310. The CEO's role in transformation

Speaker A: What is that irreducible core, that undelegatable role of what the CEO themselves needs to do to make transformations actually be effective in diverse company contexts?

Speaker B: From McKinsey and Company, I'm Sean Brown and welcome to Inside the Strategy Room. That was Kurt Strovink setting up our discussion about the critical and undelegatable role that the CEO plays in the context of a high stakes transformation. In today's episode, Kurt, along with his fellow guests Megan Hill and Matthew Lee, take us on a journey to reveal five collective action problems that are commonly encountered in transformations and that fall directly within the CEO's purview. Drawing on their recent McKinsey Quarterly article titled Collective Action, Collective A CEO's Role in Transformation. For each problem, they offer solutions that the CEO is uniquely positioned to address. And now it's my pleasure to introduce our guests. Kurt Strovink is a senior partner in our New York office. He currently serves on our Shareholders Council and also leads our Global CEO Services practice. Kurt is the co author of the New York Times bestseller A CEO for All Seasons, as well as the national bestseller the Journey of Leadership. Kurt, it's great to have you here today.

Speaker A: Thanks, Sean, for having us.

Speaker B: And Megan Hill is a partner in our New York office and a leader in our transformation, corporate and investment banking and strategy and corporate finance practices. Megan, it's great to have you here today.

Speaker C: Thanks, Sean. Great to be here.

Speaker B: And we also have Matthew Lee, a partner in our Miami office and a leader in our transformation and financial services practices. It's great to have you here, Matt.

Speaker D: Thank you, Sean. It's a pleasure to be here today.

Speaker B: Okay, I'm excited for our conversation. And Kurt, let's start with you since we're going to talk a bit today about your recent McKinsey Quarterly article on the role of the CEO in successful transformations, which for our listeners, we'll link to in the episode description. I was hoping that you could share some background on what drove you to write the article.

Speaker D: Thanks, John, so much.

Speaker A: And uh, we're excited for this conversation too, for a number of reasons. We've long as a firm talked about transformation and led, uh, with many of our McKinsey transformation colleagues on transformational aspects of client service and working with clients through institutional level change. But we've also spent a lot of time advising and working with CEOs on their roles in leading their companies and leading more broadly and in particular leading transformations. And in some sense, we're bringing those two different elements together as part of this discussion. What is the CEO's role. What is the undelegatable role, if you will, of the CEO in the domain of transformation? We think this is a very important question, which is how do CEOs play, what is their role? Where do they lead? Where do they, if I might coin a phrase, lead leaders? They lead others through things. But what is that irreducible core, that undelegatable role of what the CEO themselves needs to do to make transformations actually be effective in diverse company contexts?

Speaker B: Thanks, Kurt. And what are some of the challenges that companies are facing today in terms of delivering that full potential of a transformation?

Speaker A: We know this today that organizations face more challenges than ever. The data shifts, the speed at which we're creating, different ways of looking at the world. The signal to noise ratio, if you will, is probably at an all time low. Company shifts is another element of this dramatic change in the world we live in. You know, the speed, the tenure of CEOs is declining. Also the tenure of companies remaining on Fortune 500 lists is declining as well. This isn't all bad news. It just suggests important aspects of leadership in our times. So that's a very important piece of the puzzle in terms of leadership. But in these turbulent times, there's a particular important question of transformation and how to ensure that transformations happen. And we find that most transformations do not.

Speaker B: So why focus on the CEO and their impact on a transformation?

Speaker A: If we think about the reasons for, if you will, leakage or drop off in possibility or potential, they trace to a number of things across target setting and the science of really making that stretch happen, implementation and other kinds of leadership across the full funnel. And our central belief is that CEOs play an incredibly important role in setting up the conditions for impact across this full waterfront. And in fact, one of the things that we're going to talk about is collective action problems, which is, uh, this, this the circumstance that happens in large organizations where individuals might have certain interests, maybe small groups have certain interests, but the larger enterprise has a different interest and uh, oftentimes they're not accessible. Um, you can't get to something that would be the best for everybody because there are smaller interests that collide and that aren't aligned. And our central idea that we've come to through much of our client work with uh, CEOs and transformations is that CEOs play a unique role in breaking or overcoming collective action problems.

