The idea of leverage, as I’m using it, has to do with being able to significantly extend your personal ability (output) through others.
That’s what leveraging human capital is all about.
If you are a supervisor and have two people working for you, but they basically are producing as much as you could on your own, you aren’t leveraged and not a very good leader (this happens). If you are Ghandi and can get millions of people aligned in a peaceful revolution, you are leveraged. Imagine how successful he would have been if he had to apply all of the pressure and convince the British leaders all by himself.
I initially learned this from my own experience combined with reading about great leaders. Earlier in my career, I tried to do everything myself. I had a team, but was heavily involved in the day to day activity of every project. I found that I wasn’t having much impact. That’s because my impact became limited by the number of hours a day I had to spend on projects.
Then I started to really focus on investing in and growing my team (personally, not in number). I gave people more responsibility and freedom and I tried to provide more coaching and vision instead of a lot of the day to day work. My impact took off.
I was able to start getting my vision implemented because I was able to get pieces of it developed in parallel rather than serially. As I read abort other leaders, I started realizing that was the pattern. What makes a leader a leader is his or her ability to leverage his or her vision/ideas/actions.
A brief primer on leverage in physics, finance, and pharmacies (for those who are interested in more fully understanding the concept of leverage).
Think back to your high school physics class and the definition of a lever.
Suppose that you are trying to lift one end of a really heavy box but are unable to do so. You might put a rock in front of the box, wedge a 2 x 4 under the box and over the rock and push down. That’s leverage in the physical sense. What’s happened is that the rock and 2 x 4 have allowed you to actually apply more force to the box than your physical capability.
In a financial sense when you invest “on margin” you are leveraging your money. Buying on margin means paying a percentage of the total price for a stock. Essentially, you are responsible for paying the full price of the stock, at some point (and guarantee that via some type of collateral), but the broker lets you buy it at a discounted rate up front. Then if the stock appreciates in value you use the proceeds to pay off the original purchase price but now own the stocks at a higher value. For example:
Suppose you want to buy 10 shares of BillyBob’s House of Barbecue. The current share price is $100 so the overall cost would be $1000.
Unfortunately, you only have $1000 to your name and don’t want to tie all of it up in this stock.
Your broker lets you buy the shares “on margin” for $10 each for a total cost of $100 ($10 x 10 shares).
You now own $1000 worth of stock for which you paid $100. You also have $900 left to invest elsewhere.
Now suppose that you bought other stocks on margin at the same price with the other $900. That’s leveraging your money. You are getting the benefit of having $10,000 worth of investment for just $1,000. (You aren’t totally out of the woods, you still owe the $9,000 – but you’ve been able to invest as if you’ve had all $10,000.
OK, now for the real power. Imagine that at some point the price of the stocks increases in value by 25%. You now own 100 shares at $125 worth $12,500.
So, you decide to pay back the initial purchase price. You sell off $9,000 worth of stock, pay your margin, and have $3500 left over – a 250% return on your investment. Not bad! Getting a 250% return on a traditional investment of $1,000 is pretty tough.
OK, just for completeness here is the downside. Suppose the market crashes and that instead of being worth $100 per share, each stock is worth $50 per share. Your portfolio is worth $5000 (100 x $50). As often happens in a crash, your broker is losing money so they call your margin (make you pay the balance). You owe them $9,000 but only have a total portfolio of $5000. You wind up $4000 in debt for a return on your investment of -500%. This is why your hear stories of people jumping from buildings when the stock market crashes.
This is oversimplified but you get the point.
Now, let’s shift from physics and money to people. Leverage relative to people is getting more output through others than you can get on your own.
A non leadership example would be the ways that pharmacies work now. In the old days if one pharmacist could fill 10 prescriptions a day and your pharmacy sold 20 prescriptions a day you’d hire two pharmacists. This worked pretty well when there were small, mom and pop pharmacies that didn’t have a lot of prescriptions. Once the mega pharmacies started coming of age, they quickly realized that a linear payroll cost tied to prescriptions was going to put them out of business. So, they invented the pharmacy tech. The pharm tech performs about a lot of the transactions actions that the pharmacist used to perform – takes order, enters order, deals with insurance issues, fills order, delivers order to patient, rings up order. The pharmacist typically only checks the prescription for interaction issues (although a lot of pharmacy systems do that automatically), confirms that the stuff that the tech put in the bottle is actually the stuff that should be in the bottle, answers patient questions about the medication, etc. They probably also handle the most complex prescriptions.
So, suppose the pharmacist now does 25% of the process. One pharmacist and four techs can have the output of four pharmacists. Given that a pharmacist’s salary is considerably higher than that of a tech, you can quickly see where the “leverage” comes in. You can get the output of four pharmacists for considerably less cost.
Of course, just like with the stock market crash, poor leverage with people can also be disastrous. Unless those people are able, focused, and motivated, their output could drop and suddenly you are the owner of a very large, very costly hole in the organization.