Tip of the Spear Ventures

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Setting Business Transformation Targets

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The Point: The establishment of goals is an important step in any business transformation initiative. If done well, this setting of business transformation targets exercise sets the tone for the entire program and fundamentally alters the way people think. It also allows leaders to reach for the impossible. We have learned four important lessons from our two-decade experience working with companies in business transformation (change) initiatives. During the target-setting phase of the transformation, companies should keep these four principles in mind. So, in this post we’ll explore setting business transformation targets… Enjoy!

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Principle #1 – You’re Going to Need More Money

Recently, we compared the actual savings made by the 15 companies that we have worked with to the initial numbers they projected. It was quite instructive. The average company delivered 2.7x more than what their senior executives expected when they started the transformations. One industrial company achieved a result that was 4.7x greater than its original target of $50 million.

This business was not unusual. Many managers are slaves to their past and more inclined to return to old routines than to explore the possibilities of doing things differently.

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Principle #2 – Thinking Incrementally can be Counterproductive

We recommend that companies start with the theoretically possible number and adjust this number downward when there is clear evidence that certain actions may not be realistic. Arguments for a lower number should be supported with facts and the person arguing for it must bear the burden of proof. They must ask the question, “Why can’t this be done?”

For example, senior leaders in a technology company initially opposed plans to reduce the travel time between the corporate headquarters and a regional office. However, frontline workers suggested that a sub-regional office be built in the region to further reduce transit time from work by twenty percent. This was a win-win situation for both the company and its workers. The company is now considering how they can take things a step further with work from home (WFH) suggestions received.

Principle #3 – Get an Independent Parties Opinion

Intending leaders will find it difficult to move beyond incremental thinking. Intending leaders find it difficult to move beyond incremental thinking. Third parties and an internal team that isn’t burdened by the “how things are done around here” mentality will be able to offer a true perspective. We suggest adopting the mindset of an investor or private equity firm and looking at every area of the business with objective analysis of competitors and benchmarks. Companies must move beyond “groupthink.” They need to be bold and break away from the kind of consensus that suggests a 5 to 7 percent improvement, but not more. It is important to establish a goal without giving exact details about how it will be achieved.

Principle #4 – Opportunities Exist Where You Least Expected Them

Too often, companies limit their goal setting to the search for savings. Companies often overlook opportunities to increase productivity, implement pricing initiatives, improve sales force effectiveness, reduce working capital (in response to excessive stock buildup), or address customer dissatisfaction. Companies that are most ambitious tend to use all of the available levers. Setting aspirational targets shows the business that you are open to new ideas and ways of doing things.

SUMMARY

In this post we’ve explored the topic of setting business transformation targets. Again, the establishment of goals is an important step in any business transformation initiative. If done well, setting business transformation targets set the tone for the entire program and fundamentally alters the way people think. It also allows leaders to reach for the impossible. We have learned four important lessons from our two-decade experience working with companies in business transformation (change) initiatives. During the target-setting phase of the transformation, companies should keep these four principles in mind.

Sam Palazzolo

The ‘How?’ of Business Transformation

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The Point: In many industries, business transformation or change management programs often fail. We know that business transformation is not for the weak of heart. We’ve seen change leadership in a company not be united and/or committed before, during, and especially after transformations. So are there portions of the business that leaders need to pay attention to? Seriously, not only the specific initiatives but also the changes that leaders are making as to how the business actually works? In this post we’ll explore the ‘how?’ of business transformation in search of a performance infrastructure that is essential for a successful transformation. Once discovered, it will allow you to achieve rapid, dramatic and long-lasting business improvement. Creating an “infrastructure of performance” can help ensure success… Enjoy!

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The Case for Business Transformation – Why?

Today’s business environment is full of disruptive forces. Even in less volatile industries, disruptive forces abound. These disruptions include technological innovation, regulatory changes and pressure from activist investors. Many technology companies — both software and hardware — are undertaking such business transformations. Sometimes they do so in response to external pressure, but other times it is to stay ahead. These companies, regardless of their motivations, are trying to introduce new ways of working for large numbers of employees with the aim of achieving a step-change in business results.

