How Good Is Your Company at Change?

18th February 2022

BusinessComments Off on How Good Is Your Company at Change?

It was a month like no other that Delta Air Lines had ever experienced: March 2020. Travel bans and rising coronavirus fears sent bookings into negative territory—more customers were canceling upcoming trips than booking new ones—and at the nadir the airline cut 85% of its flights. Not even the terrorist attacks of 9/11 had precipitated such a sharp drop in business, and the decline was accelerating each day.

Unprecedented change required a serious response. A week after the United States locked down, Delta began calling big corporate clients and surveying leisure travelers. What can we do, the company asked, to make you more comfortable with air travel? Customers consistently said they just didn’t feel at ease being seated next to strangers, even with mask requirements, improved air-circulation technology, and heightened cleaning.

Though it would be costly, the best response, Delta executives decided, would be to block the sale of middle seats. In the first week of April 2020, when Delta’s CEO, Ed Bastian, made the decision, planes weren’t filling up anyway, so the immediate impact was muted, but Bastian and his team were playing the long game. According to Paul Baldoni, Delta’s vice president of Americas pricing and revenue management, the goal was to help customers relax about traveling—in that difficult moment and over the long term. Indeed, Delta kept its block in place for 12 months, until May 1, 2021, by which time, management argued, vaccines and a decline in overall cases had customers feeling much more secure about flying in full cabins again.

Delta made the decision to block the sale of middle seats relatively quickly. But implementing it wasn’t easy. As a legacy airline, the product of multiple mergers over the years, Delta has many different technology systems. Instituting a change of this magnitude across all those systems, executives knew, would be complicated. They drew up a list of 25 to 30 things they would need to do to succeed, from adjustments to the digital site to internal and external communications about the new policy. As they worked through their to-dos, and as more levels of the organization became involved, that list grew to hundreds of items.

To help ensure that no one was placed in a blocked seat, for example, the company laminated cards detailing the new policy and distributed them to gate agents and flight attendants—a simple fix, but it worked. Over time, though, Delta shifted from emergency fixes to systemic changes. “We start with the quick solution,” Baldoni says, describing its approach, “and then look at how we can make it more efficient.” Soon the company was building new rules into all its technology systems, which allowed it to automatically determine passenger limits by plane model. Many of Delta’s competitors eventually followed suit, though often with less clear-cut policies, and most dropped the restrictions within a few months.

Delta’s quick response to the pandemic illustrates how a large-scale, complex organization can lean into its strengths and effect major change in rather short order. In the fourth quarter of 2020 removing the middle seat left the airline with 9% fewer seats to sell than its competitors had, but even so, Delta’s revenue was 12% higher than the average of American, United, and Southwest combined—a difference management sees as an indication that its customers were willing to pay for the extra space. Delta’s overall Net Promoter Score also skyrocketed to an all-time high, demonstrating that its long-term focus paid dividends.

The lesson: A company’s capacity for change matters. A lot.

Determining Your Change Power

We talk to executives all the time, all over the world, and no matter how we start out, we always end up discussing change. These executives are seasoned professionals—experts in their fields, with a deep understanding of their companies and their markets, and usually very well schooled in the art of management. But the current business landscape is evolving so rapidly and unpredictably that they are full of questions about change. How much? they want to know. How fast? How sustainable? And sometimes just How?

In our experience companies can’t hope to answer these questions unless they understand their own capacity for change. Traditionally that has been hard to determine, because they’ve lacked effective tools for measuring it. To paraphrase the old adage: If you can’t measure it, it sure is hard to address.

Two years ago, in response to the rising chorus of questions, we began devising a system to help companies measure their capacity for change—their change power, as we call it. Some people were skeptical. The idea seemed impractical, even quixotic. How can you possibly measure something as amorphous and intangible as the capacity for change? But the more we thought about it, the more we felt that question demanded an answer. After all, we have metrics for many things in business today that once seemed impossible to measure. Just a few decades ago companies had no good measure of customer loyalty. Then, in this magazine, our Bain colleague Frederick Reichheld introduced the Net Promoter System. Today NPS is so widely accepted as a barometer of success that many companies report it to their investors. That example inspired us to develop a roughly analogous system for measuring change power.

