The Inconvenient Truth about Change Management May 08.indd

Transcript

1 Conventional change The Inconvenient Truth management approaches have done little to change the fact that most change About Change Management programs fail. The odds can be greatly improved by a number of counterintuitive Why it isn’t working and what to do about it insights that take into account the irrational but predictable nature of how employees interpret their environment and choose to act. by Scott Keller and Carolyn Aiken

2 The Inconvenient Truth About Change Management Why it isn’t working and what to do about it ractice dea in p the i dea in brief the i In 1995, John Kotter published research that C) r einfor Cing me Chanisms a) Creating a C ompelling story revealed only 30 percent of change programs are #6: oney is the most expensive way to #1: What motivates you doesn’t motivate m successful. Fast forward to 2008. A recent McKinsey A change program’s objectives motivate people. (most of) your employees. Research confirms & Company survey of business executives indicates that there are at least five sources of meaning for should be linked to employee compensation to that the percent of change programs that are a humans at work: impact on society, the customer, avoid sending mixed messages. Little upside is success today is... still 30%. The field of ‘change gained, however, due to a number of practical the company/shareholder, the working team, and management’, it would seem, hasn’t changed a considerations. There is a better, and less costly, way. “me” personally. What’s more, workforces are evenly thing. split as to which of these is a primary motivator. Small, unexpected rewards have disproportionate Digging deeper into why change programs fail “Telling five stories at once” is the key to unleashing effects on employees’ motivation during change reveals that the vast majority stumble on precisely programs. maximum energy for change. the thing they are trying to transform: employee attitudes and management behavior. Conventional a fair process is as important as a fair you’re better off letting them write #2: #7: change management prescribes addressing these their own story. Research indicates that when Employees will go against their own outcome. behavioral and attitudinal changes by putting in employees choose for themselves (versus “being self-interest if the situation violates other notions place four basic conditions: a) a compelling story, told”), they are more committed to the outcome by they have about fairness and justice. Careful b) role modeling, c) reinforcement systems, and d) a factor of almost five to one. Time communicating attention should be paid to achieve a fair process the skills required for change. the message should be dramatically rebalanced and fair outcomes in making changes to company towards listening versus telling. structures, processes, systems and incentives. These prescriptions are well grounded in psychological research and make good common it takes both “+” and “–” to create real #3: d) Capability building sense – which, we believe, is precisely where energy. Deficit-based approaches (“solve the things fall apart. The inconvenient truth of human Behaviors #8: employees are what they think. problem”) to change can create unproductive nature is that people are irrational in a number drive performance. Mindsets (the thoughts, feelings fatigue and resistance. Constructionist-based of predictable ways. The prescription is right, but and beliefs held by employees) drive behaviors. approaches (“capture the opportunity”) generate rational managers who attempt to put the four Capability building should focus on technical skills more excitement and enthusiasm, but lead to risk- conditions in place by applying their “common as well as shifting underlying mindsets that enable averse solutions. By moving beyond this dichotomy sense” intuition typically misdirect time and the technical skills to be used to their fullest. and pursuing both approaches simultaneously, energy, create messages that miss the mark, and managers can neutralize these downsides and good intentions aren’t enough. Even with #9: experience frustrating unintended consequences. maximize impact in mobilizing the organization. good intentions, it is unlikely employees will apply In the same way that the field of economics new skills and mindsets unless the barriers to ole modeling b) r has been transformed by an understanding of practice are lowered. The odds can be improved uniquely human social, cognitive and emotional by using “field and forum” approaches linked to your leaders believe they already “are #4: biases, so too the practice of change management trainees’ day-to-day accountabilities reinforced by the change.” Most executives have the will and is in need of a transformation through an improved quantifiable, outcome-based hurdles along the skill to role model, but don’t actually know “what” understanding of the irrational (and often way. they should change due to their self-serving unconscious) nature of how humans interpret biases (if they didn’t think what they were doing show me the money! their environment and choose to ac t. was right, they wouldn’t be doing it). Smart use Where we have tested these inconvenient truths of concrete 360-degree behavioral feedback can in practice versus more rational, conventional break through this barrier. approaches to influencing behavior we have influential. influence leaders aren’t #5: that found they achieve significant positive results. For It is not enough to invest in a few rather than in example, in 18-month longitudinal studies using many as a way of catalyzing desired changes, no control and experimental group methodologies matter how appealing the idea is. New research we achieved a 19 percent lift in profit per banker shows social “contagions” depend less on the versus 8 percent and a 65 percent reduction in persuasiveness of “early adopters” and more on call center customer churn versus 35 percent with how receptive the “society” is to the idea. While conventional approaches alone. influence leaders are important, we warn against overinvesting in them – your effort is better spent elsewhere.

3 The Inconvenient Truth About Change Management Conventional change management approaches have done little to change the fact that most change programs fail. The odds can be greatly improved by a number of counterintuitive insights that take into account the irrational but predictable nature of how employees interpret their environment and choose to act. The Inconvenient Truth About Change Management Why it isn’t working and what to do about it The facts suggest otherwise. McKinsey & In 1995, John Kotter published what many Company recently surveyed 1,546 business consider to be the seminal work in the field of change management, Leading Change: Why executives from around the world, asking them if Kotter’s “call to action” they consider their change programs “completely/ Transformation Efforts Fail. 4 mostly” successful: only 30 percent agreed. cited research that suggested only 30 percent of 1 change programs are successful. His work then Further investigation into a number of similar (sc cott Keller s ott_ [email protected] studies over the last 10 years reveals remarkably goes on to answer the question posed in its title is a Partner in com) 5 and to prescribe what it takes to improve this similar results. The field of change management, McKinsey & Company’s it would seem, hasn’t really changed a thing. success rate. Chicago Office. He Kotter is perhaps the most famous purveyor This failure to live up to its promise is why leads McKinsey’s Organizational of change management wisdom, but in fact many senior executives today recoil at the mere Behavior Practice in he is one of many who have a point of view mention of the words ‘change management’. the Americas and regarding how managers and companies can best Memories come f looding back of significant time has deep experience manage change. In the last two decades, literally in counselling and effort invested in “the soft stuff ” that, in the thousands of books and journal articles have senior executives end, yielded little tangible value. on organization been published on the topic. Today, there are The focus of McKinsey’s applied research over performance and more than 1,800 books available on Amazon.com change effectiveness. the last four years has been to understand why 2 under the category of “Organizational Change.” Also from McKinsey & change management efforts consistently fail to The field has developed to the extent that courses Carolyn Company is have the desired impact and, most importantly, dedicated specifically to managing change are ([email protected] iken a what to do about it. At this point in our an mckinsey.com) , is now part of the curriculum in many major MBA 3 Associate Principal research we don’t claim to have all the answers. programs. in McKinsey’s With so much research done and information We have, however, developed and tested a set of Organization Practice perspectives in real-life application that senior available on managing change, it stands to reason based in the Toronto Office who has managers have found genuinely insightful and that change programs today should be more pioneered innovative successful than those of more than a decade ago, that have consistently delivered business results approaches to CEO, far beyond expectations. right? top-team and organization-wide change effectiveness. Page 1

