Insights into organization

How do I transform my
organizations performance?

Carolyn Dewar
Simon Blackburn
Anders Bruun Nielsen
Elizabeth Irons
Scott Keller
Mary Meaney
Garrett Ulosevich
Carter Wood

Article at a glance
Why is this important?
To maintain excellent performance in the face of external changes and intensifying competitive pressures,
leaders must be able to adapt their organizations to deliver. Unfortunately, few can. Evidence shows that
only a third of excellent companies stay that way in the long term, and even fewer are successful at
executing change programs.

What do I need to know?

Transforming the performance of an entire organization is an enormous undertaking, but it can be mastered.
The key is to put the same emphasis on and apply the same rigor to managing the soft stuff as you
do with the hard stuff. By doing so, you can create a culture of continuous improvement that will enable
your organization to thrive for years to come. But be warned: getting this right will require you to think
counter-intuitively about many issues.

How do I make it happen?

Our advice is to follow a proven five-phase process that tackles the fundamental questions you must
consider on a transformation journey. Where do we want to go? How ready are we to embark on the
journey? What are the practical steps that will take us to our destination? How should we manage the
journey itself? And once weve completed our transformation, how do we keep moving forward?

What is it worth?
Following this approach has helped some companies achieve turnarounds and others take performance
from great to even better. One insurance company went in three years from a negative to a 12 percent
return on invested capital and from the bottom quartile of organizational health to the top quartile globally.
An already successful bank improved customer loyalty by 33 percent, set the industry pace in crossselling, and raised employee engagement to an outstanding level.

Research: Wendy McCullough

Editing: Jill Willder
Design: Jacqui Cook
Layout: Joanne Willis
No part of this publication may be copied or redistributed in any form without the prior written consent
of McKinsey & Company.

How do I transform my organizations performance?

Most organizations are wired for mediocrity

and will shrink or disappear in the long term. Shocking, but true: only a third of excellent
companies remain excellent for decades, and when organizations try to transform
themselves, even fewer succeed. Meanwhile, economic, political, social, and technological
change continues to accelerate, and competitive pressure grows more intense. Now
more than ever, organizations need reliable methods to achieve substantial, sustainable
advances in performance. Through the most extensive research effort ever undertaken
in the field of management, we have developed a way to beat the odds: a five-phase
approach that manages the hard and soft aspects of change with equal rigor.
Have you asked yourself lately . . .
How can I dramatically improve my organizations business performance
and fast?
What are the hidden pitfalls in transforming an organization, and how can I
avoid them?
How do I ensure that the performance improvements we make will last?
How do I create a culture of continuous change so that we can stay on top
for the long haul?
How can I create a sustainable competitive advantage in a constantly
changing world?
. . . If so, then you might want to continue reading.

Why is this important?

We live in times of unprecedented change. As competitive pressures mount, organizations
need more than ever to operate at peak levels of performance. Paradoxically, though,
maintaining a hawk-like focus on todays share price or this quarters profits doesnt
necessarily mean a company will come out on top, or stay there for long.
Excellence today is no guarantee of excellence tomorrow. Even superstars burn out. When
McKinseys Tom Peters and Robert Waterman published In Search of Excellence in 1982,
they hailed 43 companies as excellent. Twelve years later, in Built to Last, Jim Collins and
Jerry Porras identified 18 companies that they believed had what it took for long-term
success. But what had become of them all by 2006 (well before the financial crisis)?
Twenty percent no longer existed, 46 percent were struggling, and only 33 percent were
still high performers.1
Why do only a third of excellent companies manage to stay that way for decades? Not
surprisingly, part of the answer is down to macroeconomic forces, industry factors, and
pure luck. But these play a relatively minor part. It turns out that more than 70 percent of
the difference in performance between companies is firm-specific in other words, what
a particular organization is doing that is different from its peers.
So how can your organization get on top and stay there? The secret lies in mastering
change: how to make it happen, sustain it, and create an organization that can constantly
adapt to and shape its environment. Unfortunately, reliable methods for mastering change
are hard to come by. When John Kotter published his seminal work on leading change in
1996, he reported that fewer than one in three change programs succeed.2 Despite the
avalanche of books on the subject in the intervening 15 years, research indicates that
todays odds are no better.

