McKinsey Lane Five Frames 20110128

The Five Frames – A Guide to Transformational Change

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Performance AND health matter

▪ Organisations attain excellence only when leaders manage both performance and health with equal rigour

▪ “Health” can be defined as an organisation’s ability to align, execute and renew itself faster than the competition

▪ Managing health is not something you do in the future; it is about the actions you take today to deliver performance tomorrow

▪ Organisational excellence can be achieved through a five-stage process: aspire, assess, architect, act and advance

“You need to create organisational DNA for long-term success. And that’s what enables you to perform in the short term”

Narayana Murthy, former Chairman of

Infosys Technologies

SOURCE: Interview by Gautam Kumra and Jim Wendler, ‘The creative art of influence: Making change personal’, Voices

on Transformation 1, McKinsey & Company, 2005.


Contents

Health today drives performance tomorrow

The Five Frames of successful transformation

Where are you in your journey to health?


Estimated life span of S&P 500 companies based on company exits

Total return to shareholder of new entrants relative to industry average

Percent

There seems to be a “survivors’ curse”whereby beyond a 20-year life cycle, organisations will struggle to remain competitive and effective

1419

26

45

90

20081995197519551935-10

-5

0

5

10

15

2520151051

Attackers

Survivors

Years

Half of all companies in the S&P 500 in 2008 are likely to be gone by 2015

SOURCE: McKinsey, ‘Creative Destruction’

Competitiveness naturally declines over time


Companies that succeed over time build and maintain organisational health - failure to do so can be an organisation’s downfall

SOURCE: Datastream; Web Search; Press search

40

50

60

70

80

90

100

110

120

130

140

150

Jan-0

4

May-0

4

Sep-0

4

Jan-0

5

May-0

5

Sep-0

5

Jan-0

6

May-0

6

Sep-0

6

Jan-0

7

May-0

7

Sep-0

7

Jan-0

8

May-0

8

Sep-0

8

Jan-0

9

May-0

9

Sep-0

9

CAGR4.26%

Share price of IBMUS$

“Despite its size, IBM has remained nimble and has kept its feet moving by changing with technology trends. Without

question, IBM is distinguishing itself as one of the best-run companies in the world.”

– Business Week (21/07/2009)

CAGR- 54.38%

Share Price of General MotorsUS$

0

10

20

30

40

50

60

Jan

-04

Ma

y-0

4

Sep

-04

Jan

-05

Ma

y-0

5

Sep

-05

Jan

-06

Ma

y-0

6

Sep

-06

Jan

-07

Ma

y-0

7

Sep

-07

Jan

-08

Ma

y-0

8

Sep

-08

Jan

-09

Ma

y-0

9

“GM's core problem is its corporate and workplace culture -the unquantifiable but essential attitudes, mindsets and

relationships passed down, year after year.”

– New York Times (06//2009)


Both performance AND health must be managed

Health

What an enterprise delivers to stakeholders

in financial and operational terms (e.g.,

net operating profit, ROACE, TRS, net

operating costs, stock turn)

Performance

“The narrow pursuit of shareholder value was the dumbest idea in the world”

– Jack WelchFormer Chairman and CEO of GE

Financial Times, August 2009

“We have not achieved our tremen-dous increase in shareholder value by making shareholder value the only purpose of our business”

– John Mackey Founder and CEO of Whole Foods

Reason Magazine, October 2005

The ability of an organisation to align, execute and renew

itself to sustain exceptional

performance over time

SOURCE: Scott Keller and Colin Price, ‘Performance and Health: An evidence-based approach to transforming

your organisation’, 2010.


There are nine vital signs of organisational health

A clear sense of where the organisation is heading and how it will get there

The ability to evaluate organisational performance and risk, and to address issues and opportunities

The extent to which leaders inspire others to act

The shared beliefs and quality ofinteractions across the organisation

The extent to which individuals understandwhat is expected, have appropriate authority, and take responsibility for results

The presence of the institutional skills required to execute strategy and create competitive advantage

The presence of enthusiasm that drives employees to put in extraordinary effort to deliver results

Direction

Leadership

Culture and climate

Accountability

Coordination and control

Capability

Motivation

The quality and flow of new ideas, and the ability to adapt and shape the organisation

Innovation and learning

The quality of engagement with customers, suppliers, partners and other external stakeholders

External orientation

Innovationand learning


Culture and climate

Direction

Accounta-bility

Capability Motivation


Leadership




EBITDA margin

Growth in enterprise value/book value

Growth in net income/sales

1 Comprised of 2nd and 3rd quartilesSOURCE: McKinsey Organisational Health Index data mining effort

Healthy organisations are more profitableLikelihood that organisations with ‘top’ results in health profile have above-median financial performance, %