4 The Inconvenient Truth About Change Management experience frustrating unintended consequences suCCessful Change from their efforts to inf luence change. ommon sense reQuires unC Why? In implementing the prescription, they Digging deeper into why change programs fail disregard a scientific truth of human nature: reveals that the vast majority stumble on precisely people are irrational in many predictable ways. the thing they are trying to transform: employee The scientific study of human irrationality has attitudes and management behavior (versus shown that many of our instincts related to other possible sources such inadequate budget, understanding and inf luencing our own and poorly deployed resources and poor change others’ motivations push us towards failure 6 architecture). instead of success. We systematically fall victim to Literally thousands of prescriptions are subconscious thought processes that significantly put forward in various change management inf luence our behavior, even though our rational publications regarding how to inf luence employee minds tell us they shouldn’t. How many of us attitudes and management behavior. However, drive around looking for a close parking place the vast majority of the thinking is remarkably to “save time” for longer than it would have taken similar. Colin Price and Emily Lawson provided to walk from the available parking spaces? How The a holistic perspective in their 2003 article, about falling into the trap of spending $3,000 , that suggests Psychology of Change Management to upgrade to leather seats when we buy a new that four basic conditions have to be met before $25,000 car, but finding it difficult to spend the 7 employees will change their behavior: same amount on a new leather sofa (even though They must see the A compelling story: A. we know we will spend more time on the sofa point of the change and agree with it, at least than in the car)? Are you willing to take a pencil enough to give it a try home from work for your children to use, but B. They must also see Role modeling: are not willing to raid the company’s petty cash colleagues they admire modeling the desired box for the money to buy a pencil for the same behavior purpose? These examples point to how all of us systems: C. Reinforcement Surrounding are susceptible to irrationality when it comes to structures, systems, processes and incentives 8 decision making. must be in tune with the new behavior D. The skills required for change: They need to have the skills to do what is required of The scientific study of human them. irrationality has shown that This prescription is well grounded in the field many of our instincts related to of psychology and is entirely rational. Putting all four of these conditions in place as a part of understanding and influencing a dynamic process greatly improves the chances our own and others’ motivations of bringing about lasting changes in the mindsets push us towards failure instead and behaviors of people in an organization—and thus achieves sustained improvements in business of success. performance. One of the merits of the approach above is its In the same way that the field of economics has intuitive appeal, so much so that many managers been transformed by an improved understanding feel that, once revealed, it is simply good common of how uniquely human social, cognitive and sense. And this, we believe, is precisely where emotional biases lead to seemingly irrational things fall apart. The prescription is right, but 9 so too the practice of change decisions, rational managers who attempt to put the four management is in need of a transformation conditions in place by applying their “common through an improved understanding of the sense” intuition typically misdirect time and irrational (often unconscious) way in which energy, create messages that miss the mark, and Page 2

5 The Inconvenient Truth About Change Management humans interpret their environment and choose investors will not continue to put money into to act. an underperforming company. We are capable of far more based on our assets, market position, In what follows we will describe a number of counterintuitive insights regarding human size, skills and loyal staff. We can become a top- quartile performer in our industry by exploiting irrationality and implications for putting the four conditions for behavior change into place. We our current assets and earning the right to grow.” will also offer practical—if inconvenient—advice These stories both seem rational, yet they too (as it calls for investing time and effort in areas often fail to have the impact that change leaders desire. Research by a number of leading thinkers that your rational mind will tell you shouldn’t in the social sciences, such as Danah Zohar, Chris matter as much as they do) on how to improve the odds of leading successful change. We illustrate Cowen, Don Beck and Richard Barrett, has shown these approaches through concrete examples of that stories of this nature will create significant how various companies have, either by conscious energy for change in only about 20 percent of your 10 workforce. awareness, intuition, or simple luck, leveraged Why? The stories above all center on the company—beating the competition, industry predictable employee irrationality to great effect in making change happen. leadership, share price targets, etc.—when in fact Dealing with the human side of change is research shows that there are at least four other not easy. As Nobel Laureate Murray Gell-Mann sources of meaning and motivation that can be once said, “Think how hard physics would be if tapped into to create energy for change. These include impact on society (e.g., making a better particles could think.” All told, we don’t expect society, building the community, stewarding our advice to make your life as a change leader resources), impact on the customer (e.g., making any easier. We are convinced, however, it will have more impact. it easier, superior service, better quality product), impact on the working team (e.g., sense of belonging, caring environment, working together onVenient a. the inC efficiently and effectively), and impact on “me” personally (my development, paycheck/bonus, truth about Creating a empowerment to act). Compelling story Change management thinking extols the What the leader cares about (and virtues of creating a compelling change story, typically bases at least 80 percent communicating it to employees and following it up of his or her message to others with ongoing communications and involvement. This prescription makes sense, but in practice on) does not tap into roughly three inconvenient truths often get in the way of 80 percent of the workforce’s this approach achieving the desired impact. primary motivators for putting Inconvenient Truth #1: What motivates you extra energy into the change doesn’t motivate (most of ) your employees program. We see two types of change stories consistently told in organizations. The first is the “good to great” story along the lines of “Our historical The inconvenient truth about this research advantage has been eroded by intense competition is that in surveys of hundreds of thousands of and changing customer needs; if we change, we employees to discover which of these five (society, can regain our leadership position once again, customer, company/shareholder, working team, becoming the undisputed industry leader for the “me” personally) sources of meaning most foreseeable future and leaving the competition motivates them, the result is a consistently even in the dust.” The second is the turnaround story 20 percent split across all dimensions. Regardless along the lines of, “We’re performing below of level (senior management to the frontline), industry standard and must change dramatically industry (healthcare to manufacturing), or to survive; incremental change is not sufficient— Page 3

6 The Inconvenient Truth About Change Management geography (developed or developing economies), In a famous experiment, researchers ran a the results do not significantly differ. lottery with a twist. Half the participants were This finding has profound implications randomly assigned a lottery ticket. The remaining for leaders. What the leader cares about (and half were given a blank piece of paper and a pen and asked to write down any number they would typically bases at least 80 percent of his or her like as their lottery number. Just before drawing message to others on) does not tap into roughly 80 percent of the workforce’s primary motivators the winning number, the researchers offered for putting extra energy into the change program. to buy back the tickets from their holders. The Those people leading change should be able question researchers wanted to answer is, “How to tell “five stories at once” and in doing so much more do you have to pay someone who ‘wrote their own number’ versus someone who unleash tremendous amounts of organizational energy that would otherwise remain latent in the was handed a number randomly?” The rational organization. answer would be that there is no difference (given By way of practical example, consider a a lottery is pure chance and therefore every ticket cost-reduction program at a large U.S. financial number, chosen or assigned, should have the services company. The program was embarked same value). A more savvy answer would be that on with a rational change story that “ticked all you would have to pay less (given the possibility the boxes” of conventional change management of duplicate numbers in the population who write wisdom. Three months into the program, their own number). The real answer? No matter management was frustrated with the employee what geography or demographic the experiment resistance inhibiting impact. The team worked has taken place in, researchers have always found together to re-cast the “story” around the cost that they have to pay at least five times more to program to include an element related to society 11 those who wrote their own number. (to deliver “affordable housing”: we must be This result reveals an inconvenient truth about most affordable in our services), customers human nature: When we choose for ourselves, we (increased simplicity, f lexibility, fewer errors, more competitive prices), the company (expenses are far more committed to the outcome (almost by are growing faster than revenues, which is not a factor of five to one). Conventional approaches sustainable), working teams (less duplication, to change management underestimate this impact. more delegation, increased accountability, faster The rational thinker sees it as a waste of time to pace), and individuals (bigger, more attractive let others self-discover what he or she already jobs created: a great opportunity to “make your knows—why not just tell them and be done with own” institution). it? Unfortunately this approach steals from others This relatively simple shift in approach lifted the energy needed to drive change that comes employee motivation measures from 35.4 percent through a sense of ownership of “the answer”. to 57.1 percent in a month, and the program went on to achieve 10 percent efficiency improvements When we choose for ourselves, in the first year—a run rate far above initial expectations. we are far more committed to the outcome (almost by a factor Inconvenient Truth #2: You’re better off of five to one). letting them write their own story Well-intentioned leaders invest significant Consider another practical example in Barclays’ time in communicating their change story. Personal Financial Services CEO, David Roberts, Roadshows, town halls, magazines, screen-savers who employed a fairly literal interpretation of the and websites are but a few of the many approaches above finding. He wrote his change story in full typically used to tell the story. Certainly the story prose, in a way that he found meaningful. He then (told in five ways!) needs to get out there, but the shared it with his team, getting feedback on what inconvenient truth is that much of the energy resonated and what needed further clarification. invested in communicating it would be better He then asked each of his team members to “write spent listening, not telling. Page 4

