Introduction

Excellence Found?

What is the greatest invention of all time? In our view, it isn’t the wheel, it is organization: people working together toward a common goal. Organizations can achieve feats that go far beyond anything that individuals can accomplish alone. As each successive generation finds better and better ways of working together, it performs at levels that could barely have been imagined a few decades earlier. And when there are improvements in the effectiveness of our organizations—whether they be private enterprises, governments, public agencies, charities, community groups, political parties, or religious bodies—these gains translate into benefits for society as a whole. Innovations such as mass production, public transport, space travel, the internet, and the mapping of the human genome are all products of human organization.

Fittingly, the book you’re now holding is itself the product of a collective feat of organization: many colleagues and friends have worked with us to advance the state of the art in management thinking. For Colin, this book marks the intellectual culmination of his leadership of McKinsey’s global Organization Practice. For Scott, it represents a manifesto for an approach to management that he has long advocated and practiced, and at times staked his career on.

But Beyond Performance wasn’t written for us; it was written for you. If you are a leader who wants to change things for the better, this book is for you. If you want to leave a profound and lasting legacy for your organization and its stakeholders, this book will help you do so. The concepts and approaches we describe apply broadly to anyone who leads people in an organization, whether you are the CEO of a company, the managing partner of a professional services firm, or the head of a public sector body, an activist group, a nongovernmental organization, or a social enterprise.

Much as we hope that every leader who reads the book will benefit from it, we would like its impact to ripple out still further. If we can help improve the way that people manage organizations, we hope that in some way we can also help advance the progress of society itself. It is our firm belief that the human race is capable of achieving far more by working together in the future than we are capable of achieving today.

Ultimate Competitive Advantage

This book explains, both conceptually and practically, what it means to achieve excellence in leading and managing organizations. Although a multitude of volumes have already been written on this topic, we believe no other work offers what we are trying to provide. Our approach combines two views. The first view is of a “stable equilibrium” state of organizational excellence in which high performance can be sustained; the second is of the dynamics of the transition required to reach that state. This effort is, perhaps, a kind of management equivalent to the attempt by modern-day physicists to combine classical Newtonian physics with subatomic physics in order to advance the field and develop a deeper understanding of the fundamental nature of reality. In much the same way, by combining static and dynamic views of organizations, we aim to arrive at a fuller understanding of their fundamental nature.

To that end, we aim to shift the “installed base” of management thinking. In what follows, you’ll learn what management courses don’t teach, at least not yet. Our central message is that focusing on organizational health—which we define as the ability of your organization to align, execute, and renew itself faster than your competitors can—is just as important as focusing on the traditional drivers of business performance. That’s because, as Sir William Castell, chairman of the Wellcome Trust, puts it, “Healthy organizations get things done quicker, better, and with more impact than unhealthy ones.”1

In this book, you learn how to set aspirations for performance and health that are unique to your organization. You learn how to assess how ready your organization is to change so that it can achieve those aspirations. You learn how to develop a powerful plan to move your organization from where it is today to where you want it to be. You master what it takes to implement this plan successfully. And you discover how to help your organization make a gradual transition to a self-sustaining state of continuous improvement in performance and health. In short, this book is a field guide to harnessing the full potential of your organization.

Unlike many business books, this book does not suggest that you study what other organizations do to succeed and then apply their recipe to your own situation. How many companies have analyzed how General Electric replicates its business model across multiple industries, or how Southwest Airlines delivers low-cost air travel, or how the Ritz-Carlton sets standards in customer service, or how Procter & Gamble manages its brands, without ever being able to replicate the success these companies have achieved? The answer must be “too many.” Although there are always helpful things we can learn from others, the recipe for excellence in a particular organization is specific to its context: its history, the capabilities and passions of its people, its external environment, and its aspirations. Creating and sustaining your own recipe—one uniquely suited to these factors—delivers results in a way that your competitors simply can’t copy (or copy at their peril). This, we believe, is where ultimate competitive advantage lies.

The forces that shape today’s global economy have weakened or even wiped out our customary sources of competitive advantage. Consider the instant, often cost-free availability of information facilitated by the staggering growth (more than 20 percent per year) in the international use of internet bandwidth.2 Such ready access to information undermines the advantage that companies have traditionally gained from smarter strategies and superior assets, which can now be copied with great speed and efficacy. The competitive advantage of the twenty-first century is increasingly derived from hard-to-copy intangible assets such as company culture and leadership effectiveness. Saad Al-Barrak, former CEO of Zain, a Kuwait-based telco, puts this well: “In the west, you can no longer create a competitive advantage with a new product or a new service, because everybody will follow suit. The level of development is so high and access to resources is so rich that cloning a product or a service takes no time. But to clone a community takes all the time in the world.”3

Why It Matters for Business

The pace of change in business is increasing faster than ever. Consider how long an average company from the S&P 500 stays in the index. In 1955 it was estimated to be 45 years; in 1975, 26 years; and in 2009, 17 years.4 At this rate, half of the companies that appeared in the 2010 S&P 500 Index are likely to have left it before 2020.

Moreover, in recent years many former household names have fallen not just out of a business index but out of existence: consider Enron, Digital Equipment Corporation, Lehman Brothers, Arthur Andersen, and British Leyland. Which of today’s household names will have ceased to exist in 10 or 20 years” time?

It’s a question that’s even harder to answer in times of rapid and far-reaching economic change. As we write, the world appears to be emerging from the most profound economic crisis since the Great Depression of the 1930s. No one knows how the situation will evolve, but there is broad consensus that the “new normal” will be characterized by increased volatility and unpredictability in capital markets, in consumer confidence, and in government policy. Charles Darwin’s observation that “the fittest win out at the expense of their rivals because they succeed in adapting themselves best to their environment” may have become something of a cliché in the literature on change management, but it has never rung more true in the business world. The ability to manage an organization dynamically so that it can both shape its environment and rapidly adapt to it is becoming the most important source of competitive advantage in the twenty-first century.

Success is about winning not just in the marketplace for customers, but also in the marketplace for talented employees. The role of business in society is changing. As we work more and socialize less, the time we have left for traditional activities involving our family, our local community, and our religious institutions is declining. As a result, our sense of meaning and identity is increasingly derived from the workplace (our jobs) and the marketplace (the products and service we buy).

So work occupies a central place in our lives. But what do we expect from it? To answer this question, we surveyed more than 5,000 executives from the top 200 of their respective organizations, and asked what factors they saw as essential when deciding to join, stay with, or leave a company. Among the highest-rated factors were “freedom and autonomy” and “exciting challenges.” These factors were chosen by more than half of the survey respondents, whereas less than a quarter chose “high total compensation.” Among the lowest-rated factors were “high job security” (chosen by 8 percent) and “reasonable pace and low stress” (chosen by 1 percent).

The message is that talented employees are not content to be cogs in a machine geared to hitting quarterly performance numbers. They want to work in dynamic workplaces where they feel empowered to make meaningful, positive change happen. As Adam Crozier, former CEO of Royal Mail, notes, “People are looking for a sense of belonging, a sense of meaning.… Graduates are asking the questions, do I want to belong here? Do I see a future here? What kind of training do you give? What do you do for the community?”5 Another CEO, Roberto Setubal of Brazil’s Itaé Unibanco, concurs: “Talented people don’t come here just to perform tasks. They want to offer their ideas, discuss freely, grow professionally, and contribute to the future of the company.”6

So are we getting better at creating meaningful contexts for people to work in? Unfortunately not; in fact, we’re getting worse. Take job satisfaction in the United States as an example. In 1987, 61 percent of employees reported they were satisfied with their jobs. By 2000, satisfaction was down to 51 percent. Fast-forward to 2009 and the share had dropped to 45 percent.7 This trend holds true for all ages and income brackets.

Less satisfied is one thing, but are we at least more productive? No: between 1995 and 2009, the output of U.S. businesses increased more slowly than in any 15-year period since 1950.8 The vast majority of developed-market economies exhibit similar trends.

As our economies emerge from recession, the ability to lead and manage organizations in a way that motivates employees and helps them be productive is more important than ever. An Ipsos Mori poll of 100 board-level directors from the 500 biggest companies in the UK reported that “attracting, motivating, and retaining the best employees” was the number-one priority for business, ahead of improving efficiency or having the right strategy.9

Why It Matters for Society

If we look beyond the marketplace for customers and talent to society at large, organizational excellence has never been more important. In the political process, for instance, leaders committed to change are attracting unprecedented levels of public engagement. This engagement is driven less by their personal charisma than by a growing acknowledgment that current approaches to health care, education, economic regulation, foreign relations, and other major issues simply aren’t working.

In the United States, President Obama was elected on a promise of large-scale change across the whole political system. In France, President Sarkozy is driving the largest transformation project ever undertaken in the country’s public sector. In the United Kingdom, leaders are pushing through a raft of reforms to change the way public institutions work, with new service agreements between ministries and central government, decentralized decision making, and broad-based efforts to improve skills.10 In Malaysia, prime minister Dato” Sri Najib Tun Razak has introduced a program to make the government more effective and more accountable as part of the country’s mission to become a fully developed nation by 2020. These are but a handful of many wholesale reforms happening at government level across the globe.

Outside politics, nongovernmental and not-for-profit organizations continue to tackle key cross-border challenges such as sustaining the environment and helping the developing world break the cycles of poverty, corruption, and inadequate education.

In the world as a whole, at least five factors are driving widespread change: the historic shift in economic growth from the developed to the developing world; the unprecedented imperative for mature economies to raise productivity to preserve living standards; the rise of new networks of hitherto unimaginable complexity for communication and trade; the increasingly urgent challenge to balance economic growth with environmental sustainability; and the expanding role of the state in regulating markets and influencing economic development. These factors are likely to continue to drive change for decades to come.

The way we respond to these challenges will have a profound effect on all our futures. Will our efforts be underpinned by organizational excellence? What are the odds of their being successful? And what will be the consequences if they aren’t? What will be the social costs? And who will bear them?

Excellence Lost

Almost three decades ago, McKinsey’s Tom Peters and Robert Waterman published what was to become one of the best-selling and most influential business books of all time, In Search of Excellence: Lessons from America’s Best-Run Companies. Perhaps the book’s most powerful legacy is its famous “7S framework.” Having examined 43 of the Fortune 500 list of top-performing companies in the United States, Peters and Waterman identified seven factors involved in organizing a company in an effective and holistic way: strategy, structure, systems, staff, skills, style, and shared values.

Since In Search of Excellence, there has been a torrent of business titles providing accounts of organizational excellence and theories about what drives it. One of the best-known examples is Jim Collins and Jerry Porras’s 1994 book Built to Last, which analyzed patterns among 18 successful companies.

Unfortunately, it seems that the recipes for excellence offered by these landmark publications provide no guarantee of staying power. It’s revealing to look at what has become of the “excellent” companies lauded in the pages of In Search of Excellence and Built to Last. By 2006—well before the recent financial crisis—20 percent no longer existed, 46 percent were struggling, and only 33 percent remained high performers.11 Why was this?

Not all of these changes in fortune can be attributed to the companies themselves, of course. Performance is partly driven by macroeconomic forces, industry attractiveness, and sheer luck. But it’s also driven by the decisions leaders make, what they do and don’t do, and the way they lead, which are things under every leader’s control.

Our research, as we show in Chapter 1, suggests that many companies fall from grace because of an excessive bias toward a static view of managing performance. They synchronize their “7S” dials to deliver against quarterly and annual targets instead of taking a more dynamic view that encompasses not only their company’s performance but also its health: its ability to align, execute, and renew itself faster than the competition.

So if organizations need to take a more dynamic view of excellence, how can they achieve it? This takes us to the question of how leaders make rapid, large-scale change happen, and how they develop cultures of continuous improvement.

In 1996, when John Kotter published Leading Change—widely considered to be the seminal work on change management—he reported that only 30 percent of all change programs succeed. Fifteen years later, we can choose from more than 25,000 books on organizational change, and hundreds of business courses on how to lead and manage it. In spite of this abundance of advice, all available research suggests that—you guessed it—still only one in three programs succeeds. The field of change management, it would seem, hasn’t really changed a thing.

Only a third of excellent companies remain excellent over the long term. Even fewer change programs succeed. Why is this?

We don’t claim to have all the answers, but at this point in our research efforts, we’re confident that we do have insightful (beyond common sense) and pragmatic (readily applicable) advice that will help leaders beat these odds and achieve sustained organizational excellence. In fact, we’ve observed so many successes in so many industries and from so many different starting points using the approaches we describe that we regard successful transformation and sustained excellence as a real possibility for almost any organization.

The Science of Organization

The world of management is rife with opinion and conjecture. In writing this book, we have endeavored not only to draw on our own experience as management consultants, but to ensure that our arguments are as objective and fact-based as possible. Whereas In Search of Excellence was based on a study of 43 American companies and Built to Last on 18, this book draws on a much broader array of evidence. We have had the benefit of the results of surveys on the drivers of organizational performance and health from more than 600,000 respondents from more than 500 organizations across the globe, surveys on the experience of transformational change from more than 6,800 CEOs and senior executives, reviews of more than 900 books and articles from academic journals, one-on-one interviews with 30 CEOs and other senior executives who shared their personal experiences of leading change and driving performance, data and learning from more than 100 clients served by McKinsey on engagements specifically related to performance and health, and close working relationships with four eminent scholars who helped to challenge and augment our findings. In fact, we are confident that Beyond Performance represents the culmination of one of the most extensive research efforts ever undertaken in this area.

We realize that most of our readers will be more interested in the practical lessons we can draw from the research than in the research itself, so most of the book focuses on helping leaders get better results from their organizations. However, Chapter 2 provides details of our sources and methods for anyone who is interested in our fact base and technical approach. Other readers may want to skim through this section to understand the evidence base that underpins the assertions we make.

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If this book helps more organizations to become and stay excellent, and more change programs to succeed, it will have done its job. If it also helps people make faster progress in tackling the major social and political issues of our time, it will have achieved everything we could have hoped for. But setting these grand aspirations aside, if you put this book down feeling that you are better equipped to make a positive difference in the world through the way you lead and manage your organization, we will feel that our work as authors has been accomplished.

Part I

Why Performance Is Not Enough

1

The Big Idea

Performance and Health

In early 2004, the Coca-Cola Company was struggling. Since the death of CEO Roberto Goizueta in 1997, its fortunes had suffered a sharp decline. Over that seven-year period, Coke's total return to shareholders stood at minus 26 percent, while its great rival PepsiCo delivered a handsome 46 percent return. Two CEOs had come and gone. Both had overseen failed transformation attempts that left employees weary and cynical. A talent exodus was under way as leaders in key positions sought to join winning teams elsewhere.

At this less than auspicious moment, enter Neville Isdell. As vice chairman of Coca-Cola Hellenic Bottling Company, then the world's second-largest bottler, he had enjoyed a long and successful career in the industry. Since retiring from that role he had been living in Barbados, doing consultancy work and heading his own investment company. However, the opportunity to lead the transformation of one of the world's iconic companies was a powerful lure, and he was soon installed in the executive suite at headquarters in Atlanta.

Isdell had a clear sense of what needed to be done. The company had to capture the full potential of the trademark Coca-Cola brand, grow other core brands in the noncarbonated soft drinks market, develop wellness platforms, and create adjacent businesses. But how could he follow these paths to growth when his predecessors had failed?

Experience told him that focusing solely on improving performance wouldn't get Coke where it needed to be. There was another equally important dimension that wasn't about the performance of the organization, but its health. Morale was down, capabilities were lacking, partnerships with bottlers were strained, the company's vision was unclear, and its once-strong performance culture was flagging.

Just a hundred days into his new role, Isdell announced that Coke would fall short of its meager third- and fourth-quarter target of 3 percent earnings growth. “The last time I checked, there was no silver bullet. That's not the way this business works,” Isdell told analysts.1 Later that year, Coke announced that third-quarter earnings had fallen by 24 percent, one of the worst quarterly drops in its history.

Having acknowledged the shortfall in performance, Isdell ploughed onward, launching what he called Coke's “Manifesto for Growth.” This outlined a path to growth showing not just where the company aimed to go, but what it would do to get there, and how people would work together along the way. Working teams were set up to tackle performance-related issues such as what the company's targets and objectives would be and what capabilities it would require to achieve them. Other teams tackled health-related issues: how to go back to “living our values,” how to work better as a global team, and how to improve planning, metrics, rewards, and people development to enable peak performance. The whole effort was designed through a collaborative process. As Isdell explained, “The magic of the manifesto is that it was written in detail by the top 150 managers and had input from the top 400. Therefore, it was their program for implementation.”2

It wasn't long before the benefit of addressing performance and health in an integrated way became apparent. Shareholder value jumped from a negative return to a 20 percent positive return in just two years. Volume growth in units sold increased from 19.8 billion in 2004 to 21.4 billion in 2006, roughly equivalent to sales of an extra 105 million bottles of Coke per day. By 2007, Coke had 13 billion-dollar brands, 30 percent more than Pepsi. Of the 16 market analysts following the company as of July 2007, 13 rated it as outperforming, and the other three as in line with expectations.

These impressive performance gains were matched by visible improvements on the health side. Staff turnover at U.S. operations fell by almost 25 percent. Employee engagement scores saw a jump that researchers at the external survey firm hailed as an “unprecedented improvement” compared with scores at similar organizations. Other measures showed equally compelling gains: employees’ views of leadership improved by 10 percentage points to 64 percent, and communication and awareness of goals increased from 65 percent to 76 percent.

But the biggest change could be felt in the company's halls. In a 2007 interview, Isdell noted that “When I first arrived, about 80 percent of the people would cast their eyes to the ground.   Now, I would say it's about 10 percent. Employees are engaged.”3 When he returned to retirement in July 2008, he was able to hand over a healthy company that was performing well.

The Health of Organizations

Neville Isdell's actions at Coca-Cola revealed his intuitive grasp of a great paradox of management. When it comes to achieving and sustaining excellence in performance, what separates winners from losers is, paradoxically, the very focus on performance itself. Performance-focused leaders invest heavily in those things that enable targets to be met quarter by quarter, year by year. What they tend to neglect, however, are investments in company health—investments in the organization that need to be made today in order to survive and thrive tomorrow.

Perhaps surprisingly, we have found that leaders of successful and enduring companies make substantial investments not just in near-term performance-related initiatives, but in things that have no clear immediate benefit, nor any cast-iron guarantee that they will pay off at a later date. At IT and consultancy services company Infosys Technologies, for instance, chairman and chief mentor N. R. Narayana Murthy talks of the need to “make people confident about the future of the organization” and “create organizational DNA for long-term success.”4

So why is it that focusing on performance is not enough—and can even be counterproductive? To find out, let's first look at what we mean by performance and health.

Performance is what an enterprise delivers to its stakeholders in financial and operational terms, evaluated through such measures as net operating profit, return on capital employed, total returns to shareholders, net operating costs, and stock turn.

Health is the ability of an organization to align, execute, and renew itself faster than the competition so that it can sustain exceptional performance over time.

For companies to achieve sustainable excellence they must be healthy; this means they must actively manage both their performance and their health. Our 2010 survey of companies undergoing transformations revealed that organizations that focused on performance and health simultaneously were nearly twice as successful as those that focused on health alone, and nearly three times as successful as those that focused on performance alone.5

High performance is undoubtedly a requirement for success. No business can thrive without profits. No public sector organization can retain its mandate to operate if it doesn't deliver the services that people need. But health is critical, too. No enterprise that lacks robust health can thrive for 10, 20, or 50 years and beyond.

In fact, we would argue that strong financial performance can have a perverse effect: it sometimes breeds a degree of complacency that leads to health issues before long. In the months before the 2008 economic crash, the financials of most banks were at record highs. Similarly, oil at record prices of more than US$200 per barrel led the oil majors to declare record profits. As it turned out, this didn't mean that the banks and the oil companies were in the best of organizational health.

The importance of organizational health is firmly supported by the evidence. When we tested for correlations between performance and health on a broad range of business measures, we found a strong positive correlation in every case. For example, companies in the top quartile of organizational health are 2.2 times more likely than lower-quartile companies to have an above-median EBITDA (earnings before interest, taxes, depreciation, and amortization) margin, 2.0 times more likely to have above-median growth in enterprise value to book value, and 1.5 times more likely to have above-median growth in net income to sales (Exhibit 1.1). Across the board, correlation coefficients indicate that roughly 50 percent of performance variation between companies is accounted for by differences in organizational health.

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The results from our large sample of companies are mirrored by the results within individual organizations. At a large multinational oil company, we analyzed correlations between performance and organizational health across 16 refineries. We found that organizational health accounted for 54 percent of the variation in performance (Exhibit 1.2).

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So strong is this relationship between performance and health that we're confident it can't have come about by chance. We'd be the first to admit that correlations need to be treated with caution. Take an example: education and income are highly correlated, but that doesn't mean that one causes the other. It's just as logical to argue that a higher income creates opportunities for higher education as it is to argue that higher education creates opportunities for a higher income (and even if it does, we can't infer that everyone who gains more education will have a higher income).

But our argument doesn't rely solely on correlations. On the strength of our research and analysis, we assert that the link between health and performance is more than a correlation, and is in fact causal. We argue that the numbers show that at least 50 percent of your organization's success in the long term is driven by its health, as we see in Chapter 2. And that's good news. Unlike many of the key factors that influence performance—changes in customer behavior, competitive moves, government actions—your organization's health is something that you can control. It's a bit like our personal lives. We may not be able to avoid being hit by a car speeding round a bend, but by eating properly and exercising regularly we are far more likely to live a longer, fuller life.

To shed more light on this causal link, here's an anecdote from our own experience. At McKinsey, we hold an internal competition called the Practice Olympics to develop new knowledge. A “practice” is a group of consultants dedicated to a specific industry (such as financial services) or function (such as strategy). In the Practice Olympics, teams of consultants compete to develop new management ideas and present them to a panel of judges at local, regional, and organization-wide heats. In 2006, the topic of performance and health made it through to the last round.

A few days before their final presentation, the performance and health team decided to add in an extra ingredient. Rather than drawing conclusions from a retrospective view of performance and health at various organizations, they asked themselves, “If we look at the health of today's high-performing companies, what does it tell us about their prognosis for performance in the future?” After reviewing publicly available information about Toyota, the team concluded that it would face performance challenges within the next five years. What were the reasons for this seemingly unlikely verdict? The team noted that Toyota's strong focus on execution meant that its organizational health was partly driven by how well it developed talent in key positions—something that was likely to come under strain before long because of the way it was pursuing performance.

In 2005, Toyota had set itself the aspiration to overtake General Motors as the world's largest carmaker. Renowned for its manufacturing expertise, the company had developed unusually close collaborations with suppliers during decades of shared experience. But this new aspiration would force it to expand so rapidly that it was hard to see how its supply-chain management capability could keep up. The company would have to become increasingly dependent on new relationships with suppliers outside Japan, yet it didn't have enough senior engineers in place to monitor how these suppliers were fitting into the Toyota system. And those engineers it did have wouldn't be able to give new suppliers a thorough grounding in how to do things the Toyota way in the limited time available.

In front of the judges at the finals of the 2006 Practice Olympics, the team put their stake into the ground. Toyota, with its proud reputation for building quality into its products at every step, was likely to have health issues that would affect its medium-term performance. Having sat through a day of novel ideas, the panel of judges reacted with outright disbelief. Toyota had just posted a 39 percent increase in net profit largely driven by U.S. sales, and appeared to be on a roll. One of the judges remarked that the team's prediction was “provocative, but completely ridiculous.”

Fast forward to 2010, and Toyota was in the throes of recalling a number of models on safety grounds. So serious was the situation that its president Akio Toyoda was called before the U.S. Congress to offer an explanation and an apology for the defects. The general consensus on the reasons for the breakdown in quality was in line with the turn of events that the team had foreseen four years earlier.

That organizational health matters is repeatedly borne out by leaders’ testimonies. Larry Bossidy, former chairman and CEO of Honeywell and Allied Signal, comments that, “The soft stuff—people's beliefs and behaviors—is at least as important as the hard stuff. Making changes in strategy or structure by itself takes a company only so far.”6 Don Argus, retired chairman of BHP Billiton, suggests the key to long-term success is to “mobilize and develop our people to unleash their competencies, creativity, and commitment to get things moving forward.”7 We could fill a chapter with similar quotes from virtually every successful leader we have spoken to.

The notion that organizational health matters as much as performance makes intuitive sense when we consider that ultimately it isn't organizations that change; it's people. Take people away and the life-blood of the organization is gone, leaving only the skeleton of infrastructure: buildings, systems, inventory.

Because getting and staying healthy involves tending to the people-oriented aspects of leading an organization, it may sound “fluffy” to hard-nosed executives raised on managing by the numbers. But make no mistake: cultivating health is far from a soft option. As the co-founder of Fast Company, William C. Taylor, observed in his book Practically Radical: “The truth is, the work of making deep-seated change in long-established organizations is the hardest work there is.”8 Nor should health be confused with other people-related management concepts such as employee satisfaction or employee engagement. Organizational health is much more profound and far-reaching. It is about the extent to which your organization is able to adapt to the present and shape the future faster and better than your competitors can. In that sense, health encompasses all the human elements required to achieve sustainable success.

The Perils of Performance

Ask almost any business leader about a company's goals and you are likely to hear some variation on the performance mantra: “We want to outperform our peers.” “We aspire to lead the market in performance.” A laser-sharp focus on performance—on doing better according to metrics such as profits and share price—pervades modern business. Of course, there's nothing wrong with focusing on performance, or profits, or a rising share price—unless, that is, a fixation on short-term results debilitates the organization and jeopardizes its future, leaving it incapable of achieving more than a brief moment of glory.

Here the history of Atari provides a cautionary tale. The company was founded in 1972 to exploit what was then no more than a figment of a designer's imagination: the electronic game. In 1973, Atari sold US$40 million worth of these games (remember Pong?) and earned US$3 million in profits. Not long after, it was bought by deep-pocketed owners who invested heavily in R&D. In 1980, it was on top of the world, posting record revenues of US$415 million and being hailed as the fastest-growing company in U.S. history. Two years later, it was saluted by Thomas Peters and Robert Waterman in their book In Search of Excellence.

But even as the book's readers were discovering how Atari excelled, the company was crumbling. Teamwork began to decline, communication broke down, a culture of risk avoidance set in, investment in R&D was cut, and product quality was sacrificed to the cause of faster time-to-market.

The result was some of the biggest duds in video-gaming history. The shoddy visuals and poor playing characteristics of the games console versions of Pac-Man and ET alienated hitherto devoted customers. Fed-up engineers left in droves, many to set up or join rival companies whose innovative products would soon woo away Atari's fan base. By 1983, the rot had set in. The company lost US$536 million and resorted to massive layoffs.

Atari never recovered the glory of its heyday. The shell of the company, by then little more than a brand name, was sold in 1998 for a paltry US$5 million. Although Atari may have been consigned to history, the gaming market to which it belonged has gone from strength to strength. Worth US$25 billion globally, it is still growing at a tremendous pace.

Two questions arise from this sorry story. Where did Atari go wrong? And how did Peters and Waterman miss it?

A single answer will suffice. Both the company and its chroniclers were so intently focused on performance that they were oblivious to the symptoms of deteriorating organizational health: declining teamwork, reduced investment in R&D, and the other factors that we noted above.

By way of contrast, consider the case of Pixar. The CGI animation studio had earned 24 Academy Awards, six Golden Globes, and three Grammys at the last count—all the more impressive given that its president, Ed Catmull, had no business experience before he co-founded the company. In a talk about Pixar's creative process, he noted that the company's development process differs from that at most Hollywood studios: “Our development team doesn't look for stories. Their job is to create teams of people that work well together.”9

While an average Hollywood studio produces between six and 12 films in a year, Pixar produces just one, a risky bet given that an animated film costs approximately US$180 million to make. “We have realized that having lower standards for something is bad for your soul,” Catmull explained. Pixar's internal culture, known for its alternative, lifestyle-oriented feel, focuses on avoiding “no, but …” responses to other people's ideas and suggestions. “What you need to create,” states Andrew Stanton, the writer and director of Finding Nemo, “is the most trusting environment possible where people can screw up.”10 Taking the right risks and accepting that bold, innovative ideas require a tolerance for uncertainty are central to the whole culture. As Catmull says, “Talent is rare. Management's job is not to prevent risk but to build the capability to recover when failures occur.”11

Another company from Peters and Waterman's research on excellence, General Motors, provides a further chastening example of the consequences of poor organizational health. In 2009, the company that once led America's “Big Three” automakers and dominated the world's car market filed for bankruptcy and received a government bailout of US$50 billion to resurrect itself. This was not a sudden fall from grace, but a calamity that had crept up on the company over time. In 2005, GM posted a loss of US$10.6 billion. By 2007, its losses for the year were US$38.7 billion. Sales for the following year dropped by a whopping 45 percent. By the fourth quarter of 2008, GM had reported it would run out of cash around the middle of the following year unless it was able to secure government funding, a merger, or a sale of assets.

Following an 18-month turnaround, GM made a return to the stock market in late 2010. Although the stock offering raised almost US$20 billion and helped to reduce the government's stake in the company from 61 percent to 33 percent, many would agree with an article that described GM as “a shadow of the company that once symbolized U.S. might” and saw it as still plagued by the repercussions of its short-term performance focus.12 Mark Reuss, the head of North American operations, admitted that, “We have a lot of work to do. … There are a lot of people who do not understand who we are. We need to re-create the soul of the company.”13

What had gone wrong? On the face of it, GM fell victim to its own strategic and operational choices. For instance, it had eight distinct brands while competitors such as Honda had just two. This drove up marketing spending, yet it still wasn't enough to saturate the target audiences, given that the investment had to be spread across such a broad portfolio. Innovation—or rather the lack of it—was another weak spot. As fuel prices soared and environmental concerns grew more urgent, competitors responded by investing in hybrid technologies, but GM stuck with its traditional focus on large vehicles with poor fuel efficiency. Product quality didn't keep pace with the competition either: for instance, in industry comparisons, every single Chrysler model was rated in the bottom quartile for quality.14 At the same time, a fully funded pension plan negotiated with unions put GM at a strategic disadvantage in terms of its labor costs.

Scratch beneath the surface, though, and we can trace back the source of these strategic and operational failures to breakdowns in organizational health. GM had been aware of all these issues for 20 years. In the 1990s and early 2000s it had plenty of cash, but failed to use it. In discussing the company's downfall, the New York Times reported that “GM's core problem is its corporate and workplace culture—the … essential attitudes, mindsets and relationships that are passed down, year after year.”15 The article quotes from a “brave and prophetic” memo written by former GM executive Elmer Johnson as early as 1988: “We have vastly underestimated how deeply ingrained are the organizational and cultural rigidities that hamper our ability to execute.” In the end, the company's undoing came down to decisions that overemphasized short-term performance and neglected factors contributing to long-term success.

Perhaps the starkest example of the perils of pursuing performance at the expense of health is the story of Albert J. Dunlap, famous for taking over struggling companies, ruthlessly downsizing them, and selling them at a profit. Dunlap's mantra was “If you're in business, it's for one thing—to make money.” In 1996, he took over U.S. appliance maker Sunbeam Products and, true to his “Chainsaw Al” nickname, sold two-thirds of its plants and fired half of its 12,000 employees. Ironically, at this point Sunbeam's stock price proceeded to rise so high that it wrecked his plans to sell the company. Having compromised Sunbeam's health, Dunlap now found he needed to sustain its performance for the coming years. But the damage was too great. By 1998, Sunbeam was facing quarterly losses as high as US$60 million, and Dunlap was fired.

Compare Dunlap's tactics to those of Lou Gerstner when he took the helm at IBM in 1993. Despite pressure from Wall Street to engineer a rapid turnaround at the ailing technology giant, Gerstner decided not to focus exclusively on improving its performance, but to put considerable effort and resources into improving its health as well. Under Gerstner's stewardship, the company worked on collaborating as “one IBM” across businesses. It became more externally oriented, reduced bureaucracy, and moved from an arrogant to a continuous learning mindset. By the time Gerstner retired nine years later, the stock had increased in value by 800 percent, and IBM had regained its leadership in multiple areas of the computer, technology, and IT consulting industry.

In retrospect, it's easy to see that the period of economic history between the collapse of Enron in 2001 and that of Lehman Brothers in 2008 was characterized by an obsessive focus on short-term business performance. During this time wealth creation as measured by shareholder value rose dramatically, only to crash leaving shareholders with huge losses. Although the crisis can be blamed on a multitude of factors, including strategic errors and ineffective regulatory regimes, the failure of large companies to tend to their organizational health is clearly implicated.

Take Enron: part of the blame for its collapse has been attributed to dubious accounting practices that allowed the energy giant to keep its spiraling debt off its balance sheet. A bigger question, though, is why Enron had allowed itself to become so highly leveraged in the first place. The story goes that it had taken a number of hasty investment decisions in its desire to continue to show shareholders impressive growth in the face of mounting losses. At the time, a source close to top Enron executives neatly phrased this as “You make enough billion-dollar mistakes and they add up.”16

In order to retain shareholder confidence, Enron's top management developed increasingly complex off-balance-sheet financing systems that were a mystery to most employees, outside observers, and even members of the company's own board. Enron's steadily rising stock price and investment grade shielded it from public scrutiny until the very end, when concerns about its accounting methods and complex financial arrangements came to the surface. Its subsequent declaration of losses in October 2001 led its stock price to tumble, triggering arrangements with investors that required loans to be paid back immediately. Unable to generate further leverage thanks to its nose-diving stock price, Enron eventually filed for Chapter 11 bankruptcy—another sobering example of the possible consequences of an excessive focus on performance.

The Enron collapse prompted a number of financial and accounting reforms designed to prevent similar situations from arising in the future. Yet these reforms did little to curb the appetite for quick returns and consequent performance focus that led to a number of equally spectacular collapses during the 2008 financial crisis. Lehman Brothers, a 158-year-old Wall Street bank that had financed corporate giants such as Macy's and 20th Century Fox, stands out as one of the sorriest cases.

At the beginning of the financial crisis in 2006, Lehman was no more or less entrenched in the housing market than other banks. However, it was one of the few that had made direct investments in commercial real-estate deals. In 2007, when even U.S. treasury secretary Henry Paulson was encouraging securities houses to scale back their balance sheets, Lehman continued to invest, doubling its real-estate commitments from US$20 billion to US$40 billion in the space of just one month.17 Betting against the market had paid handsome dividends for the bank during previous crises such as the Russian ruble devaluation of 1998.

Ignoring warnings of an imminent collapse, Lehman continued on its downward path, bolstering its market position by overvaluing its deadly mortgage assets and announcing record profits in 2007. Once again, the desire to continue to deliver short-term performance overshadowed the need to conduct an honest assessment of the firm's position and take corrective measures. Eventually the bank had to revise its valuation of its mortgage assets, which led it to declare losses in late 2008. The market reacted almost immediately, sending Lehman's stock price into free fall. The bank made a number of internal changes in the hope of bolstering the market, but it was too little, too late. Lehman Brothers eventually filed for the largest corporate bankruptcy in U.S. history.

A more recent and equally sobering account is that of energy giant BP and its 2010 Deepwater Horizon disaster, the largest marine oil spill ever experienced in the petroleum industry. After an explosion in a drilling rig that killed 11 men and injured 17 others, a seafloor gusher proceeded to leak more than 200 million gallons of crude oil into the Gulf of Mexico. According to White House energy adviser Carol Browner, the spill was the worst environmental disaster the United States had ever faced.18

How did such a devastating turn of events come to happen at BP, once voted Europe's most admired company, and an organization with a long and impressive heritage? Press reports have pointed to cost pressures and tight deadlines as possible causes of the difficulty BP had in handling the disaster. Similar causes had been cited before for smaller-scale crises at the company. Inquiries into an incident at the Texas City refinery in 2005, for example, cited BP's “short-term focus” as a key factor. Bob Dudley, the recently appointed CEO, has conceded that BP must “look at risk management of safety in a different way.”19

The tendency to emphasize performance at the expense of health is not confined to the private sector. The National Health Service in England harnesses the talents of 1.4 million people to pursue the noble purpose of providing universal health care that is free at the point of service. Yet even the best-intentioned institutions are not immune to unhealthy subcultures. A recent inquiry into “shocking” systematic failures of hospital care at the Mid Staffordshire NHS Foundation Trust revealed that patients were left, as one newspaper reports, “routinely neglected, humiliated and in pain as the trust focused on cutting costs and hitting government targets.”20

The inquiry concluded that the failures of care, which led to between 400 and 1,200 more deaths than at other hospital trusts between 2005 and 2008 (after correction for patient numbers and pathology), was driven by a host of factors. These included short-term target-driven priorities, disengagement of clinicians from management, low staff morale, lack of openness, acceptance of poor standards of conduct, and denial of criticisms. In other words, the Mid Staffordshire NHS Foundation Trust was suffering from a breakdown in organizational health.

In a bid to maintain its Foundation Trust status,21 the hospital had undertaken crippling cost-cutting measures that had left it with too few clinical staff and nurses, inadequate training, and problems with the availability and functioning of vital equipment. The accident and emergency (A&E) department, one of the hospital's worst offenders, would often rely on unqualified receptionists to triage patients, and then simply leave the patients in a nearby ward to ensure that the national four-hour target for A&E waiting time was met. Overburdened clinical staff raised concerns, but were mostly ignored. Things got so bad that the majority of staff didn't want to be treated by their own hospital if they became ill.22

The chairman of the independent inquiry into the case, Robert Francis QC, observed that “Such a culture does not develop overnight but is a symptom of a long-standing lack of positive and effective direction at all levels. This is not something that it is possible to change overnight either, but will require determined and inspirational leadership over a sustained period of time from within the Trust.”23

The Genius of “And”

The Mid Staffordshire case is a sharp reminder that poor organizational health doesn't just hit shareholders, but also hurts employees, customers, and communities. A McKinsey survey of more than 2,000 senior executives carried out in 2010 reveals that transformations that ignore health and focus only on performance are 1.5 times more likely to fail in the long run.24 Leaders could hardly have a stronger rallying call to give equal weight to health and performance. The good news here is that research and experience both tell us that performance and health are not in conflict, but are complementary. In fact, the most important word in “performance and health” is the “and.”

To see why, consider a sports team that is focusing single-mindedly on its performance. If all it thinks about is winning games and titles this season, it will have a rude awakening in years to come. It will have failed to recruit new members, develop the bench, secure stakeholder support, obtain financial backing, build community relationships, and so on.

On the other hand, if the team takes steps to improve its health, it will improve its performance as well. Recruiting promising new members will help it perform better in the future. In turn, performing better will make it easier to recruit new members and secure financial backing. A team that performs well this year is a product of superior financing, recruitment, and training in the past. In this way, paying attention to performance and health creates a virtuous cycle of sustained excellence over time. An important aspect of the “and” concept is that both performance and health require action today, even though returns on investments in health may not mat- erialize for many years.

Let's take another analogy from the sporting world. For athletes, the route to future performance comes from tending to underlying health right now, long before any signs of deterioration or illness set in. World-class athletes don't just perform, they also monitor their body fat, diet, fitness regime, and lifestyle in general, and curb bad habits such as smoking, drinking, and staying up late. They also monitor leading indicators of health such as blood pressure, cholesterol level, and heart rate. If today's performance was their only concern, they wouldn't worry about most of these measures. And if they waited for their performance to decline before doing anything about their health, it could be a long road back to the top. Worse yet, if they waited for alarming symptoms such as chest pains before acting, it might be too late for any corrective measures to make a difference.

As with our bodies, so too with our organizations. The evidence, as we'll see in Chapter 2, supports the conclusion that sustainable organizational excellence requires a focus on both performance and health. But health is not a word that you'll often encounter in companies’ annual reports or in the business press. Do capital markets understand organizational health? Or will a company that chooses to invest in its health be punished before its investments begin to pay off by markets that would prefer to see it focus on enhancing performance in the short term?

There is undoubtedly a noisy segment of analysts and traders fixated on the next quarter's earnings. Contrary to conventional wisdom, however, markets do recognize that health is essential for turning a company's growth prospects, capabilities, relationships, and assets into future cash flows (which are what most investors are looking for). As a former managing director of McKinsey, Ian Davis, observes, “An examination of share prices demonstrates that expectations of future performance are the main driver of shareholder returns. In almost all industry sectors and almost all stock exchanges, up to 80 percent of a share's market value can be explained only by cash flow expectations beyond the next three years. These longer-term expectations are in turn driven by judgments on growth and—a lesson relearned after the dot-com bust—on long-term profitability.”25

The Five Frames of Performance and Health

If achieving sustained excellence means paying close attention to performance and health, how can leaders bring about significant and mutually reinforcing improvements on both these fronts at the same time? The answer is to follow a structured process designed to transform performance and health in an integrated manner.

