Reprinted from Employment Relations Today, Spring 1997
59 CCC 0745-7790/97/240159-9 1997 John Wiley & Sons, Inc.
FIVE LEVERS OF EFFECTIVE
CHANGE IN HR
Jay F. Stright, Jr.
A certain large corporation - let's call it Goliath - used to need six months to know what it had sold in every store; it now needs only one week. But one of its competitors knows everything its stores have sold within eight hours. That competitor is now the biggest in its field; Goliath isn't anymore. As Goliath learned, a key to business success today is being able to embrace change more effectively than your competitors.
There's another lesson in the fall of Goliath. At first glance, the young company seems to have ousted Goliath by using advanced technology. Its distribution and merchandise-tracking systems made those of Goliath seem like Stone Age relics. But a closer look shows that there was more to the upstart's success. Its enterprise culture supported innovation, so its employees accepted and integrated the new technology easily. If Goliath had installed the same new technology, its employees and management would have resisted it.
Businesses often invest in technology with the idea that it can improve productivity by itself. The result is often failure. The textbook example is the application of new machinery in British mines during the industrial revolution. The equipment should have improved productivity dramatically, but it had the opposite effect. The technology failed to produce results because no one considered the cultural and process implications of the change. This expensive mistake became obvious in British mining two hundred years ago, yet continues to be repeated over and over again today.
If technology is not enough to give competitive advantage, what is? It's a central question for HR professionals. With the change curve almost vertical, HR and other support services are often called upon to institute changes, sometimes major ones, not only in technology, but also in policy, structure, and strategy. How do we make sure our change efforts will actually improve business results? And how do we overcome the resistance and inertia that can sabotage our efforts to bring about change? This article addresses both questions.
A MATTER OF METRICS
A father took his 12-year old son boating. He had him motor out of sight of land and distracted him with conversation. Then he said, "Son, plot a course to the harbor." The son replied, "I can't. I don't know where we are." The father told his son never to forget what he had just learned: only when you know where you are can you plot a course to your destination.
The lesson applies to business just as strongly as it does to boating. Business people sometimes decide they need to change an organization and even begin the process, but they don't know exactly where their organization is. If you want to get to Manhattan but don't know that you're starting in Brooklyn, you might eventually get to your destination-but instead of traveling a mile, you could eventually travel 26,000 miles. And, of course, you could end up in Altoona.
How do you find out where your organization is, and exactly where you want it to be? Through metrics-measures-which come in three basic types: vision metrics, metric arrows, and metric targets.
Vision metrics tell you where you are - exactly. They measure the current state of the variables you're focusing on. Which variables to focus on depends on the enterprise's objectives, and on the scale of the change that is sought - different scales have different metrics. Some common metrics are cycle time, head count, costs, and customer satisfaction.
For support organizations like HR, customer satisfaction can be confusing, because the customers fall into at least four groups:
Each group listed above is interested in the services HR provides and how much they cost. But the reasons for their interest vary. You must address each group's needs to gain support for change from all of them. However, it is crucial that you determine which of the customers is the most important to successfully implementing a change.
Customer satisfaction and costs, two of the most important vision metrics, are interconnected. For example, if you aim to change the way you interact with retirees, you must determine what retirees want (usually, more service and a higher level of service), the cost for the services, and what retirees are willing to pay. Once you know what your service costs, how well you're providing it, and how much your customers value it, you're in a position to consider options for change.
Metric arrows and targets
The metric arrow tells you the direction you want to move in. Metric arrows point either up or down; for example, the metric arrows for cost and head count generally point down, while that for customer satisfaction points up. You use metric arrows before you've done enough analysis to know exactly how big a change is appropriate for the organization.
Metric targets are the specific goals that a company commits to achieve. The goals that are selected should be both meaningful and attainable. A target might be attainable but not meaningful, e.g., a 5% change is no change. Or a goal might be meaningful but not attainable, e.g., a 100% change may not be attainable given the current environment.