The sad reality is, however, that the majority of these organizations are not able to change. Business transformations more than often fail. Research has shown that 70% of large-scale, complex change management programs fail to achieve their goals. Common pitfalls are a lack or inadequate management support, low employee engagement, poor cross-functional collaboration and a lack in accountability. A major change in mindsets and behavior is required to sustain a business transformation’s success. This is something that very few leaders are able to do.

As practitioners in Business Transformation, The Zeroing Agency — a Tip of the Spear Venture — focuses on supporting such turnarounds and transformations. When it comes to Business transformation, we’ve seen it across all industries, and we know that the hardest part of improving performance isn’t deciding what to do but rather — how to do it. This article will discuss an important component of the ‘how‘ of business transformation: the creation of an “infrastructure for performance” which is made up of people, processes and tools that allow successful execution and sustainable results.

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Performance Improvement Requires a Holistic Approach

Companies in financial trouble tend to be more focused on cost reduction and immediate solutions. Many consumer-focused businesses are able to offer stable and healthy product categories. These companies don’t see transformation as a struggle for survival. It’s about reaching the full potential of the company (going from good-to-great) or responding to external challenges or opportunities, such as learning new ways to win or moving away from a historical money-maker.

We have found that no matter what the circumstance, true transformation occurs when the leadership team accepts the idea that there is a holistic approach to changing the way the business operates. This includes addressing all factors that add value to the organization, such as top line and bottom line. This is not an easy task. Ordinary transformation approaches often produce suboptimal results.

To achieve extraordinary results, we believe a comprehensive, highly disciplined methodology–encompassing both the “what” and the “how”–is needed (exhibit). The “what” refers to the smooth flow of specific ideas and initiatives throughout three phases: planning, independent diligence, and implementation. For the experienced executive, these phases will be familiar. We find that executives are more focused on the individual initiatives than how the company must change. This is a problem that many leaders feel. They express concern about sustainability and execution risk, and know that initiatives won’t stick unless they fundamentally change the way the business operates. How can an organization transform its operating model? The “how” is broken down into two parts: performance infrastructure and change management. Many organizations find change management challenging. We will discuss this in detail in a future article. This article will focus on the performance infrastructure. It is essential for effective alignment, communication and coordination at executive level during a transformation.

Making Change Happen at Speed

Performance infrastructure is made up of people, processes, and tools that all work together to deliver superior execution and value. It is the heart of a transformation effort, and plays an important role in its success.

The People: A Governance Structure Lead by a Chief Revenue Officer?

To oversee the execution of each “workstream” (or area of activity), ensure decisions are made quickly, and keep the transformation on course, companies must create a governance structure–specifically, a transformation office (TO) comprising a few respected executives supported by analysts from the finance and HR functions. The Chief Revenue Officer (CRO) should lead the TO and be part of the company’s executive committee. The CEO should be regularly updated by the TO on progress, and highlight issues and possible solutions.

You might wonder, “Is a CRO in charge of business transformation really necessary — or appropriate?” The CEO should lead the transformation. We are unambiguous in our answer. The CEO should be the leader of the company. A full-time, experienced CRO should oversee the transformation. Why?

A CRO with extensive experience in leading sales in companies experiencing business transformation is the ideal candidate. The CRO should have a vision of what is possible. This includes a view of the company’s performance and current capabilities, as well as a realistic plan to encourage different groups to work together.

This is a demanding job, especially in comparison with the already monumental duties assigned typically to a CRO. However, the CRO must radiate confidence and gravitas from the beginning. This will ensure that the organization is motivated and inspired, no matter what the circumstances. The CRO should not be a stern, egotistical dictator. Instead, they must have the ability to see and judge how people are doing so that they can reach their full potential. The CRO should also be able to take deep dives into complicated issues important to the company.

