Topics:   Corporate Governance,Risk Management,Strategy

Topics:   Corporate Governance,Risk Management,Strategy

December 10, 2015

Facing Change With Confidence

December 10, 2015

Protiviti and North Carolina State University’s Enterprise Risk Management Initiative conducted a global survey involving 275 board members and executives across multiple industries, one of the top 10 risks cited was that resistance to change may restrict an entity’s ability to make necessary adjustments to its business model and core operations. This finding is important because change is inevitable and necessary. If organizations fail to continuously improve their products, services, processes, and capabilities, they will ultimately encounter serious performance gaps relative to more adaptive competitors.

Change creates opportunities to enhance the organization and threatsthat impair enterprise value. It can also challenge the fundamental assumptions underlying a company’s strategy and business model. Organizations must embrace change, and, in this era of continuous and disruptive change, early movers are the ones most likely to survive and prosper.

Identifying Incremental Change

Correctly diagnosing the opportunity or issue precipitating the need for change is the most important aspect of this process. If managers are confident in the diagnosis, they can then allocate the appropriate resources to address the needed change.

Changes in the business environment come in small and large doses. Small doses usually result in incremental improvements in business processes. These improvements may address new laws and regulations, contracts and internal policies that create additional corporate requirements. Alternatively, they may focus on improving customer and employee satisfaction levels. Whatever the drivers, it leads to continuous improvement in processes that achieve business objectives.

It is also important to focus on larger, root causes of change, the situations that are likely to lead to undesired consequences or outcomes. Root causes include external factors such as emerging technological trends or opportunities to improve products and services. They can also be internal issues such as poorly written policies, process failures, or inadequate training.

Performing a root cause analysis can identify the factors that drive undesirable performance. Once an opportunity or issue is fully understood and defined, relevant data is gathered and evaluated, possible underlying causes are identified and systematically reduced, multiple interrelated causes are considered, and corrective actions are formulated to eliminate those root causes. Actual results are then monitored over time, and the technique is applied again until acceptable results are achieved.

Identifying Disruptive Change

Today, managers face disruptive changes to business models and even entire industries. Whereas disruptive innovations may have once taken a decade or more to transform an industry, research shows that this timeframe is compressing and continues to shrink, leaving very little time for businesses to react. Sustaining a business model in the face of digitally enabled competition requires constant innovation to stay ahead of the change curve.

There are powerful forces reshaping our world, forcing leaders to rethink the assumptions underlying decisions relating to consumption, resources, labor, capital, competition and more. According to No Ordinary Disruption: The Four Global Forces Breaking All Trends, there are four great disruptive global forces that, collectively, are shaping a radically different world:

  1. The shifting locus of economic activity to emerging markets. Nearly half of global gross domestic product growth between 2010 and 2025 will come from 440 cities in emerging markets, 95 percent of which are not currently well known to the Western business world, e.g., places like Surat, India, Foshan, China and Porto Alegre, Brazil, each of which is expected to contribute more to global growth between now and 2025 than Madrid, Milan or Zurich.
  2. Acceleration in scope, scale, and economic impact of technology. The growth in processing power and connectivity through technology has been exponential. There is also the concurrent data revolution, which delivers unprecedented amounts of information to consumers and businesses in increasingly convenient ways, spawning new ways of analyzing data, doing business and fulfilling customers.
  3. Changing demographics. The human race is aging as fertility falls as life expectancy rises. In 2013, about 60 percent of the world’s population lived in countries with fertility rates below those needed to replace each generation. The consequences of this trend include stagnant growth in a consumer-driven economy, dramatic escalation of the war for talent, and the prospect of a smaller working population supporting a larger, aging population.
  4. The world is becoming more connected through trade and movements in capital, people, and information flows. Interconnectedness matters because it is changing the competitive landscape. Well-established incumbents must prepare for entrants from anywhere, build new global ecosystems and become more agile.

