Most companies do not truly want to transform. When I say “want,” I mean the want that goes beyond some executive meetings and e-learning classes. The kind of want that goes past a glossy mission statement on a poster board on bagel day. Even if they need it, even if they know it, most companies aren’t willing to do it, and fewer still know how.
What is Transformation?
One definition I found said ‘a thorough or dramatic change in form or appearance.’ Thorough and dramatic change.
Business transformation requires strategy, planning, execution and effort. True, major transformations will undoubtedly involve some hardship and sacrifice, and most of us just don’t want to hear it. It may require naysayers and foot draggers to be convinced and cajoled, and they will require uncomfortable conversations. We do not accept change readily, especially that of the thorough and dramatic type. I am looking in the mirror as well – I do not accept change readily.
Think about lifestyle changes or dieting. The industry can sell pills, fad diets and short-cut exercise programs, but the bottom line is that most people who know will tell you the simple fact is you can’t outwork a bad diet. To transform yourself, it requires a plan and effort every day to achieve the outcome, and then a plan and effort to protect the gains once they’ve come.
It’s Easy to Mistake a Cost-Cutting Approach for Transformation
I think that many companies, especially in the manufacturing world, have come to mistake the “blind task” or “haircut” cost-cutting approach for transformation. For a myopic executive, it is presumably the easiest “transformation” to initiate. The assumption is that for given functions in a company, there is an optimal level of cost vs productivity that is achieved simply by the assignment of a percentage budget cut. Here’s what I mean: If a Global Engineering leader thinks her engineering department in North America should be running at $90M a year, and it is running at $100M, she sends that Regional Engineering leader a 10% budget task or reduction, and then there is a presumption that the regional leader will execute that task, people will be walked out and efforts stopped, and everyone will automatically figure out exactly what should be done. At the end of the year, the run rate was down that $10M and she looked like the big hero making the tough decisions.
One can keep this up for a couple of years and keep their name on the C-suite executive door. The goal is that before there is a hollowing out of the department’s long term capability, morale degrades too far, or it is found that they have cut into bone, that leader gets promoted to the next big job or moves to the next company, and leaves the investment and clean up to the person behind them. But according to them, while they were there, they “transformed” the company.
I get concerned whenever I see “Transformation” in someone’s title. Companies don’t like titles of people that don’t have organizations and produce some kind of widget every day. Not for very long anyway. And what is it that they are mandated to transform?
A Path Forward with the Transformation of Processes and Systems
Let’s talk about transformation efforts and what I believe is one of the biggest positive enablers of transformation out there.
I’ll start with Mergers & Acquisitions. If Company A buys Company B as a cost synergy play, what do they need to do? First thing they will do is go through their supplier lists and optimize their spend. This isn’t easy, and there is no shortcut. Every key vendor needs to be vetted, and then sourcing decisions need to be made and supply chain changes enacted. If I have two steel suppliers and I can get to one that can do the job at a lower price, I want to execute that. And all the way through for my hundreds or even thousands of vendors, and even if I have been doing business with vendors for years, I do the exercise. I look at back office functions – AR and AP clerks, Finance Analysts, Buyers, Cost Accountants, HR staff, IT staff, and others, and I make decisions about what organizational changes are required.
Unfortunately, many companies involved in M&A simply hand down a benchmark driven task. The problem is that there often is no attending roadmap to savings and transformation of processes and systems. For example, if company A runs a process in one system for procurement and company B runs a process in another system for procurement, each with different user bases and support structures, and then there are blind tasks given to the newly conjoined organization, there is a probability that there may be a lopsided cut, requiring the remnants of the acquiring company to take over unknown processes and systems from the acquired division, along with what they already have. Then, waste and mistakes can ensue, and in some cases contingent workers are then re-added to make up for the issues. It is no wonder that these common blunders happen. According to collated research and a Harvard Business Review report, the “failure rate for mergers and acquisitions (M&A) sits between 70 percent and 90 percent.” If one is running around with benchmarks and has no pathway to achieve the benchmark, then failure is all but certain.
There could actually be a greater reduction if the processes were road mapped and integrated, but the company was probably unwilling to do the real, underlying transformational work because an investment was required beyond exit packages, and the company did not think that through in the M&A sessions, and didn’t want to spend any real transformational money other than charges for separation packages and the common reorganizational charges. The deal advisory firm may have given them a cost benchmark to hit, but not a cost roadmap that revealed how to get to the outcome.
A Transformational ERP Project
Many of us have had to endure a number of poorly conceived, blind task cost cutting efforts in our time. In what some would find ironic, one of the greatest transformation projects I have been a part of was an ERP project for two companies that were putting large, multi-billion dollar pieces of business into a joint venture. What transpired was something out of the ordinary. Think about two large companies coming together, headquartered in different countries with different key languages and cultural norms. Companies that had different operational processes in everything from accounts payable to shipping and receiving. And all of those processes were executed in separate systems with different code sets and architectures.
So why was the ERP project transformational?
Think about what an ERP project requires. Again, two purchasing organizations from those two companies needed to get into a room and compare their vendor lists, understand their spend, and then load the suppliers and prepare for their cost synergy discussions and negotiations. They needed to vet the ERP vendor’s purchasing process in the system and prepare the formerly separate companies on how to now execute that single best practice. Indirect buying now works “this way”, and direct material procurement works “like that”. Key players were brought into a room to validate and train and get the message out. A single, globally enabled team was created to carry that process across the company.
And along with Purchasing, there was Supply Chain. How does the accounts payable and accounts receivable processes work? Well, you get the key players into a room to discuss those processes and decisions are made. Bonds are built. Friendships are forged. Processes and practices are established, and then the team carries it across the globe. Two disparate cultures are much more quickly integrated because of these in-depth meetings, and earnest and open discussions of how work will be done. Conflicts are resolved much more quickly. There was a single core playbook that the two conjoined companies could now run the process out of. Charts of accounts, shipping processes, receiving, inventory, customer orders; now because of this ERP initiative going on during the M&A integration, there was a roadmap to bring the companies together not only at the process and system level, but culturally as well, because the companies were now seeing how the other was working, and disparities were being eliminated. This ERP transformation actually brought the cultures together.
Successful Transformation Requires True Synergy
Cultures are hard to integrate when the people of one culture don’t know what the people of another culture are doing. What this ERP project did was actually enable the cultures to start working together and understand and execute a common process. That was true transformation, bottom up and top down.
Was it all sunshine and lollipops? No. But there was a common process to map to, there were strong leaders in the business and systems teams, and there was a system integrator that knew how to execute with the final outcome in mind, and not to keep the spigot going. Conflicts were dealt with, and the eye was kept on the final prize: Transformation.
Once it was complete, it was found that the new run at rate cost was indeed significantly lower than the combined cost of the separate paradigms, as intended. Transformation. And because of that, we then found that transformation was no longer a dirty word. It was definable, and it was obtainable.