How do the best CEOs enable transformation with a capital T? In the eighth episode of the CEO Insights series, senior partner Michael Bucy speaks with Laurel Moglen, McKinsey’s managing producer, to share how CEOs unlock the full potential of transformations to drive outsize performance.
CEO Insights, which features short, sharp perspectives on the evolving role of the CEO, is produced by The McKinsey Podcast in partnership with the CEO Special Initiative.
This transcript has been edited for clarity and length. To catch the full episode, click here.
Laurel Moglen: Transformation is a word that means many things to different people. When it comes to organizations, how are we defining it for our conversation today?
Michael Bucy: For us, we call it a capital T transformation—an organization-wide effort to change how the company operates to drive outsize performance. And by performance, we mean financial performance, operating performance, and organizational performance. These organization-wide efforts are so important because change is tough. But change is now being forced upon organizations because of the pace at which the world around us is changing.
I’ve had the privilege of doing this across all different types of industries—telecom, software, fintech, manufacturing, insurance—and the single most important factor is the role of the CEO. That is the determination of whether these efforts are successful.
Laurel Moglen: Let’s talk about that role of the CEO. What is the CEO uniquely responsible for doing during times of transformation?
Michael Bucy: The CEO sets the tone, the pace, and the scope of the change. CEOs must solve what we call collective-action problems. These happen when an individual or group is incentivized in one way, and they never optimize for the whole because of the incentives that are set up in the system.
The easiest one to conceptualize is what I call the budget problem. Every single organization faces this. The CEO demands, “I want 10 percent improvements.” But the business leader has every incentive to go for incremental improvement over last year—not the full potential. Only the CEO can step in to say, “No, we’re going to go after our full potential.”
Another collective-action problem example is the optimization of the group versus the organization. Within organizations, folks come together in their small groups—the people they work with every single day—and it becomes natural to prioritize what that group needs, potentially at the expense of the whole.
Again, the CEO is uniquely positioned to ensure that everybody says, “The organization is what really matters, not what the individual group wants.” They have to bring the organization together cross-functionally, to engage with each other, to collaborate, to push each other, to challenge each other—so that we realize our full potential.
Laurel Moglen: That leads me to my next question. Is this about the CEO rallying the employee mindset? Are there specific ways a CEO can approach that?
Michael Bucy: The CEO is really the chief storyteller. They’re the person who is setting the vision for the organization and helping the organization craft the case for change. What is the fact-based reason for why we need to transform? Why do we need to change? Why do we need to adapt from what is comfortable and how we’re operating today?
Then the CEO needs to encourage each person in the organization—each executive, each manager, each person on the front line—to figure out their personal “why.” Why am I excited about this? Why am I motivated by this change? What’s my personal change story? This kind of storytelling is so important—not just for the narrative, but to motivate.
Laurel Moglen: We can use employees to help radiate the story. Can you talk a little bit about frontline workers?
Michael Bucy: The most important thing is that each frontline worker needs to understand their role in the change, their role within the company. What do they do every single day? What do they need to bring for the company to be successful?
There’s a story that resonates with me from a mining operation in Western Australia. They’re digging up iron ore from the ground, and one of the things that hinders the mining operations is this sticky dirt. If you’re a truck operator and you hit this sticky substance, it’s going to gum up the rest of the system. There was a worker, Norm, who was an operator at this company. Every single one of his incentives told him to keep going. But he realized he had hit the sticky dirt, and he said, “No, I'm going to slow down.” Not only did he slow down, he also told the person on the night shift, “Hey, you need to slow down as well.” That one act preserved the chain that we were trying to create. It increased the overall throughput, even though he had reduced his own throughput.
Again, this goes back to the CEO being able to cascade that vision down, so that everybody starts to understand their role, by articulating what we’re trying to accomplish as an organization.
Laurel Moglen: That seems obvious, but it’s not, is it?
Michael Bucy: Everybody having their role is an obvious thing, but it’s really hard to do in practice. It requires intense conversations and trade-offs. And it requires working together as an organization.
There are four traits a CEO needs to have during a transformation. One is aspiration, which we talked about: setting the organization up with the ambition and vision. The second is being engaged. The CEO has to be on top of what they’re trying to drive as this change and be regularly engaged in it at the right times and the right moments. Third is that the CEO has to be empowered. CEOs often know what they want to do, but because of the board or other stakeholders, they don’t always have the ability to drive what they want to. The last trait is being effective. CEOs need to step up. They need to make the decisions that only they can make.
Laurel Moglen: What happens when newly hired talent comes into an established workforce during a transformation? How can they be helped to join forces, as opposed to creating friction?
Michael Bucy: Too often, talent coming in joins a moving train. We do a really poor job of getting them up to speed on the collective journey that the rest of the organization has already been on. At the same time, when someone comes in with fresh eyes and a new perspective, they can provide the galvanizing force to get the organization to change even faster. So it’s an opportunity.
But too often, because we don’t do the proper context setting, we don’t create the right moments for them to get onto the moving train, and they start to steer things in a very different direction from where everybody else is going. And the transformation isn’t as successful as it really could be.
Laurel Moglen: What would you say is the single biggest challenge you see across industries that CEOs don’t anticipate during transformations?
Michael Bucy: One of the challenges we see is that bridges aren’t built between the transformation and the day-to-day business. Two things happen as a result.
First, within the transformation itself, we’re operating at a different pace. We’re starting to make decisions faster and behave differently. But when those same attributes aren’t brought into the day-to-day business, everything feels like business as usual, and we don’t act with urgency. That leads to suboptimization.
The second issue is when the change and the transformation are not in lockstep. Therefore, you get into lots of disputes about “I can’t see the financial results here” or “I don’t understand what is really driving my performance,” because at the bottom line, I can’t disaggregate what is driving this.
We emphasize getting closer to the operating metrics of the business. These are the leading indicators that show us where we’re heading. We also make sure we have a tight linkage within the day-to-day efforts and the change in those operating metrics.
Laurel Moglen: What comes to mind about culture and communication that a CEO is uniquely suited to instill?
Michael Bucy: First is that the CEO has to say, “What we’re doing today is not where I want to be in three months’ time, six months’ time, 12 months’ time.” Just the sheer act of setting a vision for how we want the organization to operate is a powerful change. It sets the organization onto a different course.
The second piece is to say, “OK, we’re going to operate differently.” But who is going to be the catalyst of this change? At the end of the day, it’s the leaders within the business. In general, it’s our high potentials, the ones who see the problems in the business every day. They see how we could potentially operate differently. What are the things we need to change? Unleashing them to be able to operate much differently, I think, is another powerful act that allows the organization to run much faster and move in the right direction.
Laurel Moglen: When all the teams are executing this transformation, how hands-on is the CEO in sustaining the desired impact?
Michael Bucy: I’ve got good news and bad news for CEOs. The good news is that you don’t need to be involved with the transformation 24 hours a day, seven days a week. But the bad news is that you do have to be engaged. You do have to be involved.
The cadence that we like to think of is weekly, which is enough to actually get work done—to be able to move an organization forward, to get to the fact base of what needs to be solved, and to tee up the right decisions. But it’s not so long that we’re actually losing weeks and months of a year of performance.