The Five Frames A Guide to Transformational Change

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Performance AND health matter

You need to create organisational DNA for long-term success. And thats what enables you to perform in the short term Narayana Murthy, former Chairman of Infosys Technologies

Organisations attain excellence only when leaders manage both performance and health with equal rigour Health can be defined as an organisations 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

SOURCE: Interview by Gautam Kumra and Jim Wendler, The creative art of influence: Making change personal, Voices on Transformation 1, McKinsey & Company, 2005.

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Contents

Health today drives performance tomorrow

The Five Frames of successful transformation

Where are you in your journey to health?

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Competitiveness naturally declines over time

Total return to shareholder of new entrants relative to industry average Percent Half of all companies in the S&P 500 in 2008 are likely to be gone by 2015 Estimated life span of S&P 500 companies based on company exits

15 10 5 0 -5 -10
1 Years 5 10 15 20 25 Attackers Survivors

90

45 26 19 14

1935

1955

1975

1995

2008

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

SOURCE: McKinsey, Creative Destruction McKinsey & Company

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Companies that succeed over time build and maintain organisational health - failure to do so can be an organisations downfall
Share price of IBM US$
150 140 130 120 110 100 90 80 70 60 50

Share Price of General Motors US$

60 50 CAGR 4.26% 40 30 20 10 0 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09
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)
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CAGR - 54.38%

40 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09

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)
SOURCE: Datastream; Web Search; Press search

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Both performance AND health must be managed

Performance Health

What an enterprise delivers to stakeholders in financial and operational terms (e.g., net operating profit, ROACE, TRS, net operating costs, stock turn)

The ability of an organisation to align, execute and renew itself to sustain exceptional performance over time

The narrow pursuit of shareholder value was the dumbest idea in the world Jack Welch Former 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
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SOURCE: Scott Keller and Colin Price, Performance and Health: An evidence-based approach to transforming your organisation, 2010.

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There are nine vital signs of organisational health

Direction A clear sense of where the organisation is heading and how it will get there The extent to which leaders inspire others to act The shared beliefs and quality of interactions across the organisation

Direction

Leadership Culture and climate

Accountability

Coordination and control

External orientation

Leadership

Innovation and learning

The extent to which individuals understand Accountability what is expected, have appropriate authority, and take responsibility for results Coordination The ability to evaluate organisational performance and risk, and to address issues and control and opportunities Capability 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 The quality of engagement with customers, suppliers, partners and other external stakeholders The quality and flow of new ideas, and the ability to adapt and shape the organisation

Capability

Motivation

Culture and climate

Motivation External orientation Innovation and learning

SOURCE: Scott Keller and Colin Price, Performance and Health: An evidence-based approach to transforming your organisation, 2010.

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Healthy organisations are more profitable

Likelihood that organisations with top results in health profile have above-median financial performance, % EBITDA margin

31
Bottom

48

68
2.2x

Mid

Top

Growth in enterprise value/book value

52 31
Bottom Mid

62
2.0x

Top

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 Varley CEO Barclays, Financial Times 4 June 2009

Growth in net income/sales

38

53

58
1.5x

Bottom

Mid

Top

1 Comprised of 2nd and 3rd quartiles SOURCE: McKinsey Organisational Health Index data mining effort McKinsey & Company

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Organisations typically encounter similar pitfalls in their transformational journey to achieving performance AND health
1. The urgent drives the important out of sight 2. Pressure for progress inhibits discovery 3. Change programmes emphasisedoing different things rather than doing things differently 4. Initiatives are created independently, complementarily 5. Standardisation results in insensitivity to context 6. Planning takes the place of piloting and experimentation 7. Apparent consensus fades when challenged 8. Continuity is marginalised in the midst of change
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We have invested in years of learning to uncover the key to successful transformation

311,000

Respondents from over 400 organisations completed our organisational health survey providing the inputs for McKinseys Organisational Health Index (OHI) database CEOs and senior executives completed surveys regarding their experience with transformational change Academic journal articles and books reviewed CEOs and chairpersons shared their personal experience with change in face-to-face interviews Leading academics reviewed, challenged and augmented our findings Years dedicated to developing and refining our understanding of healthy organisations
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3,000 900 20 4 3

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Winning organisations focus on the Five Frames of performance and health to drive sustainable transformational change
Transformation stages 1. Aspire
Where do we want to be?

2. Assess
Where are we today?

3. Architect
What do we need to do?

4. Act
How should we manage the journey?

5. Advance
How do we sustain and improve?

Five Frames of

Health

Performance

Strategic Objectives

Capability Platform

Portfolio of Initiatives

Delivery Model

Continuous Improvement

Health Essentials

Discovery Process

Influence Model

Change Engine

Centred Leadership

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Contents

Health today drives performance tomorrow

The Five Frames of successful transformation

Where are you in your journey to health?

