for many years now, Transformation is an umbrella term that describes how organizations take appropriate actions to reach their full potential. Companies typically aim to achieve healthy financial performance and organizational effectiveness before focusing on higher growth, new strategies, and technology-enabled solutions.
However, the speed of change means waiting to 'earn the right to grow' is no longer the best strategic or financial option. Several trends speak for themselves. New digital entrants are disrupting industries, with many companies commanding more value and significantly higher stock valuations than incumbents. Ecosystem-based strategies are here to stay. Companies that are committed to environmental, social, and governance (ESG) standards are becoming increasingly visible. And as leaders look to strengthen the right capabilities to create value, talent has become a more important priority than ever for executives.
In such a dynamic business environment, focusing on new ways of working, new capabilities, and new technologies is the way forward. But getting change right is not easy. McKinsey research has long documented that enterprise-wide transformation is difficult, with fewer than one-third of transformations achieving the goal of improving organizational performance and sustaining that improvement over time. It has been transformed into
Here, years of research have taught us how to begin comprehensive and lasting business transformation.
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Why start a change program?
Many companies turn to change because leaders want to capture untapped potential or achieve growth and efficiency.
The most successful transformations address most of the organization's value creation opportunities, but some transformations focus on specific themes (such as transforming the workforce to adopt agile ways of working).
Almost all transformations are “digital transformations” because they require new investments in technology and technology-enabled processes. But some digital transformation efforts are so important that they become large, stand-alone efforts.
Companies have many goals, including addressing urgent external challenges (disruptive new market entrants), industry disruptions (technology-driven changes in consumer behavior), or macroeconomic pressures such as supply chain crises. Pursue and initiate change.
Many organizations are adopting transformation techniques to achieve broader strategic goals, such as creating value from ESG. Major M&A and portfolio changes. Prioritize the principles of diversity, equity, and inclusion to drive greater impact.
Who is involved in the transformation?
CEOs help make change a success by communicating the importance of change, modeling the desired change, building a strong top team, and being personally involved.
The chief transformation officer (CTO) is an increasingly important executive role in many sectors and a high-level coordinator of the transformation process. The CTO is an extension of her CEO and should have the power and authority to make decisions regarding personnel, investments, and operations. Although the CTO may be responsible for hundreds of initiatives, day-to-day decision-making and responsibility for implementing those initiatives rests with line leaders, change managers, and others.
While executive attention is critical, more people (sometimes 25% or more of the workforce) are needed to drive change. These employees play transformation-specific roles, such as workstream leaders and initiative owners. But what is the minimum level of employee engagement needed to ensure a successful transformation? McKinsey recently examined data from 60 organizations that had been at least two years into their transformation and found that at least 7% of We found that transformations where employees own a portion of the transformation are twice as likely to result in better total shareholder returns. Even for a medium-sized organization with hundreds of employees, 7% may seem like a small number.
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How do transformational leaders achieve their goals?
The most successful transformations transform ideas into detailed business plans with trackable, time-bound metrics to measure results. Ultimately, these business plans should lead to value creation, cost savings, growth opportunities, and other improvements.
Many transformations are accomplished through a central transformation office (TO) led by the CTO. TOs define goals, model new ways of working, and keep the overall program and specific work streams on track. It also provides a repository for leaders to get help when faced with challenges and develop new skills.
Typically, TOs deliver results through weekly action-oriented meetings. Attendees can include each work stream sponsor and other key initiative owners, as well as representatives from finance and his CTO.
TO goes beyond change planning to help organizations change the way they work over the long term, ensuring companies don't revert to old ways of doing things once the change effort is complete.
What makes change successful?
According to McKinsey's global research, three core actions specifically predict the most value-creating transformations:
- Identify opportunities for improvement using an objective fact base. The more thoroughly an organization uses facts to assess the greatest economic benefits of change, the more confident leaders will be to pursue ambitious and realistic goals that best reflect the potential of change.
- Communicate a compelling reason why change is needed. Protecting your bottom line is not enough. Leaders need to explain why employees should behave differently. If people don't understand what change means for their day-to-day operations and overall business goals, people will continue to think and act differently, and the health of the organization will suffer. Role modeling, developing talent and skills, and fostering understanding and belief are ways to ensure you get people on board and keep them there.
- Matching the best talent to your company's most important initiatives. This measure emphasizes the importance of linking business and talent priorities by clearly understanding where value is created within the organization and who within the organization has the ability to deliver that value. is emphasized.
McKinsey research also shows that the execution phase, which embeds change discipline into business-as-usual structures, processes, and systems, is key to creating value. Companies that successfully transform are more likely than others to make significant changes to their annual business planning processes and review cycles, from weekly executive-level briefings and monthly or quarterly reviews to individual performance conversations. It is more likely that you have added
When it comes to far-reaching outcomes, generous, tangible financial incentives are one of the most effective tools for motivating employees. According to McKinsey analysis, companies that implemented financial incentives tied directly to transformation outcomes achieved nearly five times the increase in total shareholder return compared to companies without similar programs. In parallel, a well-crafted program of non-monetary incentives creates high levels of energy and excitement throughout the organization and encourages discretionary effort among employees.
Finally, speed matters. Companies with top quartile financial performance typically capture 74% of the value of their transformation within the first 12 months. That value can be reinvested into new initiatives, creating a virtuous cycle of improvement.
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Why does the conversion fail?
Some additional behaviors can put the conversion at risk.
- Victory was declared too soon. When a transformation is successful, companies typically turn their initial idea into a rigorous plan that can be achieved within a few months. When change fails, the initial impact is not sustained. There can be various reasons for this. For example, if budgets are not aligned with goals, performance and governance discipline may suffer.
- No clarity has been established regarding resources. Without clear ownership and accountability for action, it is impossible to embed rapid decision-making and strengthen new ways of thinking to continue to drive change.
- You can't refine it midway. No single action or group of actions determines the success of a transformation. However, leaders who invest in tangible changes to normal business structures, processes, and systems. Prioritize transformation as the main event. By maintaining a long-term mindset, organizations have the best chance of realizing their full transformational potential. According to McKinsey research on successful business transformations, many companies have replenished their number of initiatives by up to 70% after their first year. That's a surefire way to maintain momentum for the challenges ahead.
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- “Introducing the newest member of the Consumer C-suite: Chief Transformation Officer,” December 5, 2022, AD Bhatia, Kevin Carmody, Rebecca Johnson, Emily Rizzi, Jim Scott, Christy Weaver
- “Don’t Hurry: A Conversation with Andy Penn” September 6, 2022, Wesley Walden
- “The Powerful Role Economic Incentives Can Play in Transformation” January 19, 2022, Hugh Bachmann, Robin Ligon, Dominic Skerritt
- “Losing from Day One: Why Even Successful Changes Are Not Enough”, December 7, 2021
- “How many people does change really take?”, September 23, 2021, Laura London, Stephanie Madner, Dominic Skerritt
- “The Numbers Behind Successful Transformations”, October 17, 2019, Kevin Laczkowski, Tao Tan, Matthias Winter
- “The Wisdom of Change: How Successful CEOs Think About Change,” July 23, 2019, Oliver Vladeck, James Deighton, Alison Dunn, Tip Huizenga, Wesley Walden