Transformation with a capital T
Companies
must be prepared to tear themselves away from routine thinking and behavior.
Imagine. You
lead a large basic-resources business. For the past decade, the global
commodities supercycle has fueled volume growth and higher prices, shaping your
company’s processes and culture and defining its outlook. Most of the top team
cannot remember a time when the business priorities were different. Then one
day it dawns on you that the party is over.
Or imagine again. You run a retail bank
with a solid strategy, a strong brand, a well-positioned branch network, and a
loyal customer base. But a growing and fast-moving ecosystem of fintech
players—microloan sites, peer-to-peer lenders, algorithm-based financial
advisers—is starting to nibble at your franchise. The board feels anxious about
what no longer seems to be a marginal threat. It worries that management has
grown complacent.
In industry after industry, scenarios that
once appeared improbable are becoming all too real, prompting boards and CEOs
of flagging (or perhaps merely drifting) businesses to embrace the
T-word: transformation.
Transformation is perhaps the most
overused term in business. Often, companies apply it loosely—too loosely—to any
form of change, however minor or routine. There are organizational
transformations (otherwise known as org redesigns), when businesses redraw
organizational roles and accountabilities. Strategic transformations imply a
change in the business model. The term transformation is also increasingly used
for a digital reinvention: companies fundamentally reworking the way they’re
wired and, in particular, how they go to market.
What we’re focused on here—and what
businesses like the previously mentioned bank and basic-resource companies
need—is something different: a transformation with a capital T,
which we define as an intense, organization-wide program to enhance performance
(an earnings improvement of 25 percent or more, for example) and to
boost organizational health. When such transformations succeed, they radically
improve the important business drivers, such as topline growth, capital
productivity, cost efficiency, operational effectiveness, customer
satisfaction, and sales excellence. Because such transformations instill the
importance of internal alignment around a common vision and strategy, increase
the capacity for renewal, and develop superior execution skills, they enable
companies to go on improving their results in sustainable ways year after year.
These sorts of transformations may well involve exploiting new digital
opportunities or accompany a strategic rethink. But in essence, they are
largely about delivering the full potential of what’s already there.
The reported failure rate of large-scale
change programs has hovered around 70 percent over many years. In 2010,
conscious of the special challenges and disappointed expectations of many
businesses embarking on transformations, McKinsey set up a group to focus
exclusively on this sort of effort. In six years, our Recovery &
Transformation Services (RTS) unit has worked with more than 100 companies,
covering almost every geography and industry around the world. These cases—both
the successes and the efforts that fell short—helped us distill a set of
empirical insights about improving the odds of success. Combined with the right
strategic choices, a transformation can turn a mediocre (or good) business into
a world-class one.
Why
transformations fail
Transformations as we define them take up
a surprisingly large share of a leadership’s and an organization’s time and
attention. They require enormous energy to realize the necessary degree of
change. Herein lie the seeds of disappointment. Our most fundamental lesson
from the past half-dozen years is that average companies rarely have the
combination of skills, mind-sets, and ongoing commitment needed to pull off a
large-scale transformation.
It’s true that across the economy as a
whole, “creative destruction” has been a constant, since at least 1942, when
Joseph Schumpeter coined the term. But for individual organizations and their
leaders, disruption is episodic and sufficiently infrequent that most CEOs and
top-management teams are more accomplished at running businesses in stable environments
than in changing ones. Odds are that their training and practical experience
predominantly take place in times when extensive, deep-rooted, and rapid
changes aren’t necessary. For many organizations, this relatively placid
experience leads to a “steady state” of stable structures, regular budgeting,
incremental targets, quarterly reviews, and modest reward systems. All that
makes leaders poorly prepared for the much faster-paced, more bruising work of
a transformation. Intensive exposure to such efforts has taught us that many
executives struggle to change gears and can be reluctant to lead rather than
delegate when they face external disruption, successive quarters of flagging
performance, or just an opportunity to up a company’s game.
