How capability building can power transformation

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Picture this: an international manufacturing corporation with thousands of workers is spun off from its parent. In less than a year, its stock price drops more than 80 percent, morale plummets, and measures of the organization’s health drop into the bottom quartile of its sector. Something has gone very, very wrong.

Fast-forward four years, and the company’s stock price has increased sixfold. A step change in organizational health has taken the corporation from the bottom to the second quartile, with its employees feeling more connected to each other and invested in the success of the company. Plant safety has dramatically improved, with increased discipline and effective risk management. Customers have noticed and celebrated the changes. One even calls the CEO to say the manufacturer will be the customer’s preferred vendor going forward.

So what changed? In this real-life example, the manufacturing company undertook a full-scale transformation effort to change its trajectory on performance, organizational health, and one other crucial value-building element we call “capabilities,” or the hard and soft skills needed to help organizations reach—and sustain—their full potential.

When it comes to enterprise-wide transformations, we know that most companies miss the mark on capabilities during their initiatives. While the majority of organizations recognize the importance of a skilled and motivated workforce, many don’t devote enough time and resources to developing one. The priorities lie elsewhere, and an irreplaceable opportunity is missed. For others, foundational capability building sounds too simple—we are already doing this, a CEO might think. But in our experience, what sounds like common sense is rarely common practice across an organization, and that leaves opportunities to better performance on the table.

Capability building goes well beyond traditional training of employees: it’s about fundamentally changing how the work gets done. It’s also one of the best ways to energize people, from the C-suite to the factory floor, to support the transformation in the first place. Without that energy, achieving and sustaining a successful transformation becomes exceedingly difficult—perhaps impossible. But with effective capability building, companies develop the mindsets and behaviors to deliver transformational gains and add to these gains over time, embedding an execution engine for continuous value improvement.

In this article, we explore the essential elements of a robust capability-building program. We show how empowering employees with new skills not only enables sustainable change at scale but also helps the bottom line, as it did during the holistic transformation eventually undertaken by the international manufacturing corporation previously described.

The building blocks of an effective capability-building program

Capability building changes the way people go about their jobs. It strips the workday down to its most basic components and rebuilds it, embedding new habits around timeworn tasks. The lessons can be basic (for example, how to hold a meeting in 30 minutes instead of an hour and how to write the most effective emails) or more sophisticated (for example, how to prioritize responsibilities and how to anticipate, and thus ward off, poor project outcomes). They can also be technical or functional in nature. For example, to create an efficient supply-chain organization, employees can build capabilities in forecasting, segmented networks, demand planning, inventory management, and more. Many of these core ideas sound like common sense, but we’ve found that they are rarely common practices consistently applied across an organization (see sidebar, “Approaches to closing capability gaps”).

Because this disconnect is ultimately behavioral, we turned to behavioral science for solutions. Three key elements are necessary for an effective capability-building program: leadership role modeling, widespread employee engagement, and virtual delivery.

Role modeling

Research tells us that people mimic—both consciously and unconsciously—the actions of the individuals and groups around them. One of the best ways to drive the adoption of new mindsets and behaviors is by ensuring that senior leaders model the desired change.1The psychology of change management,” McKinsey Quarterly, June 1, 2003, When employees see highly visible colleagues behaving differently, it reinforces the new way of working and signals a commitment to the transformation. Indeed, when senior leaders role model the behavior changes they’re asking employees make, transformations are 5.3 times more likely to be successful. This means it’s often best for senior leaders to be the first participants to complete a capability-building program.

This was the case at the international manufacturing corporation mentioned previously. When executives first took the pulse of its employees, the company scored in the bottom quartile of McKinsey’s Organizational Health Index (OHI).2 Survey results and further discussions showed that many employees lacked trust in top management as the organization’s financial position deteriorated. Leaders weren’t communicating their goals or progress clearly, and no one was accountable for results.

By role modeling new norms, senior leaders helped rebuild trust in the organization and the transformation itself—capability building included. By changing their own behaviors, they signaled to the organization that this change was real, thereby building trust.