The mathematician and philosopher René Descartes advised us to “Divide each difficulty into as many parts as is feasible and necessary to resolve it.” For a large corporation, achieving organizational excellence is an enormous undertaking that can involve tens if not hundreds of thousands of people. Various academics, commentators, and practitioners have recommended breaking down the change process in a multitude of different ways: you can identify, plan, adopt, maintain, evaluate; believe, decide, act, achieve, maintain; evaluate, vision, organize, link, vest, embed; prepare, connect, discover, activate, integrate; or define, discover, dream, design, destiny. However, the good news for leaders is that most of these people are saying much the same thing.

We've chosen to describe the process for achieving organizational excellence in terms of five basic questions that need to be answered in order to make change happen. Each question is summed up in a word beginning with the letter “A” to make it simple and memorable, and so the five stages in the process are collectively known as the “5As.” Here they are:

·       Aspire: Where do we want to go?

·       Assess: How ready are we to go there?

·       Architect: What do we need to do to get there?

·       Act: How do we manage the journey?

·       Advance: How do we keep moving forward?

In turn, each of the 5As translates into a specific challenge for performance and for health, and a particular approach for tackling it.

In performance, these challenges (and approaches) are:

·       Aspire: How to develop a change vision and targets (the strategic objectives).

·       Assess: How to identify and diagnose an organization's ability to achieve its vision and targets (the capability platform).

·       Architect: How to develop a concrete, balanced set of initiatives to improve performance (the portfolio of initiatives).

·       Act: How to determine and execute the right scaling-up approach for each initiative in the portfolio (the delivery model).

·       Advance: How to make the transition from a transformation focused on a one-time step change to an era of ongoing improvement efforts (the continuous improvement infrastructure).

And in health, the challenges (and approaches) are:

·       Aspire: How to determine what “healthy” looks like for an organization (the health essentials).

·       Assess: How to uncover the root-cause mindsets that drive organizational health (the discovery process).

·       Architect: How to reshape the work environment to influence healthy mindsets (the influence model).

·       Act: How to ensure that energy for change is continually infused and unleashed (the change engine).

·       Advance: How to lead transformation and sustain high performance from a core of self-mastery (centered leadership).

In Part II of this book we show you how you can successfully navigate through the five stages in a transformation (the 5As) by adopting the approaches listed above, which are summarized visually in Exhibit 1.3. Taken together, these approaches are known as “the five frames of performance and health.” We use the word “frames” to acknowledge that change doesn't happen in a linear way in real life, even if it may sometimes be portrayed that way on paper. When an organization undergoes a transformation, it experiences a process that is dynamic and iterative, rather than a one-way sequence of separate steps.

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For example, when a company looks at where it is today during the “assess” stage, it often uncovers information and insights that send it back to refine the change vision and targets it developed earlier during the “aspire” stage. In much the same way, a company may need to go back and forth between the performance and health frames within a particular stage. When it is working on health essentials during the “aspire” stage, for instance, it may uncover health constraints that lead it to tone down the strategic objectives it had initially planned to set for its performance.

We should also stress that the approach we propose in this book is designed not only to support an organization through a one-time cycle of major change, but to help it increase its capacity to change and keep changing over time. In effect, our aim is not to help organizations “learn to adjust” to their current context, or to challenges that lie just ahead, but to help them “learn to learn” so that they will be able to respond flexibly to, and even shape, whatever the future may hold in store. The old adage applies: give a man a fish and he will eat today; teach a man to fish and he will eat every day. To extend the metaphor, teach a man to learn and he will be able to hunt and gather and farm as well as fish. Organizations that learn are able to keep finding new sources of value and capturing them more quickly and effectively than their peers, creating the ultimate competitive advantage that we talked about in the Introduction.

To see how the five frames of performance and health work together, imagine that you aspire to become a marathon runner. You decide which marathon you'd like to compete in, find out when it takes place, work out how long you have to train for it, and set your performance targets accordingly. Perhaps you even have a finishing time in mind. Having decided on your performance aspiration, you can then work out your health aspiration: the level of fitness you'll need to run the marathon in your chosen time.

Next you need to assess your current capability as a runner. On the performance side of things, how fast can you run? How good is your technique? Do you have the right equipment? Can you get access to the facilities you need? On the health side, do you have the mental toughness to achieve your target fitness level? What dietary changes are you prepared to make to get into better shape? How much time are you willing to dedicate to training? If you have unhealthy habits like smoking or staying up too late, do you have the willpower to give them up?

Armed with this information, you can architect a training plan to improve your performance by alternating high- and low-intensity workouts and extending your range gradually over a few months. On the health side, you can plan a diet that will give you the energy you need. You may also want to make adjustments in other aspects of your life: letting go of commitments to free up time, telling your friends you won't be seeing them so often for a while, finding the money to pay for a trainer, and so on.

Then it's time to act on the plan. In terms of performance, you start out gradually and then ramp up your training. In terms of health, you change your diet and your life in general in the ways that you've planned, monitor and review your results, adjust your approaches as you go, and find ways to keep your energy levels and motivation high.

As you get closer to the date of the marathon, you consider how to make this more than a one-off event—how you can advance your running afterward. On the performance side, what will be your baseline training regime before you ramp up again for your next marathon? On the health side, how will you prepare yourself mentally to make marathon running a regular part of your life? What if you get injured? How will you keep a good balance between your training, your work, and your personal life?

It isn't hard to see how this way of thinking can be applied in a management context. We've found that the concept of tending to both the performance and the health of an organization makes intuitive sense to most experienced managers. Indeed, the case for promoting health is easy to make. The real challenge, however, is to adopt it as our “permanent residence,” and not just a nice place to visit during episodes of discursive thinking. As Chris Argyris, a business theorist and expert on learning organizations, might say, it needs to become the “theory-in-use.”

Apart from the next chapter, in which we describe our evidence base, research, and analytical methods, the rest of the book is devoted to exploring how leaders of organizations can approach the five frames of performance and health. Although both aspects are critical, we go into much more depth on health. Why? Because that's where the greatest need exists. Most companies already know how to keep a close eye on performance; it's their health that more often suffers from neglect. By way of example, when we asked more than 2,000 executives to nominate the areas where they wished they had better information to help them design and lead transformation programs, only 16 percent chose “determining what needs to be done to generate near-term performance.” On the other hand, more than 65 percent chose “determining what needs to be done to strengthen the company's health for the longer term.”26

This appetite for guidance on long-term health makes sense when we look at the data regarding why change programs fail. What we might think of as the usual suspects—inadequate resources, poor planning, bad ideas, unpredictable external events—turn out to account for less than a third of change program failures. In fact, more than 70 percent of failures are driven by what we would categorize as poor organizational health, as manifested in such symptoms as negative employee attitudes and unproductive management behavior (Exhibit 1.4).27

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In the chapters that follow, we look at numerous examples of organizations that have grappled with such symptoms, traced their root causes, and brought themselves back to sound health—and have stayed that way. Their stories show that it can be done, but it is no easy task. As Roger Enrico, former chairman and CEO of PepsiCo, put it, “The soft stuff is always harder than the hard stuff.”28

Of course, no two change programs are alike; any organization embarking on a transformation will need to devise its own journey in the light of its own internal and external context. Having said that, we believe that the five frames of performance and health contain all the key ingredients to deliver a successful organizationwide transformation in almost any circumstance. Is your performance under pressure from mounting shareholder expectations, rising consumer demands, increasing competition, a changing regulatory environment, or inefficient operations? The five frames can help you find better ways to tackle any and all of these.

The same goes for health concerns. Whether the issue is slow decision making, poor morale, a weak performance ethic, a lack of talent, or confusion over roles and responsibilities, the five frames can be used to tackle the causes and restore good organizational health.

balcksqure.jpg

Achieving sustained organizational excellence by understanding and applying the five frames of performance and health is undoubtedly more complex an answer than some readers will be looking for. After all, it involves working through 10 separate frames, each with several steps of its own. Where are the rules of thumb that typically reside in management literature, you may wonder? Not here—for the simple reason that such principles are all too often, paradoxically, both common sense and yet astoundingly difficult to put into practice.

Louis Lavelle, in a book review in BusinessWeek, puts this well: “To hear most authors of business books tell it, there is no management conundrum so great that it can't be solved by the deft application of seven or eight basic principles. The authors are almost always wrong: Big public companies have too many moving parts to conform to any set of simple precepts.”29

We agree. Our aim is not to offer a simplistic checklist, but to provide thoughtful insights and guidance to help leaders achieve excellence in anything from the smallest start-up to the largest and most complex multinational organization. At the same time, we've tried not to introduce any complexity that doesn't add value. We've done our best to abide by Einstein's edict that everything should be made as simple as possible, but no simpler.

2

The Science

Hard Facts behind the Soft Stuff

Why do so many organizational change programs fail? And why are so many “excellent” organizations unable to stay that way? These questions have preoccupied us for some time, and have been the focus of much of our work as leaders of McKinsey & Company's Organization Practice. To answer them, we sought to amass as much evidence as possible by undertaking extensive research and assembling reliable data on the factors that enable and sustain positive change.

When we reviewed the classics of management literature, we found that most were based on relatively small samples of companies and executives. It dawned on us that the organization we both belong to, McKinsey & Company, has a much greater global reach than it did in the early 1980s, when our fellow firm members Tom Peters and Robert Waterman wrote and published In Search of Excellence. We wondered what we might be able to learn if our research efforts were able to tap into McKinsey's presence in 99 offices in 57 countries. By drawing on the firm's unrivaled access to senior leaders at some of the most important organizations in the world, we would be able to gather information and test hypotheses on a scale beyond anything ever attempted before.

The Quest Begins

With access to such a vast pool of high-quality data, the first challenge was to decide what to ask. How could we investigate what creates organizational excellence and sustains it over the long term in a way that would yield robust new insights? Finding out which companies had been successful and which had failed would be relatively easy. So would probing what had happened to them. But how should we investigate the central question of why?

We began by invoking Isaac Newton's notion of standing on the shoulders of giants. Before we started to gather data at scale, we wanted to consult three groups of giants in particular: our colleagues, a small group of senior executives, and a select group of leading thinkers from the academic world. If we could draw on the help of these three sources to develop an integrated view of what makes organizations successful over time, we could then use McKinsey's global reach to test and refine it at scale.

Our first group of giants was by far the hardest to tame. We began by interviewing colleagues who had deep experience in leading major change programs, and colleagues whose clients had sustained high performance over long periods. We then brought our sources together for a series of working sessions. Discussions about the real drivers of sustainable performance soon turned into heated debates. One camp contended that “The right incentives are 80 percent of the answer,” while another countered with “The real secret is to engage hearts and minds.” Yet another insisted that “You start with strategy, then get the structure right, then produce a strong implementation plan and you're there,” only to be contradicted with “Top-down solutions don't work in large, complex global organizations—what you need is a vision and values, then you kick off change from the bottom up.” These debates went on late into the night and were continued via e-mail for months after the formal sessions were over.

Our second group of giants—the senior executives—were better behaved, but equally diverse in their recipes for success.1 We heard everything from “It's all about your vision” to “A vision was the last thing on my agenda.” Or from “Make a clear plan and pursue it consistently” to “Adapt as you go, and pray for all the things you can't control.” Or from “Trust and collaboration are the key” to “Individual accountability and incentives are what matter.” Or from “The secret is continuous improvement: doing better every day, week, year” to “Innovation is where it's at: always being able to find the next big thing before your competitor does.” To say that no clear consensus emerged would be putting it mildly.

The third group—the academic giants we spoke to, and those authorities whose work we reviewed—also offered a vast array of contrasting advice. Some suggested that long-term competitive advantage is determined largely by the nature of the industry a company competes in; others placed the emphasis on the top team and on decision-making patterns within the organization. Still others argued that luck plays as big a role as any other factor. We were struck too by the spectrum of communication styles on offer. They ranged from the technical (we learned much about “meta-analytic path analyses,” “empirical tests of relative inertia,” and “efficacy-performance spirals”) to the playful (as found in Who Moved My Cheese?, The Complete Idiot's Guide to Change Management, and Fish! A Remarkable Way to Boost Morale and Improve Results, among others), with seemingly every other approach in between.

None of the groups converged on an answer—that would have been too easy—but when we stepped back to look for patterns across everything we had heard and read, we saw three themes emerging.

There was no doubt that long-term success required some sort of internal alignment on direction—a compelling vision and well-articulated strategy that are meaningful to individual employees and supported by the culture and climate of the organization.

A high quality of execution was also key: this meant having the right capabilities, effective management processes, and high motivation.

The final common thread was a capacity for renewal: an organization's ability to understand, interact with, shape, and adapt to changes in its situation and the external environment.

With these three themes in mind, we put together a first draft of a framework to describe the essential components of organizational excellence.

The Road Less Traveled

At this point, the only thing we could be certain of was that we didn't have an answer. All we had was a starting point and a route. We also knew that there would be many roadblocks, detours, and dead ends along the way. So we set off on the next phase of our work.

Our journey involved three stages: expanding and validating our research, testing our hypotheses in practice, and refining our models and approaches. First, we started to gather data from hundreds of organizations and thousands of senior leaders around the world, using both surveys and workshop-based approaches. Second, we tested our hypotheses in the field by applying them in large organizations and monitoring their impact over long periods of time—not weeks or months, but years. Third, we embarked on a deeper dive into the relevant literature to pressure-test our emerging model.

On the survey front, our first step was to create a tool to measure the themes of alignment, execution, and renewal that had emerged from our earlier work. In putting it together, we used our experience to judge what to include, what to leave out, and how to group the various elements. We had an initial version of the survey by the end of 2002. As we gathered more data, we continued to develop and refine it. Over the next few years, it evolved rapidly, and by 2005 it had become a robust tool for measuring organizational health, and was known as the organizational health index (OHI).

By that time, we had a sizeable database that we could mine to validate the link between health data and financial performance. That gave us confidence that we were on the right road to what promised to be an exciting destination. The OHI enabled us to identify and measure the characteristics that underpinned an organization's ability to sustain high performance over time—in other words, the elements that made up its health. However, it didn't give us much insight into what the organization could do to improve its health.

Imagine you go to a doctor with a bad cold, and the doctor tells you, “You have a cold. It means your nose is running, your head feels stuffed up, your eyes are watering, you sneeze and cough, your temperature is all over the place, and you probably aren't sleeping well. When I look at the data on others with your condition, I can say with a high degree of certainty that you won't be able to achieve much in this state.” So you ask, “Okay, what can I do to get better?” The doctor replies, “Good question. I'm not really sure.” Chances are that's not a doctor you'll be visiting again.

The next step in our journey was to gather data related to our emerging hypotheses about how organizations could become healthy and keep up a high standard of performance over time. We started with a simple three-step model that we referred to as the 3D approach: diagnose your current state, design an intervention program, and deliver against the plan. Over time we came to believe that the diagnostic step should have two elements: setting a performance aspiration and assessing the organization's readiness for change. We also found it was helpful to separate the delivery step into two: delivering against the plan and making the transition from a transformation program to a state where continuous improvement is part of the organization's whole way of life. As we learned these lessons, the 3D approach became the 5As (aspire, assess, architect, act, advance).

So as to understand what work needed to be done on performance and health at each stage of a transformation, we looked to the McKinsey Quarterly to help us with data gathering. The Quarterly is a business journal that offers new ways of thinking about the management of private, public, and nonprofit organizations. Its combined print and web audience is in excess of 2,300,000 readers. We enlisted a portion of these readers—in excess of 32,000 as of spring 2011—to act as a panel to respond to online surveys created by McKinsey's practice teams in conjunction with research and editorial experts. With its broad geographic reach and representatives from the full spectrum of industries, functions, and ownership models, the panel was an ideal sounding board for testing our approach as it developed.2 To date, we have conducted three surveys with this panel---in 2006, 2008, and 2010.3

As well as conducting surveys, we also gathered input through a series of workshops that we call the Change Leaders Forum. This is a regular peer-learning event involving executives from a cross-section of leading organizations throughout the world. Since 2005, we have held 18 forums in a variety of locations including the United States, the United Kingdom, France, Dubai, and South Africa. As participants share best practices at these events, we take the opportunity to refine our thinking about organizational health and its relationship to performance during what can often be heated debates. We also draw insights from a network of more than 1,000 past participants from these sessions, as well as gathering feedback from them on what works in the field and what doesn’t.

Although surveys and focus groups give us huge amounts of data to work with, they ultimately rely on perceptions: we ask people a set of questions, and they report back what they think. We wanted to go further and test our emerging hypotheses in the crucible of real organizations that are trying to improve the way they work. To do that, we set out to compare experimental and control groups over a period of 18 months to two years. One group would embark on making change happen in a fairly traditional fashion, and the other would use the new approach we were starting to develop—an approach that gave equal weight to performance and health and employed our embryonic “five frames.” By viewing performance over a relatively long period, we sought to remove any distortions that might derive from the Hawthorne effect, whereby subjects alter their behavior simply because they are being studied, not because of the interventions being tested.

At one large financial services institution, we selected an experimental group and a control group that were comparable and representative of the wider organization in terms of their performance across a range of criteria. These included net profit before taxes (in terms of overall growth and average over the longest coherent period of data available), customer economics (average income per customer in retail banking; industry composition in business banking), and branch staff characteristics (performance rating and tenure). The two groups then pursued a sales stimulation program over an 18-month period, and we compared the results. We took care to minimize any distortions during the trial—operational restructuring, changes in leadership, significant staff turnover, or other corporate initiatives—that might have a disproportionate effect on one group.

The results of the study were compelling. In business banking, the traditional approach yielded improvements in value of 8 percent, whereas adopting our new “performance and health” approach delivered improvements of 19 percent. In retail banking, the traditional approach delivered a 7 percent improvement, compared with 12 percent for our new approach. Similar studies in other industries yielded similar results, as shown in Exhibit 2.1.

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As well as gathering data through surveys and workshops and testing our hypotheses in the field, we also set out to explore in some depth the academic literature available to leaders. In particular, we wanted to understand the state of the science that underpinned current thinking on organizational effectiveness and change management. To ensure that we were reviewing the most thorough and credible material, we applied strict screening criteria. Studies needed to have applied tests of statistical significance at 95 percent certainty levels; the impact reported had to include “hard” financial, economic, commercial, technical, or social metrics; and articles had to have been published in top-tier peer-reviewed journals.4

We are confident that the body of research we conducted is more exhaustive than anything previously undertaken in the field. In combination, it consists of:

·       Responses to OHI surveys on the drivers of organizational performance from more than 600,000 employees at more than 500 organizations.

·       McKinsey Quarterly survey panels asking more than 6,800 senior executives about their experience of transformational change.

·       Data from more than 100 clients served by McKinsey on specific “performance and health” engagements.

·       Reviews of more than 900 books and academic articles.

·       In-depth personal interviews with 30 CEOs and other senior leaders who shared their personal experiences of leading change and driving performance.

·       Close working relationships with four eminent scholars who helped to challenge and extend our findings.

But that certainly doesn't mean we feel we've reached our journey's end. On the contrary, we've reached only the first staging post. We're convinced that many more new and valuable insights will emerge as our sample continues to grow from 500 today to—who knows?—maybe 5,000 organizations one day.

Organizational Health Defined

So much for the journey to define organizational health and how it can be achieved. What about the destination?

You'll remember that we identified three key attributes of good health: internal alignment, quality of execution, and capacity for renewal. Working from these attributes, we developed a definition of organizational health that consists of nine elements that combine in different ways to support and sustain them, as shown in Exhibit 2.2.

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Let's take a quick look at each of these nine elements.

1. Direction is a clear sense of where the organization is heading and how it will get there that is meaningful to all employees.

2. Leadership is the extent to which leaders inspire actions by others.

3. Culture and climate is the shared beliefs and quality of interactions within and across organizational units.

4. Accountability is the extent to which individuals understand what is expected of them, have sufficient authority to carry it out, and take responsibility for delivering results.

5. Coordination and control is the ability to evaluate organizational performance and risk, and to address issues and opportunities when they arise.

6. Capabilities is the presence of the institutional skills and talent required to execute strategy and create competitive advantage.

7. Motivation is the presence of enthusiasm that drives employees to put in extraordinary effort to deliver results.

8. External orientation is the quality of engagement with customers, suppliers, partners, and other external stakeholders to drive value.

9. Innovation and learning is the quality and flow of new ideas and the organization's ability to adapt and shape itself as needed.

Each of these nine elements can be further broken down into a set of practices that go to make it up. For instance, one of the practices related to “direction” is “Articulating a clear direction and strategy for winning, and translating it into specific goals and targets.” What these practices do is to take the high-level elements of health and make them tangible, observable, and above all actionable—not qualities that are always associated with models of organizational effectiveness. Exhibit 2.3 lists the 37 management practices that make up the nine elements of organizational health.

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A New Management Accounting?

These nine elements of organizational health and their related 37 practices are at the heart of the OHI survey, a tool for measuring health in a rigorous and comprehensive manner.

We are sometimes asked how the OHI differs from other surveys, and in particular those used to assess employee satisfaction and engagement. These surveys, which many organizations run annually, generally focus on how employees experience the people-related dimensions of their working environment. Typical questions ask how far individuals agree or disagree with statements such as “I get good coaching,” “I am satisfied with my job,” and “I am rewarded for what I do.” What's different about the OHI is that it generates insights not only into these outcomes—employees’ perceptions of the quality of coaching, job satisfaction, and rewards, in this case—but also into the specific management practices that help to produce them. This makes the OHI far more actionable than other surveys because it identifies precisely what you need to change in order to achieve the results you desire.

Another key difference between the OHI and other surveys is its scope. Surveys of employee satisfaction and engagement rightfully claim that these factors correlate positively with business performance. However, there are other areas of organizational effectiveness that are equally correlated to performance—such as coordination and control, innovation and learning, external orientation, and capabilities—which are not covered in these other surveys, but are addressed in the OHI, as core elements of organizational health. When we've compared the OHI with other commonly used employee surveys, we've found that on average only about 30 percent of its questions are similar to those included in other surveys, while the remaining 70 percent of the content is unique to the OHI.

The OHI establishes a powerful quantitative baseline against which organizations can check their progress toward their aspirations. It also enables them to benchmark their position against a huge and growing database of large companies. What's more, the OHI has been rigorously tested for reliability and validity, and provides global benchmarks from most major industry sectors. That makes it far more than just another organizational survey.

Let's start with the reliability and validity of the survey tool. For those interested in the specifics of the data, internal reliability (Cronbach's alpha) showed extremely high reliability (alpha scores above 0.85) in most cases, and acceptable levels of reliability in all cases (Exhibit 2.4). We observed no significant biases based on language, country, region, or industry.

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In terms of benchmarking, our database spans all major industries in a ratio similar to that of the Datastream global index. Twenty-two industry sectors are represented, in the proportions shown in Exhibit 2.5.

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In developing the OHI as such a comprehensive and robust tool, our aspiration was to do for organizational health what the accountancy profession has long done for financial health: to establish a consistent method of measurement that allows “apples to apples” comparisons to be made both within and between organizations. We were convinced that if organizations had at their disposal a reliable evidence-based tool for measuring organizational health, the results it reported would be just as important as this quarter's profits or last year's operating performance as far as shareholders, customers, employees, regulators, governments, and other stakeholders were concerned.

Whether the OHI fulfills this aspiration is not for us to judge. Our guess would be, though, that if you're deciding whether to expand internationally, you would find it extremely helpful to have not only economic, socio-demographic, and market data at your fingertips, but also information on the general heath of management practices in your target country. If you're contemplating a merger, having a window into how well (or badly) your management practices will dovetail with the other company's could give you a head start. If you're making strategic decisions, knowing how healthy your industry is compared with others could have a bearing on your future direction. And if you're voting for elected officials, imagine the difference it would make if you could understand the health of the institutions your taxes pay for, and see the direct results of any changes as they happen over time.

More on Our Methodology

By this point, we hope we've persuaded you that we've done our homework, and that the advice and guidance you'll find throughout this book have a solid foundation in evidence. But we suspect there may be a few statisticians or skeptics out there who'd like to know more about our survey methods or the analysis that underpins our definition of organizational health. If you're one of these, please continue reading. If you aren’t, we suggest you skip to the end of the chapter, unless you happen to be reading in bed and need help going off to sleep. You have been warned!

What Research Underpins the Nine Elements of Organizational Health?

Here is a brief summary of the primary and secondary research that contributed to our identification of the nine elements of organizational health.

1. Direction. Our analysis of the data gathered in our OHI survey shows that the EBITDA (earnings before interest, taxes, depreciation, and amortization) margin is 1.9 times more likely to be above the median when people feel clear about and excited by where their organization is heading. External research by Bart and Baetz working with data from 83 of the largest organizations in the United States also found there was a strong correlation between a clear direction (where the company mission is aligned with performance management systems), employee behavior (0.59), and return on assets (0.37).5 Research by Collins and Porras drawing on a survey of 1,000 CEOs confirms that visionary companies outperform their peers financially.6

2. Leadership. In 2005, Schneider, Ehrhart, Mayer, Saltz, and Niles-Jolly showed a clear linkage ( p = 0.40) between leadership behavior, service climate, employee engagement, customer satisfaction, and sales.7 McKinsey research provides confirmation: companies with top-quartile scores in leadership have a 59 percent likelihood of having above-median EBITDA. As long ago as 1972, Lieberson and O’Conner reported similar findings: in their review of data for 167 companies over 20 years, they found that performance is correlated with leadership across all industries (between 14 percent and 68.7 percent of the variance in company profit margin performance could be explained by a proxy for leadership).8 Further analysis of the data set by Thomas in 1988 showed that senior leaders’ influence on net income and sales was on average 62.8 percent and 71.5 percent respectively.9

3. Culture and climate. An analysis of the OHI data reveals that companies that are top quartile in their culture and climate are 1.8 times more likely to have above-median EBITDA. A landmark 1992 study by Kotter and Heskett that tracked 207 large U.S. companies in 22 different industries over an 11-year period yielded similar results.10 Companies with strong cultures had a cumulative annual growth rate that far outpaced that of companies with weak cultures: 21 percent compared with 9 percent in revenue, 23 percent compared with 5 percent in stock price, and 22 percent compared with 0 percent in net income. Also in 1992, Gordon and DiTomaso found a strong correlation (0.78, p < 0.01) between culture strength and income growth when testing across management levels within the insurance industry.11

4. Accountability. Our research shows that the likelihood of demonstrating an above-median EBITDA margin for companies with an accountability score in the top quartile was 65 percent, 1.9 times more likely than for companies with a bottom-quartile score. A 2003 study by Wagner, Parker, and Christiansen demonstrated that employees who feel psychological ownership work harder at making their company more profitable because they feel ownership of the organizational outcomes.12 The study showed a strong relationship between psychological ownership beliefs and ownership behaviors (0.79, p < 0.01) and financial performance (0.35, p < 0.01). In 2009, Avey, Avolio, Crossley, and Luthans confirmed that psychological ownership is positively related to several performance-enhancing behaviors such as offering improvement ideas (0.57, p < 0.01).13 Conversely, such ownership was inversely related to undesired work deviance (−0.36, p < 0.01).

5. Coordination and control. Our data shows that this is among the most critical of the nine elements of health: a high score on coordination and control gives an organization a 73 percent chance of an above-average EBITDA. We also know that balancing five measures of performance (financial, operational, people, professional, and risk) produces significant benefits. A study by Davis and Albright in 2004 showed that banks that introduce balanced scorecard systems outperform those that implement only financial metrics for at least 18 months after introduction in terms of noninterest income, percentage loan yield, and nonincome deposit volume.14 Another study by Gittell in 2002 in a hospital setting showed that “relational” coordination (work routines, cross-functional liaisons, and team meetings) improves organizational performance by facilitating interaction among employees in the work process, and is positively associated with quality of care (0.26) and reduced length of stay (−0.46).15

6. Capabilities. The likelihood that a company with top-quartile capabilities has above-median EBITDA margin is 67 percent, suggesting it is a key contributor to financial performance. A study by McGahan and Porter (1997) indicated that 36 percent of the difference in performance between specific businesses can be attributed to institutional capabilities residing in organizations, with variations by industry ranging from 27 percent in agriculture and mining to 46 percent in retail.16 Similar results were reported by McKinsey's John Stuckey in 2005, who found that 35 percent of business-unit profitability across all industries was explained by company-specific capabilities.17 A further study by Takeuchi (2005) indicated a strong correlation (0.20, p < 0.01) between human capital (defined as the acquired knowledge, skills, and capabilities that enable individuals to act in new ways) and innovation and growth.18

7. Motivation. The likelihood of a company with top-quartile motivation also having above-median EBITDA margin was found to be 73 percent: 1.8 times the likelihood for comparable bottom-quartile companies. Companies showed a 42 percent chance of beating the median no matter whether they were bottom-quartile scorers or in the middle half, indicating that only truly distinctive motivation provides real financial benefit. Research by Gallup in 2005 confirms the importance of employee motivation, indicating that unhappy, demotivated, and disengaged employees cost the U.S. economy up to US$350 billion a year in lost productivity from absence, illness, and other problems.19 In 2006 Harrison, Newman, and Roth found a strong correlation (0.56, p < 0.01) between motivation and individual effectiveness based on correlations derived from 21 previously published meta-analyses.20

8. External orientation. Our research shows that the likelihood that a company with top-quartile external orientation has above-median EBITDA margin is 59 percent, and that the additional benefit gained from being in the top rather than middle quartiles is limited. This means most companies need not be concerned with excelling on this measure, although they should take care not to lag behind. Harrison-Walker's 2001 study of 137 business units to assess the impact of different aspects of market orientation on 12 key business performance indicators including customer retention, sales, and ROI found that customer orientation was positively linked to her compound performance measure (0.30, p < 0.001).21 In a 2004 meta-analytic review of 58 studies conducted in 23 countries spanning five continents, Cano, Carrillat, and Jaramillo determined that market orientation is strongly correlated to business performance (0.35, p < 0.05) and is even more salient to service providers than manufacturers.22

9. Innovation and learning. Our research shows that the likelihood that a company with top-quartile innovation has an above-median EBITDA margin is 66 percent, suggesting that it is a key contributor to performance. Further, we found that the relationship between innovation and performance was relatively linear, with improvements in innovation showing roughly commensurate improvements in financial outcomes. A 1994 study by Zahra and Covin showed that product innovation was positively linked to net profit margin (0.31, p < 0.001), sales growth (0.29, p < 0.01), and return on sales (0.27, p < 0.01).23 In 2007 Paladino sampled 249 senior executives from top-performing companies in a range of industries and found a correlation (0.2, p < 0.01) between innovation and product quality, itself an important driver of performance.24

This summary is not exhaustive, given the extent of our primary and secondary research as noted above, but it is representative, and indicative of why we feel confident in the robustness of our model of organizational health.

How Is the OHI Survey Organized?

Completing the survey involves answering a number of questions about health outcomes and management practices within each of the nine elements of organizational health.

OUTCOMES

In the “outcomes” part of the survey, we make statements describing a positive, healthy attribute of an organization and ask respondents to what extent the statement applies to their company or organization.

For instance, under the outcomes relating to the health element of “direction,” we include the following statement: “The vision for the company's future is widely understood by its employees,” and ask respondents the extent to which they agree. The possible responses are: 1 Strongly disagree; 2 Disagree; 3 Neutral; 4 Agree; 5 Strongly agree.

Each respondent is asked five outcome questions on each of the nine elements. We combine the answers to these five questions to determine an overall score for each element. This is reported in two ways: as an average between 1 and 5, and as an overall “agreement” score (defined as the percentage of respondents who answer 4 or 5). We typically report the latter, since many people find it easier to understand. The results of statistical analyses have been roughly the same for both measures.

PRACTICES

In the “practices” part of the survey, we make statements describing healthy, constructive actions that an organization and its leaders might take to drive the associated outcome, and ask respondents how often these practices are demonstrated at their organization.

For instance, in the section on the practice of “shared vision” under “direction,” we include the statement “Management articulates a vision for the future of the company that resonates with my personal values.” Respondents are asked the extent to which it is true of their organization. The possible responses are: 1 Never; 2 Seldom; 3 Sometimes; 4 Often; 5 Always.

Each respondent is asked three questions on each of the 37 practices. As with the questions on outcomes, the responses to all questions on a given practice are combined to arrive at an overall score for that practice.

For a list of the 37 practices covered in the survey, see Exhibit 2.3.

What Data Is Used in Analyzing the Correlation between Health and Financial Performance?

The data gathered during the OHI survey is culled in accordance with strict criteria. For inclusion in the analysis, surveys have to be completed in full, not in short or customized versions; they have to come from a broad cross-section of the organization in question, not just top-team members; and a large enough group must be involved to be representative of the organization concerned.

Surveys also have to meet one further requirement: that robust, publicly available data on financial results is available either for the organization concerned or for the broader corporation to which it belongs. Nonprofits, government entities, and private companies are excluded for analytical purposes if financial performance data is unavailable or inadequate.

The data from our survey is assumed to reflect the state of the organization's health at the time the survey is administered and for a period of roughly six months prior to that. Separate surveys for the same company are aggregated and matched to financial data for the appropriate fiscal year. In the analysis of the external data on financial results, scores are again aggregated at the company level.

We use Bloomberg and Compustat as sources for raw data on metrics such as sales, pretax income, EBITDA, net income, employee numbers, book value, shareholder equity, and net debt. We convert this data into ratios (such as return on sales and EBITDA to sales) and percentages (such as sales growth).

We normalize our data on financial results by constructing industry benchmarks for each of the sectors represented in the OHI. We select at least 100 publicly traded global companies for each sector and create percentile benchmarks for selected ratios and growth numbers. We then allocate each company in the survey a percentile ranking for each financial metric on the basis of benchmarks for the year in which the survey was conducted or the year after. Companies are categorized as to whether they were performing at, above, or below the industry median on the metric in question. We use this as the critical criterion or dependent variable for further analysis. The companies surveyed have shown a wide range of performance relative to industry peers, suggesting that our sample is robust and representative.

Albert Einstein had a poster in his office that declared “Not everything that counts can be counted, and not everything than can be counted counts.” In the exhaustive research underpinning our definition of organizational health and the OHI measurement tool that we've developed, we believe we've been able to get closer than ever before to “counting what counts” in making organizations effective.

For those of you who have made it right through this chapter—however few!—we hope that the evidence underpinning our approach to improving performance and health will give you the confidence to put our recommendations into practice in your organization, and influence others to do so as well.

Part II

The Five Frames

3

Aspire

Where Do We Want to Go?

In the summer of 2006, Mexico's largest national insurance company, Grupo Nacional Provincial (GNP), was facing challenges on many fronts. Founded in 1901, it had a proud heritage as the nation's first life insurance company. In 1969 it became a universal insurer, and in 1972 it was purchased by the family-owned Grupo Bal, one of the largest entrepreneurial conglomerates in the country. The company prospered for many years, enjoying a privileged position as the largest Mexican-owned insurer in a regulatory environment that favored domestic players.

But as the twenty-first century dawned, the industry began to experience a dramatic increase in competitive intensity. In the wake of sweeping government reforms, a host of new players piled into the market: multi-national insurers, mono-line attackers specializing in particular products, and global banks looking to extend their reach into insurance. With them came a push toward doing business through direct channels, along with a number of product offerings that were not natural strengths for GNP.

At this point, enter new CEO, Alejandro Baillères, the son of the chairman of Grupo Bal, Don Alberto Baillères. The company he was inheriting was not in the best of shape. Prior to his appointment, GNP had lost money for two years running. Its market share was eroding fast, its cost structure was high for the industry, and employee satisfaction was on a downward trajectory. It was Alejandro's responsibility to restore GNP to its former glory and then take it to the next level of performance and health.

The first step for the company was to face the facts. That meant doing work to obtain management data that would paint a clear picture of performance. Traditional analytics focused on market share were augmented with new ones focused on profitability. Cost structures were compared not just to those from previous years but to those of competitors as well. And organizational health was measured using the OHI. The results told some hard truths about what had become a complacent culture, with low- to mid-quartile scores on most health elements.

Having gathered the data, the company's leaders rolled up their sleeves and got to work. In a series of sessions involving as many as 300 leaders at a time, GNP developed and agreed on a set of performance aspirations. Its broad goals were to restore profitability within 18 months; to give its parent company the confidence to invest in its proposed growth initiatives within 36 months; and to regain industry leadership within five years in four key areas (profitability, client service, operating efficiency, and attraction and retention of talent). GNP also set aspirations for its health, with a view to moving from complacency to a strong focus on execution and continuous improvement.

Equipped with a clear sense of its goals and readiness for change, GNP formally kicked off its transformation program in 2007. It committed to pursuing a raft of performance initiatives that included creating new product offerings for target segments, upgrading its risk-assessment capabilities, redesigning its claims-management processes, reducing its overhead costs, and improving its statistical controls. These performance initiatives were implemented in ways that would enable GNP to improve its organizational health as well as achieve its performance goals.

In addition, the company defined a short list of broad-based health initiatives. These included crafting a compelling transformation story and cascading it interactively through to the front line, creating a new leader-ship standard and development programs to build much-needed skills, developing individual performance contracts for all leaders with clear accountabilities for specific key performance indicators (KPIs), and overhauling the talent review process so that it would reflect and reward behaviors as well as performance. The new process introduced a committee structure for evaluation to eliminate favoritism, and a forced ranking system to foster a degree of internal competition and upgrade the talent pool.

By 2010, victory had been declared in the turnaround phase of the transformation. Return on invested capital had gone from a high single-digit negative return to a strong double-digit positive return. Similarly, the company's technical result (profits generated by the underwriting of insurance contracts, including financial revenues and capital gains related to these contracts) had gone from a loss to a profit of hundreds of millions. GNP had also achieved a reduction of more than 10 percent in its overall cost base.

There had been big improvements in the company's health, too. The number of employees who felt that their personal goals were in alignment with GNP's vision had risen from 33 percent to 86 percent, the number who felt that their behavior was guided by strategy had risen from 46 percent to 72 percent, and the motivation of the workforce had risen from a rating of 32 percent to 73 percent. In terms of its overall health, the company had shifted from the bottom to the top quartile.

As we write, GNP's transformation still has several more years left to run. This is a journey with many different facets, but it all started with setting the right aspirations. As Alejandro Baillères explains, “Our ‘vision 2012’ is our compass: it specifies what we are trying to achieve and by when. Our strategies follow from it in successive multiyear waves. Our annual performance contracts then link to how well we are delivering against our strategies. And our performance management system links to how well people deliver against those contracts and live our GNP leadership standard. The whole approach starts with a shared aspiration and makes it personal. The result is that as a company we are executing well, our confidence is building, and we're making a bigger difference than ever for our customers, our employees, our shareholders, and our country.”1

As the work done by GNP's senior leadership team illustrates, any transformation program needs to start by figuring out what targets to set and how to go about setting them. This much is hardly news: management literature is virtually unanimous in extolling the virtue of setting clear aspirations. Yet when a recent McKinsey survey of almost 3,000 executives asked, “If your company undertook the transformation again, what, if anything, would you do differently?” nearly half (48 percent) picked “set clearer targets” as their top choice from a set of 16 responses.2

Clearly, there's still a gap between what senior managers should do (and probably know they should do) and what they actually do. To help leaders get it right from the start, we now offer our best guidance on how to go about setting performance and health aspirations for your organization.

Performance: Strategic Objectives

The aspirations your organization chooses will depend to a great extent on your starting point. They will also depend on your industry or sector: a bank's performance aspirations will be quite different from those of a mining company, or a hospital, or a government department. All the same, there are three lessons that almost any organization can apply when setting its performance targets: focus on your medium-term future, balance facts and intuition, and set tough but achievable goals.

Focus on Your Medium-Term Future

When it comes to setting aspirations, some companies opt for bold long-term visions. Jack Welch's famous call for GE to be “number 1 or 2 in every business we are in” is a prime example. Others are Stanford University's 1940s vision to become the “Harvard of the west” and Sony's 1950s drive to overturn the reputation of Japanese electronic goods for poor quality.

