Mq - Corporate Transformation Under Pressure

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Voices on transformation 3 Corporate transformation under pressure

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Most companies find it hard to transform themselves in difficult circumstances. Those that use proven tactics markedly improve their chances of success.

Corporate transformation under pressure

Josep Isern, Mary C. Meaney, and Sarah Wilson

As the economic turmoil of the past year continues to intensify, more and more companies are being forced to attempt to transform their performance fundamentally. The overall global situation is in many respects unprecedented, and more companies will be cutting costs, for example, than trying to move from good to great performance. Yet present circumstances do not alter best practices for staging change.

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Voices on transformation 3 Corporate transformation under pressure

It’s relatively rare for transformation programs

Building successful transformations

to succeed; many surveys, including our own,

We surveyed executives from around the world

put the success rate at less than 40 percent.1 Our

about recent corporate transformation processes

recent research, however, underscores the fact

they had experienced. These transformations

that certain tactics promote successful outcomes.

had a wide range of objectives. Some were clearly

The most important tactics are setting clear

undertaken on the offense, such as moving

and high aspirations and targets, exercising strong

from good to great performance or expanding

leadership from the top, creating an unambigu-

geographically; others were clearly defensive,

ous structure for the transformation, and

such as reducing costs or turning around a crisis.

maintaining energy and involvement throughout

Some—for instance, merger integration and

the organization.2 Companies that used all of

preparing for privatization—didn’t fall clearly into

these tactics succeeded more than 80 percent of

either category. Slightly more than a third

the

time.3

of all respondents said that their companies had been very or extremely successful at hitting

The same research also shows that what we call

the target.

defensive transformations (those undertaken to stem trouble) have lower success rates than

1

For example, see “Organizing for successful change management: A McKinsey Global Survey,” July 2006; and “Creating organizational transformations: McKinsey Global Survey Results,” August 2008, both available on mckinseyquarterly.com. 2 See Josep Isern and Caroline Pung, “Driving radical change,” mckinseyquarterly.com, November 2007; and “Organizing for successful change management: A McKinsey Global Survey,” mckinseyquarterly.com, July 2006. 3 See “Creating organizational transformations: McKinsey Global Survey Results,” mckinseyquarterly.com, August 2008. 4 Transitional transformations—M&A, preparing for privatization, and divestitures—are all about as successful as defensive transformations. 5 These same tactics are also correlated with success in the other three types of transformations.

To compare the success rates of transformations

progressive ones (launched, for instance,

begun for clearly offensive and defensive reasons,

to boost growth or to move from good to great

we limited the sample to them and refined the

performance). This finding seems to contra-

comparison by taking into account how they were

dict the common wisdom that it is hardest to

triggered. Some were undertaken in reaction

transform a company when it lacks an acute

to external shocks, market pressure, or poor

and apparent need for change. In our experience,

financial performance; others were initiated

however, while employees are more likely

proactively. The most successful transformations

to see the need for change when a company is in

are those that are both offensive and proactive—

crisis, this advantage is outweighed by difficult

we call them “progressive”—which have a

circumstances.

47 percent success rate. Defensive transformations have a 34 percent rate of success (Exhibit 1).4

Moreover, we find that many companies under pressure do not make use of proven tactics

Two findings should encourage leaders who

for implementing change. Instead, they tend

must now mount a defensive effort: the tactics

toward secrecy and may have small groups

used in all successful transformations, regardless

of troubleshooters plan the transformation rather

of type, are nearly identical, and in defensive

than involve the whole organization and

transformations that fail, those tactics are rarely

set clear, widely communicated aspirations and

used.5 The key successful tactics that our

targets. Our research shows that companies

research highlights (Exhibit 2) can be organized

using proven change tactics when they undertake

in four well-known transformation design

defensive transformations boost their chances

themes: aspirations (well-defined stretch targets),

of success considerably.

leadership (strong CEO involvement), process (a clear structure for the transformation),

As more and more companies face pressure to

and energy (for instance, efforts to ensure

transform their performance, it is crucial

frontline ownership of change). It’s not enough

for them to understand how proven change

simply to bring these tactics to bear, of

tactics increase their chances of success

course; executing them well is the other half of

and how to avoid approaches that undermine

the battle (see sidebar, “Successful transfor-

many transformation efforts.

mations, step-by-step,” on page 12).