7 The Inconvenient Truth About Change Management encounters in the organization: 1) how do you their own lottery ticket”: what was the change make a difference? (testing for alignment on the story for them, in their business, that supports the company’s direction); 2) what improvement idea bigger PFS-wide change story? His team members are you working on? (emphasizing continuous wrote their change story, again in full prose, and improvement); 3) when did you last get coaching shared it with their teams. Their teams gave from your boss? (emphasizing the importance of feedback and then wrote their own story for their people development); and 4) who is the enemy? area/department, and so the process continued (emphasizing the importance of “One Emerson”/ all the way to the frontline. It took twice as long no silos, i.e., he wanted to emphasize the “right” as the traditional roadshow approach, but for a answer was the competition and not some other five-times return on commitment to the program, 12 department!). it was the right investment to make. On a final note, many executives are Sam Palmisano, current CEO of IBM, in surprised not only by the ownership and drive spearheading a change effort to move IBM towards a values-based management system, for implementation that comes from high- involvement approaches, but also by the improved enabled thousands of employees to “write their quality of the answers that emerge. As one CEO own lottery ticket” regarding IBM’s values. told us, “I was surprised how people stepped During a three-day, online discussion forum (dubbed ValuesJam), over 50,000 employees were up during the direction-setting process – I was worried about everything getting ‘dumbed down,’ empowered literally to rewrite IBM’s century-old 13 values. but in the end we got a better answer because of Other applications need not be so literal. At the broad involvement.” a global consumer goods company the CEO Inconvenient Truth #3: It takes brought together his top 300 for three two-day both “+” and “–” to create real energy “real work” sessions over three months where they In 210 B.C., a Chinese commander named created the story together. Again, this invested Xiang Yu led his troops across the Yangtze River significant time, but having the top 300 five-times to attack the army of the Qin (Ch’in) dynasty. committed to the way forward was considered Camped for the night on the banks of the river, well worth the investment. At BP, to develop a his troops awakened to find their ships on fire. comprehensive training program for frontline They rushed to the boats ready to take on their leaders, a decision was made to involve every attackers, only to find that it was Xiang Yu key constituency in the design of the program, himself who had set their ships ablaze. Not only giving them a sense of “writing their own lottery that, but he had also ordered all the cooking pots ticket.” It took a year and a half to complete the crushed. Xiang Yu’s logic was that without the design using this model, but was well worth pots and the ships, they had no other choice but it. Now in implementation, the program is the to fight their way to victory or die trying. In doing highest rated of its kind in BP. It involves more so he created tremendous focus in his troops, who than 250 active senior managers from across the battled ferociously against the enemy and won businesses willingly teaching the course, and, nine consecutive battles, obliterating the main- most importantly, has resulted in managers who force units of the Qin dynasty. have been through the training program being The above story is perhaps the ultimate consistently ranked higher in performance than example of creating a “burning platform” to those who haven’t, both by their bosses and by the motivate action—a message that says “We’ve 14 employees who report to them. got a problem, we have to change!” This model At a minimum, we advocate that leaders is often referred to as a deficit-based approach leverage the “lottery ticket” insight by augmenting to change. It identifies the problem (what is the their telling of the story with asking about the story. need?), analyzes causes (what is wrong here?) Consider David Farr, CEO of Emerson Electric, and possible solutions (how can we fix it?), and who is noted for asking four questions related then plans and takes actions (problem solved!). to his company’s story of virtually everyone he Advocates of this approach point out that its Page 5

8 The Inconvenient Truth About Change Management linear logic and approach to dissecting things averse and take the gain. What would you do if given the choice between a sure loss of $100 or a to understand them is at the heart of all the 50 percent chance of losing $200? If you are like scientific progress made by Western civilization. They also cite examples like that of Xiang Yu, most individuals, you are risk seeking in this case 17 and choose a 50 percent chance of losing $200. where it has a profound effect. Given the case for the deficit-based approach, it has become the A single-minded focus on “what’s possible,” with its bias towards more conservative choices, f lies in model predominantly taught in business schools and is presumably the default change model the face of achieving radical change. The reason in most organizations. At success rates of 30%, for this is that, as humans, we inherently dislike 18 however, the vast majority of change leaders are losses more than we like gains. The inconvenient truth is that both the deficit- not enjoying the same success as Xiang Yu did. based and constructionist approaches to change Why is this? Research has shown that a relentless focus on have their merits and limitations. It is clear that a single-minded focus on today’s problems creates “what’s wrong” is not sustainable, invokes blame more fatigue and resistance than envisioning a and creates fatigue and resistance, doing little positive future. But it is also clear that when it to engage people’s passion and experience, and comes to behavioral change some anxiety is good, highlight their success. This has led to the rise of and that an over-emphasis on the positive can what many refer to as the constructionist-based approach to change. In this approach the change lead to watered-down aspirations and impact. process is based on discovery (discovering the best of what is), dreaming (imagining what might It is clear that a single-minded be), designing (talking about what should be) and focus on today’s problems creates 15 destiny (creating what will be). fatigue and resistance... But it is Consider a study done at the University of Wisconsin where two bowling teams were also clear that when it comes to recorded on video over a number of games. behavioral change some anxiety Each team received a video to study. One team’s is good. video showed only those occasions when it made mistakes. The other’s showed only those occasions when it performed well. The team We believe the field of change management has that studied its successes improved its score drawn an artificial divide between deficit-based twice as much as the other team. The conclusion and constructionist-based approaches. The best is that choosing the positive as the focus of answer is an “and” answer. While it is impossible inquiry and storytelling is the best answer for to prescribe generally how the divide should be 16 Whereas the deficit-based creating change. split between positive and negative messages, as change approach is well suited for technical this will be specific to the context of any given systems, research into the constructionist-based change program, we strongly advise managers not approach shows that in human systems a focus to “swing the pendulum” too far in one direction on “what’s right” can achieve improved results. or another. Consider Jack Welch at GE, who So should enlightened change leaders shift their took questions of “what’s wrong here?” (poor- focus exclusively to capturing opportunities and performing businesses, impending bankruptcy, building on strengths instead of identifying and silo-driven behaviors, bureaucracy, etc.) head on, solving problems? We think not. as well as “imagining what might be” (number Humans are more risk averse when choosing one or two in every business, a “boundaryless” among options framed as “gains” than when culture of quality, openness, accountability, etc.). they choose among those framed as “losses.” Revisiting the University of Wisconsin For example, what would you do if given the bowling team experiment mentioned above, we choice between a sure gain of $100 and a 50 and suspect that a team that studied its successes percent chance of gaining $200? Social science mistakes would outperform teams that studied experiments show that most individuals are risk only either/or. Page 6