1 Based on the analysis in Stuart Cranier and Des Dearlove, Excellence revisited, Business Strategy
Review, March 2002, updated to 2006.
2 John P. Kotter, Leading Change, Harvard Business School Press, 1996.

How do I transform my organizations performance?

What do I need to know?

When organizations fail to make change happen, its often because they have neglected
the four key principles below.
To sustain high performance, dont make it your primary focus
Business leaders are always being told to focus on performance. Thats their job, isnt
it? Up to a point but performance isnt everything. If you weight your investments
toward the things that help you reach your quarterly targets, its easy to neglect your
companys long-term health. We define health as an organizations ability to align,
execute, and renew itself faster than competitors so that it can sustain exceptional
performance over time.
To achieve and sustain excellence, leaders need to take deliberate steps to manage
both the performance and the health of their organizations. When we surveyed more
than 2,000 executives from organizations that had recently undertaken change
programs, we found that those transformations that focused on health as well as
performance were three times more likely to be regarded as successful than those that
focused on performance alone.3
Delving deeper into company data confirmed the importance of health. Drawing on
McKinseys unique database covering more than 500 organizations, we analyzed the
relationships between a broad range of business measures and found a strong positive
correlation between performance and health in every case. For example, companies in
the top quartile for organizational health are 2.2 times more likely than lower-quartile
companies to have an above-median EBITDA4 margin, 2.0 times more likely to have
above-median growth in enterprise value to book value, and 1.5 times more likely to have
above-median growth in net income to sales. Across the board, roughly 50 percent of
performance differences between companies can be attributed to differences in
organizational health.
The results from our large sample are mirrored by those from within individual
organizations. When we analyzed 16 refineries at a major oil company, for instance, we
found that organizational health accounted for 54 percent of variations in performance.5
We also field-tested our thinking and approaches in a number of company transformations
in a range of industries, comparing our balanced performance and health approach
with more traditional performance-focused efforts. Results from these studies are
shown in Exhibit 1.

3 What successful transformations share, McKinsey Quarterly, January 2010.

4 Earnings before interest, taxes, depreciation, and amortization.
5 See Scott Keller and Colin Price, Beyond Performance: How great organizations build ultimate
competitive advantage, John Wiley & Sons, 2011, p.8.

Exhibit 1

Testing the power of performance and health interventions

Comparison of traditional and experimental change efforts over an 18- to 24-month period

Control group using

traditional approaches

8%

Business bank
Profit per
business banker

15

Coal mine
Increase in tonnage

Retail bank
Profit per
retail banker
Retailer
Sales-to-labor ratio

Telco call center

Customer churn
reduction

Experimental group using

performance and health
approach

19

25
7
12
34
51
35
65

So the evidence is clear: leaders need to focus as much on health as on performance

to get the best out of their organizations both now and in the long run.
The soft stuff can be managed as rigorously as the hard stuff
We often hear executives say that the health of their organization is important. However,
they freely admit they struggle to find concrete ways to measure and manage it. In the
survey mentioned earlier, two-thirds of executives wished they had better information to
help them determine what needs to be done to strengthen the companys health for the
longer term.
This lack of guidance may be partly to blame for the ill fate of so many change programs.
When we analyzed the reasons behind these failures, what we might assume to be the
usual suspects inadequate resources, poor planning, bad ideas, or chance events
turned out to account for less than a third of cases. The vast majority, more than
70 percent, were caused by factors related to organizational health, such as negative
employee attitudes and unproductive management behavior.

How do I transform my organizations performance?