The CRO should extend the CEO’s reach and have the authority and mandate to manage all levers and influence decisions regarding personnel, investments and operations. The CRO can be an important part of “getting people on the bus,” making key decisions regarding the addition or removal of managers.

Many companies lack the ability to find someone with these qualifications, let alone one who can step in and fill the position. Therefore, the CRO often comes from the outside. Although company leaders might be concerned about the outsider, the ability of an outsider to see the business and make decisions without being restricted by internal politics is one of the most important success factors for a CRO.

The Process: An Unstoppable Cadence of Delivery

Ineffective business transformation is possible if it takes too long. A weekly schedule of transformation meetings is essential to creating a performance infrastructure. Most turnarounds are managed by a project management office that meets once a week to discuss all workstreams. We recommend a 60-to-90-minute weekly meeting for each workstream. In addition to a weekly TO meeting of two hours, we recommend a cadence for weekly transformation meetings. This cadence works because it is relentless and aggressive. It enforces “closed loop” accountability, accelerates implementation, and prevents “pocket vetoes,” other delay tactics, and slippage.

Meetings, and in particular the question-and answer exchanges between CRO and line leaders, are essential for holding people accountable. This is not a consensus-driven approach. The CRO should be open to confrontation when managers fail to meet their promises. Meetings should be transparent and honest. This allows the organization to assess its current situation and identify the best solutions. Transparency is essential to help everyone understand the company’s priorities and decision-making process.

These weekly meetings provide a platform for discussing and debating difficult tradeoffs between revenue generation and cost reduction, as well as for refining individual plans for each initiative. The TO is able to quickly make cross-functional decisions and help prioritize and evaluate competing priorities. The weekly meetings are a valuable tool for developing new talent, and identifying individuals who can be the most beneficial to an initiative. The weekly meetings were used by the TO to identify highly-motivated and high-performing individuals to help develop and build the mobile app.

Although the weekly cadence is an important building block in the transformation process, it’s not sufficient on its own. To instill an execution-focused mindset into daily decision-making, monthly value analysis to quantify the bottom-line impact and an annual “refresh”, which plugs into budget cycles to rekindle idea generation and foster continuous improvement, it should be supplemented with daily performance management.

The Tools: Transparent Reporting and Accurate Tracking Systems

The tools and systems that are used to monitor business transformation performance make up the third component of the performance infrastructure. These might include organizational-health assessments, benchmarks, value-capture models, and visual management and planning aids. Advanced initiative-tracking tools, such as those that can be sorted according to owner, department, delivery status and other criteria, allow users to quickly see the progress of all initiatives. These tools should be easy to use, allowing users to identify delays and trends, track impact, and create rich, yet simple reports. These tools should be accessible to all involved in the transformation.

Our experience shows that the best tools for leaders to monitor the impact of initiatives have the greatest success rate in business transformations. Too many executives simply launch initiatives and hope that the money will eventually show up in their company’s bank accounts. Initiative owners can use sophisticated tracking tools to tie each initiative’s impact to a profit and loss line item. Executives can use this level of detail to make sure that each initiative has a positive impact on business results — It also builds in additional layers of accountability towards achieving the ultimate business transformation goals.

SUMMARY

Business Transformation is not for the weak of heart. Before embarking on a change management program, change leadership in a company must be united and committed. Once they have achieved this, they need to pay attention to not only the specific initiatives but also the changes that they are making to how the business actually works. A performance infrastructure is essential for a successful transformation. It will allow you to achieve rapid, dramatic and long-lasting business improvement.

