Turnaround artists: How companies can
catch up to the digital revolution
Latecomers
can succeed at digitization if they take these five steps.
As Michael Busch, the CEO of German bookseller
Thalia, looked across the Atlantic at the U.S. book market in the mid-2000s, he
had a dispiriting preview of what might happen when the full effect of the
digital revolution hit his own shores. Even then, Amazon was taking significant
market share in Germany. The picture looked bleak.
Rather than wait for
the full force of the looming crisis to hit, Busch jump-started a rapid
turnaround program that significantly ratcheted up his company’s digital
capabilities. Working with a network of partners, rolling out bold innovations
at speed, and instilling a new culture that favored action over perfection,
Thalia launched a number of significant initiatives, including the rollout of
an e-reader called Tolino. By 2013, it had reversed its lagging market share to
overtake Amazon.
‘A crisis is a terrible thing to waste.’
That quote is from Paul
Romer, the Stanford economist, in 2004. He was referring to the increasing
competition America was facing from the rising education rates in other
countries. But it’s a useful way to think about digital transformations as well.
Thalia was able to use
the looming digital crisis as a catalyst to spur the organization to change
before the situation was dire. The reality is that for most large companies
today, it’s not a question of if digital will upend their
business but when (for more on how digital has affected
industries over time, see sidebar, "Turning point of the three waves of
digitization"). In fact, there is a lot more digitization still to come.
McKinsey research finds that industries, on average, are less than 40 percent digitized.
As the pace of change
and disruption increases, companies can ill afford to wait or be seduced into
thinking that they’ll have enough time to respond when a real challenge hits—or
that half measures will suffice to stave off the challenge. History shows that
this approach just hasn’t worked.
In fact, the opposite
is true. Companies that act now, deliberately and at speed, can shape their own
futures and build real value.
Having a “crisis”
mind-set—even if there isn’t a crisis at hand—can simultaneously force
important decisions, drive activity across many fronts, and radically
accelerate the pace of change. We call this a Digital Turnaround &
Transformation (DTT) approach.
To digitize effectively, act like it’s a turnaround
Crisis mode is
certainly a high-pressure environment, but it should be free from any sense of
panic. Many companies we’ve worked with, in fact, find this restructuring
process energizing and liberating.
Just as in a corporate
restructuring program, however, digital transformations require choices about
what sort of change the company should pursue. In our experience, there are
five main options, each one requiring a specific approach and set of
activities, each with its own costs and benefits.
Which option a company
selects depends on various conditions, such as marketplace dynamics, existing
capabilities, and leadership conviction. In practice, companies can choose a
number of options. For example, a company can establish a Digital Center of
Excellence to create a critical mass of digital expertise, then direct those
resources to work on transforming a set of customer journeys or processes. Or
they may buy a start-up and use that business’s talent and processes to
jump-start an organization-wide program to develop agile, crossfunctional teams
working on specific products. Whichever option or set of options a business
chooses for its digital transformation, the company needs to pursue it with the
vigor of a restructuring program.
Our experience shows
that most effective DTT programs follow a well-proven five-step process:
1. Break the compromise.
The temptation with any
transformation effort is to play it safe and make incremental changes to the
business. But incrementalism is the death of a rapid turnaround. Digital is by
its nature disruptive, so the transformation needs to be disruptive as well.
Successful programs require leaders to be bold and think big. In fact, McKinsey
research shows that digitization will take a significant bite out of revenues
for companies that stay idle, while those that are willing to disrupt
themselves through bold action can drive significant growth.
Mathias Döpfner, CEO of
the German publishing company Axel Springer, embodied this boldness in his
turnaround effort. Sensing that digital would completely disrupt the business,
he set a target of 50 percent of sales coming from digital in five years and
recast his company’s mission to become the “leading digital publisher” in the
world. Digital activities now generate more than 60 percent of Axel Springer’s
revenues and just over 70 percent of its operating profit.
That boldness plays out
in how the scope of the DTT program is defined and driven. In most
transformations, scope might start out being bold but is often watered down
during the alignment process. In a true DTT program, the entire business is in
scope. The pace of the DTT effort also reflects this bold stance by embracing a
clear bias for action over analysis. A digital-turnaround program in particular
emphasizes putting many experiments in the field on a constant basis to learn
what works rather than developing “bulletproof” plans. That applies
particularly to IT, where DTT programs focus on as many as 30 detailed KPIs.
