Filtration of Transformation Strategies in Challenging Economic Conditions- The How?
“Transformation” a buzz word if ever I heard one, more so now as we head towards the hopeful end of the global Covid pandemic. So, what is it? Well, organisational transformations range from product/ service launches, overhauling back-office processes, production automation, ERP/ systems implementations to operational excellence changes in how the business is structured and run.
Variations in transformations programme success exist, mainly through proposals for changes often overriding the formal process of setting performance targets that commensurate with the task in hand, and/ or in the absence of any in-house governance protocols and external specialists help.
If targets are set too low, aiming for incremental change, but then other initiatives are set too high, this could result in failure because the programme does not clarify who owns the goals and the associated responsibilities with the various strands of the transformation programme. The end result usually leads to value leakage despite viable projects, which will prevent benefits from filtering to the bottom-line, stifling impetus and potentially hinder buy-in for the change effort.
Finance (collectively the CFO and finance team) have a crucial role in not only setting stretch targets but also providing the PMO governance framework to mitigate value leakage and fully deliver transformational benefits to the bottom line. Transformation leakage may be because of nebulous assumptions or suboptimal execution of the project. Or initiatives may deliver benefits as intended, but actions in other areas of the company create leaks, e.g., cost savings are passed on to customers through wholesale higher trade discounts. Often macroeconomic effects outside of management’s control will create leaks, i.e., the recent UK car fuel crisis and spikes in petrol/ diesel prices, wholesale electricity and gas prices in contango, national minimum wage increasing in April 2022 all end up offsetting any genuine benefits from the programme. Alternatively, savings from the transformation may be reinvested for growth (R&D), but a lack of transparency about the how, can often create confusion about its bottom-line impact, as well as misunderstandings about the success or failure of the programme.
Keeping large transformations on track requires specialist programme leads² to help leaders and the CEO articulate and validate the value to be gained from the initiative as well as the scope of change required. When initiatives are under way, finance should provide single forecasts, business reports and budgets- combining data about transformation activities with those of daily operations. In this way, the CEO and business leaders can identify what aspects of the transformation are working in which areas of the business and which initiatives should be introduced in other areas so they can be revamped or even abandoned.
Continually monitoring and identifying the root cause of value leakage and performance issues will help the wider functional company teams to address them better. Including, being better prepared to address profitability question when it comes to change initiatives: “Where are they in the bottom line?”
Big, hairy, audacious transformation goals require plans!
As a consultant, I have seen companies that have found success with their transformations relative to their competitors having established an overarching governance framework/ purpose of change initiatives at the outset, relying on typical things such as for example, expand, explore, extend, efficiency and execution- 5E’s © ¹. Some will abandon the status quo approach to planning and go with “what we did last year, plus a bit more”.
This is precisely why a proper assessment of the value of proposed transformation initiatives and what the financial and operational milestones should be via detailed plans will ensure hitting all, if not most of the targets².
Too often I have witnessed company leaders, in their haste launch a new idea and forfeiting the formal business case evaluation by relying on their own back-of-a-cereal box calculation and risk assessment, if any, only to turn to outside expertise when issues crop up. Mandating a Transformation Consultant to review detailed business cases before any transformation initiative approvals and launches, is best practice, including vis-à-vis other considerations (outside the scope of this article), adopting KPIs that demonstrate a clear correlation between operational changes and financial outcomes to create responsibility and accountability.
Fundamentals for success
Transformation Consultants² can help separate transformation efforts from daily operations- giving managers and their functional teams the time and space to pursue BAU initiatives and insulating them from the burden of the programme idiosyncrasies. Having a main “lead” interfacing with the team to create buy-in across the organisation from functional areas to programme sponsors to address bottlenecks, resources and any other business issues will strengthen success rate considerably.
A review of transformation related data with BAU business numbers can give leaders, employees and other key stakeholders' insights into what they need to actively engage in and commit to as a part of the change programme. Big-picture, single holistic views can reveal the scope of investment the company is making, the impact of those investments and how the company is meeting or exceeding budget expectations. Three valuable key takeaways include¹:
FP&A teams looking to reconcile approved business plans with new/ existing forecasts and clarifying the potential value from the transformation by evaluating underlying assumptions to revise their forecast and communicate back to management as well as the wider business stakeholders.
Reporting to track the relationship between financial and operational activities and outcomes, because the success of transformation activities cannot always be judged solely through financial metrics alone. A comprehensive dashboard/ report, comparing current KPIs against baselines established during the initial budget, as well as management operational targets established by the Board would provide a more comprehensive perspective on the net benefit.
Getting the first year of the transformation programme in line with the overall group budget cycle, by updating forecasts only, rather than retrospective budget restatements is usually a sensible way forward. In the second year, after more data is available, the cost of transformation (be it one-off and/ or recurring), constant benefits from completed initiatives to incremental benefits from partially realised initiatives and remaining commitments to the transformation will be easier to track.
It is important to use prior-period actuals when comparing future performance figures when assessing the impact of the transformation. This will help demystify the annual budgeting exercise (which could be in a state of flux until numbers are locked down) to get a clearer sense of actual performance against signed off targets.
Turning ideas into actionable events with owners and timelines
Setting bold goals, detailed plans and comprehensive reporting is important, but just completing those things alone will not change everything. To do so, strong ongoing support is required to methodically root cause value leakages, take corrective project action, monitor progress and inform stakeholders of subsequent discussions about the transformation initiative.
Embracing Lean-Agile techniques will help¹, rather than overloading the business with superfluous data. Presenting conclusions using Lean-Agile diagnosing techniques, using data only to support insights, options and recommendations and making sure there is a link specifically to performance issue findings or emerging opportunities associated with the transformation, is usually best practice in transformation project management.
The long-term success of transformations programmes will be an arduous journey to achieve unless companies use an appropriate Lean-Agile know-how governance framework to set goals and then work with the business to ensure that those intentions show up directly in net financial performance.
So, if senior leaders are wanting to send a wind of change, what are you really waiting for?
Dee Singh Kothari is a senior partner in Kothari Partners
© & ¹ Ideas expressed and/ or methodologies in this article are solely of the authors. The author nor Kothari Partner’s accept any liability for the incorrect application of these ideas either used by companies, employees or other individuals alike.
² At Kothari Partners, we have worked with various UK and overseas listed and PE/ VC backed clients across various industries to consider how their business and finance services can bring them both cost reductions and performance improvement.
Our approach is to help our clients understand their current situation, identify the value and decide on the scope, vision and set of strategies for what they could achieve for their business. We help plan their implementation and support them and deliver the solution/ change needed, so it is properly and permanently embedded in their organisation.
We aim to help past and future clients by delivering high-quality work to their organisation, generate real efficiencies and free up time to support better business decisions.
For a confidential discussion please free to contact us, via our corporate website: https://dipakagkothari.wixsite.com/website