9 The Inconvenient Truth About Change Management consistently think they are better than they onVenient b. the inC truth are—a phenomenon referred to in psychology about role modeling 19 Whereas conventional as a “self-serving bias.” change management approaches surmise that top Conventional change management suggests team role modeling is a matter of will (“wanting leaders should take actions that role model the to change”) or skill (“knowing how to change”), desired change and mobilize a group of inf luence the inconvenient truth is that the real bottleneck leaders to drive change deep into the organization. to role modeling is knowing “what” to change at Unfortunately, this prescription rarely delivers a personal level. the desired impact because it neglects two more inconvenient truths about change management. The fact is that most well- intentioned and hard-working Inconvenient Truth #4: Your leaders believe they already “are the change” people believe they are doing Most senior executives understand and the right thing, or they wouldn’t generally buy into Ghandi’s famous aphorism, be doing it. However, most “Be the change you want to see in the world.” They, often prompted by HR professionals people also have an unwarranted or consultants, commit themselves to “being optimism in relation to their own the change” by personally role modeling the desired behaviors. And then, in practice, nothing behavior. significant changes. The reason for this is that most executives Typically, insight into “what” to change can don’t see themselves as “part of the problem,” and be created by concrete 360-degree feedback therefore deep down do not believe that it is they techniques, either via surveys, conversations who need to change, even though in principle or both. This 360-degree feedback should not they agree that leaders must role model the be against generic HR leadership competency desired changes. Take for example a team that models, but instead against the specific behaviors reports that, as a group and as an organization, related to the desired changes that will drive they are low in trust, not customer-focused and business performance. This style of feedback can bureaucratic. How many executives when asked be augmented by fact gathering such as third- privately will say “no” to the questions, “Do you party observation of senior executives going about consider yourself to be trustworthy?” and “Are their day-to-day work (e.g., “You say you are not you customer focused?” and “yes” to the question bureaucratic, but every meeting you are in creates “Are you a bureaucrat?” Of course, none. three additional meetings and no decisions are The fact is that most well-intentioned and made”) and calendar analyses (e.g., “You say you hard-working people believe they are doing the are customer focused but have spent 5 percent of right thing, or they wouldn’t be doing it. However, your time reviewing customer-related data and no most people also have an unwarranted optimism time meeting with customers or customer-facing in relation to their own behavior. Consider that employees”). 94 percent of men rank themselves in the top Consider Amgen CEO Kevin Sharer’s approach half of male athletic ability. Of course this is of asking each of his top 75, “What should I do irrational, as mathematically exactly 50 percent differently?” and sharing his development needs of males are in the top half of male athletic ability. 20 and commitment publicly with them. Consider This isn’t only true for males and athletics—far the top team of a national insurance company more than 50 percent of people rank themselves who routinely employed what they called the in the top half of driving ability, although it is a “circle of fire” during their change program: Every statistical impossibility. When couples are asked participant receives feedback live in the room, to estimate their contribution to household work, directly from their colleagues on “What makes the combined total routinely exceeds 100 percent. you great?” in relation to “being the change” and In many behavior-related areas, human beings Page 7

10 The Inconvenient Truth About Change Management guidance is given to find and mobilize those in “What makes you small?” Consider the leadership coalition (top 25) of a multi-regional bank who, the organization who either by role or personality (or both) have disproportionate inf luence over after each major event in their change program, how others think and behave. We believe this is conducted a short, targeted 360-degree feedback sound and timeless advice – indeed having a cadre survey regarding how well their behaviors role modeled the desired behaviors during the event, of well-regarded people proactively role modeling and communicating the change program is a “no ensuring that feedback was timely, relevant and practical. regrets” move. However, since Malcom Gladwell popularized his “law of the few” in his best-selling While seemingly inconvenient, these types of techniques help break through the “self-serving , we have observed that The Tipping Point book, bias” that inhibits well-meaning leaders from the role of inf luence leaders has moved from being perceived as a helpful element of a broader set of making a profound difference through their interventions to a panacea for making change actions to the ultimate impact of the change program. happen (likely an unintended consequence of Gladwell’s work which itself was directed towards Note that some readers may be thinking, “But surely there are a few people who marketers versus change leaders). fully role are modeling the desired behaviors—what does this mean for them?” If the purpose of senior executive Influence leaders are no more role modeling is to exhibit the behaviors required likely to start a social “contagion” that ensure the success and sustainability of the than the rank and file... success change program (e.g., collaboration, agility in decision making, empowerment), then the answer depends less on how persuasive is “keep up the good work!” If the answer, however, the “early adopter” is, and more is expanded to include role modeling the process on how receptive the “society” is of personal behavioral change itself, there is more to do. Recall that Gandhi also said famously, “For to the idea. things to change, first I must change.” We often cite Tiger Woods’ reaction to his Gladwell’s “law of the few” suggests that rare, astonishing, 18-below-par victory in the Masters highly connected people shape the world. He tournament in 1997: he chose to rebuild his defined three types of inf luence leaders that are swing. As he practiced many of its 270 elements, among this select group: Mavens—discerning he endured a period of awkward performance. individuals who accumulate knowledge and The press deemed him a one-Masters wonder. share advice; Connectors—those who know lots Four years later, he won the world’s four major of people; and Salespeople—those who have the golf tournaments in one year, an unprecedented natural ability to inf luence and persuade others. accomplishment. At one point, Woods’ lead over Gladwell famously illustrates his point with the the second-ranked player was larger than the example of Hush Puppies. The footwear brand was 21 gap between No. 2 and No. 100. The lesson is dying by late 1994—until a few New York hipsters clear: continued success requires critical self- began wearing their shoes. Other fashionistas examination and growth. Few senior executives followed suit, whereupon the cool kids copied would suggest they are less in need of personal them, the less-cool kids copied them, and so learning than Tiger Woods. on, until voilà! Within two years, sales of Hush Puppies had exploded by 5,000 percent, without a 22 Compelling stories penny spent on advertising. Inconvenient Truth #5: Influence leaders such as this have been interpreted by many change aren’t that influential leaders as evidence that the lion’s share of their Almost all change management literature places role should focus on getting the inf luence leader importance on mobilizing a set of “inf luence equation right and – voilà! – all else will follow. leaders” to help drive the change. Typically Page 8

11 The Inconvenient Truth About Change Management Duncan Watts, a network-theory scientist onVenient the inC C. working for Yahoo!, has conducted a number of Cing truth about reinfor experiments that help explain why “inf luence meChanisms leaders” are not the panacea the above example implies. In the context of the Hush Puppies story, Conventional change management emphasizes he essentially posed the more expansive question, the importance of reinforcing and embedding “Given East Village hipsters were wearing lots of desired changes in structures, processes, systems, cool things in the fall of 1994, why did only Hush target setting and incentives. If you want Puppies take off? Why didn’t their other clothing collaboration, create cross-functional teams. If choices reach a tipping point too?” His research you want customer focus, make sure your systems shows that inf luence leaders are no more likely give you a full picture of the customer relationship. to start a social “contagion” than the rank and If you want just about any behavior, make people’s file. He concludes that success depends less on paycheck dependent on it, and so the logic how persuasive the “early adopter” is, and more goes. Again, these are all perfectly rational until on how receptive the “society” is to the idea. To confronted with two inconvenient truths. start a social epidemic is less a matter of finding the mavens, connectors, and salespeople to do the infecting and more a matter of developing the Inconvenient Truth #6: Money is the most expensive way to motivate people “virus” that society is a fertile spreading ground for. Upton Sinclair once wrote, “It is difficult to Watts suggests a better metaphor than a virus—a get a man to understand something if his salary forest fire—for the way social inf luence really 24 If depends upon him not understanding it.” works. There are thousands of forest fires a year, a change program’s objectives are not linked but only a few become roaring monsters. Why? somehow to employee compensation, this sends Because in those rare situations the landscape is a strong message that the change program is not ripe: sparse rain, dry woods, badly equipped fire a priority, and motivation for change is adversely departments. In these situations, no one will go affected. The f lip-side, however, is not true. around talking about the exceptional properties linked to are When change program objectives of the random smoker who unwittingly tossed a compensation, motivation for change is rarely smoldering cigarette butt into a patch of parched 23 meaningfully enhanced. The reason for this is as grass in the middle of a forest during a drought. practical as it is psychological in nature. The inconvenient truth is that it is not enough Consider the change manager who is working to invest in a few rather than in many as a to link the change program with compensation. way of catalyzing desired changes, no matter He or she is faced with existing executives’ annual how appealing the idea is. We warn against compensation plan that is typically comprised of overestimating the impact a group of inf luence three elements: a portion dependent on how the leaders can have and, in turn, overinvesting in corporation does (typically an earnings or return- them in a world of scarce resource (time, money, on-capital number for the whole company), a people). We advocate that change leader attention portion dependent on how the leader’s specific should be balanced across all four conditions business or function does, and a portion for change – a compelling story, role modeling, dependent on individual goals, often related to reinforcement systems, and the skills required operations or people. for change – to ensure they are reinforcing The rational change manager dutifully in ways that maximize the probability of the builds change-program impact into earnings change “spark” taking off like wildfire across the forecasts and business unit/functional financial organization. operating plans. Come review time, however, he/ she realizes that with the myriad of controllable and uncontrollable variables that inf luence the Page 9

