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The Five Frames A Guide to

Transformational Change

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Performance AND health matter

You need to create organisational


DNA for long-term success. And thats
what enables you to perform in the
short term
Narayana Murthy,
former Chairman of
Infosys Technologies

Organisations attain excellence only


when leaders manage both
performance and health with equal
rigour

Health can be defined as an


organisations ability to align, execute
and renew itself faster than the
competition

Managing health is not something you


do in the future; it is about the actions
you take today to deliver performance
tomorrow

Organisational excellence can be


achieved through a five-stage process:
aspire, assess, architect, act and
advance

SOURCE: Interview by Gautam Kumra and Jim Wendler, The creative art of influence: Making change personal, Voices
on Transformation 1, McKinsey & Company, 2005.

McKinsey & Company

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Contents

Health today drives performance tomorrow

The Five Frames of successful transformation

Where are you in your journey to health?

McKinsey & Company

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Competitiveness naturally declines over time


Total return to shareholder of new entrants
relative to industry average

Estimated life span of S&P 500 companies


based on company exits

Percent
Half of all companies in the S&P 500
in 2008 are likely to be gone by 2015

90

15
Attackers

10

Survivors

45

26
19

-5

14

-10
1

10

15

20

25

1935

1955

1975

1995

2008

Years
There seems to be a survivors curse
whereby beyond a 20-year life cycle,
organisations will struggle to remain
competitive and effective

SOURCE: McKinsey, Creative Destruction


McKinsey & Company

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Companies that succeed over time build and maintain organisational


health - failure to do so can be an organisations downfall
Share price of IBM
US$

Share Price of General Motors


US$

150

60

140

50

130
120

CAGR
4.26%

110

40

100

CAGR
- 54.38%

30

90
80

20

70

10

60
50
Sep-09

Sep-08
Jan-09
May-09

Sep-07
Jan-08
May-08

Jan-07
May-07

Jan-06
May-06
Sep-06

Sep-04
Jan-05
May-05
Sep-05

Jan-04
May-04

Despite its size, IBM has remained nimble and has kept its
feet moving by changing with technology trends. Without
question, IBM is distinguishing itself as one of the best-run
companies in the world.
Business Week (21/07/2009)

Jan-04
May-04
Sep-04
Jan-05
May-05
Sep-05
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09

40

GM's core problem is its corporate and workplace culture the unquantifiable but essential attitudes, mindsets and
relationships passed down, year after year.
New York Times (06//2009)

SOURCE: Datastream; Web Search; Press search


McKinsey & Company

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Both performance AND health must be managed


Performance

Health

What an enterprise
delivers to stakeholders
in financial and
operational terms (e.g.,
net operating profit,
ROACE, TRS, net
operating costs, stock
turn)

The ability of an
organisation to align,
execute and renew
itself to sustain
exceptional
performance over
time

The narrow pursuit of


shareholder value was the
dumbest idea in the world
Jack Welch
Former Chairman and CEO of GE
Financial Times, August 2009

We have not achieved our


tremen-dous increase in
shareholder value by making
shareholder value the only
purpose of our business
John Mackey
Founder and CEO of Whole Foods
Reason Magazine, October 2005

SOURCE: Scott Keller and Colin Price, Performance and Health: An evidence-based approach to transforming
your organisation, 2010.

McKinsey & Company

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There are nine vital signs of organisational health

Direction

Accountability

External
orientation

Coordination
and control

Leadership

Capability

Innovation
and learning

Motivation

Culture and
climate

Direction

A clear sense of where the organisation is


heading and how it will get there

Leadership

The extent to which leaders inspire others to


act

Culture
and climate

The shared beliefs and quality of


interactions across the organisation

The extent to which individuals understand


Accountability what is expected, have appropriate authority,
and take responsibility for results
Coordination The ability to evaluate organisational
performance and risk, and to address issues
and control
and opportunities
Capability

Motivation
External
orientation
Innovation
and learning

The presence of the institutional skills


required to execute strategy and create
competitive advantage
The presence of enthusiasm that drives
employees to put in extraordinary effort to
deliver results
The quality of engagement with customers,
suppliers, partners and other external
stakeholders
The quality and flow of new ideas, and the
ability to adapt and shape the organisation

SOURCE: Scott Keller and Colin Price, Performance and Health: An evidence-based approach to transforming
your organisation, 2010.