We had been studying corporate change efforts for more than a decade, tracking which programs worked and which didn’t. From that research we identified nine common traits and abilities that make companies excel at change: purpose, direction, and connection (necessary for leading change); capacity, choreography, and scaling (necessary for accelerating change); and development, action, and flexibility (necessary for organizing change). Delta Air Lines has strengths in each of the three groups, which helps explain why it responded so well when the pandemic hit, relative to its competitors. The company is particularly strong in purpose, connection, and action.

In developing our system we conducted a survey of close to 2,000 employees from 37 large global organizations representing a variety of industries. What we found is that a company’s change power is a strong predictor of its performance. Companies that appear in the top quartile of the index are more profitable, with margins twice those of companies in the bottom quartile. Companies in the top half grow revenue up to three times as fast as do companies in the same industry that rank in the bottom half. Each move into a higher decile on the index (from, say, the 50th to the 60th percentile) correlates with a margin improvement of 150 basis points and an increase in total shareholder return of more than 250 basis points. In addition, companies that appear in the top quartile of the index tend to have leaders and cultures that rate significantly higher in the eyes of their employees than those in the bottom quartile, and they have employees who feel more inspired and engaged. These findings on leadership, culture, inspiration, and engagement were consistent with Glassdoor rankings for the same companies.

What we learned in our research convinced us that change power is a valuable metric for companies to focus on. By working to understand their capacity for change, they can identify their strengths and weaknesses, take stock of how they compare with their competitors, and use that knowledge to develop focused plans for getting better at change.

Four Common Archetypes

Every company will have its own balance of factors that affect change power. But we’ve found that most fit a pattern corresponding to one of four common archetypes: In search of focus, stuck and skeptical, aligned but constrained, and struggling to keep up. Each archetype has its own symptoms and remedies.

In search of focus.

This archetype describes 37% of the companies we reviewed. Their strength is their energy. They’re beehives of activity and have had many successes. They’re constantly innovating, and their people have the capacity to take on a lot. But, like young children playing soccer, everyone in these companies seems to be chasing the ball. Statistically, this group shows weakness in the traits of purpose, direction, and connection.

To address this, leaders should focus on the big picture, connecting company activities to purpose and strategy. Defining a multiyear ambition—and then telling and retelling the story of how you and your company will make that ambition a reality—is important to a sense of common purpose. It can also be helpful to identify top initiatives and assign them to agile teams that connect various disciplines, functions, and parts of the organization. But you must prioritize ruthlessly: To stay focused on the best initiatives, you’ll have to say no to some good ones.

Delta has harnessed its proclivity for action by focusing on purpose and connection during this time of change. The company has accelerated a number of its airport-renovation projects despite the drop in air travel, and it is now 18 months ahead of schedule on one of the biggest: a $1.9 billion project to connect and refurbish two terminals at LAX in Los Angeles. Speeding up construction meant closing an entire terminal, so Delta management worked with frontline employees to understand what the implications would be, from mapping new shuttle bus routes to adjusting staffing. Executives consistently made the case with employees for the value of new technology and the better door-to-door customer experience the upgrades would enable. To build connection and ensure that its workforce felt part of the process, Delta (which, unlike many other airlines, manages its own construction projects) invited all employees, from gate agents to pilots, to come out and sign the beam that would be placed over the new terminal entrance before it was hoisted into place. “It’s making everybody a participant in the process,” says Mark Pearson, Delta’s vice president for corporate real estate. “Change is hard. People don’t like change in general. The more you can get people excited about better service, the community, a better airport, the better.”

Stuck and skeptical.

Of the companies we reviewed, 20% fit this archetype. They have good ideas and a history of success, but too much of their change gets stuck at the local level. They tend to underestimate the full scope of what they have taken on. They are commonly weak in connection, scaling, and action. Innovations seem to stall and don’t spread across the organization. That makes people impatient: How can all our hard work have so little impact? The elusiveness of success comes to feel almost unfair. Skepticism, even hopelessness, grows.

No single leader can lift a whole company out of this state. Success will come only from reigniting the enthusiasm of your teammates, which starts with convincing them that they can in fact succeed. One way to do that, and to build energy fast, is to quickly put some wins on the board.

