Transformation: What are the triggers?
Updated: Aug 12, 2019
We have been hearing a lot about transformation in recent years. It has become quite common to talk about it even beyond business circles. For some people, transformation is perceived as a threat, while for others it means promising perspectives. So, we wanted to demystify transformation, and explain what it really means and what you can expect from it. Our goal is to provide decision makers with answers to their questions before, during, and after transformations.
What is transformation?
Transformation means deeply changing an organization to the extent of modifying its business model. The required change is so structural that management attributes a higher priority to transformation issues than to usual business issues. This higher priority is confirmed by a special governance to cope with the flow of choices to be made in a timely manner.
Who is involved in the transformation?
The answer is straightforward: “EVERYBODY”
Management defines the strategy and communicates to employees why the organization is going through a transformation, what are the expected achievements, etc.
Employees implement the transformation and communicate the objectives and results of the transformation to customers and suppliers.
Customers and suppliers validate the success of the transformation. One key objective of all transformations is to make customers happy. It’s great to please customers, and it’s even better to receive customer feedback to improve the results of the transformation even more.
Business partners can be of different kinds: regulators, consultants, journalists, etc. They can also contribute to the success of the transformation one way or another
What triggers transformations?
Transformation is closely related to the culture of an organization, its market share, and the competitiveness of its core market. Leading organizations operating in disrupted markets regularly undergo transformations to stay ahead of their competitors, while others never go through any transformation, because they don’t face any competition and their market is extremely stable. It’s worth mentioning that not being able to adapt or transform is a vulnerability. It can lead an organization such as Kodak simply disappearing.
Though many reasons can justify a transformation, our analysis demonstrates that there are five main triggers to launch transformation programs.
a) Disruptive technology
Think of the press, telecoms, and photography. Many industries were completely disrupted. New players replaced incumbents in just a few years because the incumbents failed to change.
One of the oldest industries, financial services, is considered by many experts as the industry most prone to technological disruption. For the time being, regulations are protecting incumbents, but new players are already eating a growing portion of the financial services pie. Libra, the new crypto currency, and Calibra, the digital wallet, both powered by Facebook, represent the equivalent of an atomic bomb for many financial institutions.
In general, the increasing use of technology and social media is accelerating disruption. This is why “digital transformation” is still widely used in business vocabulary. Big data and artificial intelligence are pushing organizations to conduct transformations to become more data-driven.
To be able to cope with the constant change in technology, becoming an agile organization is another growing trend in business.
One big mistake is to consider that technology-driven transformation should be handled only by technology people. Business and technical staff need to work hand in hand to harness most benefits brought by new technologies and deliver the best applications to serve customers.
B) Mergers and acquisitions
Mergers and acquisitions transactions are realized from the perspective of harnessing synergies. Extracting these synergies often means launching transformation programs. Confrontation between two separate teams and loss of talent are probably the biggest challenges for M&A transformations, particularly if the due diligence and final negotiation stages are staggered over time.
Absence of communication during the period between the first sale announcement and the actual takeover creates uncertainty that favors the spread of negative rumors. Rumors make staff adopt protective behaviors such as not sharing knowledge, promoting based on trust instead of competence, forging alliances against management, or simply jumping ship to cut short any uncertainty. Those behaviors are negative for the overall organization, and as a result one out of two merger operations fails.
What happens if a company sells more products than its production capacity or, on the contrary, its customers don’t like the new products or cannot find them?
In all cases, growth is a challenge that must be addressed holistically, because it involves the whole organization, not only sales and marketing. It takes a combined effort across an entire organization to succeed in outperforming peers, which means transforming the organization until it can accurately answer all growth challenges, such as making sure that customers like the products, optimizing operations while improving quality, hiring the right talent, etc.
Failing to transform across the whole organization makes it vulnerable to many risks, and seemingly promising commercial perspectives can turn out to be a fiasco.
It’s a no-brainer that if performance is going downhill, painful decisions are needed to restructure the organization. Restructuring can be anything from a small cost-cutting project up to a large transformation program to achieve deep changes.
The biggest challenge is, of course, lack of financial resources. Saving money very often means undertaking initial investments. For example, laying off employees to reduce payroll requires paying them a large sum of money as compensation. Similarly, automating processes may also require buying expensive IT systems. If the organization is already losing money, it will be challenging to find cash to spend on investments.
The result is often extending the duration of restructuring programs to soften cash requirements. Even if some short-term results are harnessed, the consequences in the long run can be deeply damaging. Imagine a patient that must endure a disease because she cannot afford the required medicine.
Postponing restructuring is even worse than extending its duration. Sometimes, it is already too late to survive. Our recommendation: if structural underperformance is observed, the leadership team shouldn’t wait too long to launch a transformation program.
E) New leadership
Shareholders might hire a new leadership team with the responsibility of fulfilling new objectives. To satisfy shareholders, the new management needs to draw a new vision for the organization and launch a transformation program to shape this vision until it becomes reality.
Drawing an initial vision takes time. The new management needs to first understand the existing culture before launching a transformation program.
The main risk is the emergence of conflict between the new management and established managers that we can call “local barons”. They established their power over time and may feel threatened by the change in leadership. They may also be the main cause of underperformance and need to be replaced. For all these reasons,” local barons” will resist change and hinder any kind of transformation.
The struggle between new management and “local barons” is certainly negative for the overall performance of the organization and not sustainable on the long term. A transformation program can be the answer to overcoming this situation, particularly with the assistance of external consultants, as they are used to navigate amidst conflictual environments. Their impartial recommendations will be primarily driven by expected benefits to the organization.
After reviewing the triggers, the next step would be to provide insights about transformation itself. Therefore, in the coming articles we will present two complementary descriptions of what to expect during transformations:
the standard approach for transformation program
the reality of transformation based on our experience
We will complete our series by describing the main reasons behind transformation failures.
For more information, please contact us. Our dedicated team will be happy to assist you in your transformation journey.