When Sir Terry Leahy announced in 2010 that he was stepping down from the CEO's job at Tesco, the U.K.-based supermarket chain, he was clear about the vision that had guided his leadership: “When I became chief executive I had a plan to build Tesco around its customers, to make it number 1 in the U.K., and to find new long-term growth in nonfood, in services, and in international expansion.” During Leahy's 14 years in charge, Tesco quadrupled in size, to the point of taking £1 in every £7 that consumers spend in Britain. It also became the first British supermarket to transform itself into a global brand. Leahy notes: “It has taken all of those 14 years, but the strategy has become a firm reality.”3

In practice, however, a bold long-term vision isn't the right approach for every company. Not long after Lou Gerstner took the helm at IBM, he shocked some observers by saying, “The last thing IBM needs right now is a vision.”4 It wasn't that he lacked a clear set of aspirations, just that he knew that his medium-term focus needed to be on fixing things that were clearly broken. Another incoming CEO, Procter & Gamble's Alan G. Lafley, argued that it is counterproductive to over-promise: “The first thing I did was to set lower, more realistic goals.”5

With so many different approaches employed at successful companies— bold vision statements, no vision statements, high targets, low targets— where can leaders look for guidance? Our research and experience suggest that a feature common to the vast majority of successful change efforts is the clear definition of a medium-term future for each element of the transformation. Why is that? It's because having a sense of where you want to be two or three years from now is much nearer and clearer than having a long-term vision. It gives you the immediacy and tangibility you need to inspire stakeholders, set a rapid pace for change, break through resistance, and create an action-oriented attitude right through the whole organization to the front line.

When Ravi Kant became managing director of Tata Motors, an India-based vehicle manufacturer, the company was in crisis. After a decade of strong revenue and margin growth, it had been hit by the sudden collapse of demand for its trucks. At the same time, there were growing threats from overseas competitors, as well as cost pressures resulting from Tata's entry into the passenger car business and investment in complying with new emissions standards. In a turn of events that shocked the markets, Tata Motors reported a 5 billion rupee (US$110 million) loss for the fiscal year ending in 2001.

Under the circumstances, Tata might have been expected to devote all its energies to tackling the immediate problems that beset it. But that's not what happened. Instead, Kant worked closely with his senior leaders to create a bold vision for the company. They planned not merely to restore it to its former glory as India's leading truck manufacturer, but to turn it into a diversified automobile giant with global ambitions. Exciting though this vision was, Kant and his team knew that it wasn't enough. It would be unlikely to mobilize people's energies unless it was broken down into actionable pieces.

As Kant explains, “We decided on a recovery strategy that had three distinct phases, each of which was intended to last for around two years. Phase one was intended to stem the bleeding, since we just couldn't ignore the fact that our sales volumes were still falling with the shrinkage of the overall market. Costs had to be reduced in a big way, and that was going to be a huge challenge for a company that was not only the market leader but had been used to operating in a seller's market and employing a cost-plus approach to pricing. Phase two was to be about consolidating our position in India, and phase three was to involve going outside India and expanding our operations internationally.”6

The plan proved remarkably successful. Having slashed 8 billion rupees (US$176 million) from its cost base in the first phase, Tata then made a successful entry into passenger cars in the compact, midsize, and sports utility vehicle markets. It was able to capture opportunities presented by favorable social and economic trends such as the new affluence and desire for mobility among young Indians and the government's substantial road-building program. By 2010, the company had become India's largest carmaker, and the winner of the coveted title of India's most valuable brand.7

Outside its home market, Tata built a significant presence both through its sales efforts in markets such as the former Soviet republics, Turkey, South Africa, and countries in the Middle East and South Asia, and through its acquisitions in the United Kingdom, South Korea, Thailand, and Spain. By 2010, it was the world's fourth-largest truck manufacturer and second-largest bus manufacturer, and it employed 24,000 workers.

Would Tata have been able to achieve its aspirations without breaking down its long-term vision into a series of medium-term objectives? It's hard to say, but there is little doubt that the immediacy of medium-term goals makes them more actionable. When managers are planning two or three years ahead, that period is close enough in time to allow them to choose relevant goals and identify specific initiatives to reach them.

On the other hand, what if Tata had simply set objectives in the form of year-on-year targets, without having a longer-term view? Again, we have no way of knowing, but certainly there are advantages in having objectives distant enough to reduce any temptation to rob tomorrow to pay for today—a constant battle for public companies under pressure to achieve quarterly results.

For a wider view, let's take a look at a couple of the companies we mentioned above to see how they went about setting their aspirations.

Shortly after taking the reins at GE in 1982, Jack Welch had announced his long-term vision. It was to transform the lumbering giant of a company he'd inherited into a leading player that would, as we saw earlier, be “number 1 or 2 in every business we are in.” A bold vision indeed, but how was it to be realized? Again, by breaking down the effort into three phases. The first was about “fix, close, or sell”—a phase of massive portfolio restructuring in which Welch sold 125 businesses in the space of four years, including consumer brands that had long been core to GE's identity. It was then that Welch earned the less than flattering nickname of Neutron Jack, in an allusion to the way a neutron bomb eliminates people while leaving buildings intact.8

The second phase was about growing GE's services and high-technology businesses. In this phase, the company made several important purchases, including its largest to date, the acquisition of Radio Corporation of America (RCA), the owner of leading U.S. television network NBC, for US$6.4 billion. Another major purchase was financial services provider Employers Reinsurance Corporation, acquired from Texaco for US$1.1 billion. By 1988, 80 percent of GE's earnings came from services and high-tech businesses, up from 50 percent six years earlier.

In the third phase of the transformation, Welch emphasized the “software” of his organization, pumping money into the revitalization of Crotonville, a facility in New York that trained 10,000 employees a year. He also oversaw the creation of the “Workout” program, a town hall–style meeting where 30 to 100 employees would discuss common problems over the course of a few days. Bosses were not allowed to attend until the final hours, when they were obliged to make on-the-spot yes or no decisions on a list of action points that the group had compiled. In a five-year period, more than 200,000 employees—85 percent of GE's workforce—took part in a Workout session.

So what were the results? By 1993, every business in GE's portfolio had reached one of the top two rungs in its market, fulfilling Welch's vision. During his tenure as CEO, GE's stock consistently outpaced the market, and by the time he left its market value had increased by US$60 billion.

At IBM, Lou Gerstner may have had his doubts about the value of a long-term vision to a company in crisis, but that didn't stop him setting medium-term goals. When he became CEO in 1993, the company had just posted what was then the biggest annual loss in U.S. corporate history. So like the leaders of Tata, GE, and indeed most companies in need of a turnaround, Gerstner made cost cutting his first priority.

Having inherited an active plan to disaggregate the company, the new CEO also chose to set a medium-term strategic aspiration that would take it in the opposite direction. He pledged that in three years’ time it would still be together as one organization, and would be positioning itself to become a broad-based technology integrator. In another seemingly contrarian move, he disregarded the prevailing wisdom that IBM's mainframe operation was headed for the scrapheap, and chose instead to put it at the core of the business.

The second set of medium-term aspirations that Gerstner and his team developed related to growing IT services and PC businesses. The third and final set was about enabling companies to move into a brave new networked world by providing guidance on their technology strategies, helping them build and run their systems, and acting as the architect and repository for their corporate computing.

The results of the program spoke for themselves. IBM's share price increased eightfold and its income more than doubled, from US$3 billion to US$7.7 billion.

In our view, the idea of defining your desired medium-term future gets less attention than it deserves in management literature. Accounts of successful transformations tend to overlook the vital distinction between long-term vision and medium-term future. When senior leaders look back on their success, they often define their long-term vision in retrospect, while creating the impression that they had it right from the start. Our experience with organizations undergoing transformations indicates that many leaders actually embark on their journey with a medium-term future in mind, and fill in the detail of their long-term vision along the way.

We don't mean to suggest that a long-term vision isn't helpful, just that it isn't enough. Even if your long-term vision is clear, it must still be rolled back to a desired medium-term future that is granular and actionable, but also ambitious about the scale and pace of change. And if on the other hand your long-term vision isn’t clear at the outset, that's no reason not to embark on the journey. If your organization is constantly working toward the next stage in its medium-term future, your long-term vision is more than likely to emerge as you go along.

Balance Fact and Intuition

When an organization's performance aspiration is not strategically sound, the rest of the change process matters little. Consider the notorious remark made in 1977 by Ken Olsen, the CEO of Digital Equipment Corporation, at a meeting of the World Future Society. Olsen said that he saw “no reason for any individual to have a computer in his home.” The company's subsequent pursuit of a strategy narrowly focused on the scientific and engineering community led to its eventual downfall and purchase by Compaq: a cautionary tale indeed.

So how can leaders minimize their chances of going in the wrong direction and maximize the likelihood of going in the right one? Clearly, hard facts have a part to play in determining your aspirations. Our research shows that those transformations where “considerable effort was made to create a robust fact base” are 2.4 times more likely to succeed than those “based largely on perception and gut feel.”9

To obtain a robust fact base, companies need to ask themselves questions. What competitive pressures and opportunities do we face? What do our customers demand? What do our shareholders expect? How does our performance stack up against benchmarks? What would happen if we got better at sharing internal best practices? What if we pushed our processes and systems to their technical limits?

As part of the fact-gathering process, organizations can test scenarios in order to ensure that goals are set against the right measures and don't cause unintended consequences. A key factor in Enron's implosion was its system of sales goals and incentives. These were based solely on the revenues that salespeople generated, with no regard for the soundness and profitability or otherwise of the underlying trades.

Consider, too, the U.S. federal education program No Child Left Behind, enacted in 2001. It linked government aid to highly specific student performance targets based on standardized test scores. Critics argued that the program led teachers to focus on teaching the narrow skill sets required for the tests rather than on promoting wider values such as cooperation, innovation, thoughtfulness, and ethical standards.

However, relying on data alone is not enough. The brain is not an all-powerful computer capable of imagining countless future scenarios and calculating exactly how likely they are to come to pass. In real life, our thinking is hampered by biases, such as giving more weight to evidence that supports our argument than to evidence that contradicts it. We are also loss-averse: experiments have shown that our perceptions of probability change dramatically when we are asked to think in terms of losses rather than gains, even if the outcomes are identical. Does your organization's risk management process track only bad outcomes, or positive ones, too? We suspect the answer is the former.

So we need to guard against relying too heavily on the kind of fact-based logic that leads us to conclude that no individual has any need of a computer in the house. We agree with T. Gary Rogers, former chairman and CEO of Dreyer's Grand Ice Cream, when he says that “Successful leaders should follow their intuition—if it doesn't feel right in your gut, don't do it.”10

Intuition involves knowing or sensing something without the use of rational processes, and generally comes from a combination of experience and self-awareness. At a time when information is so freely available, it might seem that intuition has had its day—but we think its role in decision making will only increase. As John Naisbitt, author of Megatrends and (with Patricia Aburdene) Re-inventing the Corporation, puts it, “Intuition becomes increasingly valuable in the new information society precisely because there is so much data.”

Consider the experience of John Akehurst as CEO of Woodside Petroleum, an Australian petroleum exploration and production company partly owned by Royal Dutch Shell. During the construction of the Laminaria oilfield development facility, which represented the company's most promising growth investment, the project suffered a US$250 million cost overrun, and a delay of six months. These mishaps took Akehurst and his team completely by surprise. Why? Because the people working on the project had gone to great lengths to avoid giving their leaders any bad news along the way, always hoping they'd somehow find a way to catch up. The result was a major embarrassment in front of the board and a big disappointment for shareholders, many of whom felt they'd been misled.

Once the market had been informed and remedial actions had been taken (including dismissing some of the senior leaders on the project), the leadership team did a postmortem to work out how they'd failed to pick up that something was going seriously wrong. A number of team members admitted that they'd had a feeling in their gut that things were not going well, but didn't have any real evidence, so said nothing. The team agreed that if they ever had such intuitions again—no matter how unsubstantiated—they would share them.

One evening a few months later, after a day of reviewing data on development prospects, three of Akehurst's team entered his office looking sheepish. They indicated that while they had no hard evidence, something didn't feel right. This was a moment of truth for Akehurst. As he explains, “As an analytical person, I would previously have thrown them out, telling them to come back when they had something worth talking about. Or, more likely, they would never have raised their concerns with me for fear of being thrown out. This time, in line with our new appreciation of the value of intuition, we all sat down and shared how we felt.”11

The discussion centered on the team's hunch that Shell, then a 34 percent shareholder, was preparing to make a hostile takeover bid. Even though there was nothing concrete to back this up, Akehurst and the team took steps to prepare themselves to defend a takeover should their intuition prove correct. Sure enough, a few months later it did, and Shell launched what turned out, thanks to the team's foresight, to be an unsuccessful bid.

More proof of the power of intuition comes from the example of Net-a-Porter, an online retailer of upmarket women's fashion. When Natalie Massenet set up the business in June 2000, the dot-com bubble was bursting and the world was awash with failing internet startups. “There were a lot of unimaginative private-equity people who said that women would never shop online.… I'm sure their wives are having Net-a-Porter bags delivered to their homes every day,” she wryly remarks.12 Jo Elvin, editor of Glamour magazine, observes that “The main thing Natalie did right was trust her gut. I admire her strength in sticking to her guns when everyone told her Net-a-Porter would never catch on—such was the perceived wisdom 10 years ago.”13

Intuition continues to play a dominant role in the way Massenet runs her business: “If we come up with an idea and someone says it's never been done before, that's when we get going.”14 Employees are also encouraged to act on their gut instinct, and the company has a policy of not hiring experts. This novel approach to business has paid off: Net-a-Porter was sold to the Richemont luxury goods group in early 2010 for a reported £350 million (US$533 million).15 Not bad for a business started with £800,000 (US$1.4 million) in funding.

Of course, intuition—and common sense—has its drawbacks, too. It tells us that the coin that has just come up heads four times in a row is going to come up tails next time, and that heavy objects fall faster than light ones. Fortunately, we can correct our intuitive response in these cases by using mathematics and logic.

Similarly, when leaders use instinct to make business decisions, they need to bring data and analysis into play too so that they don't get led astray. Economist and Nobel laureate Daniel Kahneman sounds a warning over the image of the CEO as the person with the “golden gut”: “My general view [is] that you should not take your intuitions at face value. Overconfidence is a powerful source of illusions.”16

The key is to balance intuition with fact and not allow either to have sole sway.

Set Tough But Achievable Goals

A survey of some 2,500 senior executives conducted by McKinsey in January 2010 indicates that programs that set tough but achievable goals are 1.2 times more likely to be considered a success than those whose targets are incremental and easy to reach, and 1.6 times more likely to be successful than those whose targets are considered to be impossible to reach.17

In our experience, targets are too often incremental, cautious, or tailored to existing capabilities. They fail to create momentum or pressure for an organization to push the limits of what is possible, and they seldom lead to breakthroughs. Naturally, if people see goals as beyond reach, they will become disillusioned and give up. But most organizations, whether strugglers or top performers, have more headroom than they think before goals truly do become unattainable.

In the financial services sector, for example, a bank that is in the lowest performance quartile of its industry could manage a sixfold increase in its ratio of operating profits to total revenue if it were able to move to the top quartile. Even a top-quartile bank could boost its performance by 50 percent if it combined the sector's peak level for income per employee with top-tier labor-cost efficiency. Our advice? Aim high.

That said, unrealistic or ill-conceived goals can create unintended consequences. In the early 1990s, U.S. retailer Sears set its auto-repair staff new billing targets of US$147 per hour. Unable to meet the goal in the normal course of their work, the mechanics started performing unnecessary repairs and overcharging their clients, triggering a major customer relations crisis.

Ford fell foul of the same trap. Its 1969 aspiration to design a new model that weighed less than 2,000 pounds, sold for less than US$2,000, and would be in showrooms within two years may have been catchy, but it backfired badly. The Ford Pinto was rushed out so fast that commonsense safety checks were skipped. So close was its fuel tank to its rear axle that rear-end crashes sent it up in flames, causing 53 deaths and numerous injuries, not to mention a string of lawsuits.18

By way of contrast, a powerful example of aspirations that are ambitious, granular, and clearly defined for the medium-term future comes from Poste Italiane. Under the leadership of new CEO Corrado Passera, it decided that within two and a half years, its post offices would have better-functioning layouts and processes than bank branches do, at 30 percent of the cost; that waiting times for 80 percent of customers would fall below 7.5 minutes; and that growth would rise from minus 2 percent to 5 percent a year. These goals were set against the backdrop of a broader vision to become a regional leader in financial services.

The results didn't just meet the goals, but exceeded aspirations. Customers opened 2 million checking accounts, and in just two years Poste Italiane rose to third place among the country's insurance providers. Productivity rose by 30 percent; revenues by 20 percent. The Financial Times reported that the reinvigorated organization had “begun to establish itself as a serious competitor to Italy's commercial banks,”19 and the prime minister observed that citizens had one less topic to talk about: no more long lines at the post office.

Health: Essentials

When an organization sets aspirations for its health that are as clear and explicit as those for its performance, it significantly increases its chance of achieving a successful transformation. The McKinsey survey of senior executives mentioned above revealed that change programs with clearly defined aspirations for both performance and health are 4.4 times more likely to be extremely successful than those with clear aspirations for performance alone.

Let's start by taking another look at our definition of organizational health, and then focus on how to set the right health aspiration for your organization, including the important question of who should be involved in the process.

Checking Your Health

First, a quick recap. In Chapter 1 we introduced the idea of organizational health, defining it as an organization's ability to align, execute, and renew itself faster than the competition so that it can sustain exceptional performance over time. In Chapter 2 we identified the nine elements of organizational health, namely direction, leadership, culture and climate, accountability, coordination and control, capabilities, motivation, external orientation, and innovation and learning. We also broke down these nine elements into the 37 management practices that feed into them, and described how our survey-based tool, the organizational health index (OHI), can provide organizations with a comprehensive and rigorous understanding of their health.

For the purposes of this chapter, we've developed a high-level overview of the OHI to remind readers of what organizational health involves. This is illustrated in Exhibit 3.1. You can use it to conduct a rough assessment of how healthy your organization is. Think about where it belongs in each element: is it ailing, able, or elite? What elements are most important to you in achieving your medium-term performance aspirations? Where do you need to be on each element in two or three years’ time? (If you'd like to make a deeper assessment of your organization's health without doing a full OHI survey, you can visit our website at www.mckinsey.com/beyondperformance, where you'll find tools and resources to help you set the right health aspirations to meet your organization's specific situation and needs.)

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To get a full picture of organizational health, the OHI should be augmented with fact-based analyses where possible in order to confirm that perceptions are based on reality. If they prove not to be, the solution may lie in improving transparency and communication rather than changing practices. The types of analysis that are often helpful at this stage include customer loyalty scores (customer focus), hiring rates from target talent pools (talent acquisition), compensation systems (financial incentives), breakdowns of how executives spend their time (various of the leadership practices), and scorecards (strategic clarity).

One financial services organization discovered that its staff didn't find monetary incentives motivating because they perceived that pay didn't vary with performance. Analysis showed, however, that this was a misapprehension. Instead of recommending a revamp of the compensation system, the firm quickly concluded that what was needed was a communications program to make the link between pay and performance clearer.

In our experience, though, employee perceptions are accurate in most cases, making the OHI a powerful and comprehensive management tool in and of itself.

Setting a Health Aspiration

Measuring health is one thing, but what is the right health aspiration for your organization? Our research indicates that organizations need to achieve a threshold level of health across all nine elements of organizational health. More specifically, they need to be above the bottom quartile on each of the 37 practices that drive the outcomes on these nine elements.

This makes sense when we think of the practices as simply those things a leader needs to do in order to align an organization on a common direction and enable it to execute and continuously improve. After all, leaders can't simply neglect to ensure that targets are set, strategies are developed, budgets are allocated, people are hired, performance is monitored, and so on.

Yet while all of these things must be done, not all of them necessarily require the same emphasis. To revisit the analogy with human health, what it means for individuals to be healthy, beyond the basics, will depend to some extent on their performance aspirations—what they want to do with their lives. A healthy weight for a body-builder is different from that of a jockey; a pilot requires a higher standard of eyesight than an academic; a ballet dancer needs more flexible joints than a lawyer.

Our research has shown that the same is true of organizations: they don't need to excel in every aspect of health. When we dug more deeply into the 37 practices, we found that a company that is in the top quartile for six or more of them has an 80 percent likelihood of being in the top quartile for overall health, which in turn drives superior business performance (Exhibit 3.2).

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This means that beyond achieving an “able” standard (above the bottom quartile) on all practices, organizations need choose only six to 10 practices to be distinctive at. That's good news for leaders, since no organization can hope to achieve elite status on every aspect of health.

So how should you determine which practices your organization should drive to distinction? There are three questions to ask yourself. First, which practices are most likely to enable me to reach my performance aspirations? Second, where do my existing strengths lie? (It's much easier to build on strengths you already have than to develop them from scratch.) Third, which practices will complement one another?

The concept of complementarity is defined by John Roberts in his book The Modern Firm: “Two choice variables are complements when doing (more of ) one of them increases the returns to doing (more of ) the other.”20 To see how this works, let's look at the example illustrated in Exhibit 3.3. If a company wants to increase motivation, it has various management practices at its disposal. If it decides to offer incentives to its staff, it has a 48 percent probability of increasing its motivation to the top-quartile level (perhaps surprisingly, the lowest probability for any motivation practice). However, if the company offers incentives and modifies its culture and climate to create a competitive internal environment, the probability goes up to 95 percent. Adopting two complementary management practices instead of relying on just one greatly increases the chance of success—almost doubling it, in this case.

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The concept of complementarity is easier to grasp if we think about cookery. Flour, yeast, and water are hardly exciting ingredients by themselves, but when they are used in the right proportions and prepared in the right way, they can turn into fresh, hot bread that tastes sensational. Or take peanut butter and jelly: combined in a sandwich, they have a salty-sweet taste that many people far prefer to either filling alone.

The food analogy also illuminates that complementarity has a flipside, as one of our colleagues can confirm. While he was in a client meeting late one night, his team decided to order dinner for everyone. They knew that his favorite dishes were pizza and seafood. Lo and behold, the menu offered a seafood pizza. What could be better, they thought? To this day, our colleague claims it was the worst meal he's ever eaten.

So adding one good thing to another doesn't necessarily create something better; it can create something worse. Let's see how this applies to combinations of management practices. If an organization wants to increase its innovation and learning, it has various practices at its disposal. If it decides to use top-down innovation as a lever, it has a 58 percent probability of increasing its innovation and learning to the top-quartile level. However, if it emphasizes incentives, internal competition, and talent-acquisition practices in addition to top-down innovation, the likelihood of achieving a top-quartile innovation and learning level drops to 44 percent. Why?

It turns out that large-scale innovation is by nature a collaborative effort. This particular combination of ingredients overemphasizes human capital (people's intellectual contributions and functional skills) at the expense of social capital (networking, collaboration, and information sharing). A far better recipe would combine top-down innovation with a shared vision, knowledge sharing, and customer focus, which yields a 78 percent likelihood of achieving a top-quartile level of innovation and learning.

The Four Archetypes

So far, we've established that to be healthy, an organization must be above the threshold level of health on all 37 of the management practices defined in the OHI. We've also established that an organization has a much higher likelihood of being in the top quartile of health overall (which is highly correlated with superior business performance, as we saw in Chapter 1) if it's in the top quartile for six or more of these practices. Finally, we've established that when certain management practices are carried out at distinctive levels, they can combine with others to deliver a “1 + 1 = 3” level of impact.

So the billion-dollar question is this: How do we find the six practices that we should excel at to achieve excellent organizational health?

The answer is that there is no one recipe. In fact, when we analyzed the complementarities among the practices underpinning organizational health, we found there are four recipes that can be used as a foundation on which to build. For simplicity, we've labeled each recipe as an “archetype” of a healthy organization. The four archetypes are leadership driven, execution edge, market focus, and knowledge core.21

Exhibit 3.4 shows the ingredients of each recipe—the distinctive management practices that contribute to the archetype—in rank order. Let's take a closer look at each archetype in turn.

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LEADERSHIP DRIVEN

Companies that fit this archetype believe that leaders are the catalysts for performance, setting high expectations and supporting the organization in achieving them. So why aren't leadership practices at the top of the first list in Exhibit 3.4? It's because the highest priority for leaders in this archetype is to build a pipeline of future leaders, and the way they do that is by creating career opportunities, which is at the top of the list. In this archetype, leadership is learned by doing. Like riding a bike, it can't be learned simply through observation.

Leaders in this archetype are highly empowered, which explains why open and trusting management practices come second in the list. If empowered individuals are to channel their efforts in the right direction, accountabilities must be clear. The ingredients related to performance contracts and reviews, operational management and discipline, and consequence management all ensure that the right level of accountability and transparency is in place.

Beverages and convenience foods giant PepsiCo is a good example of a company that embodies the leadership-driven archetype. It's renowned for offering its employees excellent opportunities for early responsibility and a culture that encourages initiative, risk taking, and access to decision makers. Employees are given the freedom to pursue their goals without the burden of excessive structures.

Less well known is the rigor of PepsiCo's performance contracts, which tie each individual's objectives to the goals of the business. Performance evaluations are based on delivery against these objectives and on an assessment of 11 leadership competencies. They are also monitored centrally to ensure that an individual's evaluation aligns with the overall success of their business unit. If a business unit is doing badly, for instance, its leaders can expect to have poorer performance reviews than they would if it were doing well. (Though this might sound like plain common sense, some organizations give their managers positive individual evaluations even as their business fails—not a healthy state of affairs.)

EXECUTION EDGE

Companies that fit this archetype believe that discipline, sound execution, and continuous improvement are the foundation for great performance. At the top of the list of ingredients for this recipe comes knowledge sharing: it's essential for getting things done in the best possible way and for creating an environment that supports continuous improvement. When something works, it gets shared, others pick up on it, and everyone wins. There's enough internal competition to drive adoption of best practices, yet the stakes aren't so high that they stop people sharing.

This also explains why practices such as operational discipline aren't in the top 10 ingredients. At first sight, that might seem surprising. How can a company achieve excellence in execution without a strong emphasis on standardization, for instance? In fact, companies that embody the execution-edge archetype do achieve a remarkable level of standardization, but not in the way we might expect. Standardization isn't driven by mandates from on high, but by the various parts of the organization wanting to adopt best practices. In other words, it's not a matter of enforced compliance and audits against rules and procedures, but a flexible approach to standardization that rests on a shared direction and shared set of values. Companies that fit this archetype are constantly looking for ways to do things better and taking steps to involve employees at all levels.

Walmart is an example of a company embodying this archetype. Its culture of driving out costs and working in partnership across the supply chain means that routine decisions are pushed down to the lowest level of the organization. This enables inventories to move flexibly across the system, and their status is tracked visually so that any problems can quickly be addressed. The entire system is adjusted in real time as numbers are updated from the point of sale, and sales and merchandise inventories in every store are tracked globally via satellite. This data-rich environment enables leaders to know what's working well and what isn’t, facilitating best-practice sharing across the organization. Management processes such as these are complemented with Walmart's “grass-roots process”—a way to give every associate a voice in improving the company. The effect is to ensure that all ideas for improvement are captured on a regular basis.

MARKET FOCUS

Companies that fit this archetype believe that shaping market trends and building a portfolio of strong and innovative brands keep them ahead of the pack. Not surprisingly, the hallmark of this archetype is a strong external orientation with emphasis on customers, competitive insight, and business partners.

This intense external orientation is channeled into a single direction through a shared vision that creates the space for new and exciting innovations that delight the customer. At Apple, Steve Jobs’ rallying cry to “put romance into computing” gave rise to the sleek and stylish product designs that make customers clamor to get their hands on the latest offerings.22 For P&G, as former CEO Alan G. Lafley explains, the heart of its vision is to be the globe's most connected company: “We are touching lives and improving life for consumers around the world.”23

Why do business partnerships top the list? Because most organizations that excel at the market-focus archetype need partners to help them develop their products and get them to market with the right levels of quality and service. P&G established more than 500 business partnerships in the quest to source half its innovation from outside the company. But perhaps the most striking example of the role of business partnerships in the market-focus archetype is that of Apple.

When Steve Jobs returned to Apple as CEO in 1996 with a mandate to turn it around, he observed, “Apple lives in an ecosystem, and it needs help from other partners.”24 He went on to join forces with Microsoft's Bill Gates in announcing the launch of an Apple-compatible version of the ubiquitous Microsoft Office. In 2006–2007 alone, more than 200,000 companies from software houses to carmakers to newspapers signed up to partnerships with Apple.25

The company has also revolutionized the development of apps—third-party software programs—for its products, and hosts more than 300,000 of them on its website. It similarly forms partnerships with manufacturers to produce its products rather than making them itself. Apple's success in pursuing a strategy of innovation via a market-focus archetype can be judged from its nomination as Fortune magazine's most admired company in the world for three years running.

At first sight, one ingredient of this archetype—number five in the list—might seem puzzling. What does financial management have to do with market focus? On reflection, though, it makes perfect sense. The factor that differentiates successful from unsuccessful exponents of this archetype is the extent to which they are able to delight customers and beat the competition in the marketplace while earning a profit. P&G's Alan G. Lafley puts it succinctly: “Generating ideas is important, but it's pointless unless there is a repeatable process in place to turn inspiration into financial performance.”26

KNOWLEDGE CORE

Companies that fit this archetype believe that their pool of talent and knowledge represents their most important asset, and that their success depends on developing it effectively. As with managing a successful sports team, they need to get the right players (talent acquisition), put them in the right positions (role clarity), give them the right incentives (rewards and consequences), keep them focused (personal ownership), study how they've played in recent games (performance review), and so on.

One example of this archetype is our own organization. At McKinsey, we closely monitor our ability to attract, develop, and retain the best talent, and keep our value proposition for potential recruits under constant review. Our core HR resources are small; it's our partners who are responsible for providing feedback, coaching, and mentoring for junior colleagues. A small number of well-defined roles helps to create clear career paths, and a merit-based “up or out” model ensures that the talent pool is constantly refreshed and that high performers are able to develop at a rapid pace, opening up career opportunities both inside and outside the firm. Compensation at each level is strategically pitched to reward performance without being at the top of the market, ensuring that people are attracted not just by money but by McKinsey's values and development opportunities. A strong culture of collaboration and a state-of-the-art knowledge-sharing system ensure that consultants are continually learning from others and are able to bring the organization's full institutional knowledge to bear on their work for clients.

Another exponent of this archetype is investment bank Goldman Sachs. To ensure that it hires only top talent, it puts would-be recruits through more than 40 interviews before making an offer.27 Such is its focus on acquiring and developing the right people that in 2010 a senior human resources manager was elected as partner, a privilege usually reserved for top-performing investment bankers. Employees who fail to meet Goldman's high standards are regularly moved out, even if they are elected partners.28 With just five layers in the organizational hierarchy, employees are clear on what's expected of them and how to progress within the firm. This competitive environment gels well with Goldman's focus on rewards and incentives: employees receive generous bonuses and benefits, but tend to value the prestige of working for the bank above all else.

CHOOSING AN ARCHETYPE

It's important to note that these four recipes are not a mere analytical construct, but a deeply ingrained fact of organizational life. We saw this recently when a company we were working with asked us how “real” the four archetypes are. By way of response, we asked a few questions. One of the executives had joined the company just two months earlier, so we asked him, “When was the first time you had any contact with customers?” His answer: on day one as part of his orientation, and again later that week during dinner with his sponsor (another executive charged with helping him in his transition).

We pointed out that this isn't the case in most organizations we encounter, and then asked, “When did your boss first give you feedback on your performance?” He was mystified. “What do you mean? I've only been on the job for two months. I haven't had any feedback yet.” We then turned to one of our colleagues and asked, “When did you receive your first feedback at McKinsey?” The answer: “Day one, and virtually every day since.”

The difference between the client's market-focus archetype and our knowledge-core archetype couldn't have been sharper. The message is that the practices at the top of the list for each archetype translate directly into the everyday realities of organizational life.

The four archetypes shed light on one of the reasons why management literature has largely been unsuccessful in helping leaders create sustainably excellent organizations. The vast majority of the books and articles we surveyed during our research turned out to have been written from the vantage point of promoting one particular archetype as the answer to all situations.

Pick up Leadership without Easy Answers by Ronald Heifetz, John P. Kotter on What Leaders Really Do, or The Power of Servant Leadership by Robert Greenleaf, and you'll notice that the recommendations they make rely on the leadership-driven archetype. Read Built to Last by Jim Collins and Jerry Porras, Doing What Matters by James M. Kilts, or Execution by Larry Bossidy and Ram Charan, and you'll find that the execution-edge archetype is the implicit model. Should you choose Delivering Happiness: A Path to Profits, Passion, and Purpose by Tony Hsieh, The New Market Leaders by Fred Wiersema, or The Innovator's Dilemma by Clayton Christensen, you'll discover that the discussion hinges on the market-focus archetype. Or study Mobilizing Minds by Lowell Bryan and Claudia Joyce, Now, Discover Your Strengths by Marcus Buckingham and Donald Clifton, or The War for Talent by Ed Michaels, Helen Handfield-Jones, and Beth Axelrod, and you'll see that the knowledge-core archetype is at the heart of the thinking. It's not that any of these books is unhelpful or misguided—just that their recommendations presuppose a desired archetype that may or may not be right for your organization.

So what is the right archetype for your organization? As we mentioned, it will be the one that plays to your greatest strengths and best supports your performance aspirations. And do you have to stick to just one? Not all healthy companies fit neatly into a single archetype, but most—around four-fifths—do.

Further guidance on your choice may come from the industry you are in: some industries lend themselves more to certain archetypes than others. For example, consumer packaged goods companies like P&G tend to be most successful with a market-focus archetype, whereas professional services firms like McKinsey do best with a knowledge-core archetype. But this isn't cast in stone: our data indicates that each archetype, if done well, can lead to success in any industry.

Another finding from our research that's helpful to bear in mind is that it's harder for an organization to change its archetype than to go from unhealthy to healthy within its archetype. As a neat way to see why this is so, fold your arms. Now try to fold them the opposite way (if you can even figure out how). Difficult, isn't it? What if we asked you to do this not once, but every time you fold your arms from now on? It's not likely the new behavior would last long, regardless of the aspiration. The same is true for management practices—the habitual ways we get things done in our organizations.

That said, this is a rule of thumb, not a law. There are exceptions. Some companies do make a successful move from one archetype to another. In fact, one of them is Grupo Nacional Provincial, the insurer whose story appeared at the beginning of this chapter. GNP started out with the defining characteristics of the market-focus archetype, yet chose to aspire to an execution-edge archetype, and has succeeded in making it a reality.

If you've worked through all these considerations and still not found a leading contender for your choice of archetype, don't despair: there is good news. At this point, it's simply a matter of choosing any of the archetypes that fit your organization, and doing it well. Once an effective archetype is chosen and put into place, it is exceedingly difficult to imitate because of the complementarities at work—which takes us back to why organizational health is such a powerful source of competitive advantage.

We end with a warning. Don't be tempted to look at the list of archetypes and say “We need to be great at all of these.” Keep in mind that being leadership driven doesn't mean that an organization isn't market focused, can't execute, and has no knowledge core. In the same way, being execution focused doesn't mean neglecting leadership, the market, and knowledge. Healthy companies are good at all 37 management practices; as we saw earlier, that means they are above the bottom quartile for performance across the board. What makes them great, though, is choosing the right complementary few practices—between six and 10—to be the best at.

Involving a Broad Coalition in the Process

Now we know what organizational health is, how to measure it, and how to set aspirations for it by referring to the four archetypes. But who should be involved in this process: the CEO? The top team? A project team?

We've found that the best approach is to get a broad coalition of leaders personally involved in setting the aspirations. That's true for performance aspirations, too, but even more so for health because of the emphasis on complementarity. To get the full mutually reinforcing impact from tackling multiple management practices simultaneously, it's essential that units across the organization synchronize their efforts.

Our research shows that transformations designed through a large-scale organization-wide collaborative effort are 1.5 times more likely to succeed.29 Why? Because such a process builds buy-in from the outset. That makes it far more effective in creating energy and commitment for execution. Later in the transformation, there's no delay while the organization waits for communications programs or process changes to kick in. People who have been involved in designing the program are already primed to help make it a reality.

To understand why collaboration is so powerful, consider a famous experiment where researchers ran a lottery with a twist. Half the participants were randomly assigned a numbered lottery ticket. The remaining half were given a blank ticket and a pen, and asked to choose their own lottery number. Just before drawing the winning number, the researchers offered to buy back all the tickets. They wanted to find out how much they would have to pay people who write their own number compared with people who are handed a number at random.

The rational expectation would be that there should be no difference, since a lottery is pure chance. Every number, whether chosen or assigned, should have the same value. A more savvy answer would be that you should pay people less if they write their own number, because of the possibility that numbers will be duplicated.

Neither of these turned out to be the right answer. Regardless of nationality or demographic group, people who wrote their own number always demanded at least five times more for their ticket.

This reveals an important truth about human nature. When we're personally involved in “authoring” an outcome, we are far more committed to it because we feel we own it. The underlying psychology relates to our need for control, which is a deep-rooted survival instinct.

Consider another experiment that examined the importance of a sense of control among elderly people in a nursing home.30 Some of the residents were given the opportunity to decide how their rooms should be set out, and asked to choose a plant to look after. The others had no say in the layout of their rooms, and had a plant chosen and tended for them. After 18 months, the survival rate among residents who had control was 85 percent, but among those who had no control it was just 70 percent. It appears that our desire for control is strong enough to keep us alive.

How does this apply to setting aspirations in large organizations? Consider some examples. In 2003, when CEO Sam Palmisano spearheaded an effort to move toward a values-based management system at IBM, more than 50,000 employees were given an opportunity to “write their own lottery ticket” by taking part in a three-day online discussion forum (dubbed ValuesJam) to rewrite the company's century-old values. Out of this effort came a new set of values to guide decision making and behavior throughout the organization. Following the exercise, more than 200,000 employees—nearly 70 percent of the workforce—downloaded the “values manifesto” that emerged out of the discussion.

A similarly collaborative approach to problem solving was adopted by Neville Isdell when he took charge at Coca-Cola in 2004. Once a month for three months, he brought together his top 150 people in two-day “real work” sessions so that they could create a change story together.31 The story was then rolled out across the organization via one- or two-day sessions in which small working groups explored the implications for their particular parts of the business.

If we go back to the Tata Motors case we featured earlier in the chapter, it's interesting to see how managing director Ravi Kant went about getting widespread ownership for the company's new aspirations. He was aware that seasoned managers who had achieved career success under more favorable market conditions might well be resistant to the kind of changes the company would have to make to weather the difficulties it faced. He discovered that the best approach was “not to give orders but to ‘sell’ new ideas internally.” He comments, “The trick was how to expose people to the outside world to allow them to see what is happening there rather than drilling change into them through speeches and letters.”32

Tata got its people to listen to customers talking about problems and suggesting product improvements, and took competitors’ products apart to see how they compared to its own. As Kant admits, “This process took longer, of course, but unless you convince people about what you are asking them to do, they are not going to make it happen.” As it turned out, slow was fast. In less than three years, the company had successfully reduced its break-even from nearly two-thirds of capacity to around a third.

Admittedly, not all transformations allow much time for pursuing co-creative approaches like these, especially when companies need to turn around their performance. When Idris Jala became CEO of the ailing Malaysian Airlines in 2005, “We had three and a half months to fix the problem, and if we didn't fix it by then we'd be bankrupt—we'd have no money for salaries, no money for fuel.”33 Yet despite the burning platform, Jala still managed to adopt a collaborative approach. After spending time with the P&L to understand where transformation was most needed (in costs, yield, and network efficiency), Jala assembled groups of 10 to 15 people from various functions and backgrounds—“all people who had a direct stake in a given activity”—and made them accountable for “big results fast.”

Executives who adopt the “write your own lottery ticket” approach to aspiration setting are often surprised not only by the sense of ownership and drive for implementation that it creates, but by the quality of the answers that emerge. That doesn't necessarily make it easy to do, however, especially for decisive leaders who are used to coming up with their own solutions.

John Chambers, chairman and CEO of networking specialist Cisco Systems, observes that “It was hard for me at first to learn to be collaborative. The minute I'd get into a meeting, I'd listen for about 10 minutes while the team discussed a problem. I knew what the answer was, and eventually I'd say, ‘All right, here's what we're going to do.’ But when I learned to let go and give the team the time to come to the right conclusion, I found they made just as good decisions, or even better—and just as important, they were even more invested in the decision and thus executed with greater speed and commitment.”34

At the end of the “aspire” stage of transformation you'll have answered the question “Where do we want to go?” for your organization. You'll have used your intuition as well as hard facts to arrive at concrete medium-term goals for health as well as performance—and you'll have made sure that these goals will stretch your organization without creating unintended consequences. You'll also have discovered what you need to do to reach your aspirations: namely, to bring all your management practices to a threshold level of health and excel at certain practices that reinforce one another and support your aspirations for performance. And you'll have gathered together a broad coalition of leaders to set these aspirations so that you ensure broad ownership from the start. That way, you'll unleash the energy your organization needs to achieve its goals.

People who have been through this process know how powerful it can be. We began the chapter with GNP, so let's hear what CEO Alejandro Baillères has to say about his experience: “Setting the aspiration was challenging, but also exhilarating. From there the journey only becomes more intense, taking those same two emotions and magnifying them tenfold.”