A few years ago the CEO of one of the world’s largest transportation and logistics companies found himself in exactly this situation. After a year of hard work on a strategic transformation designed to ease competition with digitally native rivals, he noticed that the pace of change seemed to be slowing. This was frustrating. There was still so much to do. His team struggled to convey the urgency of the challenge. Operating in a highly competitive, increasingly commoditized industry, the front line was focused on day-to-day execution and thus easily distracted from the broader strategic challenges.

After some debate over the best approach, the company’s leaders tried something they had never done before. They invited 40 influential and respected executives from across the company to meet at the European headquarters. Their task was to create a shared story of the company’s future—its common purpose. Together they would articulate why they had to change and what was needed to get there.

Two days later they had come up with a narrative that they all owned. It did more than set targets and make logical arguments. It had emotional goals: to create a sense of belonging and purpose at all levels, to tap into the staff’s love of the industry, and to cultivate a culture of caring, humility, and honor. The 40 leaders returned to their respective markets around the world inspired, aligned, and connected. They were able to catalyze the next phase of transformation for the company, including an energetic new focus on data analytics and artificial intelligence, which they are now using to improve capacity utilization, cut energy usage, and better predict and plan for required maintenance.

Aligned but constrained.

This archetype applies to 24% of our companies, which share important strengths: Their employees work well as a unit, have locked arms, and are headed in the same direction. Early success heightened their expectations, and now they find themselves pushing against hard constraints. These companies often don’t have the people they need to fill key roles in managing greater amounts of change and its accumulating disruption. Picture running a race in the mud. Each step requires more energy than the one before, which saps optimism. Teams that fall into this category struggle with connection, capacity, and development.

To counter these problems, companies need to identify and address their capacity bottlenecks. They may have to reorder their priorities and add resources where most needed. That involves closing key capability gaps across the organization by bringing in new talent and helping existing talent develop new skills.

Talent development has played an important role at Worley, a global company that provides professional project and asset services to the energy, chemicals, and resources sectors. During the past six years the company has met a series of difficult challenges and established a record of effectively managing change. The first challenge came when a glut of oil overwhelmed a slow-moving economy, causing prices to plunge by 70% from mid-2014 to early 2016. With many of Worley’s customers and much of its revenue vulnerable to changes in the price of oil, the downturn forced a significant restructuring.

According to Worley’s CEO, Chris Ashton, the stark circumstances demanded that the company create a transformation team staffed by its best people—those with the ability to learn quickly on the job and engage the broader organization. Many of these people were emerging leaders, and the operations they worked for often had a difficult time letting them go. But given the circumstances, they had little choice. The new team built a turnaround strategy that helped Worley survive the shock. And for the leaders who took part, it was a big development opportunity, says Francis McNiff, the company’s executive group director of transition and change, who estimates that the time they spent on the transformation team probably accelerated their careers by several years. When they returned to the business lines, these leaders were armed with a new network of connections from across the organization and quickly became effective local evangelists for the company’s strategy.

Worley followed a similar blueprint in 2019, when it merged with the energy, chemicals, and resources division of Jacobs Engineering Group: It assembled a team that was able to ensure a successful integration of the businesses. Then, in 2020, came the “double black swan” of Covid-19 and another oil-market crash. “We had to get right back on the horse,” says Mihaela Carpo, a member of the new transformation team. Job one for the team: almost immediately equipping 45,000 people to work from home. Carpo, now the director of Worley’s Group Project Management Office and Innovation, gained confidence in earlier transformation projects. “If this had happened a few years ago,” she says, “I’m not sure if we would have been able to mobilize everybody as quickly or know what to do or what levers to pull. The last few years prepared us for this.”

Worley recently tapped more than 1,000 people, from support staff to PhDs and senior executives, for 70 structured workshops held around the world and designed to help develop and codify a shared purpose and values for the company. At them, groups of 20 to 25 people spent three to four hours exploring questions about what got them out of bed in the morning, what they saw as the company’s greatest business opportunities, what behaviors they believed were key to success, and what they understood Worley’s key strengths to be. Karen Sobel, the group president of Worley’s business in the Americas, took part in a number of workshops. She recalls that at a large fabrication facility in Norway, teams working in a mix of Norwegian and English really put their hearts into it. “It allowed the people in our organization to tell their story and share their perspective on the direction they thought the company should take,” she says.