Speaker B: So we're looking forward to exploring those collective action problems in a bit more detail. But before we do, Kurt, your thesis is that CEOs play a critical role in the successive transformations. But no two transformations are identical. And some are led by Chief Transformation Officers, Some may also be directly led by a CEO. So maybe you could just talk a little bit about how the CEO and CTO are, might split up their responsibilities when, when both are involved in a transformation.

Speaker A: Yeah, the CTO is an incredibly important role, certainly in all the transformation work that we do and in some sense sometimes acts as a proxy for the CEO, certainly in our humble experience needs to be very closely aligned with the CEO in order to deliver transformations that work. So the role is critical, Sean, and it is absolutely vital we recommend that a CTO exist in transformational situations. Not everybody has them, by the way. Uh, but the ones that are more successful typically do. But nonetheless, the CEO still plays an important framing role, target setting and helping set true full potential, maximum stretch. They have to have a strategy for stretch as a, as a CEO. And good transformations are ones where CEOs establish targets that are sometimes higher than those around them believe are achievable because they underwrite the kind of creativity that then, um, follows. Ctos play an incredibly important job in, in leading that overall change. But they don't substitute for some of the undelegatable roles of the CEO on setting up a transformation for success. Spotlighting certain things that are fully working is another role that CEOs sometimes play. Reinforcing the importance of enterprise wide norms and behaviors is another that they play. And so I would say both roles are important. The CTO role is critical for high impact transformations, but that doesn't obviate the fact that there are elements of the CEO role that need to be played by the CEO. And that's actually something we'd love to, to explore Sean, as we go, go forward here.

Speaker B: Sounds great, so let's do that. You mentioned collective action problems earlier, which you define as circumstances in large organizations where individuals or small groups have interests that aren't aligned with the interests of the larger enterprise. So your article describes five of them. Matt, maybe you could start us off by just giving us an overview of the five and how they fit into a given transformation. And then maybe we can explore each of them in a bit more detail.

Speaker D: Great. You know, when we look across industries and looking at successful transformations, we find they follow a pretty consistent arc, right? A three part arc starting with setting a high aspiration, then moving to execution against those plans, uh, with a high aspiration. And then it's building the mechanisms to sustain that change over a long period of time. Uh, but our research show as we mentioned earlier that organizations can lose value across each phase, uh, of a transformation. And the big reason is the presence of these collective action problems. Now in the aspiration setting phase, the first phase, the biggest problem we face is the negotiated settlement, right? This is the tendency for teams to negotiate down targets to something more comfortable rather than aiming for full potential during execution. Two other issues typically pop up. The first is what we call the aversion to transparency, um, where people hold on to information because they're not sure how it'll be used or maybe they're incentivized to do so. Uh, the next is a, uh, me first or local mindset, right? Where individuals or functions and teams optimize for their local goals or own goals instead of enterprise wide goals. And the last arc is when organizations try to sustain the impact. And we face two other problems here. One is relying too much on the trustworthy few, right? The folks that everyone knows and trusts. But this creates capacity bottlenecks. And the last one is transformation in a silo, when change is, uh, almost on an island where the transformation runs separately from the day to day business. And so the changes never truly stick. And what's important across each of these challenges and collective action problems is they each are rooted in human behavior. They each have their own dynamics and root causes. But the good news is that they can all be addressed, right, as long as we're aware of them and we have the right focus and leadership, especially CEO intervention.

Speaker B: It's interesting that you point out that these issues are rooted in human behavior and that because of this, it would seem they might be inevitable. So as you thought about these collective action problems, were there any additional issues or problems that didn't make your list of five, and did the those align with specific stages of a transformation?

Speaker D: Uh, that's a great question, Sean. And look, there's of course a longer list of problems that folks might face, but we do believe that these five are typically the most important ones to address head on. And I think you mentioned the word inevitable. I think that's, uh, you know, it's a great question or point as well. We believe that they're not inevitable, but they're predictable. And because of that, we can actually address the systems, incentives and culture in place to, uh, address that. And the specifics might vary by each organization, each company, of course, but those underlying human behaviors are remarkably consistent. So the tendency for folks to protect their teams, to be loyal to their teams, to trust their past experience and pattern recognition, that'll always exist. But the way to channel that human behavior is very much addressable. And that's why we believe that once CEOs and leaders understand those underlying behaviors, they can intervene much more effectively.

