Gerrit Lahrmann (BMW Group) and Robert Winter (University of St. Gallen) and Axel Uhl (SAP)
A lot of global companies are currently carrying out major change projects with high strategic relevance. These transformation programs combine business and technical content where information systems and management come together. The following article explains what characterizes current transformation programs and the potential that can be leveraged by applying a holistic transformation management approach. Companies that rate themselves as mature in regard to transformation management assess certain transformation aspects differently than less mature companies.
Transformation describes the fundamental change of a company and is an effective answer to an unstable, permanently changing economic environment.1 In light of the current economic crisis, many companies have initiated extensive transformation programs e.g. to improve profitability or better control risks. These programs often combine business and technical content by using IT investments as a basis for enabling or facilitating organizational changes.
Introduction of a new banking platform for all member companies of a banking group – program duration of two years, budget of 60 million euros
Global standardization of corporate processes based on an integrative Enterprise Resource Planning (ERP) platform in a high-tech company – program duration of four years, budget in excess of 1 billion dollars
When a company decides that it wants or needs to initiate a transformation program, numerous questions arise. What exactly should the program achieve? What drives a successful transformation program and what prevents it from being carried out? What basic approaches are there for ensuring that a transformation program is successful?
Business practice is a good starting point for answering these and similar questions. That is why the following pages present the results of an empirical study designed to describe the current state of transformation management and point to areas in which further development can be realized.
The study was conducted using a questionnaire. Part I involved collecting demographic information about the company representative and the company in general. In part II, details about the company‘s transformation program were gathered. Part III introduced a holistic transformation management approach, and the participants had to evaluate its potential. A self-assessment comprised part IV, whereby participants were asked to characterize the maturity of their company with respect to the individual components of the holistic transformation approach and specify to what extent they value each component. Additional questions targeted the completeness of the approach. Finally, in part V, open questions were asked about the aspects of transformation management not covered by the previous questions.
Representatives from 28 companies in the high-tech (25%), manufacturing (29%), banking and insurance (11%), logistics (11%) and service (11%) industries participated in the study. The questionnaire addressed managers such as program leaders, directors, and regional CIOs, in particular at large, international companies. Specialist departments and IT representatives also participated. 72% of the 28 companies in the survey are located in EMEA (Europe, Middle East and Africa), 14% in the Americas and 14% in the Asian Pacific region. More than 70% of the companies have more than 10,000 employees. Figure 2.1 summarizes the key participant characteristics.
Transformation Programs in Practice
The transformation programs analyzed in the study have a typical duration of two to four years and a budget of between ten and 100 million euros (see Figure 2.2). Smaller companies (< 10,000 staff members) have an average of 52 full-time employees committed to the respective program. For larger companies (> 10,000 staff members), this number is 126. Most transformation programs are rooted in business transformation or combine elements of this and IT transformation. The programs strive to reduce costs, increase sales, and improve agility (defined as the ability of a company to respond to changes more quickly). Surprisingly, mitigating risks was not viewed as being very important, despite the recent economic crisis. Figure 2.3 shows how many times one particular goal was mentioned (frequency) and the priority it was associated with. The classification of Baumöl2 was used and expanded for this purpose.
Business optimization, business models (operating models), roadmaps, standardized processes and platforms – all functional topics – were mentioned as desired key outcomes (“deliverables”) of transformation programs. The enablers of successful transformations are: support from top management, stakeholder management, and clearly communicated responsibilities. Resistance to changes, organizational obstacles, and limited resources prevent successful transformations. Figure 2.4 summarizes those deliverables, enablers, and inhibitors of successful transformation programs.
Holistic Transformation Management
Possible components of a holistic management approach were derived from technical literature to gain an optimal overview of transformation management. The approach is based on the established business engineering framework3 and breaks down into the following levels:
structural and process organization level
IT implementation level.
It comprises thirteen components. Questions about additional required components led to the approach being regarded as complete.
What Potential Does a Holistic Approach Have?
To determine whether transformation programs are more successful when a holistic transformation management approach is used, company representatives were asked to assess the effects of such a program implementation. A transformation program from the respective company or a sample program was used as a basis for the evaluation.
Figure 2.5 summarizes the conclusions of the representatives with respect to program quality, budget, duration, and risk. Program quality refers to the extent to which all objectives were reached and the sustainability of the transformation.