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Frame one Where do we want to be?

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

Health Essentials

Discovery Process

Influence Model

Change Engine

Centred Leadership

Which of the following statements best describes the targets your company set to define success for the transformation? %, N = 2, 694 Relative success Relative failure

The targets were well defined and represented a genuine new level of performance The targets were well defined but did not stretch the company significantly

44

56

73

27

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

The targets were not well defined

88

12

Source: McKinsey analysis; CEO interviews McKinsey & Company

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A powerful aspiration clearly states which organisational qualities are needed to deliver on strategic performance ambitions
Our strategy
Meeting customers needs and improving margins through new revenue streams
5 1

CLIENT EXAMPLE Being the provider of choice for premium customers

Sustaining and building on our leadership position in our hub

To be the leading global premium player in our industry by

Delivering differentiated service for all customers at key touch points

3 Growing our presence in key locations

Our health aspiration

Direction

Elite Able

To become a high-performing market-focused organisation Characterised by a pervasive external focus Providing the conditions that facilitate innovation
External orientation

Accountability

Coordination and control

Ailing

Leadership

Innovation

Capabilities

Motivation

Internally cohesive and disciplined

Work environment

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Measure organisational health

Use rigour to measure health

Organisations health profile n = 260
Direction 52% Accountability 53% External orientation 59% Coordination & control 51% Leadership 47% Innovation & learning 43%
Distinctive, 85% + Superior, 70%-84% Common, 50%-69% Not effective, <50%

Paper n = 85 49% 53% 43%

47% 44% 43% 52% 26% 34%

Pulp and energy n = 44 47% 48% 46%

47% 51% 49% 54% 31% 37%

Sales and logistics n = 23 50% 61% 62%

49% 46% 34% 57% 43% 45%

Motivation 54%

Capabilities 61%

Administration n = 43 52%

58% 60%

View results for each Culture and climate dimension of health

37%

Identify perception of 70% 57% 56% health at specific 71% 58% business lines or 40% management levels

25

50

75

100

Direction Leadership Culture & climate Accountability Coord & control Capabilities

No or weak spike

Emerging spike

Prevalent spike

Leadership driven Market focus Performance edge Knowledge core

Motivation Innovation & learning External Orient

Not Effective

Benchmark your organisation against a Common Superior Distinctive 400 database of over companies

View organisational fit 5 8 10 relative to four health Similarity Index archetypes

SOURCE: Don Beck, Mark Loch, Patricia Oaklief, Raj Ratnakar, Bill Schaninger, Salah Zalatimo, The organisational health index: Improving and sustaining performance, McKinsey & Company, 2009

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Frame two Where are we today?

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

Health Essentials

Discovery Process

Influence Model

Change Engine

Centred Leadership

Performance impact post transformation % difference in improvement Transformations focused on systems and process re-engineering only Transformations incorporating mindset and capability-building interventions Retailer (Sales-tolabour ratio)
+67 15
25

+126

Mining (Productivity increase)

19 43

If the pace of change is slow, it is because mindsets have not changed. So thats the leaders biggest challenge. Narayana Murthy, Chairman and Chief Mentor of Infosys Technologies
51

+50

TELCO (Churn reduction)

34

Source: McKinsey analysis; CEO interviews McKinsey & Company

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Dig deep to identify limiting mindsets

The discovery process deep dives into an organisations inner workings

Current state Where are we, and what do we want to achieve? Outcomes (e.g. blame) Desired state Outcomes (e.g. accountability)

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

Practices (e.g. no clear performance contracts) Behaviours (e.g. minimal performance dialogue) Mindsets (e.g. Keep my head down, watch my back)

Practices (e.g. clear performance contracts) Behaviours (e.g. ongoing performance dialogue) Mindsets (e.g. If it is to be, it is up to me)

What changes in behaviour do we need to breathe life into desired practices? What changes in mindsets do we need to make in order to achieve sustainable changes in behaviours?

SOURCE: Scott Keller and Colin Price, Performance and Health: An evidence-based approach to transforming your organisation, 2010.