Speaker A: Matt, if I could jump in, I think these five represent our synthesis of what we've seen in transformations where there's moments where you either get to a higher plateau of performance or you don't. And things that per the earlier, uh, discussion can stop transformations from being successful. And so in a way there are probably other things that could intercede here or there. But this is our synthesis from a transformation practice perspective of where typically transformations underperform and where they can be high graded and they trace to things that the CEO can do. And so I think that's you, uh, think about it as a synthesized list of the intersection between the CEO role and the transformation failure points.

Speaker B: So Matt, let's dig into these in a bit more detail.

Speaker D: Sounds. Why don't we dive into the first collection action problem, the negotiated settlement. And this is the moment where we alluded to earlier. Um, it's when people, for a variety of reasons, right, uh, negotiate down targets and aspiration even early on, and not because necessarily because they lack ambition, but you know, it's often because folks want to ensure that they'll hit those targets and hit those aspirations. And, you know, why does this happen, right? It could be because of a belief that goal setting equates to guaranteed outcomes, right? A promise to deliver something. It could be, you know, institutional or personal memories of past failures or missteps and wanting to, you know, hedge those risks and hedge those bets. It could also be, you know, a fear of, uh, consequences, right, for missing targets. So there's a common saying of how do we under promise and over deliver? But the real insight here is that we find, and based on our experience in research, that aiming low is actually much riskier in terms of institutional outcomes than it is for aiming high and maybe falling a little bit short of those high aspirations. And so the CEO and leadership team's job is really to create conditions where people feel safe to seek their full potential and to design incentives that reward that pursuit of ambition, not just hedging against it. And if we think about practically, right, what can a CEO and leadership team do to prevent those negotiated settlements? It's really two things we boil it down to. The first is the CEOs and leaders must hold the line on, uh, full potential thinking. That means setting the aspiration based on facts and analytical truths, right? A fact driven assessment of full potential rather than negotiated comfort levels and you know, they should commit to this full potential publicly and role model it consistently. A second, as I alluded to earlier, is really addressing the incentives, the culture, the system that, you know, creates this. Right? Uh, most companies unintentionally reward caution. Hitting a safe target typically earns praise, right? That someone committed to something and did that. And stretching and missing those targets actually earns questions, right? Why did that not happen? Why did we not achieve what we set out to achieve? Instead, we believe that we should reward people not just for big wins, but also for fantastic failures. Right. And when they pursue the full potential with discipline and effort and fall short, that we should actually celebrate that. And so when people see the CEO and the top team celebrating ambition, not just safe delivery, it unlocks enormous creativity and guards against the cycle of negotiated settlements.

Speaker A: Maybe, Matt, if I could uh, just maybe add one thought to here. I think we believe a lot of transformation's full potential is lost at the beginning on target setting, that they just aren't sufficiently high enough. Usually it's because of a negotiated settlement. It's because of the resultant vector of a bunch of people who are saying what they think they can achieve and that the CEO broadly takes that with a little bit of negotiation, uh, as opposed to creating a fact base for a full potential of an organization and then effectively deciding we're going to go and act as if this is something we can achieve. And I know everybody doesn't think that we can achieve it yet, but let's see what happens. That kind of secondary approach which kind of underwrites the creativity to follow. And a bunch of people might say, I just don't know how we're going to get there. That's a constructive tension and first step that tends to yield more value in time. We sometimes talk about this as the solutioned things that you can imagine that you can do at the beginning and the unsolutioned things that you can't imagine you can do at the beginning. And we often advise CEOs that you need to have both solutioned and unsolutioned components to any appropriately high enough target to achieve the full potential of transformations. A lot of people will just go only with the solutions in the beginning and they will sub optimize performance.

Speaker B: So this brings in the concept of bottom up, goal setting versus top down. And if you ask the front line what they think they can achieve, you might get some sandbagging. Right? But if you ask the CEO, the risk is that they may set aspirations that are either really unattainable or seem unattainable to the organization. So how do you balance this? How do you get to a truly ambitious plan that actually has a really good chance of being accomplished as well?

Speaker D: That's a great question, Sean. And I think we, you know, tying together a few points we mentioned earlier, and that's why we believe that uh, we don't want to make it seem trivial. Right. Setting an aspiration, it's not just simply pushing higher, it's really going back to facts and analysis so that it's grounded in uh, something that's objective. Right. As opposed to starting from the get go on making it around. What are people comfortable with? It's actually starting with facts and analysis so that we can always go back to something that's grounded and objective.