That level of granularity is necessary to address the particular complexity in
transforming IT to enable the rest of the business to digitize. Because there
are so many experiments going on, a turnaround will have a 3–5:1
failure-to-success ratio. Maintaining momentum, therefore, means having a
sufficient number of experiments in the pipeline. Nowhere is that bias for
action more visible than in the way successful businesses make decisions.
Meetings are frequent but short (sometimes just 15 minutes) and have the
express purpose of resolving a specific issue. One CEO of a European retail
company set the goal that a decision had to be made within 30 minutes of a
meeting’s start. The mentality is that a bad decision is better than no
decision at all.
2. Bring in the digital muscle.
Rapid transformations
are complex and require specific skills. Getting moving quickly and effectively
generally requires an injection of specialized talent. In many cases, that
starts with bringing in a chief digital officer (CDO). While the CDO should have a
substantial digital skill set (e.g., cloud, cybersecurity, advanced analytics)
the crucial capability needed is around change management. In a rapid
transformation program, the CDO needs to be the primary agent and driver of
change by putting in place new performance metrics, creating a culture that
rewards different behaviors, harnessing influencers in the business to drive
the change, and role modeling new ways of working. The role also has extensive
business responsibility. Driving change is good, but it needs to result in new
revenue, and a good CDO has explicit accountability on that score. Importantly,
CDOs must have substantive budgets and decision-making rights. They generally
report to the CEO and, in some cases, also join the board. The CEO needs to
assign senior leaders to the CDO’s team who have deep functional knowledge—for
example, of transferring sensitive IT systems to the cloud, or building new
compensation structures—and experience in leading change. Their seniority is an
important point, because it greatly increases the likelihood that leaders in
the business will take their advice and guidance seriously.
There are cases when a
CDO isn’t the right answer. Sometimes the CEO or a “council” of leaders acts as
the main driver of change. In each case, though, the drivers of a
transformation take a highly visible role, set clear aspirations, and put in
place the mechanisms and capabilities to support change across the business.
3. Activate many fronts.
A significant
difference between a DTT program and more traditional transformation approaches
is in the scale of the activity. DTT efforts happen across many fronts at the
same time. McKinsey research shows that winning companies
not only invest more in digital, but invest across more dimensions of the
business.
A light-bulb company
took this kind of multifront action when it decided to switch to making LEDs.
That required building out new semiconductor technology to create the LEDs, as
well as developing a different way of selling that included more reliance on
digital tools, such as better search and comparison on a website and automated
reordering. That in turn required finding new people with the right skills and
creating a new digital department that functioned next to existing IT.
In another example,
Telefonica, a large telecoms company, decided that to accelerate its digital
transformation, it needed to set up a new IoT business. This new
business unit set up shop in its own space so it could make decisions quickly,
including signing up OEM customers and ecosystem vendor partners. They hired a
workforce of about 35 people (including vendors and support) with strong IoT,
cloud, API, and app skills. At the same time, they built a working prototype of
the IoT platform in about 100 days.
This multifront
approach may sound like a recipe for chaos, especially with the high volume of
experiments required, and that can certainly be the outcome if it’s not
effectively managed. We’ve found that it’s essential to put in place a
management tool that can track the many “minitransformations” happening across
the organization. To be useful, this tool needs to provide sufficient
transparency so that the CDO can track progress at a meaningful level of
detail. It should include tasks, people who are accountable, milestones, and
timing. This tool should also help decision makers spot where progress is
falling behind, determine what dependencies need to be addressed and when, and
make the right allocations of people and spend to keep the momentum moving forward.
4. Establish a digital control tower.
Where a
traditional digital transformation might establish a central
team to roll out needed changes, companies operating with a turnaround mind-set
create a dedicated Transformation Office or TO. Managed by the CDO, the TO has
a broad remit and significant decision-making authority. It manages traditional
change efforts, such as planning and coordinating digital initiatives,
centralizing management, and maintaining tight execution discipline. Where a TO
is really different from traditional transformation-management teams is in its
adoption of a private-equity management approach.
