The term “diversity” is becoming so widespread that its meaning is becoming increasingly unclear. This lack of clarity has become damaging because without understanding why and how diversity is beneficial, companies will continue to invest significant resources without moving the needle.
We describe here a new framework to help leaders understand what diversity is about, why it can be a powerful competitive advantage, and how to think about diversity in a way that will maximize the probability of success.
To begin, let’s define diversity as the blend of characteristics of a company’s talent pool along several dimensions: race, gender, creed, age, nationality, attitude, experience, etc. We also want to emphasize that every company is different, not just in the blend of its talent, but in how it operates and what it considers to be “success.” From this vantage point, the goal should not be to find “the right numbers,” but rather to figure out the team composition that will yield the best results for the company. In other words, what is the link between diversity and performance?
To define this link, we propose a new framework that defines success in terms of four “pillars of performance” representing a company’s ability to:
- Attract talent
- Retain talent
- Operate efficiently
- Gain market appeal
Virtually all business performance metrics can be mapped to, or derived from, combinations of these four pillars. For example, revenues are primarily due to market appeal, while profitability depends heavily on retention and operational efficiency. The benefit of using this framework is that it is easier to understand the impact of diversity on each of the four pillars.
- Talent attraction
Whether it’s HR recruiters knowing where to reach minority candidates, or employees referring candidates from their personal network, a diverse team gives you access to a more diverse candidate pool, which means greater selection. Diversity in your existing team also has some secondary effects. First, if you add 20 minority résumés to your pool, but your review is done by a homogenous team, the expanded pool won’t be of much use. Second, if potential candidates see that your leadership team is homogeneous, they may simply decline to apply. The bottom line here is that diversity of the entire company impacts you ability to attract talent.
Further, there are indirect effects: if qualified candidates find out that people like them are leaving after a few years, they may be less inclined to apply. Hence, to the extent that diversity impacts retention, it will also impact recruiting.
- Talent retention
Many companies have found that simply increasing diversity at the entry level is not sufficient, if the same “diverse” people are then more likely to leave. Diversity influences retention in several ways. First, new employees who see that their managers and leaders look nothing like them are less likely to stay. Second, if new employees are subjected to prejudice by their colleagues, they will be more likely to leave. Third, if the leadership is homogeneous, the company may neglect to offer basic benefits that matter to “diverse” people – such as an all-male leadership team forgetting to offer private rooms for lactating mothers.
Here, too, there are indirect effects. For example: concerns about retention are moot if the company is not able to attract diverse talent; and if teams do not operate efficiently, individuals may become frustrated and leave. Hence, to the extent that diversity impacts recruitment or operational efficiency, the impact on talent retention will be amplified.
- Operational efficiency
The efficiency of a team generally depends on the success of each member and synergies among team members. If one team member is stressed because the environment is not conducive to her productivity, or if a member feels that his contributions are not appreciated because of his age, the team’s performance will suffer. Hence a more inclusive company is more likely to operate more efficiently. A more difficult question is whether team diversity directly impacts team performance, because there are documented examples where team diversity is better, but other examples where it is worse. This means that managers must understand when and how to leverage diversity at the team level to boost performance. A company whose leadership is homogeneous is less likely to know how to deal with diverse teams and to use them wisely.
In terms of indirect effects, operational efficiency is impacted by poor retention, which forces people to take on more responsibilities and to spend time hiring and onboarding new employees. It is also impacted by sales (market appeal) because lower revenues can also lead to staff cuts.
- Market appeal
Perhaps the most oft-cited reason for diversity is that a company’s talent should match its customer base. This, however, can be misleading for several reasons. First, it is only relevant for roles that have a direct impact on the customers, such as product design, sales, and support. But in most companies, there are many roles that have no impact on market appeal. Furthermore, many companies cater to a narrow segment of the population. Should these companies have homogenous teams?
Again, it is up to the company’s leadership to understand the nuances of its unique ecosystem, and a more diverse leadership is more likely to be able to make the most of it, leveraging diversity where it’s needed while ensuring that the entire company is inclusive even if certain parts are less diverse than others. And it should be clear that recruitment, retention and operational efficiency all ultimately impact market appeal.
Conclusions: the complexity of diversity
By thinking about the different ways in which diversity impacts a company, it becomes clear why so many attempts to increase diversity are failing, and why there is no “silver bullet”: companies are complex ecosystems whose actions have ramifications across all four pillars, and the same actions at different companies will yield different outcomes.
Using the “Four Pillars of Performance” framework makes it clear that, especially at the management and executive levels, diversity creates positive feedback loops that give it a multiplicative effect. Conversely, failing to embrace diversity, especially at the upper levels, will result in negative feedback loops that can impair a company’s performance across all four pillars.