Speaker A: Yeah, that's part of the reason, Sean. We recommend usually a constrained first phase before transformations where a CEO and top team will try to get objective facts. Usually, you know, you're better off with something short, 10, 12 weeks, that looks at the full potential, maybe with external perspectives, gives you a view of what others are achieving in different functional domains and different businesses. And that allows you to create a fact base which is rigorous. So it's not finger in the air empiricism, you know, where you're just sort of picking a number out of the air. It is actually grounded, but it is a theoretical maximum because it's based on what everybody else is doing in different functions and businesses. And so it's something that allows a CEO the freedom to be able to put with conviction or at least with um, with credibility, a target on the table that underwrites the creativity of everything you follow. And I think it's actually very dangerous to take targets, uh, just from bottom up. You should take them top down, but they should be industry informed, uh, functionally and domain specifically informed. And they should have stretch in them and they should be unsolutioned as well as solution.

Speaker B: That sounds great. So Matt, let's move to the second collective action problem. Now. What happens once we've set that aspiration and established those targets?

Speaker D: The second one is really around, um, transparency or the lack of it. Right. And you know what's at stake if it's not resolved. Right? You, without that transparency and full view of information, uh, you get slower decisions. Right. You might miss warning signals and problems might grow quietly until it's too late or too difficult to intervene. And so teams often without that transparency burn a lot of time debating, you know, perception of facts instead of the actual facts. And a transformation may Lose momentum because no one actually has a full view of what's going on. And why does this happen? Right. It's, you know, sometimes, again, deeply rooted in human behavior and incentives and systems. It could be because folks are worried about what might happen with that information. They're worried about being perceived as being behind or how it might be viewed in terms of their competency level if they ask for help. Right. So the CEO and top team's job here is really to flip the culture a bit from fear of sharing that information to openness and a problem solving mindset instead of a, you know, problem, you know, identification mindset.

Speaker B: And what do you see happening in organizations when this shift towards a more open problem solving culture actually starts to happen? Maybe you could bring this to life with a couple of examples.

Speaker D: So when transparency goes up, we consistently see three things happen, right? Speed of decisions increase, the quality of decisions improve, and teams start to identify problems earlier, long before they balloon, and when it's frankly easier to solve. If you think about how does a CEO break through this transparency barrier? You know, we really think it's a couple things, right? For the first is really demanding that radical transparency. You know, creating a single source of truth, building a common language around stages, risks, dependencies. Right? So people are speaking the same language, uh, insisting on a rigorous cadence. We often recommend a weekly cadence that focuses on problem solving instead of status reporting. And so when everyone sees everything and the focus of discussion is how can we help instead of what went wrong, hiding information becomes not only impossible, but frankly, unnecessary. Right. And the second is celebrating asking for help. And one example that we'd love to share is, you know, what happened at Ford in the, you know, early 2000s. Um, we think it's a perfect example. But in the late 2000s, Ford was faced with billions of dollars in losses and needed to turn things around quickly. Right? But despite this, uh, burning platform, every initiative that was being shown to the CEO and top team was reporting, uh, in the green, right? Just based on that, you would have thought everything was going fine. So when one leader finally stood up and showed an initiative that was in the red, the CEO stood up and applauded that leader for showing that things were in the red. And what happened next was a matter of fact discussion to help that executive fix the initiative. And that moment really started to rewire the culture and transparency went up. People, we're less afraid about showing issues. It's an example of how CEOs and leaders can have an enormous signaling power, uh, and a series of, well, Placed interventions combined with the right incentives and systems can really shift an entire company's norms.

Speaker B: Indeed, that sounds really powerful, but it also raises a few questions. So what happens when you set, let's say for example, a five year strategy with really ambitious goals? The company is now two years into their transformation, but they're falling short of some of the targets. And some of the people on the top team no longer believe that those really ambitious goals set two years ago are achievable. How do you, and do you reset as the CEO to keep things moving forward? How do you keep the team and your organization believing in these goals and motivated to try to still attain them?

Speaker D: Ah, yeah, I think, uh, of course, uh, we believe that even though an aspiration initially set should be ambitious, that it should reflect, um, changing dynamics. And I think we would ask, it's hard to generalize a bit, but it really is situation specific. And we would ask why that is, why are folks no longer able to achieve that initial aspiration and really get to the root cause? Is it that the initial facts, analysis, you know, maybe the assumptions made were not the right assumptions, or has the environment changed that we would revisit those assumptions if we were to do it again today, but also guard against, you know, is it actually negotiated settlement just manifesting later, uh, in later phases as well? So, so it really comes down to the root cause. And going back to, as we mentioned earlier, some of those objective facts and analyses as well.