Sam Palazzolo

Private Equity’s Lean Into Business Transformation

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The Point: Private Equity-backed businesses outperform their business counterparts in periods of economic uncertainty and/or business transformation because their leaders are more involved in leading. If you’ve read anything about Private Equity or Business Transformation — or Business in general over the last few years, it’s likely that you’ve heard a lot about leaning in. Recently, we’ve encouraged clients to “lean in to business transformation,” or told leaders to “lean in on innovation,” or “detail the future by leaning in.” So we pulled-up recently and asked ourselves at Tip of the Spear Ventures and our Business Transformation Consultancy, The Zeroing Agency, “What’s with all the leaning in going on here?” When business leaders actively accept challenges and seek more responsibility — especially in order to progress towards goal attainment, the “lean in” movement makes sense. And in no other area of business ownership does leaning in on business transformation play out better than with Private Equity. So in this post, we explore Private Equity’s Lean In To Business Transformation… Enjoy!

Private Equity's Lean Into Business Transformation

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Private Equity’s Business Transformation Performance

It is well-known that the top private equity firms have the highest returns on equity by using financial leverage to improve the strategy and operations and then exiting at higher multiples. PE advocates also argue that strong board governance, management incentives, and a concentrated shareholder pool are essential for long-term success.

Nothing represents business transformation than those industries faced with difficulties, like in oil and gas, as well as mining, in the wake of falling commodity prices. McKinsey conducted a study to determine if more disciplined PE practices would make a difference in difficult economic times. They compared the performance over a period of nine years amongst 659 PE-backed enterprises and public companies in different sectors. They found that PE-backed businesses outperformed public peers in business transformation efforts and those recovering from business distress. This was even after taking into consideration a higher probability of bankruptcy.

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Is Private Equity Just Better At Business Transformation?

PE ownership has some advantages over public ownership in business transformation. Based on our experience with both types (full disclosure, Tip of the Spear Ventures is a Private Equity firm), we have found that PE boards are more active in setting ground rules and willing to hold management accountable for a business transformation or turnaround. For example, the most successful PE-backed companies boards quickly change the rules of engagement, communicate performance targets clearly, establish a timetable and determine if the CEO and the leadership team are capable of executing the plans. We have observed that these successful PE boards are also very adept at shifting organizational behavior away from “normal” working mode and into “overdrive” mode when planning progresses to execution.

The Lean Into Rules for Business Transformation

These lean into rules — or requirements — for business transformation are not mandatory for all leaders and their companies boards. Others may not have the time or motivation to follow these guidelines. We believe boards and leaders of public companies can benefit from the urgency, energy, and hands-on involvement in rapid owner-assisted business transformations. PE governance offers clear benefits during difficult times as well as the tangible benefits of active board leadership, and direct owner accountability. These are able to truly transform the game and provide the perfect setting for “lean into” moments for business transformation.

SUMMARY

In this post, we explore Private Equity’s Lean In To Business Transformation. While there is much success provided for PE-backed organizations success during business transformation, it’s important to realize that Private Equity does not own the exclusive rights to business transformation success. The key underlying concepts of urgency, energy, and hands-on involvement regardless of ownership structure are elements of success for those seeking business transformation.

Sam Palazzolo

How to Effectively Communicate Your Business Transformation Initiative – Five Tips!

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The Point: In business transformation initiatives, everyone scrutinize every detail – Stakeholders, Investors, etc. So how can you effectively communicate so as to manage the discussion? At Tip of the Spear Ventures’ Business Transformation Consultancy — The Zeroing Agency — We’ve seen business transformations achieve less than full-potential results because of communication. So, in this post we’ll explore how to effectively communicate your business transformation initiative along with five tips… Enjoy!

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Business Transformation Communication

As a leader, you know that there are always a few challenges present in your business. Communicating with stakeholders (Your superiors, subordinates, and peers) during a business transformation initiative is perhaps the most difficult aspect. Leaders must be prepared for increased scrutiny of disclosures and reporting. Leaders are subject to rigorous performance discussions about their managerial-abilities. Leaders in business transformation situations must convey humility and confidence about any mistakes made, as well as a belief that they can correct them.