Executives embarking on a transformation can resemble career
commercial air pilots thrust into the cockpit of a fighter jet. They are still
flying a plane, but they have been trained to prioritize safety, stability, and
efficiency and therefore lack the tools and pattern-recognition experience to
respond appropriately to the demands of combat. Yet because they are still
behind the controls, they do not recognize the different threats and
requirements the new situation presents. One manufacturing executive whose
company learned that lesson the hard way told us, “I just put my head down and
worked harder. But while this had got us out of tight spots in the past, extra
effort, on its own, was not enough this time.”
Tilting
the odds toward success
The most important starting point of a
transformation, and the best predictor of success, is a CEO who recognizes that
only a new approach will dramatically improve the company’s performance. No
matter how powerful the aspirations, conviction, and sheer determination of the
CEO, though, our experience suggests that companies must also get five other
important dimensions right if they are to overcome organizational inertia, shed
deeply ingrained steady-state habits, and create a new long-term upward
momentum. They must identify the company’s full potential; set a new pace
through a transformation office (TO) that is empowered to make decisions;
reinforce the executive team with a chief transformation officer (CTO); change
employee and managerial mind-sets that are holding the organization back; and
embed a new culture of execution throughout the business to sustain the
transformation. The last is in some ways the most difficult task of all.
Stretch
for the full potential
Targets in most corporations emerge from
negotiations. Leaders and line managers go back and forth: the former
invariably push for more, while the latter point out all the reasons why the
proposed targets are unachievable. Inevitably, the same dynamic applies during
transformation efforts, and this leads to compromises and incremental changes
rather than radical improvements. When managers at one company in a highly
competitive, asset-intense industry were shown strong external evidence that
they could add £250 million in revenue above what they themselves had
identified, for example, they immediately talked down the proposed targets. For
them, targets meant accountability—and, when missed, adverse consequences for
their own compensation. Their default reaction was “let’s underpromise and
overdeliver.”
To counter this natural
tendency, CEOs should demand a clear analysis of the company’s full
value-creation potential: specific revenue and cost goals backed up by well-grounded facts. We have found it
helpful for the CEO and top team to assume the mind-set, independence, and tool
kit of an activist investor or private-equity acquirer. To do so, they must
step outside the self-imposed constraints and define what’s truly achievable.
The message: it’s time to take a single self-confident leap rather than a
series of incremental steps that don’t lead very far. In our experience,
targets that are two to three times a company’s initial estimates of its
potential are routinely achievable—not the exception.
Change
the cadence
Experience has taught us that it’s
essential to create a hub to oversee the transformation and to drive a cadence
markedly different from the normal day-to-day one. We call this hub the
transformation office.
What makes a TO work? One company with a
program to boost EBITDA1by
more than $1 billion set up an unusual but highly effective TO. For a start, it
was located in a circular room that had no chairs—only standing room. Around
the wall was what came to be known, throughout the business, as “the snake”: a
weekly tracker that marked progress toward the goal. By the end of the process,
the snake had eaten its own tail as the company materially exceeded its
financial target.
Each Tuesday, at the weekly TO meeting,
work-stream leaders and their teams reviewed progress on the tasks they had
committed themselves (the previous week) to complete and made measurable
commitments for the next week in front of their peers. They used only
handwritten whiteboard notes—no PowerPoint presentations—and had just 15
minutes apiece to make their points. Owners of individual initiatives within
each work stream reviewed their specific initiatives on a rotating basis, so
third- or fourth-level managers met the top leaders, further increasing
ownership and accountability. Even the divisional CEO made a point of attending
these TO meetings each time he visited the business, an experience that in
hindsight convinced him that the TO process was more crucial than anything else
to shifting the company’s culture.
For senior leaders, distraction is the
constant enemy. Most prefer talking about new customers, M&A opportunities,
or fresh strategic choices—hence the temptation at the top to delegate
responsibility to a steering committee or an old-style program-management
office charged with providing periodic updates. When top management’s attention
is diverted elsewhere, line managers will emulate that behavior when they
choose their own priorities.
Given these distractions, many initiatives
move too slowly. Parkinson’s law states that work expands to fill the time
available, and business managers aren’t immune: given a month to complete a
project requiring a week’s worth of effort, they will generally start working
on it a week before the deadline. In successful transformations, a week means a
week, and the transformation office constantly asks, “how can you move more
swiftly?” and “what do you need to make things happen?” This faster clock speed
is one of the most defining characteristics of successful transformations.
