Strategy, Transformation & IT: Why Haven’t they Worked?
Enterprise Transformation is big business – very big business. It has been big business since at least the early 1990s when Business Process Reengineering was the thing to do. This year over $2 trillion will be spent on various forms of ‘transformation’ including new strategy development and execution, the myriad forms of ‘digital transformation’, process changes, organizational restructuring, supply chain redesign, changes in the way we recruit & manage staff and the list could go on.
This is not a new trend but is one that is accelerating, driven in large by the accelerating pace of change in technology and with that unprecedented reach to new markets and customers and rapidly shifting – and diversified - consumer wants and preferences.
Unfortunately, the failure rate for all these initiatives down the years has been above 70%. Is this really true and, if so,why? There is certainly no shortage of advice on how to succeed (including this article!). This article looks at reasons for failure / success, asks is there something wrong in our assumptions and provides some simple steps to follow to increase this woefully damaging percentage.
Do over 70% of Transformations Fail?
It is interesting that over the years the ‘law’ of 70% failure seems to have been pretty consistent where 70% is pretty much the baseline as in no major transformation effort gets better than a 30% success rate. Whether we are talking about Digital Transformation, Strategy execution, LEAN transformation, HR transformation, ERP implementations, CRM implementations, etc. A quick Google search will give you the same sort of numbers. What’s worse is that seemingly these percentages, rather than getting better over the years as organizations, consultants, business press, academics & software vendors get more experienced and new ‘better’ ways of implementing are developed the figure seems to get worse; A number of reports and surveys from last year from leading consultancies seem to show that the failure rate for Digital Transformation is as more than 80%.
The first question that should be asked is are these numbers true? There is, after all, no objective data source that we’re aware of that compares expected outcomes with actual outcomes and even if there were who is to say that the expected outcomes were realistic? Who is to say that the actual outcomes weren’t actually the best that could be expected given that business conditions had changed during the implementation timescale?
Should we then ignore the figures – especially as mostly they come from consultancies or research organizations with something to gain from highlighting the ‘failure’ rate and then providing the answer (Disclosure: We are aware that we might seem to be doing exactly the same thing).
The business press is normally filled either with success stories or the stories of monumental failures. Successes that become the ‘poster children’ for the method or failures that cost a lot of money or in extreme cases cause an organization to go out of business. In our experience the vast majority of large transformations fall into the, largely unwritten about, ‘MEH’ bucket. The OED definition of ‘meh’ as an adjective is “Uninspiring, unexceptional, unenthusiastic or apathetic”. If you want MEH to be a TLA (three letter acronym) that seem to be necessary for something to be taken seriously then I’ll offer “Might’ve Ended Horribly (but didn’t)”. These are typically programmes that begin with huge fanfare and end with relief that they are over or have been supplanted by ‘the next big thing’ and are 'just there'. Not great, not getting the results we wanted but at least not causing huge disruption.
We can actually check this out, not by looking at anecdotes or ‘research’ but by looking at company results. The following graph shows a conservative estimate of what improvement should have meant for a generic manufacturing company following a number of transformational ideas and IT advances covering things like MRP2, reengineering, ERP, eCommerce, CRM, BI, etc from the 1970s to today assuming a 2% organic growth rate:
“Expected” Average Operating Profit as % of Revenue
We conducted research across a number of leading companies and industries and from this we can see that a hypothetical ‘best in class’ company performed as follows:
Not quite the same curve – although profitability did go up very slightly - by less than 2%. It should be noted that this is NOT the average, this is the best in class. Research from Deloittes looked at the other side of the coin and looked at Return on Assets over the same period:
ROA shows a steady decline with some very bumpy times during the early 2000s internet bubble crash and the global financial crisis of 2008. It is very hard, if not impossible, to see the effects of all the transformation, strategy, IT enablement, etc during this time. The very definition of ‘MEH’. From this we can certainly say that most transformations so not meet their objectives so why is there such a big gap between what expectations were and what reality delivered – and importantly, can we use the insights to avoid outright failure or, more likely, simply being ‘MEH’.