The workshops produced a huge amount of data that the team distilled into a core purpose—“Delivering a more sustainable world”—and four company values. According to Ashton, everybody from “graduates to grandparents” agreed that this was the right focus, and the process gave employees a valuable feeling of connection. That sense of purpose, he says, became “a powerful force for change.”

Struggling to keep up.

Among the companies we reviewed, 19% fit this archetype. They’re like teams of cyclists in the Tour de France, battling a grueling race of many stages. Each day the riders must adjust to changing terrain, unpredictable weather, and the strategies of their competitors. They must plan how they’ll work as a team, supporting and even sacrificing for one another. They’re great athletes whose single-minded focus and action orientation have delivered results. As the race wears on, fatigue sets in, and adaptability becomes increasingly important. But these companies struggle to cope because they’re weak in choreography, scaling, and flexibility. Their single-minded focus, once a virtue, begins to morph into a vice.

Companies in this category need to get better at anticipating what’s around the corner and changing their plans accordingly. To catalyze this shift, they must first take stock. Is their strategic direction still the right one? If not, they need to reprioritize and reallocate resources to be ready for the next leg of the race.

Seven years ago Assurant began just such a transformation. In 2014 it was an insurance holding company, a conglomeration of independent businesses acquired over several decades by its former Dutch parent. Each division had its own chief executive and its own leaders of finance, IT, HR, marketing, distribution, and operations. The business units were so distinct that in 2015, when its recently appointed CEO, Alan Colberg, traveled to Atlanta to meet with senior leaders from three of the company’s businesses, he discovered that those executives had never been together in one room, even though they worked in the same office building.

Not long after that, it became clear that Assurant’s health insurance business—the oldest in the company’s portfolio but recently upended by market changes created by the Affordable Care Act—no longer had a sustainable business model. Colberg and the board seized the opportunity to make dramatic changes. Since then Assurant has exited three of four business segments, made a number of significant acquisitions, and centralized many functions. “It’s been perpetual change,” says Keith Demmings, a 24-year veteran of the company who will succeed Colberg at the end of 2021.

Constant change has led to a lot of questions at Assurant, so management has put a strong focus on communicating its strategy to employees and making the case that as the business evolves, they personally can have a bright future at the company. Today half of every meeting with employees is devoted to Q&A, and executives are always on the lookout for signs of change overload. “I step back every once in a while,” says Francesca Luthi, Assurant’s chief administrative officer, “and ask myself, Can we still absorb all this? Because it has been fast and furious. There are opportunities for growth, to stretch yourself, but is this just too much? Are we going to break?” Since Colberg became CEO and began to shift its operating model, Assurant’s annual shareholder return has risen to 14.6%, up from 10.1% in the decade prior.

According to Luthi, Assurant in recent years has developed new “muscle” and “elasticity” and as a result is better equipped than ever to handle change. The company is more open now to trying new things—and to learning from failure. It has trained 1,000 employees in agile principles of IT management and has introduced a new focus on customers, innovation, testing, and learning.

Steps to Take Now

We live in unprecedented times, and our challenge as leaders is to build businesses that will thrive in a world of unpredictable and accelerating change. So what can you do to boost your change power?

1. Get the facts.

Too many companies and executives are wandering in the dark, speculating about what might or might not be. Dig in, determine your change power baseline, and understand where you are relative to your competitors. Identify specifically what you can and must improve. Small moves now are better than big ones later—test, learn, and iterate, as Delta did when implementing its middle-seat block.

2. Disrupt how you work.

Approach your current and upcoming changes by thinking not in terms of distinct projects but, rather, in terms of an organizational shift—just as Assurant did when it transformed itself from a disjointed group of independent operators into an organization focused on evolving toward a shared future. Consider these changes a balance-sheet issue and invest actively to build the strength necessary for sustained success.

3. Mobilize your leaders.

Transformations provide the best training ground for the next generation of leaders. If you want to disrupt old patterns, embrace a new approach, and improve critical change capabilities, you’ve got a lot to do: You’ll need to orchestrate a team effort, develop a shared ambition, and map an action plan. That’s what the logistics company’s 40 executives did at their European retreat.

. . .

More than ever before, companies need to measure, understand, and boost their capacity for change. The ideas we’ve laid out in this article can help with that. By studying and improving your change power, you can build a nimbler and more resilient organization and become a more formidable competitor in the process.