Collaborating with senior leaders across
the entire business, the TO must have the grit, discipline, energy, and focus
to drive forward perhaps five to eight major work streams. All of them are
further divided into perhaps hundreds (even the low thousands) of separate
initiatives, each with a specific owner and a detailed, fully costed bottom-up
plan. Above all, the TO must constantly push for decisions so that the organization
is conscious of any foot dragging when progress stalls.
Bring
on the CTO
Managing a complex enterprise-wide
transformation is a full-time executive-level job. It should be filled by
someone with the clear authority to push the organization to its full
potential, as well as the skills, experience, and even personality of a
seasoned fighter pilot, to use our earlier analogy.
The chief transformation officer’s job is
to question, push, praise, prod, cajole, and otherwise irritate an organization
that needs to think and act differently. One CEO introduced a new CTO to his
top team by saying, “Bill’s job is to make you and me feel uncomfortable. If we
aren’t feeling uncomfortable, then he’s not doing his job.” Of course, the CTO
shouldn’t take the place of the CEO, who (on the contrary) must be front and
center, continually reinforcing the idea that this is my transformation.
Many leaders of traditional
program-management offices are strong on processes but unable or unwilling to
push the CEO and top team. The right CTO can sometimes come from within the
organization. But one of the biggest mistakes we see companies making in the
early stages is to choose the CTO only from an internal slate of candidates.
The CTO must be dynamic, respected, unafraid of confrontation, and willing to
challenge corporate orthodoxies. These qualities are harder to find among
people concerned about protecting their legacy, pursuing their next role, or
tiptoeing around long-simmering internal political tensions.
What does a CTO actually do? Consider what
happened at one company mounting a billion-dollar productivity program. The new
CTO became exasperated as executives focused on individual technical problems
rather than the worsening cost and schedule slippage. Although he lacked any
background in the program’s technical aspects, he called out the facts, warning
the members of the operations team that they would lose their jobs—and the
whole project would close—unless things got back on track within the next 30
days. The conversation then shifted, resources were reallocated, and the
operations team planned and executed a new approach. Within two weeks, the
project was indeed back on track. Without the CTO’s independent perspective and
candor, none of that would have happened.
Remove
barriers, create incentives
Many companies perform under their full
potential not because of structural disadvantages but rather through a
combination of poor leadership, a deficient culture and capabilities, and
misaligned incentives. In good or even average times, when businesses can get
away with trundling along, these barriers may be manageable. But the
transformation will reach full potential only if they are addressed early and
explicitly. Common problematic mind-sets we encounter include prioritizing the
“tribe” (local unit) over the “nation” (the business as a whole), being too
proud to ask for help, and blaming the external world “because it is not under
our control.”
One public utility we know was paralyzed
because its employees were passively “waiting to be told” rather than taking
the initiative. Given its history, they had unconsciously decided that there
was no advantage in taking action, because if they did and made a mistake, the
results would make the front pages of newspapers. A bureaucratic culture had
hidden the underlying cause of paralysis. To make progress, the company had to
counter this very real and well-founded
fear.
McKinsey’s influence model, one proven tool for helping
to change such mind-sets, emphasizes telling a compelling change story, role
modeling by the senior team, building reinforcement mechanisms, and providing
employees with the skills to change. While all four of these interventions are
important in a transformation, companies must address the change story and
reinforcement mechanisms (particularly incentives) at the outset.
An engaging change story. Most companies
underestimate the importance of communicating the “why” of a transformation;
too often, they assume that a letter from the CEO and a corporate slide pack
will secure organizational engagement. But it’s not enough to say “we aren’t
making our budget plan” or “we must be more competitive.” Engagement with
employees and managers needs to have a context, a vision, and a call to action
that will resonate with each person individually. This kind of personalization
is what motivates a workforce.