Why is there a gap between 'Expectation' and 'Reality'
It is clear that there is a gap between expectation and reality. Some questions to ask include “Were the expectations reasonable?” and, if so, why is there such a gap? We will begin with a very brief analysis of a typical business case for an ERP system and ask ‘is it reasonable?’. A fairly typical set of benefits for an ERP system will often consist of something like the following:
- Better sales management and information leading to increased revenue
- Better control over pricing leads to more disciplined pricing and less ‘maverick’ discounts being offered
- Better information on procurement leads to better control and pricing of organizational purchases
- More automation and efficiency leads to lower costs in finance / HR / admin functions
- Better information leads to more informed and better decisions
- Better stock visibility and forecasting leads to decreased stock levels
The above don’t have any numbers attached, so lets try adding some typical ones to a simple financial model:
About the company:
- Sales of $100m
- Variable cost of $50m (this includes materials used, logistics expenses to ship product, sales commissions, etc.)
- Throughput or gross margin is 50%
- Operating expenses are all expenses paid that are incurred irrespective of whether we sell a product
- Investment = current and fixed assets, including inventory less liabilities
Translating the business case into numbers:
- Sales revenue should increase. In the above model its assumed that there is a quantity increase due to ‘organic’ market growth of 2% and 1% attributable to the ERP for better sales management and information. In addition, most ERP systems have strict pricing and control mechanisms so there should also be an impact from better ‘margin management’ and avoiding unnecessary discounts and pricing errors.
- Variable cost quantity will rise by 3% in line with the additional volume but there is a 1% reduction in costs due to the ‘better procurement’ and the ‘better sales management’ which should better manage a quote to order process, better manage commissions and reduce returns and credit memo costs for complaints
- These changes should mean that there is close to a doubling of both actual profit and as a percentage of sales.
- Furthermore most ERP business cases include inventory reduction and accounts receivable improvements so the ROI / ROA should also improve. In this case a 2% reduction should lead to a nearly doubling of ROA based on the bottom line improvements.
Is this expectation unrealistic? Given the power of ERP systems the above figures seem not just realistic but also at the very low end of what expectations could reasonably have been expected to be. Since ERP is a fairly ‘old’ and staid application, shouldn’t we expect at least that from ‘modern’ techniques in strategy, improvement and technology? Why aren’t we?
The same Old Reasons why Transformation Efforts Fail
What is interesting is to look at the reasons given why transformation efforts fail (and the converse of how to succeed). Getting this information is easy. A quick Google search will provide tens, if not hundreds of thousands of articles and advice. Across all transformation efforts its pretty easy to pull out some core ‘failure’ reasons:
- Lack of executive support
- Poor project management
- Poor or Incomplete methodology
- Lack of “Buy-in”
- Lack of ‘talent’ / resources
- Resistance to Change
- Lack of Training
- Underestimating the complexity of the task
- Lack of Focus
While each particular transformation effort may have some unique ‘failure points’ the above are all common. Why is this so? We have been involved with many companies who have done at least one major initiative and yet nowhere have we seen a conversation that goes. “Right, this is a major initiative for our company. I have asked my executive team, who have to fund this project, not to support it – as I won’t. We have found Joe - who has no project management experience, internal network or credibility - to lead the project and we’ve made people who have no business experience or knowledge in this area as key team members and in any case we’ve made sure that if, by some miracle, they have the knowledge, we don’t have enough of them. In any case, we’ll still expect them to do their day job anyway. Also, we've hired the worst and least knowledgeable external experts we can find and we've checked and know that they will be impossible to work with. We know this initiative is likely to ruffle some feathers among all levels of the organization so we’re not going to communicate it in any way or try to address people’s concerns – and then we’re certainly not going to train them in what they need to do. Oh, and as soon as this meeting is over there’ll be another one to do exactly the same to the next big thing. After all, there's nothing like multiple, competing initiatives happening at the same time to ensure that none of them succeeds." It sounds funny and of course this type of speech never happens. The outcome, however, seems often to be exactly as if it did.
It would seem, therefore, that we can draw three possible conclusions from the above. Firstly, we could assume that no one in most organizations, big and small and no consultancy has ever seen the above, don’t have the common-sense to work out at least some of them or have never used Google to search. This is, of course, ridiculous. The second possible conclusion is that of course leaders have seen the above, they just don’t agree with it. This is possible but, in our view, although it may account for some cases, it cannot possibly be attributable across the decades industries and geographies. The third - and by far and away most likely conclusion – is that there is something generic blocking organizations from ensuring that the above are successfully done.