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Web 2009 Voices transformation Exhibit 1 of 3 Glance: Defensive transformations are less likely to succeed. Exhibit title: Defensive versus progressive

Exhibit 1

% of respondents, n = 2,994

Defensive versus progressive

Share of transformations described as extremely/very successful Progressive (offensive and proactive) Offensive Moving from good to great performance t Expanding geographically

37

t

Objective of the transformation: goals the company wishes to achieve

47

Wholly defensive (defensive and reactive) Defensive Reducing costs t Turning around a crisis situation t

34

34

Reactive External shock (eg, change in regulatory environment) t Response to market pressure or poor financial performance t

Proactive Outcome of annual strategic planning process t Bottom-up realization that benefits can be achieved t

Trigger of the transformation: impetus for transforming, what sparked the transformation Source: 2008 McKinsey global survey on performance transformation

Even more interesting, the more of these

happen at all. CEO Om Prakash Bhatt, who

tactics companies use, the likelier a successful

took over the State Bank of India in 2006 when it

conclusion, regardless of context (Exhibit 3).

was foundering, remarked that “no one ever told

Setting a well-defined stretch target is the single

executives the real state of the company,” so they

tactic most tied to success—indeed, 90 percent

did not see the need for change. By explaining

of transformations that lack such a target fail.

the truth to them, Bhatt laid a foundation for a

Each additional tactic increases the likelihood

fundamental transformation (see “Remaking

of success.

a government-owned giant: An interview with the chairman of the State Bank of India,” in this issue,

Why some companies get it wrong

to learn more about how he turned the company

It’s critical for companies starting defensive

around). That bias toward secrecy, our experience

change programs to rely on proven tactics,

at other companies indicates, may stem from

yet responses to these situations frequently

fear of failure, of confrontation with employees, or

fall short of best practice. Even though

of bad press that could make problems worse.

employees, investors, and others expect— indeed welcome—fundamental change from

Yet secrecy itself tends to compound problems,

such companies, other factors lead them in

often by ensuring that the front line isn’t involved

counterproductive directions.

or energized. One infrastructure maintenance company facing collapse, for example, chose a

Having a leader who is open about a company’s

small, select team to design a new corporate

problems is necessary for real change to

organization. Over six months, that team worked

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Voices on transformation 3 Corporate transformation under pressure

Web 2009 Voices transformation Exhibit 2 of 3 Glance: Six tactics related to four themes are most strongly correlated with success in transformations. Exhibit title: Effective tactics Exhibit 2

Effective tactics

% of respondents, n = 2,994 Transformation theme

Tactic

Aspirations

Establishing well-defined stretch targets

Yes

Assuring strong CEO involvement

Yes

Organizing a clear structure for change

Yes

Ensuring frontline ownership of change

Yes

Implementing equal mix of positive and negative messages

Yes

Leadership

Process

Energy

Did your company use this tactic?

No1

Degree to which transformation was successful, %2

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No

No

70

67 2

3 +167% 40 9

21

3 +104% 41 10

27 46

2

2

26

52

38

60

7

4 +65% 43

62

7

10

18

47 62

7

Extremely

46

48

3 9

Very

42

2

No

No

Somewhat

Not at all

27

10 5

+71% 7

6 +36%

Launching large-scale, Yes 1 46 44 9 Web 2009 collaborative planning effort No 7 60 28 5 Voices transformation +61% Exhibit 3 of 3 1 In this and other cases, denotes any response other than yes (eg, stretch targets were set but they were not well defined). Glance: Using all tactics doubled the chance of success for everyone, even those in a 2Figures may not sum to 100%, because of rounding. defensive context . Source: 2008 McKinsey global survey on performance transformation Exhibit title: Increasing the odds

Increasing the odds

Share of transformation described as extremely/very successful, % of respondents, n = 2,994

All transformations Progressive transformations (offensive and proactive) Wholly defensive transformations (defensive and reactive)

100

Success rate of transformation, %

Exhibit 3

80 Share of success reported independent of any tactics

60

Progressive 40 Wholly defensive 20

Used none

Used any 1 tactic

Used stretch targets tactic only Use of tactics

Source: 2008 McKinsey global survey on performance transformation

Used stretch targets tactic plus any 2 others

Used all 6 tactics

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in almost complete secrecy and isolation. By the

quality, operational efficiency, and commercial

end, rumors were rampant throughout the

effectiveness—that could be tracked at each post

company, and the vast majority of its employees,

office counter. He then traveled to post offices

who never felt engaged or consulted, rejected

around the country, explaining to managers and

the team’s solutions. This company was respon-

employees alike the targets and the plans to

sible for a number of serious failures of public

reach them. As for the significance of his own role,

infrastructure, most of the senior leaders were

he noted that “you have to put your face in front of

fired, and the company was taken over.

the people if you want them to follow you.”