Leaders, Team Members, etc. will scrutinize every financial statement, report and public appearance for signs of weakness or strength, regardless of whether the business transformation is a formal restructuring or strategic redirection. Competitors will use any hesitation or ambiguity to win customers, suppliers and key employees. All these challenges are present simultaneously, when core business management is most challenging.

Communication during business transformation is not an easy task. Our research suggests that there are some guidelines for communicating with stakeholders. Leaders can improve their focus and support their teams by focusing on the team’s perspective, monitoring changes in support base, identifying future milestones and building trust/credibility.

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Five Tips to Effectively Communicate Your Business Transformation Initiative

Tip #5 – Communicate from the Team’s Point of View

To achieve a successful business transformation, there must be input from many stakeholders such as investors, board members, owners, employees, customers, suppliers, government agencies, communities, and unions. It is important to communicate early and often in order to establish a consistent narrative for stakeholders and convince them that the business transformation is a win-win proposition.

Investors hold the purse strings. Employees may be motivated to work harder if they acknowledge a company’s achievements and reward it by increasing their share price. If investors remain negative about a company for too long, it can lead to low morale and defections that ultimately affect the viability of any business transformation. A decline in share prices can lead to activists launching attacks or to a takeover bid for a company with a lower intrinsic value. In such a situation, news that is not good news is often considered to be bad news. This process can be accelerated and accompanied by increased risks from a lack of communication.

Communication with investors and team members is important to set the tone for all discussions. It is tempting to adapt messaging for different stakeholders. We have found that this can lead to confusion, conflicting narratives and increased risks. Some cases ended badly because the company misrepresented what it said to whom. We have also seen messages from internal management leak to investors and other stakeholders (such unions) or messages meant for employees confuse employees about company priorities.

Tip #4 – Watch for Shifts among Core Supporters

Even in times of great fortune, smart leaders invest their energy understanding the views and values of their most important supporters. These “intrinsic supporters” base their decisions on a thorough understanding of the company’s strategy, performance and potential for long-term value. They are more likely than short-term supporters to support leadership during a business transformation and to help the company’s stock prices move as it develops. However, we have found that supporters can shift more in times of business transformation than in times of crisis. This can indicate the difficulty of the transformation ahead.

Leaders can benefit from a thorough analysis of these supporters to help them assess the potential impact of any improvements. External agents such as public-relations or communications firms can help to identify pain points. Leadership must address these issues head-on and not hide behind pleasant statements and platitudes. For example, one company’s supporters praised management’s efforts in addressing hot-button issues raised during meetings between top supporters and the board of directors.

Tip #3 – Share a Specific Vision for the Future

A company going through a business transformation should have a clear and compelling strategic vision about its plans to fix the root causes of underperformance or distress. This meant that one client had to recognize its shortcomings in capital discipline and commit to improving return on investment and short-term results. It meant that another client had to integrate ten previous acquisitions that had tripled its size, reduce fragmentation and build a more efficient central support system.

A vision should include financial goals and an outline of how they will achieve them. The organization should be open about the tradeoffs it is making between saving money to improve the bottom line and investing in the business to sustain its performance after the business transformation efforts are complete. We have found that investors are open to reinvestment as a key part of long-term value generation. They are willing to support if they know what investments are being made and when they expect returns.

Although being too precise about timing can lead to problems, investors often value and sometimes demand a guidepost. One client company, for example, set a midterm goal to grow earnings margin by 18 percent to 20 percent. It regularly reported on progress towards that goal during earnings calls and in reports. A company that was part of a cyclical industrial industry business had been earning lower returns for five years. It set bold goals to return capital invested at or above cost. This goal included estimates of margin and cost improvements from its largest divisions.

Tip #2 – Build Trust & Credibility

Leaders of companies that are underperforming will not be able to regain trust and credibility with stakeholders until they have a discounted version of the improvements they claim. To regain trust, leaders must be transparent and open about their work and inspire confidence in their ability to do the right thing.