The company’s former chief transformation officer recalls that employees were convinced that capability building was a worthwhile endeavor only when they learned that they could trust what management was saying. “Management had to actually do things that were different, show some evidence of change, take some risks.”

The CEO joined in as well, attending many of the capability-building workshops that the company held and interacting with employees across role levels around the world. Employees, watching closely, responded in kind when it became clear how important the program was to the boss. A virtuous cycle of encouragement and recognition was born. The CEO even began calling employees directly if they did something well or demonstrated the behaviors that the program was trying to enforce. To this, frontline employees at first expressed disbelief. Some actually hung up on the CEO, thinking that the call was a prank. When it became clear that it wasn’t, employees proudly related the turn of events to one another.

Not all top managers readily accepted the program, however. For one, the company’s head of talent, a key player, was skeptical. He thought that the skills felt too basic and that the company was already doing enough. He changed his mind when he realized that however simple the capabilities may have sometimes appeared, the organization didn’t consistently apply the skills effectively, which dragged down productivity, reinforced silos, and generally short-circuited the value building, threatening the ultimate aspiration: the success of the broader transformation.

Widespread employee engagement

For capability building to occur, transformation-program participation must be sufficiently widespread. Even when propelled by top-level buy-in, capability building still needs to be scaled well beyond a few rounds with a chosen few because employees who aren’t included in a transformation feel disengaged, disconnected, and left behind. Anything less than broad engagement defeats the purpose.

In fact, we’ve found that to create the foundation for truly widespread change, a capability-building program must directly engage at least 25 percent of the workforce. In our experience—and in behavioral-science research—this is the tipping point that must be reached for a minority of employees to create a new cultural norm.3 In other words, by engaging at least 25 percent of employees, the critical mass of the workforce can overturn deeply embedded behaviors within the organization and enable transformational change to scale across the enterprise.

To inspire behavioral change in all levels of an organization, a capability-building program ought to start by targeting the organization’s top influencers. Those people, whatever their rank, should be among the first to go through it. The idea is that these influencers will serve as evangelists for the new ways of working. Influencers can inspire their colleagues to change through use of personal anecdotes and compelling arguments.

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Before the COVID-19 pandemic limited in-person learning, one global manufacturing organization asked the head of each of its production plants to complete the company’s capability-building program and then lead in-person workshops on the skills for the employees in their plants. Most of these production chiefs had no formal experience as facilitators or public speakers, but their influence was felt across each of their sites. As one frontline employee said later, “The power of this program was not just that I got to spend time in the same room with the factory head, but they were actually supporting me to grow—supporting me to improve and do my job better.”

The struggling international manufacturing corporation presented as our first example also took the influencer approach to heart. It made sure to run workshops in a number of locations around the world, and at least two members of its executive committee attended each one. The company was sending a message: we care about you and your development.

Shaping a new learning environment: Virtual delivery

Shaping the learning environment is another essential part of capability building. In the age of the COVID-19 pandemic (and in all likelihood, going forward), that means capability building must be deployed primarily through virtual means. Fortunately, capability building easily lends itself to virtual learning.

Moreover, there is evidence to suggest that virtual environments can deliver experiences that are equivalent to or better than those of traditional in-person programs and workshops. Some 87 percent of participants in newly adapted virtual experiences in recent months agreed that the programs were at least as effective as in-person events would have been.

Perhaps the most significant aspect of a virtual capability-building program is the opportunity for global reach. At multinationals, it’s paramount that as many employees as possible, in every geographical nook and cranny, have the opportunity to learn and embed new skills. In the more traditional in-person workshop protocol, as meritorious as it is, that’s very hard to achieve because of logistics and cost; imagine flying thousands of people in and out of regional hubs.

For the international manufacturing corporation’s head of talent, the program’s digital evolution was a game changer, solving any concerns over the breadth of participation. “After the first few in-person workshops, people were knocking down my door to get in. The program had gone from ‘this is too simple and doesn’t make sense to me’ to ‘Why am I not invited to this workshop?’ Once we launched the digital program, it was available to everybody.”