As this suggests, completing all the steps in the aspire phase gives leaders a great feeling. It's a bit like the one you might get after poring over a stack of tourist brochures for that once-in-a-lifetime vacation and agreeing with your holiday companions on your dream destination. But before you pick up the phone and make the booking, do a quick reality check. Will you be able to pay for it? Can you find the time to get away? Are your flights and hotels available? Are you willing to put up with the inevitable hassles of a long journey?

Questions like these take us to the next phase: looking at where we want to go and assessing “How ready are we to go there?”

4

Assess

How Ready Are We to Go There?

When Pierre Beaudoin took over the aerospace division at Bombardier in 2001, he knew he was in for a bumpy ride. Heading up the third-largest civil aircraft manufacturer in the world put him in a good position, but times were hard: 9/11 had sent shockwaves through the industry, and demand had taken a sharp downturn.

Decisive action was needed, so Beaudoin quickly put new performance objectives in place. Foremost among these was the lifting of the aerospace division's EBIT (earnings before interest and taxes) margin from 2 percent or 3 percent to 8 percent, an improvement that would deliver C$500 million to the bottom line. On the health side, the objectives were equally ambitious. Aware that its culture was focused on engineering (sometimes for its own sake) and that there were deep divisions between different functions, the aerospace division sought to improve its health within its existing execution-edge archetype so as to deliver continuous improvement for the benefit of the customer.

After assessing its capabilities, the division concluded that developing lean manufacturing skills would be the key to achieving its aspirations. But Beaudoin knew that a successful transformation would require more than skill building—it called for a deeper shift in mindsets as well. Instead of letting the engineers get straight to work on improving the hardware and systems, he insisted that the organization should take the time to understand what was happening below the surface. Bombardier was a leader in the business and regional aircraft segments, yet its customers didn't seem all that happy. What was missing?

As Beaudoin admits, probing cultural issues wasn't an approach that came naturally to an organization that prided itself on its technical expertise. “It was a challenge for me and for my leadership team to explain why we were spending so much time on the soft stuff when we could be fixing factories, hardware, airplanes. We had lots of conversations explaining that, if we did the soft stuff right, our employees, with our help, would be more able to do what they're supposed to do, like make our factories efficient and work on engineering problems. For Bombardier, that's a hard change.”1

The inquiry into the soft stuff revealed some uncomfortable truths about how things got done at Bombardier. How come managers recognized there was a problem, but everyone insisted it wasn't in their department? Why was it that if someone brought up an issue, someone else would reply, “You don't understand this properly. Actually, we're really good”? Why were employees unable to say what their organization's goals and values were?

The results of the assessment revealed a shortlist of limiting beliefs that affected the value placed on individuals, the role of teamwork, the efforts for continuous improvement, and the drive for results. One area where change was urgently needed was in attitudes to handling problems. As Beaudoin explains, “Suppose I come to a meeting and hear about four problems, and I slam my fists on the table and say, ‘I don't want to hear about problems any more; you guys are there to fix them.’ Well, guess what—I'm not going to hear about problems. And that's how you get yourself in deep trouble.” Airplanes are complex products, so there will be problems every day. “To get it right, the team has to work together, share the problems, fix them, [and] make our engineers comfortable bringing an issue to the table so we can give them the tools to fix it.”

So did the efforts to dig below the surface prove worthwhile? In fact, they paid dividends. Not only did the division reach all its performance goals, but surveys showed that engagement among its 30,000 employees climbed more than 15 percent between 2004 and 2010. Both performance and health held firm during the deepest recession the industry has ever seen, demonstrating the organization's resilience to external shocks. Moreover, a survey of consumers carried out in 2010 rated Bombardier as one of the three most admired and trusted brands in Canada, and ranked its workplace as the second most admired.2

For Beaudoin, though, the biggest prize is his company's eagerness to keep improving: “What I like most … is that we now have an organization that wants to get better.” So what difference has that made to life at Bombardier? “We used to make excuses for why our performance was good enough. Today we say, ‘What will it take to get to world class?’ That is what has changed.”

For most leaders, once they've set their performance and health goals, it's tempting to move straight into action. In our experience, this is seldom wise, and often counterproductive. Organizations that succeed in their change efforts take the extra time to assess how ready they are for change. That means working out whether they have the capabilities and mindsets to fulfill their performance and health aspirations. In our 2010 survey, we found that organizations that rigorously assess their change readiness as part of their transformation effort are 2.4 times more likely to be successful than companies that skip this stage.3 Here's further evidence that slow means fast when you're laying the groundwork for a successful transformation.

Let's now take a quick look at how to assess whether your organization has the capabilities it needs to achieve your performance aspirations. We'll then take a deeper dive into how to assess your organization's mindsets to see how far they support your health aspirations. Broadly speaking, it can be helpful to think of capabilities as your organization's “skill” and mindsets as its “will,” although as we'll see, our approach to both these elements is wider than these terms might suggest.

Performance: Capability Platform

Assessing the capability platform of your organization takes place in a two-step process: determining the capabilities that matter most in terms of your performance aspirations, and then evaluating the state of these capabilities in your organization today. This is a vital part of the transformation process: our survey indicates that organizations that explicitly assess their current capabilities against those required to fulfill their performance aspirations are 6.6 times more likely to succeed in their transformation.

Determining the Capabilities that Matter

What capabilities does your organization need to fulfill its performance aspirations? This is a valuable question to ask and answer. Consider an organization that needs to do something to stop its margins being squeezed. Its natural response will be to cut costs. But what capabilities will it need to implement this strategy? The answer will depend on where it intends to achieve the savings. Will it look to lean manufacturing? Better procurement? Supply-chain redesign? A review of overhead costs? Having targeted one or more areas, it faces another question: How good does it need to be at these areas to capture the savings? And looking further ahead, which of them is worth investing in strategically? In other words, which might yield competitive advantage in the future?

Answering questions like these will give you a clear view of the institutional capabilities you'll need. For some capabilities, bringing them up to industry parity will be enough. For others, those that are truly strategic, you'll need to make a much bigger investment to build distinctiveness. Determining which capabilities are genuinely strategic is difficult, but crucial.

Our research and experience suggest that there are three tests for strategic capabilities: they are scarce within the industry, superior to substitutes, and difficult to imitate. Capabilities that satisfy all these tests are generally few in number; an organization seldom has more than three. Successful companies take the time to understand which strategic capabilities are important for achieving their performance aspirations. When P&G underwent its transformation, for instance, it identified three strategic capabilities in which it needed to be distinctive: brand building, innovation, and leveraging scale.

At first sight, it might seem that most savvy organizations would have a good idea of where their strategic capabilities lie. But that's not necessarily the case. In practice, the truly strategic capabilities may not be the ones that first spring to mind.

Consider McDonald’s. That supply-chain management and marketing are strategic capabilities for the world's largest fast-food chain will come as a surprise to no one, but the company's most strategic capability is neither of these things. So what is it? As founder Ray Kroc once remarked, McDonald's isn't in the restaurant business, it's in the real-estate business. In fact, it didn't start to turn a profit until Kroc set up a realty company to purchase prime tracts of land both for his own use and for renting out to other franchisees.4 The care that McDonald's puts into selecting exactly the right locations for the properties in its vast portfolio—320,000 restaurants in more than 100 countries—enables it to maintain a clear edge over the competition, especially when establishing strong footholds in developing markets such as Russia well ahead of the pack.5

Rather more obvious examples of strategic capabilities include BHP Billiton's low-cost mining operations, IBM's consultative sales force, Coke's brand, GE's control processes and culture, and Google's ability to attract and retain talent.

So it's worth spending some time deciding which of your organization's capabilities are strategically important in achieving your aspirations. Which capabilities are scarce, superior to substitutes, and difficult to imitate? These are the areas where you'll need to focus your attention.

Once you've identified your strategic capabilities, it's time to assess the shape they are in.

Assessing Your Current State

Having decided which capabilities are strategically important for achieving your aspiration, you can then undertake a structured inquiry into the current state of these capabilities in your organization. Simple though this may sound, caution is needed. Even the best-laid transformation plan can be undone if an organization overestimates its capabilities.

One mining company felt that its health and safety capability was strategically important, and was convinced it was best in class. But this belief didn't stand up to close examination. It turned out that the company's capability was only slightly better than the average for the industry, and certainly not distinctive enough to act as a platform for attracting skilled labor. If the company wanted to turn its health and safety capability into a source of competitive advantage, it had a lot of work to do.

A global manufacturer fell into the same trap. Having designed a growth program that depended on sharing best practices across its plants, it was dismayed to discover that its track record in this supposed strength was patchy at best.

So objectivity is vital. You'll need to conduct a thorough analysis to determine how far your capabilities secure cost advantages or deliver superior products and services. You'll also need to establish whether the capabilities are truly institutional—in other words, embedded as a permanent feature of your organization. Will they endure as generations of employees come and go? Or do they depend on a particular individual or group to maintain them?

In our experience, genuinely institutional capabilities are supported by three systems within an organization: technical, management, and behavioral, as shown in Exhibit 4.1.

nc04f001.eps 

To make this point clearer, we sometimes use a fishing analogy. When you go fishing, the technical system is about having the right equipment: a sturdy rod, a good reel, the right bait. The management system is about having the right structures and incentives: a fishing permit, a boat if you need it, a market for the fish, and a way to get them there. The behavioral system is about knowing how to fish, using the right techniques, and understanding the habits of the fish that you're likely to encounter.

Back in the business world, consider an organization that wants to make pricing a strategic capability. What changes will it need to make to these three systems?

In its technical system, the organization could change its pricing model from adding a percentage to the cost of the product (“cost plus”) to understanding what customers are willing to pay to have their needs fulfilled (“value to customer”); switch from order-by-order selling tools to account planning tools; and move from treating all customers the same to using customer prioritization tools. In its management system, it might want to reorganize from a regional sales structure to a national customer-segment structure; change from price setting by the sales force to price setting by a commercial manager; and switch from monthly to weekly sales reporting. In its behavioral system, it could consider moving from generic sales training programs to individual needs-based learning; switch its policy from promoting from within to hiring from industries with sophisticated pricing practices; and move from an all-purpose coaching approach to a new mentoring program that pairs up novices with pricing experts.

The mining company, whose health and safety capability wasn't as distinctive as it thought, set about bringing it up to expectations in much the same way by focusing on its technical, management, and behavioral systems.

To upgrade its technical system, it invested in state-of-the-art health, safety, and crisis-mitigation equipment for all its mines. Teams were provided with specialized emergency kits in case they were stranded underground.

To upgrade the management system, the health and safety team studied more than 50,000 safety incidents from both inside and outside the company before revising its crisis plan. The exercise revealed that the power to make decisions on health and safety matters was left not to senior management but to line managers, who would often cut corners to finish tasks on time. So the roles and responsibilities of the health and safety manager were overhauled and a new management infrastructure was created. In addition, each mining team was assigned its own health and safety champion, who reported directly to the health and safety manager and had the right to shut down the team's operation if their actions appeared to be unsafe. What's more, senior leaders were required to include at least one performance goal related to health and safety in their annual objectives.

To upgrade its behavioral system, the company revised its health and safety training curriculum with input from leading industry experts. It launched an “intervene if you think it's unsafe” campaign to ensure that a safety mindset became part of the culture. Miners received 30 hours of mandatory health and safety training per quarter to ensure that every member of the workforce was up to date on the company's health and safety practices.

As these examples suggest, all three systems—the technical, the management, and the behavioral—converge to create and support an institutional capability. But that doesn't answer the next question: How can you make a sober assessment of your capabilities? There's a vast array of tools to help you do just that—far too many, in fact, to list here. Many of them are geared to specific capabilities, but most fall into a small number of categories: performance metric assessments and benchmarking; process mapping and “pain point” analyses; and observational assessments (grids that break an institutional capability down into its component parts and describe what “poor,” “good,” and “great” look like so that you can compare the description with the reality at your organization). By selecting and using the right tools, you can arrive at a clear, fact-based evaluation of the reinforcements and shifts you have to make to strengthen the capabilities you need to fulfill your performance aspirations.

By the time you've determined which capabilities matter most in achieving your performance aspirations and assessed what state they are in at present, you'll be ready to plan the actions you need to take to get them to the right level. We'll look at that topic in the next chapter. First, though, we tackle the big question of how you assess the mindsets of the people in your organization.

Health: Discovery Process

So far we've discussed how to measure organizational health and how to determine what good health looks like for your organization. But if we find symptoms of ill health, how can we trace them back to root causes? As with our personal health, this isn't always simple. However, experience can tell us, or our doctor, where to look—and with organizational health, the place to look is at underlying mindsets. Mindsets drive behaviors, and behaviors support (or obstruct) the management practices that lead to good (or bad) organizational health.

Of course, mindsets matter in human health, too. Consider the predicament of people with heart disease. Years of research have shown that most cardiac patients can live considerably longer if they change their lifestyle by cutting out smoking and drinking, eating less fat, reducing their stress levels, and taking regular exercise. Indeed, many make a real effort to do so. Yet study after study has shown that 90 percent of people who have undergone surgery for heart disease revert to unhealthy behavior within two years.

That's a situation that Dean Ornish, a professor of medicine at the University of California at San Francisco and founder of the Preventative Medicine Research Institute, was determined to change.6 He decided to try a new approach. Rather than focusing on the behaviors patients should adopt to survive, he decided to tackle their mindsets instead. As he said, “Telling people who are lonely and depressed that they're going to live longer if they quit smoking or change their diet and lifestyle is not that motivating. Who wants to live longer when you're in chronic emotional pain?”

Having realized that trying to motivate patients with a fear of dying wasn't getting him anywhere, Dr. Ornish turned the conventional approach on its head: he started trying to inspire them with the joy of living. How much better would they feel if they could enjoy the pleasures of daily life—making love, taking a hike, playing with their children or grandchildren—without suffering any pain or discomfort? Dr. Ornish put his patients on a low-fat vegetarian diet and helped smokers quit their habit. To help his patients make the right choices, he also offered them support groups and classes in relaxation, yoga, meditation, and aerobic exercise. It worked: 77 percent of his patients managed to make permanent changes in their lifestyles, as against a normal success rate of 10 percent.

As with people, so it is with organizations. To improve health, you need to trace issues back to the behaviors that shape them, and then go further still, to their root cause in shared mindsets. Bringing these mindsets to the surface and working with them explicitly is the only way to make sustainable change happen. Missing this step will doom any transformation to failure. In our 2010 survey, none of the companies that did no work on diagnosing mindsets rated their transformation programs as “extremely successful.” Moreover, companies that did go below the surface to identify deep-seated mindsets were four times more likely than those that didn't to rate their transformations as “successful.”

Now let's take a look at why mindsets matter. We'll also describe the scientific evidence underpinning our approach and explain how to uncover underlying mindsets by using the discovery process.

The Hidden Drivers of Outward Behavior

Having set clear aspirations for organizational health that target changes in specific management practices, surely we're ready to start changing people's behavior? Not yet.

If we tackle behavior head on, we're likely to waste time and energy, alienate those around us, and suffer a host of unintended consequences. At this point, we may well concede that the skeptics were right to claim that there's no reliable way to manage the soft stuff. So where have we gone wrong? We've overlooked a vital fact: people's behavior is driven by their mindsets.

We define a mindset quite simply as a fixed mental attitude or outlook that predetermines how people interpret situations and respond to them. In an organization, the interactions between members, leaders, and the external environment go to make up a set of shared mindsets that underpin “how things get done around here.” These mindsets in turn spawn a myriad of predictable behaviors.

That's why mindsets are the highest leverage point for management time and energy. Chasing behavioral change without addressing mindsets is like playing Whac-A-Mole in an amusement arcade. You pound one mole into its hole only to find many more moles popping up all around you.

To see how much mindsets shape our actions, let's take an example: the assumption that our colleagues are well intentioned and capable. This mindset creates trust and encourages behaviors such as sharing information, asking for and offering help, and being decisive. When it's absent, people hoard information, seek control, and suspect others’ motives. Employees who lack this mindset don't seem to miss it, or notice negative consequences like these. But if we can show them the damage the mindset causes and persuade them to adopt a different perspective, countless tiny day-to-day actions can be transformed for the better.

Take a company that wants to introduce a lean production system. Part of the change will be about defining new processes, systems, and behaviors to eliminate waste and reduce variability, and then embodying them in standardized working methods and manuals. But if the transformation stops there, its effect is unlikely to last for long. It will be all too easy for people to lapse back into old familiar working patterns, and any benefits will be short lived.

Now consider how different things would be if the company also addressed people's mindsets. If employees were encouraged to see inventory not as an asset but as a liability, how would their behavior change? If managers stopped seeing reporting as a quarterly activity and understood it as a real-time management tool, how would it affect the way they work? What if the organization no longer saw people as an expense, but recognized them as an asset? If it regarded the purpose of frontline jobs not as execution, but as the engine of continuous improvement? If it saw improvements in cost, quality, and service not as trade-offs, but as elements that could be successfully combined?

We once worked with a retailer that was struggling to improve the performance of its sales staff. When we explored employees’ mindsets, we found that average performers and high performers had very different ways of looking at their work. The first important difference was in their view of customers. Many average performers believed that customers had decided before they even came through the door whether they were going to make a purchase or simply look at the merchandise, head home, and do their shopping online. These average performers also felt they were highly skilled at identifying which customers were which. In sharp contrast, high-performing sales staff believed that everyone who walked through the door might make a purchase.

The second key difference related to how staff viewed coaching from their boss. Average performers viewed it as something that happened when they'd done something wrong, and avoided it as far as they could. But high performers actively sought out coaching from their boss. They believed that as in sport, the coach is more likely to spend time with the star player than with someone who's about to be dropped from the team.

The Power of Mindsets

Any skeptics still unconvinced of the power of mindsets should consider Roger Bannister's story. Until the mid-1950s, the four-minute mile was regarded as beyond human achievement. Even medical journals judged it unattainable. Yet in May 1954, Bannister smashed through the barrier with a time of 3 minutes, 59.4 seconds. How did he do it? In his memoirs, Bannister explained that he spent as much time conditioning his mind as his body. He wrote that “the mental approach is all-important … energy can be harnessed by the correct attitude of mind.”7

What is perhaps more amazing is that two months later the four-minute barrier was broken again, by Australian John Landy. Within three years, 16 other runners had followed suit.

So what had happened? A sudden spurt in human evolution? A new super-race of genetically engineered runners? Of course not. It was the same physical equipment, but with a different mindset: one that said, “This can be done.”

Are there any four-minute miles in your organization? If a few people could break through them, would you be able to unleash a new level of performance, just as Roger Bannister's attitude of mind unlocked a new level of achievement among athletes?

That's exactly what happens at successful organizations. In 1997, when Coca-Cola faced limited growth options in a mature market, it shifted its mindset from “We sold 1 billion servings of soft drinks this year” to “We've got 47 billion servings of beverages yet to go” (the number of worldwide beverage servings including bottled water, coffee, and tea). This way of thinking opened the door to a new set of growth opportunities that the company had never considered before.

Another vivid illustration of the power of mindsets involves a man named Abraham Wald who was in charge of assessing how vulnerable airplanes were to enemy fire during World War II. Statistics showed that some parts of planes were hit more often than others. Military leaders wanted to have these parts reinforced to minimize damage. Wald took a different view, arguing that the parts hit least often should be the ones that were protected. He surmised that if planes were hit in a critical area, it was unlikely they would make it back to base. Those planes that were able to return probably hadn't been hit in a critical area. Thus, he reasoned, reinforcing parts of planes that had sustained many hits would be unlikely to pay off.

How many well-intentioned people are hard at work reinforcing damaged parts of your organization? And how much more productive would their efforts be if they challenged prevailing assumptions about how and why work gets done?

Look at the case of the CIO of a large financial services firm in the midst of one of the largest mergers in the sector's history. As employees grappled with the challenge of reducing the cost base of the combined entity by one-fifth, the CIO turned the problem on its head. He asked, “If we double our transactions [as the firm did thanks to the merger], by what percent will our costs rise in the two legacy organizations?” Since the infrastructure costs were largely fixed, the answer was quite small. When employees started thinking about the challenge from this different perspective, it suddenly seemed much more modest, and perfectly achievable.

In Competing for the Future, Gary Hamel and C. K. Prahalad describe a hypothetical experiment that powerfully illustrates how today's experience becomes tomorrow's theology. Four monkeys sit in a cage that has a bunch of bananas hanging from the roof, accessible by a set of steps. Whenever the monkeys try to climb the steps to get to the bananas, they are blocked by a blast of cold water. After a few days, the monkeys give up climbing the steps. Researchers then remove the water hose and replace one of the original monkeys with a new one. Seeing the bananas, it starts up the steps. What happens? The other monkeys, being social creatures, pull it down before it gets blasted with water. This happens again and again until pretty soon the new monkey doesn't bother to go for the bananas either.

Over the next few weeks, the researchers remove the rest of the original monkeys one at a time and replace them with new monkeys who've never seen the jet of water. Even though there's no longer anything to stop the monkeys reaching the bananas, the new monkey is always pulled down by the others before it gets to the top of the steps. By the end of the experiment not a single monkey has ever seen a jet of water, but none of them tries to climb the steps. They've all learned the rule that “You don't grab the bananas around here.”

How many of your employees are holding back from taking steps that would improve the performance of your organization simply because they've become accustomed to “the way things are done around here”?

Sometimes you need to make a decisive break with the past, as IBM's history illustrates. It had developed a proud technocratic tradition at a time when the market was ruled by mainframe computing. As the market shifted, however, it had to recognize and challenge the mindsets that were preventing it from moving to a new focus on customer solutions. Looking back, CEO Lou Gerstner observes that “I can recall numerous occasions in the early days when I would outline a change I thought was necessary, and my team would say: ‘Oh, we tried that before and it didn't work.’” But Gerstner had to stick to his guns: “I couldn't explore the ‘befores’ or I'd learn all the reasons not to change.”8 By making a determined effort to stop looking back and look forward instead, IBM was able to enter the next era of growth and profitability.

In companies with long histories and long-serving employees, we find it can often be helpful to encourage people to think in terms of eras so that they understand that ways of thinking that served them well in the past may not work so well in the future.

The Evidence that Mindsets Matter

Advances in neuroscience have made it possible to undertake direct observation of the human brain, generating a vast amount of experimental data and a range of theories to explain what's going on inside our heads. Complex though an individual human brain is, an organization is even more so. When groups of people get together to negotiate and make decisions, a whole host of unique mindsets come into play. And groups are also susceptible to “groupthink” and other biases that can limit their flexibility and hinder their performance.

Leaders who want to understand the scientific arguments for why mindsets matter to performance have a considerable body of work at their disposal. In their book The Unbounded Mind, Ian Mitroff and Harold Linstone examine the need to change key assumptions to move from old ways of thinking to “unbounded systems thinking.” Peter Senge analyzes how mindsets can limit or contribute to organizational learning in books such as The Fifth Discipline. Carol Dweck's book Mindset: The New Psychology of Success compares the impact on performance of “fixed” versus “growth” mindsets in the arenas of business, education, parenting, and relationships.

Edward Russo and Paul Schoemaker emphasize the impact of mindsets on the quality of decision making in Decision Traps and Winning Decisions. In Creating the Corporate Future and other works, Russell Ackoff argues that planning should be approached by challenging fundamental mindsets through a process of “idealized design”: starting with the desired end state and working back to the objectives needed to reach it. More rigorous academic analysis can be found in the research of Chris Argyris, particularly in his accounts of the “ladder of inference” (showing how subconscious thought processes are biased by preconceived beliefs) and “double-loop learning” (explaining how underlying mindsets and assumptions affect the learning process).9

Some of the best-known research on the power of mindsets was done by Timothy Gallwey in his investigation into how people develop excellence in a variety of sporting and working contexts. He posited that our performance is equal to our potential minus the interference that gets in the way (sometimes expressed in the equation P = p – i), and argued that much of this interference is created by self-imposed constraints that come from fear, self-doubt, lapses in focus, and limiting assumptions. These mindsets fill our heads with self-criticism, hesitation, and over-analysis, making our actions awkward, mistimed, and ineffective. As Gallwey explained, “There is always an inner game being played in your mind no matter what outer game you are playing. How aware you are of this game can make the difference between success and failure.”10

Uncovering underlying mindsets and shifting them is at the heart of making change happen. It also accounts for much of the frustration experienced by those who try to lead change in organizations. As George Lakoff, a professor of cognitive science and linguistics at the University of California at Berkeley, states, “Concepts [or mindsets] are not things that can be changed just by someone telling us a fact. We may be presented with facts, but for us to make sense of them, they have to fit what is already in the synapses of the brain. Otherwise, facts go in and then they go right back out. They are not heard, or they are not accepted as facts, or they mystify us: Why would anyone have said that? Then we label the fact as irrational, crazy, or stupid.” According to Lakoff, political debates fall foul of the same syndrome. Conservatives and liberals don't understand each other and may even think the other side is mad because they are approaching the facts with different mindsets.11

Underlying mindsets can do more than form obstacles that block change efforts; they can also unravel them, sometimes in baffling ways. In a series of studies conducted at the University of Michigan in 2005 and 2006, researchers found that when misinformed people were exposed to accurate information in news stories, they rarely changed their minds. On the contrary, they often became even more strongly wedded to their beliefs. Far from curing misinformation, the facts were actively perpetuating it.

According to the lead researcher on the study, political scientist Brendan Nyhan, “The general idea is that it's absolutely threatening to admit you're wrong.” He describes this phenomenon, known as “backfire,” as “a natural defense mechanism to avoid that cognitive dissonance.”12 How many leaders have been surprised by backfire from their organizations when attempting to make change happen? Our guess would be many, perhaps even most—especially in the 70 percent of change programs that fail.

Given the wealth of scientific evidence for the power of mindsets, we might expect every business school or management seminar to teach leaders how to address them effectively. Far from it: in fact, leaders of transformations have little in the way of established methods or proven tools for assessing the mindsets in their organization. Although such methods and tools do exist, and are well tested in other fields, they have yet to be widely applied in the business world. We suspect that the reason, ironically enough, may lie in a prevailing mindset: the conviction that such investigations should be left for the psychologist's couch rather than undertaken by leaders in the workplace.

To be sure, working with mindsets will always have a degree of art to it—probably more, in fact, than any other aspect of managing a transformation. But that shouldn't deter leaders from venturing into unfamiliar territory. Remember, perfection is not the goal. Plenty of us take art classes without expecting to end up like Picasso or Rembrandt. We may not paint masterpieces worth millions, but by learning the basics of composition and technique, we can become better artists.

Too many managers think that shifting mindsets is beyond them—something that can be done only by masters of the art. Their reticence dooms their efforts to little more than the change-management equivalent of finger painting. If instead they are prepared to learn about mindsets and follow a few basic steps, they can greatly increase their ability to make change happen.

Approaches to Assessing Mindsets

So how can leaders uncover shared mindsets in their organizations and understand how they are linked to behaviors and ultimately to performance? To provide an answer, we developed what we call the discovery process—a deep dive into an organization's inner workings that is summarized schematically in Exhibit 4.2.

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As the diagram shows, using the discovery process involves looking at both your current state of health and your desired state as you defined it during the “aspire” stage of your transformation. Your state of health encompasses both outcomes—elements of health such as accountability—and the practices that underlie them, such as performance contracts and consequence systems. These practices are brought to life by employees’ behaviors, which are in turn governed by their underlying mindsets.

The discovery process enables you to determine what behaviors you need to shift to allow your organization to adopt the desired practices. It then helps you to look beneath these behaviors into the root-cause mindsets that explain why hard-working and well-intentioned people are choosing to behave in the way that they do. Many ingrained mindsets are held at the subconscious or unconscious level, so the goal of the discovery process is to bring them to the forefront of consciousness where they can be examined.

Because mindsets lie below what we can readily observe, they are seldom scrutinized. The business thinker Chris Argyris calls them the “undiscussables.” Yet they represent the highest leverage point for interventions to improve organizational health. What this means in practical terms is that engineering small shifts in mindsets enables companies to bring about much bigger shifts in behavior to support the practices they want to adopt to reach their desired state.

So why are mindsets so powerful? By way of analogy, consider the following text:

Aoccdrnig to rsceearh at an Elingsh uinervtisy, it deosn't mttaer waht oredr the ltteers of a wrod are in so lnog as the frist and lsat ltteers are in the rghit pcleas. The rset can be a toatl mses and you can sitll raed wuothit a porbelm.13

Just as a bit of context enables us to make sense of writing that's full of errors, so our mindsets tend to interpret the huge amounts of information available to us by filtering out some things and amplifying others—especially those that reinforce our existing beliefs.

In order to help managers navigate through the discovery process and get below the surface to uncover mindsets, we've developed a number of tools and approaches. The first is an interview-based technique called “laddering.” The second takes place in focus groups using techniques such as collages and card sorting. The third involves analyzing patterns of words in texts created by or about an organization. Taken together, these tools enable leaders to bring a far greater degree of rigor to bear on the “soft stuff” than they were ever able to apply in the past.

Let's begin with the interview-based technique called “laddering.” This approach is grounded in the theory of personal change set out by Dennis Hinkle in his 1965 doctoral thesis entitled The Change of Personal Constructs from the Viewpoint of a Theory of Implications. Hinkle argues that the more abstract or deeply held a personal construct (or mindset) is, the harder it is to change. In order to probe an individual's personal constructs, Hinkle developed a method of inquiry he described as “laddering,” which essentially involves asking someone why they hold a particular opinion over and over again.

A greatly simplified version of a conversation using the laddering technique is shown in Exhibit 4.3. It works like this. Interviewees are asked about their observed behavior through a series of why questions that probes beneath the surface. The idea is that the “ladder” of questions prompts people to reflect on their deepest motivations, and eventually leads them to state the values and assumptions through which they construct their personal world. The technique originated in clinical psychology, but has been applied in business in both marketing and the field of organizational change.

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Even the hardest-nosed business operator can feel comfortable with this technique. That's because it closely resembles the “five whys” approach that lean organizations use to get to the root causes of performance problems. Before they try to fix a given issue, lean practitioners ask why as many times as it takes to understand the problem fully. (Five questions are often enough to do the trick, hence the five whys.)

Take a classic textbook example. If a motor breaks down, a lean-minded operator won't just replace it but ask why. “Because it overheated,” comes the reply. Why? “Because it wasn't properly ventilated.” Why? “Because the machine is too close to the wall.” The operator then moves the machine away from the wall before replacing the motor.

Without the probing for why, the fix would have been only temporary. The new motor would have soon burned out for lack of ventilation. Addressing the root cause produces a better and more durable solution. In much the same way, asking why about mindsets leads to insights into the points that offer most scope for improving organizational health.

So how can we drill down to the mindsets that shape individuals’ understanding of the world? We're talking about people here, so naturally it's a bit more complicated than finding out why a motor keeps breaking down. The questions still revolve around why, but they involve a range of different techniques: storytelling (eliciting a colorful and detailed narrative by asking about heroes, legends, or war stories); provocations (making deliberately exaggerated statements to prompt an emotional reaction); role playing (putting the interviewee into a realistic work situation or someone else's shoes); circling (closing the loop between the current conversation and previous statements); and hypotheticals (describing imaginary scenarios and asking how they would play out).

An example will bring the discovery process to life. A bank conducted a benchmarking exercise and found that its sales per banker were lagging the competition. By posing a few fairly superficial why questions, management discovered that bankers weren't spending enough time with customers, largely because administration took up much of their day. So the bank set about reengineering its loan-origination process to minimize paperwork and maximize customer-facing time. In addition, it gave bankers new sales scripts and more easy-to-use tools to help them put the extra customer contact to good use. After training the bankers in the new processes and tools, executives thought they had the problem licked.

Six months later, they were dismayed to discover that the level of improvement was much lower than they had expected. Frustrated, they applied the discovery process using the laddering technique to drill down to the root causes of the disappointing results. They asked a sequence of carefully constructed questions such as “What does it feel like to do administrative tasks? … Who decides how much time you spend in front of customers? … Don't you want to spend more time with customers? … Let's role play---you are selling me a loan that is 0.9 percentage points higher than the competition. … How did that feel? … Do you enjoy being a sales-person? … What are the best and worst parts of your day?”

A simple but hitherto unsuspected reason for the poor sales soon emerged: most of the bankers preferred paperwork to people. Interacting with customers made them uncomfortable, so they actively sought reasons to avoid it. Further investigation uncovered the causes of the bankers’ discomfort: a combination of introverted personalities, poor interpersonal skills, and a sense of inferiority when dealing with customers who had more money and a better education than they did.

To make matters worse, most supervisors had started out as bankers, and tended to be equally insecure in their selling and interpersonal skills and equally focused on managing paper-based activities. Moreover, most bankers hated thinking of themselves as salespeople. They thought it made them sound like hucksters at a used-car lot. To them, the bank's efforts to create more time for them to sell felt like a violation of their professional identity.

Armed with these insights into the root causes of poor sales performance, the bank adjusted its change program to address the mindset challenges directly (Exhibit 4.4). Not only did this put the program back on track within six months, it also delivered sustainable sales gains in excess of the original targets.

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As the bank could confirm, laddering is a powerful technique for identifying mindsets that may be blocking change. However, in large and diverse organizations, it isn't always practical to use an approach that involves working with individuals. Our second technique provides a way of working with groups of employees instead.

Focus groups are a valuable tool, but they have their shortcomings. Chief among these is the risk of eliciting “groupthink” responses. Fortunately, there are a few approaches that a savvy organization can use to bypass groupthink and cut straight through to genuine personal perceptions. An approach that we've often seen work well is to lay a selection of pictures on a table and ask participants to choose two images: one that represents how the organization appears to them and another that represents how they would like it to be. Where appropriate, this approach can be targeted to specific business challenges. For instance, frontline employees can be asked “Which image represents what it's like to sell to customers?”

The benefit of using pictures is that they trigger a much more honest and visceral conversation than asking stock questions like “What's it like to work around here?” ever could. When someone chooses a picture of a traffic jam for the way things are and a picture of a free-flowing motorway for the way they'd like them to be, the message comes over loud and clear. A handy side-benefit is that the images representing employees’ ideal organization can be adopted in the communications program later, thus forging a link between people's passions and the themes in the change effort. After people have chosen images individually, the wider group can go on to create collages that summarize how they collectively feel about their work.

Another useful method to cut to the chase in focus groups is card sorting. Here, up to 50 statements that list various reasons for why the organization might be facing its current situation are printed on separate cards. Participants are asked to divide them into vital, interesting, and unimportant. They then talk about the reasons behind their choices. This enables the organization to explore critical areas in depth, to establish overall group priorities, and to identify areas of misalignment.

One manufacturing organization used the card-sorting exercise with great success to explore why it was suffering repeated shutdowns. It started by using employee focus groups to help identify possible reasons. The groups came up with a list of 30 statements ranging from “The right way to do things exists in the heads of a few experienced individuals” to “Standard procedures are considered optional” to “Operations, maintenance, and technical groups don't all work seamlessly as one team.” Each reason was put on a card, and then a cross-section of the organization was asked to sort the cards in the way we've just described. When the company knew which statements most staff classified as important, it followed up by probing them in more depth. The “Aha” moment came when it uncovered the prevailing mindset that maintaining a quick production turnaround always took priority, even if it meant factory workers had to sidestep a few maintenance procedures.

Whether conducted through interviews or focus groups, the discovery process represents a change intervention in itself. Both interviewer and interviewee come away with a much better understanding of the mindsets that help or hinder performance. Once subconscious elements are brought to consciousness, it's possible to examine an individual's current and potential role in maintaining constructive mindsets and shifting unconstructive ones.

Using a skilled and objective third party to help with interviews and focus groups can be helpful, but we often suggest that the leadership team should take part too. This is what lean manufacturing executives call genchi genbutsu or “go and see”: head for where things are happening and find out what is actually going on.

The third tool for understanding mindsets comes from the social science methodology known as qualitative data analysis (QDA). This method can be utilized at scale to help large organizations mine rich sources of textual data such as reports, websites, advertisements, internal communications, and press coverage. QDA uses a number of techniques ranging from the tracking of word patterns to deeper linguistic analysis, all designed to discover themes emerging from texts created by individuals or organizations.

One technique involves analyzing how often words are repeated in a particular text or texts as a proxy for what matters to an organization. The results are then processed by visualization software to generate a “word cloud,” in which the size of each word reflects how often it has been used.

The value of word clouds comes not just from the insights that they yield individually, but also from the conclusions that can be drawn by putting together word clouds from different sources: public or private, formal or informal. Setting two examples alongside one another can expose blind spots—places where an organization espouses one set of values or standards but enacts another. There's a good chance that blocking mindsets will be at work somewhere in this conflict.

Another revealing technique is to set word clouds developed from internal texts alongside an organization's stated values and formal leadership standard. One large public sector institution had spent a lot of time defining and communicating a set of values concerned with quality, collaboration, accountability, customer focus, and efficiency. To see what impact these efforts had had, the organization distilled its broadcast online communications—manager blogs, broadcast e-mails, discussion boards, internal websites—to produce a word cloud.

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The results (see above) came as a shock to executives. Some of the core values were barely featured in the word cloud; others weren't there at all. After so much effort, why weren't people talking about them? And if they weren't talking about the values, they probably weren't thinking about them either—or, more to the point, living them.

Drastic action was clearly needed: not just an overhaul of communications, but a raft of measures that would make the values part of people's lives. So the organization introduced new training programs, made changes in performance evaluation, and asked its senior team to act as role models so that employees would see them embodying the values as they went about their daily work.

Focusing on the Vital Few

The goal of the discovery process is to identify mindsets that should be strengthened and reinforced, as well as those that might create barriers to organizational health. However, the latter are particularly important because of our tendency to cling to mindsets that used to be valid in the past. If the transformation program requires people to abandon old mindsets and adopt new ones, it must address the shift explicitly. Without correction, old mindsets can make it impossible to adopt new practices.

Shifting mindsets is a gradual process, and we'd advise organizations not to take on too many at once. Tackling three to five “from/to” shifts over a 12- to 18-month period would be a reasonable target. Keeping the list short acknowledges that you have limited time and resources to do the work involved, and allows you to focus on the desired end state.

So how do you choose the shifts that matter most? It takes reflection, discussion, and judgment. You need to understand your performance and health aspirations, the state of your health, and what your employees really care about.

One global financial services institution was grappling with traders’ less than constructive attitude toward risk taking. On numerous occasions, it had found itself in peril after a succession of separate actions by different traders had caused a slow build-up of risk over time. Whenever such a situation arose, the bank would heroically save itself—which served only to reinforce traders’ mindsets that they were free to take more and more risk.

Investigation revealed that traders saw generating revenue as far more important than the risk a particular trade might pose. At a deeper level, they found the buzz of last-minute risk mitigation exciting, and felt that all the firefighting gave them more status in the eyes of others. Once this mindset had been properly understood and brought to awareness, work could begin on developing the more constructive mindsets needed in the future. The organization developed a set of “from/to” statements that included shifting from “brilliant risk trouble-shooting in response to a crisis” to “vigilance and measured action in anticipation of potential risks” and from “degree of hunger for all revenue opportunities” to “fundamental loss of appetite for revenue with inappropriate risk.”

In another case, a large retailer bent on delighting the customer emphasized perfection in everything it did. Any decision connected with getting products into customers’ hands had to be vetted by multiple stakeholders via multiple rounds of consultation. Although the aim was to make customers happy, no one had stopped to ask whether all this activity genuinely boosted customer satisfaction or sales.

Many consumer panels later, the retailer learned that far from being excited by its products, customers saw it as reliable but dated. So it decided to shift from a perfectionist mindset to one focused on progress. “Delighting customers” was redefined as moving ahead with good ideas and getting innovative products to the customer at the right time. This approach helped the retailer establish a successful online presence well ahead of its competitors, and dramatically improved its customer preference ratings.

If we look back on all the work we've done on mindsets, the “from/to” shifts that recur most often are those that relate to moving from a trans-actional to relational way of working, from working in silos to collaborating where it counts, and from assigning blame to taking accountability. Typical examples of these shifts are illustrated in Exhibit 4.5.

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It's important to note, though, that the shifts don't always have to be from one mindset to another. For many organizations, the choice is not “either/or” but “both/and.” This is especially true for those aiming for a “good to great” transition rather than a turnaround. Instead of losing the benefit of existing mindsets, they need to build on them to take the organization to the next level.

Some organizations get the best results by combining from/to mindset shifts with the both/and variety. Consider the National Health Service (NHS) in England, a complex group of government-funded organizations providing health-care services that are in most cases free to the patient at the point of delivery. The NHS is a massive entity employing over 1.3 million people, and with a budget of £110 billion (US$176 billion). Since becoming its CEO in September 2006, Sir David Nicholson has been working to improve the performance and health of the system, in part by focusing on a clear set of mindset shifts that combines either/or with both/and approaches.

