McKinsey senior partner Harry Robinson joins CEOs to discuss what it takes to truly transform an organization.
The next normal: Transformation with a capital T
This collection is the second of five edited volumes to accompany our multimedia series, airing on CNBC, focusing on the forces shaping the next normal.
Business leaders pride themselves on their ability to pivot and course-correct in times of crisis and economic turmoil. But there isn’t a CEO or management team on earth that’s experienced the health, financial and operational headwinds that have resulted from the coronavirus pandemic. These are extraordinary times, and inevitably they have required some companies to lean into these challenges by slashing costs, reducing headcount and halting investments to conserve cash.
But to thrive in the Next Normal, companies need to make more fundamental changes. That’s because if business models and mindsets don’t shift, those costs will just creep back. True transformation—the kind that alters the way a business operates on a cellular level—is what’s needed in today’s uncertain climate. It’s the only path to elevating financial performance, building capabilities and changing culture in ways that will not only get companies through this global health crisis but sustain them in the years ahead.
The good news is that there are companies doing this kind of transformation successfully, and business leaders can learn from their wins. “Transformation is one of the most overused terms in business,” says Harry Robinson, a Los Angeles-based senior partner with McKinsey & Company. “But there are companies out there undergoing real transformations that are creating a sense of urgency, resiliency and momentum to deliver material and sustainable results.”
Of course, a company would never seek out a pandemic to catalyze a transformation, Robinson says. “But it’s here now, and the organizations going all-in on transformation can change the odds in their favor and will accelerate out of this crisis,” he adds. “Those companies will never look back.”
Here are the key elements of transformation—with a capital “T”—and how making the right moves now can pay off in the coming years.
Transformation is one of the most overused terms in business. But there are companies out there truly undergoing transformations that are creating a sense of urgency, resiliency and momentum to deliver real and sustainable results.
Harry Robinson, senior partner, McKinsey & Company
One of the most important indicators of the colossally successful transformations is the scale of the undertaking itself. The magnitude of the ambition needs to be a huge step change in performance. McKinsey research shows that more than 40 percent of a successful transformation’s value comes from growth initiatives—not cost cutting, layoffs or other slash-and-burn strategies. “The companies that are doing transformation right have an all-in mentality from the start,” Robinson says. “Incremental change is not their story.”
For George Oliver, chairman and CEO of Johnson Controls, a building technology and solutions company, the transformation challenge was as clear as it was big: Make the 2016 merger of Johnson Controls and Tyco more cohesive, with a unified strategy and a leadership team all moving in lockstep. Stepping into the CEO’s role in September 2017, Oliver was convinced that small, discreet changes would not fix what was ailing the company. “Tyco and Johnson Controls each had a lot of legacy, but we still needed to blend multiple cultures together and reformulate it in such a way that the combined companies were in a position to win,” he says.
It started with making sure the company had the right leadership in every line of business, but Oliver says it was more expansive than that. It also meant engaging employees at every level of the organization. “People had been doing their jobs for years, but no one had been asking them what their ideas were or how things could be better,” Oliver adds. That was the start of Johnson Controls’ transformation—getting the right alignment at the leadership level, and then “turning the company bottoms up so that we’re getting all the best ideas that over the years weren’t being listened to,” he says.
The work paid off. In July, the company unveiled OpenBlue, its open digital platform that connects traditionally separate systems to make buildings more efficient, sustainable and safe—an especially vital offering in today’s environment. Oliver says OpenBlue was designed to be a game changer, not a quick fix or interim solution. “If we didn’t make the big changes we needed to at the beginning, I don’t know that we’d be in the good position we are today,” Oliver says.
In July, JCI unveiled OpenBlue, an open digital platform that connects traditionally separate systems to make buildings more efficient, sustainable and safe—an especially vital offering in today’s environment.
When it comes to transformation, speed is your friend. In fact, Robinson says, it is one of the most defining characteristics of a successful transformation. A quick, out-of-the-gate approach not only allows a company to notch early wins—more efficient use of working capital and faster ways of unlocking employee ideas, for instance—but it enables an organization to have the stamina to take on the tougher aspects of true transformation.
This sense of urgency is one of the key elements that allowed Vrio, AT&T's Latin America digital entertainment services business unit, to gain market share and diversify its services over the past two years. “It’s almost a sense of ‘the bridge is burning and there’s no going back,’” says Melissa Arnoldi, Vrio CEO. “You have to paint a picture of where the business needs to head and why.”