All participants in the study predicted higher program quality if all six proposed components are implemented. Three out of four managers expect a positive effect on the duration and the budget of the program, i.e. a shorter time for implementation and lower overall costs (presuming that the additional time and effort associated with a holistic approach at the beginning will be compensated by the improved program quality). The other 25% of participants associated a holistic approach with a larger program budget and a longer duration. Program risk was generally seen as being lowered by a holistic approach.
What Components do Mature Companies Regard as Being Particularly Important?
One part of the analysis involved determining the maturity of the company in relation to individual transformation management components and the importance placed on these components. To this end, company representatives were asked several questions and responded using a 1-to-5 point scale. Dividing the companies into mature ones (self-assessment of 4 or 5 points) and less mature ones (self-assessment of 1, 2, or 3 points) allows especially noteworthy components to come to the fore. Also, further development opportunities for individual companies could be identified. Companies that regarded themselves as being mature deem the following aspects as more important than less mature companies:
Active management of transformation in general (as mature companies rated almost all components to be more important than less mature companies)
Operational and process organization in general (e.g. through a joint Governance Model and Organizational Change Management)
Specific strategic aspects (e.g. common understanding of business objectives)
What Potential for Further Development Exists?
Components that were viewed as being very important but have a low level of maturity possess more development potential than others. Figure 2.6 shows that the components with potential are the following:
Identifying and managing interdependencies of projects within and across programs
Management of program value and
Business process optimization and innovation services.
It is also these components that tend to exert the most leverage in practice.
Is Holistic Transformation Management Already Being Practiced in the Real World?
A factor and cluster analysis was performed to identify archetypal transformation management approaches currently pursued in companies.4 The factor analysis takes into account the maturity of the company with respect to specific components as assessed by company representatives and uses it as input to summarize the effectiveness of these components. The cluster analysis classifies the transformation management approaches in place at the companies based on this information.
Figure 2.7 shows the resulting five factors: Governance model, change management, holistic planning, commitment to transformation, and benefits management.
The cluster analysis identifies three transformation management approaches (see Figure 2.8): the value driven, the un-governed, and the change-driven approach. Those approaches were analysed with regard to the five factors from Figure 2.7.
The value-driven approach is present in 57% of the examined companies and can be charatericed by a high target driven planning and a high degree of benefit management.
The change-driven approach (18%) emphasizes the importance of the governance model, change management and management commitment.
By contrast, the un-governed approach is dominated by little people and technology governance.
All three approaches are similar in that they focus on specific areas but lack a balanced, holistic strategy. Further improvement is therefore possible at all 28 companies, considering the potential of a holistic transformation management approach.
Managing transformation programs is an important topic and becomes even more so in large companies. Although different transformation management approaches are in place at the 28 surveyed companies, a holistic approach could not be identified. All participants in the study believed that a holistic transformation management approach would have significant potential for improving quality and thereby achieving and maintaining defined objectives.
Companies that consider themselves as experienced in transformation management assess certain components of a holistic approach differently than less experienced companies. This especially applies to active transformation management, structural and process organization, and specific strategic aspects, which are very important to mature companies.
Reducing costs, increasing sales, and improving agility are the most common objectives of transformation programs. These are all business and not technical objectives. Information systems and technology seem to be regarded by companies as a general prerequisite for successful transformation management. Surprisingly, reducing risk was not viewed as very important, despite the current economic crisis.
Drivers and preventers of successful transformation are dominated by “soft” factors. More important is knowing that transformations should be driven by functional and strategic content.
Main objectives for transformation programs are cost reduction, revenue improvement and agility improvement. Despite the experience of the financial crisis, risk reduction still has a low priority. Business networking has not arrived at all.
The main factors driving transformation are the Governance Model, Change Management, Holistic Planning, Commitment to transformation and Benefits management.
Companies which rate themselves as transformation experienced put either a lot of emphasis on Objective setting and Benefit management (value driven approach) or on Governance, holistic Change Management and Commitment to the transformation initiative (Change driven approach). Companies rating their transformation experiences as low do not put a lot of emphasis on any of those factors (un-governed approach).
Conclusion: After going through a couple of “painful” transformation initiatives, companies become more sensitive with respect to the benefits or the organizational change aspects of a transformation initiative.
However, all companies participating in the survey lack a holistic and integrated approach for business transformation management.