Speaker B: And those examples you shared earlier really bears that out. So you need that open culture and level of transparency where people are willing to say these are the things that aren't on track, how do we get them back on track? Kurt, anything you'd add there?

Speaker A: Yeah, uh, that's a, it's a great question and I think Matt, Matt, Matt mentioned that it's really situation dependent. But uh, the other thing I would add is that there are many, many times in the early going phases, usually a year to a year and a half, even into transformations where Senior teams and CEOs will need to remind and kind of almost re. Hold the line on the target. Okay. Despite initial resistance that we're not going to get there, we can't find the way to there, et cetera. It's part of what underrates this creativity. And it is important that it not be sort of immediately rebid, uh, because the first sign of circumstances changing circumstances will always change. And yet your goals as a company and your target setting and the heuristic of setting a target for results that will come when you actually act as if is important to hold the line on. And, uh, so there'll be many opportunities for, uh, CEOs to hold the line in our experience in the first year, year and a half. Um, but ultimately the facts dictate, and, you know, you need to be mindful of that too.

Speaker B: Okay, so while we're still in the planning and implementation phase, Megan, maybe you could take us through the third collective action issue.

Speaker C: Great, thank you. Um, so we'll close out planning with the third collective action problem, with which is a dynamic we see in almost every transformation. So even when the organization has a shared aspiration, which we've talked about, setting the full potential in the target setting phase, individuals and teams often default to looking at their own priorities first. And we call this the local or me first mindset. Um, and here's why it becomes a collective action problem. Each team or person is acting rationally to maximize their own outcomes. So, so they may have their own KPIs, their own budget, their own visibility, but when everyone behaves this way simultaneously, the organization underperforms its potential. And so the sum of the rational individual choices leads to an irrational collective outcome. And we often use an orchestra as an analogy. Often when you're constructing the orchestra, you're pulling in the top tier soloists, each accomplished, each loyal to their own section. But unless they all play their parts together, the strings with the strings, the horns with the horns, but then collectively the strings with, uh, the horns, the resulting sound will be hollow and incomplete. And so the CEO's role here is really to balance a basic truth about human behavior, which often gets amplified during periods of change. And there are really two interventions we found that break this pattern. The first is creating an organization, first, incentive, and second, highlighting sources of meaning at work. I'll touch on both of those interventions. The first is around overweighting, uh, organizational incentives rather than focusing on the individual ones. So transformations, if done successfully, mobilize large swaths of the organization. And we call this, in many cases, democratizing the change. And in many ways, CEOs and senior management teams need to refine and reframe their incentives to acknowledge that there's now more people involved in changing the organization. And so these incentives often need to be tailored to the specific transformation initiatives. And these can include nudges to adopt new behaviors, to implement new process steps, or to actually reward the individual frontline individuals who are executing each of these specific initiatives. The second intervention is around highlighting sources of meaning. So usually at the outset of the transformation, when you're setting the target. There'll be an organizational wide case for change that everyone's rallying behind. But oftentimes, to really get at the heart of what's going to motivate everyone on the front line, employees need to attach their own source of meaning to the work that's going on. And of course no two employees derive meaning from work in precisely the same way. And so rather than adopt a one size fits all approach to motivating employees, leading CEOs understand that five sizes actually fit most. And they seek to highlight the impact that employees are having in multiple areas. And some of those include society, company customers, team and personal success.

Speaker B: Got it. And Megan, are there any signals that the CEO can look for that might indicate early on an emerging or prevailing me first mindset, a uh, canary in the coal mine if you will, that this is starting to happen?

Speaker C: Yes. Yeah, I think, great question. There are definitely a few early warning signs. So one, you'll start to notice when teams are optimizing for their own KPIs rather than the enterprise. And if you're, if you're highly attuned, you'll start to see that their decisions make sense locally, but they actually work against the broader transformation. Another sign is you'll often see duplication of effort. So you'll start to see different parts of the organization solving the same problem in parallel because they're not sharing information or coordinating. And I think if you're especially aware in the transformation cadence, and there's often a set series of uh, uh, structures or tools that we say to put in place, if you start to listen to people's language, you'll hear words like my team, my budget, my goals, rather than our goals, the broader team, the collective organization. And then finally one of the most challenging aspects of um, running a transformation and often the thing that most organizations need to uh, actually cause to happen is to break down silos across the organization. And so if you have teams operating with this me first mindset, you'll see a lack of follow through on some of these cross functional initiatives which can be extremely detrimental to the overall success of the transformation.