At one agribusiness, for example, someone
not known for speaking out stood up at the launch of its transformation program
and talked about growing up on a family farm, suffering the consequences of
worsening market conditions, and observing his father’s struggle as he had to
postpone retirement. The son’s vision was to transform the company’s
performance out of a sense of obligation to those who had come before him and a
desire to be a strong partner to farmers. The other workers rallied round his
story much more than the financially based argument from the CEO.
Incentives. Incentives are
especially important in changing behavior. In our experience, traditional
incentive plans, with multiple variables and weightings—say, six to ten
objectives with average weights of 10 to 15 percent each—are too complicated.
In a transformation, the incentive plan should have no more than three
objectives, with an outsized payout for outsized performance; the period of
transformation, after all, is likely to be one of the most difficult and
demanding of any professional career. The usual excuses (such as “our incentive
program is already set” or “our people don’t need special incentives to give
their best”) should not deter leaders from revisiting this critical reinforcement tool.
Nonmonetary incentives are also
vital. One CEO made a point, each week, of writing a short handwritten note to
a different employee involved in the transformation effort. This cost nothing
but had an almost magical effect on morale. In another company, an employee
went far beyond normal expectations to deliver a particularly challenging
initiative. The CEO heard about this and gathered a group, including the
employee’s wife and two children, for a surprise party. Within 24 hours, the
story of this celebration had spread throughout the company.
No
going back
Transformations typically degrade rather
than visibly fail. Leaders and their employees summon up a huge initial effort;
corporate results improve, sometimes dramatically; and those involved pat
themselves on the back and declare victory. Then, slowly but surely, the
company slips back into its old ways. How many times have frontline managers
told us things like “we have undergone three transformations in the last eight
years, and each time we were back where we started 18 months later”?
The true test of a transformation,
therefore, is what happens when the TO is disbanded and life reverts to a more
normal rhythm. What’s critical is that leaders try to bottle the lessons of the
transformation as it moves along and to ingrain, within the organization, a
repeatable process to deliver better and better results long after it formally
ends. This often means, for example, applying the TO meetings’ cadence and
robust style to financial reviews, annual budget cycles, even daily performance
meetings—the basic routines of the business. It’s no good starting this effort
near the end of the program. Embedding the processes and working approaches of
the transformation into everyday activities should start much earlier to ensure
that the momentum of performance continues to accelerate after the
transformation is over.
Companies that create this sort of
momentum stand out—so much that we’ve come to view the interlocking processes,
skills, and attitudes needed to achieve it as a distinct source of power, one
we call an “execution engine.” Organizations with an effective execution engine
conspicuously continue to challenge everything, using an independent
perspective. They act like investors—all employees treat company money as if it
were their own. They ensure that accountability remains in the line, not in a
central team or external advisers. Their focus on execution remains relentless
even as results improve, and they are always seeking new ways to motivate their
employees to keep striving for more. By contrast, companies doomed to fail tend
to revert to high-level targets assigned to the line, with a minimal focus on
execution or on tapping the energy and ideas of employees. They often lose the
talented people responsible for the initial achievements to headhunters or
other internal jobs before the processes are ingrained. To avoid this, leaders
must take care to retain the enthusiasm, commitment, and focus of these key
employees until the execution engine is fully embedded.
Consider the experience of one company
that had realized a $4 billion (40 percent) bottom-line improvement over
several years. The impetus to “go back to the well” for a new round of
improvements, far from being a top-leadership initiative, came out of a series
of conversations at performance-review meetings where line leaders had become
energized about new opportunities previously considered out of reach. The
result was an additional billion dollars of savings over the next year.
Nothing about our approach to transformations is
especially novel or complex. It is not a formula reserved for
the most able people and companies, but we know from experience that it works
only for the most willing. Our key insight is that to achieve a
transformational improvement, companies need to raise their ambitions, develop
different skills, challenge existing mind-sets, and commit fully to execution.
Doing all this can produce extraordinary and sustainable
results.
By Michael Bucy, Stephen Hall, and Doug Yakola
http://www.mckinsey.com/business-functions/mckinsey-recovery-and-transformation-services/our-insights/transformation-with-a-capital-t?cid=other-eml-alt-mkq-mck-oth-1611
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