NEED YOUR CHANGE EFFORT TO ACTUALLY WORK? SIMULATE IT.

By Sameer Srivastava, Partner, Lattice Partners

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MONITOR GROUP

LATTICE PARTNERS

NEED YOUR CHANGE EFFORT TO ACTUALLY WORK? SIMULATE IT.
By Sameer Srivastava, Partner, Lattice Partners

Change efforts come to all executives. Most fail. But simulation can change that.

Embroiled in leading a major change effort? If not, you will be. In every industry, firms need to constantly adjust and realign the way they work. The triggers and types of change may vary, but, in the end, leaders must find a way to drive large-scale change.

Unfortunately, the odds are not in your favor. By some estimates, only one third of major change efforts achieve even partial success. On average, then, that big change effort you are contemplating is twice as likely to fail as it is to succeed.1 In our experience, the best way to avoid that failure is to simulate the change first. The right organizational simulation, aimed at the right problem, can sharply reduce your risk. It is also one of the most powerful tools available to improve both the quality of the change you make, and the support you get for it throughout the company. That makes it low-cost insurance against a risk you really can’t afford.

Why Bad Things Happen to Good Change Agents
It’s ironic that change efforts so often fail. After all, they focus on big problems that no one in the company seriously denies; they receive enormous investment; and they hold out the potential of long-term gain for most individual participants. Yet when you look at the aftermath of many failed change programs, you find some sobering patterns: Living on the fault line. Significant change cranks up the strain on organizational “fault lines,” those spots of natural tension that exist in any organization (e.g., differing objectives and priorities of Marketing and R&D). During times of change, the tensions at these fault lines can build

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to the breaking point. The result is deep, distracting conflict among the groups that are most critical to executing the change. Hearts and minds. That conflict can be very tough to deal with, because it has both rational and emotional elements. There are always substantive disagreements: who should get to make what decisions? Where should resources be deployed? And there are always political concerns: how will this change affect me? Is our group losing power? Untangling these factors is next to impossible. And the stakes are high; if they weren’t, no one would attempt major change in the first place. So the company is soon swimming in a hopeless muddle of conflict. Navel gazing. Surrounded by this mixed rational/emotional conflict, the people you depend on most now do exactly the wrong thing: they shift even more of their attention to the risks, problems, and battles inside the company. That is perfectly natural. After all, how can you improve market performance until you decide who is going to do what inside the firm? The resulting jockeying for position leads to too much distraction and too little attention to those distant customers and competitors—the ones who drive the need for change in the first place. Internal conflict drives an inward orientation. Best-laid plans. And that is how most change efforts fail, not with a bang, but with a whimper. We call it “design drift:” the frustrating, destructive gap separating the carefully thought out structure you design from the reality you end up with. All that energy focused on internal conflict leads to an endless stream of tweaks, gaps, and shortfalls. Most seem minor; together, they gut the change effort. Meanwhile, the shift of energy from external issues—like customers—reduces performance even below its original level. The timing really couldn’t be worse. Often, all the constituents end up disappointed, including shareholders.

The Centralization Wars
The pattern of design drift plays itself out in a variety of contexts. One common illustration is in the implementation of a shared services model. This change, which company after company has undertaken, stems from a real competitive imperative: the need to respond to external cost pressures. While painful, it has an upside: if you can spend less on internal services while keeping performance up, then you’ll have more to invest in other areas: new products, better marketing, higher returns to shareholders. But it drastically increases strain at the fault line between Corporate and the individual business units. This conflict has complex substantive aspects: what services really should be shared? What level of service does each business need? And how much control? But it also has emotional teeth: as a unit head, can I really trust Corporate to understand, and deliver, what I need? If we give up control of some essential service, how can our team really be accountable for and appropriately compensated for our business results? On the other side, how does Corporate know what’s going on out there? When are business unit needs truly distinct and when are they portrayed as such so individual leaders can maintain control over resources?

