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Article

Making Change Stick

Making Change Stick

Seventy percent of change programs fail. They often fail because leaders shy away from making changes broad enough, deep enough and-above all-swift enough to revive the company.

  • May 01, 2002
  • min read

Article

Making Change Stick

Seventy percent of change programs fail. Depressing news at a time when more and more companies face upheaval. They often fail because leaders shy away from making changes broad enough, deep enough and-above all-swift enough to revive the company. Instead, they administer a series of half-cures, which often serve only to prolong the agony.

But there appears to be a way to beat the average and lead your company to dramatic and sustained improvement. When Bain & Company studied 21 of the most remarkable transformation stories of recent years, we discovered that four principles underpinned the success of each one of those companies. These principles are easy to articulate, although not easy to achieve:

  • Set high standards and lead by example

  • Put the right managers in place and give them real power

  • Focus on results, not on an elaborate change process

  • Do it quickly-tackle issues in parallel not in sequence

The principles held true whatever the type of company (small or large, regional or international, diversified or focused), whatever the industry, and whatever particular challenges they faced. Some were already in crisis and were looking for a rescue program. Others needed to move fast in anticipation of changing consumer tastes or new competitors.

In fact, their only common link was an astonishing transformation story: Their share prices rose on average 250% a year in the period during and after the turnaround, and more than 1,000% a year for some companies.

Turning around a telco
Consider Optus Communications, a 1992 start-up that became the number two telecommunications firm in Australia. After a promising start, by the mid-1990s the company faced a host of problems, including the end of Australia's telephone duopoly, a subsidiary hemorrhaging cash, a twice-delayed IPO, and a revolving door to the CEO's office. In 1996, these problems culminated in a staggering before-tax loss of $667 million. In 1997, shareholders came "within an inch of liquidating the company."

But instead of a line gone dead, investors soon found a profitable company. First, Optus's CEO and CFO were replaced and an entirely new management team installed. The new leadership integrated the problematic subsidiary, Optus Vision, and brought its cash outflow under control. A cost-saving initiative, Project Breakeven, targeting a variety of short-term opportunities, yielded $260 million in pretax earning improvements. Management completely reworked Optus's balance sheet, put an employee stock-ownership plan in place, and restructured its senior management team's objectives and incentives. Finally, they launched the long-delayed IPO.

Elapsed time? One year.

After that, Optus turned in four consecutive years of profit growth and became one of the top 10 Australian companies in market capitalization. In September 2001, Optus was acquired by Singapore Telecom for more than double the IPO price, locking in more than $9 billion in shareholder value created since the turnaround began.

The speed and scope of Optus's turnaround is remarkable. But it is hardly unique.

Transforming a publisher
Another recent turnaround success is that of UK-based publisher Reed Elsevier. When Crispin Davis joined the firm as CEO in September 1999, he ended a period of nearly a year without a CEO. The company—the product of a 1993 merger between the UK's Reed International and Elsevier of the Netherlands—was in trouble. Feuding between its London and Amsterdam boards had distracted senior managers from problems in its business units, and three separate profit warnings had plunged Reed International's share price on the London Stock Exchange to a low of 348 pence (US $4.96).

By December, Davis was ready to unveil his transformation plan. He started, by replacing 11 of the company's 12 top executives. This new senior team then set about tackling the problems in Reed Elsevier's business units. In particular, Reed's legal division and its US trade publications business, Cahners, were rapidly transformed. Meanwhile, science unit Elsevier was moved onto the Internet. This meant annual price increases for Elsevier's periodicals could be scrapped, thus reducing the level of library cancellations.

Davis made substantial investments in the core businesses where he identified value. He earmarked £150-200 million (US $214-$285 million) a year for new product development, a sizeable chunk of which was directed towards the Internet strategy. At the same time, he shed units, like OAG Worldwide and Springhouse, which did not fit in with his strategy. On top of this he identified cost savings of £170 million (US$ 242.3 million), including 1,500 job losses.