Tip #2A | Get Rid of All the Bad News. Leaders should be as honest as possible right from the beginning. This is a well-known principle in politics, but it also applies to businesses going through a business transformation. The opportunity for a new leadership team to admit all past failures and begin fresh is a wonderful one. One example: A company’s stock rose after it announced a write off of over $1 billion. Investors and stakeholders saw this as a sign that the new leadership team would take responsibility for past mistakes and make tough decisions about exiting investments that were still taking capital and management’s time. The task of a current leadership team is more difficult. Strong leadership is required to critique one’s actions and sometimes risk being replaced. Investors and stakeholders might be more patient when a business transformation is in progress, but they will wait for evidence to prove that it is working. If bad news keeps coming in, even the most dedicated stakeholder or intrinsic investor’s patience will be worn thin.

Tip #2B | Establish a Track Record of Delivering. Only communicate the goals that you are confident you can reach–using metrics and milestones that you review regularly. Then prove that you can accomplish them. Credibility is important in a turnaround. Nothing can undermine it more than making promises and then failing to deliver. Metrics don’t have to be strictly financial. One company, which had repeatedly missed its output and financial targets, focused its business transformation goals on operational metrics to show tangible improvement in performance. For instance, it tracked progress towards overall equipment effectiveness. Although these operational metrics weren’t directly related to top-line performance they provided stakeholders and investors with a way for them to monitor their leaders and hold them accountable for making improvements.

Tip #2C | Offer Incentives to Targets. Talk is cheap and sophisticated stakeholders and investors tend to gravitate towards leadership teams that are willing to put their money where it is needed. Structured compensation packages that directly tie them to business transformation targets and having board members and executives buy significant amounts of stock in a company are signs of confidence and commitment to keep their promises. One company presented a new incentive plan for business transformation that aligned incentives between leadership and frontline employees based on similar performance metrics. Stakeholders and investors responded positively to this plan, citing it as an example of the company’s focus and commitment towards turning a new chapter and a reason to keep their current position.

Tip #2D | Increase Transparency. Honesty can be helpful not only in the financial guidelines, but also for specific projects. Two made a habit of describing — during earnings calls or investor gatherings — 10-20 projects that would improve operational efficiency, cash generation, and worker behavior. The stakeholders and investors noted that they were more impressed by the clear picture of the transformations that these companies underwent and that they believed that the margin improvement was more sustainable than shortsighted cost reduction.

Tip #2E | Be Confident. Leaders need to project confidence in their ability to weather difficult times and compete with other companies, as well as a positive outlook on the company’s future. They must also show humility when faced with distress, regardless of whether it is due to past underperformances or external factors. Stakeholders and investors will be looking at word choice and tone to identify signs of arrogance or overconfidence that can result from denial of past mistakes.

Tip #1 – Brand the Business Transformation

Although branding a business transformation might seem like marketing to many executives, it can be a powerful way to create a focal point for the outside world and amplify the story to make the rebuilding effort more credible inside the business. For example, a client company gave a succinct name to its transformation efforts and included it in all of its external communications. Stakeholders, investors and media began to mention the project name in their communications. This was a shortcut for the company’s impressive transformation. It made internal and external communication more cohesive and gave employees some external recognition.

Brands can convey a feeling of new beginnings. A campaign name can be attached to write-offs, exits of failed ventures, or even boring PowerPoint templates for earnings call slides. This will reinforce a consistent, compelling story about change and help build critical momentum.

SUMMARY

in this post, we explored how to effectively communicate your business transformation initiative along with five tips. In business transformation initiatives, everyone scrutinize every detail – Stakeholders, Investors, etc. So how can you effectively communicate so as to manage the discussion? At Tip of the Spear Ventures’ Business Transformation Consultancy — The Zeroing Agency — We’ve seen business transformations achieve less than full-potential results because of communication. Why?

Communication is not an alternative to performance. A stock price can only be driven by beating expectations and punishing short-sellers quarter after quarter. Leaders can build momentum by communicating with investors and other stakeholders in a thoughtful way to help them raise a company that is struggling to create new value through business transformation.

