By Hein Knaapen and Sandy Ogg
Why do so many transformations not deliver what they are created for?
I recently talked with Sandy Ogg about this question in my new webinar series. Check out the key insights from our conversation below, or watch the full 60-minute video.
At the turn of the twenty-first century, ninety percent of the world's investments were in public companies. Today, it's about fifty percent. During the last twenty years, trillions of dollars have flowed into private equity. That influx of capital, combined with the exponential rate of external change, has made the success of organizational transformations imperative.
It used to be that a private equity firm could buy an asset, perform some financial re-engineering, and then quickly sell it for a profit. That approach no longer works. PE firms have to buy the right companies and transform them to create value. And transformations are filled with execution risk. Therefore, they have to have CEOs in all of their portfolio companies who can mitigate those risks, affect the required transformation, and deliver the returns investors are expecting.
When Sandy joined Blackstone in 2011, he reviewed the firm's history and found their portfolio company CEOs were only succeeding about 44% of the time. ACCORDING TO ALIX PARTNERS ' ESTIMATES, the CEO success rate across private equity-backed companies is now down to 27%.
There are three main reasons why CEOs tasked with transformations fail:
1. The firm matched the CEO talent to an outdated job description rather than the work to be done to transform the asset and, consequently, hired the wrong person,
2. The CEO was unwilling or unable to assemble enough talent where it mattered in the organization in time and/or
3. The transformation was just too slow.
Making talent choices, informed by an awareness of both value and risk, involves tracking two curves, forecasting value, and following three new principles of transformation.
TRACKING 2 CURVES
As Mike Tyson said, "Everyone has a plan until they get punched in the face."
All too often, CEOs follow the mantra of "Think big, start big." They have an investment thesis or a strategy they want to deploy, but as soon as their "big plan" meets the reality of the organization they have, everything slows down. That punch in the face can knock them out of the ring, especially if they don't know how to stage a comeback and complete the work of the transformation in time.
To deliver the company's value agenda, a CEO should be tracking two curves:
- The transformation of the value (change in value over time)
- The transformation of the organization (change in the organization over time)
These two curves are linked: the company you have must be transformed to be able to deliver the value you want. If the organization's transformation curve starts to flatten, the value curve will flatten. If you can accelerate the organization's transformation, you can raise the value curve faster.
Success, of course, depends on bending both curves upwards as fast as possible.
For decades, we believed belief that the higher up a role was in the organizational hierarchy, the more value was expected of it. Using the hierarchy as a proxy for value like this worked when external change was slow, and roles were relatively fixed.
Then little things like the internet, the iPhone, and artificial intelligence started changing the world fast. Plus, now we are dealing with a flock of black swan events. With all this change hitting our organizations faster and faster, hierarchy starts to wobble. Value keeps moving.
We try to tighten the ship to keep up. We look at the organization, turn to our talent supply and match the best we've got to the standard job descriptions we have for the most important roles in the hierarchy. Sometimes those roles sit at the top; sometimes, they represent a whole "family" of workers lower down in the organization. Tradition has us rating, ranking, stacking, and measuring the people in these roles against our generic expectations. Value still spills out.
It seems that focusing on talent supply and assessing individual performance against general job requirements is not enough to ensure value delivery in an exponentially changing world.
What if we were to look at talent demand?
Our research has shown us that the majority of the risk to value creation sits in the context in which the individual will operate. Specifically, in the work and the role, two areas on the demand side of the talent equation that, until now, have not received much of our attention.
By reviewing context along with talent, we've been able to assess how well an individual "clicks" into the realities of the work and the role we are asking them to do. This allows us to literally forecast the probability of the value arriving.
FOLLOWING 3 NEW PRINCIPLES
Every value creation plan is like a house with many rooms. There's a lot of interesting stuff in it, but it's not very focused. So rather than set up a program office to manage the organization's transformation, you can perform a series of "reducing steps" to focus on the work and the roles that really matter in that house.
1. Clarify what the transformation itself is. Determine the overall value you want to create and in what time period (value over time). Reduce the strategy to the four or five main pools of value, along with their GPS coordinates within the organization, that will deliver 75 to 80% of that value agenda. Imagine the business you need to have to generate that value, then compare it to the business you have now. The gap between the two will lay out the terms of your organization's transformation.
2. Think bigger, start smaller, move faster. Corporations are a conspiracy of complexity; therefore, create the conditions necessary to get to the simplicity beyond that complexity. Align your leadership team on where to focus in the organization and how to operate for the value to arrive. Treat alignment as a process and an emotional challenge, not as a cognitive exercise or rational discussion of economics. Communicate and enroll people in that shared vision and harness their collective energy.
3. Be specific to avoid organizational overwhelm. Articulate the critical work that must be done at your four or five identified GPS coordinates. In each of those spots, identify the two or three initiatives that will be critical for creating value. Assign the work of those initiatives to specific roles. (In a typical transformation, there are about 25 of these critical roles, each with about four jobs to be done.) Clarify what needs to be true for the value to arrive in each job. Connect the right talent to those critical roles. (Our white papers explain more about connecting talent to value in this way).
Recognize that any work not assigned to a specific role and talent will not be done—and will only contribute to the "illusion of transformation."
Connect with us to get a clear, concise view of the essential work and roles that will drive value creation in your business.