Finally—and perhaps most important now—many

Over two years, Poste Italiane completely

companies focus so closely on responding to a

redesigned its frontline operations—for instance,

crisis in the short term that they fail to step back

improving the customer’s physical environment,

and plan their longer-term transformation in a way

revamping the computer system, and training

that would produce the best results. Instead, these

60,000 employees to meet the new service

companies tend to move from one short-term cost-

standards. The company tested specific improve-

cutting initiative to the next, without setting or

ments on the front line, and those generating

communicating a clear, stretch aspiration (for more

the greatest benefit were scaled up first, in the

on how to develop a transformation strategy, see

areas deemed most difficult to change. For all

“Organizational change in a crisis: Moving quickly

employees, this tactic highlighted the possibility

and thinking long term,” in this issue).

of a real transformation.

Getting out of trouble

Eventually, the time customers spent in lines

Some companies in defensive situations have

fell by 50 percent—an improvement resulting in

avoided these traps and found ways to use most or

part from operational efficiencies that

all of the tactics tied to successful transformations

allowed more than 15,000 employees to move

in order to achieve a radically improved position.

from the back office to the front line and in part from a 30 percent increase in transactions

Poste Italiane

per counter clerk. As a result of those changes,

In 1998, Corrado Passera became the CEO of

business hours rose by more than 12 percent at

Poste Italiane, Italy’s state-owned postal service.

no extra cost, and with 10,000 fewer staff.

The company, which hadn’t made a profit

Poste Italiane also became Italy’s third-largest

in more than half a century, was near financial

insurance provider, and revenue at postal

collapse, with a loss of €1 billion in 1998. Revenue

counters increased by 20 percent. The company

had fallen 8 percent in a single year because

made its first profit under Passera in 2001 and

of moves by local and global competitors, and the

has remained profitable ever since.6

company was under broad public pressure from consumers dissatisfied with its service.

Malaysia Airlines Idris Jala’s leadership of Malaysia Airlines offers

6

To read more on Passera’s views on transforming companies, see Giancarlo Ghislanzoni and Julie Shearn, “Leading change: An interview with the CEO of Banca Intesa,” mckinseyquarterly.com, August 2005.

Passera began by proposing, in his words, “a

an example of how strong-minded and visible

mission that is, at one level, a dream but is

CEOs can engage the staff through collaborative

also achievable. Too much of a dream, and people

planning when they set a clear structure for

will not believe in it. Too much emphasis on

change. In 2005, as Jala became CEO, the company

survival, and they will not accept the sacrifices.”

had less than four months’ cash on hand. By

He set two stretch targets: becoming one of

focusing solely on the profit-and-loss statement,

Europe’s best post offices and Italy’s largest

he created a turnaround plan setting forth

financial-services organization. Passera involved

what he called the “seemingly impossible” goals

the entire company by setting goals—for service

that could save the company.

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Voices on transformation 3 Corporate transformation under pressure

Successful transformations, step-by-step

Josep Isern and Caroline Pung

Transformations that succeed usually set clear,

makes change seem not only manageable and

stretch targets; develop a clear structure for the

realistic but also personal and exciting.

transformation; and maintain energy and involve-

Moreover, articulating exactly which functions,

ment throughout the organization. Strong and visible

geographies, and product lines will be affected

leadership is the fourth design theme—one that

reduces unnecessary anxiety in the organization.

is critical for the success of the others and for the transformation as a whole.

In our experience, there should be three to six themes—three seems to be the minimum number

Clear, stretch targets

of digestible chunks; more than six becomes

Defining a transformation to create a sustainable

unwieldy. Some themes might focus on a distinct

step change in a company’s performance and health

business area (frontline outlets for a retail bank,

unites the disparate elements of organizational

for example, or upstream production for an energy

change. It underlines, for example, the importance

company). Others might aim to capture synergies

of improving profitability, market value, and

and efficiencies across business units (say, by

returns on capital employed—all things executives

strengthening the company’s leadership, reducing

routinely think about in the context of performance.

costs, or applying lean approaches to operations).

But it also highlights the imperative of corporate

However defined, each theme should have clear

health. This metaphor, consciously taken from human

leaders and be as distinct and self-contained

health, encourages executives to think about the

as possible to avoid confusing overlaps.

organization as a system whose parts are mutually interdependent.

