Organizational Transformation
Transformations That Work - Sun and Planets Spirituality AYINRIN
Rick Salafia
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Summary.
More than a third of large organizations have some type of transformation program underway at any given time, and many launch one major change initiative after another. Though they kick off with a lot of fanfare, most of these efforts fail to deliver. Only 12% produce lasting results, and that figure hasn’t budged in the past two decades, despite everything we’ve learned over the years about how to lead change.
Clearly, businesses need a new model for transformation. In this article the authors present one based on research with dozens of leading companies that have defied the odds, such as Ford, Dell, Amgen, T-Mobile, Adobe, and Virgin Australia. The successful programs, the authors found, employed six critical practices: treating transformation as a continuous process; building it into the company’s operating rhythm; explicitly managing organizational energy; using aspirations, not benchmarks, to set goals; driving change from the middle of the organization out; and tapping significant external capital to fund the effort from the start.
Nearly every major corporation has embarked on
some sort of transformation in recent years. By our estimates, at any
given time more than a third of large organizations have a
transformation program underway. When asked, roughly 50% of CEOs we’ve
interviewed report that their company has undertaken two or more major
change efforts within the past five years, with nearly 20% reporting
three or more.
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Unfortunately,
most transformation programs aren’t all that transformative. Though
they typically start with great fanfare—complete with big announcements
and proclamations of wholesale change—most fail to deliver. Our research
indicates that only 12% of major change programs produce lasting
results. Too often, leadership accepts disappointing outcomes and moves
on, only to launch another program in a few years’ time. One prominent
U.S. bank, for example, has initiated three substantial restructuring
programs in the span of just four years, yet all of them have fallen
flat.
It
doesn’t have to be this way. Over the past two decades we’ve worked
with dozens of companies that have effectively transformed their
businesses and studied hundreds of others that have attempted to. Our
analysis has revealed six important differences between the programs
that worked and those that didn’t. In this article we’ll explain why so
many ambitious change initiatives come up short and outline the steps
that leading companies are taking to defy the odds and realize the full
promise of transformation.
Underwhelming Results
In
late 2023, Bain & Company completed the second of two comprehensive
surveys of 300 large companies worldwide that had attempted
transformations. The first survey had taken place a decade earlier. The
participating companies included both Bain clients and nonclients. The
findings
highlighted two concerning trends.
Less failure, but not more success.
In the 1990s John Kotter and other scholars identified the most common
reasons for ineffective transformation attempts—notably, a lack of
urgency, insufficient leadership, limited vision, poor communication,
and a shortage of “quick wins.” Many companies have taken steps to avoid
those pitfalls, often seeking outside advisory support. As a result,
companies are experiencing fewer outright failures in their
transformation endeavors. If we define “failure” as achieving less than
half of what leadership aimed for, then only 13% of recent
transformation programs can be labeled as such. That’s a significant
improvement from the 38% rate observed in 2013 and can be attributed to
lessons learned over the years.
In the 1990s John Kotter and other scholars identified the most common
reasons for ineffective transformation attempts—notably, a lack of
urgency, insufficient leadership, limited vision, poor communication,
and a shortage of “quick wins.” Many companies have taken steps to avoid
those pitfalls, often seeking outside advisory support. As a result,
companies are experiencing fewer outright failures in their
transformation endeavors. If we define “failure” as achieving less than
half of what leadership aimed for, then only 13% of recent
transformation programs can be labeled as such. That’s a significant
improvement from the 38% rate observed in 2013 and can be attributed to
lessons learned over the years.
But
there’s a catch. Despite the decline in outright failures, success
rates have not risen. If “success” is defined as meeting or exceeding
leadership’s expectations, then only one in eight transformations can be
considered successful—and that rate has remained constant since 2013.
An acceptance of mediocrity.
The percentage of transformation programs with so-so outcomes—that is,
those that achieved more than 50% but less than 100% of their
targets—increased from 50% in 2013 to 75% in 2023. Instead of pushing
their organizations to deliver more, many senior leaders seem to settle
for improved but still unexceptional performance. While that reaction is
understandable, it often signals to employees that if they wait long
enough, the status quo will be restored. Worse, it breeds cynicism that
undermines the success of future change efforts.
The percentage of transformation programs with so-so outcomes—that is,
those that achieved more than 50% but less than 100% of their
targets—increased from 50% in 2013 to 75% in 2023. Instead of pushing
their organizations to deliver more, many senior leaders seem to settle
for improved but still unexceptional performance. While that reaction is
understandable, it often signals to employees that if they wait long
enough, the status quo will be restored. Worse, it breeds cynicism that
undermines the success of future change efforts.