12 The Inconvenient Truth About Change Management financial outcomes, the link to specific change them for their work on the company’s “Perform, program implementation becomes weak at best. Grow and Breakout” change program. The CEO Operational (non-financial) impact from change of a large multi-regional bank sent out personal program implementation creates a stronger link thank-you notes to all employees working directly to outcomes and individual efforts. Unfortunately, on the company’s change program to mark its however, the weighting of non-financial outcomes first-year anniversary. Most change managers would refer to these as merely token gestures and from the change program in the context of the vast argue that their impact is limited and short-lived. array of other metrics also “linked” to rewards (e.g., Employees on the receiving end beg to differ. compliance, safety, social responsibility, diversity, Recipients of these “dime in the photocopier” talent development, leadership competencies) renders any link to compensation hardly relevant. equivalents consistently report back that the The reality is that in the vast majority rewards have a disproportionately positive impact on change motivation that lasts for months, if not of companies it is exceedingly difficult to years. meaningfully link a change program to individual compensation. So why not just change the compensation approach? This is of course an For human beings it holds that option, but easier said than done and certainly satisfaction equals perception not without risk and potential unintended minus – small, expectation consequences when considering that change must happen in real time—the organization must unexpected rewards can have continue to carry out its day-to-day tasks and disproportionate effects. functions while at the same time fundamentally rethinking them. The good news is that there The reason these small, unexpected rewards are easier, relatively inexpensive ways to use have such impact is because employees perceive incentives to motivate employees for change. them as a “social exchange” with the company In one study, researchers gave people a tiny versus a “market exchange.” To understand the gift and measured the increase in satisfaction difference, consider the following: Assume you are with their lives. Specifically half of a group of at your mother-in-law’s house for Thanksgiving people who used a photocopier found a dime dinner. She has spent weeks planning the meal in the coin return. How much did the gift and all day cooking. After the meal you thank increase their satisfaction with their lives? When her and ask her how much you should pay for the asked about how satisfied they were with their experience. What would her reaction be? Most lives, those with the dime were 6.5 on a 7 scale 25 people report that their mother-in-law would be whereas those without were only 5.6. Why such horrified and the relationship damaged as a result. a lift in satisfaction for such little reward? For Why? The offer of money takes the interaction human beings it holds that satisfaction equals from a social norm, built around a reciprocal, perception minus expectation (an equation long-term relationship, to a market norm that often accompanied by the commentary, “reality is more transactional and shallow. Back to your has nothing to do with it”). The beauty of this mother-in-law, would she have accepted a nice equation for change managers is that small, bottle of wine for the table as a gift from you? unexpected rewards can have disproportionate Likely yes, as small, unexpected gifts indicate effects on employees’ “satisfaction” with a change 26 social norms are at play. program. Consider the study of a daycare center where Gordon M. Bethune, while turning around a $3 fine was imposed for parents picking up Continental Airlines, sent an unexpected $65 their children late. When the fine went into place, check to every employee when Continental made incidents of late pickups went through the roof. it to the top 5 for on-time airlines. John McFarlane Why? Before the fine was imposed, the daycare of ANZ Bank sent a bottle of champagne to every staff and the parents had a social contract—for the employee for Christmas with a card thanking Page 10

13 The Inconvenient Truth About Change Management 29 You may receive three times as much as they do. parents, feeling guilty about being late compelled be thinking to yourself that with a total pie of $10 them to be more prompt in picking up their to share, unequal allocations are rejected only kids. Once the fine was imposed, the daycare because the absolute amount of the offer is low. center had inadvertently replaced social norms Seemingly irrationally, however, the “ultimatum with market norms. Free from feelings of guilt, game” findings are the same even when the parents frequently chose to be late and pay the fee 27 absolute amount of the offer is equivalent to two (certainly not what the center had intended!) 30 weeks of wages. When it comes to change, social norms are not only cheaper than market norms, but often more effective as well. By way of example, against Employees will go consider the AARP (American Association of their own self-interest (read: Retired Persons) which asked some lawyers if incentives) if the situation they would offer less expensive services to needy retirees, at something like $30 an hour. The violates other notions they have lawyers said no. Then the program manager about the way the world should from AARP had the idea to ask the lawyers if work, in particular, in relation to they would offer free services for needy retirees. Overwhelmingly, the lawyers said yes. When fairness and justice. compensation was mentioned the lawyers applied market norms and found the offer lacking. When The inconvenient truth is that employees will no compensation was mentioned they used social go against their own self-interest (read: incentives) 28 norms and were willing to volunteer their time. if the situation violates other notions they have about the way the world should work, in particular, in relation to fairness and justice. In the case of Inconvenient Truth #7: A fair process is as the banking price-rise example described above, important as a fair outcome whether right or wrong, the frontline view of the Consider a bank which, as part of a major pricing and incentive changes was that they were change program, diagnosed that its pricing did unfair to the customer, a symbol of increasingly not appropriately ref lect the credit risk that the greedy executives losing sight of customer service. institution was taking on. New risk-adjusted rate Even though it meant they were less likely to of return (or RAROC-based) models were created, achieve their individual sales goals, a significant and the resulting new pricing schedules delivered number of bankers vocally bad-mouthed the to the frontline. At the same time, sales incentives bank’s policies to customers, putting themselves were adjusted to reward customer profitability on the customer’s side, rather than the bank’s. versus volume. The result? Customer attrition Where possible, price over-rides were then used (not only of the unprofitable ones) and price to show good faith to customers and inf lict over-rides went through the roof and, ultimately, retribution on the “greedy” executives. significant value was destroyed by the effort. The In making any changes to company structures, rational change manager scratches his or her head processes, systems and incentives, change in confusion wondering, “What went wrong?” managers should pay an unreasonable amount “Ultimatum games” offer a compelling example of attention to employees’ sense of the fairness of the inconvenient truth at play here. Give a of the change process as well as the outcome. stranger $10. Tell them they must split the money Particular care should be taken where changes with another stranger however they wish. If the effect how employees interact with one another person accepts the offer, the money is split. If they (headcount reductions, changes to processes such reject the offer, no one gets any money. Studies as talent management, annual planning, etc.) show that if the offer is a $7.50/$2.50 split, more and with customers (sales stimulation programs, than 95 percent will reject it, preferring to go call center re-designs, pricing, etc.). Ironically, home with nothing than to see someone “unfairly” Page 11

