The Business Case for Diversity | Applied

Joe Caccavale

2

March

2021

7

min read

|

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Updated 20/05/21 with additional research.

While there is no shortage of articles and research around how diversity improves creativity, collaboration,  and customer perception, HR leaders may find it difficult to make a compelling business case for prioritising diversity and inclusion.

It’s not hard to imagine how a more diverse group of people may have more creative ideas or a deeper empathy for their customers, but this doesn’t tell us much about the impact of diversity on the bottom line.

This article will show how diversity can help ensure the overall success of a company, as well as how to create a strong business case for improving diversity within your organisation.

DISCLAIMER: Diversity should matter because it’s the right thing to do. Whilst making a business case for diversity may help get others on board with initiatives and drive home their value - financial performance should never be the only reason for improving diversity.

Whilst making business case for diversity may help get others on board with initiatives and drive home its value - financial performance should never be the only reason for improving diversity.

Industry outperformance

By gender

When we look at the impact of diversity on boards, a recent Australian study claims to be the first to do casual mapping of how gender diversity affects financial performance.

How the number of women on boards affects performance


Key takeaway: Organisations with more than one-third female boards are more likely to outperform their sector.

As you can see from the chart above, not having a gender diverse board is actually becoming more of a hindrance over time.

Companies that have no women on their board are three times more likely to be underperforming than those that have at least one-third female Boards.

Looking at management positions more broadly, McKinsey’s report found that organisations with more women in the C-Suite were more likely to experience above-average profitability and had a 27% likelihood of outperforming their peers on longer-term value creation.

It’s estimated that closing this gender gap could add $28 trillion to the value of the global economy by 2025.

By ethnicity

McKinsey researchers also looked at ethnic diversity on boards…

Diversity effects on earnings and return on equity


Key takeaway: Companies ranking in the top quartile of board diversity had 53% higher ROEs than those in the bottom quartile.

EBIT margins at the most diverse companies were also 14% higher than those of the least diverse companies.

Looking at both gender and ethnic board diversity over the past five years, we can see that one of the clear benefits of equity and diversity: better diversity leads to a better chance of outperformance.

It’s also clear that diversity is only becoming more of a deciding factor in financial performance year-on-year (you can read the full report here.)

Innovation

Innovation is often touted as being one of the many benefits of equity and diversity in a team.

But how do you quantify and measure this innovation and its impact on the bottom line?

Well, a Boston Consulting Group study looked at 1700 companies across 8 countries - researchers found that those with more diverse management teams had 19% higher revenues due to innovation.

Just under half of this revenue came from products and services launched in the past three years.

These results are especially important for tech companies and startups that depend on their ability to innovate and scale at speed.

For these companies, diversity isn’t just a ‘nice-to-have’, but an essential for financial success and growth.

Diversity impact on innovation


Key takeaway: Diverse management teams generate more revenue through innovation


How does diversity help a business become more competitive and innovative?

So, we know that diversity drives innovation and helps businesses compete more effectively, but how does this occur? The answer is in how it impacts the way teams think, act, and approach problems.

It delivers a fresh perspective and new ways of problem-solving

Research by the Harvard Business Review showed that teams can solve problems at a faster rate when they have greater cognitive diversity. Bringing people together of different generations, cultural backgrounds, and gender improves our ability to generate solutions and innovate, helping organisations to pivot faster, become more agile, and address challenges more effectively.

Simply put, the more similar a group of people are, the more similar their ideas tend to be. Diversity delivers fresher approaches that spark new ways of thinking, leading to increased performance and higher productivity.

It attracts the widest pool of talent and improves talent retention

By 2025, 75% of the global workforce will be made up of millennials.

As a result, millennials are the key demographic that organisations will be looking to attract and hire.

If we then look at attitudes towards diversity and inclusion, a 2018 Deloitte Millennial Survey found that 74% of these individuals believe their organisation is more innovative when it has a culture of inclusion.  

86% of jobseekers also say that they place a high value on diversity when looking for a job, and organisations with higher rates of diversity and inclusion report 5.4 times higher employee retention than their competitors.

So, if organisations are looking to hire (and retain) millennial talent, they must take diversity into account.

Just take a look at the results of this 2016 survey:

Diversity and attracting talent (survey)


Key takeaway: 47% of millennials are actively looking for diversity and inclusion when considering a role.

How do diversity and inclusion save money by reducing staff turnover?

It reduces and redirects hiring costs

The reality is that the costs of hiring and onboarding are often exceptionally high. Although there are variations between sectors, the average cost is around £3,000. This includes external and internal costs, from job advertising expenses and background checks to pre-hire assessments, administrative paperwork, and referral rewards. It also takes around 27.5 days to source a new employee and as much as 8 months for that employee to settle in and get fully up to speed.

Because diverse and inclusive organisations tend to have a lower rate of turnover, the cost of hiring new employees is limited to hires due to growth and expansion and minimised in terms of replacing existing employees.

It means accessing a larger talent pool

It’s common sense to advertise to the widest pool of talent possible, which is where a diversity-focused approach again pays off in terms of reducing turnover by delivering the highest volume of suitable candidates.

Finding the right candidate for the job based on their skills, experience, and commitment to your organisation’s vision is easiest when your hiring policies are actively encouraging people from all backgrounds, genders, ethnicities, and employees who are the right fit for their job are more likely to stick around for longer.


How does diversity boost sales performance?

A 2009 study found that businesses with high levels of racial (60%) and gender (62%) diversity are more likely to report higher than average percentages of market share and higher than average profitability.

Better diversity means higher sales revenue


After further analysis, researchers were able to determine a positive relation between diversity and sales revenue.

Diversity accounted for roughly 6% of the variance in sales revenue.

In another Harvard Business Review study, venture capitalists – a notoriously non-diverse sector - were used as an example of the relationship between diversity and financial performance that is more powerful than the benefits of having a shared culture or background. They found that diversity in VCs leads to significant improvements in financial performance relating to profitable investments and overall returns on funds.

It creates a connection

In terms of sales specifically, it is important to remember that one of the fundamental elements behind sales success is the ability to develop a relationship with your market. And if your market is diverse, then having a diverse sales team is key to building this affinity, as seen in this Deloitte Review.

In today’s world where consumer awareness is higher than ever, the ability to understand and connect with your market means success, and that means accurately reflecting who your customers are and what they stand for.

It creates competition and engagement

A diverse sales team is also more likely to perform more competitively, with Gartner research showing that 62% of organisations with sales teams made up of 45% or more women showed higher-than-average profitability.

In environments where diversity and inclusion are supported, you not only have access to a wider pool of talent when looking for new hires, you’re also creating a space where these employees feel welcome and empowered by a shared purpose and values. This sense of belonging creates an engine for competitive productivity – an environment where 73% of employees feel they deliver their best work. A highly engaged sales team will deliver their best performance, measurably impacting your bottom line.

Key takeaway: Higher levels of diversity means higher sales revenue
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