Speaker D: One thing I love to add to this discussion is I um, think sometimes it's easy for executives to look at those employees who are the loudest in terms of this me first mindset and uh, wonder why that is. And we truly believe that the root cause is around the systems, the incentives, the culture, less about those individuals specifically. In fact, when we see that we rewire the organization to become more enterprise focused to become more, you know, collaborative. Uh, we find that those individuals who are the loudest, uh, in terms of me, first become the biggest supporters of the, you know, collaborative effort. Right. So don't write those folks off. In fact, the loudest folks may be your biggest supporters under the new, new and improved system.

Speaker B: And so where do you see CEOs falling short when it comes to communicating the purpose as the heart of the transformation and really, uh, getting it to appeal to the whole organization? Perhaps you could share an example of a CEO who's done this.

Speaker C: Well, yeah, I think another great question, and I think one, um, thing to emphasize with this particular question and point is that CEOs should continually highlight these sources of meaning as they make the case for change, not just at the launch of the transformation, but throughout the entire life cycle of the transformation. One trap that organizations fall into is assuming that the purpose needs to be articulated only once. So often when you launch the transformation at target setting. But in reality, the transformation often spans years, and people's connection to the work must be renewed and reinforced. And, um, maybe one example of a CEO that I saw do this especially well was consistently, over the course of multiple years, in every town hall, um, he would dedicate a few minutes to invite one or two employees to share a personal story about what the transformation meant to them and which source of meaning it tapped into. And these small moments, uh, can easily fall by the wayside if you're trying to get right into the meat of the meeting. But if you maintain them and you have the discipline around maintaining them, they actually have an outsized effect because employees really notice those moments and they see themselves in the journey. They understand that the individual purpose is, is as important as the organizational, financial, uh, success. And they then draw inspiration from hearing their peers on a consistent basis. And that often those little moments, uh, are what sustain and really fuel the. The transformation over years.

Speaker B: And, and just on those little moments, Kurt, people are motivated by different aspects of work. It could be to have a positive impact on society. It might be to lead an industry or to exceed customer expectations, or maybe just to be successful individually or as part of a team. So are there any particular types of purpose or motivation that are most powerful in the context of a transformation? And do they occur in any kind of a sequence?

Speaker A: Yeah, I think if you think about this in a transformational context, um, you're often focusing on a goal, a customer goal, an outcome, uh, something that's about making something successful in the outside world and our unique ability to do that. And that transformation is part of creating those conditions and those outcomes. So often we see a customer lens or ambition anchors this. Um, and it's closely related to the benefit or the potential for the company. So the company and shareholders piece kind of comes inside of that or connected to that. Usually it's more powerful for sources of meaning and purpose if it's external focused and then there's an internal matching versus it's all about the company alone and one's not taking a position on what's happening outside. Um, sometimes that customer view can then ladder up to society and a broader picture of what we're trying to do and what good in the world we're creating, which can be very important and emotional. Um, but I think the importance of team experience and personal success is that usually successful transformations aren't just one and done performance improvement efforts. They are, they are deeper systematic ways of transforming how the companies work and grow and learn. And as part of that there's a huge human capital dimension for teams and people about growing as executives and leaders. And usually uh, the transformations that succeed and the CEOs that lead those transformations that succeed with the CTOs dial into that human capital potential and make it as deeply adhesive. Where people feel like they are themselves growing, their teams are growing, we're working better together and that's laddering up to an overall ambition for the company and customers and ultimately society that we, that we esteem and we're excited by.

Speaker B: Uh, and Megan, if we could now look to the next collective action problem in that next phase of a transformation. So setting up for sustained impact and enduring change across the whole organization. So what are the issues or collective action problems that CEOs should be looking out for there?