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These rational and emotional questions lead to inward orientation (e.g., squabbles over which business unit requirements are truly distinct; disagreements about the potential cost savings from sharing). Things start to go wrong in a couple of different ways. First, it’s easy in this environment to simply make the wrong decision. Things either get overly centralized, which leads to a decline in performance, or remain overly decentralized, which leads to unrealized cost savings. Second, the inward orientation can fuel bad behavior. People start clamoring for special deals and exceptions. Senior managers spend their time ruling on these impassioned pleas—not boosting sales, quality, or cost control. These decisions clog inboxes amazingly high in the chain. As people struggle to understand the impact on their individual jobs and standing, anxiety fuels all kinds of obvious yet unproductive behaviors: defensiveness, cynicism, resentment, and fights over turf, credit, or blame. Having experienced this kind of trauma before, many general managers consider a “change management” program as a precautionary investment. Unfortunately, many typical programs don’t address the root of the problem: the increased tension at the fault lines. Often, change management turns out to mean broadcast communications pushed out to people with an eye to securing their “buy in.” When the new structure is “rolled out,” it’s quite common for managers to complain “it feels more like being rolled over.” Badly done, change management can even become an expensive, distracting way to make things worse. As one M&A veteran said, “There’s a knowledge side to change and an emotional side. In my experience, companies tend to overdo the emotional side—and still not do it very well.” Often, so much time is spent on communications and psychology that crucial details of what the change means for people’s jobs, functional roles, and so forth are simply left unanswered. The resulting anxiety further fuels the tension. The striking thing is that the underlying problems—the disputes and uncertainties that drive distraction and destruction—are so predictable, even to those about to go through them. As one experienced executive said, “People can see the conflicts coming, but they defer them. Decisions like which individuals will be in charge of critical positions get delayed longer than they should. I’ve seen a number of mergers, for example, where they knew what the problems were, but basically hoped that goodwill would carry them through.” As the failure rate shows, that hope is often in vain. Tough issues are ignored until the change effort is well underway. At that point, there’s no room for error.

Reducing risk
And that’s where simulations come in. In fields where failure is obvious and final, it’s axiomatic: if failure really isn’t an option, then simulate until you know you won’t fail. That applies to your change effort. Simulating is just about the only way to find the serious bumps ahead of time. It forces you to confront the issues that are commonly ignored while there is still time to do something about them. In the process, it provides two other kinds of value: buy-in and learning.

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Both of these benefits come from the special nature of simulations. First, they let you learn through experience, which is felt as much as heard. Second, they provide a little less pressure than real life. Simulations treat people the way that life does; they allow you to make mistakes or to prove your knowledge. But they do it in ways that are not permanently damaging. (Temporary damage, on the other hand, may actually be a good thing. Feeling upset helps capture the knowledge in a way that is more permanent and deeper.) This makes simulation a powerful learning tool. A well designed simulation engages the learner in a way that feel almost completely real. Some of the most effective simulations we have seen had managers truly feeling the strain. Voices got tense, people began to sweat, traditional tensions popped up—all over an imaginary world. This, of course, is exactly what you want: real emotion forces us out of those comfortable discussions where managers substitute what they and their people should do for what they really will do. A good simulation can be frustrating, stressful, even scary; it can show everyone what will happen if those tough issues aren’t resolved up front. Participants may walk out saying, “that was terrible; we can’t let this happen in real life.”

High drama
How does this work in practice? Consider one recent case: the US marketing arm of a global pharmaceuticals company. The plan was to change the relationship between product marketing teams and the various internal centers of excellence such as market research and promotions development. Existing decision rights and reporting structures were ambiguous. This created duplication, churn, spotty execution, and a great deal of mistrust. Naturally, the change effort brought a new structure, consolidating centers of excellence and eliminating “shadow organizations” in product marketing teams. It also shifted decision rights for these programs to the centers, and revamped processes to better use the centers’ defining expertise. These changes had been carefully thought through, and came with strong positive motivation: to ensure that the organization could maintain its track record in the face of continued growth and expansion. Yet they were expensive, ultimately affecting more than three hundred jobs and over $1 billion in promotional spending. This was a change effort that could easily go off the rails. To reduce that risk, senior management decided to invest in an organizational simulation. Thirty-five managers, directly affected by the changes, took part. The key was to have them really experience the new reality, including the consequences of their decisions. (Hint: no matter what it’s called, if a learning activity leaves you talking about what you “would do,” instead of actively doing…it’s not much of a simulation.) So each participant faced a tough set of decisions alone. Realistic external scenarios were created specifically to test the new design: e.g., the launch of