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Healthy organisations are more profitable


Likelihood that organisations with top results in health profile have above-median financial performance, %
EBITDA margin

31
Bottom

68

48

Mid

2.2x

Barclays has survived and


prospered only by making tough
decisions. This has required
leaders to make the right
judgements in their time - right
for the business of the day,
respectful of history and mindful
of setting the right path for a
healthy business in the future"

Top

Growth in enterprise value/book value

52

62
2.0x

31
Bottom

Mid

Top

Growth in net income/sales

38

Bottom

53

58

Mid

Top

1.5x

John Varley
CEO Barclays,
Financial Times
4 June 2009

1 Comprised of 2nd and 3rd quartiles


SOURCE: McKinsey Organisational Health Index data mining effort
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Organisations typically encounter similar pitfalls in their transformational


journey to achieving performance AND health
1. The urgent drives the important out of sight
2. Pressure for progress inhibits discovery
3. Change programmes emphasisedoing different things rather
than doing things differently
4. Initiatives are created independently, complementarily
5. Standardisation results in insensitivity to context
6. Planning takes the place of piloting and experimentation
7. Apparent consensus fades when challenged
8. Continuity is marginalised in the midst of change
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We have invested in years of learning to uncover the key to successful


transformation

311,000

3,000
900
20

Respondents from over 400 organisations


completed our organisational health survey
providing the inputs for McKinseys Organisational
Health Index (OHI) database
CEOs and senior executives completed
surveys regarding their experience with
transformational change
Academic journal articles and books
reviewed
CEOs and chairpersons shared their personal
experience with change in face-to-face interviews

Leading academics reviewed, challenged and


augmented our findings

Years dedicated to developing and refining our


understanding of healthy organisations

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Winning organisations focus on the Five Frames of performance and


health to drive sustainable transformational change

Performance

1. Aspire

2. Assess

3. Architect

4. Act

5. Advance

Where do we
want to be?

Where are
we today?

What do we
need to do?

How should we
manage the journey?

How do we sustain
and improve?

Strategic
Objectives

Capability
Platform

Portfolio of
Initiatives

Delivery
Model

Continuous
Improvement

Health
Essentials

Discovery
Process

Influence
Model

Change
Engine

Centred
Leadership

Health

Five Frames of

Transformation stages

McKinsey & Company

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Contents

Health today drives performance tomorrow

The Five Frames of successful transformation

Where are you in your journey to health?

McKinsey & Company

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Frame one Where do we want to be?


Successful transformations stretch aspirations with a clear and inspiring view of the future state

Health
Essentials

Discovery
Process

Influence
Model

Change
Engine

Centred
Leadership

Which of the following statements best describes the targets


your company set to define success for the transformation?
%, N = 2, 694
Relative success
Relative failure

The targets were well defined


and represented a genuine
new level of performance
The targets were well
defined but did not
stretch the company
significantly

The targets were


not well defined

56

44

73

88

27

12

Of course, we want to grow and produce


a great bottom line. But in doing so, we
want to be seen as a truly innovative
company breaking new ground and going
into unchartered territories successfully.
We want to make India proud.
Ravi Kant,
Vice Chairman, Tata Motors

Source: McKinsey analysis; CEO interviews


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A powerful aspiration clearly states which organisational qualities


are needed to deliver on strategic performance ambitions
CLIENT
EXAMPLE

Our strategy
Meeting customers needs
and improving margins
through new revenue streams

Sustaining and building on our


leadership position in our hub

To be the
leading global
premium
player in our
industry
by

Being the provider of choice


for premium customers

Delivering differentiated service


for all customers at key touch
points

3 Growing our presence in key locations

Our health aspiration

Elite
Direction

Able

To become a high-performing market-focused


organisation

 Characterised by a pervasive external focus

Coordination
and control

Accountability
External
orientation

Leadership

Ailing

Innovation

 Providing the conditions that facilitate innovation


Capabilities

Motivation

 Internally cohesive and disciplined


Work
environment

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Measure organisational health

