Managing organizational change: a growing body of knowledge

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1 August 2015 Managing organizational change: a growing body of knowledge A White Paper by Gregg E. Anderson, CRMA, CIA, and Lisa M. Voeller, PMP, Prosci OCMP, CBAP Audit / Tax / Advisory / Risk / Performance Smart decisions. Lasting value.

2 Managing organizational change: a growing body of knowledge Effective change management is essential for successfully implementing many initiatives in both public and private sector organizations. The past several decades have seen growing attention to this critical subject. The challenge facing today s organizations is determining how they can apply the professional and academic research that has been done in recent years to their own change management challenges. Quate The ability to adapt successfully to changing conditions long has been recognized as a critical component to success in individuals and organizations alike. But the focus on change began to intensify in the past few decades as organizational change management became a defined goal in many organizations and a critical component of enterprisewide change initiatives. After years of effort, however, many large-scale initiatives in both private and public sector organizations still fail to produce the desired results. In many instances, the failures can be attributed in large part to stakeholders inability to adapt to change or their outright resistance to it. Major technology upgrades such as enterprise resource planning (ERP) implementations offer good examples of the challenges associated with large-scale organizational change. Looking back at the past few decades of organizational change management research, and considering real-world experience in both private industry and governmental organizations, it is possible to draw some conclusions. More important, it is possible to identify some critical components of organizational culture that can improve the odds of successful change management in support of major initiatives. 2 August 2015 Crowe Horwath LLP

3 White Paper Ongoing focus on change management The inevitability of change and the importance of managing change successfully are certainly not new fields of study. Business leaders since the dawn of the Industrial Revolution have recognized the need to change or be changed. Interest in change management as a dedicated topic of study greatly accelerated in the latter half of the 20th century. By the 1980s and 1990s, authors such as Harvard Business School professor John P. Kotter were spelling out many of the concepts that today are considered fundamental to understanding and managing organizational change. In a 1995 article that previewed his landmark book Leading Change: Why Transformation Efforts Fail, Kotter outlined the eight steps he believed were necessary to achieving fundamental and lasting change. Those eight steps, along with eight common errors that cause change to fail, still form the foundation for many change management efforts. (See the sidebar Kotter s Eight Steps of Organizational Change. ) 1 Despite all the attention and study, however, major change initiatives still fail more often than they succeed. The failure rate of organizational change efforts generally is estimated at about 70 percent, a number that has held remarkably steady over the years as numerous researchers surveyed organizations about the effectiveness of their change management efforts. The original source of the 70 percent failure rate appears to have been the focus of two other Harvard writers, professor Michael Beer and Harvard Business School Dean Nitin Nohria. In a Harvard Business Review article that appeared several years after Kotter s book, they observed: Despite some individual successes, however, change remains difficult to pull off, and few companies manage the process as well as they would like. Most of their initiatives installing new technology, downsizing, restructuring, or trying to change corporate culture have had low success rates. The brutal fact is that about 70 percent of all change initiatives fail. 2 The examples of critical change initiatives mentioned by Beer and Nohria clearly still are relevant today. In fact, it could be argued that the urgency of change and the difficulty of managing it successfully actually increased in the 15 years since they made their observations. For example, the implementation of major new technology systems such as ERP have grown even more complex with the advent of virtual offices, social media, and other trends. So while the need to be adaptable, flexible, and capable of change has never been greater, many of today s technological advances have served to further complicate the effort. In addition to accelerating the pace of change, new technology such as social media actually can make it even more difficult to communicate a controlled and consistent message about the direction of change. As new generations of workers enter the workforce, the pace of change is almost certain to continue to accelerate. The need for effective organizational change management, and the importance of establishing a corporate culture that embraces change, will continue to increase in both private sector and public sector organizations. 3

