The larger and more complex the company, the more are the business transformation pitfalls.
Having driven and followed large-scale business transformations of leading industrial companies, I have seen several successful projects with positive impact on both financial results and the customer experience. Then again, I have witnessed several others who failed to bring the expected business outcome and created enormous stresses on the organisation.
In this article I am discussing a few key reasons that make business transformation a trying exercise, and highlighting the pitfalls which companies should avoid.
Change is a chance
2020 was an exceptional year. Exciting changes gained momentum in most industrial sectors; in life sciences; energy; machinery; transportation; food and beverage; and in retail.
Covid19 has accelerated the changes. Whether it was about the operations, the retail, the communication or even learning and people development, change became inevitable.
The seeds of the current development are deep-rooted in the fast growth of the 90’s. Companies grew large via mergers, acquisitions and rapid expansion within the emerging countries. Growth brought prosperity and high living standards, but also planted some of the issues companies are facing these days.
Adaptability is a must. Yet, many companies, which benefitted from the affluence, including those who set industry benchmarks in the past, are on the rack.
What are the reasons hindering these companies to renew their operations?
In the euphoria of growth, companies developed massive departments without too much care of organisational efficiencies. Margins were high. Unclear structure and overlapping responsibilities were not a concern.
Having recognised some inefficiencies, many companies introduced moderate changes, in the early 2000’s. The real breakthrough had to be waited for since changing the “old boy’s” structure required courage and an appealing vision and determination.
As economies have changed and cost pressure came to the fore, the organisational “silos” became increasingly dysfunctional. Being concerned about their positions, managers often fought their peers, instead of dealing with external risks and elaborating new customer opportunities. Influencing became the norm. Decisions were seemingly made collectively, which, besides being costly, often promoted inadequate decisions.
The complex organisational structure often obstructed the smooth flow of the information, services and the transactions, within these companies.
Not that people were willing to embrace disruptions! Disruptions emerged since the operational processes mirrored the disintegrated organisation.
As many departments were involved, the “end-to-end” processes were not clearly defined, and participants were often driving different agendas.
Whether it was about the “order to cash”; “requisition to pay”; or “record to report” processes, the flow was repeatedly interrupted, and the final outcome was beyond expectations. Even if a smaller unit, let’s say a production cell, was operating seamlessly, once other units came into the picture, for example invoicing; disruption could easily prevail.
Stakeholders were busy; they did not have the time, nor the possibility to dig into the root causes of the cross-functional process issues, in a meaningful way.
Tax optimisation schemes promoting “principal” and “toller” units gave additional complexity to the already multifaceted operations.
Ownership of enterprise master data often remained blurred within the companies growing fast through mergers and acquisitions. Data was managed inconsistently and quality was insufficiently scrutinised. Involved operations and IT teams haven’t realised the increasing importance of granular data, for a long time.
Data scrubbing was a painful and time-consuming exercise, requiring expertise of both the operations and the data architects. No wonder data cleansing was left behind.
As data of the acquired companies was merely “kneaded” into the core business, it created a huge incomprehensible data mess. Consequently, data with the same “label” could cover distinct transaction types; or data with a different “label” could stand for the same kind of transaction.
Due to organisational, process and data deficiencies companies had limited and retarded visibility of what was really happening inside the company and on the outside markets.
It became apparent that costs of the operations were high, analytics were time consuming, and various interpretation of data hindered the effective decision making. Companies have slowly responded to the market changes and have gradually lost competitiveness towards emerging new players.
In the past decade, it became clear for many companies that it was necessary to optimise their organisational structure and streamline their processes.
Many of these companies started with “business transformation” projects before Covid19 affected the economy.
Business transformation had various facets, but within many companies, the main objective was to reduce costs.
Although many have started with customer centred initiatives, for example implementing new product lines or redefining sales channels; these initiatives endured only when the short-term benefits were important enough to cover the costs: a challenging condition for industrial innovations.
Expense optimisation measures were basically around 3 main areas:
1) Transitioning activities into “low cost” places
Although the concept of out-, or in-sourcing to low-cost countries has been known since the 90s; the current cost pressure promoted the outsourcing vigorously to the front. Companies created new Shared Services Centres (SSC’s) and moved more activities into existing ones. Given that the cost difference often exceeds 1:4, such labour arbitrage presented companies with a relatively easy “win” to reduce cost.
2) Standardising and simplifying the process
Realising that “seamless flow” is key to productivity and therefore profitability; companies started to look into standardisation opportunities, reduction of process steps and elimination of “waste” within their processes. To optimise processes “lean” principles were applied. The benefit was not only faster transaction processing, but also a reduction in error rates, satisfying internal and external customers.