Yet managers can get access to comprehensive, robust approaches to measure their
organizations health. By that, we dont mean employee engagement or customer
satisfaction surveys (useful though these may be in certain situations), but tools that yield
a deeper insight into what drives an organizations alignment, execution, and renewal.
The approach we have developed is the organizational health index or OHI, which
assesses performance in terms of 37 management practices that have a proven
correlation to financial results. The OHI provides a precise vocabulary and reliable
measures for all aspects of the soft stuff that matter, making them as tangible and
manageable as financial and operational metrics.
Copying best practices can be more dangerous than helpful
One of the great fallacies of management is that you can improve performance by copying
best practices from other organizations. Though it may work in some operational areas,
it can be a recipe for disaster in organizational health. Thats because health is systemic,
and best practices from one system can turn bad when transposed to another system.
Consider the case of company A, which wants to be more innovative. It decides to
emulate a leading innovator and borrows company Bs approach, where innovation is
led by senior managers. But company A fails to appreciate that company B combines
its top-down approach with management practices such as knowledge sharing and the
pursuit of a common vision. Because large-scale innovation is by nature a collaborative
effort, adopting these practices together makes it much more likely that they will yield the
desired results. Indeed, our research shows this combination has a 78 percent probability
of success.
Unfortunately, company A has a culture of internal competitiveness and an incentive
system that rewards individual rather than collective performance. Combining these
elements with efforts to drive top-down innovation created great confusion. Decisions
were sidestepped, efforts were wasted, and initiatives never came to fruition.
So how can organizations make sure they put the right ingredients together? When
certain management practices are carried out at distinctive levels, they can combine
with others to deliver a 1 + 1 = 3 level of impact. And on the flip side, the wrong
combinations can create a 1 + 1 = 0 level of impact. So the big question is, whats the
best recipe?

The answer is that there isnt one, there are four. When we analyzed which of the
37 management practices best complement each other in supporting performance, we
found four archetypes that are adopted by almost every successful organization:
Leadership driven: leaders are the catalysts for performance, setting high
expectations and supporting the organization in achieving them.
Execution edge: discipline, sound execution, and continuous improvement are the
foundation for great performance.
Market focus: shaping market trends and building a portfolio of strong and innovative
brands keep the organization ahead of the pack.
Knowledge core: the organization treats its pool of talent and knowledge as its most
important asset, and develops and deploys it effectively.
These archetypes suggest why leaders seeking to create sustainably excellent
organizations find management literature of limited value. We found that most business
books and articles are written from the vantage point of a single archetype and promote
one combination of best practices as a model to suit all situations. But whats right for
your organization is the archetype that plays to your greatest strengths and supports
your performance aspirations best.
Common sense will often lead you astray
Much of current thinking on change management appeals to common sense. This
should raise alarm bells. Leaders who rely on their common sense when influencing
change typically spend time and energy on the wrong things, send messages that miss
the mark, and create frustrating unintended consequences.
Why? Because common sense neglects a basic truth about human nature: that people
often act irrationally. Scientific study has shown that we fall victim to subconscious
thought processes that influence our behavior even when our rational minds tell us they
shouldnt. Thats what happens when we spend 10 minutes driving around to find the
closest parking space to a store even though we could have saved half that time by
parking in the first empty space and walking the extra few yards.
Behavioral scientists have found ways to understand how seemingly irrational decisions
like this one are influenced by social, cognitive, and emotional biases, and can therefore
be predicted. Leaders who want to make change happen should follow their example.
The good news is that theres a small number of predictable biases that can be turned
from miscues into powerful ways to help transform your organization.

How do I transform my organizations performance?

Heres the difference. Leaders using their common sense will want to tell employees
about their organizations problems: costs growing faster than revenues, competitors
catching up, or whatever the challenge may be. Theyll decide what to do about it and
tell employees the full story what, why, and how everywhere they go. Theyll link the
results of the transformation program to bonuses so that the effort has teeth. Theyll
invest in giving employees the technical skills they need to succeed. That all sounds fine
yet chances are theyll fail miserably. Weve seen it happen time after time.
So what went wrong? These leaders did some of the right things, but not all. By relying
on common sense, they failed to take advantage of less obvious but more potent ways
of motivating employees. They missed an opportunity to create broad ownership of the
new direction by involving a critical mass of people in setting the aspiration. They focused
only on problems to be solved and neglected strengths to build on, breeding fatigue and
resistance. They chose the most expensive form of incentives rather than cheaper and
more effective ones, and forgot that relational skills are as necessary as technical skills.
The result: failure, wasted effort, and frustration all round.