Having used the discovery process to assess mindsets, Sir David and the NHS Management Board found that there was a strong sense of accountability in each of the individual organizations that make up the NHS. Though positive in itself, this mindset had the unintended consequence of not supporting the kind of collaboration between organizations that would bring further benefits to patients. So the need here was to achieve a both/and shift in mindset: both to retain the strong sense of individual accountability and to expand the view of what that accountability was for so that it became “what is best for the patient.”

This collaborative mindset proved helpful in planning for the Quality, Innovation, Productivity and Prevention (QIPP) initiative in 2008, which aimed to identify £15 to £20 billion (US$24 to US$32 billion) of productivity improvements in the space of four years. Local NHS organizations worked together—often for the first time—to develop regional plans, while hospitals and social care providers ceased competing with one another and began sharing best practices and transferring knowledge. The effort helped the NHS identify opportunities to reduce the risk of stroke in patients with atrial fibrillation by 50 percent to 70 percent, which is expected to save up to 4,000 lives a year and deliver savings of £134.5 million (US$215 million).

By contrast, another prevailing mindset—that “innovation is risky”—was holding back improvements in care. Here, there was a clear need for a from/to shift, to “innovation is necessary.” Innovation was central not only in improving productivity but also in areas as diverse as waste management, breast-cancer screening, the prevention of hospital-acquired infection, and catheter management. Having adopted the “to” mindset, an acute medical unit at Ipswich Hospital introduced a system for managing pulmonary embolism on an outpatient basis. The system is now used in 95 percent of cases, saving the hospital 1,000 bed days a year. The unit has gone on to devise tools and techniques to roll out the innovation on a national scale. If successful, it could save the NHS 217,000 bed days and £65 million (US$104 million) a year.

The transformation of such a huge and complex entity as the NHS will take some time to complete. However, early results have been highly positive. One example can be seen in the ratings of NHS Trusts. These are independent health-care entities such as hospitals, ambulance providers, and payors that are regulated by the government, but have their own board and CEO, and enjoy relative freedom to define their agenda and manage budgets. The number of trusts rated as “excellent” rose more than sixfold between 2006 and 2008, and those classed as “weak” fell from nearly 10 percent of the total in 2006 to just 5 percent.

A final consideration for organizations tackling mindset shifts is the sequencing of the shifts. The trick is to start with the fundamental shifts that will make the biggest difference. When universal bank ANZ faced this decision, the senior team chose to focus for the first 18 months on establishing a shared direction, creating a baseline of trust, and developing a sense of personal accountability. Once these elements were sufficiently embedded, the team worked on mindsets related to innovation, people development, and customer focus for the next 18 months. Attempting to tackle all six themes at once, or in a different order, could easily have fragmented the effort and weakened its impact.

The Process of Assessment

In 210 BC, a Chinese commander named Xiang Yu led his troops across the Yangtze River to attack the army of the Qin dynasty. Camping for the night on the bank of the river, they awoke to find their ships on fire. They rushed to take on their attackers, only to find that it was their own leader who had set the ships ablaze. Not only that, he'd had all their cooking pots smashed. Without the pots and the ships, he knew that his army had no choice but to fight their way to victory or die trying. Xiang Yu's seeming sabotage created tremendous focus in his troops, who fought ferociously and won nine consecutive battles, obliterating their opponents.

That's a perfect example of what's often referred to as “deficit-based” change: “We've got a problem, let's fix it.” This model identifies the problem (“What is the need?”), analyzes causes (“What's wrong here?”), considers possible solutions (“How can we fix it?”), and then plans and takes action (“Problem solved”). Advocates of this approach argue that its linear logic—dissecting things to understand them—is at the heart of all scientific progress made by western civilization.

Deficit-based change has become the dominant model taught in business schools, and the default option for most organizations. However, there are drawbacks to this approach. Research by David Cooperrider, Suresh Srivastava, Diana Whitney, and others in the field of appreciative inquiry—a discipline concerned with how to engage people in an organization to make change happen—has shown that a relentless focus on what's wrong is unsustainable, invokes blame, and creates fatigue and resistance. People have no opportunity to use their passions and experience, or to celebrate their successes.

Hence a rival model has arisen: the “constructionist” approach to change. Here, the plan is to find out what is working well today, imagine what life would be like if it happened more often, put plans in place to make it so, and then execute them. Result: you get more of what works.14

In a study carried out at the University of Wisconsin, two bowling teams were filmed in action. Each team was then given its own video to study. One team got a video that showed only its mistakes; the other got a video that showed only its successes. After seeing the videos, the team that studied its successes improved its score by twice as much as the team that studied its mistakes.

The moral of the story is that it's better to focus on the positive than the negative when it comes to changing human behavior. The deficit-based approach works for technical systems, but a constructionist approach revolving around what's going right pays dividends where people are concerned.

So should enlightened leaders focus only on where things are going well, and forget about identifying and solving problems? We think not. Strange though it may seem, people are more averse to risk when choosing from options framed as gains than from those framed as losses.

What would you do if offered a choice between a sure gain of US$100 and a 50 percent chance of gaining US$200? Social science experiments show that most individuals are cautious and choose the sure gain. But what if you had to choose between a sure loss of US$100 and a 50 percent chance of losing US$200? Most of us are happy to take the risk and choose a 50 percent chance of losing US$200.15

The message here is that a single-minded focus on what's possible actually prevents us from achieving radical change because it tends to bias us toward conservative choices. As humans, we instinctively dislike losses more than we like gains, so we tend to think more boldly when looking to solve problems or fill gaps than we do when building on our strengths.

Both the deficit-based and the constructionist approach have their limitations as well as their merits. It's clear that dwelling on problems creates more fatigue and resistance than conjuring up visions of a positive future. But it's equally clear that when it comes to behavioral change, some anxiety is good. An excessive emphasis on the positive can lead to watered-down aspirations and diminished impact.

Our view is that the field of change management has drawn an artificial divide between the deficit-based and constructionist approaches. The best solutions combine both. If the University of Wisconsin had got a third bowling team to study both its successes and its mistakes, we suspect it would have beaten both the other teams. When leaders assess their organizations we advise them to investigate “What's wrong, and how do we change it?” and “What's working, and how do we get more of it?” with equal focus and vigor.

Our 2010 survey confirms this view. It shows that transformations that emphasize a company's strengths as well as its weaknesses are three times more likely to be successful than those that focus on one or the other.

One leader who advocates precisely this approach is T. H. White, former president of GTE Telephone Operations: “If we dissect what we do right and apply the lessons to what we do wrong, we can solve our problems and energize the organization at the same time. … We cannot ignore problems, but we just need to approach them from the other side.”16

At the end of the “assess” stage of transformation, you'll have answered the question “How ready are we to go there?” in relation to your performance and health aspirations. You'll have identified the critical few strategic capabilities required to fulfill your performance aspirations, and taken a long, hard look at the state of these capabilities in your organization today. You'll also have uncovered the mindsets you need to support the level of health you hope to achieve, and determined the critical few mindset shifts you need to make to drive the right behaviors. You'll have taken a balanced approach to this inquiry, unlocking bold ideas as well as building energy for change.

Be warned, though: getting to this point involves a lot of effort. The journey through the “assess” stage can be the most challenging in the whole transformation. Organizations begin it with clear aspirations and a sense of excitement about the changes in store. It feels like it's time to act. But instead, people are being asked to explore their unspoken assumptions and views of the world. “What's happening? Let's just get on with it” is what we often hear at this point.

So it's hardly surprising that some leaders wonder if they can skip this stage. The answer is always the same: “You can do it now, or you can do it later.” In our view, it should be now. If an organization doesn't tackle mindsets before it moves on to the “act” stage, it's sure to have to do so months or years down the line, after its transformation has stalled, and it doesn't know why. At that point the work will be harder, because high hopes will have given way to cynicism and disengagement.

The truth is, though, that the assess stage is always hard. That goes for leaders as well as their organizations. Bombardier CEO Pierre Beaudoin speaks frankly about how uncomfortable self-assessment can be: “We really had to force ourselves to look in the mirror and say, ‘The first thing you have to recognize, if we're going to fix this organization, is that you, as a leader, have things to address.’ Asking leaders to make themselves vulnerable is not that easy.”17 But as Bombardier's story shows, it's worth it.

Having assessed how ready you are to make the journey, you're now prepared to tackle the question in the next stage of the transformation: “What do we need to do to get there?”

5

Architect

What Do We Need to Do to Get There?

When Alan G. Lafley took the helm at Procter & Gamble in June 2000, the global consumer goods giant was floundering. His predecessor as CEO had issued three profit warnings in four months, and Lafley vividly recalls being “the deer in the headlights, being grilled about the company and about why it was doing so badly. And the stock price had gone down a few bucks that day because I was a total unknown.”1

Jump forward five years to 2005, and the company's fortunes had been transformed. Profits had soared by 70 percent to US$9.8 billion, and revenues by almost 30 percent, to US$51 billion. Jump forward another five years to 2010, the year Lafley retired, and his legacy was plain to see. P&G's portfolio of billion-dollar brands had grown from 10 to 22, the number of brands with sales between US$500 million and US$1 billion had increased fivefold, overall sales had doubled, profits had quadrupled, and market value had increased by more than US$100 billion.

Impressive though they undoubtedly are, the numbers don't tell the whole story. Under Lafley, P&G had also become a more consumer-driven and externally focused company. Between 2002 and 2007, the billion dollars it invested in consumer research went not only on traditional techniques such as focus groups, but on studying consumers in more detail by living and shopping with them. Lafley also drove innovation through the organization by looking externally for ideas and making it clear that “innovation is everyone's job.”

So how did Lafley and his leadership team do it? As with any transformation, the journey was a sequence of complex interlocking decisions about brands, people, technologies, and markets. Lafley committed P&G to “stretching but achievable double-digit earnings-per-share growth” and a relentless market focus. “I wanted to put consumers front and center and get back to asking, ‘Who are they and what do they want?’ Find out what they want and give it to them. Delight them with P&G products.”

But P&G's secret sauce lay not so much in the nature of its goals as in its choice of actions to achieve them. Although that might sound obvious, it doesn't happen easily. As Lafley noted, “Most human beings and most companies don't like to make choices. And they particularly don't like to make a few choices that they really have to live with. They argue, ‘It's much better to have lots of options, right?’”

Lafley rejected this line of thinking and opted instead to make explicit and categorical choices about what P&G should do. At such a vast and diverse organization it was impossible to tackle every market and operation at once, so he and his senior management team decided to give priority to four core businesses and 10 out of more than 100 countries. Many companies talk about their core businesses, but few define them as stringently as P&G. Their core businesses had to be global leaders with the best structural economics in their industries, and demonstrate an ability to grow consistently at a certain rate while delivering a certain return on investment. The businesses that qualified were fabric care, baby care, feminine care, and hair care.

As well as drawing up a “to do” list focusing on these priority areas, Lafley also took the more unusual step of drawing up a “not to do” list. One item on this latter list was P&G's “skunk works”: experimental technology projects outside the mainstream businesses. These projects—which had an annual budget that went as high as US$200 million—were driven by technology rather than customer needs, and culminated in products and services that had to be “pushed” to consumers in the hope they would be taken up. Lafley, on the other hand, wanted the organization to concentrate on products that clearly fulfilled consumer needs—those “pulled” by consumer demand. P&G also abandoned some regional advertising and marketing promotions in favor of more unified and coordinated global efforts. The “not to do” list was rigorously enforced: “If we caught people doing stuff that we said we were not going to do, we would pull the budget and the people and we'd get them refocused on what we said we were going to do.”

As well as working to shape P&G's portfolio of business improvement initiatives, Lafley took every opportunity to role model what it meant to have a consumer-centered mindset. Best known for his work with Tide washing powder, he sometimes encountered skepticism over his plans to roll out proven P&G approaches across different product categories. One senior manager in Japan told him that cosmetics was nothing like laundry products. Undeterred, Lafley spent much of the next month talking with customers in shops and in their homes.

Not only was this the best way to find out what they really cared about, it also gave Lafley an early chance to role model P&G's intense new customer focus. He came back with a renewed sense of purpose. “Do you know what I've learned after 30 days?” he asked his team. “Cosmetics is everything like laundry detergent! You need to know who your customers are—intimately. You need to understand not just their habits and practices but their needs and wants, including those they can't articulate. Then you've got to delight them with your brands and your products.”

Aware that having a clear strategy would mean nothing if people didn't understand it, Lafley communicated the game plan with “a Sesame Street level of simplicity” to get through to managers who “have so many things going on in the operation of their daily businesses that they don't always take the time to stop, think, and internalize.”

Formal systems were also adjusted to reinforce the company's new direction. Planning processes now started with understanding consumer trends. Technology investments were shaped not by innovation for innovation's sake, but by a clear idea of what consumers were looking for. Rather than abandon the organizational structure introduced by the previous CEO, Lafley reframed it with a stronger consumer orientation. In practice, that meant that the first “moment of truth” in the customer relationship—the purchase decision—became the responsibility of the new market-development operation, while the responsibility for the second moment of truth—when the customer uses the product—fell to the new global business units. An inherited organizational structure that might have been a liability had thus been turned into an asset now that it had “a simple reason for being,” as Lafley put it.

Lafley also invested in building the skills to support the culture he was trying to create by founding an in-house college for general managers and ensuring that P&G's consumer focus pervaded every aspect of the curriculum. In addition, he dedicated a substantial part of his own time to coaching, holding monthly private sessions with line presidents and functional leaders, for instance. As a result of this emphasis on individual leadership development, P&G consistently comes close to the top of the Fortune list of the best companies for leaders.

In addition, Lafley built on his predecessor's efforts to harness external sources of expertise with the intention that “half [of new products and technologies] would come out of P&G labs and half would come through P&G labs, from the outside.”

Told in these terms, P&G's journey looks like a classic turnaround story. Lafley knew his starting point and he knew the destination he was aiming for. But things are never as clear-cut at the time as they look in retrospect. How did Lafley work out what choices he needed to make to take P&G from its shaken state in 2000 to its new-found (and enduring) confidence in 2005?

That's the theme we turn to here. First we take a brief look at how you can develop a portfolio of performance initiatives. Then we discuss in much more detail how you can choose appropriate steps to shift mindsets and behaviors in your organization. We give this more space than any other topic in the book because leaders keep telling us that it's the hardest part of a transformation, and the one where they need the most help.

It's just as well, then, that at this stage in the journey an organization's efforts to improve performance and health start to come together. They interlock and reinforce one another as the portfolio of initiatives becomes the main vehicle for shifting mindsets.

Performance: The Portfolio of Initiatives

By this stage, you know your aspirations and the facts about your capability platform, so it's time to work out exactly what you need to do to get from where you are now to where you want to be. To make the transformation manageable, you'll need to break it down into a portfolio of change initiatives. Companies that follow a portfolio approach and set clear targets, benefits, milestones, resources, and leadership for each initiative are 3.5 times more likely to have a successful transformation according to our 2010 survey.2

Identifying the right set of initiatives is not always straightforward. Again, there's a close analogy with human health. When you feel ill and visit your doctor, he or she will ask about your symptoms, conduct an examination, eliminate possibilities, and if necessary use tests to form a judgment on your disease or condition, the course it will take, and the treatment most likely to prove effective. Translated into a business context, this might sound something like: “This is where we are heading if we carry on as we are. Unless we address X and build on Y, we won't be able to get to where we want to go.”

Just like the human body, organizations are dynamic and interconnected. We need to understand the whole entity reasonably well. If we don’t, we may end up treating a symptom while missing a cause, or create unintended consequences in some other part of the system.

To help companies devise a holistic set of actions to meet their performance goals, we've developed an approach that we call the “portfolio of initiatives.” To follow it, organizations develop a list of potential initiatives to take and then plot them on a grid with two axes, time and familiarity, as shown in Exhibit 5.1. The grid they produce will reveal at a glance whether the initiatives are balanced, like the large grid in the exhibit, or unbalanced, like the six smaller grids on the right. It's worth looking at the grid in a little more detail.

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The time axis helps ensure that the portfolio is balanced between efforts that meet current earnings expectations, efforts that yield medium-term impact, and efforts that create long-term value.

The familiarity axis ensures that the portfolio isn't biased toward big bets on the future on the one hand, or incremental improvements that stay too close to the core on the other.

The value-creation potential of each initiative is denoted by the size of the circles plotted on the grid.

Adopting a portfolio-driven approach doesn't just help organizations to balance time and risk. It also helps them guard against fragmenting their change program across too many initiatives, and weigh their expenditure of money and resources against expected risks and rewards. For instance, they can choose to make small staged bets on less familiar opportunities rather than wait for these opportunities to become clear—when it will be too late to capture competitive advantage.

The unbalanced portfolios on the right-hand side of Exhibit 5.1 illustrate six patterns that organizations would do well to avoid: lacking focus or depending on too many big bets, taking too many risks or being risk averse, and showing poor innovation or poor definition.

A portfolio of initiatives should embody all the actions that your organization needs to take to meet your medium-term performance aspirations. That means looking at all the main levers available to improve performance:

·       Improving customer productivity via price optimization, sales stimulation, product development and innovation, trade promotion effectiveness, product and customer mix profitability, brand portfolio reshaping, and so on.

·       Improving cost productivity via site-by-site cost-performance enhancement, logistics redesign, sourcing leverage, sales and marketing spend effectiveness, overhead reductions, labor contracts, and so on.

·       Improving capital productivity via site configuration, throughput de-bottlenecking, outsourcing, capex controls, working capital discipline, and so on.

Any initiative adopted will need a well-defined project plan incorporating a charter, timelines, milestones, resourcing, accountabilities, measurement mechanisms, involvement model, dependencies, and so on.

Every organization needs to draw up its own portfolio of initiatives to suit its own circumstances. There is no magic formula to follow, but seeing the portfolios of initiatives that other organizations have adopted can help to make the concept more concrete.

Take the experience of EMC, a maker of information storage equipment, as an example. When Joseph M. Tucci became CEO in 2001, the company was posting record losses. Five years later, record losses had turned into record gains, and annual net income was in excess of US$10 billion. So what was the portfolio of initiatives that brought about this remarkable turnaround?

EMC first embarked on a number of cost-cutting initiatives, exiting noncore businesses and carrying out two waves of downsizing. One medium-term initiative was to exploit a previously neglected networked storage product and a newly developed system for retaining and protecting fixed content such as check images, X-rays, and e-mail archives. EMC supported this initiative by developing an integrated solution to combine its range of high- and mid-tier data-storage products with leading-edge software and services. Another initiative involved overhauling its flagship offering to increase the role of software and services in its revenue mix. Building new sales partnerships and distribution channels with Dell and others and acquiring organizations such as VMWare took EMC into less familiar territory that it explored for longer-term impact.3

Another company that adopted the portfolio of initiatives approach was Tata Motors. As we saw in Chapter 3, it had suffered a shocking loss of 5 billion rupees (US$110 million) in 2001, and managing director Ravi Kant and his team had developed a set of aspirations to “stem the bleeding,” consolidate Tata's position in its home market, and expand internationally. These aspirations were translated into a portfolio of initiatives that included slashing costs across the whole supply chain, improving product quality and features, intensifying product development efforts, introducing new sales planning processes built on sharper customer segmentation, tightening credit norms, improving dealer profitability and liquidity, extending the distribution network, and making targeted acquisitions in key markets and segments. Five years later, Tata's fortunes had been transformed, with profits of 19 billion rupees (US$423 million). By then it was the world's fifth-largest manufacturer of medium and heavy trucks, owned a 60 percent share of its home market, and had the second-highest passenger vehicle sales in India.4

The most valuable aspect of the portfolio of initiatives approach to driving performance is that it makes choices explicit, as we saw in P&G's experience at the beginning of the chapter. That means organizations are forced to have robust discussions about what they will focus on—and, equally important, what they won’t. Organizations that pursue too many initiatives can easily lose focus.

So how many initiatives should an organization take on? That depends on its capacity to drive the changes. It will already have a good idea of this from the work it has done during the “assess” stage of the transformation. In our experience, the biggest constraint is likely to be how much time and energy senior managers can devote to sponsoring the effort so that it delivers real impact.

Health: The Influence Model

Once you've decided on the vital few shifts in mindset that you need to make to achieve your performance and health aspirations, your next priority is to devise a set of interventions to influence them. Taking deliberate steps to move the needle on the soft stuff is a vital element in organizational transformations, though it's often overlooked. In our 2010 survey, we asked senior executives if they pursued any initiatives that were intended not to improve performance directly but to change employees’ mindsets and behaviors. Those who did were twice as likely to report that their transformations were successful.

Let's now look at how to influence wholesale mindset shifts in your organization. In doing so, we'll also explore some counterintuitive insights about people's predictable irrationality. Understanding when doing the logical thing might create unintended and unhelpful consequences could save you a lot of time and frustration when you come to pursue your own transformation.

Creating the Right Context

The key to influencing mindsets lies in making meaningful changes to the context in which people work. To see why, imagine that you go to the opera on Saturday and a football game on Sunday. At the climax of the opera, you sit silent and rapt in concentration. At the climax of the football game, you leap to your feet, yelling and waving and jumping up and down. You haven't changed, but your context has—and so has your mindset about the behavior that's appropriate for expressing your appreciation and enjoyment.

To continue with the analogy, organizations that are unhealthy are often caught between an opera house and a football stadium—not a comfortable place to be. Asking employees for a football-stadium mindset is no use if your evaluation systems and leadership actions communicate that your organization is still an opera house. If you want your people to think like football fans, you need to provide plenty of cues to remind them they are in a stadium.

Through years of research and practical application, we have developed what we call the “influence model.” It identifies four major levers that leaders can use to shift employee mindsets on a wide scale (Exhibit 5.2):

·       A compelling story. Can employees say, “I know what is expected of me, I agree with it, and I want to do it?” The key elements in a compelling story are its content, the way it is communicated, and the embedding of its message through rituals.

·       Reinforcement mechanisms. Do the organization's formal mechanisms reinforce the shifts in mindset that employees are being asked to make? To make sure they do, organizations need to link performance and health with rewards and consequences, leverage nonfinancial incentives, and adjust their management processes, structures, and systems.

·       Skills required for change. Do employees have the skills they need to think and behave in the new way? The right skills can be developed by adopting a “field and forum” approach, working on the required relational as well as technical skills, and refreshing the talent pool.

·       Role modeling. Do employees see their leaders, colleagues, and staff thinking and behaving in the new way? Effective approaches to role modeling include having the top team undergo a visible transformation, taking symbolic actions, and selecting and nurturing influence leaders.

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To see how the four elements fit together, imagine that we want you to develop a mindset of “Sky-diving is worth the risk.” To make that happen, we sign up to a charity initiative where for every jump we donate US$100,000 to cancer research, a cause dear to your heart. That makes for a compelling story. We promise to multiply your bonus by 10 this year if you do the jump, but say we'll withhold it altogether if you don’t. To make sure you're safe, we also ensure that you have state-of-the-art equipment. Those are powerful reinforcement mechanisms. In addition, we get a champion sky-diver to give you an in-depth training program. Now you have the skills you need. Finally, your boss and two of your closest colleagues did the same jump last year, and had such a great time and raised so much money for charity that they've agreed to do it again this year. That takes care of role modeling. Wouldn't all those changes make you more likely to adopt the mindset we are looking for? The research on influencing mindset shifts suggests that they would.

Indeed, so strong is the intuitive appeal of the influence model that it can lead managers astray. It's obvious, they think: all we need do is apply the model using plain common sense. But that's not the way to get good results, for the simple reason that people don't always behave rationally. Subconscious thought processes influence our behavior even when a moment of objective analysis would tell us they shouldn’t.

When we're in a hurry, how many of us circle around a parking lot looking for the most convenient space when we'd have been much quicker walking from the first one we saw? Why might we think nothing of spending US$3,000 to upgrade to leather seats for our new US$25,000 car, but consider it extravagant to spend it on a leather sofa that all the family will use every day? Why are we happy to spend a small fortune during the sales, but reluctant to spend so much on full-price goods? How come we'd take home a pencil from the office for our kids without a thought, but be shocked at the idea of raiding the petty cash to buy them one? In certain situations, we are all susceptible to irrationality in our decision making.

Don Ariely, author of Predictably Irrational, drives this point home by showing his audiences an optical illusion.5 It's a powerful way to demonstrate that knowing something to be true doesn't necessarily make people believe it—a prime example of irrationality. Have a look at the two tables in the picture. Which is longer? Easy: the one on the left. Now take out a ruler and measure them. Lo and behold, they are exactly the same length. Now look at the picture again. Which table is longer? Still the left! It's as if you've not learned anything in the past few seconds.

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How do we know which table you see as longer? Because there are certain predictable ways in which our eyes deceive us, and this is one of them. What's most striking about optical illusions like the “two tables” or Shepard illusion is that processing visual information is one of the things human beings do best: the visual cortex is the biggest part of the brain. So if we make mistakes in vision—something that by and large we are very, very good at—what are the odds we'll make mistakes in something that we aren't so good at, like change management?

The social, cognitive, and emotional biases that lead to irrational decisions are already well understood in the field of economics. In our view, it's high time they were also appreciated in the field of change management. With that in mind, our exploration of the influence model looks at areas of human irrationality that any effective change program will need to take into account.

A warning: Dealing with the irrational side of change is not easy. As Nobel laureate Murray Gell-Mann once said, “Think how hard physics would be if particles could think.”

Now let's look at each of the four dimensions of the influence model in turn.

A Compelling Story

The first lever for influencing mindsets is to create a compelling story and tell it whenever you can, wherever you can, and to whomever you can. That's because people need to understand not just the facts about the change you're planning, but the thinking behind it. The advantage of a story—as opposed to a report or an analysis—is that it can convey emotions as well as facts. For that reason, we respond to it in a different way; we don't just process the information intellectually, we relate it to our personal experiences and beliefs.

The work of Stanford social psychologist Leon Festinger demonstrates the great need people have to align their actions with their beliefs. Half a century ago, Festinger proposed the theory of “cognitive dissonance”: he observed that individuals seek consistency among their thoughts, opinions, and beliefs (or cognitions), and try to eliminate any inconsistencies or dissonance between them. Festinger noted, “It's difficult to behave in a different way if the behavior is inconsistent with your view of the world.” Seen in this light, the purpose of a compelling story is to give people a clear view of what's possible for their organization in the future, and to prepare them for the role they are expected to play in creating that future.

According to our survey, programs that communicate an emotionally compelling narrative about the transformation are 3.7 times more likely to succeed than those that don’t. The secret of telling a compelling story is to get the content right, to adopt the right storytelling process, and to embed the story in the organization's language and rituals.

WHAT'S THE STORY?

We use stories to transmit meaning. Every transformation needs a story that explains why the change makes sense both for the organization as a whole and for the individuals in it. Indeed, so great is this need that if the leader doesn't provide a story, employees will create their own. For instance, an innocent comment from a leader about the need to be more cost conscious can spark near hysteria as it spreads through an organization. Before long, it can turn into a story like “All the work in our division is going to be outsourced and we'll all lose our jobs.” Sounds far-fetched? Not at all—we've seen it happen.

With better communication, this kind of misunderstanding would never have arisen. Good change stories use language that is concrete, evocative, and immediate. They answer employees’ fundamental questions: Why do we have to change? What are we changing to? How do we get there? By when? (A fuller list of questions appears in Exhibit 5.3.)

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In addition, stories operate at an emotional level by revealing what the transformation means to the person who tells the story, and clarifying “gives” (“What changes am I expected to make?”) and “gets” (“What's in it for me? How will I be supported? What won’t change?”). A story helps employees to see the objectives they are working toward and shows them how the tiny changes they make in their day-to-day working lives will benefit the whole organization. As Corrado Passera, the CEO of Italian bank Banca Intesa, notes, a good story is “not like an analyst's presentation, with figures and graphs,” but is rather “a book written in human language, telling people where we were, where we wanted to go, and how we were going to get there.”6

This much is hardly news to savvy business leaders, you might think. But there's more. To achieve maximum impact, stories need to be carefully framed to appeal to their audience on several different dimensions at once. Not many leaders realize that. As a result, they tend to fall back on a couple of classic narratives. One of these narratives is “good to great,” which goes something like this: “Our historic advantage is being eroded by intense competition and changing customer needs. If we change, we can regain our leadership position, dominate the industry for the foreseeable future, and leave our competitors in the dust.”

The other narrative is “the turnaround,” which goes something like this: “We're performing below the industry standard, so we need to transform ourselves to survive. Incremental change won't be enough; investors won't keep pouring money into an underperforming company. Given our assets, market position, size, skills, and staff, we can do much more. We can become a top-quartile performer in our industry by exploiting our current assets and earning the right to grow.”

These stories seem plausible enough, so what's wrong with them?

Research by a number of leading social scientists such as Danah Zohar, Chris Cowen, Don Beck, and Richard Barrett suggests that such stories tap into only a fraction of the energy that people can bring to change.7 That's because these classic narratives revolve around the company—beating the competition, leading the industry, attracting investors—which is only one of the sources of meaning that motivate people to change. There are at least four others. People also want to hear about the impact changes will make on society (improving people's lives, building a community, stewarding resources), the customer (providing superior service, better products, closer relationships), the working team (creating a sense of belonging, a caring environment, harmonious working conditions), and me personally (better development opportunities, increased pay and bonuses, more empowerment to act).

In surveys of hundreds of thousands of employees to discover which of these five sources of meaning motivates them most, the surprising result is a consistently even 20 percent split between dimensions. Regardless of level (senior management to frontline), industry (health care to manufacturing), and geography (developed or developing economies), the split stays broadly the same.

The implication for leaders is profound. It suggests that what they care about and typically put at the heart of their story—namely the company—will tap into only about 20 percent of what motivates their workforce. To get people truly on board, leaders need to be able to add that missing 80 percent and draw on all of the sources of meaning that their employees care about. In other words, they need to be able to tell five stories at once. If they can pull that off, they'll unleash tremendous amounts of energy in the organization. But if they can’t, it will remain latent.

When a large U.S. mortgage company embarked on a program to increase its efficiency by reducing overheads and reengineering processes, it devised a story that ticked all the boxes according to conventional wisdom on change management. Costs were up and revenues were down, so the burning platform seemed obvious, and so did the message: if we don't get leaner, we won't survive. Three months into the effort, though, the story didn't seem to be working. Employee resistance was holding the program back. Hardly anyone was submitting improvement ideas, and people were still keeping performance information to themselves.

Desperate to break through the barrier, the team recast the story. Instead of focusing on the company's need to stem the unsustainable growth in expenses, they broadened the story out to include elements on the missing four factors. The new story touched on the benefits change would bring for individuals through the creation of bigger, more attractive jobs and opportunities to shape the whole organization. It touched on a better life for working teams, with less duplication of effort, greater delegation of responsibility, and a stronger sense of accountability. It touched on the improvements that customers would experience in the form of greater simplicity, fewer errors, and more competitive prices. And it touched on the benefit for society: affordable services that would enable more people to own their own homes.

This simple and easy-to-achieve shift in approach had a dramatic impact. Within a month, employee motivation levels had soared from 35 percent to 57 percent. What's more, the program went on to achieve efficiency improvements of 10 percent in the first year—far surpassing the company's initial expectations.

We should make it clear that “telling five stories at once” is not about spin. The message that a leader communicates must be true to the actions being taken. It must also offer reasons for those actions that are wholly credible and likely to appeal to different perspectives. And it must be sincere. John Mackey, CEO of Whole Foods Market, notes that any “lack of honest, authentic communication and transparency usually boomerangs … and undermines trust and creates cynicism.”8

HOW SHOULD WE TELL THE STORY?

Too often, executives make the mistake of not communicating the change story enough. That's because they fall victim to the phenomenon known as “the curse of knowledge.” Because they themselves know the story inside out, they assume that other people will take it in quickly and see all the implications that they can see. But that's not how it works. When people hear a story for the first time, they are so busy processing what they hear and trying to work out what it means that they can't possibly appreciate all the nuances. Leaders who have to tell and retell a story over and over again can easily lose sight of what it's like to hear the story for the first time.

Consider an experiment that involved a group of people divided into two sets, “tappers” and “listeners.”9 Tappers were asked to beat out the rhythm of a well-known tune such as “Happy Birthday to You”; listeners had to guess what it was. Tappers were asked to predict what proportion of their listeners would guess correctly. They predicted half; the actual result was just 2.5 percent. Only one person in 40 correctly identified the tune.

Why the huge gap between expectation and reality? It's because once we know something, we find it incredibly hard to imagine not knowing it. It's easy for us to hear the tune as we tap, but the listener hears only a sequence of apparently random beats. Similarly, leaders must take care that the carefully crafted messages that make so much sense to them aren't heard by employees as a string of seemingly disconnected ideas.

One of the choices leaders must make when telling a story is which channels to use: speech, print, online channels, actions, symbols, new-minted language, and so on. Using multiple channels enables leaders to show that there is a consistent message. Employees may hear from their leader at an off-site working session that a transformation is under way, then read about it on the company home page as they log in. At lunch, they see posters on the walls. At home, they read about the plans in the press. As time goes on, they notice how the environment is changing. People work in open-plan offices, not behind closed doors. The corporate jet goes up for sale. All of these things combine to convince employees that the story is real.

As well as deciding how to tell the story, leaders need to think about when: do we launch it at a big event, for instance, or should we let the narrative unfold gradually? The best approach depends on the circumstances. In an organization that has already gone through multiple change programs, a gradual approach may be advisable. For organizations that need to change fast, it will probably make sense to go for the “big bang” option.

A key characteristic of a good change story is that it encourages employees to feel a sense of authorship, like the lottery-ticket writers in Chapter 3. That's the thinking behind the “interactive cascade” approach illustrated in Exhibit 5.4, which turns writing and telling a story into a job for people at every level of an organization.

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The story cascade begins with the senior leader writing down their own story about why the transformation is necessary, how it will be accomplished, why they are personally committed to it, and what they need to change in their own thinking and behavior to make it happen. The CEO then tells this story to direct reports, who ask questions and discuss what transformation means for them and for their areas of responsibility.

Once they fully understand the story and its implications, these managers write a version of their own that will make sense to their teams. They tell it, and then the team members who have heard the story tailor it to their areas in turn. Level by level, the process cascades throughout the whole organization. Being involved in writing the story builds conviction among the “authors” as well as ensuring that the story is applicable to every part of the organization and every person in it.

One company that has used the cascade approach successfully is Symantec, the manufacturer of Norton antivirus software and a global leader in IT security, storage, and systems management. After senior managers had spent several months defining a transformation story, they held a series of four-day events to communicate it to the company's 14 divisions. During the first two days of each event, managers were exposed to the new strategic vision, the core initiatives, and the values, behaviors, and culture that the company wanted to develop. The managers also grappled with the question “What does it mean for us in our division?”

In the last two days of each event, everyone in the division right down to the front line came together to translate the company's direction into job-level objectives for all employees. The entire process was completed in 13 weeks, and then the content from the cascades was built into the company's orientation program for new hires.10 The impact was felt almost immediately. Symantec went on to gain the number one spot in the worldwide security market, and increased its market share by 6 percent within a year.11

Cascading the story in such an interactive way undoubtedly takes longer than pushing it directly through the organization. However, savvy leaders realize that even if it takes twice as long, it's likely to have far more impact in building people's commitment to the outcome. Indeed, if the lottery-ticket experiment is any guide, the impact could be as much as five times higher— which makes the cascade approach a solid return on investment by any standard.

HOW DO WE EMBED THE STORY?

To have a sustained effect, the change story must be told over and over again to remind employees where they are heading, and to highlight places where the transformation is already achieving results. Recognizing how important this is, organizations such as technology company 3M and NASA (National Aeronautics and Space Administration) go to the lengths of building storytelling skills into the curriculum of their leadership development programs.

At 3M, the business units abandoned conventional business plans in favor of business narratives. These narratives set the scene, state the challenges, and finally offer possible resolutions. When the organization re-located its U.K. headquarters in 2003, it asked employees to help create a story about what the new office would look and feel like for a customer and an employee. The story was repeated to the wider workforce through town halls, artists’ interpretations, and written communications.

When NASA was approaching its fiftieth anniversary, it approached a master storyteller to turn its history, achievements, and future challenges into a compelling narrative. The story then became a play and was performed for employees. NASA also shares knowledge in story form in its ASK (Academy Sharing Knowledge) magazine, a compendium of vivid first-person stories told by NASA project managers about the work they have been doing.12

When we are telling stories, the words we use are critical. As Robert Kegan and Lisa Lahey write in How the Way We Talk Can Change the Way We Work, “Leaders have exponentially greater access and opportunity to shape, alter, or ratify the existing language rules. We have a choice whether to be thoughtful and intentional about this aspect of our leadership.”13 Choosing the right words is just as important when you are telling employees how you see the future of the organization as it is when you are making a presentation to investors or launching an innovative new product in the marketplace.

Capturing a key message in a memorable phrase is a good way to make it part of the culture. Consider Walmart's “10-foot rule,” which reminds frontline employees of the company's customer service aspiration: whenever you are within 10 feet of a customer, look them in the eye, smile, and ask how you can help. For phrases to be memorable, they must be simple. As Willie Walsh, CEO of British Airways, explains, “The simpler the message, the easier it is to deliver. The simpler the message, the more likely it is to be consistent. The simpler the message, the easier it is to control and manage the communication.”14

The language not used can be just as powerful. When Australian telecommunications and media company Telstra wanted to improve internal collaboration, it banned people from using the word “they” in conversations about other teams and units so as to remind employees to work as one organization. Posters proclaiming “No ‘they’ ” appeared everywhere, and people started to call attention to references to “they” and “them” even in casual conversations.

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Stories can also be embedded through a company's rituals. Consider the “Workout” town-hall meetings that GE holds to promote continuous improvement, as mentioned in Chapter 3. After groups of employees have spent a couple of days brainstorming, they take part in a review session where they present ideas to the plant manager and his or her boss. The employees present one idea after another, and the plant manager has to approve or reject them on the spot. Any idea that gets the green light is implemented according to an established process. The ritual is a power-ful way to make sure that plant managers know their business, and that employees have the scope and skill to develop and present ideas. Having the plant manager's boss in the room signifies that the ritual is taken seriously.

Some manufacturing and mining companies make a point of opening all meetings with an announcement about emergency exits and safety hazards. Viewed as a one-off activity, this might seem a waste of time given that serious accidents don't often happen in meeting rooms. Regarded as a ritual, however, it serves a valuable purpose in reinforcing the mindset that safety matters.

When we were on our way to a meeting at Shell one day, an executive asked us to hold the handrail as we climbed the six steps to the imposing front door. Strange though the request seemed at the time, it was a great example of walking the talk.

Reinforcement Mechanisms

The second lever that leaders can use to influence shifts in mindsets is formal reinforcement mechanisms. Unless individuals feel they have support from their organization in transforming their mindset and behavior, the result will be massive cognitive dissonance: the feeling that “I'm being asked to do one thing but rewarded for another.” As Paul Allaire, former CEO of Xerox, notes, “If you talk about change but don't change the recognition and reward system, nothing changes.”15

B. F. Skinner and other behavioral scientists have argued that human behavior is a reaction to stimuli such as praise, rewards, punishments, and so on. When the stimulus changes, so does the behavior. According to Skinner, our environment sends us signals that make us more likely to behave in certain ways. However, fixed rewards and consequences lose their power to shape behavior over time. This limits the long-term impact of reinforcement mechanisms, which must be used in conjunction with the other three levers if they are to remain effective.

In practical terms, the key reinforcement mechanisms to put in place are linking performance and health to rewards and consequences, leveraging nonfinancial incentives, and adjusting management processes, structures, and systems.

LINKING PERFORMANCE AND HEALTH TO REWARDS AND CONSEQUENCES

As the U.S. novelist Upton Sinclair observed, “It is difficult to get a man to understand something if his salary depends upon him not understanding it.”16 It's hardly news that financial reward has a big effect on our behavior. Yet not all change programs create a direct link between the organization's aspirations and the incentives and performance targets that it gives to individual employees. Those that do are four times more likely to be successful.

So our advice would be to hardwire the mindset changes you want to see into the rewards and consequences you offer your employees. A straightforward mechanism for doing this is illustrated in Exhibit 5.5. The matrix is used to evaluate individuals in terms of both their business results (the horizontal axis) and their leadership behaviors and ability to “live the values” (the vertical axis). Each cell in the matrix carries clear implications for a set of rewards and consequences. The rewards include short-term incentives, promotions, and high-profile special assignments, and the consequences include formal warnings, remedial coaching, and demotion or termination.

