$37 Billion: Cost of “Employee Misunderstanding” To Businesses

by Michael Moberly

In the increasingly knowledge-based global economy, wherein 65+% of most company’s value, sources of revenue, and ‘building blocks’ for growth, sustainability, and profitability include, among other intangibles, intellectual, relationship, and structural capital, it stands to reason that sound asset protection strategies would include systematic on-boarding and proper training of the established workforce.

Unfortunately flying under risk management radar is an IDC study commissioned by Cognisco that shows UK and US employers are losing an estimated $37 billion annually from their EBITDA merely as a result of employee misunderstanding, meaning actions or errors of omission by employees who have either misunderstood or misinterpreted (or, were merely misinformed about) company policies, business processes, job functions or a combination of the three. (Bear in mind, employee misunderstanding is a very different proposition from intentional disregard for rules or merely a mistake.) 

IDC’s survey of 400 US and UK corporations estimates that the cost of employee misunderstanding in a 100k-employee company averages $62 million annually.

Of the industries covered in IDC research, the financial services sector, experienced the highest losses, e.g., loss of business due to unplanned downtime was the single largest area of loss attributed to employee misunderstanding.  However, the cost (i.e., value erosion) of intangible assets like reputation, image, goodwill and customer trust, etc., could produce even greater losses.

Clearly, employee misunderstanding can have significant adverse and enterprise-wide effects.  But, interestingly, according to IDC, a relatively low percentage of companies have taken affirmative steps to mitigate employee misunderstanding, most assuredly elevating company risk (exposure). A valuator’s thorough due diligence would include  a review of a company’s investment in effective and comprehensive (employee) on-boarding and training programs to create better employee understanding of company policies, procedures, and practices.