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Dig deep to identify limiting mindsets

Mindsets underpin performance

What we see and attempt to address

Individual behaviours

Performance = Potential Interference

There is always an inner game being played in your mindHow aware you are of this game can make the difference between success and failure

Mindsets and beliefs What we dont see and dont know how to address

Values Timothy Gallweys ground-breaking investigation into how people develop excellence in sporting and working contexts highlights the potential negative impact mindsets can have on performance

Hamel and Prahalads thought experiment about monkeys learnedNeeds behaviour (met or unmet) illustrates their point that past experiences can create mindsets that limit current performance

SOURCE: Scott Keller and Colin Price, Performance and Health: An evidence-based approach to transforming your organisation, 2010. McKinsey & Company

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Systematic data gathering can help to identify the shifts that are required
Underlying mindsets uncovered
CALL CENTRE EXAMPLE

Value drivers % Utilization

% of value Behaviour 10 Low call resolution with high level of transfer to other internal area (back-office) Service times met but customer satisfaction scores and quality falling Over 40% of agents do not reach the minimum standards of required performance

To

Call resolution 25

I filter and transfer calls I cant actually resolve client issues

I facilitate solving clients issue

Cost per call

10 Cost at the expense of quality You cant cut costs and improve service quality and time together I am an individual contributor Its not worth making an effort, I cant make a difference We can deliver the AND

Service quality 15

Wait time

10 I am a vital part of a highperforming team

Calls per day

20

Avg handle time 10

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Frame three What do we need to do?

Successful transformations support strategic and operational shifts with targeted behavioural shifts

Health Essentials

Discovery Process

Influence Model

Change Engine

Centred Leadership

Transformation success rate and reasons for failure

Success Failure due to behavioural reasons Failure due to other reasons Employee resistance

Program achieves objectives

30%

27%

10%
Other obstacles

I came to see, in my time at IBM, that culture isnt just one aspect of the game, it is the game. Lou Gerstner, Former Chairman IBM

10%

23%
Senior management behaviour does not support change

Insufficient resources/ budget

Source: McKinsey analysis; CEO interviews McKinsey & Company

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Shift employees context using the influence model

The four levers in the influence model

Role modelling
I see my leaders, colleagues, and staff behaving differently.

A compelling story
... I understand what is being asked of me and it makes sense.

I will change my mindset and behaviour if . . .

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

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

Skills required for change

Reinforcement mechanisms

SOURCE: Scott Keller and Colin Price, Performance and Health: An evidence-based approach to transforming your organisation, 2010. McKinsey & Company

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Expect and leverage irrationality

Expect the unexpected

Role modelling A compelling story

Your leaders believe they already are the change ensure they are changing as well Influence leaders are not that influential dont 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

Employees are what they think address the underlying mindsets as well as the technical skills Create space for employees to practise new skills back in the workplace

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

Skills required for change

Reinforcement mechanisms

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

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Frame four How should we manage the journey?

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

Health Essentials

Discovery Process

Influence Model

Change Engine

Centred Leadership

How was your companys transformation designed and planned? %, N = 2, 694 Relative success Relative failure The transformation was designed and planned through a large-scale collaborative effort across the organisation A small cross-functional team formed especially for the purpose did most of the work

47

53

66

34

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

The CEO and top team did most of the work themselves

68

32

Source: McKinsey analysis; CEO interviews McKinsey & Company

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Developing a change engine consisting of structure, ownership and evaluation is essential to success
Structure - The transformation was organised into a clear structure with readily understandable sections %, n = 2,041 Entirely true 27 73 Ownership - Roles and responsibilities were clear, so people felt accountable for delivering results %, n = 2,057 Entirely true 26 74 Evaluation - Clear, unambiguous metrics and milestones were in place to ensure that progress and impact were rigorously tracked %, n = 2,044 Entirely true 28 72

Very true Somewhat true Not at all true

47

52

Very true Somewhat true Not at all true

47

53

Very true Somewhat true Not at all true

47

54

75

25

78

23

73

27

88 12

89 11

91 9

x 6.1

x 6.4

x 7.3

SOURCE: McKinsey Quarterly Transformational Change survey, January 2010 McKinsey & Company

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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
Health themes De-bureaucratising

Health themes Corp. citizenship People systems

Performance themes

Growing production Value chain integration Maximising downstream Efficiency and Safety

Level 1 The bold aspiration

Level 2 The big change themes

Level 3 Initiatives across three horizons

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Performance themes

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

Collaboration

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Build ownership for change

Build ownership by combining military and marketing tactics

Manage the transformation like a military campaign

as well as a marketing campaign

Role clarity

Role descriptions, accountabilities, performance contracts, decisionmaking authorities

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

Governance rigour

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

Project discipline

Activists Core team plus voluntary connectors Simple rules, opportunistic, go with energy Big aim, open approach Celebrations, change campaigns Empowered Based on wisdom

SOURCE: Scott Keller and Colin Price, Performance and Health: An evidence-based approach to transforming your organisation, 2010. McKinsey & Company

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Gathering evidence of change on multiple levels is key to coursecorrection along the journey and reinvigorating celebration of success
Description 4. Monitor enterprise value or shareholder value as the ultimate outcome Measure performance to ensure improvement where expected. Key metrics are business outcomes like increased revenue, decreased cost, cash flow and reduced risk Monitor key health indicators to ensure initiatives are having impact. These will be behavioural outcomes assessed through surveys, check-ins, customer forums and the like Track progress of initiatives to ensure they are delivered on time, on budget and to quality. Invest in developing an effective programme dashboard

Enterprise value

3.