Six Critical Practices
Clearly,
the prevailing approach to transformation in most companies is not
yielding the desired results. It’s time for a new model—one
incorporating six practices that our research has shown are key to
successful programs.
1. Treating transformation as a continuous process.
Most transformation efforts are structured as discrete programs—with a
clear beginning and end. Top management sets an ambitious goal, defines a
series of initiatives designed to meet it, assigns leaders to manage
the change, and then monitors performance until the program is complete.
It’s an approach inspired by the work of the psychologist Kurt Lewin,
who believed that the process of change entails (1) creating the
perception that a change is needed, (2) moving toward the new desired
behavior, and (3) solidifying that new behavior as the norm. This became
widely known as the “unfreeze-change-refreeze” model.
Most transformation efforts are structured as discrete programs—with a
clear beginning and end. Top management sets an ambitious goal, defines a
series of initiatives designed to meet it, assigns leaders to manage
the change, and then monitors performance until the program is complete.
It’s an approach inspired by the work of the psychologist Kurt Lewin,
who believed that the process of change entails (1) creating the
perception that a change is needed, (2) moving toward the new desired
behavior, and (3) solidifying that new behavior as the norm. This became
widely known as the “unfreeze-change-refreeze” model.
Although
that model may have made sense when most business transformations were
transitory—that is, a temporary deviation from “normal”—or if the change
involved managing the implementation of, say, a new enterprise resource
planning system, it’s not well suited to deliver major change in
today’s highly dynamic environment. Most companies are (or should be) in
a state of constant transformation. It’s simply no longer possible to
refreeze and step aside. The most successful efforts recognize that
transformation must be continuous and orchestrate their programs
accordingly.
Dell
Technologies is a case in point. When Michael Dell took the company
private, in 2013, he knew he wanted to transform the PC maker into a
broad-based leader in infrastructure technology. He also recognized that
to do so he needed his team to keep stretching to drive the next level
of performance.
Starting
in 2014, Dell’s executive leadership meetings centered on what was
referred to as the Dell Agenda. This agenda amounted to a backlog of the
most critical issues the company was confronting at the time and, by
implication, the most important changes Dell had to make to transform
successfully. Some issues, such as the need to simplify Dell’s product
portfolio and transition from a made-to-order to a made-to-stock
approach, pertained to day-to-day operations. Others, like defining a
new go-to-market structure for the company’s direct sales force, were
organizational in nature. Finally, many, such as determining how to
strengthen the company’s position in the rapidly growing, high-margin
storage segment, involved strategic opportunities.
What
made the Dell Agenda particularly noteworthy was its evergreen nature.
When an issue was successfully resolved, it was removed, and a new issue
took its place. This ongoing process of addressing operational,
organizational, and strategic issues produced extraordinary results.
From 2014 to 2023, Dell Technologies experienced a dramatic increase in
market value, achieving more than 10-fold growth. The surge in value was
a testament to the company’s newly established leadership positions in
areas such as commercial PCs, servers, storage solutions, and other
critical infrastructure technologies.
2. Building transformation into the company’s operating rhythm.
Too often transformations are viewed as separate from company
operations and handled by a distinct program-management office. In most
instances, however, working on both should be considered part of every
manager’s day job.
Too often transformations are viewed as separate from company
operations and handled by a distinct program-management office. In most
instances, however, working on both should be considered part of every
manager’s day job.
Consider
the approach Alan Mulally took to successfully lead the transformation
of Ford Motor Company from 2006 to 2014. Shortly after taking the helm,
he introduced a rigorous business plan review (BPR) process, which
involved weekly meetings with the entire senior leadership team. The BPR
played a pivotal role in aligning the team around a compelling vision
and a comprehensive strategy known as One Ford.
The
BPR ingrained the implementation of One Ford into the company’s
operating rhythm. As Mulally noted, “Everyone knew the plan, the status
against that plan, and all the areas that needed special attention.
Everyone was working together to change the reds to yellows and greens.”
Under
One Ford the company divested itself of Aston Martin, Jaguar, Land
Rover, and Volvo. It terminated its passenger-vehicle joint venture with
Mazda and discontinued the Mercury brand. Ford also streamlined its
vehicle platforms and standardized components across its models, which
resulted in significant cost savings and improved product quality. The
proceeds from asset sales and the savings from restructuring, along with
external financing, were channeled into creating a “balanced business”
of cars, trucks, and SUVs. The company revitalized its iconic brands,
including the Ford F-150 pickup and the Mustang, transforming itself
from a near-bankrupt relic into an industry leader.