4 Managing organizational change: a growing body of knowledge Kotter s eight steps of organizational change John P. Kotter s 1996 book, Leading Change: Why Transformation Efforts Fail, outlined an eight-step process for transforming an organization and making the change last. Kotter s landmark book remains one of the most widely used change management resources, and his eight steps form the basis for many of today s popular change management models: 1. Establish a sense of urgency. Examine market and competitive realities. Identify and discuss crises, potential crises, or major opportunities. 2. Form a powerful guiding coalition. Assemble a group with enough power to lead the change effort. Encourage the group to work together as a team. 3. Create a vision. Create a vision to help direct the change effort, and develop strategies for achieving that vision. 4. Communicate the vision. Use every vehicle possible to communicate the new vision and strategies. Teach new behaviors by the example of the guiding coalition. 5. Empower others to act on the vision. Get rid of obstacles to change. Change systems or structures that seriously undermine the vision. Encourage risk taking and nontraditional ideas, activities, and actions. 6. Plan for and create short-term wins. Plan for visible performance improvements. Create those improvements, and then recognize and reward the employees involved. 7. Consolidate improvements and produce still more change. Use increased credibility to change systems, structures, and policies that don t fit the vision. Hire, promote, and develop employees who can implement the vision. Reinvigorate the process with new projects, themes, and change agents. 8. Institutionalize new approaches. Articulate the connections between the new behaviors and corporate success. Develop the means to ensure leadership development and succession. (Adapted from Leading Change: Why Transformation Efforts Fail by John P. Kotter) 3 4 August 2015 Crowe Horwath LLP

5 White Paper Filling in the missing pieces One reason for the commonly high failure rate of major change initiatives is that many organizations still approach change in a haphazard manner. Researchers at the Ken Blanchard Companies training consultancy found that 29 percent of change initiatives are launched without any formal structure whatsoever. 4 Even in organizations that do take a more disciplined and structured approach, a number of important gaps still must be overcome. Among the most common gaps are: Poorly communicated vision. A corporate merger or acquisition is one of the most dramatic examples of major organizational change. When mergers fail, one of the most often cited causes is the absence of a shared vision between the two organizations typically abbreviated as culture clash. From AOL/Time Warner or Daimler Benz/Chrysler to Sprint/Nextel, the lack of a common vision meant that the necessary organizational change never took hold. 5 Harvard s John P. Kotter explained it this way: Without a sensible vision, a transformation effort can easily dissolve into a list of confusing and incompatible projects that can take the organization in the wrong direction or nowhere at all. 6 Failure to accommodate the organization s unique culture. Even without the direct clash of cultures that can occur in a merger or acquisition, a change initiative must reflect and address the organization s individual culture often defined as the way we do things around here. What works in one organization might not work in another. This is particularly true because the goal of most enterprisewide initiatives is to fundamentally change the way we do things around here. That cannot be done without first understanding and addressing the way things are done now. Missing critical components. One of the most popular ways of visualizing corporate change was originally developed for use in educational circles. The model, adapted from Managing Complex Change by Delores Ambrose, often is cited by school districts, colleges, and private training organizations because it takes a somewhat clinical approach to change, enumerating six critical components vision, skills, incentives, resources, an action plan, and assessment that must be present in order for change to occur. When any one is missing, the model indicates what the outcome is likely to be. (See the sidebar Assembling the Components of Change. ) 7 Inadequate resources. Whenever an organization commits to a major initiative, such as an ERP implementation or other enterprisewide effort, there is nearly always an understanding that the effort will cost money. What is less clear in the case of organizational change, however, is how much money will be needed or even how to estimate the need. While the technology office can estimate the cost of hardware, software, training, and other necessary components, there is no standard procedure for estimating the cost of change management or assessing how much value it adds. Failure to involve all stakeholders. In their Harvard Business Review article, Beer and Nohria explore two alternative archetypes or theories of change. In one theory, which they call Theory O, change management focuses on organizational capability, with an emphasis on developing corporate culture and human capacity for change. Theory E change, on the other hand, is based on economic value typically shareholder value and usually involves the heavy use of economic incentives

