Compound interest is a powerful concept that has helped people to multiply their wealth. In this post, I want to use it as an analogy of how developing (or not developing) your managers in the engineering world directly correlates to how fast your firm can grow (or fail).
Wikipedia defines compound interest as the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest.
For example, if you invest $10,000 today into a retirement account that yields a 7% return annually, after year one, you will have $10,700 in that account. Now, in year 2, instead of starting with $10,000, you start with $10,700 and therefore, after year 2, you have $11,449 in that account. If you never add another dollar to the account, after 30 years, you will have $76,122.55 in that account, an increase of 661%. Not a bad investment.
Compound Interest in Management
At the Engineering Management Institute, we are always talking to consulting firms about investing in people leadership or project management development for their managers. Many firms proceed with our programs, but others pass on development, citing excuses such as:
- Our managers are too busy for training,
- It’s not in our budget, or
- Our managers get great mentoring from others.
Let’s say that a firm decides that one of its strategic objectives will be to focus on developing their senior managers. They spend one year providing extensive development and coaching programs. They now have a solid fleet of senior managers who can interact well with their reports, who are middle managers.
Through mentoring and observation, the middle managers are likely going to adopt many of the habits and actions of the upskilled senior managers. The designers and other technical professionals who report to the middle managers are then likely to adopt the habits and actions of the middle managers.
Do you see how this works? It is like compound interest in that the firm made one sound investment, and it multiplied over and over. Now, this isn’t to say that the middle managers or designers will never have other development needs or require training, but if they do, it will likely be less because of the strong mentoring they received from the senior managers.
The Reverse Equation Is Bad
You don’t have to be an engineer to figure out that if the reverse of the scenario I presented above happens, then things could get bad, quickly.
If a company decides not to invest in the development of their senior managers, this may result in poor management, bad people interaction, and poor project performance. Even worse, the middle managers will likely adopt some of the senior managers’ bad habits and actions, and then the design staff will adopt those same habits from the middle managers.
Then the resignation rate of the staff increases dramatically, until the senior leadership team is asking themselves, “Why are so many people leaving our company?”
Compound interest is an important concept in investing, business, and life. Please consider it in growing your career (or your company).
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” ~ Albert Einstein
We would love to hear any questions you might have or stories you might share about the monumental compound interest of good (and bad) engineering management.
Please leave your comments, feedback or questions in the section below.
To your success,
Anthony Fasano, P.E., AEC PM, F. ASCE
Engineering Management Institute
Author of Engineer Your Own Success