During
Mulally’s tenure, Ford rebounded from a $12.7 billion loss to a $6.3
billion pretax profit. Though its stock price fell during the global
financial crisis, it shot up 800% from its low point, and when Mulally
left it was nearly double what it had been when he started.
3. Explicitly managing organizational energy.
Transformations fizzle when they consume more energy than they
generate. That’s why their tendency to continually disrupt the work
routines of the same group of individuals is problematic. Over time that
group may start to ignore further requests for change or even actively
resist them. Our research shows that if an organization tries to change
more than two primary routines simultaneously, the odds of failure
increase dramatically. For example, consider a scenario in which a
company’s sales force is asked to sell in newly defined territories
while also promoting an expanded portfolio of products and services. In
such a situation it’s highly likely that sales productivity will drop.
Still, despite its importance, organizational energy is rarely managed
effectively during transformations.
Transformations fizzle when they consume more energy than they
generate. That’s why their tendency to continually disrupt the work
routines of the same group of individuals is problematic. Over time that
group may start to ignore further requests for change or even actively
resist them. Our research shows that if an organization tries to change
more than two primary routines simultaneously, the odds of failure
increase dramatically. For example, consider a scenario in which a
company’s sales force is asked to sell in newly defined territories
while also promoting an expanded portfolio of products and services. In
such a situation it’s highly likely that sales productivity will drop.
Still, despite its importance, organizational energy is rarely managed
effectively during transformations.
In
successful programs leaders explicitly identify the employees and
functions that will be most impacted by each aspect of the initiative
and ensure that no group is expected to alter multiple routines at once.
Changes are carefully sequenced to limit disruption and prevent
widespread organizational fatigue. Success is recognized and rewarded
along the way to build energy and enthusiasm for the effort.
Take
the transformation of Virgin Australia. In April 2020, just a few
months into the Covid-19 pandemic, the company entered voluntary
administration as a bankrupt carrier. That September, Virgin was
acquired by the U.S. private equity firm Bain Capital (an entity
entirely separate from our firm), and by the end of November, Jayne
Hrdlicka had been appointed CEO. Under her leadership the company
reorganized itself as a much leaner, midmarket carrier. Once it had
turned the corner it expanded its fleet by 60%, hired thousands of new
employees, opened many new routes, and completely reimagined its
customers’ experience. Such massive changes could have caused
debilitating disruptions had leadership not been meticulous about
managing organizational energy.
At
the start of the process, every aspect of Virgin Australia’s overhaul
was carefully sequenced. The airline made significant investments in new
planes and technology, restructured its head office, revamped its
marketing and sales function, bolstered its procurement team’s
capabilities, and introduced new customer-service innovations. Virgin’s
leadership assessed how each change would affect employees and
consciously scheduled the hundreds of initiatives involved to avoid
overburdening any one part of the organization at any one time.
Unnecessary or lower-priority efforts were put on hold, either
temporarily or permanently, freeing up organizational bandwidth.
Leadership applied a simple rule of thumb: Prioritize the changes that
were most crucial to passengers and deemphasize or eliminate those that
weren’t. The strategic staging and focus allowed Virgin Australia to
move quickly without exhausting its people.
In
our study nearly all failed transformations were underfunded. Many
leaders tried to finance them through cost-cutting measures. That
strategy typically fell short.
Hrdlicka
and her team also actively engaged the organization throughout the
transformation, tapping into Virgin Australia’s unique “Virgin Flair”
culture. They encouraged employees to contribute new ideas for making
Virgin “the most-loved airline in Australia.” Great ideas were
celebrated, and the inclusive approach injected passion and energy into
the team’s work, significantly accelerating the pace of change.
Frontline staff and executives shared in the success of the
transformation, receiving bonuses and other financial rewards in
recognition of their contributions to the turnaround.
4. Using aspirations, not just targets, to stretch management’s thinking.
In typical transformation efforts, especially turnarounds and
restructurings, the initial step involves examining external benchmarks.
These are then used to set top-down targets for cost and head count
reductions, and the organization is tasked with figuring out how to meet
them. While that approach may appear rigorous and data-driven, it
seldom sparks transformative thinking. Relying on benchmarks tends to
confine “the art of the possible” to what others have already achieved,
effectively setting the bar too low.
In typical transformation efforts, especially turnarounds and
restructurings, the initial step involves examining external benchmarks.
These are then used to set top-down targets for cost and head count
reductions, and the organization is tasked with figuring out how to meet
them. While that approach may appear rigorous and data-driven, it
seldom sparks transformative thinking. Relying on benchmarks tends to
confine “the art of the possible” to what others have already achieved,
effectively setting the bar too low.