Maintaining energy and involvement A timetable of three to five years, typical for the

When leaders emphasize organizational health

overall aspiration of a transformation, can

and performance in the way they frame and

seem too distant for managers and employees

articulate the aspiration, they lock in the goal of

preoccupied by short-term pressures. The next

lasting, sustainable change. The idea of a step

challenge is therefore to take the overall aspiration,

change is significant as well because a successful

as well as the themes and initiatives, and translate

transformation always moves the organization

them into descriptions of what the company

onto a higher plane.

will look like at various points along the journey— the projected halfway mark, for example.

A clear structure for transformation The magnitude of the challenge can paralyze

Rearticulating goals in this way is desirable for two

companies embarking on a transformation. Where

contrasting reasons. On the one hand, the

to start? What and how to prioritize? How

midpoint is sufficiently close at hand to be described

This sidebar is an excerpt

to allocate tasks across the organization? These

in highly tangible and specific ways. Such

from Josep Isern and

problems are particularly severe at crisis-

concreteness, which isn’t characteristic of longer-

Caroline Pung, “Driving

plagued organizations fighting fires on a number

term visions, helps employees to see the

of fronts.

way forward and to feel personally accountable for

Leaders therefore need to outline clear themes

this intermediate target is just a station along the

whose objectives will collectively achieve the overall

way reinforces its status as something to be not

in McKinsey’s Madrid

aspiration. These themes should be broken down

just achieved but also surpassed. An overall goal of

office, and Caroline

into specific initiatives, and the company should make

one million new customers in three years might,

Pung is a consultant in

it clear how the initiatives will be sequenced and

for example, be broken down into progressively

the London office.

how they will relate to one another. This approach

more demanding annual targets.

radical change,” mckinseyquarterly.com, November 2007. Josep Isern is a director

specific targets. On the other hand, the fact that

13

A good transformation story is another step to

Executives, for example, typically get excited

bridge the gap between top management and the

about a big idea and dive straight into initiatives

rest of the organization. Typically using meta-

and task forces, wrongly assuming that one

phors and analogies to explain what’s at stake, the

speech from the CEO will get everyone on board.

story addresses three key aspects: the case for

But unless employees receive clear direction

change, the challenges and opportunities ahead,

and an understanding of how they themselves

and the impact of change on individuals. The

can contribute to the overall goal, their energy

story should be written by the leadership in prose,

will flag rapidly. Likewise, they will flounder if

not bullet points. Good stories also confront

they face too many conflicting transformation

the emotional angle—the need to bid farewell to

priorities. Clearly, it’s not enough to mobilize or

cherished habits and routines and to embrace a

unleash energy; it must also be channeled

different, and perhaps initially uncomfortable, future.

appropriately.

As the transformation progresses, a combination

Negative energy—cynicism and obstructive

of energy and ideas is crucial if an organization is to

behavior—must also receive attention, especially

maintain its momentum. The power of the big

early in a transformation. It can be dissipated

idea is implicit in the aspiration. Less well appreciated

in a variety of ways: for instance, by removing or

is the way each theme and the initiatives under-

converting a de-energizing person, ensuring

lying it depend on a flow of good ideas. Leaders

that visible successes emerge quickly, eliminating

should guard against common pitfalls. The first

unnecessary and irritating bureaucratic non-

is the common misapprehension that generating

sense (including low-priority, energy-sapping tasks),

ideas is an esoteric art requiring unusual levels

and emphasizing fair processes.

of personal creativity or the teachings of the latest innovation guru.

In our experience the best leaders use a range of catalysts—practical mechanisms to mobilize and

Another misapprehension is the willingness to

sustain energy—and don’t just stick with those

be satisfied with ideas that are merely good enough,

that reflect their natural biases. Some prefer formal

which cannot be energizing, because such ideas

systems and processes to engage employees in

don’t stretch an organization and its people.

initiatives. Others are inclined toward single,

Established orthodoxies must be broken and

unexpected actions, such as the appointment of

innovation encouraged, so don’t let unconventional

an “ideas champion” or the sudden dismissal

ideas fall victim to hierarchy, bureaucracy, or

of a blocker. Both approaches are needed to ensure

silos (or all three). Leaders can avoid these traps by

success.

clarifying their expectations right from the start and reinforcing those expectations throughout the

Finally, used intelligently, structures, systems,

transformation. They should emphasize that

and incentives align individuals with the goals of the

practical, small-scale solutions can be as useful as

transformation by rewarding certain sorts of

big, groundbreaking ideas and take care to

behavior and discouraging others. It is no longer

provide guidance on what needs improving and

enough just to motivate employees to perform:

where orthodoxy and conventional thinking are

they must also be motivated to transform themselves

best challenged.

and the organization. Energy for change emerges from reflections on what’s needed and why and on

Most leaders acknowledge the importance of energy

what change means for each employee and

in organizational change—but many struggle

for the colleagues with whom he or she has strong

to unleash it or to keep it at high levels over time.

emotional ties.

