Transformation Is More Than Just Cost Cutting
Transformation can mean a lot of different things. Some leaders use it to describe any change they make in their organization that isn’t just BAU. This can be anything from a new IT system, to a cost cutting exercise, right through to a complete change in strategic direction.
The word transformation implies a significant change… but even when it isn’t that significant, it sounds so much better in boardroom and investor briefings than just calling it a “cost out exercise”, a “program of work”, or an “initiative”.
I have a pretty firm view on what a change initiative needs to be before it can be called a transformation – I have three criteria:
- First up, it has to make a structural difference – which is to say that it has to create a new baseline for the organization to move forward with
- This could be a permanent change to the cost base; or
- An innovation that fundamentally changes the way the business competes;
- It could be a change in the company’s product mix
- My second criterion is that it has to create measurable value for the company
- Whether it’s a stronger balance sheet
- Greater market share
- Healthier gross margins
- And my third criterion is that the change should be sustainable in the long term:
- Not just short-term window dressing to prop up the numbers
- We often see companies go through restructuring or cost-cutting exercises
- That’s a well-worn technique that CEOs employ to buy time for performance improvement
- But often, the performance improvement never comes, and it simply precipitates… yep, you guessed it… another restructure
I’m sure you’ve all seen this… But, however you define it, and whatever you decide to call it, the unfortunate truth is that your transformation is unlikely to succeed. A research report released a couple of years ago by McKinsey suggests that most transformations fail to deliver anywhere near the benefits that were envisaged at the outset.
And they ought to know… consultants are the ones who typically convince you of the value at stake. But identifying upside is the easy part. Your job is exponentially harder, which is to actually capture that value by executing organizational change… and making it stick!
John Kotter, the elder statesman of organizational change, said that 70% of the change that’s needed in organizations fails to be delivered.
So, let’s assume you are running a genuine transformation… the biggest obstacles to harvesting the value are not financial, or physical, or technological… the biggest obstacles are cultural.
Humans typically don’t like change, because change represents impending loss:
- Loss of security…
- Loss of power…
- Loss of opportunity…
- Loss of status
And this fear of loss generates all sorts of interesting behavior!
Cutting through that behavior to execute change effectively is incredibly difficult. One of the main reasons for this, is that the people who are supposed to be driving the change – the leaders below you – are the very same people who are most resistant to the change… let’s face it, they have the most to lose.
This is why the number one predictor of successful transformation is your ability to shift the culture. The only way to do this is to set incredibly high expectations for the leaders below you – and that requires a superhuman level of energy, commitment, and resolve.
If you don’t have this, your team won’t even come close to capturing that 70% of value that routinely gets left on the table.