Just 20 months after his transformation plan was announced, Reed International's share had nearly doubled to 634 pence (US $9.04).

Leading by example
So what is the formula for successful change? First, like the CEOs at Optus and Reed Elsevier, advocates of transformation programs must be real leaders. They need to roll up their sleeves, clearly see the job, and get on with it. If you are asking the entire company to share your vision, you must begin by leading from the front. You must be seen as a person of action. You need to introduce a single set of performance and ethical standards and communicate these as simple, powerful messages to all employees.

Putting the right managers in place
Next, no matter how good a CEO is, he or she cannot single-handedly transform a company. He needs a strong support team. Unfortunately, the existing senior management team is often not the right talent to steer the company through the change process. Even capable managers may be closely aligned with the old company and viewed by employees as incompetent or untrustworthy. Our research shows that replacing senior management correlates closely with successful change. Almost every one of the 21 textbook turnarounds substantially replaced the senior team.

Chris Anderson of Optus and Crispin Davis at Reed Elsevier both replaced most of their top executives. Reflected Davis on his company's rapid move from strife-ridden publisher to stock market hero: "It was clear that management had to be wrong if a company like this was performing that poorly."

Focusing on results
Thirdly, the most successful leaders of troubled companies are not beguiled by the process of change, but stay focused on the end result. Successful transformers begin by developing a clear view on where the value lies within the business, and what will be required to get it. Once this goal is in their sights, they establish nonnegotiable targets, both financial and non-financial, to get there. Then they step back and let managers achieve those results in the way they see fit.

The story of Continental Airlines turnaround in 1994-95—on a diet of tough cost cuts and tantalizing performance rewards—is legend. In a recent Bain interview, Greg Brenneman, the former COO of Continental and key change leader, said the secret to getting results was not to direct action, but to find ways to keep people focused on the right things, and for the most part, let them figure out how to achieve the goals themselves. The experience of Continental says: If you provide incentives, link them to short-term achievements, such as monthly or quarterly targets. Said Brenneman: "(Continental's) monthly on-time bonus [of $65 or $100] has become a point of pride and a fact of life for employees; every month they expect to get that check and every day they work hard to make sure it comes through. And for executives, the quarterly bonus program keeps everyone focused on delivering results early in the year, day in and day out."

Six years after the turnaround, Continental employees were still focused on results: In the first quarter of 2001, Continental and Southwest were the only two major American airlines to report a profit. More remarkably, for Continental this marked its 24th consecutive profitable quarter. Since the events of September 11, Continental has struggled in a besieged sector. Still, it posted narrower losses for the year than many airlines, and has one other advantage in tough times: it knows the way back from the brink.

Doing it quickly
Finally, successful transformations turn on speedy execution. Prioritizing the key elements of change, implementing that change quickly and tackling the issues, for the most part, in parallel, is far more effective than easing change into the organization. How quickly? The most successful transformers in the study substantially completed their turnarounds in two years or less. None took more than three years. And in all cases, some form of tangible, improved results appeared almost immediately.

Corporate transformation may be the most difficult professional test an executive will face. Nothing we say here will change that. There is no simple formula for a successful turnaround; companies and their challenges vary too widely. But the simple principles that characterize the most successful transformations apply across industry and company boundaries.

It's time to roll up your sleeves.

What can you do Monday morning, 8 a.m.?

  • Set clear priorities-identify the "must dos", and focus on them.

  • Identify which of your managers can effectively lead change, and which can't. Act decisively to make the right people with the right skills and attitude accountable.

  • Give the people you select the mandate and resources to succeed

  • Identify the three or four measures of a successful turnaround and communicate them throughout the company, again, and again.

Stan Pace, based in Dallas, directs Bain & Company's change management practice. Paul Rogers, a director based in London, is a leader in Bain's organization and strategy practices. Paul Wilson is also a director and leads Bain's financial services practice in London.

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