3) Introducing systems and digital tools
Aiming for continuous improvement, companies purchased systems (applications) offering automated transaction processing (workflows). An additional benefit of these tools was the increased visibility of transaction time, quality and costs. The applications offered an understanding of costs, not only at an operational level, but also at a team and individual level; or at product and geographic levels, so far as segmentation criteria were defined and available.
Some companies succeeded well and improved operational efficiencies by 20-40%. Others struggled, not only because the cost cutting did not bring sustainable results, but also because occupational stress dramatically increased, causing health issues and burn outs for employees, including executives.
Several companies drew back their first initiatives and started from scratch after re-evaluating their objectives.
Business transformation pitfalls to avoid
Efficiency improvement is undoubtable necessary. What are the pitfalls which cause a slow-down or a failure to the efficiency objective?
Being distant to the human factor
Within those companies which struggle with the structural change, CEOs often lost engagement of their teams. In pursuit of quick tangible results, they ground to a halt honest feedback and failed to mobilise their people.
Insufficient communication and a lack of detailed, people-oriented transition plans created a fear culture within these companies.
Fear culture, even if it seemingly allows fast change, hit back in the longer term, not just because CEOs lost their best people, but also because they could not trust the commitment of those who stayed.
Being afraid of losing their jobs, people naturally hide operational inefficiencies – the exact problem that created the existing challenges in the first instance.
Also, fear blocked creativity, hindered collaboration and weakened the team mindset, which was absolutely needed to overcome the challenging times.
Moving activities into low-cost countries is certainly a way to reduce operational costs, if the move is prepared diligently, considering the need of the core and the receiving teams.
Companies which struggle, have neglected the otherwise important additional transformation costs and looked only into the labour cost only.
Another pitfall was the complete division of the “core business” from the one taking over the activities. Eradication of authorities of the core business team led to frequent disruptions in the preparation, transition and post takeover phases. Full dependence from the off-site team represented financial and business continuity risk, which was not properly assessed and addressed at the preparation phase.
Floundering companies often failed to address the question of how to mitigate conflict between the transitioning and receiving parties? How to turn the obvious conflict of interest into a meaningful collaboration? How to create a structure which allows most of the team to flourish and grow?
Fragmentary “lean” approach
Most companies have realised the importance of “lean” and have increased their knowledge of process excellence tools.
Companies which failed, usually focused on optimising the flow within their existing departments instead of mapping it across the value stream, considering all involved participants.
Organisational silos, given their management was concerned about the change, often hindered creation of a clear “end to end” process, thus, optimisation of the value streams.
Another issue was that companies often separated their “process excellence” teams from their operations, aiming for faster deployment of best practices.
Segregation of “process excellence” from operations management was clearly inefficient and expensive.
Excelling the process requires in-depth knowledge of the operations that people normally acquire working for years in the operations. Once process people step out from their native value stream, their knowledge rapidly fades. Developing process experts and maintaining their knowledge parallel to the operations folks, added additional costs. Ultimately, this was offset by the savings of the operations.
On top of this, as “process excellence” people were involved into many initiatives, their divided focus prevented them promptly addressing improvement opportunities within their native value stream. Loose alignment to the operations objectives often created superfluous conflict within the already challenging environment.
An elusive organisational vision and a disintegrated process excellence view, prevented these companies to capitalise on the lean approach, even if the toolkit and best practices were available.
Insufficient business analysis
Several companies rushed their system implementations in the quest of rapid productivity improvements. Being desperate about automatization, they often overjumped a very important step: the analysis of the business requirements.
The business requirements were not thoroughly defined, therefore, the newly implemented systems could not bring the expected benefits.
Implementing systems without sufficiently analysing the process or implementing a system on a disruptive process was a frustration to everyone participating in such, otherwise strategic undertakings.
Another issue with uncircumspect system implementations was the data. When data is garbage – automatization does not work or works with limited effect; therefore, digitalisation remained a buzzword within these companies, without truly impacting results.
The secret of a successful business transformation
The larger and more complex the company, the bigger the challenge. However, success is possible. Within those companies which succeeded the elements of a successful business transformation toolbox were the following:
1.Clear organisational vision
3.Well defined cascading objectives
4.Incentives promoting the desired outcome
5.Clear “End to End” ownership
6.“Process excellence” aligned to the Operations
7.Thorough business analysis prior to system implementation
8.Clean and consistent data
9.Visibility through consistent KPI tracking
The secret of a truly successful “transformation” is to find the equilibrium between pursuit of the changes at speed, yet prepare the changes with ample attention to details.
In driving changes, the human factor plays the most important role whether it is about defining the lean end-to-end process, or implementing systems with quality data, or in leading companies through the rapid changes of the 4th industrial revolution.
People are important. The key to any successful business transformation is offering people purpose and nurturing their competency pool. Once engaged, adaptable people will build an adaptable organisation.