Our latest transformations research confirms that success remains elusive and reliant on a holistic approach. Yet some actions are especially predictive of realizing the financial benefits at stake.
After 15 years of original McKinsey research on transformations,1 the results from our latest McKinsey Global Survey confirm an enduring truth: the more transformation actions a company takes, the greater its chances for success.2 Yet success remains the exception, not the rule.
While we’ve known for years that a comprehensive approach to transformation is more conducive to lasting change, the average success rate has remained persistently low. Less than one-third of respondents—all of whom had been part of a transformation in the past five years—say their companies’ transformations have been successful at both improving organizational performance and sustaining those improvements over time.
But even companies with successful transformations don’t always capture the full financial benefits of these efforts. So we took a closer look at the different stages of a transformation’s life cycle to understand where value is lost and what companies can do to preserve it. According to our analysis, three core actions of a transformation are especially predictive of value capture—and the companies with successful transformations are more likely than the rest to pursue the specific tactics that support them.
The value at stake from transformations
The survey results confirm that there are no shortcuts to success. The main differentiator between success and failure was not whether an organization followed a specific subset of actions but rather how many actions it took throughout a transformation’s life cycle (Exhibit 1).3
At the same time, the results suggest that even successful transformations deliver less than their full potential. Respondents reporting success estimate that, on average, their organizations have realized only 67 percent of the maximum financial benefits that their transformations could have achieved. By contrast, respondents at all other companies say they captured an average of only 37 percent of the potential benefit. Similarly, there’s room for many companies to improve their timing; even the companies with successful transformations could have benefited from speeding things up (for more on the transformation’s timeline, see sidebar “Accelerate the timeline for capturing value”).
What’s more, while much of a transformation’s value loss (55 percent) occurs during and after implementation, a sizeable portion happens as early as day one (Exhibit 2). On average, respondents say that nearly one-quarter of value loss occurs during the target-setting phase, suggesting that the full potential might be compromised before companies’ transformations even get started.
Yet even after the implementation phase, a company’s hard work is not done. According to respondents, 20 percent of value loss occurs after implementation, once the initiatives have been fully executed. To mitigate this loss, the results suggest that embedding transformation disciplines into business-as-usual structures, processes, and systems can help—and that this is a more common practice among successful transformations. In particular, companies that have undergone successful transformations are more likely than others to have made substantial changes to their annual business-planning processes and review cycles, from executive-level weekly briefings and monthly or quarterly reviews to individual performance dialogues (Exhibit 3).
Three positive indicators of value capture
While no single action or group of actions defines transformation success, our analysis shows that three actions are positive indicators for transformations capturing the most value, and they should be prioritized from the start:
Completing a comprehensive, fact-based assessment of the business to identify opportunities for improvement. The more thoroughly that an organization uses facts to assess the maximum financial benefit it can achieve from a transformation in the first place, the more confidence leaders will have in setting and pursuing ambitious yet realistic targets that reflect the transformation’s full potential.
Setting an overall financial target for the transformation is one of the most important steps to take, as it sets the tone for the whole program and what’s possible; if companies set high expectations, people tend to meet them. In an in-depth review of 15 transformations, we found that companies on average deliver 2.7 times more value than their senior executives thought possible when the transformations got under way. Other McKinsey research shows the power of high expectations: companies that set transformation targets at 75 percent or higher of their trailing earnings are more likely to earn outsize total shareholder returns (TSR).
Adapting goals for employees at all levels. It’s not enough to set effective and ambitious aspirations for the transformation. People need to understand what these goals mean for their day-to-day jobs and what they will be expected to do differently; if they don’t know how they connect to the transformation, their behaviors and how work gets done won’t change. But the survey results suggest a possible perception gap: senior leaders are nearly 20 percent more likely than people in other roles to believe that their transformation’s goals have been adapted for relevant employees across the organization.
Making a transformation’s goals tangible for all employees takes more than just one-way communication. We see from the survey that the most successful organizations are more likely to involve employees and engage them in face-to-face communication: specifically, using line-manager briefings (cited by 65 percent of respondents whose transformations were successful), leadership town halls, and a cascade of information throughout the business (for more on employee communication and engagement, see sidebar “The power of influencers”) (Exhibit 4).
Allocating high performers to the highest-value initiatives. According to our survey, the transformations that come close to realizing their full financial benefit are more likely than others to match their best talent to their most important initiatives. This further emphasizes the importance of linking business and talent priorities by having a clear view of where value is generated in the company, and who in the organization has the experience and skills to deliver that value.
Other McKinsey research shows that the burden placed on these high performers can be too high. Rather than overloading high performers with too many initiatives, companies should keep these individuals focused on the biggest, and often highest-profile, initiatives that make up 5 percent or more of the total value (which, on average for successful transformations, comprise only 5 percent of the total portfolio of initiatives). For smaller initiatives, it’s best to involve a wider coalition of managers and employees, which builds broader buy-in and reduces the potential for delayed value capture.
Our survey results indicate that companies’ transformation efforts remain stuck. The 30 percent success rate hasn’t budged after many years of research, and we now know that even successful transformations still leave value on the table. In a period of such prolonged and dramatic change in business, the economy, and the world at large, the newest results suggest that it’s time for companies to treat transformations as more than just a side project or discrete event and use them as opportunities to fundamentally change how their business runs. 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 the truly holistic approach that success requires.
This article first appeared in www.mckinsey.com
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