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a new product by a competitor, surprising new clinical data, and so forth. Participants had to assume the new organizational structure was in place, ignore short-term constraints—no copping out with objections like “our culture wouldn’t allow that”—and then fashion their best organizational response. Who would play key roles, make critical decisions, and control core work flows? As in real life, each decision led to a different next state…and the various paths converged on a few key end states. The stakes were real enough that participants felt involved. Fueled by emotional engagement as well as analytic findings from their solo experience, participants were then broken out into three cross-functional teams to extract lessons and conduct further simulation “moves” as a group; this step gave teams the chance to confront interpersonal dynamics at the same time they were trying to fix substantive problems (much like real life). Finally, a summary workshop brought everyone together to identify the key decision traps and jointly identify what would be required to make the new design work well. Along the way, all kinds of conflicts emerged. For example, the product marketing teams were very reluctant to give up certain decision rights to the centers of expertise. Eventually, they did agree— so long as certain short-term constraints could be addressed. The terms of the debate then shifted from whether the centers should have certain decision rights to what was required for them to play their new roles effectively. The participants found that the company needed new competencies and skills in the centers. They would have to act as true strategic partners to the product marketing teams, not just tactical executors, and that meant developing or hiring new kinds of people. Entirely new performance measures were also needed to make sure that both centers and product teams had the same incentives. Intellectually, the findings were not a surprise. Behaviorally, though, they were a huge win…because they were identified, and resolved, before the underlying problems had caused damage in the market, or exacerbated fault lines in the organization. Equally important, the simulation gave the company’s senior executives the confidence to move ahead with the plan (after appropriate fine tuning). They now had a very good idea of what would work well and where problems might pop up. They had real buy-in from a large and critical group. And they had a true roadmap for implementation—one based on essentially real experience, not just conceptual models. So processes, training, decision rights, communication, and roles—everything about the final change was based on realistic experience and detailed guidance from the people who would be living with them.

Crucial details
To deliver benefits like these, your simulation simply must be well designed. Experience shows that four ingredients are crucial: • The right people: a careful blend of those most affected, key opinion leaders, and those around leverage points.

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• The right scenarios: plausible ones that accentuate the pressure points in the new organization. The goal is to activate people’s hopes and fears so they behave as they would in real life. To put a design to the test, for instance, you almost certainly need to explore external marketplace scenarios. • The right detail: not too much data, or things get slow and irrelevant. Yet enough to capture the messy reality of day-to-day organizational life; how work gets done in practice, not on paper; how key decision processes play out. It is at this level of detail that many of the thorniest conflicts occur. • The right environment: everything from timing to technology to which senior executives facilitate and how. Do this wrong, and things fall flat. A simulation like this is clearly a major undertaking—but it is considerably less expensive than making mistakes in the actual change. And compared to the cost of the change effort failing outright…well, there is no comparison. In the end, you’re investing in risk reduction. You can’t avoid change efforts. Yet the stakes are always high, and so is the rate of failure. Simulation lets you sharply reduce that risk. But it also has an upside: simulation is the only way of finding out ahead of time what will really work. With that knowledge, you can make the change effort really, dramatically work—capturing the strategic benefits that brought you there in the first place. Isn’t that what it’s all about?

Endnote
1 Gene Hall, Jim Rosenthal, and Judy Wade, “How to Make Reengineering Really Work,” Harvard Business Review, November-December 1993; Michael Beer, Russell A. Eisenstat, and Bert Spector, The Critical Path to Corporate Renewal (Boston: Harvard Business School Press, 1990); and Bert Spector and Michael Beer, “Beyond Total Quality Management Programmes,” Journal of Organizational Change Management 7, no. 2 (1994).

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MONITOR GROUP
Monitor Group is a global family of professional services firms that brings a unique array of assets to bear on the complex questions facing decision-makers today. We are located in 30 offices around the world, spanning five continents. For more information, please visit www.monitor.com.

LATTICE PARTNERS
Lattice Partners — a Monitor Group company — helps clients achieve competitive advantage through their organizational design and human assets. We provide a wide range of service and configurable product offerings, including: • Designing corporate governance systems to improve board effectiveness and manage risk • Aligning organizational design with strategy • Helping teams work together in a more effective and productive manner • Helping individuals develop as leaders

CONTACT
Monitor Group Two Canal Park Cambridge, MA, 02141 p 617.252.2000 f 617.252.2100
Copyright © 2006 by Monitor Group All Rights Reserved

Sameer Srivastava p 617.252.2475 sameer_srivastava@monitor.com www.monitor.com www.latticepartners.com

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