6 Managing organizational change: a growing body of knowledge Focus and responsibility for change Developing adequate resources, filling in missing components, and addressing the other common gaps will not by themselves ensure a successful change initiative. Even well-planned and well-prepared initiatives can falter often due to self-imposed challenges. Among the most common are: Too much focus on people issues; not enough focus on technical issues. Many organizations regard organizational change management primarily as a human resource problem, with a concentration on the emotional and motivational aspects of change. The human resource issues are important, of course, but change initiatives can flounder when those in charge fail to pay adequate attention to the mechanics of change. These basics include such tasks as defining new job roles and classifications, writing job descriptions, defining the required skills and abilities, spelling out how job transitions will be handled, and thinking through the organizational structure to identifying gaps or disconnections. Organizational change cannot be fenced off as a separate issue or task. It must be recognized as an integral part of everyone s responsibility. Too much focus on technical issues; not enough focus on human issues. Many large-scale change initiatives suffer from the opposite approach: They view organizational change as primarily a technical process and do not pay sufficient attention to generating buy-in and support among stakeholders. This often is a problem in technology implementations, where those in charge tend to visualize projects as basically a list of deliverables and timelines. Their checklists typically include such items as define the as-is process, define the to-be process, and develop a communication plan. What they often lack, however, is a process for making sure all those affected feel they had adequate input and involvement in the process. Success requires a balance of both the technical and human components. Isolating responsibility for change management in a single department. On the surface, the logic of such an approach can be appealing. After all, the thinking goes, managing organizational change will be such a critical component of our new initiative, it only makes sense that somebody be given direct accountability for it. Unfortunately, when responsibility for change is focused in a single department or function, change management eventually becomes an afterthought, and the department responsible for it is left out when major implementation decisions are made. Organizational change cannot be fenced off as a separate issue or task. Rather, it must be recognized as an integral part of everyone s responsibility. 6 August 2015 Crowe Horwath LLP

7 White Paper Delegating change management to outside experts. It can be tempting to rely on outside consulting organizations to drive organizational change management. Again, the logic behind this approach is that change management is so important it should be handled by experts but the flaw in this thinking also is clear. Outside organizations certainly have an important role to play when it comes to helping organizations manage a major change initiative. But their role is comparable to that of a combination golf pro and caddy. They offer valuable guidance, experience, fresh ideas, and effective tools, but they can t swing the club for you. In the end, successful change management depends on those inside the organization taking ownership of and responsibility for it. Assembling the components of change The following model for managing change, generally attributed to educator Delores Ambrose, has been adapted and modified by various speakers over the years. The top row lists the critical components that must be present in order for change to occur, with the desired outcome, Meaningful Change, in the far-right box. In the subsequent rows, the right-hand box indicates the likely outcome if one of the components is missing: Vision Skills Incentives Resources Action Plan Assessment Meaningful Change Skills Incentives Resources Action Plan Assessment Confusion Vision Incentives Resources Action Plan Assessment Anxiety Vision Skills Resources Action Plan Assessment Gradual Change Vision Skills Incentives Action Plan Assessment Frustration Vision Skills Incentives Resources Assessment False Starts Vision Skills Incentives Resources Action Plan Unknown Results (Adapted from Managing Complex Change by Delores Ambrose) 9 7

8 Managing organizational change: a growing body of knowledge Successful models for managing change Ultimately, successful organizational change requires more than a checkthe-box approach. Moreover, the elements of success will vary from one organization to another and from one change project to another. Fortunately, the numerous academic and field studies that have examined change processes in the past 20 years have produced an abundance of advice on how to more successfully manage such initiatives. Several of the most critical and frequently overlooked components are: change process or structure that is universally applicable to all situations. A group formed in 2009, the Association of Change Management Professionals (ACMP), worked for five years to address this problem and in late 2014 released The Standard for Change Management. Successful organizational change requires more than a check-the-box approach. Clear communication. This appears as an essential element in virtually every study of successful change. Communication about the need for change should be clear and open, with clear, specific, and believable examples of how change will benefit those being asked to implement it. A strong executive sponsor. Every change initiative also needs a highprofile champion who is capable of communicating the vision clearly and succinctly. This champion should be at a high enough level in the organization with enough authority to do whatever it takes so that everyone recognizes the change is inevitable. Structure and discipline. Because change by its very definition involves flexibility and the ability to adapt, it is impossible to outline a consistent In an effort to establish a recognized standard that is applicable across multiple industries, organizations, and roles, the standard encompasses five broad change management areas that address practice proficiency, quality, and credibility: Evaluating change impact and organizational readiness. Review the overall change and how it will affect the organization, and establish whether the organization is ready and able to handle the proposed change. 2. Formulating change management strategy. Develop the approach for achieving specific organizational outcomes. 3. Developing change management plans. Document the scope, actions, timelines, and resources needed. 8 August 2015 Crowe Horwath LLP

