Successful Transformation: Is there such a thing?

Episode #189 Successful Transformation: Is there such a thing?

The term transformation can mean a lot of different things. Some Chief Executives and senior leaders use the term for any change they make to the organization that isn’t just business as usual. This can be anything from a new IT system or a major cost-cutting exercise, right through to a complete change in strategic direction. Transformation implies a significant change – which many probably aren’t. But it sounds so much better in the boardroom and investor briefings than just calling it a cost out exercise, a program of work or an initiative. However you define it and whatever you want to call it, the unfortunate truth is that your transformation is unlikely to succeed. A research report recently released by McKinsey suggests that most transformations fail to deliver anywhere near the benefits that are envisaged at the outset.

Now, I realize that many of you aren’t in a position to influence how a transformation program is structured and executed because of the level you are at in your current organization. You simply don’t have enough control over the work that’s foisted onto you from above. So I’m bearing this in mind as we go through the next 20 minutes or so. But whether you are the CEO calling the shots by making critical decisions on transformation scope, or someone who leads a team further down the organizational hierarchy, there are things you can do to increase the likelihood that your next transformation is a success. Today I will:

• Start with a summary of what the latest research tells us

• Talk about some of my experiences with corporate transformations of different types

• Finish with some suggestions for making your next transformation deliver a greater percentage of the available value.

So let’s get into it.

McKinsey published a study in December of 2021, summarizing the outcomes of their most recent research into organizational transformations. It’s a standalone study, but as a reasonableness test, the authors quote results from John Kotter, the father of change management. Kotter’s view is that 70% of change needed in organizations fails to be delivered. This is pretty consistent with McKinsey’s recent report, so it calibrates fairly well. McKinsey surveyed over 1000 respondents across different industries, geographical regions, company sizes, functional areas, and so forth. They’ve gathered a pretty good mix of views. Now, bear in mind, McKinsey is the Rolls Royce of the consulting industry, along with a small handful of other consulting brands that are the Bentleys, Ferraris and Maseratis. For this reason, they aren’t cheap – which tells you that the respondents will generally be from larger businesses with the resources, and the size of opportunity, to warrant McKinsey’s involvement.

Even though these numbers paint a fairly dire picture of transformation failure, you can expect the truth to be even worse. Remember, the people who are the decision makers and architects of these programs will probably feel more positive in retrospect than they probably should about the outcomes. They’re likely to overstate the benefits and to understate the opportunity costs that these programs delivered.

KEY FINDINGS IN ORGANIZATIONAL TRANSFORMATIONS

Having said all of that, here are some of the key conclusions that the report draws. Now, the first finding’s pretty interesting:

Of 24 transformation actions specified in the survey that could be taken, the companies that took a greater number of actions ultimately delivered more value 

These 24 key actions were undertaken across three main phases: goal setting, design and implementation. They include things like project management; assignment of roles; alignment of incentives; implementation; processes; systems; how well things were embedded into business as usual; and how well Executives role modeled the behaviors they wanted.

Now, there was a massive difference in outcomes here. For the majority of transformations, those that didn’t undertake all 24 actions, the average benefit capture was a tick over 30% – that’s astoundingly low. But for those that undertook all 24 actions, the success rate jumped to 78%.

Now, I had to think about this. I really dug into it a little because I’m a huge believer in the principle of simplicity and focus – understand what things drive the greatest value and only do those things. Less is best. If you try to do everything, it will all be delivered half-assed and the value leakage will be enormous. You’ll burn people out with unnecessary work that they can’t see the point of. Now, I think this is still absolutely true, and the findings of the research don’t indicate anything to the contrary. This is more about the scope of the individual initiative.

Think of it like we are entering a baking contest. You don’t want to have to bake five cakes – it’s time consuming, and it’s prone to error. You want to bake your strawberry shortcake. The one that everyone raves about and you know, is your best product. So you focus on that, but guess what? If you want the cake to be awesome, you can’t leave out any ingredients. So try not putting in eggs or butter or flour, the cake won’t be near what it should be – and may even be a disaster. Well, think of McKinsey’s 24 change actions as the ingredients in the strawberry shortcake. Just bake one cake – that’s your simplicity and focus – but make sure all the ingredients are spot on. In fact, the punchline of the report says, “When a company frees up its bandwidth from other initiatives and focuses its resources and energy solely on a transformation, then it’s possible to take a truly holistic approach that success requires.”