Use rigour to measure health


Organisations health profile
n = 260

Distinctive, 85% +
Superior, 70%-84%

Direction
52%

External
orientation
59%

Coordination
& control
51%

Motivation
54%

49%
53%

61%

50

75

37%
54%

46%

Administration
n = 43
52%

49%
46%

58%
60%

Identify
perception
of
70%
57%
56%
health
at71%specific
58%
business
lines or
40%
management levels

45%
57%

62%

51%
49%

31%

34%

43%

37%

25

52%

50%

Capabilities
61%

View results for each


Culture and
climatedimension of health

48%

34%

26%

Sales and logistics


n = 23

47%

47%

44%
43%

43%

Innovation
& learning
43%

Leadership
47%

Pulp and energy


n = 44

47%

Common, 50%-69%
Not effective, <50%

Accountability
53%

Paper
n = 85

100

No or weak spike

Direction

Emerging spike

Prevalent spike

Leadership
Culture &
climate

Leadership driven

Accountability

Market focus

Coord & control

Performance edge

Capabilities

Knowledge core
Motivation
Innovation &
learning
External Orient
Not Effective

Benchmark your
organisation against a
Common
Superior
Distinctive 400
database
of over
companies

View
organisational
fit
5
8
10
relative
to
four
health
Similarity Index
archetypes

SOURCE: Don Beck, Mark Loch, Patricia Oaklief, Raj Ratnakar, Bill Schaninger, Salah Zalatimo, The organisational
health index: Improving and sustaining performance, McKinsey & Company, 2009

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Frame two Where are we today?


Successful transformations go beyond the surface to identify and shift deep-seated mindsets

Health
Essentials

Discovery
Process

Influence
Model

Change
Engine

Centred
Leadership

Performance impact post transformation


% difference in improvement
Transformations focused on systems
and process re-engineering only
Transformations incorporating mindset
and capability-building interventions
Retailer
(Sales-tolabour ratio)

+67
15

If the pace of change is slow, it is


because mindsets have not changed. So
thats the leaders biggest challenge.

25

+126

Mining
(Productivity
increase)

19
43

Narayana Murthy,
Chairman and Chief Mentor of Infosys
Technologies

+50

TELCO
(Churn
reduction)

34
51

Source: McKinsey analysis; CEO interviews


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Dig deep to identify limiting mindsets

The discovery process deep dives into an organisations


inner workings
Current state
Where are we, and what
do we want to achieve?

What changes in
practices do we need to
achieve the desired
outcomes?

What changes in
behaviour do we need to
breathe life into desired
practices?
What changes in mindsets
do we need to make in order
to achieve sustainable
changes in behaviours?

Desired state
Outcomes
(e.g.
accountability)

Outcomes
(e.g. blame)

Practices
(e.g. no clear
performance
contracts)
Behaviours
(e.g. minimal
performance
dialogue)
Mindsets
(e.g. Keep my
head down,
watch my back)

Practices
(e.g. clear
performance
contracts)
Behaviours
(e.g. ongoing
performance
dialogue)
Mindsets
(e.g. If it is to
be, it is up to
me)

SOURCE: Scott Keller and Colin Price, Performance and Health: An evidence-based approach to transforming
your organisation, 2010.

