Getting Smart About Change Management

Getting Smart About Change Management

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Getting Smart About Change Management

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    The Four Fatal Errors of Change Programs

    No matter what specific changes a change program is intended to bring about—a new operating model, a superior cost position, new sources of competitive advantage—the fundamental objectives are always the same: to improve performance, substantially and sustainably, and to establish an organization agile enough to adapt to future disruptions. Those aims necessarily involve a sustained change in employees’ behavior. And for that to occur, it must be in the individual interests of employees to change their behavior—or at least in their individual interests as they perceive them to be. After all, people don’t willingly and proactively behave in ways that seem detrimental to their perceived interests. If employees are to commit to the change program and support it throughout, there has to be something in it for them as individuals. (See “The Smart and Simple Approach to Changing Performance.”)


    Company performance is determined by, or even tantamount to, the behavior of the company’s workforce. Behavior can be defined simply as “what people do”: the decisions they make, the actions they take, the interactions they engage in. What happens in a company—from its innovations to its customer service to its key processes and capabilities—is clearly a function of what people do.

    Broadly, people pursue a rational strategy when it comes to behavior: they choose to behave in ways that are in their own perceived best interests. In other words, people adopt rational, “individually winning” behaviors. That is the foundation of Smart Simplicity. Which behaviors are rational is determined by an individual’s current context; that is, the combination of rewarding or unrewarding factors that influence his or her actions, decisions, and interactions. (For most employees, a favorable context is one that provides job security and allows them to flourish in their careers. For employees nearing retirement, a favorable context might be one featuring a generous severance package; for younger employees, the ideal context might include flextime, or a prominent public role, or exciting travel opportunities.)

    Viewed through the lens of Smart Simplicity, a company is a system of rational strategies pursued by individual employees. Fortunately, most of these strategies tend to be widely shared among the workforce. It’s by understanding and shaping those strategies that executives can effect change. And the way to get individuals to change their strategies and hence their behavior sustainably—and consequently to boost company performance—is to change their contexts so that the behaviors conducive to the change program are also in the individuals’ best interests.

    In any change program, there will inevitably be losers as well as winners among the staff. One painful prospect is that some of them might have to be laid off; others might have to take on roles that they did not originally want. However, all employees will still behave in their own perceived best interests, given the options available to them. So the challenge is to adjust the context in such a way that their best interests are served by cooperating as fully as possible with the program rather than resisting or undermining it.

    For a fuller discussion of this “rational strategy” approach to workplace behavior and hence to corporate performance, see Six Simple Rules: How to Manage Complexity without Getting Complicated, by Yves Morieux and Peter Tollman (Harvard Business Review Press, 2014).

    Unfortunately, only a minority of change programs change employees’ contexts sufficiently to produce the new behaviors that the program requires. Accordingly, many change efforts fail. Numerous factors can contribute to this failure, of course, but it’s worth looking at four particular errors that companies tend to make repeatedly—the four fatal errors, so called because they fatally undermine change efforts and frequently the credibility of the people leading them. Like most of the best fatal errors, they seemed like excellent ideas at the time and remain extremely appealing, so companies keep repeating them—and keep getting the same results. Our formulation of the four errors is distilled from more than 50 years’ collective observation of companies in all major industries around the world. For obvious reasons, the case studies cited below have been anonymized and hybridized.

    Fatal Error 1: Neglecting Employees’ Individual Interests. Consider the case of a global industrial goods company that wanted to improve its sales forecasting. Sales forecasting serves many purposes, and these can sometimes conflict with one another. For example, forecasting is used for setting expectations, both internally for budget purposes and externally for earnings guidance; but it’s also used for determining manufacturing volumes and inventory-carrying levels. In making estimates, the company’s sales-forecasting team proved consistently conservative, and each year the sales team ended up selling substantially more than was forecast. Stockouts would sometimes occur, therefore, and the manufacturing team was held responsible. So the manufacturing team ceased trusting the sales forecasts and started to add an unofficial, roughly calculated buffer to its production quotas. As it happens, the manufacturing team was not held responsible for excess inventory and therefore consistently erred on the side of overestimating the required inventory. In consequence, the company’s annual inventory-carrying costs were $120 million higher than necessary.