You need to undertake comprehensive fact-based analysis of the business to work out what the opportunities are for improvement 

Now we need to be careful here because there is attention. Transformation programs can cost a lot of money – sometimes a real lot of money. So it can be a natural tendency to overstate the size of the prize. Be realistic about the potential benefits that might be recovered and their ease of recovery. For many transformation objectives, if you say it fast enough, it sounds easy – but then you actually get into the implementation phase, only to find that it’s near impossible to execute on the plan. If you set ambitious, but realistic targets, it’s much more likely to be successful. There needs to be an overall financial target, and I’m going to give you some suggestions for how to do this shortly.

Adapt goals for employees at all levels

I speak a lot about the need to connect people to the overall objectives of the organization. In transformations, this is especially important:

• What do we want to be different?

• Why does it need to be different?

• How does the transformation make it different?

• Why are we doing it now?

• What’s the catalyst and what do we need from you?

If people can see where they fit in, if they can understand the part they play and the impact they can have, they’re much more likely to give you their discretionary effort. On top of this, decision making at lower levels is likely to be more effective because they know what they’re trying to achieve rather than just working on isolated tasks.

This is a challenge for leaders at every single level. Many leaders don’t understand the objectives well enough – but instead of asking questions to seek clarity from above, they muddle it along, hoping to deliver the things on their task lists. Not understanding the overall context means that it’s virtually impossible to communicate the requirements effectively to your people.

Allocate the highest performers to the highest value initiatives

It sounds like a no-brainer, right? But I’ll tell you a story shortly about a time in my career when that didn’t happen, and I’ll tell you why. You should always have your best people doing the work that returns the biggest dividends in whatever value category you’re looking at: financial, customer, brand value, compliance – it doesn’t matter. In transformation, this is especially important. Not only are you trying to deliver the transformation element successfully, you’re also trying to build capability and that needs to start with your best and brightest.

REAL LIFE TRANSFORMATION EXPERIENCES

I just want to mention a couple of transformation experiences that I’ve had very quickly to give you a feel for what I’m talking about. I’ve been through dozens of these things over my career, but these are a couple that stand out.

The first was one that I saw very early on in my career. It was really nothing more than a cost-cutting exercise, but calling it transformation made it sound so much more noble – it was really a euphemism. So this company I was working for took out about 10% of its entire workforce. Then, a few months later, it took out another 5%. And then, within 12 months, it took out another couple of percent for good measure.

Now, the good news was that it reduced the cost base of the organization, but there were huge problems. The majority of the first cut was achieved through voluntary redundancies. So guess who left? It wasn’t the ones who knew that they were unemployable. It was the best people. The ones who knew that they could take a big cash payout and still get a job with a competitor company the next Monday for at least the same money. Happy days! What we were left with was more work than the company was resourced to undertake, and to make matters worse, the average quality of people had been reduced. The corporate gene pool was weakened through that transformation. That’s not something you want to have as an outcome. So don’t fall into this trap. Sometimes the market will reward you when costs are reduced, but they really have the desired result in the long term.

The other ramification here was that with multiple cuts, everyone was waiting for the ax to fall again. They were sleeping with one eye open. It’s incredibly disruptive and distracting to your workforce, the people who are left. So if you’re going to do this measure twice, cut once. If it’s unavoidable, you get it out of the way, and then you let everyone in the organization know that the cuts are over so they can get back to business. The minute you break this rule, your people completely lose confidence in you.

Now, the other transformation I wanted to mention quickly was a capital productivity initiative that I was the lead Executive for at Aurizon. This initiative created huge value for the organization. Billions of dollars were saved by eliminating or deferring capital expenditure on some of the largest projects. In an asset intensive business, capital efficiency is everything. But the mistake we made here was in the capability building. The program was led by an incredibly capable and passionate senior leader. You couldn’t ask for anyone better to drive a change of that type, but the problem was: the line Executives were reluctant to give their best people over to work on the transformation. They had other pressing priorities. So although the initial impact was incredible, the opportunity to build a really strong internal capability was somewhat lost. Sure, there was some ongoing value, but I could see the limits to where that was going to take the company in the longer term.

SIX TIPS TO MAXIMIZE TRANSFORMATION SUCCESS

According to the McKinsey research, a huge amount of value – around 45% of the total value – is lost before you even go into the implementation phase. So I want to give you a quick outline of half a dozen ideas for areas to focus on, to maximize your chance of success in your next transformation:

1. Use benchmarks liberally, not sparingly 

A benchmark, for those of you who don’t know, is a data set collected to help companies understand their performance in the context of other comparative businesses in a similar industry, location or functional discipline. It gives you a basis for understanding where you sit in relative terms. Now, benchmarks can give you a reality check on your performance and they come in all different shapes and sizes. You can benchmark:

• Your cost base as a percentage of revenue

• The productivity of your people

• The performance of your assets

• Staffing ratios – for example, what’s a healthy ratio of HR support people per number of employees?