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Voices on transformation 3 Corporate transformation under pressure

Jala engaged knowledgeable frontline and

retailer. He also stressed “happy employees for

managerial employees in what he called “laborat-

happy consumers,” “lower costs for lower

ories,” where they explored problems such as

prices,” and three other cross-cutting themes

unprofitable routes. In this way, he found a device

embracing the key sources of value and employee

to make the whole company believe that the

engagement. For each of these themes, the

necessary changes were possible. Some problems

CEO and his team developed tactical plans with

couldn’t be solved; as Jala put it, “We had a

result-oriented metrics, such as closing hopeless

team looking at the Kuala Lumpur–Manchester

stores, improving the effectiveness of promotions,

route. The team couldn’t fix it. To be profitable,

and opening new stores more quickly.

we needed 40 percent more passengers than we had capacity for. What would we do? Tie the

Planning began with the executive committee,

passengers on the wings? After we went through

which developed the initial strategic and tactical

a full analysis, everyone on the team knew

plans and took steps to improve the effective-

that the route couldn’t be fixed. They all knew

ness of its individual members and of their work

that they were out of a job.” But the company

as a team. They wrote and signed a leadership

saved enough routes and made enough changes,

charter that included such points as accountabil-

with the full support of employees and other

ity for results, resolving issues publicly rather

stakeholders, to save itself. (For more details, see “Turning around a struggling airline: An

than behind closed doors, and the imperative for all members to address their own shortcomings

interview with the CEO of Malaysia Airlines,”

before those of others. The charter, introduced

in this issue.)

throughout the organization, became a tool for changing the culture to support the performance

A global retailer in Brazil

transformation. What’s more, the top team

For decades, the Brazilian subsidiary of a global

held many workshops to gather the employees’

retailer was number one in its field, both in

contributions to its initial strategic and

market share and profitability, as well as top of

tactical plans, to generate buy-in, and to instill

mind for consumers. Yet by 2004, the position

the new mind-sets, symbols, and language.

of this subsidiary had deteriorated so far that more

This collaborative input was included in the final

than half of its stores operated at a serious

plans in areas such as new stock layouts and

loss. A new CEO was appointed with a mandate

replenishment systems.

to fix or sell. His actions highlight the importance of relentlessly training the top team to lead

Within two years, earnings had increased by

effectively, establishing collaborative-planning

$100 million, bringing the company out of the red.

processes, and making the top 250 executives

Within three, it had surpassed its rivals’ average

think and behave like owners by embedding the

profitability and received from its corporate

spirit and mechanisms of accountability for

parent the largest check any subsidiary had gotten

meeting clear stretch goals.

in seven years, to accelerate expansion and acquire a local rival. Today, five years into the

The new CEO decided on the theme of the

transformation journey, the subsidiary enjoys

overall transformation—to “recover the place that

an enviable market and financial position and is

belongs to us.” He set high targets: to post a

a central growth engine for its global parent.

positive

7

Earnings before interest and taxes.

EBIT7

in the first year and then earn one

more point of EBIT annually for three years,

Lessons for today

to open ten new stores a year (up from two in

Companies now face an unprecedented credit and

three years), and to ensure that the company was

market crisis. Many struggle with cash shortages,

once again the consumers’ top-of-mind

steeply decreasing sales, and difficulties

15

predicting even the near-term future. But as

Instead, senior leaders must set clear goals that

the examples above show, a company can turn

can make a company face reality; establish an

itself around in the most dire situations, even

unambiguous and inspirational course for change,

when there isn’t much time. Taking shortcuts—

with high targets and straightforward milestones;

for instance, putting insufficient effort into

and then do whatever it takes to communicate

communicating or focusing on small, short-term

with and engage the organization as a whole. No

changes—only deepens the problems.

single tactic will lead to success; rather, each company must find the right combination of tactics and then execute all of them well. By doing so, it can markedly increase the chances that it will transform itself successfully, even in the worst of times.

The authors wish to acknowledge the contributions of Sidhanth Kamath and Caroline Pung, consultants in McKinsey’s London office, to the development of the ideas in this article. Josep Isern is a director in McKinsey’s Madrid office; Mary Meaney is a principal in the London office, where Sarah Wilson is an associate principal. Copyright © 2009 McKinsey & Company. All rights reserved.