Hard facts behind the soft stuff

This article is based on a new book, Beyond Performance: How great organizations
build ultimate competitive advantage, by Scott Keller and Colin Price (John Wiley & Sons,
June 2011). Described by management expert Gary Hamel as a manifesto for a new
way of thinking about organizations, it represents the culmination of the most
comprehensive research program ever undertaken in the field of organizational
effectiveness and change management. The effort lasted more than a decade and drew
on input from more than 600,000 executives and employees from 500 organizations,
some 900 academic books and articles, and hands-on practical work with over 100 organizations.
The book distils this deep knowledge to offer pragmatic, readily applicable methods and insightful,
frequently counter-intuitive advice to help any leader and organization achieve a successful transformation
and sustain excellence over the long term.

How do I make it happen?

If paying close attention to health as well as performance is the key to sustaining
excellence, how can you achieve mutually reinforcing leaps forward on both fronts at the
same time? The answer is to follow a structured process that we characterize as the
5As: aspire, assess, architect, act, and advance. For each of these stages there are
clear frameworks for performance and health that enable leaders to manage both with
the same rigor and discipline (Exhibit 2). Together they make up what we call the five
frames of performance and health. Lets take them one by one.
Exhibit 2

The five frames of performance and health

Performance
Aspire

Where do we want to go?

Transformation stages

Assess

How ready are we to

embark on the journey?

Architect

What are the practical steps that

will take us to our destination?

Act

How do we manage the journey?

Advance

How do we keep moving forward?

Strategic
objectives

Capability
platform

Portfolio of
initiatives

Delivery
model

Continuous
improvement

+
+
+
+
+

Health
Health
essentials

Discovery
process

Influence
model

Change
engine

Centred
leadership

Aspire: Where do we want to go?

The first step in setting an aspiration is to get the facts. For performance, thats about
analyzing competitive requirements, customer needs, shareholder expectations, industry
benchmarks, and macroeconomic trends. For health, it involves gathering input from
leaders and employees to establish how healthy the organization is and which archetype
will best support its strategic objectives.

How do I transform my organizations performance?

The most effective objectives take a medium-term view; thats because knowing where
you want to be two or three years from now gives you the immediacy and tangibility you
need to inspire stakeholders, set a rapid pace, break through resistance, and instill an
action-oriented attitude across the organization.
Objectives should also be tough but doable. Avoid those that are incremental, cautious,
or tailored to existing capabilities; they wont lead to breakthroughs or create pressure to
push the limits. But dont go too far if people think goals are unattainable, theyll give up
trying. However, youll probably have more headroom than you think before that happens.
Finally, use intuition as well as facts in setting your objectives, and involve a broad
coalition of leaders perhaps as many as a few hundred in a large organization. Only
when a critical mass of leaders feel personal ownership of the aspirations can the
organization unleash enough energy to realize them.
Assess: How ready are we to embark on the journey?
Once youve set your aspirations, its time to assess how ready your organization is to
change. Where are you starting from in terms of the skill and will the organizations
capabilities and mindsets that matter most?
For performance, identify those few strategically important capabilities you need to
reach your aspirations, whether they are in marketing, sales, manufacturing, supplychain management, real estate, product development, or other areas, and take stock of
where you stand. For health, use rigorous methods to probe the underlying mindsets
that contribute to your present state of health, then select three to five that need to be
strengthened or shifted to achieve your objectives. Thats not a task for a psychologist;
any business leader can identify the critical mindsets to work on by using practical
methods such as interviews, focus groups, and targeted analytics.
During the assessment process, look for strengths to build on as well as weaknesses to
tackle, and involve your broad leadership coalition in determining which capability and
mindset shifts will make the biggest difference.
Architect: What are the practical steps that will take us to our destination?
Now that you know where you are staring from, where you want to end up, and how
ready you are to make the journey, you can design your transformation route to take you
to your destination.
For performance, develop a portfolio of initiatives that combines short-, medium-, and
long-term efforts and balances radical innovations with incremental improvements to
manage risk. The challenges you face will determine the initiatives you pursue, whether
they be sales-stimulation programs, reductions in overhead spend, improvements to
working-capital discipline, or other efforts. Taking a portfolio approach prevents

