A new publication, “How Diverse Leadership Teams Boost Innovation,” released from The Boston Consulting Group (BCG), indicates that companies with above-average diversity on their leadership teams generate better business innovation results. According to BCG findings, management teams with above-average diversity reported earning nearly half of their revenue from innovative products and services—nearly 20 percentage points more than companies with below-average diversity on their management teams.
In addition, the findings revealed that organizations with diverse management teams report better overall financial performance. Earnings before interest and taxes (EBIT) margins for those companies are nearly 10 percentage points higher than for companies with below-average diversity on their management teams.
Aiming to gauge the level of diversity on leadership teams, BCG studied more than 1,700 companies across eight countries. Looking specifically at factors such as age, gender, career path and nationality, BCG also reviewed companies’ revenue from products and services launched in the past three years.
“Diversity offers organizations a wide range of benefits, and our analysis shows that having a more heterogeneous team can deliver measurable gains in innovation and financial performance,” said Rocío Lorenzo, a partner at BCG and coauthor of the report. “Multifaceted teams offer a robust range of perspectives, and this allows organizations to formulate strategic solutions that can help them efficiently accomplish their goals, overcome challenges, and bring new ideas to the table.”
Small steps can lead to early momentum
The study also found that implementing small changes in the makeup of the management team—just a couple of dozen people—can make a lasting impact. For a hypothetical company with 50,000 employees and 1,500 managers, BCG found that mixing in 30 people from a different industry could boost business innovation revenues by a full percentage point. Increasing the diversity of the team with 38 female managers or with 23 managers from outside the company’s home country would have the same effect.
These findings indicate that positive change does not necessarily require a major HR or change initiative. Companies can implement these strategies the next time they hire new managers and executives.
Digitization further accelerates growth
Looking at the effect of digitization on overall innovation, BCG found that companies that invest heavily in digital technology show an even stronger relationship between diversity and innovation. Those companies thus reported even higher percentages of revenue from new products and services.
“If companies want to accelerate growth, it’s essential to capitalize on digitization,” said Miki Tsusaka, a senior partner at BCG and coauthor of the report. “Our study indicates that companies that strongly invest in digital technology show the biggest benefits from diverse leadership teams. They’re able to capitalize on the wealth of new ideas those teams can generate.”
Putting the right foundation in place
In addition to building more diverse leadership teams, companies need a solid foundation. This includes maintaining fair employment practices, implementing leadership that is receptive to diversity, and fostering an open-minded culture. That said, only 40 percent of those in the study said that these factors exist at their company—indicating that more work needs to be done.
Overall, BCG’s findings provide companies with a clear prescription to become more innovative: Hire managers and leaders with diverse backgrounds, talents, educations, and viewpoints, and foster an environment where their ideas can take flight.