Wednesday, July 16, 2008

The Problem of Corporate Transformation

"Business Transformation" is increasingly in vogue as businesses look for ways to deter the inevitable decline that occurs when their core products become commodities or worse. Telecommunications, financial institutions, computer and network hardware manufacturers have all struggled recently.  Companies (Lucent, Nortel, etc) in these industries in particular have goals to dramatically re-engineer themselves to reinvigorate growth.  This then becomes an archetypal transformation:  cut costs, eliminate non-performing product lines, enter new or adjacent markets, offer new products and change the corporate culture. 

One oft-cited example of successful transformation was IBM's change from being the world's largest mainframe computer manufacturer to the largest technology services provider in the world.  But most often dramatic re-engineering does not lead to success.  Corporate Strategy Board research, the most comprehensive to date on the topic, cites a 1 in 36 chance that businesses are able to create a model for sustained revenue growth.  Of these only about 5% are effected through business transformation.  None were the result of entering wholly unrelated lines of business.  The pitfalls are many, lack of core competency with proposed new business lines, loss of strategic direction and the challenges of developing new technology infrastructure or  to support an unfamiliar business. 

In addition, there is a natural tendency for people throughout an organization to reject a new culture.  Corporate change experts talk about the "ten percenters."  The ten percent of the employee base who will never embrace the change.  

With these issues in mind, here are some suggestions based upon experience on how to successfully transform a business, given these challenges:

1) Ensure that a suitable culture change plan is in place prior to undertaking the change. Hire seasoned experts.  There will be no time to "learn while doing" with this type of venture and one cannot afford to fail because employees weren't receptive.

2) Obtain funding for the undertaking before starting.  When beginning extensive technology re-engineering efforts, not having sufficient funding to complete the re-engineering leads to costly redesigns.   It is best to obtain prioritized funding that remains in the funding portfolio for the requisite number of years to complete the project successfully.

3) Create a dedicated transformation organization to lead the effort and an appropriate governance process to manage it across the enterprise. Include both business and technical architects that will lead platform re-engineering and business model re-engineering efforts. 

4) Define concrete measures of success for the transformation that cross the business.  Be aware of interdepartment metrics tradeoffs--e.g. when cost is reduced in one area of the business only to increase in another unnoticed as a result of a process or system change.  Attach the appropriate incentives to these measures to drive their attainment.  

5) Identify empowered executive advocates or sponsors.  It is often best if the sponsor is the chief executive officer or another similarly senior position.

6) Don't underestimate development timelines and costs for the project at the onset and ensure it generates an appropriate return even under these conditions.  In fact a rule of thumb would be to double or even triple informed cost estimates.  Also, don't underestimate benefits that accrue as a result of the change, however. 

7) Engage and involve the highest performers in line functions to assist with the process of transforming the business. It will take that caliber of talent to realize success.  

8) Don't try to do too much all at once.  Engineering such complex changes is best tackled via understanding interdependencies and properly sequencing activities.  

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