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We arrived at a nine-cell matrix after trying out a range of options. We found that using fewer than nine cells offers too little differentiation, demotivating high performers and putting insufficient pressure on low performers. Conversely, using more than nine cells introduces too much complexity.

Assessing how well an individual has delivered against expected business results is generally straightforward: it involves reviewing actual results against predetermined targets in terms of key indicators such as increasing sales, meeting budgets, and maintaining quality levels. However, a complication sometimes arises when employees don't have the necessary decision rights to influence their targets. For example, if a safety manager has the authority to report how safe the workplace is but not to design and enforce programs to make it safer, then it's hardly fair to hold that manager personally accountable for the company's overall safety record. People must have the power to make the decisions that affect the outcomes for which they are accountable.

Where decision rights and accountabilities are blurred, companies can use a tool called the RACI matrix to bring clarity. The matrix has five columns. Column one is for listing key decisions and activities; column two is headed “Responsible” (referring to the person who makes a recommendation on a decision or course of action and is tasked with executing it); column three is “Approval” (the person who approves the recommendation); column four is “Consult” (those who need to be consulted before the recommendation is made); and column five is “Inform” (those who are informed of the decision or actions afterward, and shouldn't expect to be involved in advance). By putting the relevant names in each cell, an organization can clarify where roles and responsibilities lie for particular decisions or actions.

Clarifying decision rights and aligning them with accountabilities is one essential step for organizations using the matrix in Exhibit 5.5. That step ensures that the business results axis can be evaluated fairly. But what about the leadership behaviors axis?

The key here is to be explicit about the expected leadership behaviors. Although it can be tempting to use an off-the-shelf model of leadership competency for this purpose, we advise organizations to create a leadership standard or model that is tailored to the mindset shifts they seek to achieve.

Exhibit 5.6 shows a sample leadership standard for an organization that has set its sights on six mindsets: results orientation, accountability, innovation, trust, collaboration, and passion. The organization has then translated these mindsets into specific observable behaviors. To evaluate an individual using the leadership standard, it gathers feedback about the extent to which they exhibit the desired behaviors from their peers, subordinates, and, if appropriate, external or internal clients, as well as their manager (or managers, in a matrix organization). From these many points of view, a clear pattern will typically emerge, enabling the organization to give the individual robust feedback and an objective evaluation.

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Leaders need to face up to the fact that even when the organization's rewards and consequences are brought into line with its aspirations for change, some individuals may remain fixed in unconstructive mindsets. This means they will need to be dealt with—and the higher up they are, the more important this is.

Successful leaders don't shy away from this challenge. Cisco CEO and chairman John Chambers is known for withholding managers’ bonuses if their behaviors aren't in line with expectations, even if they deliver results. Joseph M. Tucci, CEO of EMC, talks about “sorting out the skeptics from the cynics. The skeptics are your best allies, and the challenge is to win them over, to show them that the new habits are good and that it's ultimately their choice to adopt them. … The cynics are the real hardcore, arrogant individuals, and you have to get rid of them.”17 Dismissing employees is never easy, but as GE's Jack Welch reflects, “Anyone who enjoys doing it shouldn't be in the job, but nor should someone who can't do it.”18

LEVERAGING NONFINANCIAL INCENTIVES

Leaders of organizations that sustain excellent performance don't wait for formal reviews to reward desired behaviors. Nor do they rely exclusively on financial rewards. Offering big bonuses is the most costly way to persuade people to change. Other methods can be just as effective.

Researchers in one study measured how much a small unexpected gain increased people's satisfaction with their lives. In the experiment, a group of people were using a photocopier. Half of them found a dime in the coin return slot. When asked to rate their satisfaction level, those who got a dime scored an average of 6.5 on a 7 scale, while those who didn't scored 5.6.19

Why did such a tiny reward produce such a huge difference? It's been said that satisfaction equals perception minus expectation. If we aren't expecting a reward, even a small one can have a disproportionate effect on our state of mind. That's also true of employees during a change program.

When Continental Airlines made it to the top five for punctuality, CEO Gordon M. Bethune sent a US$65 check to every employee in the company. At ANZ Bank, John McFarlane gave every employee a bottle of champagne for Christmas with a card thanking them for their work on the change program. The CEO of Wells Fargo, John Stumpf, marked the first anniversary of its change program by sending out personal thank-you notes to all the employees who had been involved. Indra Nooyi, CEO of PepsiCo, goes so far as to send the spouses of her top team handwritten thank-you letters. After seeing the impact of her success on her mother during a visit to India, she began sending letters to the parents of her top team as well.

Some managers might dismiss these rewards as token gestures with at best a limited impact. Employees on the receiving end would beg to differ. They say that the resulting boost in motivation can last for months if not years.

So why are these rewards so powerful? It's because employees perceive them as a form of social—as opposed to market—exchange with their organization. To see the difference, imagine you are invited to your mother-in-law's house for a special dinner. She has spent weeks planning the meal, and all day cooking. After dinner you say thank you and ask how much you owe her. How would she react?

Chances are she'd be mortified. The offer of money changes the experience from a social interaction built around a reciprocal long-term relationship to a market transaction that is financially based, shallow, and short-lived.

But what if you had brought your mother-in-law a bottle of wine as a contribution to the feast? She'd probably have accepted it graciously. The offer of a gift rather than payment indicates that social and not market norms are in play.20

Consider another example. A daycare center decided to impose a US$3 fine when parents were late picking up their children. Instead of encouraging them to be punctual, it had the opposite effect. Late pickups went through the roof. Why so?

Before the fine was imposed, a social contract existed between daycare staff and parents, who tried hard to be prompt and felt guilty if they weren’t. By imposing a fine, the center had inadvertently replaced social norms with market norms. Freed from feelings of guilt, parents frequently chose to be late and pay the fine—which was certainly not what the center had intended.21

When it comes to change, using social rather than market norms to shape behavior is not only cheaper, but often more effective. The American Association of Retired Persons once asked some lawyers if they would offer their services to needy retirees at a cut-rate price of around US$30 an hour. The lawyers declined. Then the AARP asked if they would offer their services for free. Most of the lawyers agreed.

So what was going on here? When compensation was mentioned, the lawyers applied market norms and found the offer lacking. When no compensation was mentioned, they used social norms and were willing to volunteer their time.

Reinforcement mechanisms need not always be material. Public recognition by peers and superiors has a powerful motivating effect. When Infosys Technologies hands out awards to recognize exceptional performance, it invites the nominees to present their work to a big audience that includes management council members and employees from all locations. This not only gives the award winners senior exposure and peer recognition, but serves as a role-modeling exercise and a demonstration of the value placed on behaviors such as collaboration and teamwork.

And let's not forget that words can be the most persuasive motivators of all. As Sam Walton, founder of Walmart, put it, “Nothing else can quite substitute for a few well-chosen, well-timed, sincere words of praise. They're absolutely free—and worth a fortune.”22

ADJUSTING STRUCTURES, PROCESSES, AND SYSTEMS

The structures, systems, and processes that underpin the activities of day-to-day working life have a profound influence on employees’ mindsets and behaviors.

When a multinational energy company decided to instill a mindset of accountability, it reorganized around a larger number of P&Ls, creating dozens of business units where before there had been just a few. This was designed to give more leaders full control of the levers that drive performance so that they would have no excuses when it came to the results they posted. The company also wanted to encourage a collaborative mindset, so it expanded job descriptions to ensure that leaders from similar business units met regularly to discuss the strategic and technical challenges they had in common.

Organizations need to think about adjusting their systems as well as their structures. Do you want your frontline employees to develop customer-centered and empowered mindsets? Then give them customer relationship management (CRM) systems to help them engage with customers. Do you want your managers to become more attuned to people development? Then give them ready access to information about career opportunities.

Even seemingly innocuous systems can have a surprisingly powerful effect on mindsets. When PricewaterhouseCoopers was making the transition to a more entrepreneurial culture, one partner complained that although he liked what was happening, he felt he was treated not like a partner but like a salaried employee. If he wanted to give his assistant flowers for working until midnight, he needed three signatures for the expenses system. If he wanted to meet a client in another city, that was another three signatures. He felt he wasn't trusted. It had never occurred to anyone that the expenses system was transmitting powerful behavioral cues that were incompatible with an entrepreneurial culture. To prevent mishaps like this, organizations need to review their reinforcement programs regularly, and revise them when necessary.

Processes can have a potent effect on mindsets, too. Consider the annual planning process. Managers often see it as the place where the rubber meets the road in terms of balancing short-term performance with long-term investment and showing the value that's placed on collaboration, honesty, and transparency.

To promote the mindset that long-term considerations are just as important as short-term issues, Emerson Electric, a provider of engineering services and one of the largest conglomerates in the United States, split its annual review cycle into two sets of dialogues. One examines how operational improvements can be achieved through initiatives in compensation management, productivity, asset management, and other areas. The other focuses on capturing long-term growth by expanding market share, introducing new products, reexamining channels and marketing, pursuing M&A, strengthening talent, and building capabilities.

Talent management processes such as recruitment, selection, induction, career paths, on-the-job development, formal training, and succession planning also send powerful signals that shape mindsets. Savvy leaders take every opportunity to use these processes to support the changes they want to see. One way to boost collaboration is to encourage high performers to make frequent moves between businesses so that they can develop skills and networks that help them solve problems across the organization. Orientation processes for new employees can be updated with new modules that showcase the desired culture and tell stories about what it feels like from the inside.

Similarly, career paths can be shaped to reflect new priorities and values. At companies such as 3M and oil and gas company Petronas, a “dual ladder” system of parallel career paths—management and technical—reinforces awareness that scientific innovation is central to the business. Even small actions, such as using a promotion announcement to comment on the behavior that earned the promotion, can have a discernible effect on mindsets.

Beyond talent management and planning, many other processes can influence mindsets and behaviors. Consider the public sector organization that decided to abandon the 1,500 pages of supply-chain reports it produced every month. It replaced these towering stacks of paper with a weekly meeting of 20 people from key areas in the supply chain. Each week, the group discusses how to keep improving the time from demand to delivery, and keeps a sharp eye on last week's results as well as longer-term trends. The new process encourages participants to develop new mindsets such as not tolerating bureaucracy, taking an end-to-end view of customers, and valuing collaboration. Introducing the process had a huge and immediate impact on performance, shaving more than 70 percent off delivery times in just three months.

It's worth bearing in mind that formal processes can affect mindsets and behaviors by their absence as well as their presence. Netflix, an online DVD rental company and video-streaming service, has no formal policy on vacations, for instance. Chief talent officer Patty McCord wryly observed, “There is also no clothing policy at Netflix, but no one has come to work naked lately.” Organizations don't need detailed policies to cover every eventuality. Doing without them can help to stem bureaucracy.

When revamping structures, processes, and systems, savvy leaders go out of their way to ensure that employees see the changes as fair. One bank undergoing a major change program learned this the hard way. Having decided that its pricing did not fully reflect the credit risk it was taking on, it created new risk-adjusted rate-of-return models and new pricing schedules for frontline staff to follow. At the same time, it adjusted sales incentives to reward customer profitability rather than volume.

The result? Customers (profitable as well as unprofitable) deserted in droves. Price overrides soared, destroying a great deal of value. So what had gone wrong?

Looking at what's called an “ultimatum game” can offer us a clue. We give player A US$10 and explain that the money has to be shared with player B. Player A has to propose how the money is split, and if player B accepts the offer, they both get the agreed shares. If B rejects the offer, though, no one gets any money. Studies show that if player A offers a US$7.50/US$2.50 split, player B will reject it more than 95 percent of the time, preferring to go home with nothing than see someone else get three times as much for no good reason. And that isn't because the absolute sums are so small: even when the money on offer is the equivalent of two weeks’ pay, the results are similar.23

There's a clear message here for organizations planning change. If employees are put in a position that violates their sense of justice and fair play, they will act against their own self-interest, and against whatever formal incentives are in force. This may seem irrational, but it's entirely predictable.

Let's go back to the bank. When it raised its prices and adjusted its sales incentives, frontline staff thought it was being unfair to customers—a case of greedy executives losing sight of customer service. Even though they were putting their own sales targets in jeopardy, many bankers bad-mouthed the new policies to customers, choosing to take their side rather than the bank’s. They also used price overrides to show good faith to customers and take revenge on the “greedy” executives.

Ironically, their perception of injustice was misdirected. Customers were, after all, only being asked to pay a price commensurate with the risk the bank was taking on. The whole sorry saga could have been avoided if the bank had only paid enough attention to employees’ sense of fairness when it was developing the communications and training that accompanied the price changes.

Skills Required for Change

The third lever that leaders can use to shape mindsets relates to the skills people need before they can change. Employees must be confident in their ability to think and behave in the way their leaders desire. As individuals, we like to do things we feel competent at, especially when others are watching. Those of us with no natural ability may try to avoid dancing, for instance, unless we've been talked into it or lost our usual inhibitions.

Academic support for the importance of this lever comes from a number of sources, including adult learning theorist David Kolb and organizational psychologist Chris Argyris, in work related to experiential and action learning. However, the “expectancy theory” of educational psychologist Victor Vroom is perhaps the most relevant thinking in this area. Vroom believes that if management wants to motivate employees, it must do three things: first, discover what employees value; second, discover what resources and skills employees need; and third, deliver on promises of rewards and make sure employees know about it. He thus puts building skills on an equal footing with offering rewards and tapping into employees’ passions.24

Our survey confirms the importance of building skills: those change efforts that do so are 2.5 times more likely to succeed. In practice, we have found there are three key factors for success: adopting “field and forum” approaches, addressing both technical and relational skills, and augmenting the talent pool where necessary with skills from outside the organization.

THE “FIELD AND FORUM” APPROACH

A Chinese proverb makes a good point about learning new skills: “Tell me and I'll forget; show me and I may remember; involve me and I'll understand.” Studies of adult learners have established that if they take part in speech-based training sessions such as lectures, presentations, demonstrations, and discussions, they retain only 10 percent of what they have learned after three months. When they instead learn by doing—through role plays, simulations, or case studies—they retain 65 percent. And when they take what they have learned in the classroom and immediately put it into practice for a few weeks at work, they retain almost everything.25

Aware of the need for practical application, many organizations duly pack their skill-building programs with interactive simulations and role plays in a bid to ensure that time spent in the classroom is as effective as it possibly can be. Participants are often asked to make commitments about the actions they will take back to the workplace to embed their learning (“My Monday morning takeaway is …”). So far so good—except that come Monday morning, very few do what they have promised.

The gap between intention and action is highlighted in a social science experiment carried out at a Princeton theological seminary.26 Students were asked questions about their personalities and religious beliefs before being sent across the campus. On their way, they encountered a stranger who was slumped over, groaning, and asking for help. Did the students who classed themselves as nice people help more? Not at all. Nor did those who professed religious commitment.

The only factor that had much bearing on the students’ behavior was how much time they had. Half the students had been told they were late for an appointment on the other side of the campus; the others believed they had plenty of time. Sixty-three percent of those with spare time helped, as opposed to just 10 percent of those in a hurry. When short of time, even those with religious leanings didn't stop to help.

Human nature being what it is, we can't expect employees to practice new skills and behaviors in the workplace unless there are formal measures to encourage them to do so. No matter how good their intentions are, busy executives, like the seminary students, simply don't have the time and energy to learn to perform an activity in a new way or tackle an extra set of tasks, especially when they are playing catch-up after days away on training programs. Organizations that fail to create space for practice back in the workplace shouldn't be surprised if their training programs don't achieve the impact they intended.

In our view, day-to-day practice needs to become a fixture in the skill-building process. First, training shouldn't be a one-off event. We recommend a “field and forum” approach in which the forum—classroom training—is spread over a series of sessions and interspersed with fieldwork. Second, since skills are best learned through real-life application, trainers should set fieldwork assignments that are directly linked to participants’ day jobs. People should practice new mindsets and skills in contexts for which they are accountable. Assignments should have outcomes that can be measured to indicate the level of competence participants have reached, as well as certification that recognizes and rewards the skills they have attained.

One manufacturing company employed such an approach to build lean skills in its workforce. The first forum focused on core skills and mindsets related to performance improvement. The fieldwork that followed involved meeting targets for cost, quality, and service over a three-month period. Anyone who made the grade was awarded a “green belt” in lean.

The next forum sought to develop deeper skills in designing technical systems and leading projects and teams. The fieldwork included redesigning areas of the plant floor and overseeing teams dedicated to specific improvements. Quantitative targets were set in terms of financial results and people and project leadership. Those who achieved these targets became “black belts” in lean.

The final forum built advanced skills such as shaping plantwide improvement programs to address strategic issues, applying improvement concepts to complex operations, and coaching and mentoring. As before, fieldwork was used to put these lessons into practice. Those who met the quantitative improvement goals emerged from the program as “master black belts.”

PepsiCo adopts a field and forum approach in its Strategic Customer Leadership Forum, a program to help high-potential talent develop business knowledge and innovation skills. Participants attend a three-day classroom-based course where they work in teams on a business simulation. Teams are then assigned a high-profile executive sponsor who specifies a business development project for them to work on during the fieldwork phase. They spend six months developing these projects, with their executive sponsor providing mentoring and support. The program culminates with a final meeting where projects are presented to an executive panel and moved through to implementation.

Project pilots and final implementation have both delivered substantial benefits for PepsiCo. One team that worked on analyzing the company's relationship with Walmart identified an opportunity to market directly to the retailer's Hispanic customers. A seven-week trial resulted in a 50 percent growth in Walmart's sales of PepsiCo brand products, and a 45 percent increase in its net profits for Quaker, Tropicana, and Gatorade products.27

An Indian wholesale bank also adopted a field and forum learning program in combination with coaching and facilitation. At the first forum, the top 80 leaders were asked to review raw data from a strategic assessment, decide what the bank should do, and identify which behavioral changes would be needed. Smaller working groups then formed around each opportunity and were supported through real-time skill building in key behaviors such as engaging customers in discussions and collaborating with central product departments. This effort involved additional facilitated forums that introduced new concepts, explored them through role play, and then took them out into the world through fieldwork, with experienced coaches on hand to help leaders and teams reflect on and learn from their experiences. The feedback on the program was extraordinary. One participant said, “I have learned more in this program than in all of my career to date. In a very short time I have built a number of new skills that will be vital to lead the company into the future.”

When skill building is done well, employees move through the full adult learning cycle from being unconsciously unskilled (“I didn't know this was important”) to consciously unskilled (“I realize this is important and I can improve my performance”) to consciously skilled (“I can do it if I concentrate on it”) and finally to unconsciously skilled (“It comes naturally to me”). Once people reach the last stage, applying the skill takes little effort. That means they can put more energy into improving other skills that need work.

Learning to drive is a good example of the learning cycle in action. Some of us make the move from being unconsciously unskilled to consciously unskilled as teenagers, when it dawns on us that having to rely on our parents to act as taxi drivers is holding back our social life. Whatever our motivation, the first few months of learning will require our full attention: checking the mirrors, remembering to signal before turning, working out who has priority at a junction. With time and practice, we gradually become consciously skilled.

As we gain more experience, we find that driving requires less effort. We seem to be able to do everything we need to do without having to think about it first. Now we've become unconsciously skilled. At this point we can get from A to B safely while having a conversation, eating a snack, consulting the satellite navigation system, or even thinking up great solutions to nagging issues from work. Of course, multitasking while driving can be taken too far—you wouldn't want to cause an accident—but under normal conditions an experienced driver will be able to drive safely without having to concentrate as single-mindedly as a learner would.

Formal training programs are not the only way to build the skills required for change, of course. Other common approaches include introducing job rotations, offering informal coaching and feedback, setting up a mentoring scheme, and assigning special projects. One of the benefits of the field and forum approach is that it can serve as a device to bring together multiple approaches like these into a coherent program. For example, managers who are rotating into new roles or taking on special projects can learn about these opportunities in a forum and then apply what they have learned in fieldwork coupled with coaching and mentoring, 360-degree feedback, and so on.

TECHNICAL AND RELATIONAL SKILLS

As Peter Gossas, president of Sandvik Materials Technology, a manufacturer of high-performance metal and ceramics products, notes, “Change must be driven by developing competence within the organization.”28 When it comes to shifting mindsets, relational skills are often more important than technical skills, though both need to be addressed.

Take an organization targeting a customer-service mindset. Frontline staff may need to develop their relational skills to help them pick up cues about the kind of behavior that particular customers would prefer. Do they want to cut straight to the transaction? Or would they prefer to exchange small talk first to establish a personal connection? On the other hand, an organization that needs to strengthen its performance ethic may need to help managers build their skills in coaching and conducting performance dialogues so that their interactions with employees come across as honest and compassionate rather than sugar-coated or harsh.

There are many more examples. If an organization is too inwardly focused, it will need to improve its ability to draw insights from outside, perhaps by honing its skills at segmenting customers and understanding their buying decisions. If empowerment is an issue, employees may need to develop problem-solving skills to help them find opportunities for improvement. These skills could include learning how to break down a problem into its component parts, how to generate hypotheses for addressing them, and how to test the hypotheses through analysis.

Motorola, a provider of telecommunications equipment, created a vice presidents’ institute to help senior leaders deepen their technical and relational skills in the areas of collaboration (to foster networks across businesses) and innovation (to find ways to invent new technologies and businesses). Infosys has created the world's largest corporate training facility in Mysore, India to help people develop the skills they need for change. One of its projects provides high-quality training in technology competency; another seeks to develop the client-focused mindsets and skills at deploying institutional knowledge that are suited to a global consulting organization.

How are relational skills built? The short answer is: by developing emotional intelligence. In the 1990s, Daniel Goleman analyzed the difference between “good” and “high” performers in thousands of positions in hundreds of companies.29 He found that 90 percent of the difference related to emotional intelligence—EQ, not IQ. Goleman identified five characteristics that contribute to emotional intelligence: self-awareness, self-regulation, motivation, empathy, and social skills. Further studies carried out at PepsiCo found that in comparable bottling plants, teams with the highest EQ performed 20 percent above the norm, while those with the lowest rating performed 20 percent below.

Goleman's most important discovery, however, was that EQ is learnable. If leaders reflect on their own capacity for the five elements that make up EQ, they can improve their ability to connect with others at an emotional level and so adopt the personal styles that will achieve the best results. In a typical leadership development program, EQ skills are tackled with more technical skills as part of a field and forum approach so that there is a direct link between the “softer” side of skill building and the measurable impact it has on an organization's performance and health.

REFRESHING THE TALENT POOL

Building skills sometimes involves bringing in new talent from outside the organization. This is especially true for businesses facing major issues. As an analyst noted in an open letter to the chief executive and board of directors of cellphone company Vodafone, “A turnaround cannot be led by the same managers that led the business into trouble in the first place.”30 In many cases, skill building will involve bringing in people with the necessary skills—and moving out those who lack them. The matrix for evaluating individuals on their business performance and leadership behaviors (described above in the section on reinforcement mechanisms and illustrated in Exhibit 5.5) provides a good tool to determine where talent may need to be refreshed.

If someone is performing badly, not exhibiting the expected leadership behaviors, or both, something has to give. Field and forum programs to build technical or relational skills may do the trick, but there isn't always time for such measures. And sometimes an individual may lack the performance potential required by a particular role. In such cases, the adage “If you can't change the people, change the people” applies.

On occasion, a change in strategy will make it necessary to bring in new people from outside the organization. When Apple decided it wanted to be able to add new features to its products without sharing detailed plans with external vendors, it hired people from the semiconductor industry to help it hone its skills in computer chip design. Two of the new hires were former chief technology officers at Advanced Micro Devices, Bob Drebin and Raja Koduri. Apple also sought out engineers with experience in creating the multifunction chips used in cell phones. In addition, in 2008 it acquired P. A. Semi, a designer of low-powered microchips—a move that analysts interpreted as a bid to customize key parts for its iPhone, iPod, and Macintosh products.31 These infusions of talent brought Apple not just the technical skills but also the mindsets to support in-house innovation.

Companies such as Southwest Airlines maintain the distinctive skills they have acquired and built by hardwiring them into the recruiting process. As former chairman and CEO Herb Kelleher notes, “What we are looking for, first and foremost, is a sense of humor. Then we are looking for people who have to excel to satisfy themselves and who work well in a collegial environment. We don't care that much about education and expertise because we can train people to do whatever they have to do. We hire attitudes.”32 Southwest has found that it's hard to train employees to create an upbeat atmosphere; it's much easier to hire people with the right personality in the first place.

Hiring and firing are not the only mechanisms for refreshing the talent pool. Other ways to develop skills and confidence include bringing in external contractors, introducing job rotations, and expanding or shrinking permanent roles to make way for people with fresh perspectives.

Role Modeling

The final lever that leaders can use to influence mindsets is role modeling. Employees need to see the people they admire behaving in new ways. Respected people at every level must show that they are putting the desired mindsets and behaviors into practice in their everyday work.

Niall FitzGerald, former CEO of Unilever, makes this point well: “One of the things that leaders don't fully recognize is that when they speak or act, they are speaking into an extraordinary amplification system. The slightest thing you say, the slightest gesture you make, is picked up on by everybody in that system and, by and large, acted upon.”33

Academics in the field of social psychology agree. Kurt Lewin argues that people's perceptions are strongly influenced by those in close psychological proximity to them.34 Similarly, Konrad Lorenz, a professor of psychology, winner of a Nobel Prize, and founder of modern ethology, concludes from his work on imprinting that people take their cues from those they consider as “significant” and model their behavior accordingly.35

Our research into transformation programs bears out the importance of role modeling. Programs in which leaders model the desired changes are four times more likely to be successful.

In an organizational context, the key elements of role modeling are transformation among senior leaders, symbolic acts, and developing a cadre of “influence leaders.”

SENIOR LEADER TRANSFORMATION

CEOs and other senior leaders have a disproportionate impact on a transformation. Both individually and collectively, they must be willing and able to live up to Gandhi's maxim, “Be the change you want to see.”

That's a lot harder than it sounds. Most senior leaders accept the responsibility in principle, yet do little to change in practice. Why? Because they don't see themselves as part of the problem. Deep down, they don't really believe that it's they who need to change. Executives who seem perfectly happy to characterize their organization as low in trust, lacking in customer focus, and plagued by bureaucracy are much less willing to apply these judgments to their own behavior. How many executives would say yes if asked, “Are you bureaucratic?” or no to “Are you trustworthy?” Not many, we bet.

The fact is that most well-intentioned and hard-working people believe they are doing the right thing, or they wouldn't be doing it. However, most of us have an unwarranted optimism about our own behavior, as study after study demonstrates.

An early example is a piece of research carried out in 1976 by the U.S. College Board. Students in a sample were asked to rate themselves in relation to others in the group in terms of a number of positive characteristics. When asked to rate their leadership ability, 70 percent of students put themselves above the median; when asked how good they were at getting on with others, 85 percent did so. Twenty-five percent rated themselves in the top 1 percent.36

In another study, students in Sweden and the United States were asked to rate their driving skills. As many as 93 percent of the U.S. sample and 69 percent of the Swedish sample put themselves in the top 50 percent of the group. Asked about how safe they were as drivers, 88 percent of the Americans and 77 percent of the Swedes ranked themselves in the top half.37

Excessive optimism is just as prevalent when people are asked about their health. One study asked participants to estimate how often they and their peers took part in various forms of healthy and unhealthy behavior. Participants reported that they took part in healthy behavior more often than their average peer, and indulged in unhealthy behavior less often. This was true whether they were reporting past behavior or talking about how they expected to behave in the future.38

In fact, in many aspects of behavior, people consistently believe they are better than they are—a phenomenon that psychologists call “self-serving bias.” In working life, this bias can block leaders from using their personal actions to transform the performance and health of their organizations. At one company, we asked employees to estimate how much time they spent tiptoeing around other people's egos: making a manager feel that “my idea is yours,” for instance, or taking care not to tread on someone else's turf. Most said 20 percent to 30 percent. Then we asked them how much time other people spent tiptoeing around their egos. Most were silent.

A powerful way to expose and defeat self-serving biases is to use 360-degree feedback techniques via surveys, conversations, or both. When eliciting feedback, the best approach is not to ask about general leadership competencies—“off the shelf” descriptions of what good leadership is—but to ask about specific leadership behaviors related to the mindset shifts you are seeking to achieve. We looked at this earlier when describing how to link performance and health to rewards and consequences. Keeping the feedback specific also serves the useful purpose of reinforcing the transformation story and leadership standard.

It's often revealing to engage an objective third party to observe senior executives going about their day-to-day work. The feedback can be enlightening: “You say you aren't bureaucratic, but every meeting you attend spawns three more, and no decisions are ever made.” Another revealing technique is calendar analysis: “You say you're customer focused, but last month you spent no time meeting customers and only two hours reviewing customer data.”

So how can leaders get it right? Kevin Sharer, the CEO of biotechnology company Amgen, took the direct route. He asked each of his top 75, “What should I do differently?” and spoke candidly with them about his development needs and commitment. The top team at Bombardier Aerospace adopted a technique called “the circle of fire.” As part of the change effort, every team member was given on-the-spot feedback from their colleagues on “What makes you great?” and “What makes you small?” The leaders at a multiregional bank made time after each major event in their change program to conduct a short survey on how well they had modeled the desired behaviors. This ensured that feedback was timely, relevant, and actionable.

SYMBOLIC ACTS

Senior leaders’ acts have powerful symbolic value. They help to create stories about the new mindset and behavior that will spread from person to person through the whole organization.

When McDonald's founder Ray Kroc noticed litter in the parking lot at one of his restaurants, he called the manager and his driver over, and the three of them picked it up together. As word of the incident spread, so did the realization that cleanliness and order really mattered. In a similar vein, the founder of IT company Hewlett-Packard, Bill Hewlett, once took a bolt-cutter to a lock on a supply-room door to signify that management and frontline staff could trust one another.

Sam Walton, the founder of Walmart, was a keen pilot. Whenever he flew over a town, he habitually checked out the parking lot at K-Mart and Walmart. If he thought his store wasn't getting a fair share of the action, he would call in unannounced.39 When N. R. Narayana Murthy, chairman of Infosys, takes his wife on business trips, he pays the difference between a single and a double hotel room out of his own pocket, so setting a symbolic example of integrity—a value highly prized in his company's leadership model. As he puts it, “Credibility comes from eating one's own food before recommending it to others.”40

Symbolic actions can take place at any level of leadership and through actions of any kind. The U.K. supermarket chain Sainsbury's moved to open-plan offices to symbolize the breaking down of barriers between silos. It also banned meetings on Fridays to allow managers time to prepare stores for the weekend rush, thus reinforcing the focus on customers.

When a struggling airline made an investment in a new computer system that would take a long time to pay back, the action sent a message to employees that the company was serious about capturing efficiency gains. A manufacturer redesigned production layouts by moving from functional groupings to a single integrated flow line, relocated all tooling and consumables next to the line, and removed surplus equipment from the production floor to make it clear that capex constraints were real. And a sales organization reinforced the importance of being responsive to customers by equipping its sales force with wireless-enabled laptops so that they could connect with its IT systems from the field.

INFLUENCE LEADERS

Successful transformations start at the top, but don't stop there. Another key role is played by “influence leaders”: people who, regardless of their official title or status, have a wide circle of personal contacts who respect and emulate them. Our 2010 survey showed that transformations that engage influence leaders to help motivate employees were 3.8 times more likely to be successful.

A powerful testament to the importance of influence leaders comes from the story of Blake Mycoskie. While traveling through Argentina, he noticed that many of the children he saw had no shoes. Not long after, he founded TOMS Shoes, a company that promises that for every pair of shoes purchased by a customer, it will give away a pair of new shoes to a child in need. By targeting influence leaders at college campuses and using innovative marketing techniques such as asking customers to go without shoes for a day, TOMS attracted a lot of attention. Key influence leaders would be invited to accompany Mycoskie on “shoe drops” to Argentina, Haiti, or Ethiopia.

Newspapers and magazines soon started featuring celebrities wearing TOMS and covering events like the company's “a day without shoes.” This coverage attracted more celebrities, influence leaders, and social sector organizations to the cause, creating a virtuous cycle. Designer Ralph Lauren collaborated with TOMS to produce a limited-edition rugby shoe. A band called Hanson hosted barefoot mile-long walks before every concert to show its support. The company has distributed more than a million pairs of shoes to needy children, and had AT&T cover its millionth shoe drop in a television commercial.

But how do you find influence leaders in the first place? An analytical technique known as social network analysis (SNA) can be used to help identify who they are and who they influence. The SNA is like a CAT scan of an organization's brain that shows which areas are being connected up to perform a given task. It maps who interacts with whom and on what issues to make decisions or get work done, and also measures the quality of these connections in terms of frequency, helpfulness, and other criteria.

A simplified network map is shown in Exhibit 5.7. It would have been impossible to identify Smith as an influence leader from the formal organization structure on the left. However, the SNA shows the web of connections that make Smith the most influential person within the group, and thus the highest point of leverage for positive role modeling (or the highest point of vulnerability in the case of negative role modeling).

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Most leaders we encounter feel they already have a good idea of who the influence leaders are in their organizations. However, the results of the SNA take many of them by surprise: the real informal organization often looks very different from what they were expecting. Our experience with clients from many industries shows that identifying influence leaders is harder than it looks. When leaders are asked to do it, they get it right less than 40 percent of the time. This is true at all management levels, from CEOs to business-unit leaders, heads of manufacturing plants, store managers, and so on.

As well as establishing who the influence leaders are, the SNA can estimate how much authority they have (how many people do they reach? how great an influence do they exert?) and their willingness to transform and lead (can they become role models?). Once identified, the influence leaders can be set to work to role model the desired shifts in mindsets and behaviors.

Some organizations have been able to achieve significant shifts through the help of influence leaders. When the private wealth management business of investment bank Goldman Sachs was trying to increase its contribution to the firm's earnings, it identified “positive deviants”—influence leaders who exemplified a different and better way of doing things—and mobilized them to help roll out the new practices to all investment teams, showing not just how to adopt them but why. The tactics buzzed throughout the business and were adopted so fast that average productivity per team doubled.41

Although the impact of influence leaders shouldn't be underestimated, it shouldn't be overestimated either. As Malcolm Gladwell argues in his book The Tipping Point, influence leaders should be seen as one intervention among many, not an all-purpose catalyst for making change happen. After all, not everything that influence leaders say, wear, or do catches on in the way that TOMS footwear did. Influence leaders are not a panacea. They are one tool in a transformation, not the whole toolkit.

Using Performance Initiatives to Influence Mindsets and Behaviors

Each of the four levers in our influence model affects mindsets in a particular way. An individual transformation program may rely on some levers more than others, but using all four together sets in motion a powerful system that maximizes a company's chances of getting new patterns of thought and behavior to stick. Executives often ask us which lever is the most important. We reply that the key is to take a few high-impact actions on each lever simultaneously.

Some of the interventions pursued to shape mindsets will be freestanding, separate from the slate of initiatives in the broader transformation program. The cascading of the change story is one example; others include adjustments to performance management processes and broad-based leadership development programs.

However, a great deal of mindset-influencing activity can be woven into performance initiatives. In fact, every performance initiative that touches employees—be it a customer service enhancement, a sales force effectiveness drive, an IT upgrade, or a cost-cutting effort—creates an opportunity to influence mindsets. By carefully engineering initiatives like these so that they shape the culture as well as accomplish their primary objectives, organizations can do the bulk of the work involved in shifting mindsets not by doing new things, but by doing the things they are already doing in a new way.

When the Taiwanese bank Taishin launched a program to transform its retail banking, an initial health check uncovered deep-rooted mindsets that were holding employees back in executing key business initiatives. For instance, branch staff felt that cross-selling might alienate some of their best customers, that customers didn't want other products, and that the products didn't live up to expectations. So the bank crafted a series of toolkits for cross-selling, account opening, and teller referrals to support its initiatives and tackle employees’ concerns head on. It also introduced story-telling and dialogues—between consumer finance and the branches, for instance—to explain products more clearly, elicit suggestions for improvement, and communicate the benefits of cross-selling for both customers and bank. The impact was immediate and dramatic: for instance, the volume of loan products cross-sold to banking customers tripled within three months, hitting a record high.

New customers were a key focus, as COO Greg Gibb explains: “The first 60 days of a customer relationship matter most in terms of cross- selling. … After two or three months things become ‘business as usual’ and cross-selling becomes much harder.”42 To capture the opportunity, the bank designed a “day one bundle” to encourage every new customer to open four or more accounts. Take-up rates have been impressive, at some 50 percent to 60 percent of all new branch customers, and the initiative has driven up average product holdings per customer as well as customer profitability, which is “roughly four to six times greater for customers with a well-executed day one bundle.”

When introducing the new approach, Taishin began not with the biggest branches or those most in need of reform, but with those most likely to embrace the change and spread the word. It tracked progress at branch level so that successes could be celebrated and lagging branches supported. Frontline staff saw the benefits of cross-selling at first hand, and the shifts in their mindsets contributed to the success of the transformation as a whole.

When U.S. financial services provider Thrivent Financial for Lutherans undertook a performance initiative to adopt lean methods in its insurance operations, it engineered the effort to address health at the same time. Its kaizen events not only empowered frontline employees to use their ideas to improve operations but tackled cultural issues such as increasing trust between the front line and management. Thrivent's lean training programs weren't confined to technical skills but explored emotional intelligence and how individuals could connect their work to their personal legacies. The change story spoke of how leaders and frontline employees were expected to live the new values as well as what changes the transformation would bring.

By the third year of the program, Thrivent had achieved a 20 percent reduction in costs, raised service and quality standards, and improved its health on all measures, especially those related to key mindset shifts. Employees’ sense of empowerment rose by 32 percent, for example, and the feeling of trust between the front line and management improved by 48 percent.

To ensure that performance initiatives are leveraged to influence mindset shifts, a company can adopt a simple analytical tool like that illustrated in Exhibit 5.8. Each major initiative is plotted on a matrix, with the four levers of the influence model down the side and the particular mindsets or cultural themes targeted by the organization across the top. This creates a grid in which the company can log ideas for adjusting implementation by drawing on the examples and suggestions in this chapter. Ensuring that each cell of the matrix contains at least one powerful idea will “hot-wire” the implementation approach to achieve an impact on both the business and employees’ mindsets.

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By tying the vast majority of the work on shifting mindsets directly to business initiatives, organizations can maintain a strong link—what we call a “red thread”—to performance so as to ensure that health-related activities are not performed only for health's sake.

At the end of the “architect” stage of your transformation, you'll know “What do we need to do to get there?”—in other words, how to bridge the gap between your organization's current capabilities and mindsets and the ones you need in order to achieve your performance and health aspirations. You'll have made strategic choices that culminate in a concrete plan for both performance and health.

On the performance side, you'll have constructed a portfolio of clearly defined performance improvement initiatives that are well balanced in terms of timing and familiarity. That means avoiding traps such as making excessively big bets on the one hand or being unduly cautious on the other.

On the health side, you'll have planned a coherent set of actions to bring about the desired shifts in mindsets and behaviors. These actions will draw on the four levers available to leaders to influence their organizations: telling a compelling story, establishing reinforcement mechanisms, building the skills required for change, and setting a strong example through role modeling. As far as possible, you'll have integrated the actions you take on mindsets into your plans for executing the portfolio of performance initiatives. That way, work to improve performance and work to improve health will be experienced by employees as a single unified program.

At this point, in the words of P&G's Alan G. Lafley, “it's about executing with excellence.”43 In architecting a program of this kind, we should live by the adage that a good plan today beats a perfect one tomorrow. As we see in the next chapter, a “test and learn” approach to execution, coupled with rigorous monitoring and a robust governance model, will enable you to refine your plan as the journey unfolds.

We now move on to the central question of the next stage of trans-formation: “How do we manage the journey?”

6

Act

How Do We Manage the Journey?

When Julio Linares took over as executive chairman of Telefónica de España in January 2000, Spain's incumbent telecom operator was in a perilous situation. The fixed-line business was in decline, and gross earnings had fallen for three years running. Between 1997 and 1999, the company's earnings before interest, taxes, depreciation, and amortization (EBITDA) had shrunk by 10 percent, and its cash flow by 15 percent. At the same time, the sector was liberalizing, competition was intense, and growth opportunities were unclear. Not surprisingly, employee morale was low. The future looked uncertain.

As Linares admits, “the company needed to change completely.”1 But with such strong industry headwinds and a demoralized workforce, how could he and his senior team motivate the organization to go the extra mile? Simply running the business would be tough enough; how could they transform it too, and keep the effort going not just for months, but for years?

It was clear that Telefónica's transformation program would need to be handled with great care. Above all, employees needed to be able to make sense of what was going on. With that in mind, Linares and his team created a structure emphasizing three themes—growth, competitiveness, and commitment—that would run through the whole transformation.