Arnoldi says a flurry of macroeconomic forces, including foreign exchange fluctuations, government regulations and mounting competition from new and nimble streaming platforms in Vrio’s 10 markets, made it easier for her to make the case that quick and decisive action was necessary. Data reinforced her belief. “We looked at the business over a three-year period and saw that we needed to transform our business,” she says. “You have to be able to back up your vision with data to get people to understand why you’re doing something.”
Share your vision
Any truly successful transformation has to begin with the CEO creating conviction in employees to drive the change being sought. But it doesn’t stop there. For true transformation to occur, employees need to aspire to something greater, the kind of mindset that makes them believe a cultural shift is possible. Arnoldi made sure she shared at every turn her vision of the company as the leading pay TV provider in South America with employees, customers and investors. “You need to develop a transformation story that creates lasting connection to the change you want to see,” she says. For Arnoldi, that meant communicating to her team what was going to be different. “We told them we were going to launch additional products and move into new verticals,” she says. “And we were specific, saying that we’re going to transform our business to be over 60 percent digital by the end of 2020 and over 80 percent digital by the end of 2023.”
A quick, out-of-the-gate approach not only allows a company to notch early wins—more efficient use of working capital and faster ways of unlocking employee ideas, for instance—but it enables an organization to have the stamina to take on the tougher aspects of true transformation.
Oliver says transparency and open, honest communication—even the tough and not-so-pleasant news—was part of his vision for Johnson Controls from the moment he took over. “Throughout this transformation, I said we needed to work a different way in order to be successful,” he says. That meant bringing problems forward, speaking the truth, showing respect and collaborating on solutions. “You can’t pull off an effective transformation if people have hidden agendas and go off and do their own thing,” Oliver says. “There needs to be one vision and a clarity of fundamentals or it’s going to be a mess.”
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Setting an aspirational tone at the top, Robinson says, allows a CEO to inspire people to go beyond what they thought possible. “Bold performance aspirations often lead to greater outcomes,” he says. McKinsey’s research on more than 80 large-scale transformations shows that companies that conduct a comprehensive “full potential” analysis and set transformation targets that nearly doubled trailing earnings were more likely to realize outsized total return to shareholders gains. But for that kind of transformation, the right culture is required.
You need to develop a transformation story that creates lasting connection to the change you want to see.
Melissa Arnoldi, CEO, Vrio
Arnoldi concurs. “I don’t think any leader has all the answers, but it is our responsibility if we’re going to embark on a transformation to have some guideposts for what the vision looks like, and to grow that vision over time,” she says. Doing so is made easier when there’s a growth mindset, she adds. “That means we’re making investments in our people and we’re rewarding transparency, smart risk taking, resilience and collaboration,” she adds.
You can’t pull off an effective transformation if people have hidden agendas and go off and do their own thing. There needs to be one vision and a clarity of fundamentals or it’s going to be a mess.
George Oliver, Chairman and CEO, Johnson Controls
For Johnson Controls, Oliver says transformation and growth was only possible when there was alignment on the fundamentals. “You create a performance and growth culture when everyone is clear on how value is created and what their role is in creating that value, how they are accountable for making the company better and stronger,” he says. “When that all comes together, it’s magic.”
And it leads to greater things. Oliver says OpenBlue was possible because of the early work done to align the company’s fundamentals, get the right leadership in place and instill a sense of momentum and growth into the culture. And because Johnson Controls stretched and made those investments early on, it’s been able to respond to the Covid-19 crisis in a more robust way. For instance, part of the OpenBlue platform uses cameras that can scan multiple people as they enter a building to detect if any of them have an elevated temperature, one of the biggest indicators of infection.
Research shows that 70 percent of transformations fail, but by starting boldly, acting fast, sharing a vision and stretching aspirations, business leaders can flip that script. Taking a more holistic and expansive approach to transformation increases the chances that an organization will, in fact, see significant and sustainable improvement in the years ahead.
Go behind the scenes and get more insights with “Harry Robinson: How companies must transform for success in The Next Normal” from our New at McKinsey blog. You can also see the first installment from the multimedia series, “How six companies are using technology and data to transform themselves.”