True
transformation calls for breakthrough thinking and pushing beyond
current practices, often with the help of new technology. Consider
Adobe, the $18 billion developer of software for creative services
professionals. In 2011, when it declared its intent to shift its entire
product line to the cloud, the strategy was deemed unusually ambitious,
if not revolutionary. There were few benchmarks that Adobe could refer
to—only the aspiration of fundamentally reshaping the company’s business
model.
Shantanu
Narayen, Adobe’s CEO, challenged his management team to reinvent the
company. Historically, Adobe’s formula of selling software like
Photoshop to creative professionals at attractive prices had been highly
successful. However, Narayen recognized that clinging to the past would
not be a winning business strategy. Drawing on his extensive knowledge
of the industry and the company, he set the goal of transitioning 100%
of Adobe’s products to a web-based subscription model. The company would
be among the first to adopt the software-as-a-service (SaaS) approach.
This
bold ambition unified and motivated everyone at Adobe. Every facet of
the business had to grapple with the question, How do we need to do this
differently? Transitioning to the cloud significantly affected the
company’s product development, operations, and go-to-market strategies.
For instance, Adobe had traditionally introduced new features whenever a
new software version was released, typically every 18 to 24 months. But
in the cloud, products could be continuously updated, tested, and
released, necessitating a more agile and scrum-based approach to product
development.
In
addition, Adobe had to invest in cloud-based components that would
facilitate seamless downloads of products because customers still needed
to have many applications on their desktops. And the way that Adobe
engaged with its customers had to change. Its value proposition was
reorganized around delivering high-quality service, not merely
introducing new features. Aspects of it like uptime, availability,
disaster recovery, and security all became pivotal. Much closer
collaboration among the functional groups contributing to the overall
customer experience, including product management, engineering,
marketing, and IT—which all had previously operated separately—was also
required.
Adobe
continues to transform itself, lately by harnessing breakthroughs in
generative AI. In 2023 alone the company introduced 100 new features and
updates for its software, including many advanced AI-powered tools. It
has expanded Firefly, its AI product line, with three new image
generators. Beyond the “wow factor,” the wide range and high quality of
these innovations have firmly established Adobe as the leading maker of
creative tools for professionals.
The
results have been truly impressive. Since Narayen became the CEO,
Adobe’s market value has shot to more than $250 billion from just
$24 billion—and the company’s average annual total shareholder return
has been more than 15%. This compares very favorably with the tech-heavy
Nasdaq’s TSR of just under 9% in the same period. What’s more, Adobe’s
transformation has reshaped the entire software landscape. Nowadays
nearly every software company, ranging from Autodesk to Microsoft, has
followed Adobe’s pioneering lead.
5. Driving change from the middle out.
Most transformation programs are top-down: Upper management sets
targets and relies on lower organizational levels to figure out how to
meet them. Initiatives are then typically executed from the bottom up.
While this approach can yield effective ways to cut waste, it rarely
produces lasting results. Why? Because enduring improvement requires
changes in both the work being done and how it is accomplished.
Cross-company intelligence and deep experience are needed to identify
those changes, and that calls for a “middle-out” approach.
Most transformation programs are top-down: Upper management sets
targets and relies on lower organizational levels to figure out how to
meet them. Initiatives are then typically executed from the bottom up.
While this approach can yield effective ways to cut waste, it rarely
produces lasting results. Why? Because enduring improvement requires
changes in both the work being done and how it is accomplished.
Cross-company intelligence and deep experience are needed to identify
those changes, and that calls for a “middle-out” approach.
Senior
executives frequently are too far removed from day-to-day operations to
understand what truly needs to change. Consequently, top-down solutions
tend to be superficial or at least short-lived. Frontline managers,
meanwhile, often lack the contextual understanding to challenge existing
processes, and so trim around the edges rather than propose major
changes. But midlevel executives tend to have enough experience to see
the shortcomings in current operations—and aren’t so close to the ground
that they get lost in the weeds.
Amgen,
the $27 billion global biopharma company, is a case in point. In 2013
its CEO, Bob Bradway, and his team set out to reshape the company, which
was more than 30 years old and grappling with the expiration of the
patents on several of its most successful drugs. The goal was to
reposition Amgen as an agile, patient-centered powerhouse capable of
developing groundbreaking drugs quickly.
For
each transformation initiative, Bradway and his team selected two
midlevel leaders—a VP-level “initiative lead” and a director-level
“initiative liaison.” These leaders were to make the transformation
effort their primary focus. Their selection was rigorous: A “draft,”
coordinated by the chief transformation officer and the chief human
resources officer, was conducted by the CEO and all his direct reports.