    The company duly set about changing its approach to forecasting in order to make it more reliable and more relevant for everyone involved. Senior leadership, including the CEO and COO, presented a compelling case for change and tailored messages for each of the three teams—forecasting, sales, and manufacturing. The forecasting team would have to review and update its techniques in order to improve the accuracy of its forecasts; the sales team would have to make contingency plans in the event of stockouts; and the manufacturing team would have to stop buffering and produce only as much as the forecast indicated. Such adjustments would be difficult, but they would materially reduce inventory costs and help the company meet critical profit goals. The response from the workforce appeared to be enthusiastic, and the program launched in a very positive spirit. All to no avail.

    The trouble was that the designers of the change program had failed to consider people’s individual interests. It’s not enough to present a compelling case for change. Change practitioners might invoke the fashionable phrase “burning platform” to convey the sense of crisis; they might explain how the specified changes are in the company’s interests and the collective interests of all employees; they might segment their audience carefully into different stakeholder groups and customize their appeals to each of them. And, quite possibly, all employees will be convinced that the change program is in the collective interest, but many of them will still obstruct the program, perhaps unwittingly, by failing to adjust their behavior as required. (Arguably, this familiar outcome has been an important force in shaping, or misshaping, the change management industry: many supposed experts have mistakenly characterized the obstructionists—especially those in middle management—as behaving emotionally or illogically, and have continued to refine their remedies for that imaginary malaise!)

    In what way were individual interests opposed to the collective interest in this case? Why did conservative forecasting remain the rational choice for the forecasters? The underlying issue, which the leadership had overlooked, was that the forecasting team resided within the commercial division, which was compensated on the basis of sales performance relative to budgeted targets. It was in the forecasters’ interest, therefore, to set conservative targets that they could then substantially exceed: in that way, they and their commercial-division coworkers would receive handsome bonuses. An accurate forecast, in contrast, would threaten and thereby incense the senior sales managers—the very people who could most affect a forecaster’s salary or promotion prospects come the annual review.

    The manufacturing team likewise had a perverse incentive: to overestimate upcoming sales and thereby reduce the risk of stockouts and the associated blame. The manufacturing team, however, had no power over the forecasting team and no way of encouraging it to provide higher forecasts. To avoid underproducing, the manufacturing team had no choice but to persist with the buffer. And because the team was not penalized for excess inventory, it tended to overproduce by a considerable margin. That is how the excess-inventory crisis was born.

    As this case study demonstrates, the collective interest is all very well, but for individuals to change their behavior, it must be in their individual interests to do so. Inevitably, there will be some costs to employees in any change program, but the behaviors required for change can still be in their individual interests if there are benefits that, on balance, make it rational to get with the program. It’s up to leadership to understand these cost-benefit analyses and tip the scales as needed to make active support of the collective change an individually winning strategy.

    What happened at the industrial goods company when the program was launched? Nothing much, and that was the problem. The on-the-ground reality of the fore- casters—their individual contexts—remained unchanged, so they had no real incentive to change their ways. They might have paid lip service to the rallying calls, and perhaps they even believed that they should and would comply with the change program by making more refined and less aggressive forecasts. But it was not in their individual interests to do so.

    Despite the declared enthusiasm for a new style of forecasting, then, the forecasts remained conservative in practice, and the manufacturing team continued to ignore them and overcompensate. The change effort was judged a failure, and its leader—a former rising star within the company—ended up leaving the firm.

    Fatal Error 2: Underengaging the Extended Leadership Team. In advance of the launch of a major change program, it’s crucial to get the extended leadership team seriously engaged. (In a large organization, this team consists of the top 150 executives or thereabouts.) Unfortunately, a great many companies delay such an engagement effort until well after the launch, and many never get around to it at all.

    Take the case of a large bank that had attempted several change programs over five years without achieving any truly beneficial changes. Its most recent program was aimed at reducing risk taking on the part of its loan officers. By selling financial products to high-risk borrowers, those loan officers had created serious problems in the past, and the company’s loan portfolio was still worryingly exposed. The executive committee was eager to direct the loan officers’ behavior toward greater prudence. A program management office (PMO) was promptly established, and, in concert with the executive committee, it duly devised and activated a change program. The program sought to refocus frontline loan officers by pressing the standard levers—most notably, revising the incentive structure to encourage a long-term safety-first approach rather than a quick-profit approach.

