Transformational changes: How boards can help.
Many companies today are considering implementing transformational changes to their businesses that may include mergers and acquisitions (M&A), new go-to-market strategies, or significant technology rollouts. According to PwC’s 16th Annual Global CEO Survey, 61% of CEOs say they anticipate change in 2013 at their companies in M&A, joint ventures, or strategic alliances, and 75% said the same about an increase in technology investments.
To be successful in today’s complex and competitive world means companies must think ahead and be willing to transform themselves to respond to economic, political, regulatory, technological, and other pressures. Transformation comes with risk. Mismanagement of these risks can lead to negative outcomes, including failing to achieve strategic objectives, significant disruption to operations, and possible damage to a company's reputation.
The likelihood of a failed transformational program is high: 70% of all attempted organizational changes fail, according to Dr. John Kotter, who wrote The 8-Step Process for Leading Change. Some estimate the failure rate to be even higher, at 90%, according to a March 2011 Harvard Business Review article, The Big Idea: The New M&A Playbook. In fact, close to 60% of executives think that business transformation will make their companies more vulnerable to technological risks, according to the PwC 2013 Risk in review.
Such failures can result in significant costs along with lost opportunities. Failure can occur when companies do not successfully integrate a significant merger into their operations, fail to anticipate new competitors, recognize changes in consumer behaviors, take advantage of advancements in technology, or develop and execute a long-term plan.
What are the challenges?
Transformational change is difficult because it touches every area of a company, including its structure, culture, management, employees, business processes, technology, compensation, human resources and training. Each company has its own set of unique challenges, but failures can be broadly grouped into the following:
What can the board do to help?
The board of directors can play a critical oversight role during transformational change. This includes monitoring the on-going alignment of the company’s strategic objectives and the change initiative.
“There is an ever-increasing expectation of board members to understand the scope and scale of the change and the risks that the company is undertaking, as well as the value that is going to be delivered and when,” said David Tilk, PwC’s National Project Assurance leader. “Boards need to be able to ask the right questions.”
The board needs to understand the strategic goals of a planned change. Once planned outcomes and strategic objectives have been defined, there are a number of factors boards could consider throughout the life of the initiative:
One director, who sits on the boards of three different types of companies, has seen her share of transformational change, including one company that created new service lines that embrace social, mobility, analytics, and cloud (SMAC) capabilities.
“As a board, we had to provide counsel and oversight through a monitoring process,” said Maureen Breakiron-Evans, a director who sits on the boards of Cognizant Technology Solutions Corp., the Federal Home Loan Bank of Pittsburgh and Heartland Payment Systems. “As part of that process, we have a three-day annual strategy meeting that we hold in May. We invite customers to come as well as the management team and outside consultants to speak. We ask lots of questions and give insight based on our experiences.”
“The top three things I would tell boards to do when facing a transformational change is to be clear on the direction, have a system for monitoring progress and have the right management team in place,” Breakiron-Evans said. As part of the monitoring process, she advises that boards make sure management has appropriate metrics to measure progress and clear intermediate goals.
Before the transformational change takes place, boards should engage with the transformational leadership team to better understand the risk profile and likelihood of success. Here are some examples of questions boards should ask: