An ambitious transformation plan goes well beyond cost cutting; it sets a higher performance trajectory for the company. In this era of global economic uncertainty, a transformation of the portfolio, operating model, balance sheet, and digital and talent strategies can also build enterprise-wide resilience so that an organization can better handle adversity and continuously adapt for growth.
Yet McKinsey research shows that transformations are tough to pull off, despite the best of intentions. Companies have to get several elements right, including setting ambitious, fact-based targets and building a compelling “why” that goes beyond protecting the bottom line. One factor, in particular, stands out: speed. In today’s business environment, companies have to see value land quickly.
It’s hard to find anyone in the C-suite who is against the concept of speed. But that doesn’t necessarily translate into an enterprise-wide view. From changing mindsets to embedding digital beyond IT, some things take time. Three actions are crucial: preparing for a rapid execution at the start, maintaining momentum beyond the initial launch, and embedding the transformation’s operational infrastructure into business as usual so that the changes stick.
Be ready for the race
Many organizations get stuck in the starting blocks, wasting valuable time, energy, and momentum. One problem is that entrenched behaviors and practices can have a negative impact on achieving rapid outcomes. Companies that take the time in advance to identify the barriers to moving at pace and take action to remove these obstacles are four times more likely than those that don’t to rate their change programs as a success.
Sprinting at the start turns the initial burst of ideas into an achievable, rigorous plan within a few short months. Quick wins can generate excitement, cement commitment, and fuel (and fund) longer-term ambitions. McKinsey analysis shows that successful transformations typically implemented initiatives that ultimately delivered 57 percent of value within six months and 74 percent of fully ramped-up value by the end of the first year (Exhibit 1).
To support a fast start and generate cash for longer-term investments, companies often rely on initiatives that are linked to the balance sheet. For example, improving working capital through better inventory management or fixing invoicing processes often generates cash within a few months of implementation. More broadly, going to the balance sheet helps a transformation get off the ground quickly and funds the investments the company wants to make. In a period of economic uncertainty, a healthy balance sheet helps build resilience and provides companies with options to deploy capital as a recovery begins.
It’s critical to resist the temptation to declare victory too soon, even if initial signs of value creation are promising. Our research shows that organizations often fail to sustain the impact they’ve achieved, as performance discipline erodes after the first year. In these cases, incentives and budgets become misaligned with new objectives, and management teams fail to keep investing in the future, leaving them unprepared for the next horizon.
In year two of a transformation, look for new value-creation opportunities and make sure incentives reflect these refreshed goals and commitments (Exhibit 2).
Build and embed capabilities
The potential for value creation starts to decrease from day one, McKinsey research shows, with nearly half the possible financial benefits lost if companies shift to a slower pace. This underlines the importance of operational infrastructure as a new way of working (Exhibit 3).
Transformations that lose momentum often don’t focus enough on building and retaining the skills needed for success. While McKinsey analysis shows that more than 50 percent of C-suite officers rank capability building among their top three priorities, only about a quarter of them embed capability building in their transformation programs. Building core skills such as understanding capital-investment returns is central to delivering value.
In year two of a transformation, look for new value-creation opportunities and make sure incentives reflect these refreshed goals and commitments.
McKinsey organizational health data shows that when more than 30 percent of employees are engaged in capability-building programs, employee health index scores rise to 46 percent, up from just 12 percent when 10 to 30 percent of employees are involved (Exhibit 4). In this period of low unemployment and changing work preferences, companies can build capabilities to keep and attract workers.
At the same time, capability building delivers better TSR. Companies with more than 30 percent of employees engaged in capability-building programs deliver roughly 40 percent more TSR than those with no such programs.
Focusing on capabilities allows companies to maintain a rapid pace throughout the transformation, from removing barriers so they can execute quickly to maintaining that early momentum and embedding successful practices for the long term. Capturing untapped potential is not a luxury in today’s ever-changing business world—it’s essential.