The team developed a range of actions to improve performance and health and grouped them under these themes. For instance, developing new distribution models and improving customer segmentation came under the heading of growth. Moves to adopt lean work processes and enable online transactions were about competitiveness; embedding a new set of company values and reorganizing business units related to commitment. Linares explains that the approach was “a useful communication device—it helped people understand how the project they were working on would contribute to that year's targets and, therefore, to the overall transformation program.”

Another key element in execution was Telefónica's ownership model, designed to foster both top-down accountability and bottom-up involvement. To achieve this, transformation initiatives were owned by the line with support from the program management office, rather than the other way around. In addition, a broad group of leaders helped the program to evolve. Linares and his senior team brought the top 500 managers together every January to help design the program for the coming year. They explored a host of questions about the progress of the transformation: Which initiatives can we celebrate as victories? Which new initiatives should we pursue? What else can we change to help us reach our goals?

And the involvement didn't stop there. Linares knew that in an organization with more than 200,000 employees, it would take too long (and be too complex) to engage every individual in shaping the program, so his objective was to “give relevant people at different levels of the organization an opportunity to participate in the transformation program's (re)design and then to complement that with a strong communication program.”

The third key aspect of execution was the way that Telefónica constantly monitored and reviewed progress so that the program could be adjusted over time. Regular events were set up to measure improvements by means of a wide range of performance and health metrics. Linares explains, “I don't think you can succeed with a program that is very stable or rigid. People need to feel the transformation effort is changing and moving forward; otherwise they will believe that there has been no progress and that they are not changing.”

The choices made by the CEO, his leadership team, and the wider organization have paid dividends. Within four years of Linares’ appointment, the impact of the transformation was evident. Cash flow had climbed, the downward slide in earnings had been reversed, and the return on invested capital (ROIC) had almost doubled. Health was now a priority for the whole organization. As Linares explained: “We have all understood the need to balance the focus on short-term results with efforts to gradually change our capabilities and attitudes.” And still Telefónica's upward trajectory continued. By 2010, net income had tripled, earnings per share had almost tripled, and total returns to shareholders were far above global industry averages.

Executives sometimes say that managing a transformation is like trying to change the wheels of a bike while you're riding it. You have to make sure that your organization is still performing its usual functions and tasks, but at the same time you are taking them all apart, looking at them closely, and reassembling them in a new way. How do you summon up the energy—not to mention the balance, dexterity, and control—to do both at once?

Telefónica de España's experience shows that it can be done. But how do you do it at your organization? That's what we turn to now. We'll dig deep into how you take your game plan and convert it into impact.

At this stage in your transformation, the distinction between the things you do to improve your performance and the things you do to improve your health starts to blur. Performance initiatives are “engineered” to promote health as well. Your program management office supports activities on every front across the entire effort. Monitoring and review take place for health as well as performance.

This breaking down of boundaries means that employees experience implementation as one seamless integrated program. Which elements we classify as performance and which as health becomes a matter of emphasis rather than substance. This is all to the good: programs where there is a sharp divide between the two are far less likely to succeed. Remember that in the phrase “performance and health,” the most important word is “and.”

Performance: Delivery Model

Through long experience, we've found that the best way to implement initiatives in a transformation is through a three-phase approach: test, learn, and scale up. When you try out a prototype in a pilot location, you can learn from it and refine your approach before you start rolling it out more widely. If things go well, successes can be replicated elsewhere; if things go awry, you can confine mistakes to a small area and limit any damage. Early results also help to build people's appetite for change, smoothing the way for full-scale implementation.

But as you'd expect, there's more to it than that. Too often, organizations are impatient to get a pilot under their belt so they can press on with the rest of the implementation. Driving it too fast or without sufficient care and attention can quickly lead to unintended consequences, however.

Consider the experience of Eureko, a large Netherlands-based insurance group. In 2006, spurred by radical reforms in the health-care market introduced by the Dutch government, it launched a transformation of the health division within its Achmea brand. The leader of the division at the time was Jeroen van Breda Vriesman. He charged his managers with a stretch target: to improve the efficiency of their areas by 25 percent within three years.

To make this happen, one of the managers adopted a culture-focused approach in his call centers. His approach was successful: he met his 25 percent efficiency goal and improved the customer experience at the same time. This proved that the target savings were achievable, giving the health insurance division and Eureko the confidence to extend the efforts into other areas.

Before long, though, they ran into a roadblock: the approach taken by the manager who led the effort was hard to replicate elsewhere because he had achieved mindset and behavior changes through his personal influence, rather than by introducing systems to support the desired shifts. As Jeroen van Breda Vriesman wryly admitted: “We couldn't duplicate the improvement achieved by the manager who did it on his own.”2

Eureko's experience provides an important lesson: a successful pilot doesn't necessarily make for a successful rollout. To be robust, the pilot phase should consist of not one but two tests—a double pilot, in fact.

The first pilot is a proof of concept designed to establish whether the idea you are testing truly creates value. Conducted properly, this pilot will make considerable demands on your attention as well as your resources. After all, if an initiative has made it into your portfolio, that must mean you expect it to deliver significant value, so investing in a field trial will be of the utmost importance. You'll probably need to allocate more time than you might imagine, too, because you'll be testing every aspect of the initiative for the first time. And some types of pilot may require you to put temporary workarounds in place so that you can clearly understand the opportunity for value creation.

Let's say the first pilot goes well. What's to stop you jumping straight from proof of concept to scaling up? We'd strongly advise against it. In our experience, it leads to lackluster results and what we call the “Nice pilot, but . . . ” syndrome. That's because you've tested the idea, but not the robustness of the rollout approach. Whether it will work at scale will be a matter of hit or miss.

Instead, we recommend you complete a second pilot—a proof of feasibility—to work out how you can capture the bulk of the desired impact in such a way that it is fully replicable. This pilot needs resources on a par with those you'd dedicate to the real scale-up effort, plus a sustainable level of senior management attention (not an initial surge of interest that fades as time goes on). The pace of the pilot needs to be well judged, reflecting how long the scale-up approach is likely to take to deliver its contribution toward broader transformation goals. This time, any workarounds should be minimal, since the aim is to find long-term sustainable solutions.

Back at Eureko, another manager in the Achmea health division had taken a different approach. With the concept proven, the approaches were made replicable in a second pilot. This focused not just on realizing impact but on codifying the emerging method and helping change agents become skilled at using lean approaches systematically to achieve results. The feasibility pilot was conducted via a “train forward” approach in which people were brought in to learn the process so that they could go on to lead the rollout in subsequent waves of implementation.

This new approach proved successful in the health-care division: throughput rates rose, error rates fell, and quality shot up, enabling the division to reduce its workforce by one third. On the basis of this success, Eureko decided to roll out the improvement approach across all the divisions within the Achmea brand. Over time more than 200 leaders were “trained forward” to be lean experts.

The double-pilot approach also proved its worth at the NHS, the English health-care provider featured in Chapter 4. One of the transformation projects it undertook was a frontline initiative aimed at increasing the proportion of time that ward staff spent on patient care. After piloting the initiative successfully in one location, the NHS slowed the rollout to ensure that it could develop a scalable model, and to build “pull” for the project from other parts of the NHS. The second pilot built on the success of the first, but refined the approach to create an “industrial-strength” model robust enough to be rolled out more broadly.

This “go slow to go fast” pacing proved a major factor in the uptake of the program. Easy-to-use learning modules were swiftly incorporated into multiple parts of the NHS. They were propelled by stories from nurses and ward staff and shared with the wider body of employees through the intranet, communities of practice, and informal networks.

As these examples suggest, piloting both the proof of concept and the proof of feasibility will help get implementation off to the best possible start. And as Aristotle said, “Well begun is half done.”

That takes care of testing and learning. But how do you go about the third and final phase—the actual scale-up?

After carrying out detailed reviews of dozens of successful implementation programs and observing hundreds at a distance, we've identified three broad “flavors” for scaling up program initiatives (Exhibit 6.1). Which you choose will depend on a number of factors, and you may find it helpful to use different methods for different projects, like the energy company we feature in the following pages. The three models are linear, geometric, and “big bang”:

·       In linear scale-ups, the second pilot (proof of feasibility) is replicated in one area after another across the organization. This approach is the best choice if an initiative is to be rolled out in only a few areas; if capable team members are in short supply; if the company is not facing a crisis; if the stakes (risk or rewards) are high; if deep, expert-led dives are needed; if there is strong resistance to change; or if the toolkit and solutions being used need extensive customization.
 A multinational energy company used the linear approach to roll out a unified people-management software system that was replacing an array of freestanding national systems. Senior management were aware that if they switched to the new software in all their global operations in one go, or even if they proceeded on a regional basis, they might create serious technical repercussions and overload the project team with demands for troubleshooting. Since changing to the new software would be a major shift, the company also wanted to ensure that all its country-level organizations would buy into the effort, and that any concerns that might emerge at one location could be fully addressed before the rollout moved on to the next. In addition, implementation called for considerable support from an external provider that had limited resources to devote to the effort.
 All these factors prompted the organization to follow a linear scaling-up approach, with each successive effort building on the lessons from the one before. A project team comprising dedicated internal staff and outside experts moved from country to country to ensure that deep expertise was brought to bear from the beginning of each implementation. The organization was delighted to find that by following this approach, it was able to complete the project six months ahead of its original three-year schedule and save a fifth of its planned budget.

·       In geometric scale-ups, implementation takes place in waves, with each successive wave much bigger than the last (say, two sites in the first wave, four in the second, 16 in the third, and so on). This approach makes sense if multiple areas share a few common features; if many areas need to be transformed and a linear approach would take too long; if capable implementers are readily available; and if the organization has the capacity to absorb the changes.
 Whereas the energy company chose a linear approach to scale up its software project, it deployed a geometric approach when implementing its new global procurement strategy. By conducting an analysis of vendor relationships, it had uncovered similarities between markets in terms of buying patterns, levels of procurement sophistication, and vendor choice. Grouping markets that shared these similarities into clusters would enable it to increase its leverage with vendors. Once it had identified these clusters, it used the geometric approach to roll out the project within individual regions and countries. This enabled the procurement teams to get up to speed quickly, allowed approaches to be refined as the effort progressed, and ensured that cost savings could be captured from an early stage.

·       In “big bang” scale-ups, implementation takes place across all relevant areas at once. That takes many resources, but only for a relatively short time. This approach makes sense if multiple areas share many common features; if the need for transformation is urgent; if little resistance is expected (or an appetite for change already exists); and if a standard toolkit and approach can be employed.
 At the energy company, a big bang model wouldn't have worked for the rollout of the new global procurement strategy because each cluster of markets had unique requirements that a one-size-fits-all approach couldn't have accommodated. However, the company did adopt this model when it needed to overhaul its public relations process in response to a crisis. It knew it had to act fast to regain public confidence, so it specified new values and behaviors and revised its organization structure to create more transparency and accountability. It then implemented a big bang rollout across almost 100 countries within four months. The staggering scale and speed of the effort ensured that the organization not only restored its reputation, but did so much faster than competitors.

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The three implementation models apply to both performance and health initiatives. For health-based interventions, there are two further mechanisms you can use to test, learn, and scale up. One is to leverage pivotal individuals such as influence leaders (as we saw in the last chapter), high-potential employees, or peers in grass-roots movements. At GNP, for example, 30 individuals were hand-picked to receive in-depth training on how to live the company's leadership standard so that they could act as role models, ensure that health initiatives were taking hold, and help create a two-way communications channel between the CEO and managers deeper down in the organization.

The second additional scaling-up mechanism is to leverage critical interactions—such as those among the top team, or vertical interactions within a business unit—for cascading a compelling story, conducting performance dialogues, developing skills, and so on. At GNP, top-team meetings have regular slots for learning health-related leadership skills, and subsequent meetings are observed by a team coach who provides on-the-spot feedback on how well team members are incorporating what they have learned into their ways of working.

Health: Change Engine

Transformation requires work. Work requires energy. Leaders need to find ways to unleash energy in the organization over and over again as employees carry out the routine tasks of running the day-to-day business while at the same time fundamentally rethinking many of them.

Organizations that are effective at mobilizing energy tend to succeed in their transformations. In our 2006 survey of 1,536 business executives, 89 percent of those who reported that their transformation was “completely” or “mostly” successful said that their organization was “completely,” “mostly,” or “somewhat” successful at mobilizing energy during the transformation.3 Among the same group, 86 percent said their organization was also “completely,” “mostly,” or “somewhat” successful in sustaining energy during the transformation.

To help leaders generate and manage energy in their organization during the hectic execution stage, we've developed a tool called the change engine (Exhibit 6.2). It applies equally to performance and health initiatives, and consists of three linked elements:

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·       Structure. Programs are more than six times more likely to be considered successful if they are well structured according to our 2010 McKinsey Quarterly survey.4

·       Ownership. The same survey found that programs that energize employees through communications and personal involvement are twice as likely to be considered extremely successful. (Note that ownership shouldn't be confined to employees: the more that external stakeholders are involved—be they customers, users, patients, suppliers, or other partners—the more energy for change will be unleashed.)

·       Evaluation. Programs that rigorously track progress and impact through clear metrics and milestones are more than seven times more likely to be considered extremely successful.

Now let's take a closer look at each of these elements.

A Structured Approach

Compiling a portfolio of performance and health initiatives and deciding how to scale them up are both necessary steps, but they aren't sufficient in themselves to make execution happen. If your initiatives aren't carefully structured into a coherent program, you'll find it exceedingly difficult to execute them. Having a portfolio isn't the same as having a game plan. Without structure, you run the risk of the “100 lost projects” syndrome: many initiatives embarked on but few completed thanks to a lack of leadership, control, and coordination. The results are predictable: poor outcomes, no confidence that progress is being made, and a lack of motivation just when you need it most, as the grind of implementation starts to set in.

Structure is essential. Without it, things fall apart. Here's an experiment that shows why. Take a look at the picture on the left in Exhibit 6.3. What does it show? Some abstract shapes? A pattern of light and dark? What if we asked you to talk about the picture for a few minutes? Could you find much to say, or summon much enthusiasm?

Now look at the larger picture on the right of Exhibit 6.3. If we gave you that to talk about instead, would it make any difference?

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We'd be willing to bet that it would. You'd be able to describe the house and its reflections in the water and the trees in the foreground. Seeing the big picture—literally—of how everything fits together helps us create meaning. And meaning gives us energy.

Vital though structure is, it can be overdone. Micro-programming every facet of a transformation will only bog the effort down in energy-sapping bureaucracy. What we're after is coherence without rigidity. We want to be able to turn a portfolio of initiatives into an integrated whole, and then link it to our desired medium-term state (and long-term vision if we have one). To make this easier, we've developed the three-level structure illustrated in Exhibit 6.4.

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Let's start at the top and work down:

·       Level 1 is the transformation headline—a phrase that sums up the organization's aspiration and suggests the rationale behind it. A good example might be IBM's aspiration to transform itself from a manufacturer of PC hardware and software into a complete IT solutions provider. The level 1 aspiration should remain recognizable throughout the transformation, although it may gradually evolve as circumstances change and themes from the next level start up or come to an end.

·       Level 2 involves a few broad performance and health themes—usually four to eight at a time—which serve as chapters in the transformation story. Each theme should be distinct (so as not to create complexity or require undue coordination across themes) and should apply to the organization as a whole rather than reinforcing any silos that exist (except where a particular business unit faces a specific challenge that it needs to tackle individually). Themes relating to performance might include extending geographic reach, achieving operational excellence, and building a service business; themes relating to health might include collaboration, market focus, and alignment. Level 2 themes provide a consistent underpinning for the initiatives in level 3. They should stay valid, and broadly unchanged, for two to three years.

·       Level 3 consists of specific initiatives that transform the story into a frontline reality. They typically target particular topics or areas in the organization: back-office operations, branch or store layouts, supervisor development programs, changes to performance management systems, and so on. Most initiatives will rely on proven methodologies such as lean process reengineering. Each one should further a level 2 theme. Unlike the level 1 headline and level 2 themes, which remain constant for several years, level 3 initiatives are usually completed in a matter of months.

What are the advantages of this three-level structure?

First, it fits the time frames that many companies use in managing their business. The level 1 transformation headline matches strategic eras (typically five to 10 years); the level 2 themes correspond to managerial time horizons (typically two to three years); and the level 3 initiatives slot into project lifecycles and budgeting processes (typically six to 24 months).

Second, the three-level structure enables companies to move fast without losing control of the effort. A relatively rapid succession of level 3 initiatives is compatible with a slower pace in level 2 themes and stability in the level 1 transformation headline.

Third, structuring implementation in this way helps managers shake off the harmful habit of confining initiatives within organizational boundaries. This ensures that economies of scale and skill are captured across business lines so that performance and health are improved for the whole organization, not just part of it. This is especially important when tackling cross-cutting issues such as customer focus, cost reduction, and leadership development.

Finally, adopting this approach can help employees deep down in an organization to appreciate how their efforts are contributing to the success of the transformation. At a time when heavy workloads and constant change often create frustration and disillusionment, knowing that their work is making a difference can give people a new sense of energy and purpose.

One organization that used the three-level approach to great effect is the South African Revenue Service. SARS was created in 1997 to collect and administer all government income. Some 10 years later, rapid growth in collections and a decline in tax rates had put its operations and capacity under strain. So it decided to modernize its systems and processes to provide a platform for sustainable revenue collection.

In implementing the three-level structure, SARS developed a level 1 headline that was about preparing for the next wave of performance and increasing compliance and tax growth nationally. Its level 2 themes were to build a new operating model, to create a solid organizational foundation, and to pursue additional government priorities, such as implementing a national social security tax and wage subsidy and strengthening border controls. Each theme was translated into a cluster of level 3 initiatives. For instance, the theme of creating a solid organizational foundation was advanced through the initiatives of transforming the culture, making management processes and governance more professional, improving the infrastructure, and ensuring effective communications and change management.

The program enabled SARS to make enormous strides in increasing the revenue it collects. By March 31, 2009, it had collected R625.10 billion (US$64.3 billion) in revenue, less than 1 percent short of its revised revenue target despite rapidly deteriorating global economic conditions. It had also improved its efficiency in dealing with taxpayers; its audit, investigative, and enforcement capabilities for detecting and deterring noncompliance; and its quality of service for taxpayers and traders. In addition, SARS had enhanced its trade facilitation and customs compliance to keep pace with soaring trade volumes, expanded the tax base across all tax types, and improved voluntary compliance in general.

Broad Ownership

People who feel a sense of personal ownership put more effort into making their company profitable. As Richard Evans, former chairman of United Utilities, a water services provider, remarks, “If people don't take ownership, they don't deliver to their full potential.”5

Ownership can come from two sources: the formal accountabilities given to leaders and the use of “viral” tactics to mobilize self-directed change deep in the organization. To make the distinction more vivid, we can compare the first to a military campaign and the second to a marketing campaign. To achieve broad ownership, you need both.

THE MILITARY CAMPAIGN

Who is formally accountable for a transformation effort will usually depend on the hierarchy of the organization concerned. Hierarchies vary, but most program governance will include the following four elements:

·       An executive steering committee (ESC) typically made up of the CEO and a senior executive team.6 The ESC sets the direction for the transformation and makes critical decisions such as approving execution plans, allocating resources and capital, resolving issues across businesses or initiatives, and shaping the portfolio of initiatives over time.

·       A program management office (PMO) charged with coordinating the overall program, tracking its progress, and ensuring that issues are followed up and resolved. Its role also involves facilitating transparent and effective interactions between the ESC and all relevant initiatives. The PMO sometimes assists with implementation by brokering the sharing of best practices across the portfolio and acting as a consultant and thought partner to initiative teams. It seldom leads initiatives itself except in rare cases where there is no natural owner for them elsewhere.

·       Executive sponsors who provide guidance, judgment, and leadership to initiative teams by reviewing and validating execution plans and keeping a tight focus on business impact. They may be members of the ESC or senior leaders a level down who have direct line ownership of a particular initiative (or bundle of initiatives serving a level 2 theme).

·       Initiative teams who are responsible for actually executing the initiatives. Team members are typically from the line, but may include change agents from staff functions. They are involved in formulating execution plans, identifying resource and capital requirements, and developing timelines and milestones. They operate as “task and finish” teams.

Within this structure, accountability for impact should rest as far as possible with line management and be built into the relevant budgets. We use the cheesy-sounding formula BBB—“benefits baked into budgets”—as a reminder that no aspect of a transformation is complete until its benefits have been fully reflected in the relevant budget. This also helps ensure that the PMO provides support and oversight, but the line has ownership.

Our 2010 survey shows that putting these structures into place provides clear payoffs. Programs that are characterized by clear roles and responsibilities are six times more likely to be successful than those that aren’t; programs with effective steering committees are three times more likely to be successful than those without; and programs that have effective PMOs are twice as likely to be successful as those that don’t.

To see how the military campaign aspects of ownership come together, consider the case of a retailer that was restructuring its global operations. It had embarked on a transformation program in the wake of three consecutive quarterly losses, and after an OHI survey had identified a number of health issues that had worsened with the onset of the 2008 recession. During the “act” stage, the CEO set up an executive steering committee comprising senior leaders from both the retailer and its parent company. An external board member and the CEO of a different company in the group were also asked to sit on the ESC to ensure that the retailer's health issues didn't affect the quality of its decision making.

The retailer then created a program management office and asked the widely respected senior manager of the most profitable business line to head it up. He promptly enlisted a top performer from his own department as well as two highly regarded middle managers from other departments. He also hired an external change expert and a retail turnaround specialist to work on the project so that best-in-class advice would be readily to hand. Otherwise the staffing of the PMO was kept light to ensure that it didn't become a permanent structure within the organization or prevent project ownership from lying where it should, with the initiative teams.

Each initiative in the program had an executive sponsor who supported the PMO in ensuring that the relevant team was fully committed to delivering against targets and had the resources it needed to do the job. The initiative team also identified a “project amplifier” whose role was to propagate the initiative at grassroots level and relay the concerns of the wider organization back to the initiative team.

Adopting such a clearly structured ownership model helped the retailer to reorganize its 75,000-strong workforce and cut costs by 12 percent within six months. The company also saw significant improvements in its health across the board. The light yet robust program structure proved easy to dismantle, and the responsibility for continuing to deliver and track the initiatives was then placed firmly in the hands of the business.

THE MARKETING CAMPAIGN

Important though the formal ownership structure is, it won't be enough to create the energy to transform everyday functions and tasks while simultaneously keeping the business on track. Organizations also need to enlist the active involvement of staff at every level.

Programs that mobilize frontline employees to feel ownership of change are four times more likely to succeed, programs that empower employees to use their own initiative to achieve aspirations for change are five times more likely to succeed, and programs that make the organization feel engaged and energized through communications and involvement are four times more likely to succeed than programs that don't do these things.

Even when an organization has done everything it can possibly do to generate maximum energy for change—involving staff in setting aspirations, balancing urgent issues with a positive view of the way forward, and using the influence model from Chapter 5 to promote frontline engagement—it may still run up against obstacles at the implementation stage. Common roadblocks include:

·       Cynicism. Past failures feed a conviction that what began with a bang will end with a whimper, creating pain but no gain.

·       Local loyalties defeating allegiance to the wider organization. When messages from the top seem remote and unremitting, people stop taking any notice.

·       Difficulty in communicating on a broad scale. It's hard to get a lot of people to pay attention at one time.

·       Poor understanding of an organization's emotional state. When leaders don't have real-time feedback channels, they can't tap into how people are thinking and feeling.

These symptoms tend to be most acute during the phase between piloting and scaling up performance initiatives—a phase we sometimes characterize as “the valley of desolation” (Exhibit 6.5).

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Organizations that would prefer to avoid plumbing the depths of this valley can borrow tactics from the field of viral marketing. The key elements of the viral approach are that it:

·       Draws attention to what's happening right here, right now.

·       Uses raw, direct personal messages.

·       Revolves around “What's in it for me?” (not “What executives want”).

·       Relies on direct communication between peers (not corporate channels).

·       Spreads through curiosity and a desire for information (not a push from the top).

Admittedly, viral marketing efforts can be kicked off by the corporate center, but after that they must be left to spread through the organization under their own steam. To get them started, some infrastructure and funding may be needed. Companies often give an influence leader in each area a small budget and freedom within a framework—scope to decide how to create energy for change in accordance with guidance about which aspects of the transformation story to emphasize.

So how does this work? One large telecom company released a flood of communications to explain what was happening in the organization. There were limited print runs of edgy, unofficial-looking materials; a “rogue” comic strip that expressed and corrected cynical views of the change program; a fly-on-the-wall video of a senior team working session that was “leaked” to the intranet; blogs from influential leaders; and hidden intranet access points with a video game--style facility to unlock new areas of information.

Viral tactics may need to be extended beyond internal communications to the outside world. As Banca Intesa CEO Corrado Passera reflects, “Internal results undoubtedly matter, but even they won't count for much if everyone keeps reading in the newspapers that the business is still a poor performer, is not contributing to society, or is letting down the country as a whole.”7 Energy for change doesn't come only from employees; customers, users, patients, voters, and other stakeholders can also play their part.

Another example of viral communication was started by English filmmaker Rebecca Hosking. When she visited a remote Hawaiian atoll in 2006 to make a BBC TV program about wildlife, she was confronted by the sight of hundreds of dead albatrosses that had washed up on the beach after swallowing plastic waste. The sea held more horrors: dead humpback whales, seals, and turtles awash in a mass of plastic fragments. On returning to her home town of Modbury in Devon, she and a group of friends persuaded all 43 local shopkeepers to replace their plastic carrier bags with reusable cloth ones. The town became the first in Europe to ban plastic bags. As word spread, traders in scores of other small towns across Britain, as well as 33 London boroughs, said they would introduce similar bans. The movement hit the national headlines when the then prime minister said he would like to eliminate single-use plastic bags throughout the whole country.8

One of the most powerful and far-reaching examples of viral communications was Barack Obama's bid for the U.S. presidency. The campaign went far beyond national media, penetrating niche social networks catering to different ethnic groups as well as broader platforms such as Google, Facebook, Hulu, Twitter, and YouTube. That made it easy for supporters to stay connected (“Turn on your TV now, check out what Barack is doing”) and get others involved (“Check out Obama's YouTube posting this morning”).

Viral communication happens all the time, every day, in every organization, whether you're aware of it or not. Like Obama's external online director, Scott Goodstein, you can choose what to do about it: “We could either ignore that thing that was going on . . . or we could engage in it.”9

As an IT solutions provider, IBM is well placed to engage with “that thing.” It has developed a proprietary social networking tool called BeeHive for internal use. This allows employees to promote projects and generate followership by drawing on their informal networks within the company. For instance, users can create and share brief lists—called “hive fives”—to spread ideas about topics they are passionate about or projects that need wider sponsorship. Colleagues in their network can comment on the list or re-post it as part of their own profile, thus spreading the ideas virally across the organization.

Measurement and Evaluation

Rigorous monitoring makes transformations twice as likely to succeed according to our research. In the wry words of N. R. Narayana Murthy, chairman of Infosys, “In God we trust; everybody else brings data to the table.”10

The portfolio of initiatives must be continually monitored and adjusted as new challenges and opportunities emerge over the course of the transformation. It's a bit like making a long road trip through unfamiliar territory. Even with the best-laid plans, the journey seldom goes as you expected. The weather changes without warning, heavy traffic holds you up, road works prompt a detour, your car breaks down, and after all that, you need a break.

Companies on a transformation journey face similar hitches and uncertainties. Julio Linares of Telefónica warns: “The market is going to change constantly, and because of that you need to make a constant effort to adapt your company to the market. Of course, some parts of the program will end, but new ones will come up.”11

Managing the program dynamically in this way depends on good data. You have to be clear from day to day how much progress you've made against your plans. That means regularly measuring the impact of your transformation on four key dimensions (Exhibit 6.6):

·       Initiatives. Track your progress not just in terms of time and budget, but also against key operational performance indicators such as cycle time, waste, wait times, and quality.

·       Health. Are mindsets shifting to support the improvements in performance that you want to see? To look for evidence, use targeted surveys, focus groups, and observation.

·       Performance. Measure key business outcomes such as revenue, cost, and risk to confirm that improvements are happening where you expect and not causing unforeseen consequences elsewhere in the organization.

·       Enterprise value. Keep a constant eye on shareholder value as the ultimate business outcome, or monitor key stakeholder value in not-for-profit and governmental organizations.

Clearly, measurement has to be done in every area of business. But leading a transformation is a special case because it's a process that adapts and develops over time. If your personal fitness plan didn't give you the improvements in performance and health that you expected, you'd change it. So, too, a transformation program must be fine-tuned from time to time if it's to produce the desired results. Measurement and evaluation are not just a means to gauge how far you've come, but a compass to help you navigate each step along the road.

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How often you need to measure will depend on what you're measuring. As a rough guide, initiative measures could be reviewed weekly by initiative teams, health and performance monthly or quarterly by sponsors and steering committees, and enterprise value once or twice a year by everyone involved in the transformation. Reviews serve two purposes. One is to enable you to enforce accountability, identify issues, and determine remedies; the other is to identify best practices to share, spotlight successes to celebrate, and instill a culture of continuous learning and improvement.

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Whereas the “aspire,” “assess,” and “architect” phases in a transformation typically take months, the “act” stage usually lasts for years. There's no denying it can feel like a long haul, especially when you are some way in but have no immediate end in sight. At this point, there's comfort to be had in Benjamin Franklin's adage that “Energy and persistence conquer all things.”

When we're talking to companies about the act phase, we often liken it to what happens when a champion sports team takes the field. Aspirations have been shared, skill and will requirements are clear, and there's a game plan in place. But once the whistle blows, it's not often that the points scored come from well-rehearsed set plays. Whether it's a key rebound in basketball, a pass interception returned for a touchdown in American football, or a goal coming out of a full back's solo run in soccer, it's the improvising within the game plan that usually makes the difference between winning and losing. As for sports teams, so for organizations. Needless to say, the goal of everything you've just read is to help you position yourself to win.

When the going gets tough in the act stage, it's easier to carry on if everyone knows what role they are playing and you can be sure that you're on the right track. If you've followed the steps we've described here—test each initiative through a double pilot, scale it up via the appropriate model, impose coherence with a three-level structure, create ownership through a mix of formal leadership accountabilities and viral tactics, and use regular evaluations to adjust your program as you go—then you can be confident that all your efforts will bear fruit in the end.

So you're on the way to fulfilling your transformation aspirations. But what happens when you get there? How do you make sure you keep winning and stay on top? What does it take to reach the stage of transformation that Julio Linares describes as “a never-ending journey”? That's what we turn to next.

7

Advance

How Do We Keep Moving Forward?

Three and a half years ago, ANZ was the worst performer of [Australia’s] big four banks, regarded as the highest-risk bank investment by the market, and in strategic disarray. The transformation [CEO John] McFarlane has rendered over that relatively short period by implementing some exquisite forms of work-harder and work-smarter techniques on his staff has turned ANZ from the industry's lame duck into a highly polished money-making machine with an eye to its customer needs.”1

Such was the story reported in The Australian back in 2001 as ANZ finally turned the page on a dismal chapter in its history. In 1997, it had been grappling with almost A$2 billion of bad debt and a cost-to-income ratio of nigh on 63 percent. By the end of 2001, it had cleaned up the riskiness of its portfolio, doubled its share price, and reduced its cost-to-income ratio to an industry-leading 46 percent.

ANZ's transformation had begun in 1998, not long after John McFarlane took charge. An initial focus on cost cutting and risk restructuring soon gave way to a broader performance and health program structured around three themes: perform, grow, and break out. The “perform” strand continued the bank's earlier focus on cost drivers and productivity. “Grow” was about transforming the customer experience so as to become “the bank with the human face.” “Break out” was concerned with health, and aimed to create a high-performance culture.

One of the most innovative initiatives in the breakout theme was ANZ's leadership development program. It steered clear of traditional tools and approaches for setting direction, managing performance, managing time, and so on. Instead, it strived to embed deeper qualities of leadership such as self-awareness, resilience, and the ability to energize oneself and others. In the words of Siobhan McHale, head of breakout and cultural transformation at ANZ, “We realized the program had to be an ‘inside/out’ journey. In other words, it's the individual who transforms, and in turn, the organization. Achieving this would not only build a more positive culture, but improve our competitive advantage.”2

Convinced that there is no better environment for developing leaders than a transformation, ANZ had more than 6,000 individuals take part in the program. The response was tremendous: participants spoke of its “profound impact” and described the experience as “life changing.”

Some four years after ANZ's transformation had begun, the turnaround was declared complete, its goals having been met. But the story doesn't end there. Now ANZ ushered in an era of continuous improvement. For instance, under the breakout theme, there were grassroots business initiatives that ranged from delayering to bureaucracy busting, and from creating internal job markets to improving diversity. These efforts were supported by a central infrastructure of some 180 breakout champions who worked in the businesses to foster continuous improvement on top of doing their normal jobs. ANZ also held workshops designed to improve employees’ leadership capabilities, cascading them right through the organization in a process that eventually touched more than 26,000 employees.

After 10 years in the CEO suite, John McFarlane retired from the bank in 2007. He left a remarkable legacy. In the years following the transformation, the emphasis on continuous improvement had enabled ANZ to continue its upward trajectory. Since 2002, profit after tax had grown at a cumulative average growth rate of 15 percent, putting ANZ well ahead of the industry pack. Market capitalization had doubled again, and customer satisfaction had soared from 65 percent to 78 percent.

The organization's health remained strong, too. Staff engagement was the highest of all peer organizations in Australia and New Zealand. Job satisfaction ran at more than 80 percent. The share of employees who agree that “we live our values” was 85 percent. Eighty-one percent of employees felt that “we are earning the trust of the community.” This clarity of purpose and sense of pride soon led to recognition from the outside world: the accolades ANZ picked up at this time (in some cases for several years running) included Money magazine's Consumer Finance Award for Bank of the Year, Personal Investor magazine's Bank of the Year, Asiamoney magazine's Asia's Best Bank, and Australian Banking & Finance magazine's Best Bank in Australia. The “lame duck” of the 1990s had certainly come a long way.

ANZ's experience provides a vivid insight into how to make the transition from the intensive work and constant upheaval of a transformation to a period of continuous improvement. In this phase, a programmatic approach to improving performance and health gives way to a focus on, as John McFarlane put it, “unleash[ing] the potential of some very talented people by giving them a lot of freedom to take their businesses where they've got to go.”3

How do you achieve this for your organization? You do it by focusing on two things: ensuring that continuous improvement is hardwired into your organization, and leading from a core of self-mastery and ongoing learning.

Performance: Continuous Improvement Infrastructure

Building the capacity for continuous improvement is a task that requires as much energy and focus as any other stage in a transformation. An organization that has come this far on its journey will have much to celebrate, but the work of transformation must still go on. The key to embedding a capacity for continuous improvement in your organization is to hardwire it into its infrastructure. According to our 2010 survey, companies that build the capacity for continuous improvement into their organization are 2.6 times more likely to consider their transformation program a success over the long term.4

The transformation program will already have helped develop many of the mindsets and competencies that are needed to support continuous improvement: stronger functional and problem-solving skills, confidence that improvement can be achieved, the breakdown of silo thinking, and so on. But structures, processes, and systems are a different matter. Here the organization will need to take specific steps to put a continuous improvement infrastructure in place. This comprises four main elements: systems for sharing knowledge and best practice, processes to identify and capture opportunities for improvement, methods to facilitate continuous learning, and dedicated expertise. Let's take a look at each of these in turn:

·       Putting in place systems for sharing knowledge and best practice ensures that relevant improvements in one area are quickly adopted across the organization. Microsoft employees are familiar with the phrase “Knowledge shared is knowledge squared.” As former CEO Bill Gates explains, employees “read, ask questions, explore, go to lectures, compare notes and findings . . . consult experts . . . communicate what we're learning and practice new skills.”5 In Germany, Volkswagen has created its own Lean Center, a model factory designed to spread best practices in manufacturing efficiency, ergonomics, and quality, and educate employees about lean, clean process flows that can be applied to all nine brands in the carmaker's group. As a senior executive explained, “Lean is a culture, not a specific process or plan. You have to develop a culture where continuous improvement is the goal.”6 P&G operates a web-based knowledge repository, stages regular reviews to share best practices between brand managers, and constantly updates its international training programs to reflect best practices. In industries characterized by partnerships with customers and suppliers, approaches like these are often extended beyond the company to allow knowledge to be shared and leveraged from one end of a process or relationship to the other.

·       Developing processes to identify and capture opportunities for improvement enables employees at any level to change things for the better. A lean manufacturing environment is a great place to see this at work. If employees spot a problem on the production floor, they are expected to sort it out there and then: stop the line, get into a huddle to identify the cause, take corrective action, and track progress until the problem is resolved. Such processes can be adopted in any business setting. A notable example of an organization with a well-developed process for improvement is Caterpillar. As part of a transformation launched in 2001, it adopted a continuous product improvement (CPI) process that enables dealers and service representatives to communicate issues raised by customers to the wider organization. When a problem arises, a CPI team from Caterpillar contacts the customer to understand its scale and impact, launches an investigation, and in due course reports back to the aggrieved customer with its findings. It also shares the information with dealers worldwide so as to assist other customers facing similar issues, and with new product development so that relevant findings can be used to improve future product design and manufacture. Thanks to this and other elements in its change effort, Caterpillar was able to deliver an 80 percent increase in revenue from 2001 to 2005.

·       Adopting methods that facilitate continuous learning gives an organization a chance to pause, step back, and take stock of what's working, what isn’t, what it means, and what to do about it. The U.S. Army's After Action Reviews (AARs) serve precisely this purpose, and involve interested observers as well as soldiers from all ranks. They turn training activities into a learning process that asks what was planned, what actually happened, why, and what could be done better next time. The aim is not to judge success or failure, but to focus on learning from the experience so that the organization is better equipped to meet similar challenges in the future. To build its institutional capability in R&D, pharmaceutical company Pfizer holds periodic “lessons learned” sessions for researchers. Such sessions don't necessarily have to take place after the event; “premortems” can also be held to challenge assumptions. Psychologist Gary Klein describes a process in which managers ask members of their team to play devil's advocate and compete to articulate plausible ways that a project might go wrong. As he explains, the strength of the technique is that “The whole dynamic changes from trying to avoid anything that might disrupt harmony to trying to surface potential problems.”7 Moreover, learning shouldn't be confined within the walls of an organization. One international airline studied how pit stops were orchestrated in the Indianapolis 500-Mile Race to help it develop a more efficient luggage-handling system. In much the same way, a construction company took route-planning lessons from a pizza-delivery chain and was able to raise its rate of on-time cement deliveries from 68 percent to 95 percent.8

·       Having dedicated expertise enables organizations to ensure that continuous improvement gets the attention it deserves. Although continuous improvement is everyone's job, companies that excel at it tend to charge certain people and groups—often former members of the program management office—with helping it to happen. Estimates suggest that two-thirds of Fortune 500 organizations have dedicated expertise, typically a core team of skilled individuals who direct and coordinate improvement activities.9 Motorola has three such teams: kaizen teams that address relatively simple challenges; lean teams that focus on cross-functional projects; and Six Sigma teams that perform deep process analytics to resolve complex challenges. At Dutch insurer Eureko, the 200 lean experts trained as described in Chapter 6 continued in their roles and the company also put 20 experts on behavioral change in place to help the Achmea health division with continuous improvement. Public sector organizations are also beginning to invest in dedicated expertise. One Middle Eastern government is setting up an innovation unit to study excellence in government and to identify and share best practices. Expert teams will help government entities implement innovative ideas on the ground, and regular networking events will be staged to facilitate exchange between practitioners.

All four of these elements must be highly tailored to an organization's context. Some organizations will need to stress particular elements more than others. The key to success is to ensure that all the elements are thoughtfully designed and mutually reinforcing.

Let's now move from the organization to the individual, and the qualities of leadership you need to keep an organization constantly moving forward. But before we do so, a quick health warning: even the most capable leaders will struggle to drive continuous improvement if the infrastructure is lacking. To borrow a phrase from the father of modern continuous improvement processes, W. Edwards Deming, “A bad system will beat a good person every time.”

Health: Centered Leadership

Creating a continuous improvement infrastructure lays the foundation for ongoing performance. But what about health? The core requirement here is the right kind of leadership.

It's partly a matter of mindsets. Eureko's executive board member Jeroen van Breda Vriesman observes that “It's very important that [leaders] understand that continuous improvement is not a program with an end point. It's about coming to work every day with a new mindset. To understand and really feel that distinction is very important. You can almost see in the results whether top management is implementing continuous improvement or just implementing a program.”10

Naturally, leadership competencies are vital, too. Putting the right mindsets together with the right competencies is what breathes life into an organization's continuous improvement infrastructure. Although we've chosen to discuss leadership competencies as part of the “advance” stage, in practice the effort to build them takes place right from the beginning of a transformation.