6848

31

TopMid¹Bottom

2.2x

6252

31

TopMid¹Bottom

2.0x

585338

TopMid¹Bottom

1.5x

“Barclays has survived and prospered only by making tough decisions. This has required leaders to make the right judgements in their time - right for the business of the day, respectful of history and mindful of setting the right path for a healthy business in the future"

John VarleyCEO Barclays,Financial Times

4 June 2009


Organisations typically encounter similar pitfalls in their transformational journey to achieving performance AND health

1. The urgent drives the important out of sight

3. Change programmes emphasise”doing different things” rather than “doing things differently”

6. Planning takes the place of piloting and experimentation

7. Apparent consensus fades when challenged

2. Pressure for progress inhibits discovery

8. Continuity is marginalised in the midst of change

4. Initiatives are created independently, complementarily

5. Standardisation results in insensitivity to context


We have invested in years of learning to uncover the key to successful transformation

44 Leading academics reviewed, challenged and augmented our findings

33 Years dedicated to developing and refining our understanding of healthy organisations

2020 CEOs and chairpersons shared their personal experience with change in face-to-face interviews

Respondents from over 400 organisationscompleted our organisational health survey providing the inputs for McKinsey’s Organisational Health Index (OHI) database

311,000311,000

CEOs and senior executives completed surveys regarding their experience with transformational change

3,0003,000

900900 Academic journal articles and books reviewed


Winning organisations focus on the Five Frames of performance and health to drive sustainable transformational change

Transformation stagesH

ealt

hP

erf

orm

an

ce

Health Essentials

Discovery Process

Influence Model

Change Engine

Centred Leadership

1. AspireWhere do we

want to be?

2. AssessWhere are

we today?

4. ActHow should we

manage the journey?

5. AdvanceHow do we sustain

and improve?

3. ArchitectWhat do we

need to do?

Fiv

e F

ram

es o

f…

Strategic Objectives

Capability Platform

Portfolio of Initiatives

Delivery Model

Continuous Improvement


Contents





Frame one – Where do we want to be?

Which of the following statements best describes the targets your company set to define success for the transformation?

The targets were not well defined

88 12

The targets were well defined but did not stretch the company significantly

73 27

The targets were well defined

and represented a genuine new level of performance

44 56

Relative success

Relative failure

%, N = 2, 694

“Of course, we want to grow and produce

a great bottom line. But in doing so, we

want to be seen as a truly innovative

company breaking new ground and going

into unchartered territories successfully.

We want to make India proud.”

Ravi Kant, Vice Chairman, Tata Motors

Discovery Process

Change Engine

Influence Model

Centred Leadership

Successful transformations stretch aspirations with a clear and inspiring view of the future state

Health Essentials

Source: McKinsey analysis; CEO interviews


A powerful aspiration clearly states which organisational qualities are needed to deliver on strategic performance ambitions

Our strategy

Being the provider of choice for premium customers

Delivering differentiated service for all customers at key touch points

Growing our presence in key locations

Sustaining and building on our leadership position in our hub

Meeting customers’ needs and improving margins through new revenue streams

15

24

3

To be the leading global

premium player in our

industry by…

Our health aspiration

To become a high-performing market-focused organisation –

� Characterised by a pervasive external focus

� Providing the conditions that facilitate innovation

� Internally cohesive and disciplined

Elite

Able

Ailing

InnovationExternal

orientation

Work environment

Direction

Account-ability


Capabilities Motivation

Leadership

CLIENT EXAMPLE


Use rigour to measure health Measure organisational health

Organisation’s health profile n = 260

Direction52%

Innovation & learning

43%


59%

Culture and climate

37%

Capabilities61%

Motivation54%

Account-ability53%

Coordination & control

51%

Leadership 47%

Distinctive, 85% +

Superior, 70%-84%

Common, 50%-69%

Not effective, <50%

0 25 50 75 100

Direction

Leadership

Culture & climate

Coord & control

Accountability

Motivation

External Orient

Innovation & learning

Not Effective Common Superior Distinctive

Capabilities

Leadership driven

Market focus

Performance edge

Knowledge core

Similarity Index

5 8 100

No or weak spike Emerging spike Prevalent spike

Paper n = 85 47%

37%48%

31%

54%46%

47% 51%

49%

Pulp and energy n = 4447%

34%53%

26%

52%43%

49% 44%

43%

49%

45%61%

43%

57%62%

50% 46%

34%

Sales and logisticsn = 23

58%

56%70%

40%

71%58%

52% 60%

57%

Administration n = 43

View results for each dimension of health

Benchmark your organisation against a database of over 400 companies

View organisational fit relative to four health archetypes

Identify perception of health at specific business lines or management levels

SOURCE: Don Beck, Mark Loch, Patricia Oaklief, Raj Ratnakar, Bill Schaninger, Salah Zalatimo, ‘The organisational

health index: Improving and sustaining performance’, McKinsey & Company, 2009


Frame two – Where are we today?

