The COVID-19 crisis is yet another reminder that the future is uncertain, and no company is immune to major struggles. So why are so many organizations still ill-equipped to handle sudden change?
By Peter Wright
There’s an old adage that applies to both the military and the emergency services: Plan for the worst and hope for the best.
If you train an army officer to perform his duties in the most extreme circumstances, it’s reasonable to assume he’ll cope well with anything less traumatic. Similarly, emergency services and hospitals practice full-scale disaster recovery procedures because the odds are they’ll need to perform them for real one day.
So it’s curious that despite the global financial crisis of 2008, most companies don’t have built-in change capability. Instead, they seemed to assume that steady state would prevail. Or perhaps they believed that—should a global pandemic hit, say—they have an innate ability to survive.
Leadership Forum Inc. has been conducting a study into why some companies manage the business environment well while others struggle. The project started in December 2008 and is ongoing, but here I’ll highlight some of our major findings to date. (Editor’s Note: This story was written before the COVID-19 crisis.)
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Even before the novel coronavirus, seldom a week went by without hearing that a large company is in serious trouble. Fortunately, not all the problems cause the affected company to go out of business. But a growing list of organizations do pay the ultimate price, and recent projections suggest the situation is only going to become more challenging.
Almost every article on major change in the past few years mentions the acronym VUCA: volatility, uncertainty, complexity, ambiguity. VUCA as a phenomenon isn’t new, so what’s changed in the past 10 years? Why does the business environment appear more hostile? And what are the implications for companies?
We argue there are four themes that are either new, or the impact of them is now greatly exaggerated compared to the past. In addition, they all have an impact on leadership and talent management. Any of these sound familiar?
Challenge #1: Interdependence
Interdependence is what happens when the triggering of one event creates a chain reaction in other seemingly unconnected events. As you can expect, this makes it difficult for companies to predict what might happen.
We first became aware of the phenomenon in 2008: The financial crisis of that year might have started in the United States, but within days, it affected just about every financial center in the world, illustrating to many people for the first time just how interconnected our global banking systems are. Thankfully, that same interconnectivity allowed for a concerted response from both governments and the banking industry.
Challenge #2: Constant Change
If you work for a company that still talks about “change management initiatives” or “change management projects,” chances are your business still hasn’t grasped the full implications of constant change.
The few companies that do fully understand the concept differ from their competitors in two unique ways: They assume that any product or service they provide today will be made redundant at some point in the future—a reasonable assumption given that product cycles have been decreasing rapidly since the turn of the century.
What’s more, they decide that they’re best positioned to intentionally make their own product redundant before someone else does it for them. This creates a mindset that recognizes and encourages both incremental and breakthrough creativity and innovation.
Once this is done, your processes, systems, and reward mechanisms can be aligned. But you must understand that constant change is best managed proactively. Ignoring the realities of business life and hoping for the best hardly constitutes a strategy, and change will happen to companies regardless of the circumstances. For proof, all you need to do is talk to anyone from AIG, BP, British Airways, Samsung, Sears, or Malaysian Airlines, to name a few organizations that have recently battled adversity.
Change is equal opportunity: It doesn’t respect size, industry, historical track record, financial muscle, or geography. Therefore, the more proactive the stance, the better chance a company has of shaping its own future or being better prepared for the unexpected.
Challenge #3 Paradigm Shifts & Inflection Points
Paradigm shifts occur when there’s such a fundamental move in an industry or market that any existing competitive advantage is largely or completely nullified (think: Uber and Airbnb).
The rules of competition in an industry are swept away overnight, leaving new competitors to redefine the new rules. What makes this worse for longstanding companies is that for much of the past 20 years, business schools have been teaching competitor analysis and competitive intelligence.
While there are clearly advantages to such studies, this has caused some companies to spend an inordinate amount of time watching the competitors in their industry that looked like their own organizations, thereby missing the inflection point that changed the rules.
To illustrate the point, look no further than Amazon’s effect on the U.S. retail industry. A recent Credit Suisse report predicts that 25 percent of all shopping malls in the U.S. will close by 2022, emphasizing that once a traditional company misses an inflection point, it’ll have a much harder time catching up.
Challenge #4 Human Capital Risk Management
In the age of the knowledge worker, the cost of people has risen sharply both in absolute terms and as a percentage of total costs. Thus, reports that up to 40 percent of all new employees at management level and above leave within 2 years should be highly concerning.
Also alarming: According to Gallup’s latest report, only 32 percent of U.S. employees are actively engaged in their role, and as many as a third of CEOs believe their company’s performance management system adds no value to the business. This means leaders in charge of talent management have a significant opportunity—along with their line management colleagues—to make a telling contribution.
Risk management has traditionally looked at non-people-related issues. For instance, since 2008, the regulators who look after the financial services industry have issued guidelines or rules that cover everything from the reserves that banks must maintain to the LIBOR rate. Yet in an industry that’s understandably focused on finances, it’s actually the behavior of the people who handle those finances that drives most of the decision-making.
Despite the empty rhetoric of the past, we’ve just reached the point where people really are a company’s only competitive advantage.
SO IF THESE FACTORS represent the business environment of today and the foreseeable future, what are the change implications for companies? Our research has identified these five key areas.
