Sustaining the momentum of a transformation
Six years ago, the executives of a North American engineering
business realized the company’s earnings momentum had stalled. Shareholders
were restive, and the board was pushing to set a new growth trajectory. The CEO
and senior colleagues responded in a logical and determined way, embarking on
what proved to be a Herculean and seemingly successful effort to transform the
business. The company’s earnings before interest, taxes, depreciation, and
amortization (EBITDA) increased by more than $100 million, and its cash
position improved by $150 million (both of these figures were higher than the
original targets). It declared victory 18 months later.
Earlier this year, the same business filed
for bankruptcy.
The story is a salutary one for any
company undertaking a major transformation. On the face of it, and thanks to
the CEO’s sheer force of will, the business had identified much of its hidden
potential. It had made many tough and painful decisions, its financial
performance was once again on an upward trajectory, and its board and
shareholders had breathed a collective sigh of relief when the program was
over.
However, its success was an illusion.
After the initial hard work, the company slowly but surely slipped back into
its old ways, siloed thinking again prevailed, and a top-down approach to
corporate culture reasserted itself. In short, those involved had not changed
the organization sufficiently to sustain and accelerate its progress in subsequent
years.
The importance of sustaining a
transformation may sound obvious—and the actions required straightforward. But
they’re not. Companies typically neglect this long-term imperative because,
understandably, they’re obsessed by the short-term gains. They underestimate
the difficulty of kicking old habits and developing a healthy new approach that
will be manifest in thousands of everyday actions rather than referenced by a
simple checklist. New skills, intense discipline, and strong personal relationships
are needed to maintain the momentum (see sidebar, “Three common pitfalls”).
The key to sustaining a transformation is
to embed what we call an “execution engine,” a replicable process that
fundamentally changes performance rhythms and decision making in the business.
It’s about raising sights beyond the strategic choices and daily initiatives to
change how the organization works.
We believe there are five broad ways to
build this engine:
1. Take
an independent perspective.
Challenging everything is exhausting, but
companies that sustain change are never satisfied with the situation today.
They continue to look for fresh facts, rather than accepting the status quo.
They guard constantly against falling back on negotiated targets that managers
will accept easily.
2.
Think like an investor (particularly, a private-equity firm).
This mind-set is not always popular inside
organizations, but adopting it is not just for the executive team. We all know
how passive employees kill the dynamism of a business. Employees in successful
companies sustain their transformation by constantly challenging colleagues,
not just getting along. They refuse to settle back into a leisurely pace of
decision making. And they pursue new sources of value.
3.
Ensure ownership in the line.
During the transformation program per se
there is an inevitable tendency for management and outside advisers to set the
targets (as happened with the North American engineering company). This should
be resisted. Businesses with large central teams that own centrally imposed
initiatives, embedded in budgets without buy-in from managers, are most at risk
of falling back into their old ways.
4.
Execute relentlessly.
It’s all too easy for companies to allow
the pace to let up once the initial improvement targets are achieved. It’s
simpler to delegate, after all. But when senior executives go back to
high-level target setting and avoid immersing themselves in the details—perhaps
on the dubious pretext that they don’t want to micromanage—the warning lights should
be starting to flash.
5.
Address underlying mind-sets.
Inspired employees make all the difference
in an organization and in our experience conspicuously outperform those
imprisoned by a traditional command-and-control culture. Managers should not
just challenge; they must instill meaning. They must recognize extra effort.
And they should not assume that employees necessarily understand why the
company has to operate in a different way in the future.
Executives that sustain a transformation
continue to bring these five disciplines to their monthly operating meetings,
to their annual budget discussions, and to their everyday management routines.
Transformation success, they realize, ultimately is not
about the scoreboard and whether the organization can deliver $100 million, or
$500 million, at the end of the formal exercise. It is whether the
transformation has ingrained a repeatable, replicable process that will drive
better and better results long after the transformation is over.
By Michael Bucy, Kevin Carmody,
Jennifer Davies, and Greg Peacocke
http://www.mckinsey.com/business-functions/mckinsey-recovery-and-transformation-services/our-insights/sustaining-the-momentum-of-a-transformation?cid=other-eml-alt-mip-mck-oth-1611
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