Level of change
In determining what's attainable and what's meaningful, a key concern is to make sure the change you seek aligns with the business objectives of the whole enterprise. It's especially crucial to be sure that the level of change you try to bring about is aligned with level of change required by the enterprise business objectives.
There are four increasingly ambitious levels of change that you can consider. The first includes just the internal functioning of HR. This includes those tasks, services and products delivered by people assigned to the HR function, and/or people carrying out HR functional activities. An example would be the internal cost for HR to deliver the medical plan.
The next more ambitious level you can try to change, the HR process, includes the above tasks, services, and products, but also includes the time and energy that people outside of HR apply to completing the process of their delivery. In addition to HR's efforts in delivering the above-mentioned medical plan, this level would include the time it takes for an employee to sign up for the plan.
The third, still more ambitious, level of change focuses on the HR products or services. To continue our example, if the HR product is the medical plan, this level would add the costs of the medical services themselves to all the previously mentioned costs.
The fourth and most ambitious level, human organization, consists of everything in the previous three levels, but also includes all costs related to having people in the organization: payroll, rent, travel, conference rooms - the whole range.
Although it is obvious that these four levels have increasing costs associated with them, it can be surprising to see how these costs multiply. For example, if the cost of the HR function is 100 units, the cost of the HR process is 400, the cost of the HR products 1,300, and the cost of the human organization 4,600. The higher the level you decide to change, the greater the risk - but the greater the potential reward. And it is the rewards, when quantified, that will justify the change to management.
Because of the greater potential rewards at the higher levels of change, the temptation is to begin by changing the human organization level, but in almost every case you must start by working on the HR function costs. Once you've reduced the HR function costs, you can build on that success by improving the HR process costs, and so on through the other two levels.
Opportunities for change
Having decided what level of change to focus on, you can now determine your metric targets. In general, whatever the level you focus on, some significant reductions in cycle time and cost are a must, as is an increase in customer satisfaction. A 30 - 80 percent improvement is generally possible.
What can such numbers look like? If the cost of the HR function is $90 million, that can be reduced by as much as $72 million. On the level of the HR process, if its cost is $350 million, it can be reduced by up to $280 million. That kind of change is obviously meaningful, and is usually attainable - if preceded by careful planning and a well-thought-out implementation strategy.
FIVE LEVERS FOR CREATING CHANGE
Your success in attaining your metric targets depends on one factor above all: the quality of your strategies for achieving the change. We call these strategies "levers" for creating change, and they encompass five elements:
(1). methodology for managing change
(2) managing the enterprise culture to support change
(3) organization design
(4) process design
These levers do not operate independently but work together like a gear set. Your choices in one lever will affect all the others-which method you use to manage change, for example, will depend on the enterprise culture, the organization design, and so forth. Therefore, if you make a change in one lever without considering how that will affect all the others, you significantly increase the risk of failure. In fact, total success in one lever-one strategic area-and total failure in another equals not success, but overall failure. It is more important to have a little of everything than a lot of one lever and none of the others.
A key mistake that many organizations make is to focus on one lever while ignoring another. As I said at the beginning, of all the levers, the one that's most often misused this way is technology. Many failures have resulted from people investing in technology, thinking that by itself, with no consideration of the other levers, it could improve productivity.
Remember that the levers are interdependent and that:
1. METHODOLOGY FOR MANAGING CHANGE
The methodology for managing change depends on an organization's willingness, ability, and capacity to change.
o Willingness to change is closely tied to the second lever, organizational culture. Willingness does not involve skills so much as attitude towards accepting new ways of doing things.
o Ability to change refers to the competencies needed to allow the organization to make the changes it has agreed to. An example is the skill to run productive meetings.
o Capacity to change is a function of the number of activities going on concurrently in the organization. A good motto for change management is, "We can do anything, but we can't do everything." To ensure that change is made successfully, you have to throttle the amount of change activities. The capacity to change can be increased with proper exercise. However, it can be diminished if too much change is applied too quickly without the necessary preparation.