14 The Inconvenient Truth About Change Management of ventilation). A far better solution is achieved by in the pricing example described above, the outcome is inherently fair (customers are asked addressing the root cause. Let’s see how this applies to change to pay commensurate to the risk the bank is management. Consider a bank that through a taking on), and therefore the downward spiral benchmarking exercise found that its sales per described could have been avoided (and has been by other banks adopting RAROC-based pricing) banker were lagging the competition. “Why are sales per banker lower?” the rational manager by carefully tending to employees’ perceptions asks. Analysis shows bankers are not spending of fairness in the communications and training surrounding the changes. enough time with customers. “Why aren’t they spending more time with customers?” Because a significant amount of their time is spent completing paperwork. With this diagnosis the onVenient d. the inC truth bank set about reengineering the loan-origination about C apability building process to minimize paperwork and maximize Conventional change management emphasizes customer-facing time. Not only that, bankers are provided with new sales scripts and easier-to-use the importance of building the skills and talent needed for the desired change to be successful tools so that they’ll know what to do with the extra time in front of the customer. Training on and sustainable. Though hard to argue with, in the new processes and tools is administered and, practice there are two more inconvenient truths that demand attention if one is to successfully voilà, problem solved. Except for the fact that six months later, the levels of improvement are far build the needed capabilities. lower than envisioned. Inconvenient Truth #8: Employees are what Ignoring the underlying mind- they think sets of employees during change Many managers believe in their heart of hearts that the “soft stuff ”—employees’ thoughts, is to address symptoms rather feelings and beliefs—has no place in workplace than root causes. dialog. “All that matters is that they behave in the ways I need them to; it doesn’t matter why,” they will say. While rational—behaviors drive What went wrong? A further investigation performance after all—this view misses the into “why”, with an eye to the bankers’ mindsets, point that it is employees’ thoughts, feelings and provides a much fuller view of the root causes: beliefs that drive their behaviors. Ignoring the Is there anything about how they think and underlying mindsets of employees during change feel, or what they believe about themselves and is to address symptoms rather than root causes. their jobs, that explains why they wouldn’t be Consider an analogy from operations spending more time with customers? Faced management. When a motor burns out on a with a stalled improvement program, the bank machine on the shop f loor it is replaced, right? in question proceeded down this line of inquiry. Effective managers will only replace the engine They quickly found that most of the bankers in once the root causes are known: “Why did the question simply found customer interactions motor burn out?” Because it overheated. “Why uncomfortable and therefore actually preferred did it overheat?” Because it was insufficiently paperwork to interacting with people (and, in ventilated. “Why was it insufficiently ventilated?” turn, created reasons not to spend time with Because the machine is too close to the wall. The customers). This was driven by a combination operator then moves the machine away from the of introvert personalities, poor interpersonal wall and replaces the motor. Not doing so would skills and a feeling of inferiority when dealing mean the fix would be short-lived (the new motor with customers who by and large have more would have quickly burned out too, due to the lack money and education than they do. Furthermore, Page 12

15 The Inconvenient Truth About Change Management supervisors (who had mostly been recruited from Inconvenient Truth #9: Good intentions the banker ranks) were also insecure with their aren’t enough selling and interpersonal skills, and therefore It is well documented that after three months placed more emphasis on managing paper-based adults retain only 10 percent of what they activity, further exacerbating the problem. Finally, have heard in lecture-based training sessions most bankers loathed to think of themselves as (e.g., presentations, videos, demonstrations, “sales people”—a notion they perceived as better discussions). When they learn by doing (e.g., role suited to employees on used-car lots than in bank plays, simulations, case studies), 65 percent of the branches. Efforts to create “more sales time” f lew learning is retained. And when they practice what directly in the face of their vocational identity. they have learnt in the workplace for a number of Armed with these root-cause insights, the weeks, almost all of the learning can be expected 32 bank’s change program was enhanced to directly to be retained. Accordingly, effective skill- address the mindset challenges as well as the building programs are replete with interactive process and tool barriers. Training for bankers simulations and role plays to ensure time spent and supervisors was expanded to include in the training room is most effective. Further, elements related to personality types, emotional commitments are made by participants regarding intelligence and vocational identity (recasting what they will “practice” back in the workplace “sales” as the more noble pursuit of “helping (“My Monday morning takeaway is...”) to embed customers discover and fulfill their unarticulated the learnings. This is all well and good, except needs”). This enhancement not only put the that come Monday morning, very few keep their program back on track within six months, but commitments. also ultimately delivered sustainable sales lifts in Consider a social science experiment at a excess of original targets. Princeton theological seminary. Students were Those skeptical of the importance of mindsets asked a series of questions about their personality are encouraged to consider the Roger Bannister and level of religious commitment and then sent story. Until 1954, the four-minute mile was across campus. Along the way, they met a person considered to be beyond human achievement. slumped over coughing and groaning and asking Medical journals of the day went so far as to for medical assistance. Did self-proclaimed nice declare it an impossible “behavior.” In May of that people help more? Absolutely not. Neither did year, however, Roger Bannister broke this barrier, religious commitment correlate to who provided running the mile in 3 minutes, 59.4 seconds. What help. The only predictor of the seminarians’ is perhaps more amazing is that two months later behavior was that half were made to think they it was broken again, by Australian John Landy. were late for an appointment across campus, while And within three years, 16 other runners had also the others believed they had plenty of time. Sixty- broken this record. What happened? A sudden three percent with spare time helped, as opposed spurt in human evolution? Genetic engineering of to just 10 percent of those in a hurry. When short a new super race of runners? Of course not. It was of time, even those with “religion as a quest” did 33 the same human equipment, but with a different not stop to help. mindset—one that said “this can be done.” Given this aspect of human nature, it is Bannister emphasizes in his memoirs that unreasonable to expect that most employees will he spent as much time conditioning his mind genuinely practice new skills and behaviors back as he did conditioning his body. He wrote, “the in the workplace if nothing formal has been done mental approach is all important... energy can to lower the barriers to doing so. The time and 31 be harnessed by the correct attitude of mind.” energy required to do something additional, or While perhaps inconvenient, when it comes to even to do something in a new way, simply don’t building capabilities required for change, we exist in busy executives’ day-to-day schedules. believe a balance should be struck between Ironically, this is particularly the case in the building technical skills and shifting underlying days following training programs, when most mindsets (to enable the technical skills to be used managers are playing catch-up from their time to their fullest). Page 13

16 The Inconvenient Truth About Change Management away. This failure to formalize and create the plant-wide improvement programs in the context of pressing strategic issues, applying improvement space for practice back in the workplace dooms concepts to more complex operations, and most training programs to deliver returns that coaching and mentoring others. Fieldwork again are at best 65 percent of their potential. put these lessons into practice with quantitative We advocate a number of enhancements to improvement goals attached, resulting in a set of traditional training approaches to “hardwire” day- “master black belts” emerging from the program. to-day practice into capability-building processes. First, training should not be a one-off event. Instead, a “field and forum” approach should the money! W me sho be taken, in which classroom training is spread over a series of learning forums, and fieldwork is So far, we have tested the incremental impact assigned in between. Second, we suggest creating of applying these inconvenient truths in practice fieldwork assignments that link directly to the above and beyond more conventional approaches day jobs of participants, requiring them to put to inf luencing behavior in three longitudinal into practice new mindsets and skills in ways studies. Each study has employed control versus that are “hardwired” into to the things for which experimental group methodologies (comparing they are accountable. These assignments should impact with like customer and employee have quantifiable, outcome-based measures demographics, ensuring minimal distortions of that indicate levels of competence gained, and trial over a one-year test period). In each of these certification that recognizes and rewards the cases, the results have been profound. skills attained. In retail banking, for example, applying conventional change management approaches Failure to formalize and create in a salesforce stimulation program achieved an 8 percent lift in profit per business banker and 7 the space for practice back in the percent per retail banker. While respectable, this workplace dooms most training was below management aspirations of achieving a programs to deliver returns that 10 percent lift in both areas. Where inconvenient are at best 65 percent of their truths were acted on beyond conventional change management approaches, however, the program potential. achieved a 19 percent lift in profit per business banker and 12 percent per retail banker, far Consider one company’s approach to building 34 exceeding management’s expectations. lean manufacturing capabilities. The first forum In the call centers of a large telecommunications offered a core of basic skills and mindsets in company, the results of a customer churn performance improvement. Fieldwork then reduction program applying conventional change followed, involving cost, quality and service management approaches resulted in 35 percent improvement targets over a three-month period. churn reduction, falling short of management’s Anyone delivering on these targets was awarded aspiration of a 50 percent reduction. Acting a green-belt certification in lean. The next forum on the inconvenient truths, however, delivered provided much deeper technical system design 65 percent churn reduction to the delight of skills and project and team leadership training. management, employees and customers. The fieldwork that followed involved participants An insurance back office which had redesigning entire areas of the plant f loor and implemented lean operations improvements overseeing a portfolio of specific improvement found that performance six months after the teams—all aspects of which had quantitative “step change” was stagnant, not fulfilling the targets (both in terms of financial results, and continuous improvement expectations of the people and project leadership in 360-degree program. Revamping the program to leverage evaluations). Anyone achieving their fieldwork inconvenient truths, the company has now posted targets then became a black belt in lean. The more than two years of 5 percent improvement final forum built more advanced skills in shaping Page 14