Speaker C: The fourth collective action problem is another dynamic we see across most large scale transformations. It's when the stakes are high, CEOs and senior leaders often default to relying on a small group of people they trust the most. And we call this the trustworthy few problem. And the reason it's a collective action problem is that from the CEO's perspective, relying on proven performers reduces risk. From the team's perspective, stepping back and letting the inner circle lead often feels safe and appropriate. Everyone's individual choice makes sense, but collectively it overloads a few people, it sidelines others, and it limits the organization's capacity to transform. M and what's at stake if this isn't resolved is there's the notable effects which I just mentioned. Progress becomes constrained by limited bandwidth of a handful of leaders. The rest of the Organization feels underutilized, so they're not as compelled to participate in the change. And I think what's most important is actually the company misses one of the biggest opportunities of a transformation, which is using the transformation as a leadership factory to build the next generation of talent. And the CEO's role here is to recognize this dynamic and intentionally widen the circle. And we've seen, uh, two interventions make a real difference. The first is deliberately tapping and developing high potential but less proven leaders. And the second is around activating a much broader portion of the organization, which often involves them owning what we would call smaller initiatives, like the pebble and sand initiatives, that collectively drive substantial impact. And so the first intervention, as mentioned, is deliberately cultivating the next generation of leaders. So transformations are often one of the most powerful opportunities a CEO has to build leadership capacity at scale. And so rather than relying on that small group of proven performers, CEOs and senior teams should actively be on the lookout for finding folks deeper within the organization that may not have been tapped with responsibility in the past. Um, the transformation, just given the intensity of change and the broad, uh, scope of the effort, often means that it's a proving ground for emerging leaders to develop things like financial acumen, problem solving skills, and also an ability to influence the organization broadly. The second comes around activating a much broader portion of the organization. And so we've researched across the thousands of transformations that we've done. We actually have a specific hub within the firm that looks at how those transformations perform. And the average transformation engages only about 2% of employees. And the most successful top quartile transformations activate 20 to 30% of the organization. And so increasing from the average to the top quartile, given the magnitude, requires a real deliberate effort to widen participation. And CEOs can do this by structuring the work to honor smaller initiatives. Sure, you'll have a few initiatives that are 1 to 5 million EBITDA in value, but you'll also have initiatives that, say, are 250k or 500k in value, what we would call the pebbles in the sand initiatives. And those initiatives, actually, you make up, uh, the bulk of the transformation impact. And that's what really allows everybody within their area of the business to contribute to the change. And so, by bringing more people under the tent and giving them the opportunity to contribute, CEOs shift the ownership from a narrow few to a broad coalition. And over time, that increases the organization's capacity, and it also starts to generate this leadership factory, as mentioned.

Speaker A: Megan, just maybe one thing, uh, Sorry, I may One thing to add, just tying the conversation back. This is a great example of a role where the CTO can be very useful. The sizing of initiatives at the right level to make sure that you've got surface area for the broader inclusion of people that could be in transformation. To Megan's point, because you get to a tipping point, if you get 20 to 30% of people involved, doesn't mean it's only 20 to 30. Ultimately it could be 100. But you get the tipping point at 20 to 30 versus, you know, ones that fail in the low single digits. The CTO often has to define the size of the magnitude of those initiatives. And that's one of the great roles that chief transformations often play. Sometimes when you take too large initiatives and too few, you kind of in a way limit yourself by having less of the organization engaged. And Megan, that was just a build on your point. Um, but it also ties, Sean, to your earlier question of CTO's role.

Speaker B: Thank you. And so we can acknowledge the importance of gauging the entire organization. But are there any countervailing forces at play here? It obviously takes time to deeply engage more people versus engaging a small, tight team. So how does the CEO balance the need to engage the organization broadly with building the capabilities that those people would need to be involved and really drive impact? And what's the right place pace to do that, Megan?

Speaker C: Yes, and I think, um, great question. And you know, as mentioned, often the CEO or senior leaders are drawing on the select few because they think it actually reduces risk. And perhaps in the short term, if you were trying to, you know, implement a small, you know, project within the organization, that would be true. But given that it's a transformation and organizational wide effort that's actually, uh, you're actually introducing more risk if you don't think about bringing more people on board from the beginning. And so often CEOs are balancing the pressure to move fast but also build these capabilities, as you mentioned. And so, um, I think the CEOs that really invest time in going potentially a little bit slower at the beginning, making sure that people are building capabilities in parallel with actually executing, uh, over time actually reduces things like bottlenecks, burnout, linear progress. And it actually doesn't take that much time, you know, we're talking, you know, weeks, potentially months before you get the next layer of leaders who are slightly less proven, but with a little bit of capability building support can actually elevate and take on roles that you never thought, um, you know, possible before because they Just didn't have the exposure or the visibility.

Speaker B: Thanks. And Matt, anything you'd like to add here?