Because of a transnational nature, live virtual learning allows for a greater and deeper level of feedback. Chat functions in videoconferencing platforms enable participants to converse easily and ask real-time questions in ways that would be too disruptive in a conference-room setting. Virtual formats also allow for configuration and tailoring. When the transforming manufacturing company launched its digital program, lessons were translated into multiple languages, reinforcing, once again, the underlying message: management is investing in you.

Capabilities and transformation

Typically, there are four sequential capability-building steps in supporting a successful transformation. First, individual employees learn new capabilities. Second, teams apply them, and capabilities and behaviors change. Next, the organization begins to see improving effectiveness. Finally, the company achieves its financial aims and other goals.

Knowing this, it would seem that adopting a capability-building program would be common sense. However, as noted, it’s not at all common practice. Unfortunately, the reasons that companies don’t prioritize capability building—the learning outcomes are too basic or too distracting or a key C-suite player just isn’t interested—amount to lost opportunities and leave the outcomes of transformation programs to chance.

At the same time, organizations that prioritize skill building often have programs that are ineffective. In a recent McKinsey survey of 1,240 business leaders around the world, nearly 80 percent—up from 59 percent before the COVID-19 pandemic—said capability building is extremely or very important to the long-term growth of their companies. Yet just one-third of these respondents believed that capability-building programs are often or always successful in achieving their objectives and business impact.

The international manufacturing corporation’s experience, however, shows how a robust capability-building program can propel a transformation. As noted previously, the company had landed in the bottom quartile on its OHI score. But within four years of the transformation’s start, the company’s score had more than doubled, placing the organization in the second quartile.

On the ground, the issues with accountability and business-unit communications that were at the forefront of the company’s problems both changed for the better. Newly engaged employees generated almost 5,000 ideas for improvement, many of which impacted the company’s bottom line.

Those ideas for improvement brought great value to the corporation and vested more people in its success. As the company’s former chief transformation officer put it, “We can’t see everything from up here. Great ideas often come from other parts of a company. Through capabilities, management can give frontline employees a process to take an idea, champion it, and get recognized for the work.”

Other data underscored the importance of capability building in a transformation. The capability-building program’ module on effective meetings freed up 2 to 3 percent of the time on employees’ calendars. That may not sound like much, but when applied for a year across a company with thousands of employees, that’s a lot of time that can be used for more productive work or even personal activities.

Compared with peers, the company became more nimble thanks to its capability-building efforts. In one instance, a group that had taken “premortem” coaching in the capability-building workshop sat down to forecast what black-swan events might adversely affect the plant over the course of the ensuing year. One of the answers was a category 5 hurricane, which isn’t an everyday (or even annual) occurrence. Planning for that contingency, the company bought extra equipment and developed special procedures, just in case. When such a hurricane actually did occur, the plant came back online weeks before those of nearby competitors did. Implementing the transformation and the capability building that supported it also correlated with a sixfold increase in share price in fewer than four years.

Anecdotal evidence aside, research points to the power of capability building. A recent McKinsey analysis of organizations undergoing at-scale transformations showed that the proportion of employees engaged in capability building during transformations has an effect on improvements in organizational health (Exhibit 1).4 Organizations exposing at least 10 percent of their employees to such programs were twice as likely to improve their OHI scores as were organizations that didn’t. The average rate of improvement was nine percentile places—versus no improvement at all. Organizations that included upward of 30 percent of their workforce in formal capability-building programs improved their OHI scores by an average of 12 percentile places.

Companies with capability-building programs in their transformations make greater improvements in organizational health.

The economic benefits are also real (Exhibit 2). Our analysis of 38 publicly listed companies showed that when companies included more than 30 percent of their workforces in capability-building programs, they enjoyed total returns to shareholders that were 43 percent above benchmarks after 18 months.5 Just as important, the benefits flow both ways: employees are excited to develop valuable new skills and knowledge.

Companies with capability-building programs in their transformations deliver better total returns to shareholders.

Transformations are difficult to execute and even harder to sustain. Tens of thousands, sometimes hundreds of thousands, of employees need to be engaged and aligned, regardless of where they live, the language they speak, or the culture they know. Effective capability-building programs enable organizations to develop the mindsets, behaviors, and skills needed to power a transformation and achieve their full potential.

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