17 The Inconvenient Truth About Change Management (above and beyond the step change) in cost, quality and service, exceeding the 3 percent continuous improvement target built into the budget. As mentioned above, we acknowledge that our research into the impact of applying approaches based on the inconvenient truths about change management is still in its relatively early days by virtue of the fact that sustainable impact can only be measured over numbers of years. The longitudinal examples mentioned above, however, give us confidence and motivation to broadly share the thinking above. *** David Whyte once wrote, “Work, paradoxically, does not ask enough of us, yet exhausts the 35 Our narrow part of us we bring to the door.” research and experience has led us to believe that the impact of conventional change management thinking is held back by exactly this paradox. More activity is undertaken, less energy is tapped into, and ultimately change impact is disappointing. By acting on the inconvenient truths discussed above, Whyte’s paradox is at least in part resolved by tapping into motivations that are uniquely human. In doing so, tremendous individual and organizational energy for change is unleashed. Page 15

18 The Inconvenient Truth About Change Management The Inconvenient Truth About Change Management Why it isn’t working and what to do about it further reading In writing this article, the goal has been to highlight Driving Radical Change new behavior. People must also see colleagues those aspects of change management that are By Josep Isern and Caroline Pung they admire modeling it and need to have the skills most counter-intuitive, and therefore most likely The McKinsey Quarterly to do what is required of them. Applying any one to inhibit change program success. We have not June 2006 of these insights on its own doesn’t have much attempted to deliver a holistic recipe for change impact. But managers now find that applying all Genuine transformations take place on a scale management. For a comprehensive view of the four together greatly improves their chances of different from that of routine change programs more rational, conventional elements of successful bringing about lasting changes in the mindsets — and are much harder to pull off. Two of the change programs, we suggest the following and behavior of people in an organization – and most urgent challenges are setting appropriate reading: thus of achieving sustained improvements in aspirations and mobilizing energy and ideas. A business performance. transformation calls for game-changing ideas, not incremental improvements. Leaders must clarify this up front and regularly reinforce it, eliciting A R T I C L E S The Role of the CEO in Leading Transformation ideas on why change is necessary, what must By Scott Keller and Carolyn Aiken Leading Change: change, who must change, and how to change. By The McKinsey Quartery Why Transformation Efforts Fail creating clear expectations, leaders must initiate April 2007 disciplined processes for idea generation and By John Kotter development. This first phase of every initiative In today’s business environment, incremental Harvard Business Review must include time for creativity, with a challenge – enough is not periodic improvement March–April 1995 mechanism built in to avoid incrementalism. performance transformation is required to Businesses hoping to survive over the long Many transformations kick off with a rush of get, and stay, on top. Much has been written term will have to remake themselves into better enthusiasm, only to falter later. To achieve radical about what it takes to transform performance competitors at least once along the way. These change, leaders must find ways to reenergize their successfully. But what is the CEO’s role in leading efforts have gone under many banners: total organizations at regular intervals. They can do this the transformation? How does the CEO’s role differ quality management, reengineering, rightsizing, by “fuel-injecting” ideas with six proven catalysts: from the role of the executive team or of initiative restructuring, cultural change, and turnarounds, to setting high aspirations; managing pace; engaging sponsors? Surprisingly, there is little written material name a few. In almost every case, the goal has been at three levels; embedding visible change; building that addresses these questions. Guidance can be to cope with a new, more challenging market by capabilities; and making change personal given, however, based on experience derived from changing the way business is conducted. A few of scores of major transformation efforts combined these endeavors have been very successful. A few with a series of intense research projects over the have been utter failures. Most fall somewhere in The Psychology of Change Management past decade. There is no single model for success. between, with a distinct tilt toward the lower end of By Emily Lawson and Colin Price The exact nature of the CEO’s role will be context- the scale. John P. Kotter completed a 10-year study The McKinsey Quarterly specific (e.g., influenced by the size, urgency, and of more than 100 companies that attempted such 2003 Special Edition: The Value in Organization nature of the transformation, the capability of the a transformation. Here he shares the results of his organization, the CEO’s personal style). This white organizational-change Large are programs observations, outlining the eight largest errors that paper outlines four roles that successful CEOs tend notoriously difficult to run: They involve changing can doom these efforts and explaining the general to play: making the transformation meaningful, the way people not only behave at work but also lessons that encourage success. Unsuccessful role modeling desired mindsets and behaviors, think about work. Sometimes, however, changing transitions almost always flounder during at least building a strong and committed team, and individual mindsets is the sole way to improve a one of the following phases: generating a sense of pursuing impact relentlessly. company’s performance. Psychologists in fields of urgency, establishing a powerful guiding coalition, adult development have made several important developing a vision, communicating the vision discoveries about the conditions that have to be clearly and often, removing obstacles, planning for met before people will change their behavior. First, and creating short-term wins, avoiding premature they must see the point of the change and agree declarations of victory, and embedding changes with it, at least enough to give it a try. Then the in the corporate culture. Realizing that change surrounding structures – rewards and recognition usually takes a long time, says Kotter, can improve systems, for example – must be in tune with the the chances of success. Page 16

