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McKinsey and Company

Colin Price, Director

Beyond PerformanceColin Price

Organisations shape the world

1 Four realities are shaping organisations today

First reality

The nature of competition has shifted from

‘scale and stability’ to ‘innovation and change’

Net income

per employee

1984 2011

Scale is no longer the key driver of company value

Number of employees in the company

Net income

per employee

Number of employees in the company

Second reality

The gales of ‘creative destruction’ are still raging

The recent downturn has been disastrous for many

CAGR-54%

2004 2009

0

55Share price

Third reality

Most corporate transformations end in failure

70%

1995

Transformations tend to fail for the same reasons

2000

70%

2005

70%

2010

70%

Fourth reality

However, some companies do re-invent themselves

5,000

0

15,000

10,000 10,000

5,000

15,000

0

10,000

5,000

15,000

0

10,000

5,000

15,000

0

1979 Q1 2009 Q3 1979 Q1 2009 Q3

1979 Q1 2009 Q3 1979 Q1 2009 Q3

A small number consistently out-perform the market

2 McKinsey investigates organisations and change

Our journey of discovery … described in numbers

Survey respondents

from over 1,300

organizations

participated in our

‘Organizational

Health Index’

research

CEOs and senior

executives

completed further

surveys regarding

transformational

change

600,0001,000,000

6,8006,800

Survey

Years were dedicated to

developing and refining

our understanding of

organization and change

Academic journal

articles and books

reviewed

CEOs and chairpersons

did face-to-face

interviews with us

Leading academics

reviewed, challenged,

and augmented our

findings33

900900

3030

44

Research

Market value $b, Jun 2007

88

Morgan

Stanley 120

RBS

76

Deutsche

Bank91

Barclays 111

BNP

Paribas

93

Unicredit

87

Credit

Suisse

Goldman

Sachs

Santander

254

Citigroup

165

JP Morgan 215

HSBC

67

Credit

Agricole86

Société

Générale 126

UBS

88

116

Performance alone can’t explain corporate success

176

94

44

7554

34 4660

85

4569

53

99

142

200

Market value $b, Jan 2011

14 6 13 9 28 25

23 27 55 15 68

21 18 30

82

Market value $b, Jan 2009

A theory of change: balancing performance + health

Performance

What an organisation delivers to stakeholders in financial and

operational terms

Health

The ability of an organisation to align, execute and renew itself

better than the competition

and

Jack Welch

Former Chairman and CEO of GE

Financial Times, August 2009

“The narrow pursuit of shareholder value

was the dumbest idea in the world”

3 The nine vital signs of organisational health

Innovation and learning

External orientation

Culture and climate

Direction

Account-ability

Coordination and control

Capabilities Motivation

Leadership

Organisational health comprises nine characteristics

One cluster relates to strategic internal alignment



Culture and climate

Direction

Account-ability



Leadership

Another cluster is about your quality of execution



Culture and climate

Direction

Account-ability



Leadership

A third cluster concerns your capacity for renewal



Culture and climate

Direction

Account-ability



Leadership

Leadership is at the core of all these characteristics



Culture and climate

Direction

Account-ability



Leadership

Strong health profiles correlate to high performance

EBITDA margin

StrongMediumWeak

68%

48%

31%

Health profile

Growth in value

62%

52%

31%

StrongMediumWeak

Health profile

Growth in net income

58%53%

38%

StrongMediumWeak

Health profile

R2 = 0.54

Performance

Health

Health matters, from refineries in an oil company …

R2 = 0.50

… to hospitals across a national healthcare system…Performance

Health

40%

60%

80%

100%

120%

140%

40 44 48 52 56 60 64 68 72

Average OHI outcome

Scorecard outturn

Scorecard

target

Average OHI

outcome

… to the business units in a Telco

Correlation coefficient (r) = 0.62

4 How to be rigorous about organisational health

Healthessentials

Discoveryprocess

Influencemodel

Changeengine

Centredleadership

Five ways to create balanced performance + health

How ready are we to get there?

Where do wewant to go?

What do we need to do?

How will we keep moving forward?

How will we manage for success?

Health

Define your organisational aspirations

Understand the mindset shifts needed within the organisation

Architect the implementation along the levers that drive people to change

Build broad ownership, take a structured approach and measure impact

Develop leaders to enable them to drive change

Performance

Set the overall performance goals

Determine gaps across technical, managerial and behavioural systems

Develop a portfolio of initiatives to improve performance

Design the approach to rolling out initiatives across the organisation

Set up mechanisms to drive continuous improvement

Strategicobjectives

Capabilityplatform

Deliverymodel

Continuousimprovementinfrastructure

Portfolio ofinitiatives

Where do we want to go?