Sam Palazzolo

Keeping a Long-term View During Business Transformation

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The Point: Business Transformations demand an intense focus on short-term performance, but success needn’t come at the expense of long-term value. At Tip of the Spear Ventures, our Business Transformation consultancy — The Zeroing Agency — we see this desire for focus at times competing with successful initiatives outcomes. The question we ask most often is, “Should Short-term achievements compromise the Long-term success of overall Business Transformation?” So, in this post we’ll explore the importance of keeping a long-term view during business transformation… Enjoy!

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Business Transformation Long-term View

Anyone who has been through a business transformation knows that leadership requires a keen focus on the immediate results. Some moves are obvious. For example, incorporating value-creation metrics in a long-term vision, and using aggressive cash-management techniques, can help fund restructuring while avoiding existential crisis down the line.

Some moves are more risky. Leaders can be tempted to make rash decisions that could lead to irreversible financial ruin or worsening of their company’s long-term health. There are many examples of companies that have survived financial crises by cutting off discretionary spending only to lose their business later on when they were unable to rely on new investments or become unreliable. These cases can cause more damage than the initial financial loss. The loss of capital investment, whether in growth, innovation or maintenance, can lead to a host of other problems. Each one is small and easily corrected, but all add up to create a unreliable operation that damages the customer and the business’ reputation.

Leaders who balance the short-term and long-term in business decisions are what make Business Transformations successful. Many investments that don’t pay off in a timely manner (in less than two year) are still valuable and important to the viability and well-being of the company. Although there are not always clear answers to these investment decisions, we have found that there are a few methods that can help you make the right decisions with the information available.

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Is Business Transformation a Binary Decision?

Many companies respond to financial difficulties by freezing all spending. This includes capital expenditure, hiring, travel and any other discretionary costs. These moves are sometimes necessary during times of financial distress. It’s best to be more careful in most cases.

Managers should discuss the company’s largest investments in detail, paying attention to both short-term as well as long-term consequences of delaying investment. It can be disastrous to let such decisions fall within a broad spending policy. A global manufacturing company that relied heavily on electrical power decided to defer a planned transformer rebuild for a year in order to save money. Five months later, the transformer exploded, causing 20 percent of production to be stopped. The company then built and installed a new replacement. A transportation company delayed replacing key logistical equipment, which caused collateral damage to its equipment and plant.

It is better to divide spending into smaller categories that can be better discussed and understood for the long-term impact on health. It is important to distinguish between repainting hallways and repairing an electrical transformer. This distinction is not recognized by a general ban on spending maintenance money. Similar to a hiring freeze for executive assistants, it presents different risks than a freeze on vehicle drivers or sales managers.

One business transformation saw executives from a consumer-products firm discover that plant managers had not been disciplined in their spending. They invested in projects without taking into account hurdle rates and returns. More than 350 projects would be affected if a spending freeze was implemented. Executives worked with plant managers during the Business Transformation process to determine the best compromise between the need to deliver products and serve customers. They also discussed the possibility of delaying certain projects to save costs. They found that almost half of the projects they had planned could be delayed. The team implemented a program for working capital management to make inventory management easier. They approved spending that would allow the company to grow in the short and long term, while also instituting strict internal controls in areas such as overtime travel and maintenance.

Business Transformation Investment Orientation

Under pressure, managers in Business Transformation situations are often unable to take the time to carefully evaluate which activities and investments they should support or cut. Decisions are often made based on who has the greatest organizational influence, is the most persuasive, or has the highest level of personality to protect his programs and people. This is a common but not very effective way to make cuts.

We have seen companies use a better approach: a list of all actions that could create near-term cash. This list is ranked according to how much damage each could do to the long term health of the company. Typically, this will prioritize actions with the highest net current value (NPV). This list should be discussed early in the Business Transformation process. It must evaluate the impact of selling all assets and activities, as well as whether they are being discontinued or divested. The list will be completed when all actions have been taken. Although it is a difficult exercise, it allows for all ideas to be discussed.