19 The Inconvenient Truth About Change Management end n otes Harvard Business Review 1. , March–April 1995, p 1. Kotter, John, “Leading Change: Why Transformation Efforts Fail”, For a list of about 100 highly recommended books on change management see Nickols, Fred, 2006. http://www. 2. managementlogs.com/2006/04/change-management-books.html . As of March 7, 2008, Amazon had 1,861 books listed under the official category “organizational change” and 8,604 books under the category of “change.” 3. Examples include Harvard: “Managing Change”, Michigan: “Navigating Change”, MIT: “Planning and Managing and Change”, Duke: “Human Assets and Organizational Change”, Columbia: “Organizational Change”, IMD (Switzerland): “Managing Change”, London Business School (U.K.): “Managing Change”, INSEAD (France/Singapore): “Leadership & Change”, ESADE I (France): “Change Management”, Queens University (Canada): “Strategy Implementation & Change Management.” 4. Isern, Joseph and Pung, Caroline, “Organizing for successful change management: A McKinsey global survey”, The , June 2006. McKinsey Quarterly In 2002, D. Miller reported that 70 percent of change programs fail in “Successful change leaders: what makes them? What 5. Journal of Change Management , 2(4), pp 359–68. In 2005, M. Higgs and D. Rowland reported do they do that is different?”, that, “Only one in four or five change programs actually succeed” in “All Changes Great and Small: Exploring Approaches Journal of Change Management , 5(2), pp 121–51. to Change and its Leadership”, 6. Composite data from a number of sources that indicate that the reason change programs fail is due to employee resistance , Breaking the Code of Change or management behavior come from the following sources: ed. Michael Beer and Nitin Nohria, Diagnosing and Changing Organizational Harvard Business School Press, 2000; Cameron, Kim S. and Quinn, Robert E., Culture: Based on the Competing Values Framework , Addison-Wesley, 1999; Caldwell, Bruce , “Missteps, Miscues: Business , June 20, Re-engineering Failures Have Cost Corporations Billions, and Spending Is Still on the Rise,” Information Week CSC Index , 1994; Goss, Tracy, Tanner Pascale, Richard 1994; “State of Re-engineering Report (North America and Europe),” Harvard Business and Athos, Anthony G., “The Reinvention Roller Coaster: Risking the Present for a Powerful Future,” , 71, 1998; John P. Kotter and James L. Heskett, , Free Press, 1992. Corporate Culture and Performance Review 7. The McKinsey Quarterly , 2003, Number 2, Price, Colin and Lawson, Emily, “The Psychology of Change Management,” Special Edition: Organization. The leather seats and red pencil examples have been borrowed Ariely, Dan, 8. Predictable Irrationality: The Hidden Forces that Shape Our Decisions , Harper Collins, 2008, p. 20 and p. 218. Behavioral economics and behavioral finance are closely related fields which apply scientific research on human and social 9. cognitive and emotional biases to better understand economic decisions and how they affect market prices, returns and the allocation of resources. Daniel Kahneman with Amos Tversky and others, established a cognitive basis for common human errors using heuristics and biases (Kahneman & Tversky, 1973, Kahneman, Slovic & Tversky, 1982), and developed Prospect theory (Kahneman & Tversky, 1979). He was awarded the 2002 the Nobel Prize in Economics for his work in Prospect theory as a psychologically realistic alternative to expected utility theory. See Zohar, Danah, 10. , Rewiring the Corporate Brain: Using the New Science to Rethink How We Structure and Lead Organizations Berrett-Koehler, 1997; Barret, Richard, Liberating the Corporate Soul: Building a Visionary Organization , Elsevier, 1998; and Beck, Don and Cowan, Christopher, , Blackwell Business, Spiral Dynamics: Mastering Values, Leadership, and Change 1996. 11. Lottery tickets study as described in, Langer, Ellen J., “Chapter 16: The Illusion of Control” in Daniel Kahneman, Paul Slovic and Amos Tversky, eds., Judgment under Uncertainty: Heuristics and Biase s, Cambridge University Press, 1982. See Barclays’ Personal Financial Services CEO David Roberts, “Easy to Do Business With: The Way Ahead for PFS,” April 12. 2002, London, England: Barclays, Reg. # 1026167. Hemp, Paul; Palmisano, Samuel J. and Stewart, Thomas A., “Leading Change When Business Is Good: The HBR Interview 13. – Samuel J. Palmisano,” Harvard Business Review , December 2004. 14. Priestland, Andreas and Hanig, Robert, “Development of First-Level Leaders,” , June 2005. Harvard Business Review This juxtaposition of the deficit-based and constructionist-based approaches to change is taken directly from Bernard J. 15. Mohr and Jane Magruder Watkins, The Essentials of Appreciative Inquiry , Pegasus, 2002. University of Wisconsin research as cited in Bernard J. Mohr and Jane Magruder Watkins, The Essentials of Appreciative 16. Inquiry , Pegasus, 2002. Risk-taking research cited in Terry Burnham and Jay Phelan, 17. Mean Genes , Perseus, 2000. For further evidence that humans are ‘irrational’ loss avoiders, see Kahneman, D. and A. Tversky, “Choices, Values, and 18. 39, no. 4 (1984): 341-50. Frames,” American Psychologist Page 17

20 The Inconvenient Truth About Change Management Barber, Brad M. and Odean, Terrance, “Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment,” 19. , 2001. Ross, M. and F. Sicoly, “Egocentric Biases and Availability and Attribution,” Journal Quarterly Journal of Economics of Personality and Social Psychology 37 (1979): pp 322-336. Svenson, O., “Are We All Less Risky and More Skillful Than Our Fellow Drivers?” (1981): pp 143-148. Acta Psychologica 47 McKinsey & Company Organization Practice, 20. Building Exceptional Leadership Strength , 2005. Note that in an interview with Time magazine published August 14, 2000, looking back on his decision, he told writer Dan 21. Goodgame: “I know I wasn’t in the greatest position with my swing at the [1997] Masters. But my timing was great, so I got away with it. And I made almost every putt. You can have a wonderful week like that even when your swing isn’t sound. But can you still contend in tournaments with that swing when your timing isn’t as good? Will it hold up over a long period of time? The answer to those questions, with the swing I had, was ‘no’. And I wanted to change that.” Rankings reported by Harig, B., “Wood ‘Uncomfortable’ with his Game,” ESPN.com, April 26, 2004. Gladwell, Malcolm, 22. , Little Brown, 2000. The Tipping Point: How Little Things Can Make a Big Difference 23. , February 2008. Thompson, Clive, “Is the Tipping Point Toast?” Fast Company Sinclair recalled this statement from his 1934 California gubernatorial campaign speeches in his memoir, 24. I, Candidate for Governor, and How I Got Licked , Farrar & Rinehart, 1935, p 109. 25. The dime in the photocopier study, Schwarz, Norbert, Stimmung als Information : Untersuchungen zum Einf luss von Stimmungen auf die Bewertung des eigenen Lebens , Springer, 1987, pp 12–13. The ‘mother-in-law’ example has been borrowed Ariely, Dan, 26. Predictable Irrationality: The Hidden Forces that Shape Our Decisions , Harper Collins, 2008, p. 72. Dubner, Stephen J., Levitt, Steven D., 27. Freakonomics: A Rogue Economist Explores the Hidden Side of Everything , Doubleday, 2005, p. 19. Ariely, Dan, Predictably Irrational: The Hidden Forces that Shape Our Decisions , Harper Collins, 2008: p. 71. 28. 29. The seminal ultimatum game study is by Guth Werner, Rolf Schmittberger and Bernd Schwarze, “An Experimental Analysis Journal of Economic Behavior and Organization , December 1982, 3(4), pp 367–88. Note that of Ultimatum Bargaining,” new ultimatum game research in the field of neuroeconomics shows us exactly what part of the brain operates the bilateral anterior insula (not part of the prefrontal cortex) in rejecting small offers (As reported by Sanfey, A.G., K.K. Rilling, et al., Science 300 (2003): pp 1755-1758. “The Neural Bais of Economic Decision-Making in the Ultimatum Game,” 30. Economic Inquiry 1999, Cameron, Lisa, “Raising the stakes in the ultimatum game: experimental evidence from Indonesia,” 37(1), pp 47–59; This assumption was also tested t by having U.S. participants play the game for $100. They found no difference between play for $100 and play for $10 as reported in Hoffman, E., K. McCabe, et al., “On Expectations and the Monetary Stakes in Ultimatum Games,” International Journal of Game Theory 25 (1996): pp 289-301 Bannister, Roger, 31. The Four-Minute Mile , Guildford: The Lyons Press, 1981, p 210. IBM research; Whitmore, “Coaching for Performance.” 32. Darley, J. M. and Batson, C.D., “From Jerusalem to Jericho: A study of situational and dispositional variables in helping 33. behavior,” Journal of Personality and Social Psychology , 1973, 27(1), pp 100–108. Experimental and control group clusters of bank branches were chosen that matched each other and the organizational 34. average on the following dimensions: Performance: NPBT (growth and average over longest coherent period available), economics of customers, average income per customer, industry composition in business banks (split between service and manufacturing industry), and characteristics of centers; Staff: performance rating, tenure (+2.5 years min.); and Size: footings per banker. During the study we ensured no distortions of trial occurred in terms of change of management, restructuring of operations, test of other initiatives in an incomplete subset of trial participants. Performance was compared over 1 year between three groups: 1) No intervention, 2) Salesforce effectiveness improvement program with “rational” change management interventions, 3) Salesforce effectiveness improvement program with “rational” change management interventions. This approach is illustrative of all longitudinal studies mentioned. Whyte, David, 35. The Heart Aroused: Poetry and the Preservation of the Soul in Corporate America , Doubleday Currency, 1996, pp. 22. Page 18

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