“If the pace of change is slow, it is

because mindsets have not changed. So

that’s the leader’s biggest challenge.”

Narayana Murthy,

Chairman and Chief Mentor of Infosys Technologies

Discovery Process

Change Engine

Influence Model

Centred Leadership

Successful transformations go beyond the surface to identify and shift deep-seated mindsets

Performance impact post transformation

% difference in improvementTransformations focused on systems and process re-engineering only

Transformations incorporating mindset and capability-building interventions

15

25

+67

19

43

+126

34

51

+50

Retailer(Sales-to-labour ratio)

Mining(Productivity increase)

TELCO(Churn reduction)

Health Essentials



The discovery process deep dives into an organisation’s inner workings

Outcomes(e.g. accountability)

Outcomes(e.g. blame)

Practices(e.g. clear performance contracts)

Practices(e.g. no clearperformancecontracts)

Current state Desired state

Behaviours(e.g. ongoingperformance dialogue)

Behaviours(e.g. minimal performance dialogue)

Where are we, and what do we want to achieve?

What changes in practices do we need to achieve the desired outcomes?

What changes in mindsets do we need to make in order to achieve sustainable changes in behaviours?

What changes in behaviour do we need to breathe life into desired practices?

Dig deep to identify limiting mindsets

Mindsets(e.g. “Keep my head down, watch my back”)

Mindsets(e.g. “If it is to be, it is up to me”)




Performance =Potential – Interference

Mindsets underpin performance

Timothy Gallwey’s ground-breaking investigation into how people develop

excellence in sporting and working contexts highlights the potential negative

impact mindsets can have on performance

“There is always an inner game being played in your mind…How aware you are of this game can make the difference between

success and failure”

Hamel and Prahalad’s thought experiment about monkeys’ learned behaviour

illustrates their point that past experiences can create mindsets that limit current

performance

Needs (met or unmet)

Mindsets and beliefs

Values

Individual behaviours

What we seeand attemptto address

What we don’tsee and don’tknow how toaddress

Dig deep to identify limiting mindsets




Value drivers % of value

Underlying mindsets uncovered …Behaviour

Systematic data gathering can help to identify the shifts that are required

To …

25

10

Over 40% of agents do not reach the minimum standards of required performance

Low call resolution with high level of transfer to other internal area (back-office)

Service times met but customer satisfaction scores and quality falling

10

Avg handle time

% Utilization

Call resolution

Cost per call

Wait time

Calls per day

10

20

10

Service quality 15

I filter and transfer calls “I can’t actually resolve client issues”

Cost at the expense of quality“You can’t cut costs and improve service quality and time together”

I am an individual contributor “Its not worth making an effort, I can’t make a difference”

I facilitate solving

client’s issue

We can deliver the

AND

I am a vital part of a

high-performing

team

CALL CENTRE EXAMPLE


Frame three – What do we need to do?

“I came to see, in my time at IBM, that

culture isn’t just one aspect of the game,

it is the game.”

Lou Gerstner,

Former Chairman IBM

Discovery Process

Influence Model

Change Engine

Centred Leadership

Successful transformations support strategic and operational shifts with targeted behavioural shifts

Transformation success rate and reasons for failure

Success

Failure due to behavioural reasons

Failure due to other reasons

10%

10%23%

27%30%

Senior

management behaviour does

not support change

Employee resistanceProgram

achieves objectives

Other obstacles

Insufficientresources/budget

Health Essentials



The four levers in the influence model

Skills required for change

“…I have the skills and opportunities to behave in the new way.”

A compelling story

“... I understand what is being asked of me and it makes sense.”

Role modelling

“…I see my leaders, colleagues, and staff behaving differently.”

Reinforcement mechanisms

“…I see that our structures, processes, and systems support the changes I am being asked to make.”

“I will change my mindset and behaviour if . . .”

Shift employees’ context using the influence model




Expect the unexpected

Money is the most expensive way to motivate people – small, unexpected gestures can have a disproportionate effect

Pay careful attention to achieving fairness in processes and outcomes

!

