Helping employees

embrace change

Jennifer A. LaClair and Ravi P. Rao

Managing change is the responsibility ofeveryone in the corporation—from seniormanagers on down.

When it comes

to making big changes in an organization—implement-ing a Six Sigma program, optimizing business processes, adopting a newsales strategy—executives know that the wild card in the pack is theiremployees’ capacity to adapt to a new order. Although the hoped-forbenefits of a major initiative can shrink dramatically if employees misun-derstand or resist it, success or failure depends as much on how thechange is made as on the project itself. Fortunately, when companiesattempt to change, a little improvement goes a long way.To determine the role of people and process issues, we studied changeprograms at 40 organizations, including banks, hospitals, manufacturers,and utilities.

Each of these projects was initiated by senior management,

EXHIBIT

Factors for successful change

Senior managers

CommitmentCommunicationFinancial incentivesNonfinancial incentivesLeadershipStretch targetsPut initiative at top of agendaRelate single, clear, compelling story—no mixed messagesReward senior managers if initiative is successfulProvide recognition for strong performanceIdentify owner/championUphold goals with mantralike consistency; team ‘lives or dies’ by the numbers

Middle managers

Decision authoritySkills in managing peopleSkills in managing projectsExercise consistent control over defined set of tasksProvide feedback to employees on status of initiative Achieve measurable milestones in timely manner

Frontline staff

SkillsToolsMotivationConsider training key aspect of initiativeMake technology and techniques available to employeesClearly reward excellent performance to improve morale

The programs included mergers, major cost-reduction initiatives, and new pricing strategies.

HELPING EMPLOYEES EMBRACE CHANGE

KEVINCURRY

could potentially have had a large economic impact on the organization,and required major company-wide changes in behavior, tasks, andprocesses.Two dimensions interested us. First, we gauged the difference betweenthe expected value of a project (essentially calculated in the businesscase for it) and the value the company claimed to have achieved when itwas completed. Second, we rated each company’s strength in 12 widelyrecognized factors for managing change effectively, including the rolesof senior and middle managers in the initiative as well as the company’sproject-management skills, training, and incentives for promoting change(Exhibit 1). These two dimensions made it possible for us to compare pat-terns in change-management strengths and weaknesses with realizedreturns in all 40 initiatives.In all, 58 percent ofthe companies failedto meet their targets;20 percent capturedonly a third or less ofthe value expected. Theremaining 42 percent ofthese companies gainedthe expected returnsor exceeded them—insome instances byas much as 200 to300 percent.Not surprisingly, perhaps,companies with thelowest returns alsohad poor change-management capabili-ties, and companies that gained big returns had strong ones (Exhibit 2).

But we also found that strength on any one level of the organization—senior executives, middle managers, or frontline troops—gave companiesa better chance of success. No single level was more critical in thatrespect than any other.

THE McKINSEY QUARTERLY

2002 NUMBER 4

EXHIBIT

Effective change management pays

P e r c e n t o f v a l u e c a p t u r e d

Level of change-management effectiveness

= 0.70

12345160140120100806040200–20WorstBest

= the proportion or percentage of variance explained by a regression

Company’s average score (on scale from 1 to 5, worst to best) across all 12 change-management factors; n = 37 (does not include 3 outliers at high end of value-capture range).

The correlation between a company’s average score (on a scale from 1 to 5, worst to best)across all factors, on the one hand, and the percentage of expected value captured from aninitiative, on the other, was extremely high across all types of initiatives and industry sectors.This convergence clearly suggests that companies with deficient change-managementcapabilities failed to capture the potential impact of the initiatives.

Companies that hadproblems on one or twolevels of the organizationnonetheless captured allor much of the expectedreturns of change initia-tives (Exhibit 3). Sevencompanies were strongin two levels but hadpoor abilities in theother—for instance, amidsize regional bankwas weak in frontlineskills; an internationalcomputer hardwaremanufacturer, in middle-management authority.Yet these seven companies captured, on average, 129 percent of theexpected value. In fact, nearly 70 percent of it was captured even bycompanies that had inadequate change-management capabilities onany two levels of the organization.For the 11 most successful companies in our study, effective changemanagement clicked at every level: senior and middle managers andfrontline employees were all involved, responsibilities were clear, andthe reasons for the change were understood throughout the organization.These 11 companies gained an average of 143 percent of the returns theyexpected. By contrast, in companies that fell short of expectations, wefound a lack of commitment from or follow-through by senior executives,defective project-management skills among middle managers, and a lackof training for and confusion among frontline employees. Meanwhile, the11 companies that had problems at all three levels captured, on average,only 35 percent of the value they expected.Consider the experiences of two hospitals in our study. Each aimed toreduce its costs by creating an independent purchasing group. At onehospital, the CEO and the chief purchasing officer communicated theirbold expectations for the initiative, and stakeholders (that is, physicians)at every level were involved throughout it. At the other hospital, the CEOdidn’t mandate the change and was described as “invisible” during imple-mentation; other senior leaders were also largely silent; middle managersdidn’t know who made the calls; and frontline staff had no clear under-standing of the new policies or of the reasons for complying with them.

HELPING EMPLOYEES EMBRACE CHANGE

EXHIBIT

Perfection isn’t necessary to capture value

Defined as senior management, middle management, or frontline staff with average scoresof 3 or less (on scale from 1 to 5, worst to best) across all 12 change-management factors.

Number of company’s‘below-average’

organizational levelsPercent of expected valueof initiative eventuallycaptured by company

0 of 31 of 32 of 33 of 3Weightedaverage

Best Worst

1431296835100% =expected valueof initiative

Number ofcompanies

11711114090