To stay ahead of the disruption curve, business leaders must quickly discern the vital signs of change and the related implications to their business model. To do that, they must do these four things well:

  1. Understand the critical assumptions underlying the business model.
  2. Apply contrarian analysis to evaluate plausible and extreme events or combinations of events that could invalidate one or more critical assumptions.
  3. Conduct competitive intelligence activities focused on the vital signs.
  4. Distill timely information about assumptions, scenario analyses and intelligence-gathering, and report insights obtained to decision-makers.

The implications of transformative market trends can be highly disruptive to established business models. In this environment of constant change, the status quo has no future and is constantly “on the clock.” Executives and directors need confidence that they have the insights necessary to recognize the effects and implications of the profound sea change unfolding before them.

Acting on Change

Having time to act is a precious asset and is available only when performance issues, market opportunities and emerging risks, and an understanding of their implications to the enterprise’s business model are anticipated and evaluated in the cool of day rather than the heat of the moment.

Unfortunately, time to act can be squandered. Decision makers need to innovatively act on their knowledge of emerging opportunities or risks; otherwise, their knowledge is useless. To ensure timely reaction, management must:

  • Foster an organizational culture that facilitates sourcing the root causes of subpar performance and consideration of the impact of changing market realities on critical business model assumptions. Empowering process owners and stakeholders can drive continuous improvement of business processes when subpar performance and/or trending metrics signal change. With respect to changes in the marketplace, continuous conversations around business areas, alignment of incentive compensation with short- and long-term performance goals, senior management involvement, and an active board help shape a culture that encourages understanding of the reasons for and implications of change.
  • Incent managers to translate root cause analysis into actionable revisions to strategic business plans and to process improvements. Incentives skewed to maximize revenues without fostering sensitivity to changing market realities can create serious organizational blind spots.
  • Seek organizational resiliency. When companies don’t respond to disruptive change, it’s usually because they don’t have a single version of the truth of what’s happening in a rapidly changing business environment. This dysfunction can arise from incentives that do not encourage resiliency and from management being out of touch with the customer and uncommitted to managing by fact.

Facing change with confidence means accelerating the decision-making process regarding actions to address recognized performance issues, market opportunities and emerging risks. What separates winners and losers in managing disruptive change is the ability to recognize the vital signs and act on them with confidence.

Managing the Change Process

Improving products, services, processes, and implementing new strategic initiatives requires focused and disciplined approaches consistent with the organization’s structure, culture, and operating philosophy. To accomplish this, executive management must have buy-in from a committed chief executive officer and must demonstrate unwavering support for undertaking action plans that create and sustain momentum for change. With executive management’s assistance, the change implementation team must develop a business case that clarifies why change is must happen, focus on the “big picture” with a compelling shared vision, set realistic goals, develop a clear plan of action, and make periodic use of management checkpoints.

In addition, key stakeholders—such as line-of-business leaders, operating personnel and process owners who will be most affected by the change—must own the implementation of change. Their buy-in is obtained first through evidence of executive management support. They also need to be convinced that their interests and the interests of the enterprise in effecting the change are inextricably linked.

Once the support of key leaders throughout the organization is obtained, the implementation team should establish accountability for results; focus on the human side of the change effort; align organizational, process and individual performance measures; and align the change process with the firm’s culture.

If the above practices for enabling change are executed effectively, they lead to sustainable change with confidence of achieving expected results.

Questions for Boards

The following are some suggested questions that boards may consider, based on the risks inherent in the entity’s operations.

  • When framing the real opportunity or issue precipitating change, is the board comfortable that management considers the business context, understands root causes, and manages by fact? Does management mitigate the effects of bias on the fact-gathering and analytical processes leading to identification of the real change opportunity or issue?
  • Does management recognize and anticipate the root causes of unacceptable performance? Does the organization monitor the vital signs of new market opportunities and emerging risks arising from disruptive market forces? Does management act on knowledge of needs to change in a timely manner?
  • Once there is commitment to act, does the organization have an effective change enablement process that drives its key personnel from awareness to buy-in to ownership to give management and the board the confidence that the change is sustainable?

Jim DeLoach is a managing director with Protiviti, a global consulting firm.