!

Employees are what they think – address the underlying mindsets as well as the technical skills

Create space for employees to practisenew skills back in the workplace

!

!

Your leaders believe theyalready ‘are the change’ –ensure they are changing aswell

Influence leaders are not that

influential – don’t over-rely on them

!

!

What motivates you, does not motivate (most of) your employees – tell ‘5 stories at once’

It takes both “+” and “-” to create real energy –call out both what is working and what is not

!

!

Expect and leverage irrationality

Skills required for change

A compelling storyRole modelling

Reinforcement mechanisms

SOURCE: Carolyn Aiken, Scott Keller, ‘The irrational side of change management’, McKinsey Quarterly Article, 2009


Frame four – How should we manage the journey?

“It's really very simple. When people feel

they are doing something extraordinary,

their motivation increases. Our people

loved the work they did during the

transformation.”

Filippo Passerini,CIO Procter & Gamble

Change Engine

Discovery Process

Influence Model

Centred Leadership

Successful transformations are designed in a collaborative effort to build ownership and energy

How was your company’s transformation designed and

planned?

The CEO and top team did most of the work themselves

68 32

A small cross-functional team formed especially for the purpose did most of the work

66 34

The transformation was

designed and planned

through a large-scale

collaborative effort

across the organisation

47 53

%, N = 2, 694

Relative success

Relative failure

Health Essentials



Developing a ‘change engine’ consisting of structure, ownership and evaluation is essential to success

Ownership - Roles and responsibilities were clear, so people felt accountable for delivering results

Structure - The transformation was organised into a clear structure with readily understandable sections

Somewhattrue

75

Verytrue

Not atall true

47

88

Entirelytrue

27

x 6.1

Somewhattrue

89Not atall true

78

47Verytrue

Entirelytrue

26

x 6.4

91

28Entirelytrue

73Somewhattrue

Verytrue

Not atall true

47

x 7.3

Evaluation - Clear, unambiguous metrics and milestones were in place to ensure that progress and impact were rigorously tracked

73

52

25

12

74

53

23

11

72

54

27

9

%, n = 2,044%, n = 2,057%, n = 2,041

SOURCE: McKinsey Quarterly Transformational Change survey, January 2010


Level 1 The bold aspiration

Level 2 The big change themes

Level 3Initiatives across three horizons

A powerful change structure brings order, clarity and coherence to the transformation activities

“The desired transformation story”

“The chapters of the transformation story”

“The key initiatives to deliver the transformation story”

To become a highly

competitive integrated

company, recognised as

one of the top 5 energy

producers worldwide and

seen as the employer of

choice in our industry

Perf

orm

an

ce

th

em

es

Health themes

Co

rp.

citiz

en

ship

Co

llabo

ratio

n

Peop

le s

yste

ms

De

-bu

reau

cra

tisin

g

Growing production

Value chain integration

Maximising downstream

Efficiency and Safety Perf

orm

an

ce

th

em

es

Health themes


Direction-setting, decision-making and sign-off processes, funding, risk mitigation, performance management

Problem-solving approach, project management, cross-initiative integration, best practice sharing, tracking and adjusting

Role descriptions, accountabilities, performance contracts, decision-making authorities

Manage the transformation like a military campaign…

…as well as a marketing campaign

Build ownership by combining military and marketing tactics

Viral tactics to unleash largely self-directed change, mobilised by cause beyond individual gains

▪ Core team plus voluntary connectors

▪ Big aim, open approach

▪ Celebrations, change campaigns

▪ Empowered

▪ Based on wisdom

▪ Simple rules, opportunistic, go with energy

▪ Activists

Governance rigour

Project discipline

Role clarity

Build ownership for change




Gathering evidence of change on multiple levels is key to course-correction along the journey and reinvigorating celebration of success

1. Track progress of initiatives to ensure they are delivered on time, on budget and to quality. Invest in developing an effective programme dashboard

Description

2. Monitor key health indicators to ensure initiatives are having impact. These will be behavioural outcomesassessed through surveys, check-ins, customer forums and the like

3. Measure performance to ensure improvement where expected. Key metrics are business outcomes like increased revenue, decreased cost, cash flow and reduced risk

Enterprise value

Performance

Health

Initiatives

4. Monitor enterprise value or shareholder value as the ultimate outcome

▪ There is most value in measuring the highest level of the system but this is also where cause-and-effect linkages are hardest to establish

▪ Measure both performance and health to provide powerful evidence of change - layers one, two and three should be rigorously tracked at a minimum

▪ Identify the high-impact interventions and correlate between health and performance