Experiments are
evaluated frequently. Poor performers are quickly defunded, but additional
funding is released for successful experiments that meet their milestones.
At one multinational
telco, multidisciplinary teams representing a mix of seniority and skill sets
from across the business took ownership for specific crosscutting reforms. To
keep things moving, TO teams met in daily and weekly huddles where they
reviewed progress and resolved the most pressing issues. Business leaders
committed to removing organizational blockers, such as working with legal to
streamline approvals, helping teams navigate interdependencies, and setting new
stretch goals. In this way, the TO ensured changes were managed end to end with
the full involvement of the business, increasing transparency and
accountability across all layers.
5. Make the change personal.
In a turnaround, the
need for change is clear. What’s often less clear to employees is what the
change means for them and if they’re going to like the end result. To guard
against “tissue rejection”—the legacy organization resisting the change—leaders
at a few companies have created personal “change stories.” These are short
briefs describing the change they want to happen.
A general manager, for
example, might articulate where he wants the business to be in a year and what
he thinks is needed to get there. He also writes out what he expects from his
direct reports and what they can expect from him. They then pass this down to
the next level of the organization, where people build on that story by
including more details and translating those into specific actions they’ll take
to drive the change. This relatively simple step helps to ready people for
change, and makes them more amenable to working with a troop of outside experts.
In addition, senior
leadership and managers need to actively communicate so that employees
understand what the change means for them. When backed with opportunities for
employees to play a key role in shaping the change—for instance, by being part
of an empowered, autonomous TO team charged with designing a superior customer
journey—buy-in is easier to cultivate.
Incentives need to
recognize the altered environment and reward employees accordingly, such as
with outsize payouts for outsize performance. Soft rewards also help.
Recognizing a team’s work in a visible way, such as at a company event, or
sending a personalized note from leadership can be big morale boosters.
Sustaining a transformation mind-set
After months of
exhaustive effort, a company reaches its transformation goals, celebrates the
hard-won achievement—then, bit by bit, settles back into old routines.
Competing in the digital economy, however, doesn’t allow for that kind of
complacency. Organizations must continually innovate and refine their digital
capabilities to maintain high performance. One way to spur that focus is to
reinforce intelligence gathering abilities to watch for early indicators on how
markets are moving. By discovering how digitization is altering the fundamental
economics of different industry models, executives can better isolate where
disruption is most likely to occur. They continually scan the market and invest
time in examining how digitization can reshape the competition and where future
growth will come from.
Predicting exactly how
a market will shake out is impossible, but our transformation work shows that
companies that lay the groundwork now, by investing in their analytics
capabilities and embracing work practices that support continual test-and-learn
development are more likely to spot threats, anticipate opportunities and be
quicker to innovate around them.
One way to sustain the
momentum is to make the TO mind-set the de factoway of working, applying the same crossfunctional
teaming model and performance discipline to other parts of the business. When
multidisciplinary teams are empowered to deliver on specific customer and
business goals, they have a stake in the outcome. That helps foster a culture
of innovation and personal accountability that can embed the behavioral and
process changes needed. All this takes enormous commitment and a certain amount
of humility. While most companies know that digitization will bring significant
changes to their business, many don’t realize how fast those changes can come
and how quickly they can reshape the operating landscape and value chain.
Taking an outside-in view, creating a responsive execution engine, and backing
it with the right performance discipline can help business leaders spread that
commitment across the organization, ensure fresh perspectives, and generate
more rapid returns.
By the time disruptive
shifts take hold, companies can find themselves on the back foot, scrambling to
stave off obsolescence in parts of the business and bring needed innovations to
market quickly enough. But our client work finds that an aggressive
transformation that focuses on helping companies digitize at scale and better
track how their industry is likely to be reshaped by digitization, can allow
even latecomers to rebound successfully.
By Arun Arora, Michael Becker, Markus Simon,
and Florian Wunderlich August 2017
http://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/turnaround-artists?cid=other-eml-alt-mip-mck-oth-1708&hlkid=5bde21d2ee9441c1ad93db743c4e0acc&hctky=1627601&hdpid=668998c9-7210-4ffd-b0ca-06e564a0402e
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