Our research shows that change programs that explicitly address leadership competencies are 3.2 times more likely to succeed than those that don’t. But that's not an easy thing to do well. In a recent survey of CEOs and senior executives, 76 percent cited leadership development as important, yet only 7 percent thought their organization was doing it effectively.11

So what competencies do you need to lead a continuously improving organization? To be sure, there are many ways to lead, and no shortage of models and theories to help (or confuse) actual and aspiring leaders. The literature on leadership is almost as extensive as that on change management, as a visit to Amazon.com will confirm. We don't propose to discuss technical skills such as goal setting, problem solving, communications, team building, and so on, as these topics are covered in great detail elsewhere. Rather, our aim is to distill the competencies and mindsets that matter most in driving continuous improvement.

These things don't just enable leaders to be effective in driving performance and health, but also keep them passionate about their work and satisfied with their lives. In this way, they help leaders avoid the traps of burnout and exhaustion that lie in wait when the adrenaline-fueled intensity of transformation gives way to the ceaseless effort of continuous improvement. We refer to these competencies and mindsets as centered leadership.

Centered Leadership Defined

The centered leadership model comprises five elements, which, when combined, give leaders the resilience and emotional capacity to continuously improve themselves as they continuously improve their organization (Exhibit 7.1).

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These elements are:

·       Meaning: finding and communicating personal meaning in work, and enabling others to tap into their own sources of motivation and purpose.

·       Framing: discovering opportunities in adversity by viewing even the most difficult problems in a way that opens up constructive and creative solutions.

·       Connecting: taking active steps to build a web of internal and external relationships.

·       Engaging: generating the confidence to step up and act, involving themselves and others in the face of uncertainty and risk.

·       Energizing: investing systematically in one's own physical, mental, and emotional energy and creating the practices and norms needed to energize others.

A McKinsey Quarterly survey of 1,147 executives found that the five elements of centered leadership are mutually reinforcing.12 Respondents who reported that they frequently practiced four or all five gave high ratings to their passion for their work, their effectiveness as leaders, and their satisfaction with life (Exhibit 7.2).

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We'll now take a closer look at these elements, bearing in mind that as important as each one is, it's the combination of all five that gives the centered leadership model its power.

MEANING

In the centered leadership model, “meaning” relates to a leader's ability to motivate himself and others. Leaders who score high on meaning feel a deep personal commitment to the work they do, and pursue their goals with energy and enthusiasm. They know their strengths, use them to the best of their ability, enjoy their work, and inspire others to do the same. Of all the dimensions of centered leadership, meaning makes the greatest contribution to satisfaction with work and life. In fact, our survey shows that its impact on overall life satisfaction is five times more powerful than that of any other dimension.13

The idea that meaning is the prime source of personal energy is not new. Research by leading thinkers such as Danah Zohar, Don Beck and Chris Cowen, and Richard Barrett has shown that inspirational leadership is not about charisma and cheerleading—it's about engaging fully in one's own purpose and helping others connect with theirs.14 People achieve the most extraordinary feats if their purpose is truly meaningful to them. Of course, the opposite is equally true: when you can't help wondering “Why am I doing this?” it's hard to get great results.

Aristotle argued in the fourth century BC that people achieve “eudaimonia,” a contented sense of flourishing as a human being, when they use their talents to the full, thereby satisfying their basic function in life. In the twentieth century, psychologist Abraham Maslow gave the concept the new name of “self-actualization” and put it at the top of his hierarchy of human needs.15

Meaning is closely linked to happiness and energy. Engaging in activities that you choose to do, that use your core strengths, and that give you a sense of purpose leaves you with a deep and enduring sense of fulfillment. When this happens, hard work energizes rather than depletes you. Similarly, when leaders connect to their own source of authentic purpose, they create positive energy around them, becoming more compelling as role models and more inspiring as communicators. As they get better at helping the people around them to do whatever they are doing, they unleash a huge amount of collective energy in their organization.

A strong sense of personal meaning boosts motivation, generates followership, and enhances personal and business productivity in ways that formal incentives or sanctions can't match. And leading from a place of meaning creates a virtuous cycle. The greater your contribution to something bigger than yourself, the deeper the sense of meaning you derive from it, the more you inspire others, and so on. As well as influencing others and improving outcomes, you also derive great personal satisfaction.

Research by psychologist Sonja Lyubomirsky indicates that short of undergoing brain surgery, finding meaningful work is the best way to increase happiness over the long term.16 This is confirmed by thinkers in the field of positive psychology, which focuses not on treating mental illness but on making normal life more fulfilling. They define happiness in terms of three states: pleasure, flow, and meaning (which is foremost in the hierarchy).17 The notion of “meaning making” is entering the business lexicon. Gary Hamel, a business thinker and the author of our Foreword, urges modern managers to see themselves as “entrepreneurs of meaning.”18

But what does that involve in practical terms? CEO Tom Glocer can shed some light on this. Having taken the top job at Reuters during troubled times in 2001, Glocer got to work with his leadership team and turned the company around. So far, so good, but soon people started to wonder: What next? As Glocer comments, “The imminent threat of collapse had fueled all of us, but what was the rallying cry now?”19

Glocer proceeded to reflect on what the organization's deeper sense of purpose might be, and held many dialogues with other leaders to encourage them to do the same. Gradually a purpose emerged that everyone was passionate about: improving the quality of decision making for individuals, organizations, and society in general by providing the right information at the right time. When Reuters merged with Thomson in 2008, the organization acquired the enormous scale it needed to achieve this ambitious goal. Under Glocer's continued leadership, it has built on its strengths to become one of the world's leading sources of information for businesses and professionals, with 55,000 employees in more than 100 countries.

FRAMING

The frame we use to view the world and process our experiences can make a huge difference to personal and professional outcomes alike. Optimists who choose to focus on the opportunities in any situation have a clear edge over pessimists who focus on the threats.

Optimism correlates with success and much more: health and popularity, for starters. As Bill Clinton famously remarked, “No one in his right mind wants to be led by a pessimist.” Of course, not everyone is a born optimist. Many of us aren’t, and researchers say that as much as 50 percent of a person's outlook is genetically determined. However, in Learned Optimism, Martin Seligman argues that optimism can be acquired.20 Pessimists can't change their basic personality, but they can learn to apply the tools that optimists habitually use without even realizing it to put events and situations into their proper context.

It's easy to see how positive framing can improve leadership capabilities. Pessimists tend to view negative situations as permanent, pervasive, and personal. This can limit their range of thinking, preventing them from seeing strategic options and rapidly draining energy in a downward spiral. Conversely, optimists view negative situations as temporary, specific, and externally caused. This helps them see the facts for what they are, identify new possibilities, and act swiftly.

Imagine you're giving a presentation to your bosses. They seem distracted, and halfway through, the most senior leader gets up and leaves the room. At the end of your presentation, you get a subdued response rather than the fanfare you'd secretly been hoping for. As you leave the room, what are the thoughts that run through your head? Do you wonder if your content or delivery were off the mark? Do you start to worry that management has lost confidence in you? Could your career be starting to spiral?

Or does it cross your mind that the team may be grappling with an urgent problem that's only just arisen? Perhaps your presentation came at a bad time, and yet they value you so much that they didn't want to cancel your slot? You might even have taken the opportunity to stop and ask, “Should I carry on with this, or do you need to be somewhere else right now?”

We all constantly make assumptions about our environment, whether through an optimistic or pessimistic lens. For leaders, optimism, be it learned or innate, is at the heart of resilience: the ability to absorb shocks, assess their implications, and respond effectively. Taking risks, as all leaders must do, exposes us to the risk of failure. When things go wrong, it's positive framing that enables us to recover gracefully. Pessimism, on the other hand, can lead to a relentless dwelling on the negative that can paralyze a leader and stop the organization in its tracks.

To be clear, positive framing is not the same as what people call “the power of positive thinking.” Research shows that talking yourself into a positive outlook has at best a temporary effect. In any case, genuine optimists tend to be realists. Perhaps surprisingly, they are more able to face the brutal facts than pessimists are. They are susceptible to a different kind of pitfall: persisting in trying to resolve an intractable problem long after it's become time to move on.

The need to strike a balance between hope and realism is vividly illustrated in the “Stockdale paradox” described by Jim Collins in his book Good to Great. Admiral Jim Stockdale was the highest-ranking U.S. military officer in the so-called “Hanoi Hilton” prisoner of war camp at the height of the Vietnam War. Imprisoned from 1965 to 1973, he was frequently tortured, and had no prisoner's rights, no release date, and no certainty that he would ever see his family again. How did he survive? “I never doubted not only that I would get out, but also that I would prevail in the end and turn the experience into the defining event of my life . . . [But] you must never confuse faith that you will prevail in the end—which you can never afford to lose—with the discipline to confront the most brutal facts of your current reality, whatever they might be.”21

Australia's first woman prime minister, Julia Gillard, who took office in 2010, sums up the power of framing well: “If you worry about everything that can go wrong, you would never do anything. You've got to be able to focus on the things that really matter and not lose too much sleep on the rest.… in the exposure of national politics, if you got upset every time a newspaper columnist wrote something negative, or a voter came in to critique . . . then you wouldn't get through it.”22

Leaders who frame things positively can sometimes snatch victory from the jaws of defeat. When Thomas Edison was 67, his laboratory was destroyed in a fire. His response as his life's work lay in ruins? “There's great value in this disaster. All our mistakes are now burned and we can start anew.” Three weeks later, he produced his first phonograph.

Another leader who has triumphed over adversity by framing his experiences in a positive light is Steve Jobs. After co-founding Apple in 1976, he was forced out in 1984, an event that many an executive might have regarded as a career-ending body blow. But Jobs didn't see it that way: “Getting fired from Apple was the best thing that could have ever happened to me. The heaviness of being successful was replaced by the lightness of being a beginner again . . . it freed me to enter one of the most creative periods of my life.”23

As well as creative, it proved highly lucrative. Not long after leaving Apple, Jobs made the most profitable investment of his life: picking up the computer graphics division from George Lucas's Lucasfilm for US$5 million. The company didn't succeed in turning a profit in its original capacity as a graphics hardware developer, but it did rather better in its subsequent incarnation as Pixar. After forming a partnership with Disney, it scored a massive public and critical hit with its first film, Toy Story, in 1995, whereupon Jobs engineered an exquisitely timed public offering that made him an instant billionaire. A handful of blockbusters later, Jobs sold Pixar to Disney in 2006, in a deal that netted him a seat on its board and a share of its stock worth more than US$3 billion.

Jobs didn't do too badly back at the old firm either. After returning to Apple as an adviser in 1996, he became interim CEO in 1997, and subsequently CEO and chairman. Under his leadership, Apple has produced a stream of products that transformed high-tech boxes into some of the most desirable goods on the main street. The elegant pared-down design and innovative features of the iPod, iPhone, and iPad have captivated consumers, and the almost 18-fold rise in Apple's annual net income from 2000 to 2010 has kept shareholders happy as well.

CONNECTING

Another mark of the centered leader is the ability to forge relationships with influential people from many different stakeholder groups. Centered leaders build complex webs of connections that both amplify their personal influence and accelerate their personal development because of the diversity of ideas and experiences that they encounter through their contact with others.

Relationships are essential to our well-being, of course, as well as our success. However, we don't always give them the attention they deserve. Ronald Heifetz and Marty Linsky argue that people who are thoughtful about personal relationships are more successful as leaders.24 When it comes to building relationships, researchers have shown that women and men typically adopt different approaches.25 Whereas women prefer to build a small number of deep relationships, men tend to build broader but shallower networks.

Organizations need both types of networks, in fact, and both can be mastered by anyone. Broad but shallow networks provide a wide range of resources that help us expand our knowledge and professional opportunities, and make it easy to enlist enough people to drive change. Narrow but deep networks can give us access to the “let me tell you how it really is” type of advice that comes from a more intimate relationship based on knowledge and trust. Psychological research shows that this kind of relationship is also one of our greatest sources of fulfillment.

When we advocate building a network of influential people, we don't mean one that consists only of our peers or superiors in the organization hierarchy. Junior employees should be included, too—a type of networking that Jack Welch called “reverse mentoring.” He hit on the idea when he realized that he was struggling to use the internet effectively, and connected up with two much younger people at GE who could help him get up to speed. Finding the approach effective, he got his top 500 leaders to look for internet mentors of their own, recommending that they choose someone below the age of 30.26

The ability to connect and network requires a strong grounding in emotional intelligence: sensitivity to our own and others’ emotional states. Thomson Reuters CEO Tom Glocer has observed that in his experience, truly exceptional leaders have “much higher amounts of emotional intelligence” than others.27 Fortunately, EQ is learnable, as we saw in Chapter 5. Emotionally intelligent leaders quickly establish rapport with others through a combination of attention and empathy. Their relationships are based on reciprocity, with equal give and take. Social psychologist Johnathan Haidt notes that “Relationships persist to the degree that both people involved believe that what they are getting out of the relationship is proportionate to what they put in.”28 At work, such reciprocal relationships can have a powerful effect on performance.

Leaders can use their EQ to be strategic about where they connect. Approaches such as social network analysis (described in Chapter 5) enable them to work out where they may have gaps in their networks so that they can take steps to fill them. Networking consultant and executive coach Carole Kammen encourages leaders to seek out a whole host of benefits in their networks: wisdom and experience, a sympathetic ear, challenges and shifts in perspective, help in navigating the social system, nonstop coaching, visionary inspiration, and sponsors who will pound the table for you.

Organizations can do a lot internally to get the right people together and encourage them to pool their wisdom across geographies, hierarchies, and silos. At W. L. Gore, makers of Gore-Tex waterproof fabric, the founders banished formal structures outright to allow fluid working teams to form and thrive. As part of the system, new hires are expected to focus on building relationships during the first three to six months of their careers. HR leader Donna Frey explains, “Often new associates will say, ‘I don't feel like I'm contributing. I've spent three months just getting to know people.’ However, after a year they begin to realize how important this process was.”29

Most senior leaders are used to delegating to a small team of top executives with well-defined roles. Cisco Systems does things differently. CEO John Chambers works with cross-functional “collaborative councils” to set and implement strategy. As we saw in Chapter 3, he admits that learning to work this way didn't come easily, but it has allowed Cisco to be far more nimble as a company. “The days of being vertically integrated and having everything within your control will never return,” he declares.30 When senior leaders like Chambers take on the responsibility of “connector-in-chief,” they start to think less about “who works for me” and more about “who does what.”

A final benefit of having a strong personal network is the learning and growth that comes from exposure to a multitude of different perspectives. As U.S. property and business magnate Donald Trump puts it, “Watch, listen, and learn. You can't know it all yourself. Anyone who thinks they do is destined for mediocrity.”

ENGAGING

Engaging is about being willing to take bold action. We approach work and life with the mindset of “If it's to be, it's up to me.” We feel we are personally accountable and can positively influence our own experience, our team, and our organization. On the other hand, people who are disengaged tend to be passive and feel that events are out of their control. Rather than trying to fix problems, they attribute blame. In our survey on centered leadership, respondents who indicated they were poor at engaging—with risk, with fear, or even with opportunity—also lacked confidence: only 13 percent thought they had the skills to lead change.31

In the 1950s, psychologist Julian Rotter developed the theory that our personalities are determined not just by our innate character traits but by the way we engage with society. He introduced the concept of “locus of control” and argued that people who have an internal locus of control understand they are agents with the power to determine outcomes, whereas people with an external locus of control believe that their actions have no bearing on their fate.32 Engagement differs from framing in that positive framing enables us to see an opportunity, while engagement gives us the courage to risk capturing it.

Writing in 1951, the mountaineer and author W. H. Murray sums up one of the things that makes engaging so powerful: “Until one is committed, there is hesitancy, the chance to draw back, always ineffectiveness.… the moment one definitely commits oneself, then providence moves too.” For him, engaging sets in motion a whole chain of events that “[raises] in one's favor all manner of unforeseen incidents, meetings, and material assistance which no man could have dreamt would have come his way.”33

So how can we expand our level of engagement? It helps if we have an elementary grasp of how the physiology of the brain governs our instinctive responses.

Put simply, the brain consists of three parts: the brain stem, which deals with basic functions such as breathing; the limbic system, which regulates emotions; and the neo-cortex, which governs logical reasoning and creativity. Within the limbic system is an organ called the amygdala whose function is to save us from physical or emotional harm. As information about our surroundings enters our senses, the amygdala tests it on the way to the neo-cortex to determine whether we have time to think. If it detects a threat, it short-circuits our rational thought processes and prompts an immediate reaction.

Should a car roar toward you as you cross the road, you instinctively leap out of its path. Only when you're safely back on the curb does your brain take the time to work out what's just happened. Thinking first and acting second would have ended in disaster, or so your amygdala tells you. But our instinctive reaction can often be out of proportion to the actual threat: cars don't as a rule try to mow down pedestrians. This “amygdala hijack”—the term given to what happens when our emotional response overwhelms our rational thought processes—isn't confined to life-or-death situations. It also operates in the workplace, where it can have powerful unintended consequences.

Imagine your amygdala interprets an innocent comment from a colleague as a threat. It could trigger an instinctive “fight, flight, or freeze” response of anger, withdrawal, or denial. This can set off a downward spiral both internally (resentment or thoughts of revenge) and externally (passive-aggressive nodding to feign agreement or a heated row). But simply by being aware of this process, centered leaders can take stock, ground themselves, and choose the most constructive response. Instead of letting instinct take over, they can take ownership of the situation, understand it more fully, and seek a solution.

A survivor of the Auschwitz prisoner of war camp who went on to write Man's Search for Meaning, Victor Frankl, speaks of the power of exerting control over one's instinctive responses: “In between stimulus and response lies the freedom of choice.” For leaders, this freedom manifests itself in a willingness to speak up and take ownership of their careers (and their lives) by facing fears, seizing opportunities, and making efforts to further their goals.

A powerful example of engaging comes from Jean Vanier, the Canadian founder of L’Arche. Taking its name from the French for “ark,” it's an international organization that creates communities where people with and without mental disabilities can live together and support and learn from one another. Back in the early 1960s, Vanier's friendship with a French priest had led him to visit a number of institutions for mentally disabled people. He was shocked by the conditions he found there: “a kind of warehouse of human misery” was how he put it.34

Convinced that the people incarcerated in these institutions had not only rights but gifts they could share with others, Vanier threw all his energies into what became a lifelong campaign to rethink the role of mentally disabled people in society. His first step was simple, but bold: he bought a house and invited two men to leave their institutions and share it with him. And so the first l’Arche community was born.

The idea and the community grew rapidly, and Vanier began to hold conferences and retreats around the world to share his experiences and develop a new model that was to transform the lives of thousands of people. L’Arche is now a federation of 137 communities spanning 40 countries. Vanier's engagement in overturning centuries of prejudice and ill treatment won him numerous awards, including the French Legion of Honor and the Companion of the Order of Canada. But the real winners are the residents of the l’Arche communities. A resident with no disabilities explains, “Since living here, I am convinced that spending time together is more important than what we do for people, or the skills we can teach them. Most of the folks [people with disabilities] aren't used to people choosing to be with them, and genuinely liking them. That's what we can really give.”35

Another example of an engaging leader is Oprah Winfrey. Born into poverty in rural Mississippi, she has lived the archetypal “rags to riches” story. Her childhood home had no electricity or plumbing, she was often left to fend for herself, and she suffered physical and sexual abuse from an early age. These early experiences could easily have blighted her whole life. Instead, she found that she could channel them into her work, first as a radio anchor at the tender age of 19, and later on TV. In what at the time was a risky move, she engaged her audience by sharing her own experiences and fears directly with them.

After delivering a huge ratings boost within months of taking over the morning talk show AM Chicago in 1984, she went on to develop her reputation as “the queen of talk” over the course of a long TV career in which she created deep trust with audiences in the studio and at home by combining openness with “plainspoken curiosity, robust humor, and above all, empathy.”36 The phenomenal success of her multiple-award-winning Oprah show has made her one of the most influential people in the world according to the lists compiled by Forbes and Time magazine. She was even credited with helping Barack Obama in the 2008 presidential election by delivering him a million extra votes.37

Engaging is not just about being willing to take risks and pursue bold aspirations. It's also about doing more than is expected of you. Merck CEO Richard Clark led the creation of a joint venture with the Wellcome Trust to develop affordable vaccines for diseases that are rife in poorer countries. No one asked him to do it; he simply saw what had to be done and took the challenge upon himself. As he explains, “There is a critical need to develop new ways for scientific innovation to be translated effectively into new vaccines that can save lives and protect the health of people living in low-income countries. We believe that success in bringing forward these new vaccines can be best achieved through productive partnerships.”38 And so he went for it.

As these stories illustrate, engaging means being willing to step outside your comfort zone. That can feel awkward, stressful, unnerving, scary, even terrifying—“uncomfortable” is the least of it. But stepping outside your comfort zone can also be exhilarating, as anyone knows who has ever leaped out of a plane, taken a bungee jump off a bridge, or done any back-country skiing.

No matter how you feel, though, what actually happens when you step outside your comfort zone? In effect, what you're doing is entering a learning zone instead. As you learn, you get accustomed to situations that you used to find challenging; then you start to master them. In time, your comfort zone expands as you move from learning to mastery in one set of situations after another. And by stepping from your comfort zone into the learning zone on a regular basis, you also become comfortable with the process of doing so.

This process is right at the heart of continuous improvement, for organizations as well as individuals. It's about recognizing, in the words of Irish footballer Jim Goodwin, that “The impossible is often the untried.” Continuous improvement won't happen unless leaders are prepared to spend a lot of their time trying to do things that were previously regarded as impossible.

ENERGIZING

Continuous improvement requires enthusiasm and commitment from a mass of people across the whole organization. This will be hard to sustain unless leaders systemically restore their own energy levels and create the conditions for others to do likewise.

Psychologist Mihály Csíkszentmihályi has observed that fully employing one's core capabilities to meet a goal or challenge creates a mental state of “flow,” in which work becomes effortless and time seems to stand still.39 Athletes describe this feeling as being “in the zone”; musicians call it “in the groove.” Csíkszentmihályi studied thousands of subjects, from sculptors to factory workers, and asked them to record their feelings at intervals throughout the working day. When he correlated flow to performance, he found that individuals with frequent experiences of flow were more productive and derived greater satisfaction from their work. They also set themselves goals to increase their capabilities to meet greater challenges, thereby tapping into a seemingly limitless well of energy. In fact, their experience of flow was so pleasurable that they expressed a willingness to repeat flow-generating experiences even if they were not being paid to do so.

Flow sounds great, but how do we achieve it? According to Csíkszent-mihályi, it happens when we set goals that challenge us and require all our skills; when we give an effort our full attention and focus; and when we receive regular feedback from the environment so that we can fine-tune our efforts for the greatest possible impact. These conditions enable us to tap into all our energy sources in the moment.

But what if we do every one of these things and still fail? If that happens, and there are sure to be times when it does, our ability to pick ourselves up off the floor, restore our energies, and start again will be key. This is where the other four elements of centered leadership come together: reflecting on our purpose and strengths, maintaining a positive outlook, reaching out to our networks, and boldly moving on to the next challenge. The ability to recover gracefully from failure is at the heart of resilience—a leadership characteristic that is essential to leading continuous improvement.

To encourage flow, leaders can adopt specific practices that increase mindfulness. Anna Wise's book The High-Performance Mind explains how brainwave patterns affect our ability to perform.40 She used an EEG (electro-encephalograph) machine to measure what happens in the brain when individuals move from a state of stress or distraction to a state of focus or flow. By building on these findings, researchers have developed techniques to help leaders achieve a degree of mastery in moving in and out of states of flow.

Simple tactics like energy management can also increase the amount of flow leaders experience in their work and personal life. Tony Schwartz and Jim Loehr, professional speakers, writers, and founders of the Energy Project, recommend that people should manage their energy rather than their time. Time is finite, so managing it is like dividing up a pie. But if you manage energy well, you generate more, and so the whole pie gets bigger.41

Our research shows that it's possible to adapt our routines at work and at home to boost our energy reserves and make the pie bigger. We can manage our personal stocks of cognitive, social, spiritual, physical, and emotional energy by identifying the situations that deplete or restore them. Which is which isn't always obvious, since the same activity can have different effects on different people. Take driving home at the end of the day. For some people, it can be calming and restorative—a buffer between work and home that provides a space to recover from the events of the day. For others, the same drive in the same car in the same traffic can be stressful and draining.

This puts a new spin on the concept of work/life balance. At work, we can encounter experiences that restore our energy as well as those that deplete it. Once we know which experiences have which effect, we can arrange our daily activities so as to keep our energy reserves topped up instead of emptying the tank.

Some enlightened companies have embraced this idea and actively encourage employees to top up their energy levels, whether by conventional or unconventional means. Staff at Google can devote as much as 20 percent of their time to working on whatever they choose, enabling them to take a break from their day job that both restores their energy and creates something of value. This proved a smart move for Google, too: it reckons that up to half of its new products have been hatched by staff pursuing their own pet projects. And not content with providing a gym to help employees keep fit, the company encourages them to walk between the scores of buildings spread across its extensive campus. Recognizing the importance of sleep in maintaining energy levels, Google allows staff to take breaks when they need it, and has even set up special “nap pods” at various locations across its site.42 Nutrition is part of the energy equation, too, with 11 restaurants, numerous micro-kitchens for healthy snacks, and just a single vending machine, in which chips and cookies cost far more than the more nutritious alternatives available.

Other organizations are working along similar lines. ANZ sets aside relaxation rooms so that employees can recharge during the working day. It also allows employees to take up to four weeks of unpaid “lifestyle leave” on top of their normal annual entitlement to use as they see fit. In much the same way, Sony Europe offers “chill-out” rooms, recognizing that although its business is about technology, it depends on people.

In the end, though, it's up to us to take responsibility for energizing ourselves. That might mean something as simple as turning off our cell phones or setting aside a regular time in our day for reflection. Equally, it might mean something more elaborate. Consider the story of Jurek Gruhn, the president of Novo Nordisk US, a pharmaceutical company with particular expertise in diabetes care. When Gruhn was himself diagnosed with diabetes, he was forced to adopt a healthier lifestyle: “I eat breakfast now every day, I exercise much more, and I started rock climbing on a regular basis.”43 But he found that the energy payback made it all worthwhile: it wasn't just his health that improved, but his mental focus, emotional satisfaction, and spirit, too. He made changes in his working life as well. When unhealthy conflict came up, for instance, he tried to address it quickly and directly rather than let it fester below the surface, as he might have done before.

The Journey to Centered Leadership

Taken together, the five elements of centered leadership help people achieve their goals in work and life through a strong sense of purpose, belonging, lightness of being, resilience, and control. Centered leaders are well equipped to drive continuous improvement and to make the most of all the challenges and opportunities that come when you are doing something new every day. So how do you and others in your organization become more centered leaders?

In most cases, the journey to centered leadership takes a lifetime of experience. That said, it is possible to hasten your progress along the road. In fact, a transformation offers the ideal conditions: hectic activity, widespread uncertainty, and numerous opportunities for feedback.

As with any development effort, the best way for an organization to build centered leadership competencies will depend on its culture and context. However, most successful efforts share certain characteristics. They:

·       Have a direct link to performance improvement. Centered leadership attributes are best developed in the context of a live business project that poses demands and offers opportunities that stretch the leader. This anchors learning in the real world and ensures it is retained.

·       Start from a quantifiable baseline. The extent to which a leader embodies the five attributes of centered leadership can be established through a self-assessment coupled with 360-degree feedback. Gathering such information not only yields insights into strengths, gaps, and blind spots, but also sets a baseline against which to measure progress during the development journey.

·       Accommodate different learning styles. People learn in different ways, so leadership development efforts need to employ a range of cognitive, visual, and kinesthetic methods and media. Typical activities might include making videos, performing role plays, discussing real-life cases, telling stories, and taking part in simulations. People vary in their pace of learning, too, so at least part of the program must be self-directed.

·       Allow for self-discovery. A directive approach is not the best way to reach bright, thoughtful people; they must want to change and grow. The secret to lasting leadership development is to instill a felt need to learn, and then offer content that enables participants to derive their own insights. To mangle a proverb, centered leadership programs are less about leading a horse to water than about making it aware that it's thirsty.

To see how the pieces of the jigsaw fit together, consider the case of a large chemical company that had devised a comprehensive process for building centered leaders. It selected 25 people who were high performers, good at leading people, eager to learn, and in positions of influence where leadership skills were most needed. Each of these 25 leaders then chose two senior sponsors and three junior people to coach. That multiplied the original 25 participants by five so that the program reached 125 people in all, creating a nucleus for change in the organization.

The learning journey for the 25 core participants revolved around eight days of forum-style training conducted in three sessions over six months.

The first forum focused on applying centered leadership principles to leading oneself. Participants learned to be accountable for their behavior in difficult situations, to regulate it, to manage their energy and attention so as to maintain their productivity, to develop a strong support network, to leave their comfort zone and commit to opportunities, and to use their personal vision to motivate themselves.

The second forum took the attributes of centered leadership and helped participants see how they could be used in leading and influencing others. The topics covered in this session included motivating others by tapping into their sense of meaning, turning difficult conversations into moments of learning, building relationships based on trust, and providing distinctive coaching and sponsorship.

The third forum applied centered leadership principles to leading organizational change. It looked at techniques for working with others to create organizational alignment, generating energy through storytelling, understanding system dynamics and where to intervene, creating an environment for learning and creativity, and keeping a balance between performance and health over time.

Before the forums began, participants gathered 360-degree feedback and did self-assessments. The process was repeated six months later. Between the forums, the participants undertook learning assignments to apply their newly acquired insights and skills in their work on their organization's transformation program. Reflection time was built into the fieldwork through regular individual coaching and small-group peer coaching sessions.

At the end of the journey the leaders had driven advances in performance and health in their parts of the organization, built strong and healthy networks, and become role models not just for “what to do” but also “how to be” in supporting continuous performance improvement.

Let's look at another case to see the specific gains that centered leadership can bring. When John Akehurst took over as CEO at Woodside Petroleum, it was evident that leadership was one among many areas in need of attention. The Woodside Country Club, as it had been dubbed, was in the bottom quartile globally for cost performance, and had a culture of complacency. To tackle these issues, Akehurst launched a transformation that included an extensive leadership program with days of experiential training on centered leadership principles. The program was not just for the senior team, but was cascaded through virtually all of Woodside's 2,000 employees.

By the end of the process, Woodside had such a strong institutional capability that it not only showed resilience to the subsequent series of layoffs and takeover attempts, but positively thrived. Employees’ connection to meaning jumped from 50 percent to 80 percent, and their feeling of being inspired and energized from 60 percent to 85 percent. Moreover, as Akehurst explains, “The way we work together fundamentally changed. We used to spend a lot of time tending to people's egos and building fiefdoms. Through the performance leadership process we saw, there was a more creative, empowering, and encouraging way to lead that still allowed discipline and rigor to be pre-eminent. We also built the courage to go for it and make it happen.”44 In his seven years as CEO, Akehurst turned Woodside into a top-decile performer, creating AU$7 billion of new shareholder value on a base of AU$3 billion.

balcksqure.jpg

The “advance” stage differs from the other four stages in that it's never over. Your organization may have come to the end of its transformation, but there's no end to the task of continuously improving its performance and health.

That's not to say, though, that a continuously improving organization will have no need to go through a full-scale transformation ever again. Such is the pace of change that most organizations are likely to require step-change improvement programs from time to time in response to new customer needs, technological innovations, or shifts in the competitive landscape.45

But being a continuously improving organization represents a powerful competitive advantage. And if your organization can couple the experience that comes from a successful transformation with the capability to continuously improve everything it does, it will be virtually unstoppable, even in the most unpredictable of worlds. To get there, you'll need to put in place a robust continuous improvement infrastructure with knowledge sharing, improvement processes, learning methods, and dedicated expertise. And on top of that, you'll need to use your whole transformation as a platform to build centered leadership qualities that emanate from a core of self-mastery, and that drive continuous performance improvement in a way that energizes the organization, rather than exhausts it.

How does it feel to have worked through the five frames? Who better to ask than John McFarlane, who led the transformation that we described at the beginning of the chapter before retiring in 2007. As he sees it, the journey took ANZ “from a traditional banking culture into a modern, vibrant organization, creating a shared vision of an exciting organization that doesn't just create a one-time change, but gives us momentum into the future.”

Part III

Putting It All Together

8

The Senior Leader's Role

Does Change Have to Start at the Top?

By this point, you should have a clear map of your journey to organizational excellence. This is a journey that will take you through the five stages of aspire, assess, architect, act, and advance to improve both your near-term performance and your long-term health. It's our firm belief that by following this path, almost any organization can transform its performance successfully and sustainably so that it can out-execute the competition consistently over time.

As we've seen again and again in the companies we feature in this book, leadership and role modeling are central to the transformation journey. Both of these should start right at the top of the organization. John Mackey of Whole Foods Market explains why: “As the co-founder and CEO, I'm the most visible person in the company . . . our team members are always studying me . . . I'm always on stage.”1

With that in mind, this chapter is devoted to the role of the senior leader in spearheading a transformation. The senior leader means the CEO in a corporation, the director of a government agency, the head of a nonprofit, or whoever is in charge of an organization, no matter what their title may be. Their role is fundamental: our 2010 survey shows that transformations are 2.6 times more likely to succeed if they have strong involvement from the top of the organization.2

Does that mean this chapter is for senior leaders only? Not at all. By learning what the senior leader's role in a transformation should be, readers at lower levels of an organization—and would-be leaders, too—can help their own senior leader to fulfill it. If you're trying to change your organization, there's no doubt that the path will be easier and more direct if your most senior leader is on your side, supporting you and playing a full role in the change effort.

Reading this chapter gives you an insight into what you can expect of a senior leader who commits to this role. Through dozens of examples, you see what the most effective senior leaders do to lead from the top and channel the energies and passions of their organizations into remarkable feats of transformation and continuous improvement.

Don't forget that when you're trying to get your senior leader on board, you can draw on the influence model from Chapter 5. In doing so, you'll need to give some thought to their personal style and preferences. Whose opinions do they trust? What kind of transformation story will resonate with them? Do they understand and accept the role they need to play? Will they need to build new skills to play it? And are there any processes that would help to make all this happen?

It's also worth noting that the actions we commend to senior leaders, such as spotlighting successes and engaging others, are valuable steps for leaders at any level. But if the lead doesn't come from the top, efforts made further down the organization won't have the impact that they otherwise would.

What Only the Senior Leader Can Do

The senior leader's role is unique. The person at the top of the pyramid provides cues for everyone else in the organization as to what really matters around here.

A senior leader who's perceived as merely paying lip service to a transformation shouldn't be surprised when everyone else does the same. Fail to model the desired mindsets and behavior or opt out of “mission-critical” initiatives and you risk seeing the transformation lose focus and momentum. Only the senior leader can ensure that the right people spend the right amount of time on driving the right changes.

To bring home the importance of the senior leader's role, let's imagine it as a huge gear connected to progressively smaller ones. If the biggest gear does one click as it completes a rotation, the next gear down will click five or six times, and the gear below that 10 or 12 times. Go down a few more gears in the system, and the little gears are spinning very fast indeed.

What happens if the biggest gear changes its mind and decides to rotate in the opposite direction? The gear below screeches to a halt, and then starts moving in the opposite direction as well. Down the line, all the other gears start to shear. Sparks fly and the poor little gear at the bottom screeches so much that it shears right off and out of the system. Such is the power of the senior leader!

Yet surprisingly little has been written about the role of the senior leader in a transformation. Perhaps that's because there's no single recipe for success. The precise nature of the role will be influenced by the scale, urgency, and nature of the transformation, the organization's capabilities, and the senior leader's personal style. That said, our research and experience with scores of transformation efforts have enabled us to identify four key roles played by successful senior leaders:

·       Making the transformation meaningful. The impact of the change story depends on the extent to which the senior leader makes it personal, openly engages others, and spotlights successes as they emerge.

·       Role modeling desired mindsets and behavior. Successful senior leaders typically embark on a personal transformation journey of their own. Through their actions, they show what the new behavior looks like and encourage employees to adopt it in their own daily work.

·       Building a strong and committed top team. To harness the transformative power of the top team, senior leaders must make tough decisions about who has the capability and motivation to make the journey.

·       Relentlessly pursuing impact. Where significant customer impact or financial or symbolic value is at stake, there's no substitute for senior leaders rolling up their sleeves and getting personally involved.

In combination, these four roles help to ensure that the transformation effort wins what we call the “war for the middle.” In most transformations we've seen, there's a small percentage of employees who are completely on board from the outset. At the other extreme, there's another small percentage who may never come on board, and are likely to leave the organization if the changes come to pass. But the majority are in the middle, trying to work out whether this is just a passing fad, whether real change can ever happen, and whether it's worth the energy to get on board and risk being let down again. For this very large group, seeing the senior leader playing these roles goes a long way in persuading them to believe, get on board, and invest in turning the transformation into a reality.

Making the Transformation Meaningful

Transformations call for extraordinary energy, as we've seen throughout this book. Leaders and employees are required to rethink and reshape the entire business while continuing to run it from day to day. A powerful transformation story helps employees to believe in the effort, but its impact will ultimately depend on the senior leader doing three things: making it personal, openly engaging others, and spotlighting successes as they emerge.

Make it Personal

Senior leaders who take the time to personalize the transformation story unlock much more energy than those who dutifully present the PowerPoint slides that their working team has prepared for them. But what does making it personal involve?

Senior leaders need to think carefully about such questions as “How does this relate to me?” and “Why does it matter to me personally?” Then they need to share the answers with others. Effective leaders often talk about pivotal experiences and formative influences in their own lives to underline their determination and demonstrate that obstacles can be overcome.

Indra Nooyi, the CEO of PepsiCo, is open about the struggles she had after setting off from India with a scholarship and not much else: “I had the immigrant feeling arriving in the U.S.… I had to do an extra-good job; if it didn't work out, where was I going to go?”3 She uses the story as a rallying cry to get her colleagues to work harder in the battle of the brands in the hope of one day getting to the very top.

Andy Grove, a former CEO of Intel, the world's largest maker of semiconductor chips, conveys the importance of courage and decisiveness by describing his escape from Hungary during the Russian occupation and his determination to make a new life in the United States. John Chambers, CEO of Cisco, describes growing up with a learning disability to illustrate “how we can overcome anything that comes our way, and why it is so important to treat others as you would want to be treated.”4 David Roberts alludes to lessons from his hero Monty Roberts (the real-life horse whisperer) when he talks about the transformation he led as CEO of Personal Financial Services at Barclays Bank.

David Novak, the CEO of Yum! Brands, which owns franchises including KFC, Pizza Hut, and Taco Bell, neatly summarizes how a personal approach helps employees feel connected to the collective effort: “They see their CEO and it makes a big company small.” He points out that when employees get knowledge directly from their senior leader, they “care more about the company and [they’re] more committed.”5

Openly Engage Others

Once the senior leader has crafted a clear transformation story, success comes from seizing every opportunity to talk about it with employees, explain what it means, draw out its relevance to different parts of the business, and prompt others to find a personal meaning of their own.

Leaders of successful transformations invest huge personal effort in taking their story out into the organization. While he was the CEO at IBM, Lou Gerstner flew more than a million miles to meet thousands of customers, employees, and business partners.6 He famously had a sign in his office that declared “A desk is a dangerous place from which to view the world” to act as a constant reminder of the importance of engaging with people inside and outside the organization.7

As Intuit CEO Steve Bennett explains, “A CEO can't make a series of changes by sending out e-mails. Change management has to happen face to face. It's a big commitment of time.”8 Bennett saw this approach pay off in his turnaround of Intuit from an underperforming tech start-up into a producer with double-digit revenues and four times the earnings it had when he took the helm.

When Corrado Passera became CEO of Banca Intesa, he faced an urgent need to stem the decline in its performance and health. So he traveled the length and breadth of Italy to start spreading the transformation story to the bank's 60,000 employees: “It is a long process, but you have to put your face in front of the people if you want them to follow you.”9

Sometimes leaders need to work especially hard to engage challenging stakeholder groups. Om Prakash Bhatt, chairman of State Bank of India, invested a considerable amount of his time with trade unions: “I spent four days with 30 leaders from across the country . . . [even though] some of my best advisers at the bank warned that the leaders weren't trustworthy and could be disruptive . . . what hooked them was not only the quality of the discussions and the revelations but that the chairman was willing to spend so much time with them, eating and drinking, even singing and dancing.”10

Another powerful technique for senior leaders to adopt is to turn “telling” into “asking.” This is a great way to reinforce desired mindsets and create a deeper sense of perso