Evaluate consistently over time to see results

1

Customer focus

Cost reduction Cost reduction Cost reduction Customer focus11 1

Profit Shareholdervalue

Customer focus Cost reduction 2 2 2 2

Shareholder value Accountability Shareholder value Accountability 3 3 3 3 3

Results orientation

Customer focus Accountability Continuous improvement

4 4 4 4

Profit Continuous improvement

Achievement 5 5 5 5 5

Continuous improvement

Results orientation Profit Profit 6 6 6 6 6

Customer focus Continuous improvement

Results orientation Results orientation 7 7 7 7

Bureaucracy Achievement Achievement Community involvement

8 8 8 8 8

Achievement Bureaucracy Community involvement

Shareholder value 9 9 9 9 9

Cost reduction

Shareholder value

Results orientation

Profit

Goals orientation

Bureaucracy

Hierarchical

Short-term focus

Control

Risk averse Goals orientation Being the best Customer satisfaction

Customer satisfaction

10 10 10 10 10

1

2

4

7

28

Hierarchical

Year 0 Year 1 Year 2 Year 3 Year 4


Frame five – How do we sustain and improve?

Not very strongly (e.g., most transformation responsibilities were delegated to others)

80 20

Fairly strongly 72 28

Very strongly (e.g., took

an active interest in key

initiatives, reviewed

progress regularly,

pushed for impact)

51 49

% of respondents, N = 2, 694

“Challenges of today call for new ways to

lead change. The key is to help my most

competent leaders develop self-

reflection capacity so they can

transform their own behaviours and set a

new tone”

Gary Loveman,

Chief Executive Officer and President Harrah's Entertainment

Discovery Process

Change Engine

Influence Model

Centred Leadership

How strongly involved was the leader in the transformation?

Relative success

Relative failure

Successful transformations develop the leaders needed to continuously change and improve

Health Essentials



▪ Communicate inspiring vision and change stories

▪ Recognise and shift system dynamics for greater accountability

▪ Engage multiple stakeholders through appreciative inquiry

▪ Motivate others to action

▪ Turn difficult conversations into learning opportunities

▪ Build relationships based on trust and emotional mastery

▪ Engage system supportfor teams

▪ Sustain and renew via coaching and sponsorship

▪ Use personal vision to self motivate

▪ Take accountability to regulate one’s own mindsets and behaviours to create desired change

▪ Manage energy and attention to maintain productivity

▪ Develop a strong support network

▪ Leave one’s comfort zone and commit to opportunities

Centred Leadership begins with self-mastery, enabling individuals to lead others and the organisation

Leading self

Build skills in individual, team and organisational leadership

Leading theorganisation

Leading others

SOURCE: McKinsey & Company


The journey to centred leadership

Characteristics of centred leadership programmes

Example programme structure

Co

ach

ing Fieldwork

Diagnose &Design

Forum 1:Lead Self & Others

Forum 2:Lead Teams & Org

Embedding

Fieldwork

Monitor and measure

Image

Develop a programme leveraging adult learning principles

Are grounded in a quantifiable baseline

Link directly to performance improvement

Take place over time in a “field and forum” approach

Span leadership of self, of others, and of organisational change

Accommodate different learning styles

Are led from the top

Allow for self-discovery

SOURCE: Joanna Barsh and Susie Cranston, ‘How remarkable women lead’ Crown publishing, New York, 2009


Contents





The ten tests of organisational excellence

9. Do we have the structure, processes, systems, and people to drive continuous improvement in performance and health?

10. Do we have a group of committed leaders who can lead transformation and sustain high performance from a core of self-mastery?

1. Do we have a compelling, widely understood, and jointly owned vision of change and set of performance targets for our organisation?

2. Do we have a robust baseline and shared aspirations for the health of our organisation?

3. Do we have a solid assessment of our organisation’s capability to deliver our change vision?

4. Do we have insight into the root-cause mindsets that inhibit or enhance our organisation’s health?

5. Do we have a concrete, balanced set of performance improvement initiatives defined to deliver our change vision?

6. Do we have a clear plan for how to reshape our work environment to influence healthy mindsets?

7. Do we have a well-defined scale-up model for each of the initiatives in our portfolio?

8. Do we have a reliable method to ensure that energy for change iscontinually infused and unleashed during the change process?

1 2 4 53

Healthessentials

Strategicobjectives

Capabilityplatform

Discoveryprocess

Portfolio ofinitiatives

Influencemodel

Deliverymodel

Changeengine

Centredleadership

Continuousimprovement



Documents

McKinsey Lane Five Frames 20110128