Stages of Change. Regardless of the organization's willingness, ability, and capacity to change, it will inevitably go through the following four stages of change:
Denial: When first presented with a change, any person or organization, no matter who or what, will go through a denial phase. In this phase, people cannot admit that change is needed or understand why it is needed. They have no clear idea of what the change is about.
Resistance: If you've been making an effort to change an organization and you begin hearing very loud resistance, you should rejoice. It shows you've gotten past the denial stage and into the next stage, resistance. In this stage, the change is resisted as people try to protect the status quo.
An important point is that both the denial and resistance stages are loud. When you move to the next phases, the environment becomes more quiet, and the organization tends to forget that there ever was any denial or resistance. Don't expect to get any credit for helping people through the earlier phases; they won't remember that those phases even took place
Exploration: During this stage, the group begins to explore the potential that the new approaches offer. They begin to see "what's in it for me" in new ways. At this stage they have not yet let go of the old, but they are open to the new.
Commitment:. At this stage, the group feels ownership of the change and will carry it out.
The key thing to remember is that there is no way to get from denial to commitment without going through resistance and exploration. The challenge is to minimize the depth and breadth of the curve.
Approaches to Managing Change
How do you minimize the change curve? First, you choose among the four basic approaches to dealing with change. These approaches are:
(1) Power-oriented-based on nonnegotiable directives from management;
(2) Educational- still somewhat nonnegotiable, but including activities to try to educate the targets of the change on why the change is important to the organization;
(3) Facilitative- significantly less power driven and using facilitation techniques to help targets better understand and participate in the development of the change activities, and
(4) Collaborative-controlled by the targets and jointly managed by everybody involved in the change.
History shows that the less work done to understand the implications of the levers, the more power-oriented the change tends to be. For instance, in the installation of computer systems, a good indication that the change is being managed from a power position is that the only metrics talked about are cost and time to install software. Those two metrics may drive the project to completion, but, unfortunately, they don't address the business reasons for the project. As illustrated in a case study presented at the end of this article, the result can be greatly reduced success. If, instead, you use metrics that focus on business outcomes, the course and speed of the change will in most cases be driven not by implementation time but rather by the accomplishment of the project's business objective. Sometimes we get so involved in killing alligators that we never get around to our original purpose, draining the swamp. If you drain the swamp, the alligators will go away by themselves.
Which of the four approaches you should you choose depends on the organizational culture and the output metrics you've established for the change. The power approach brings the appearance of change in the short run but brings change acceptance very slowly. If instant, short-term results are what you need, this might be suitable. By contrast, in the collaborative approach, change is made much more slowly, but acceptance comes much more quickly. In most cases, acceptance is critical - the ownership of the business outcome by those who work with the problem on a daily basis - and long-term sustainable results are desired; in such cases, the collaborative approach is normally best.
A simple formula, derived from Richard Beckhard and Reuben T. Harris, gives a useful way of thinking about how to overcome resistance to change. The formula states that in order for change to occur :
D x V x F > R
D = dissatisfaction with the present situation
V = vision of what is possible
F = first steps toward reaching that vision
R = resistance to change
If any of D, V, or F are zero or near zero, you can't overcome the resistance to change. If there's not a "burning platform" for change-not enough dissatisfaction (D) with the current situation - you must spark it. If there's not a vision (V) of what can be, you must paint one. And if there are not clearly articulated first steps for moving toward that vision (F), you must articulate them.
2. ENTERPRISE CULTURE
The enterprise culture reflects the organization's management style, which has three components:
(1) Leadership style. Does the management lead or direct?
(2) Communication style. Is it an open or closed communication style? Is the messenger shot?
(3) Level of empowerment. Is the organization empowered to make change? Or when the organization makes change is it second-guessed?
