Update on the current board issues: October 2013

October 2013
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Issue in focus

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Transformational change: How the board 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:

  • Misalignment between planned outcomes and strategic objectives: Even for companies that begin with a robust process with specific objectives and planned outcomes, these outcomes and strategic objectives can fall out of alignment. Often, this is because of a change in strategy or external events that lessen leadership focus and support over the full project term.
  • Failure to define and measure promised value: While companies undertake transformational change to deliver value or achieve a specific objective, management often fails to accurately scope and quantify the expected value or objectives to be delivered. Key performance indicators are often not adequately defined or set in generic, immeasurable terms. Sometimes management also fails to monitor and track performance.
  • Lack of genuine leadership buy-in and resistance to change: The importance of “tone at the top” cannot be underestimated—it is essential to changing behaviors. Many companies fail to obtain buy-in from key constituents.
  • Failure to understand the complex nature of the business process change: Weak initial estimates of the scale and nature of business process change and limited understanding of legacy technology environments can lead to significant time and cost overruns. This can cause the return on investment to change, bringing the future or success of the transformational change into question.

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: 

  • Set accountabilities at the right levels: Make sure the right people are being held accountable. This greatly enhances the chances of program success. Companies may also integrate program success factors into management’s compensation packages to increase accountability.
  • Ensure management has a fulsome change management strategy: Discuss with management whether the impact of the change has been assessed across the company’s people, processes, and technology and whether a comprehensive change management strategy has been developed.
  • Assess resource capabilities: Consider whether those in charge of the transformation need additional resources or external advisors to drive the change. 
  • Obtain information from various sources: Obtain information from beyond the transformational leadership team. Consider whether the board should receive additional information and assurance from such stakeholders as internal audit, risk management, compliance, external auditors and outside advisors.
  • Get periodic updates from the transformational leadership team: Ask the leadership team to establish a process for regularly updating the board on the significant risk areas, key performance indicators, and progress of the transformational change. The updates can provide the board with an opportunity to assess the continued alignment of the change with strategic objectives.

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:

  1. How do the planned outcomes from the transformational change align with the company's strategic objectives? 
  2. Have the expected value and benefits of the program been identified and quantified?
  3. What are the company’s significant risks, including reputational risks, related to the transformational change, and how have they been mitigated?
  4. What is the company’s history and success with transformational change?
  5. Does the transformational leadership team have the right skills, expertise, and experience? Do we need to use external advisors with specific experience?
  6. How is management communicating the change throughout the company?
  7. What has the transformational leadership team done to ensure a robust change management strategy across people, process, and technology?
  8. What key performance indicators will be used to measure the transformational change success? Are these measures integrated into compensation programs?
  9. How will the board be updated on the transformational change throughout the life of the initiative? How and when will the board be briefed about key decisions and what information will be provided?