    Members of the extended leadership team, however, were generally left on the sidelines. They had little input into the program’s design or early implementation. Instead of feeling like owners of the change, they felt underconsulted, underutilized, and underinformed—and, consequently, disrespected. Their direct reports sensed and therefore shared their lack of enthusiasm. For the workforce, accordingly, the PMO team had little credibility, and one year after launch the risk reduction program remained largely unimplemented. Not surprisingly, the risk profile of borrowers showed no discernible difference from that of the previous year. When called to account by the board, the PMO ascribed the failure to “blockage from the extended leadership team”—referring to that team’s failure to amplify and support the PMO’s reform agenda. Meanwhile, the riskier borrowers began defaulting in large numbers. The change program had proved to be little more than an expensive vanity exercise.

    What the executive committee failed to realize is that engagement of the extended leadership team is pivotal in translating a change program’s goals into actual workforce behaviors. No matter how inspiring the speeches from senior leaders may be, employees tend to listen to their direct manager more than to a C-suite executive. Proximity trumps seniority. They are aware that the direct manager has more influence over their professional fate—job security, status, salary increases, promotion prospects. And the direct manager, if properly engaged and equipped, is much better positioned to answer the crucial question, “What does the change mean for me, my team, and our customers?”

    To align the rank and file with the change program, you need to get a critical mass of extended leadership team members on board—70% or more, in our experience. Unless they have a personal stake in the change program, they will likely have little commitment to it and little incentive to rally the rest of the workforce. This personal stake can be generated in several ways. Give the extended leadership team members a voice earlier on in the program, for example, and they will feel a greater sense of ownership and will contribute more readily. In fact, their involvement should begin as early as the design stage: after all, they know the workforce and the situation on the ground better than the PMO or the senior sponsors do. Giving them the opportunity for meaningful input will make them feel included in the program and enthusiastic about it, and will also help keep the program free of design flaws.

    Fatal Error 3: Failing to Sufficiently Empower the PMO. An oil and gas company had been conducting refinery enhancements and other focused engineering projects, all supported by a technically proficient PMO. The company was now embarking on a more ambitious, enterprise-wide transformation aimed at greatly boosting uptime at the refineries and improving efficiencies between upstream and downstream operations—a program that was meant to generate more than $700 million in annual savings. Senior management assumed that the PMO, with its existing setup and staffing, could handle the transformation and duly put it in charge. Given the PMO’s impressive record, there seemed to be no reason to change its structure or composition.

    A few months after launch, the simpler initiatives were progressing well. But the more complex initiatives, where the bulk of the value lay, had stalled. The change program as a whole was not delivering according to expectations, and senior management ordered a fundamental review.

    The review attributed the setback largely to two broad issues: first, a failure to identify, flag, and address critical delivery risks for the more complex initiatives; and, second, an inability to confirm that all the crucial and interdependent factors were in place. The reason for those shortcomings, in turn, was that the PMO lacked adequate power. (Power in this context is influence over things that are important to others. Having such influence allows one to affect outcomes related to their interests and thereby encourage them to modify their behavior. Power can derive from an obvious source, such as a reporting relationship, input into a performance review, or control over budgets. It can also derive from a subtler source, such as access to specialized information, a particular expertise, or the backing of a senior leader.)

    The PMO was unable to order a thorough risk assessment prior to launch, raise concerns with senior management and arrange a course correction, or compel initiative leaders to participate. When the PMO asked those leaders to issue regular reports on the status of key risks, most of them simply filled out the PMO’s template without describing the risks sufficiently, without specifying changes in the risks’ drivers or magnitude, and without discussing any need for support. Some of the initiative leaders did not even bother to fill out the template, despite multiple reminders from the PMO. All in all, the PMO was thwarted in one of its crucial roles: that of accurately distilling and communicating the risks involved, and thereby giving senior management the opportunity to mitigate them.

    This type of failure is alarmingly common. A PMO should be a steward of value for a change program. To play that role effectively and support senior leadership properly, a PMO needs adequate power. And to gain that power, it needs sufficient visibility into the various units and the means to influence behavior in them, especially to increase cooperation across the enterprise. A PMO will also benefit if it has prominent rising stars or seasoned leaders on its staff: the presence of rising stars signals to the organization that the PMO is to be taken seriously, and the presence of seasoned leaders indicates the PMO’s deep knowledge of and interest in the long-term performance of the organization. Absent such signals of power, initiative leaders will perceive the PMO as marginal rather than powerful, and it will have limited ability to shape people’s behavior in line with the objectives of the program.