These three elements must be diagnosed, and steps must be taken to begin the move toward a more leadership-oriented, open, and empowered culture. The more progress achieved in these areas, the more success the change effort will have in the enterprise.
3. ORGANIZATION DESIGN
From the standpoint of a support service like HR, there are four basic types of organizational design. The first type is the traditional structure. That's where the customer of the support service is the organization itself. In the case of HR, the HR manager is responsible for working with everybody in that organization: managers. executives, employees, suppliers, and delivery partners.
Because the customers are segmented and have different needs, the traditional structure make it difficult to satisfy them all. This presents a significant constraint on that organization's ability to embrace change.
The next type of organization design is the expanded traditional. Within this framework, some of the more administrative functions are centralized and added to the service that the corporation provides to its various business units. This offers some improvement over the traditional structure in that it allows you to apply some economies of scale to the services provided, such as payroll. The downside is that the customers of the service lose control. The service tends to become bureaucratic and less linked to the satisfaction of specific customers and to the business objectives of the organization
The next type of design is a service center. Like the expanded traditional design, this focuses on administrative services that lend themselves to economies of scale; but it differs from the expanded traditional design in that these services are not centralized and provided by the corporation to business units. Instead, they are managed by a committee of those units that are using it. That provides a much tighter customer focus than the traditional or expanded traditional approach, but it does not address customer segments who are not concerned with scale.
The final type is what's called the shared or leveraged service approach. This migrates furthest from the traditional approach and is the most advanced organizational design available today. It has four components. The first component is kept from the previous approach-the service center-but the other three are new.
o The center of scale, which is the same as a service center, has as its customers employees doing transactions. Costing of a center of scale is generally based on head count. The key metrics are short cycle time, low cost, and high customer satisfaction.
o The center of expertise provides the organization with activities that require special competencies that are not based on scale. Some HR examples are compensation planning, recruitment, training, and employee development. Costing of the center of expertise is generally based on services provided. The key metrics are market penetration, customer satisfaction, and product quality.
o Business partners work directly with management, and are similar to traditional HR managers, except that they don't have direct responsibility for the transactions or expertise. In implementing any ideas they come up with, they would use a center of expertise to provide support. They also might serve as organizational representative to the management of the center of scale.
Their job is to focus on the one- to three- year planning of how to optimize the use of people to support the business objectives of the unit to which the business partner is attached. The key metrics are relationship value, customer satisfaction, and business value generated.
o The final component of the Shared Service Model is called the role group. The people within the role group have similar duties to those of the business partner, but their customers and their scope are different. Business partners' customers are line management, whereas the role group's customers are the corporate executives and business leaders. The business partners plan for the one- to three- year period, whereas the role's concern is with the long term. The role group helps the organization plan how best to use its assets in the three- to ten-year forward range. Its research helps develop the data that the centers of expertise employ. It is the role group's job to anticipate future trends and insure that the enterprise uses that information to create unique competitive opportunities to drive it to achieve its strategic objectives.
4. PROCESS DESIGN
There are three basic approaches to process design:
(1) Automate existing processes. This requires detailed mapping of existing processes, because as you change the parts of the process you need to understand exactly how the changes will affect the whole process.
(2)Reengineer the process. If you choose this approach, you need much less detailed mapping of existing process.
(3) Purchase a packaged process. An example of a packaged process is a software package that enables employment verification processes. If you take this approach, the only mapping you need of existing processes looks at the connection points between the new process and the existing processes it feeds outputs to and gets inputs from.
Having decided whether you're going to simply remodel your process by automating what you do, design a whole new system, or buy a mass-produced one, you're at last ready to think about your fifth lever, technology. Technology may not be sufficient to bring effective change, but it is usually critical and takes enormous amounts of thought. You should consider the following components.