This list includes actions that are immediate and pose little risk. Actions that have a negative impact on long-term growth prospects and operational reliability will be lower down. It is important to distinguish between real and perceived long-term risks of damage. It is possible to do this by spending the time to fully understand each investment and making sure that someone is given the hard questions.

It is also a good idea for companies to set quantifiable metrics that will trigger the next cut if they are unable to pay their bills within a specified time period. It creates a plan of action for if things go wrong. It is also important to have a clear understanding about the future risks that could affect the stability of the business.

You, the Business Transformation Leader, might be able to find other actions that you could take. You may have less long-term impact than eliminating one project over another. This could make you feel more comfortable about approving one alternative versus another. You could also use Business Transformation as an exercise to reduce the time between spending approvals so that you approve only the minimum spending. You would be able to keep control of your future financial investments, in the event that things change or you have to take more drastic measures.

Discourage Short-term Actions with Negative Long-term Consequences

Increased accountability and pressure on business unit managers to meet their numbers can lead to short-termism, which often leads to poor business decisions. There are many ways they can cheat, and they may be attracted to it. Some tactics can be purely financial, like allowing sales discounts in order to reach near-term volume goals and margin goals. Others may involve structuring risky or back-loaded contracts. Some tactics can be more risky, like allowing lower quality products to go on the market, delaying maintenance outages until the next accounting period or continuing production despite safety and reliability concerns. For example, a manager in a global commodities firm hoped to increase production by delaying routine maintenance on heavy equipment, despite engineering concerns. Shortly after the equipment broke down, a long production outage ensued. It is important to note the tension between innovation and execution. In an environment that values every dollar, innovation requires experimentation and failure. It can be difficult to defend this kind of innovation.

It is important to establish urgency and accountability for short-term performance targets, without encouraging shortcuts that may be costly and have unavoidable negative consequences. Companies deal with this by protecting employees and budgets for strategic innovation while simultaneously reducing costs in other areas. Others establish short-term goals and outline what managers can do to achieve them. It is important to clearly identify and understand the effects of each step in the company’s ability create value.

Invest in Your People

Our experience shows that the most important attribute of a successful business transformation and a healthy company are the people who run it. In many cases, however, investing in people is the best way to invest in a company when it’s struggling. These steps can be used to quickly save money, whether it is pay freezes, cuts, elimination of training and benefits, or even the elimination of team-building activities. We know of more than one company that drastically reduced the hiring of leadership talent at entry level during the 2009 recession. It now faces a shortage of leaders at the middle level of the organization.

We believe that nearly all of these actions will have a negative impact on a company’s long term health. Companies depend on their employees more when a company is in trouble than they do when it is healthy. This includes the ability to increase productivity, bring up creative ideas, support morality, and improve teamwork. This will send a message to employees that they are valued and will encourage them to participate in the Business Transformation. While it is essential to make individual decisions about talent, it should also be possible to avoid cutting across-the-board benefits and people spending.

Leaders must be encouraged and supported to take hard decisions that will benefit the long-term, even if they may not yield immediate results. This starts with an aggressive education-and-awareness campaign that provides the entire organization with the tools to understand what value creation means and how it is measured. Training can be provided on financial statements, how to interpret them, how to calculate the NPV, return of invested capital, as well as how to make economic profit. Performance evaluation should be tied to short-term results. Compensation should link in some ways with equity to reflect long-term value, especially for senior leaders. Senior leaders should also be consistent in communicating the story.

SUMMARY

It is difficult to implement rapid business transformation in the most challenging of circumstances. Even if a company achieves short-term success, creating long-term value is a higher priority. Leaders who are able to transform a company should have a vision and a roadmap with markers established. They must also guide their teams in managing within this vision.

Sam Palazzolo