10

fragmentation, one of the biggest pitfalls for a change program, and helps you stay
focused on your slate of initiatives.
For health, design interventions to reinforce or shift the mindsets on which youve
decided to focus. Successful transformations cover the same four areas: telling a
compelling story about the change, establishing reinforcement mechanisms such as
incentives, building the necessary skills, and ensuring that leaders role model the
changes. Weaving mindset interventions into performance initiatives whenever possible
will enable your organization to experience the benefits of better health even as it works
to improve performance.
At the end of this phase youll have a map showing the steps youll take to achieve the
aspirations youve set. Youll have a portfolio of performance initiatives and health
interventions, each with clearly defined actions, timelines, milestones, resources,
accountabilities, metrics, and interdependencies.
Act: How do we manage the journey?
The time has come to make it happen. To do that, organize your initiatives into a clear
structure, launch military and marketing campaigns to build ownership, and constantly
evaluate progress.
To keep energy levels high through the long haul of implementation, make sure everyone
understands how their contribution fits into the big picture. A powerful way to do this is
to structure the program at three levels: a transformation headline that sums up your
aspiration and the rationale behind it, a few broad performance and health themes that
typically run for two to three years, and the specific initiatives that further these themes,
each taking a few months or so to complete.
Understanding how all the different pieces of the transformation fit together wont be
enough on its own, though. To unleash more energy, ensure people feel that they own
the program personally. Ownership can be built in two ways: first through what we call
a military campaign, by using formal leadership accountabilities such as the executive
steering committee, initiative sponsors, and change champions, and second through a
marketing campaign, by using viral tactics such as bootleg videos of confidential
leadership discussions, unauthorized intranet blogs, and rogue communications to
mobilize self-directed change among employees .
Finally, keep track of how your program is progressing so that you can manage it
dynamically. This means regularly measuring its impact on four key dimensions: initiatives
(are they on time, on budget, and shifting key performance indicators?), performance (are
outcomes such as revenue, cost, and risk improving?), health (are mindsets and behaviors
shifting?), and enterprise value (is the ultimate business outcome getting better?).

How do I transform my organizations performance?

Advance: How do we keep moving forward?

If your organization hits its performance and health targets as and when expected, then
your transformation is over and done with, right? Not quite: your transformation isnt
complete until you have paved the way for a smooth transition to an era of continuous
improvement. Without that, youll have difficulty sustaining change, and your competitors
may catch up again.
Your transformation will already have created many of the things you need to support
continuous improvement, such as stronger problem-solving skills, confidence that you
can find better ways to work, and a switch from silos to collaborative thinking. But you
also need to rewire your infrastructure by developing systems for sharing knowledge,
processes to capture opportunities for improvement, methods to facilitate continuous
learning, and dedicated expertise.
Infrastructure is half the story; the other half is leaders who can drive continuous
improvement through the system. For that, five attributes are key, and together they
make up something we call centered leadership: the ability to tap into sources of meaning
and purpose, see opportunity in adversity and find creative solutions, build a web of
internal and external relationships, take action in the face of uncertainty and risk, and
manage energy levels in oneself and others.
In most cases, these attributes come from a lifetime of experience, but a transformation
offers ideal conditions to hot-house their development: hectic activity, widespread
uncertainty, and plentiful opportunities for feedback. In fact, the journey to centered
leadership begins not now but right at the beginning of your organizations transformation,
and continues throughout it. That applies both to you as the senior leader and to the
hundreds of other leaders who receive targeted leadership development as part of
the program.
With infrastructure and centered leaders in place, your organization will be able to
continuously improve its performance and health. That will help you stay ahead, but it
doesnt mean youll never again need to make a step-change in the way you work.
Advances in technology, new customer needs, or shifts in the competitive landscape
may require you to embrace transformation again and if so, youll know exactly how to
go about it this time: by applying the five frames of performance and health. When an
organization can both continuously improve and transform itself as needed, it possesses
the ultimate competitive advantage.