1. Core system The core system is what supports the HR function, and it any be any of the major HR management systems (such as PeopleSoft, Oracle, HRizon, and SAP). The core system is the basic technology engine to manage the people-related data of the organization. When selecting a core system, the enterprise tries to choose the one that best matches its own overall technology direction; but it may be willing to adapt a bit to mismatches. The core system is a major investment and generally has a life of between eight and fifteen years.
2. Ancillary or auxiliary systems. These can have a functional focus, an enterprise focus, or an operating-element focus. It is important that the auxiliary systems integrate with the general technological approach used in the enterprise. For example, the enterprise's groupware approach might include the entire enterprise or it might just involve the specific divisions. Whatever approach the enterprise takes, your auxiliary systems need to align with it. Auxiliary systems have much shorter life cycles than core systems do, so there's less risk in having a strategy that allows quicker adaptation of auxiliary systems.
3. Overall infrastructure. If the core HR system that is being installed is the first manifestation of a new technology in the enterprise, there is a higher risk that the system will not be effective. The risk is reduced if the enterprise has an overall technology infrastructure. Some enterprises do not. Based on the type of enterprise, the technology approach may be only at the division or operating company level.
Whatever the level of the infrastructure, when you're considering change, it is important to understand where that infrastructure is now and where it is going in the future
Key Factors Regarding Infrastructure:
There are three key factors to consider when you seek a technology infrastructure that facilitates change in an organization.
The first infrastructural key is enterprise-wide data standards. These allow you to adapt the system to changing organizational designs and structures, and will let you share data across the organization without the time-consuming task of having to transfer from one standard to another. Without enterprise-wide data standards, you can create a Tower of Babel within an organization.
The second key is an enterprise technical architecture. Without understanding the enterprise technical architecture (which includes word processing, spreadsheet, and other programs used by the company), it is difficult to have the flexibility to change the organization quickly. Operating without a uniform technical architecture is analogous to trying to connect different gauge train sets. You use all your energy managing the interface between different technical architectural standards instead of applying that energy to solving business problems.
The third key is to have an infrastructure that supports client-server technology. Client-server technology can be a major change facilitator in an organization-if the following elements are in place:
(1) A well-understood total quality management program within the enterprise. This provides a conceptual framework in which change can be accepted as a way of life in the enterprise.
(2) Detailed, accurate, rigorous, activity-based costing of the products and services delivered to the full range of customers. Understanding the market costs of products and services allows market pressures to operate and provides the cost side of the cost/value relationship.
(3) Reengineering has been done on the workflow processes that the client-server technology applies to.
Applying the Levers
We can illustrate the use of the levers by examining the experiences of two companies in managing major changes.
1. Installing New Technology
The first example involves a company that was trying to incorporate an information system into its HR function. In doing so, it did not consciously consider the five "levers," but all five levers are present whether one considers them or not.
In this case, the company used the power approach to lever one (methodology for managing change); this was based on a traditional, centralized approach to organization design (lever two), and used a top-down, nonnegotiable leadership style of enterprise culture (lever three). The company handled the fourth (process design) and fifth (technology) levers effectively, though this was not entirely due to planning-the company's technological infrastructure was sound because of the nature of its core business, and it had tight HR data standards and enterprise-wide technological architecture because it had been controlled from the top.
The company's most systematic approach to change in this project was in lever four (process design), in making the decision to purchase packaged technological solutions. The core system that the company selected continues to work well, although some specific application packages have since been outmoded.
Although the software the company purchased was reasonably well-chosen, and the company achieved its metric of having the system installed on the scheduled date, the automation program did not produce the expected results. The reason was the human factor. Because the change had been managed using a power approach, it met with a great deal of employee resistance. A better approach to managing the first three levers would have won more employee buy-in, and thus would have brought better results from the technologically successful fourth and fifth levers.
We can see the advantages of managing the first three levers-as well as some pitfalls to consider-by examining the experience of the second company in managing a different form of change: downsizing its domestic workforce. To avoid sending employee morale through the floor, the company invested significantly into getting employee buy-in to the downsizing operation. It used the first three levers (methodology for managing change, enterprise culture, and organization design) consciously and effectively, and as a result, the downsizing operation was successful overall, in that it both reduced costs significantly and actually increased customer satisfaction.