Eligible executives had to be among the highest rated at Amgen, with
proven ability to tackle the most-pressing challenges.
Once
the initiative leads and liaisons were in place, teams with the
necessary capabilities and expertise were assembled. Leadership
emphasized the importance of assigning the best talent to each
transformation initiative. This ensured that the teams had the skills to
drive meaningful change quickly. Soon the transformation process became
a vehicle for testing and developing the next generation of leadership
within the company. Many of the initiative leads and liaisons have since
moved into senior roles at Amgen.
The
middle-out approach surfaced better solutions at Amgen. The team
overhauling the company’s critical process-development capability offers
a great example. Its breakthroughs included such fundamental changes as
the consolidation of 17 functions into seven, the closure of five
sites, the integration of 25 disparate systems into one new platform,
and the implementation of three new cycle-time-reduction processes
across the company. Its efforts were a significant departure from
previous transformation initiatives at Amgen, which had typically led to
modest changes to established practices and processes.
The
results have been impressive. From 2013 to 2022 the company doubled the
number of approved medicines in its portfolio—from 13 to 27. Many more
of its drugs are blockbusters. In 2013, Amgen had only three drugs that
generated $1 billion or more in sales. By 2022 it had nine.
Significantly, the transformation is still ongoing, with Bradway and his
team constantly pushing Amgen to greater heights, as evidenced by its
$28 billion acquisition of Horizon Therapeutics.
6. Accessing substantial external capital from the start.
Transforming a business is often expensive. Mulally borrowed
$24 billion to fund Ford’s transformation in 2006, and Michael Dell
invested more than $60 billion to turn Dell into a leader in
infrastructure technology in 2017.
Transforming a business is often expensive. Mulally borrowed
$24 billion to fund Ford’s transformation in 2006, and Michael Dell
invested more than $60 billion to turn Dell into a leader in
infrastructure technology in 2017.
In
our study nearly all failed transformations were underfunded. Many
leaders tried to finance them through cost-cutting measures. While that
strategy may sound appealing, it typically falls short. Efficiency gains
and waste reduction alone usually can’t provide enough financial
resources.
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In
contrast, nearly all successful transformations tapped the capital
markets. External capital played a crucial role in fueling T-Mobile’s
growth from 2013 to 2020, for instance. Shortly after John Legere took
the reins as CEO in 2012, he and his team acknowledged that a
substantial investment was required to pull off the turnaround the
company needed. At the time, T-Mobile lagged far behind Verizon and
AT&T, with only a third of the wireless subscribers of either
carrier. One major problem was that T-Mobile had not supported the
iPhone when it became ubiquitous. “Before I joined T-Mobile it was the
fastest-shrinking wireless company in America,” Legere told Investor’s Business Daily.
Avoiding
the common mistake of relying solely on internal cost-cutting measures,
Legere and his team decided to borrow $7 billion to initiate a
comprehensive transformation. They set out to redefine T-Mobile as the
“uncarrier” by eliminating hated industry practices that benefited
carriers but harmed consumers. The company started including taxes and
fees in its price quotes to eliminate surprises for customers. Unlimited
service became standard, and contracts and global roaming charges were
abolished. The iPhone was integrated into the T-Mobile network, and the
company invested heavily in acquiring spectrum to enhance coverage.
Finally, T-Mobile secured an additional $19 billion to fund its $66
billion acquisition of its U.S. telecom rival Sprint in 2020.
Though
the transformation required significant investment, the returns were
extraordinary. From 2013 to 2019 (Legere’s last full year as CEO), the
company’s earnings soared 1,000%. Subscriber numbers more than doubled,
from 33 million to 86 million. That growth far outpaced that of AT&T
and Verizon over the same period. The share price of T-Mobile also rose
by more than 400% during Legere’s tenure, significantly outperforming
the S&P 500’s 150% gain. During that time T-Mobile’s performance
even surpassed Apple’s.
. . .
Transformation
programs often promise breakthrough results, but most never realize
them. The successful ones adopt an approach that fundamentally differs
from the approach at other companies. Their leaders view change as a
continuous process, integrating it into the company’s operating rhythm.
They understand that organizational energy is a scarce resource and
manage it diligently, and they keep the focus on driving the
transformation from the middle out. Never forgetting that major change
requires major investments, they secure external capital early (and
often). In short, successful transformations employ a transformative
strategy—a must for companies aiming for enduring success in today’s
ever-changing world.
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