• What’s an appropriate spend of your revenue on technology systems?

Just beware benchmarks can often vary by industry. For example, in the banking and finance sector, it wouldn’t be unusual to see over 4% of corporate revenues spent on technology. But in the mining sector, it would be really rare to see anything over 1% of revenues spent on technology. So people need to know where they sit in the scheme of things. Benchmarking is a vital tool in shifting your people’s understanding of what it’s possible.

At CS Energy, we did some productivity benchmarks on a part of the business that showed we were lagging in operational productivity. We were in the fourth quartile of the benchmarks against our peers. But the people on the ground had come to believe over the years that they were actually performing at their peak already. I even heard the words “World’s best practice” from some middle managers at the site in question. What an unbelievable mismatch between perception and reality. If I had my corporate career over again, I would benchmark much more frequently and in more areas than I ever did.

2. Set ambitious, but achievable goals 

This is really consistent with what the McKinsey study found. It’s really important to stretch your people – you’ll always get the excuses about why something can’t be done. People look at the benchmark data and they say, “But we are different.” Well, no, you’re not different. Really, you’re not. You’re no different to any other company in your industry group.

When you set the goals you want to capture both short term and long term value. So sure, move fast and get some quick wins, that builds confidence. But you need to embed the changes so the benefits of transformation don’t dissipate over time. Scope and speed are both really important, and the McKinsey study found that most of the value from transformations is captured in the first 18 months.

3. Expect leakage 

You need to be realistic about the costs of transformation. There’s almost certainly going to be an ongoing loss of productivity. Initially, it’s because of the uncertainty that people feel – they get really distracted by that. But in the longer term, it’s driven by people coming to grips with the new accountability points that can accompany a changed corporate structure.

Also be aware of the theoretical benefit that can’t be captured. For example, often a consultants report will say something like this: “There is a benefit here to be captured of $1.3 million annually.” So that gets added to the scoreboard. But when you drill down, you find this benefit has been calculated based upon a time saving of 20 minutes per day, for all of your frontline workers. It’s impossible to capture because that time is always sucked up into non-productive pursuits. Now, unless the leadership is really strong, and can reallocate work fluidly, benefits like this are really elusive.

4. Communicate

I can’t stress enough how important it is to communicate through the line leadership. People take their cues from the manager immediately above them. They need to know how to communicate the transformation to their people. They need to be able to interpret the context for their own teams, and they need your help with that. If you have leaders below you, make sure they understand what’s required of them and that they can communicate in a sensible and intelligent way. This is one of the biggest issues that I see stymie transformation progress.

Having just said “people need to hear from their direct manager” – you need multiple communication channels and methods. So for example, an email to all staff from the CEO, or a town hall meeting from the accountable Executive, or maybe it’s a push from the CFO and the finance team in the budgeting cycle.

5. Allocate your best resources

As I mentioned in my story of the capital productivity transformation at Aurizon, sometimes you don’t get the best resources allocated. Why not? Well, some Executives just don’t want to play ball. If they know they’re being measured – in other words, rewarded – only on their business as usual outcomes,  and the transformation is someone else’s problem, someone else’s accountability, then why would a self-interested leader give up their best people?

The only one who can resolve this is the CEO who has to be adamant and really specific about which people need to be moved where. The CEO owns organizational talent, that’s just how it needs to be. The line Executives might get weird and pissed off about it, but that’s just the way it goes. So if you believe that the transformation program is the most important thing your organization is doing, move your best resources there. If you don’t build strong internal capability during the transformation program, you will never capture the long term benefits that are available.

6. Embed the changes into your organization

Any changes that you make have to be baked into your organizational processes, your work programs, your incentive mechanisms, and your divisional budgets. Everything grows back if it doesn’t have constant attention, so you need dedicated project management people. But if extra resources are brought in for the transformation itself, they have to be removed after the implementation is done, so that you can operate in business as usual mode again. You need constant Executive scrutiny. What gets measured gets managed and what gets rewarded gets done. So make sure you measure the things that matter most.

Once again, we’ve covered a lot of ground in this episode, but we’ve only scratched the very surface of transformation. There’s so much that goes into this in terms of planning and execution that you really need to be committed to it from the top down, and everyone in the organization at every level needs to live and breathe it. But hopefully this will just give you an idea about the complexity of organizational transformation and some of the things that you can do to increase the possibility that you’ll maximize value capture.