In handling lever one, to accomplish what some would think impossible - attaining employee buy-in to a downsizing project-the company avoided the "power" approach to managing change and instead used a "collaborative" approach. It held large meetings that included everybody from the chairman to line production workers. At the meetings the downsizing plans were reviewed and feedback was elicited about whether the plans would serve the needs of the various customer groups. People were not told that the company was "being downsized," but were instead briefed on what the organization needed to do in order to compete. All employees were then asked for their views on how that could be accomplished. To get people to buy in to being downsized, the company gave them the data they needed and, also, the time to determine how they might best respond to the changes from the standpoint of their own careers.
The company thus avoided the equating of downsizing with the executioner's ax. In achieving this, however, the company may have been too successful. Although a sufficient number of people opted to leave, which meant that there was no need for large layoffs, many of the employees who left were the highly skilled, self-confident, aggressive members of the organization. Some of the less-skilled, less-confident employees chose to stay and didn't have the competencies needed to run the newly downsized operation. This trend was exacerbated by an early retirement program that allowed senior people to leave. Therefore, although the company planned the downsizing well for the most part, it overlooked one crucial detail - that the remaining workforce wouldn't have the competencies it needed to get the job done perfectly. The company focused exclusively on one metric - numbers - and ignored another critically important metric - competencies.
Thus, the success was not total, and the problems arose because the metrics weren't completely thought through. And, as might be expected, a few other things went wrong. The company had planned to outsource some activities, but it turned out that the market wasn't ready to provide the needed skills. More significantly, their strategies for reaching the target metrics were too aggressive. The organization design at the beginning of the project was "modified traditional," but the company jumped directly to the shared services model without going through the intermediate stages. It was too ambitious a jump and created difficulties.
The main consequence of going too quickly was that the company didn't execute its well-considered project plan as perfectly as it could have. (Regarding that plan, I should note that the company made decisions based on data; it understood the costs of its products and services; and it determined what level of services could be provided at what cost, given assumptions about technology. It did an especially good job of gaining consensus on key metrics to measure progress and of establishing baseline metrics so that it could measure improvements.) At some point, one must make the transition from planning to rigorous execution, and the company went wrong at this point by not having enough strong leadership. Too often, nobody would make a difficult decision; instead, the company got itself into endless analysis loops. In the rush to get to the new model, the company sometimes overempowered, without insisting that people use that empowerment effectively. One should empower people to achieve results; in this case people were sometimes empowered not to achieve. If they said, "We can't do that," the answer was accepted, when what was needed was somebody saying, "Figure out how to do it" or, perhaps, "Make it so."
Again, though, the downsizing effort was a success by the standards of the bottom-line metrics. Comparing this company's downsizing effort with the technology effort of the company in the first example shows how much more effective change can be when it is managed with some attention given to the five levers. There is an additional point that should be made, however, and that is that change is an ongoing process, and the process must be managed until all desired results are achieved, and even as new metric targets are set.
CHARTING THE COURSE
Once you understand the current situation, desired situation, and the strategy for each of the levers, you're in a position to begin managing large-scale change for the organization. The methodology, enterprise culture, and organization design levers provide the means for analyzing and planning for the change. Organization design, process design, and technology provide the means for developing a consistent infrastructure across the organization to deal with the change.
Understanding the current and desired situations and the strategy for each of the levers creates a map for change. If there are great challenges for change or unexpected problems, the map can provide choices for how to respond to them.
There are many roads to achieving successful change. No one specific solution will fit any two organizations. Numerous combinations of lever "settings" can be successful in organizations, depending on the circumstances. If you want to achieve optimum impact on the organization, it is vital to tailor the change approach to the situation that exists within each of the five levers.