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Dig deep to identify limiting mindsets

Mindsets underpin performance

What we see
and attempt
to address

Individual
behaviours

Mindsets
and beliefs
What we dont
see and dont
know how to
address

Performance =
Potential Interference
There is always an inner game
being played in your mindHow
aware you are of this game can
make the difference between
success and failure

Values

Hamel and Prahalads thought experiment


about monkeys learnedNeeds
behaviour
(met
unmet)
illustrates their point that pastorexperiences
can create mindsets that limit current
performance

Timothy Gallweys ground-breaking


investigation into how people develop
excellence in sporting and working
contexts highlights the potential negative
impact mindsets can have on performance

SOURCE: Scott Keller and Colin Price, Performance and Health: An evidence-based approach to transforming
your organisation, 2010.
McKinsey & Company

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Systematic data gathering can help to identify the shifts that


are required

Value drivers

% of value Behaviour

% Utilization

Calls per day

To

Low call resolution


with high level of
transfer to other
internal area
(back-office)

I filter and transfer calls


I cant actually resolve
client issues

Service times met


but customer
satisfaction scores
and quality falling

Cost at the expense


of quality
You cant cut costs and
improve service quality and
time together

We can
deliver the
AND

Over 40% of agents


do not reach the
minimum standards
of required
performance

I am an individual
contributor Its not worth
making an effort, I cant
make a difference

I am a vital
part of a
highperforming
team

I facilitate
solving
clients issue

10

Service quality 15

Wait time

CALL CENTRE EXAMPLE

10

Call resolution 25

Cost per call

Underlying
mindsets
uncovered

10

20

Avg handle time 10


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Frame three What do we need to do?


Successful transformations support strategic and operational shifts with targeted behavioural shifts

Health
Essentials

Discovery
Process

Influence
Model

Change
Engine

Centred
Leadership

Transformation success rate and reasons for failure


Success
Failure due to behavioural reasons
Failure due to other reasons
Employee
resistance

Program
achieves
objectives

30%

10%
Other
obstacles

10%

Insufficient
resources/
budget

27%

I came to see, in my time at IBM, that


culture isnt just one aspect of the game,
it is the game.

23%
Senior
management
behaviour does
not support
change

Lou Gerstner,
Former Chairman IBM

Source: McKinsey analysis; CEO interviews


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Shift employees context using the influence model

The four levers in the influence model


Role
modelling

A compelling
story

I see my leaders,
colleagues, and staff
behaving differently.

... I understand
what is being
asked of me and it
makes sense.

I will change
my mindset and
behaviour if . . .
I have the skills
and opportunities
to behave in the
new way.

Skills required
for change

I see that our


structures, processes, and
systems support the
changes I am being asked
to make.

Reinforcement
mechanisms

SOURCE: Scott Keller and Colin Price, Performance and Health: An evidence-based approach to transforming
your organisation, 2010.
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Expect and leverage irrationality

Expect the unexpected


A compelling story

Role modelling

What motivates you, does


not motivate (most of) your
employees tell 5 stories
at once

It takes both + and


- to create real energy
call out both what is
working and what is not

Your leaders believe they


already are the change
ensure they are changing as
well

Influence leaders are not that


influential dont over-rely on
them

Employees are what they


think address the
underlying mindsets as
well as the technical skills

Create space for


employees to practise
new skills back in the
workplace

Money is the most expensive


way to motivate people small,
unexpected gestures can have a
disproportionate effect

Pay careful attention to achieving


fairness in processes and
outcomes

Skills required for


change

Reinforcement
mechanisms

SOURCE: Carolyn Aiken, Scott Keller, The irrational side of change management, McKinsey Quarterly Article, 2009
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Frame four How should we manage the journey?


Successful transformations are designed in a collaborative effort to build ownership and energy

Health
Essentials

Discovery
Process

Influence
Model

Change
Engine

Centred
Leadership

How was your companys transformation designed and


planned?
%, N = 2, 694
Relative success
Relative failure
The transformation was
designed and planned
through a large-scale
collaborative effort
across the organisation

47

53

A small cross-functional team


formed especially for the
purpose did most of the work

66

34

The CEO and top team did most


of the work themselves

68

32

It's really very simple. When people feel


they are doing something extraordinary,
their motivation increases. Our people
loved the work they did during the
transformation.
Filippo Passerini,
CIO Procter & Gamble

Source: McKinsey analysis; CEO interviews


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Developing a change engine consisting of structure,


ownership and evaluation is essential to success
Structure - The transformation was
organised into a clear structure with
readily understandable sections
%, n = 2,041