Strategic objectives

Market beating … or just playing along?

Based on sources of advantage … or based on misdiagnoses?

Granular about where to compete … or conventionally defined?

Convertible to real action and resources … or just a vague statement of intent?

Ahead of trends and discontinuities … or optimised for the status quo?

Applying privileged insight and foresight … or just common math to common data?

Accounting for uncertainty … or assuming uncertainty away?

Balancing commitment with flexibility … or rigid and tactical?

Unbiased about alternatives … or subject to undetected biases?

A personal conviction to act … or missing personal decision-making?

Is your strategy:

Performance

Health essentials Health

Ailing Able Elite

Measure organisational health

Crafts and communi-

cates a compelling

strategy, reinforced by

systems and

processes …

… and provides

purpose, engaging

people around the

vision.

Creates a strategy

that fails to resolve

the tough issues.

Direction

Leadership

Culture and climate

Accountability


Capabilities

Motivation



Building a strong, innovative brand

and shaping market trends

Our most important asset is our

collective knowledge and talent base

Set the right health aspirations

Discipline, sound execution, and

managing the bottom line

Leaders are the glue and the engine

that drive performance

Health

Elite

Able

Ailing

Executive team

Senior manager

Manager

Officer

Admin staff 4949634062397248

5758714260407354

6584734972577775

7186716981538982

67

73

72

77

69100847387609793

Mean

75

Perceptions depend upon seniority

54

59

69

75

82

Health

Technical system

Managementsystem

Behavioralsystem

Capability platform Performance

True tests of corporate capabilities

Scarce within the industry

Superior to substitutes

Difficult to imitate

Discovery process

Sir Roger Bannister

“Doctors and scientists said that breaking the

four-minute mile was impossible, that one would

die in the attempt. Thus, when I got up from the

track after collapsing at the finish line, I figured I

was dead.”

Current state

Mindsets

(e.g. “Head

down, watch my

back”)

Behaviours

(e.g. minimal

performance

dialogue)

Practices

(e.g. no clear

performance

contracts)

Outcomes

(e.g. blame)

Desired state

Mindsets

(e.g. “If it is to

be, it is up to

me”)

Behaviours

(e.g. ongoing

performance

dialogue)

Practices

(e.g. clear

performance

contracts)

Outcomes

(e.g. accountability)

Identify limiting/liberating mindsets Health

Focus on the vital few

From transactional to“I am responsible for quickly and

efficiently meeting the needs

that my clients express”

From silos to“I know what’s right for

my area and no one else

can achieve what I can”

From blame to“I show up at each

meeting so I can

watch my back”

… relational“I bring the best of my company to

clients and address their needs

whether articulated or not”

… collaboration“I can learn from others and

there is great value in ‘mining

the seams’ together”

… accountability“I trust others to do what

they are supposed to do,

in a fair manner”

Health

What’s working, as well as what isn’t Health

Portfolio of initiatives Performance

A balanced portfolio

Short(1-2 years)

Medium(2-3 years)

Long(3-5 years)

Uncertain

Unfamiliar

Familiar Lack of focus

Poor innovation

Risky future

Influence model Health

Create the right context

Role modelling

“… I see my leaders,

colleagues, and staff

behaving differently.”

Compelling story

“... I understand what is

being asked of me and

it makes sense.”

Skills needed for change

“… I have the skills and

opportunities to behave

in the new way.”

Reinforcing mechanisms

“… I see the structures,

processes and systems

to support the changes.”

“I will change

my mindset and

behaviour if …”

Health

Geometric: Successive waves of interventions

with increasing resource requirement

Linear: Sequential interventions with

stable resource requirement

Big bang: Concurrent interventions with

intensive but punctual resource requirement

Delivery model Performance

Organic: Light a forest fire and then stand

back

10 teams, each with

10 members, were asked for their collective

10 priorities

Change engine

Best possible result,

if all teams agree on all priorities

10 different priorities

Worst possible result,

if no teams agree on any priorities

1,000 different priorities

Actual number of priorities 922

Health

Level 1: Transformation

headline

To become a highly

competitive integrated

company, recognized as one

of the top five energy

producers worldwide and as

the employer of choice in

our industry

Level 2: Performance and

health themes

Health themes

Co

lla

bo

rati

o

n Ali

gn

me

nt

Cu

sto

me

r

focu

s

Acc

ou

nta

bil

it

y

Pe

rfo

rma

nce

th

em

es

Expanding production

Integrating value chain

Maximising downstream

More efficiency/safety

Level 3: Specific initiatives

Health themes

Pe

rfo

rma

nce

th

em

es

Cro

ss-

bu

sin

ess

co

un

cils

Sto

ry

casc

ad

e

Da

ta

sha

rin

g

Tale

nt

rev

iew

o

verh

au

l

Pricing

Learning

Vendor consolidation

Lean

Take a structured approach Health

Continuous improvement Performance

Continuous improvement

First-line-manager driven

Thousands of small levers

Changing ‘the way we work’