11

12

What is it worth?
Organizations that have transformed themselves using the approach we describe have
achieved remarkable results. Consider two contrasting examples: a turnaround and a
great company that got even better.
An insurance company saw its position come under threat as sweeping government
reforms opened up the market to new entrants. It had lost money for two years running,
its market share was eroding fast, and its cost structure was the industrys highest.
Investigation revealed that decision making was slow, systems and capabilities
inadequate, and employee satisfaction at an all-time low.
A new CEO was charged with turning around the business, and with a broad coalition
of senior leaders he set three key aspirations: to restore profitability within 12 months, to
secure investment for growth initiatives within 24 months, and to regain industry
leadership over time. To achieve these goals, the company decided to pursue an
execution-edge archetype that required strengths in agent productivity management,
risk-adjusted pricing and underwriting, and lean cost management, as well as a shift in
mindsets relating to entitlement, hierarchy, and bureaucracy.
The company accordingly implemented a portfolio of initiatives driven by the senior team
and coordinated by a program management office. After three years, the return on
invested capital had gone from a negative number to 12 percent, profit had increased by
over 200 million, and the cost base had been reduced by 11 percent. In health terms,
the company had shifted from the lowest quartile to among the top 3 percent globally;
as an example, workforce motivation had risen from a rating of 32 percent to 73 percent.
At a large bank, the incoming CEO had inherited an organization with a strong culture
that already led the industry in many products and customer segments. With no burning
platform, he wondered how he could define his era of leadership, so he commissioned
a review of current performance and future trends. This exposed worrying developments
on the horizon: opportunities for acquisition were few, regulation was getting tighter,
credit quality was deteriorating, and customer preferences were changing.
Further analysis revealed that the bank had a healthy execution-edge archetype. It
committed itself to pursuing historic growth rates despite the adverse trends, and decided
to focus on capturing value by mining the seams between traditional silos to boost
cross-selling and customer loyalty. This would involve shifting to a market-focus archetype,
but without losing the strengths and disciplines of the execution-edge archetype.

How do I transform my organizations performance?

The bank followed the five-phase approach to make these aspirations a reality. Three
years later, it had succeeded in maintaining earnings and revenue growth at historic
levels, increased customer loyalty by 33 percent, and exceeded cross-selling targets,
setting the pace for the industry. On the health front, it improved its ratio of engaged to
disengaged employees by 75 percent, scoring more than three times the industry
average, and achieved its goal of embodying the market-focus archetype.

To operate at the peak levels of performance that todays fast-changing markets demand,
companies need reliable methods to make change happen at two levels: transformational
step-changes in performance and health, and continuous improvement in the way they
do business from day to day. Thanks to years of exhaustive research and hands-on
experience, we now have a deep understanding of what this involves, and proven tools
to make it happen. This approach has been so effective in so many industries and from
so many different starting points that we regard successful transformation and sustained
excellence as a real possibility for almost any organization.

13

14

Insights into organization

Insights into organization is a series of articles written by experts and practitioners in
McKinsey & Companys Organization Practice. Their purpose is to address senior
executives most important and challenging questions on people-related issues. Topics
covered include organization behavior, design, and diagnostics, merger management,
performance transformation, leadership, and talent management. For more information,
please contact Garrett Ulosevich at [email protected].
Related articles in the series
How do I implement complex change at scale?
The secret of a successful transformation lies in the ability to implement complex change
at scale. The challenge is twofold: managing the implementation of multiple initiatives
and keeping energy levels high during a process that can take years. By building a few
critical design elements into their program, organizations can unlock major improvements
and boost their long-term performance.
How do I create a distinctive performance culture?
Thanks to globalization and the instant flow of information, competitors today can quickly
mimic a successful strategy but not a superior performance culture. By adopting a
proven approach that combines pragmatic business sense, problem-solving rigor, and
behavioral insight, companies can bring about cultural change that delivers significant
bottom-line impact.
How do I align and mobilize my organization to execute strategy?
The best strategic plans are worthless without execution. In todays increasingly demanding
and complex markets, the ability to align and mobilize an organization to execute strategy
is integral to a leaders success. Paying real attention to employee engagement and
behavioral changes can make all the difference in translating strategy into maximum
bottom-line impact.

Articles can be obtained by contacting McKinsey & Company (see next page).

15

How do I transform my organizations performance?

Contacts
Americas

Asia Pacific

Scott Keller

Simon Blackburn

Director

Principal

Southern California office

Sydney office

+ 1 (424) 249 1067

+61 (2) 8273 1690

[email protected]

[email protected]

Carter Wood
Director
Dallas office
+1 (214) 665 1257
[email protected]

Europe, Middle East, and Africa

Mary Meaney
Principal
London office
+44 (20) 7961 5637
[email protected]

Organization Practice
June 2011
Copyright McKinsey & Company