recordable cases. OSHA calculates the direct and indirect costs of lost time accident cases as $28,000 per case and $7000 per recordable case. Therefore, the total cost for the lost time accident cases would be ($28,000 * 6) $168,000 and the cost of recordable cases would be ($7000 * 30) $210,000. The total cost to the plant would be $378,000.
For a plant with $20 million in sales with a profit margin of 5%, the profit for the plant at the end of the year would be $1 million. However, the $378,000 comes out of the bottom line. Therefore, the cost of the accidents throughout the plant represents 38% of profits. Furthermore, to replace those lost profits, the plant would need to generate $7,560,000 more in annual revenue to replace those profits -- or just grow by 35%.
Before any issues around safety can be resolved, you really need to examine the culture first. But first, establish a baseline. By assessing the culture, the organization can identify not only the areas of weakness, but the strengths that need to be preserved as well. The cost of a good cultural assessment (including consulting) could range from $10,000 to $25,000 for a plant with 300 employees and $20 million in revenues. The cost of six lost time accident cases and 30 recordable cases will cost an organization $378,000. Reducing the LTAs by one case would pay for the assessment. Reducing the safety record in half would eliminate $189,000 in costs.
Culture is an issue that has a direct effect not only on safety, but many other measures as well (see Organizational Culture Increase Organizational Value). Recent studies show organizational culture impacts areas such as sales growth, customer satisfaction, ROA and many other measures. In a business environment where every competitive advantage needs to be utilized, the organizations that look to their human capital to gain the advantage -- based on the research -- get the edge.
Jay Richards is a partner with PerformancePLUS, a provider of organizational culture and leadership development solutions.