%, n = 2,057

Entirely
true

27

Very
true
Somewhat
true
Not at
all true

Ownership - Roles and


responsibilities were clear, so
people felt accountable for
delivering results

47

73

52

25

75

12

%, n = 2,044

Entirely
true

74

26

Very
true

53

47

Somewhat
true
Not at
all true

88

Evaluation - Clear, unambiguous


metrics and milestones were in
place to ensure that progress and
impact were rigorously tracked

78

23

11

72

28

Very
true

54

47

Somewhat
true
Not at
all true

89

x 6.1

Entirely
true

27

73

91
9

x 6.4

x 7.3

SOURCE: McKinsey Quarterly Transformational Change survey, January 2010


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A powerful change structure brings order, clarity and coherence


to the transformation activities
The desired
transformation story

The chapters of the


transformation story

The key initiatives to


deliver the transformation
story
Health themes

Level 1
The bold aspiration

De-bureaucratising

People systems

Collaboration

Growing production
Value chain integration
Maximising downstream
Efficiency and Safety

Level 2
The big change themes

Performance themes

Performance themes

To become a highly
competitive integrated
company, recognised as
one of the top 5 energy
producers worldwide and
seen as the employer of
choice in our industry

Corp. citizenship

Health themes

Level 3
Initiatives across three horizons
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Build ownership for change

Build ownership by combining military and marketing tactics

Manage the
transformation like a
military campaign

Role clarity

Governance
rigour

Project
discipline

Role descriptions, accountabilities,


performance contracts, decisionmaking authorities

Direction-setting, decision-making
and sign-off processes, funding,
risk mitigation, performance
management
Problem-solving approach, project
management, cross-initiative
integration, best practice sharing,
tracking and adjusting

as well as a
marketing campaign

Viral tactics to unleash largely self-directed


change, mobilised by cause beyond
individual gains

Activists
Core team plus voluntary connectors
Simple rules, opportunistic, go with energy
Big aim, open approach
Celebrations, change campaigns
Empowered
Based on wisdom

SOURCE: Scott Keller and Colin Price, Performance and Health: An evidence-based approach to transforming
your organisation, 2010.
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Gathering evidence of change on multiple levels is key to coursecorrection along the journey and reinvigorating celebration of success
Description
4.

3.

2.

1.

Monitor enterprise value or


shareholder value as the
ultimate outcome
Measure performance to
ensure improvement where
expected. Key metrics are
business outcomes like
increased revenue, decreased
cost, cash flow and reduced
risk
Monitor key health indicators
to ensure initiatives are having
impact. These will be
behavioural outcomes
assessed through surveys,
check-ins, customer forums
and the like
Track progress of initiatives to
ensure they are delivered on time,
on budget and to quality. Invest in
developing an effective
programme dashboard

Enterprise
value

There is most value in


measuring the highest
level of the system but this
is also where cause-andeffect linkages are hardest
to establish

Measure both performance


and health to provide
powerful evidence of change
- layers one, two and three
should be rigorously tracked
at a minimum

Identify the high-impact


interventions and correlate
between health and
performance

Performance

Health

Initiatives

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Evaluate consistently over time to see results


Year 0

Year 1

Year 2

Year 3

Year 4

1 Cost reduction

1 Cost reduction

1 Cost reduction

1 Cost reduction

1 Customer focus

2 Shareholder
value

2 Profit

2 Shareholder
value

2 Customer focus

2 Cost reduction

3 Results
orientation

3 Shareholder value

3 Accountability

3 Shareholder value

3 Accountability

4 Profit

4 Results
orientation

4 Customer focus

4 Accountability

4 Continuous
improvement

5 Goals orientation

5 Hierarchical

5 Profit

5 Continuous
improvement

5 Achievement

6 Bureaucracy

6 Continuous
improvement

6 Results orientation

6 Profit

6 Profit

7 Hierarchical

7 Customer focus

7 Continuous
improvement

7 Results orientation

7 Results orientation

8 Short-term focus

8 Bureaucracy

8 Achievement

8 Achievement

8 Community
involvement

9 Control

9 Achievement

9 Bureaucracy

9 Community
involvement

9 Shareholder value

10 Risk averse

10 Goals orientation

10 Being the best

10 Customer
satisfaction

10 Customer
satisfaction

28 Customer focus

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Frame five How do we sustain and improve?