Continuously improve across all functions

Top-down structural change

Top management driven

A few big levers

Project-based change

One-off improvements

218 cm

Western roll

224 cm1968

236 cm1980

Fosbury flop

Centred leadership

Peter Drucker

1954

“The purpose of an organization is to enable

common men to do uncommon things.”

Business excs

Car salesmen

19%

23%

50%

63%

65%Doctors

Police

Clergy

Journalists

Bankers

Lawyers

6%

13%

12%

It’s not easy being a business leader

Which professions do people respect most?

Gallup 2009; Julian Birkinshaw, London Business School

‘Reinventing Management’, November 2010

2.0

2.2

2.4

2.6

2.7

2.8

Friends

Spouse

My children

Co-workers

Clients/customers

Alone

Boss

Parents/relatives

3.3

3.0

With whom are you happiest (rating 1-5)?

Richard Layard 2009; Julian Birkinshaw, London Business School

‘Reinventing Management’, November 2010

Health

Coaching/mentoring/performance dialogue

External assessment

Feed-back

Special projects

Non-traditional training

Individual learningIn-house training

External training

0

10

20

30

40

50

60

70

0 10 20 30 40 50 60 70 80

Informal coaching

Role models

Mentoring

Development plans

360°feedback

Performance evaluation

Job rotation

Job structuring

Speedy job rotation

Company effectiveness (% responses)

Importance to my development (% responses)Roles/assignments

Formal training

Building a leadership-rich organisation Health

5 How well do you balance performance + health?

Customer focusCost reduction 2

Accountability 3

Continuousimprovement

4

Achievement 5

Profit 6

Results orientation

7

Community involvement

8

Shareholder value

9

Customer satisfaction

10

Year 4

1Cost reduction1

CustomerfocusShareholder value

3

Accountability4

Continuousimprovement

5

Profit6

Results orientation

7

Achievement8

Community involvement

9

Customer satisfaction

10

Year 3

2

Year 2

1 Cost reduction

Shareholdervalue

2

Accountability3

Customer focusProfit5

Results orientation

6


7

Achievement8

Bureaucracy9

Being the best10

4

Year 0

Cost reduction

Customer focus

1

Shareholder value

2

Results orientation

3

Profit4

Goals orientation

5

Bureaucracy6

Hierarchical7

Short-term focus

8

Control9

Risk averse10

28

Year 1

Cost reduction1

Profit2

Shareholder value

3

Results orientation

4

5


6

CustomerfocusBureaucracy8

Achievement9

Goals orientation

10

7

Hierarchical

Mindsets in an organisation really can be shifted …

1 2 4 53

9. Do we have the structure, processes, systems, and people to

drive continuous improvement in performance and health?10. Do we have committed leaders who can lead transformation

and sustain high performance from a core of self-mastery?

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

initiatives in our portfolio?8. Do we have a method to ensure that energy for change is

continually infused/unleashed during the change process?

5. Do we have a concrete, balanced set of performance

improvement initiatives to deliver our change vision?6. Do we have a clear plan for how to reshape our work

environment to influence healthy mindsets?

3. Do we have a solid assessment of our organisation’s capability

to deliver our change vision?

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

enhance our organisation’s health?

1. Do we have a compelling, understood, and jointly owned

vision of change, plus performance targets?

2. Do we have a robust baseline and shared aspirations for the

health of our organisation?

Where do we want to go?


Deliverymodel


Continuousimprovementinfrastructure

Where are you in your own transformation journey?

Healthessentials

Changeengine

Centredleadership

Strategicobjectives

Capabilityplatform

Discoveryprocess


Portfolio ofinitiatives

Influencemodel


Gary Hamel

Harvard Business Review

2003

“A turnaround is a transformation

tragically delayed”

For updates on organisational health, please join me at my ‘Linked in’ profile

Thank you

Colin PriceDirector, McKinsey

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