What is on your transformation risk checklist? Part II

Introduction

Unleashing a successful business transformation requires balancing—and rebalancing—two major drivers of change: talent and technology.

Our discussions with CFOs and other experts on transformation risks revealed just how difficult and delicate that equilibrium can be to find and maintain. Everything from differing priorities to resistance to change can work against a successful transformation. At the same time, the lack of supporting data and systems necessary to generate insights can handicap the people charged with driving the transformation, as well as the transformation itself. Here, CFOs have a critical role in reinforcing the need to sustain a shared strategic vision and ensure there are resources—people, data, technology, and capital—and alignment to fulfill it.

During a transformation, different risks are likely to be salient at different times. At the outset, it may be more important to make the right choices and frame the right transformation ambition. Later in the process, it may be more important to focus on cultural and behavioral risks that could hinder sustaining the transformation’s long-term success.

Our research interviews and our CFO Transition Labs™ have helped us identify seven major risk categories that can impede transformations. In the first installment of this article—part of our ongoing CFO Transformation Leadership Takeaway series—we highlighted four of them: making the wrong transformation choices; resource risks; leadership commitment and continuity; and third-party or agency risks (see “What is on your transformation checklist, Part I," CFO Insights, October 2020.)

In this issue of CFO Insights, we’ll identify and analyze the other risks―ineffective planning and alignment processes, behavioral risks, and, finally, the contextual risks that can threaten transformation―and we’ll present finance executives with strategies for managing them.

Ineffective planning and alignment processes

Transformations typically require alignment on the process and outcomes of the many changes that will be made along the journey. Getting alignment requires stakeholder buy-in, governance processes to resolve challenges to policy changes, and planning and execution processes to build a shared road map for the effort. And there must be a willingness to hit the brakes, as tough as that may be. As a retired Fortune 10 CFO said, “While meeting deadlines and timelines is important, it’s more important to maintain operations and not put them at risk. CFOs should be prepared to slow down a timeline or even say ‘stop,’ to reassess, redesign, or even start over if problems or complications arise.”

Stakeholder commitment

Transformations require commitment, alignment, and sponsorship from key stakeholders, and without the right level of commitment, they can be delayed, become harder to execute, or fail. Misalignment is not necessarily due to major disagreements or conflicts among stakeholders, but rather to differing priorities among them. For example, you might have a critical change project that weighs heavily in your annual performance review and for which you depend on other stakeholders. Yet, stakeholders may have other goals driving their performance reviews, and so might give less priority to your project. Thus, aligning stakeholders often requires a senior project sponsor who can make the transformation initiative a high priority for all and ensure commitment of the right resources. For each of your projects, consider getting a sponsor with the authority to align incentives across critical stakeholders.

Governance

One mechanism to sustain stakeholder commitment and continually realign it to a transformation is effective governance. A governance structure and process can help bring together the different critical stakeholders on a regular cadence during the transformation to keep them informed and committed, to seek their counsel on resolving problems, and to gain their support for future directions. Governance may be multilayered. For example, for major IT projects, there may be a business technology governance group of senior sponsors who set business direction, decide on major IT investments, and allocate funds. For specific projects, there may be operational governance where key stakeholders work together to deliver projects. Similarly, there may be governance groups to ensure technology choices are consistent with the company’s technology road map and architecture. All too often in our CFO Transition Labs, we find inadequate governance structures and processes undermine success.

Planning to build structure and resolve ambiguities and uncertainties

Transformations can also fail due to lack of clarity or ambiguity about the purpose of change, new process and system specifications, and desired outcomes and the definition of success for the effort. For example, when companies are unclear about their strategic choices, their plans may not effectively translate into value-creating execution.

Ambiguity can be especially costly in transformations requiring new information and data systems. When there is ambiguity in the purpose, the project and system requirements may not be precisely defined or specified. Programmers and developers might do their best to interpret user requirements, but specific needs could get confused or lost. Such misunderstandings can lead to the development of systems that do not meet user needs. Thus, projects need the right level of definition and clarity, as well as mutual commitment to to specifications across stakeholders.

Consider the case of creating an app to connect your company to clients or customers. Is its purpose to create convenience for them to request information or place orders in a secure manner on a mobile device? Is its purpose to inform them about new products you offer? Is its purpose for you to understand what individual customers are looking at for targeted marketing? Is its purpose to provide them with the ability to track their own accounts with your company, or all of the above? Clarity of purposes and their prioritization together usually provide a good starting point and systems that deliver to objectives.

Ambiguity can also arise from the unknown; in the preceding example, we may not know how customers will react to the new app. Even if customer focus groups are used to frame user requirements and specifications, it may be necessary to build a preliminary app, test it with users, and adjust the app features with ongoing user inputs across multiple releases to arrive at a product that meets business objectives. An iterative and agile execution process of development and testing can resolve the uncertainties of fully specifying all needs precisely at the outset of development. But doing so requires managing stakeholder expectations and acceptance of a process that includes a level of trial and error.

CFOs helping to drive transformations can mitigate the risks of stakeholder misalignment by having effective and clear sponsors for the project, governance systems to continually align stakeholders to objectives, and agreements on how to specify requirements and resolve ambiguities and uncertainties in objectives, requirements, and approaches to execution. An effective governance process also can help the change initiative to effectively adapt to unfolding events and new information.

Black swan and other contextual risks

All transformations occur within a broader economic, business, and social context. Sometimes the context can unexpectedly change. As we write this article, we are now going through the COVID-19 pandemic, which has led to the widespread shutdown of various businesses as social distancing becomes vital to help minimize contagion. It is hard to foresee what other black swans may occur; nevertheless, see Deloitte’s value killer studies, which identify a number of risks that can destroy value and shift the context for transformation. Given unforeseen major events, adopting protocols for crisis management and decision-making can help a leadership team respond to these black swans and value killers. During these times, management’s attention and other resources can be diverted away from transformation efforts—to deal with the black swan or value killer event. This, in turn, can delay the transformation and—in extreme cases—bring it to a halt. Of course, not all risks to a transformation can be controlled, and not all events can be anticipated, but having a process about what to do in a situation that’s unexpected is still important.

Acknowledgements/contacts

This is part two of the third article in an ongoing CFO Transformation Leadership Takeaway series. We would like to thank the following leaders and practitioners within Deloitte’s Finance Transformation, Human Capital, and other practices for sharing their insights based on their experiences: Jason Dess, Global Finance & Performance leader, Deloitte Inc. in Canada; and the following individuals from Deloitte Consulting LLP in the US: Susan Hogan, US Finance Transformation leader; Tom Bendert, principal; Jessica Bier, managing director; Ted Choe, principal; Mike Danitz, principal; Steven Ehrenhalt, retired principal; Dean Hobbs, principal; Wendy Huang, principal; Caleb Longenberger, principal; Nnamdi Lowrie, principal; Mark Pocharski, retired principal; Faisal Shaikh, principal; Anton Sher, principal; Matthew Soderberg, principal; and Adrian Tay, principal.