Performance

There is most value in measuring the highest level of the system but this is also where cause-andeffect 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

2.

Health

1.

Initiatives

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Evaluate consistently over time to see results

Year 0 1 Cost reduction 2 Shareholder value 3 Results orientation 4 Profit 5 Goals orientation 6 Bureaucracy 7 Hierarchical 8 Short-term focus 9 Control 10 Risk averse 28 Customer focus Year 1 1 Cost reduction 2 Profit 3 Shareholder value 4 Results orientation 5 Hierarchical 6 Continuous improvement 7 Customer focus 8 Bureaucracy 9 Achievement 10 Goals orientation Year 2 1 Cost reduction 2 Shareholder value 3 Accountability 4 Customer focus 5 Profit 6 Results orientation 7 Continuous improvement 8 Achievement 9 Bureaucracy 10 Being the best Year 3 1 Cost reduction 2 Customer focus 3 Shareholder value 4 Accountability 5 Continuous improvement 6 Profit 7 Results orientation 8 Achievement 9 Community involvement 10 Customer satisfaction Year 4 1 Customer focus 2 Cost reduction 3 Accountability 4 Continuous improvement 5 Achievement 6 Profit 7 Results orientation 8 Community involvement 9 Shareholder value 10 Customer satisfaction

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Frame five How do we sustain and improve?

Successful transformations develop the leaders needed to continuously change and improve

Health Essentials

Discovery Process

Influence Model

Change Engine

Centred Leadership

How strongly involved was the leader in the transformation? % of respondents, N = 2, 694 Relative success Relative failure

Very strongly (e.g., took an active interest in key initiatives, reviewed progress regularly, pushed for impact)

51

49

Fairly strongly

72

28

Challenges of today call for new ways to lead change. The key is to help my most competent leaders develop selfreflection capacity so they can transform their own behaviours and set a new tone Gary Loveman, Chief Executive Officer and President Harrah's Entertainment

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

80

20

Source: McKinsey analysis; CEO interviews

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Build skills in individual, team and organisational leadership

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

Leading self

Leading others

Leading the organisation

Use personal vision to self motivate Take accountability to regulate ones own mindsets and behaviours to create desired change Manage energy and attention to maintain productivity Develop a strong support network Leave ones comfort zone and commit to opportunities

Motivate others to action Turn difficult conversations into learning opportunities Build relationships based on trust and emotional mastery Engage system support for teams Sustain and renew via coaching and sponsorship

Communicate inspiring vision and change stories Recognise and shift system dynamics for greater accountability Engage multiple stakeholders through appreciative inquiry

SOURCE: McKinsey & Company

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Develop a programme leveraging adult learning principles

The journey to centred leadership

Characteristics of centred leadership programmes
Image

Example programme structure Diagnose & Design Forum 1: Lead Self & Others

Link directly to performance improvement Are grounded in a quantifiable baseline 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

Coaching

Fieldwork

Forum 2: Lead Teams & Org Fieldwork Embedding Monitor and measure

Allow for self-discovery

SOURCE: Joanna Barsh and Susie Cranston, How remarkable women lead Crown publishing, New York, 2009 McKinsey & Company

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Contents

Health today drives performance tomorrow

The Five Frames of successful transformation

Where are you in your journey to health?

McKinsey & Company

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The ten tests of organisational excellence

1 1. Do we have a compelling, widely understood, and jointly owned vision of change and set of performance targets for our organisation? Do we have a robust baseline and shared aspirations for the health of our organisation? Do we have a solid assessment of our organisations capability to deliver our change vision? Do we have insight into the root-cause mindsets that inhibit or enhance our organisations health? Do we have a concrete, balanced set of performance improvement initiatives defined to deliver our change vision? Do we have a clear plan for how to reshape our work environment to influence healthy mindsets? Do we have a well-defined scale-up model for each of the initiatives in our portfolio? Do we have a reliable method to ensure that energy for change is continually infused and unleashed during the change process? Do we have the structure, processes, systems, and people to drive continuous improvement in performance and health? 2 3 4 5
Strategic objectives Health essentials

2. 3.

Capability platform

Discovery process

4. 5.

Portfolio of initiatives

Influence model

6. 7.

Delivery model

Change engine

8. 9.

Continuous improvement

Centred leadership

10. Do we have a group of committed leaders who can lead transformation and sustain high performance from a core of selfmastery?
SOURCE: Scott Keller and Colin Price, Performance and Health: An evidence-based approach to transforming your organisation, 2010. McKinsey & Company

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