9 White Paper 4. Executing change management plans. Address the implementation processes including monitoring, measuring, and controlling delivery. 5. Closing the change management effort. Document the actions and resources needed to close the change once it is deemed sustainable. Self-awareness and understanding. Another international organization of change management professionals, Prosci, focuses particularly on the human side of managing change. Prosci, which predates the ACMP by about 15 years, has published eight longitudinal studies of change management practices, and its 2014 edition of The Prosci Best Practices in Change Management is considered the largest body of knowledge in the field. One of Prosci s best known contributions is the ADKAR Model, which suggests individuals can make change successfully if they possess five necessary attributes:11 1. Awareness of the need for change 2. Desire to participate and support the change 3. Knowledge on how to change 4. Ability to implement required skills and behaviors 5. Reinforcement to sustain the change The ADKAR Model provides an easy-to-use overview of how individuals can facilitate change and is one of the most widely used change management models in the world. 9

10 Managing organizational change: a growing body of knowledge Conclusion The growth of organizations such as ACMP and Prosci, along with the expanding body of research into change management methods and practices, suggest there is increasing awareness and acceptance of the importance of organizational change in both public and private sector organizations. Change management is now widely recognized both as a fundamental element of ongoing corporate culture and as an integral component of major endeavors such as the implementation of ERP or other enterprisewide software platforms, or the introduction of new strategic or management initiatives. This observation is consistent with other research that indicates change management is an area of concern for organizations. For example, in a 2013 Towers Watson survey of large and midsize companies in North America, Europe, and Asia, 87 percent of respondents said they train their managers to manage change. Unfortunately, research also indicates there is still much room for improvement. For example, the same Towers Watson survey found that, despite the widespread implementation of change management training, only 22 percent of the respondents said their training is effective. What s more, survey participants said that just more than half (55 percent) of change management initiatives meet their initial objectives, and only 25 percent said they are able to sustain gains from their change management initiatives over the long term. There is no single method or approach that can be applied to improve those numbers. But by reviewing some of the recent research mentioned here, engaging the help of qualified professionals, and studying best practices that apply to the specific type of initiative being considered, it is possible to improve the odds of successful change management in support of major initiatives. 10 August 2015 Crowe Horwath LLP

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12 Contact information Gregg Anderson is a director with Crowe Horwath LLP in the Chicago office. He can be reached at or gregg.anderson@crowehorwath.com. Lisa Voeller is a partner with Crowe in the Sacramento, Calif., office. She can be reached at or lisa.voeller@crowehorwath.com. Mark Walztoni is a senior manager with Crowe in the Chicago, Ill., office. He can be reached at or mark.walztoni@crowehorwath.com. 1 John P. Kotter, Leading Change: Why Transformation Efforts Fail, Harvard Business Review, January 2007, org/2007/01/leading-change-why-transformation-efforts-fail/ar/1 2 Michael Beer and Nitin Nohria, Cracking the Code of Change, Harvard Business Review, May-June 2000, org/2000/05/cracking-the-code-of-change/ 3 Kotter, op. cit. 4 Ken Blanchard, Mastering the Art of Change, Training Journal, January 2010, Blanchard_Mastering_the_Art_of_Change.pdf 5 Mary DiMaggio, The Top 10 Best (and Worst) Corporate Mergers of All Time, Rasmussen College School of Business online column, Sept. 15, 2009, 6 Kotter, op. cit. 7 The Center for Effective Learning, online support presentation material for educators, com/pdf/2010/managcomplexchange.pdf 8 Beer and Nohria, op. cit. 9 The Center for Effective Learning, op. cit. 10 Association of Change Management Professionals, online document, Effectively Manage Change With ACMP s Standard for Change Management, 11 Prosci, online document, A Model for Individual Change, 12 Towers Watson news release, Only One-Quarter of Employers Are Sustaining Gains From Change Management Initiatives, Towers Watson Survey Finds, Aug. 29, 2013, Quarter-of-Employers-Are-Sustaining-Gains-From-Change-Management In accordance with applicable professional standards, some firm services may not be available to attest clients. This material is for informational purposes only and should not be construed as financial or legal advice. Please seek guidance specific to your organization from qualified advisers in your jurisdiction. 2015, 2016 Crowe Horwath LLP, an independent member of Crowe Horwath International crowehorwath.com/disclosure PSS A