    Fatal Error 4: Allocating “Set-and-Forget” Targets. A company may be keen to empower its initiative leaders, to entrust them with considerable autonomy over budgets and resource allocation. But this well-intentioned policy can break down when it comes to more complex change initiatives, especially those involving shifts in strategy or changes to an organization’s operating model. The case of a major credit card company illustrates the perils.

    Under a newly appointed CEO, the company was embarking on an ambitious transformation program centered on shifting to a lower-cost operating model. The program involved an array of initiatives, including a cost reduction target for each department. The organization had historically followed a distinctly “federated” model, in which departments were led by strong managers who all favored the same traditional procedure: being assigned a target and then being left alone to get on with reaching it. The new CEO, in furtherance of the transformation program and in keeping with her own more rigorous approach, attempted to introduce various organizational reforms: joint executive-level redesign of the governance model, C-level visibility into the progress of the program, an increase in cross-functional cooperation, and a consistent and systematic tracking scheme based on key milestones. The initiative leaders regarded all of this as an encroachment on their turf and a lack of trust in their ability to execute. They resisted. The CEO changed tack, not wishing to undermine them early on, and for the next three years simply announced the annual targets and let the departments take responsibility for them. The hope was that assigning the targets, and then standing back, would be enough.

    Such a policy may work for simple initiatives, but for more complex initiatives it’s almost always inadequate. Simply setting annual department-level targets will generate behaviors that are short-term and incremental without challenging the business model or striving for sustainably higher productivity. Complex change programs demand a more sophisticated model—a model that includes forward-looking indicators, allows for course corrections, encourages creative and cooperative solutions, including cross-department solutions, and keeps senior management appropriately involved.

    The hands-off, set-and-forget model for allocating targets has three major shortcomings. First, if senior management neglects to inspire ambitions, to monitor progress and make proper course corrections, and to show sufficient engagement, then the initiative leaders will have little reason to go the extra mile. Presented with an annual target, they will likely focus on measures that aim simply to meet it—typically shortsighted cost-cutting measures such as restricting travel or delaying recruitment. After all, such measures are far easier to implement, and far less threatening to the delivery of day-to-day business results, than broad long-term measures such as seeking sustainable savings through increased productivity. Taking the simpler path is the rational choice when you have a very serious day job and understandably want to minimize disruption. Unfortunately, the short-term measures don’t change productivity fundamentally or sustainably. Sooner or later they are discontinued, and when that happens, the benefits evaporate.

    Second, the initiative leaders will likely seek solutions specific to their own departments rather than pursue opportunities that might contribute to collective, cross-department success. In fact, those promising opportunities, potentially conferring a competitive advantage, often remain undiscovered, since individual departments left to their own devices have no particular incentive to look beyond their silos. They might even have a disincentive to do so, because they may rightly worry that they wouldn’t get their fair share of credit for the results or that it would be a futile mission and damaging to their prospects.

    Finally, the hands-off model militates against lead-indicator metrics, timely interventions, and course correction. If senior leaders have little visibility into a departmental initiative, they cannot easily realize that things are going off track—through the pursuit of unsustainable, short-term measures—until it’s too late to do anything about it.

    So how did the credit card company fare? In the first year, almost all the departments met their targets. In the second year, most missed them. By the end of the third year, overall costs had returned to their original unsatisfactory level. So much for the transformation! Disappointed and exasperated, the CEO commissioned a detailed review to try to establish how the program had gone wrong. The review found that the program—just like several previous change programs—had emphasized quick-win streamlining rather than sustainable cost savings and that it had neglected to pursue, or even identify, attractive cross-department opportunities. The CEO should have stayed the course in the early days: when the initiative leaders resisted, she should have persevered in backing the program’s original design, and, leveraging her executive team, she should have sought a sustained productivity boost by insisting on the rigorous tracking and management of initiatives.

    The program management office—sometimes known by other names, such as the transformation office, in the context of change programs—is responsible for the day-to-day supervision and tracking of the change effort. Its role is discussed in greater detail later in this report.