Successful transformations develop the leaders needed to continuously change and improve

Health
Essentials

Discovery
Process

Influence
Model

Change
Engine

Centred
Leadership

How strongly involved was the leader in the transformation?


% of respondents, N = 2, 694
Relative success
Relative failure

Very strongly (e.g., took


an active interest in key
initiatives, reviewed
progress regularly,
pushed for impact)

Fairly strongly

Not very strongly


(e.g., most transformation
responsibilities were
delegated to others)

Source: McKinsey analysis; CEO interviews

51

72

80

49

28

20

Challenges of today call for new ways to


lead change. The key is to help my most
competent leaders develop selfreflection capacity so they can
transform their own behaviours and set a
new tone
Gary Loveman,
Chief Executive Officer and President
Harrah's Entertainment

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Build skills in individual, team and organisational leadership

Centred Leadership begins with self-mastery, enabling individuals


to lead others and the organisation

Leading
self

Use personal vision to


self motivate
Take accountability to
regulate ones own
mindsets and behaviours
to create desired change
Manage energy and
attention to maintain
productivity
Develop a strong support
network
Leave ones comfort zone
and commit to
opportunities

SOURCE: McKinsey & Company

Leading
others

Motivate others to
action
Turn difficult
conversations into
learning opportunities
Build relationships
based on trust and
emotional mastery
Engage system support
for teams
Sustain and renew via
coaching and
sponsorship

Leading the
organisation

Communicate inspiring
vision and change
stories
Recognise and shift
system dynamics for
greater accountability
Engage multiple
stakeholders through
appreciative inquiry

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Develop a programme leveraging adult learning principles

The journey to centred leadership


Characteristics of centred leadership
programmes
Image

Example programme structure


Diagnose &
Design

Link directly to performance


improvement

Forum 1:
Lead Self & Others

Take place over time in a field and


forum approach
Span leadership of self, of others,
and of organisational change
Accommodate different learning
styles
Are led from the top

Allow for self-discovery

Coaching

Are grounded in a quantifiable


baseline

Fieldwork

Forum 2:
Lead Teams & Org
Fieldwork
Embedding
Monitor and
measure

SOURCE: Joanna Barsh and Susie Cranston, How remarkable women lead Crown publishing, New York, 2009
McKinsey & Company

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Contents

Health today drives performance tomorrow

The Five Frames of successful transformation

Where are you in your journey to health?

McKinsey & Company

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The ten tests of organisational excellence


1

Strategic
objectives

Capability
platform

Portfolio of
initiatives

Delivery
model

Continuous
improvement

Health
essentials

Discovery
process

Influence
model

Change
engine

Centred
leadership

1.

Do we have a compelling, widely understood, and jointly owned vision


of change and set of performance targets for our organisation?

2.

Do we have a robust baseline and shared aspirations for the health of


our organisation?

3.

Do we have a solid assessment of our organisations capability to


deliver our change vision?

4.

Do we have insight into the root-cause mindsets that inhibit or


enhance our organisations health?

5.

Do we have a concrete, balanced set of performance improvement


initiatives defined to deliver our change vision?

6.

Do we have a clear plan for how to reshape our work environment to


influence healthy mindsets?

7.

Do we have a well-defined scale-up model for each of the initiatives


in our portfolio?

8.

Do we have a reliable method to ensure that energy for change is


continually infused and unleashed during the change process?

9.

Do we have the structure, processes, systems, and people to drive


continuous improvement in performance and health?

10. Do we have a group of committed leaders who can lead


transformation and sustain high performance from a core of selfmastery?
SOURCE: Scott Keller and Colin Price, Performance and Health: An evidence-based approach to transforming
your organisation, 2010.
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