Change Implication #1: In-House Change Management Capability
Everyone has their own favorite gripe about the big change management companies: They’re too expensive, they only understand change theoretically, and “What can a 28-year-old teach me about change, anyway?”
Yet when the change management company has imparted its wisdom and ridden off in the sunset to its next assignment, your company still needs the capability to translate recommendations into action. The truth is many companies aren’t as skilled at change as they’d like to believe.
As leaders, we know when we aren’t as knowledgeable about finance or marketing as we need to be, so we willingly take the necessary actions to rectify the problem. Why should the mastery of change be any different? Many seem to believe it’s an inherent capability that automatically goes with being appointed as a leader. This belief is unlikely to improve the company’s overall capability, and worst case might cause companies not to see a threat until it’s too late.
Simply put, there aren’t any shortcuts. And on the basis that the current environment is very unlikely to change in the near future, it’s essential that you recognize the need to improve your change management capability.
Change Implication #2: Devolved Leadership
We’ve known for a long time that most change emanates from outside a company. Therefore, managing the interface between the business and the outside world is more important than ever before.
In a fast-moving world where hundreds, if not thousands of pieces of information and intelligence pass in and out of a company on a weekly basis, it’s imperative to have bright, capable, insightful leaders who are empowered to make decisions.
Yes, it’s important to keep head officers in the loop, but the idea that a top 100 concept can effectively run a modern-day enterprise is increasingly suspect. Leadership needs to be deployed at the sharp end of an organization—i.e. those who interact with customers, competitors, regulators, and suppliers daily. Additionally, it’s difficult to imagine that people would shun the opportunity to take on new responsibilities if they’re suitably trained and recognized for doing so.
There may well be validity in keeping a core group of senior leaders in your organization, but the burden of leadership needs to be dispersed throughout the company. Of course, there’s cost involved in this—but if you don’t see it as an investment, you’ll be less likely to take the appropriate action.
As the story goes, the answer to the CFO who asks, “Why should I invest in people who might not stay with the company?” is, “What happens if you don’t invest and they do stay?” If you’ve been around long enough, you know that a key reason the top 100 concept gained favor was that it represented a less costly investment than any alternatives. But those days are gone.
Change Implication #3: Continuous Innovation
Companies that have adapted well to the current business environment put significant emphasis on innovation. It’s unrealistic to always expect breakthrough ideas, but steady incremental improvement across a range of products and services can be equally effective.
Customer focus groups that are built into the development stage of any product provide valuable insight long before a company must commit large sums of money to any new concept. Yet there are still companies that don’t know whether a new product will be a success until 18 months after it’s been launched and nobody is buying it.
It’s also important to remember that innovation isn’t just about creativity. You also need to have the discipline to manage an innovation funnel through feasibility, capability, and implementation to ensure that the kernel of an idea sees the light of day.
Finally, use the young people in your organization irrespective of where they sit in the hierarchy of the company. If you’re planning products for 3 to 5 years down the road, be aware that they think differently in almost every way to baby boomers and gen X. What’s a more powerful statement than to put some of them on a project that looks at the future of the company?
Change Implication #4: Integrated Talent Management
It often seems like we’ve read everything there is to know about talent management. Yet the degree to which any activity needs to be integrated seems to be missing.
People-based intervention will affect at least two or three other activities. The simple act of having a one-day offsite meeting to discuss succession planning affects compensation, performance management, talent acquisition, learning and development, diversity and inclusion, and expatriation.
It’s understandable that people in HR all want to report to the chief human resources officer, but having silos that independently cover things like organizational effectiveness and benefits, for example, makes coordinated activity difficult.
Because the basic organizational structure of HR has changed very little in the past three decades, it’s important to find ways of coordinating activity across all the interfaces. Plus, if the function is going to be credible, it needs to be realistic about prioritizing what it can deliver and what the organization can absorb.
Change Implication #5: Enhanced Communication
Historically, companies have been ambivalent about where communications fit into an organization. Does one person or department oversee both internal and external communications? Is it HR’s responsibility? I’ve held senior HR positions for 30 years, and the company’s internal communications were part of my job for about half that time.
Our view today is very clear: We need a specialist person and department to handle communications. This role has become very demanding. There was a time when senior management controlled where and when information would be disseminated to the workforce and what the content of that information would be. Those days are long gone.
Today, a new breed of communications is beginning to emerge. In companies that grasp this, communications instill confidence and belief in the future among all employees and external stakeholders. At the same time, they establish a compelling brand story, enhance the image of the company as an industry leader and business partner, and communicate a commitment to social responsibility and career advancement.
In a world where employees and external stakeholders have access to information at the same time as senior management, it’s vital that the message be proactive, truthful, and inspiring.
Each of these key areas could be the subject of an entire article, but our hope is that this overview provides a platform that will inspire further thought and discussion. If you haven’t started already, now would be a good time to begin.
Peter Wright is a partner with Leadership Forum Inc., a consultancy that helps companies in organizational change, leadership development, and talent management. He’s held senior human resources positions at some of the world’s best known companies, including Unilever, Estee Lauder, Merrill Lynch, BP, and AIG.