Speaker D: A couple ideas I would add to this and agree with Megan completely. I think. One is that viewing the kind of big, bolder, big initiatives that we would have done. Right. With the small, essential team, it's not mutually exclusive with the larger set of initiatives of activating the organization. So we have seen, and you can often have those big initiatives, and many of them are often in flight. When we start a of transformation programs, how do we accelerate those? How do we make those even better? But that's not mutually exclusive with also activating the 20 to 30% or more of the organization and coming up with a longer list of the pebble and sand. Right. So that's the first idea I might add, is they're not mutually exclusive. It's actually incremental and additive. The second is viewing this capacity to execute, capacity to transform as a core competency of the organization. And as Megan mentioned, of course, with building any muscle, it will take some time, but once that muscle is built, the speed, the quality, the rigor of all execution pays dividends for many, many years to come. Right. And we've seen often, as an example, organizations that maybe start a transformation with a certain set of objectives and, uh, have success with Those objectives about 18 to 24 months in, often use that same capability and muscle to do additional objectives. Right. Whether it's launching a new business or growing in new markets, new products, new channels. Right. So we often see this pay dividends in many ways over time.

Speaker B: Super. So just to build on this, as you're engaging more and more of the organization in the transformation, it also speaks to the opportunity for changing the culture at the same time. So in what ways can the CEO engage other leaders to support this? And is this something maybe they partner with the Chro, in addition to the cto?

Speaker D: Yeah, I'll.

Speaker A: I'll let Matt and Megan comment, but. Yes, yes, yes. And also the cfo, we can talk about a couple other roles, but go ahead, Megan.

Speaker C: Yes. Yeah, I was. I think that's right. Yes, yes, yes. And I think the culture change is, um, it. It really. Because it's potentially one of the most critical aspects of actually getting the transformation to sustain. Uh, you really need the whole executive team, but then also those new ways of thinking to cascade throughout the entire organization. So often one way that we do this in our transformations is you'll actually have a separate work stream, call it, that'll lead part of this cultural change movement. And we often say treat the soft stuff like you would the hard stuff. So just like we would size a financial oriented initiative to improve sales and track that with rigor, we would do the exact same thing on the culture side of things. So if we want to introduce a new mindset or a new behavior or if values need to change within the organization, there would be an initiative that would be owned with KPIs and metrics that we would evaluate and it would be managed with the exact same rigor as that financially oriented initiative. Um, and we found that that's, um, as mentioned, the culture piece is such a huge component to the success of Transformations that you have to have, you know, do focus on it throughout the duration like you would any other, um, set of initiatives.

Speaker B: Wonderful. So we have one more collective action problem to discuss before we close our podcast. Megan, can you take us through this fifth one?

Speaker C: Yes. So it arises when organizations run the transformation off to the side and it's separate from daily operations. So we call this the transformation in a silo problem. Um, and the reason this is a collective action problem is that leaders believe they're protecting the business by keeping change contained, while the Transformation team believes that they're helping by pushing ahead independently. And each group is acting in what they perceive to be the organization's best interest. But together, their actions actually prevent the transformation from becoming embedded in how the company operates. Um, and often a useful analogy is if you think about it's a company as a group of people trying to learn a new language, if only a few people take the lessons while everyone else continues speaking the old one. The Transformation team and the core business team never become fluent in these new ways of working. And as we know, if you don't practice a new language, um, the ability to speak it gradually disappears over time. And so what happens is these organizations end up with transformations that look successful on paper, but you don't actually see the results materialize in the P and L. So, for example, costs may come down in one area while there's other issues creeping up in another. Growth initiatives stall because daily operations don't shift to account for the new way of working. And then if you have all these cultural improvements or new ways of working, they dissolve because once the Transformation office steps back, there's no one driving that new way of thinking. And so the CEO's role here is to really break down this separation between what many organizations call run the organization versus change the organization and make sure there's alignment there. And we found that there's two Interventions that matter most here. The first is around creating a common operating model with a focused set of enterprise metrics that tie the transformation to the day to day operations of the business. And the second is around embedding the disciplines of the transformation so things like transparency, accountability, fast decision making directly into the core business routines so that they become the organization's default way of working. I'll maybe just touch briefly on the second one that I mentioned which is embedding the transformation disciplines into the core business routines. Um, so the oftentimes the transformation introduces a new level of rigor to the organization. So there's often fact based perspectives, there's rapid decisions, there's not quarterly follow through, there's weekly and monthly follow through. There's also transparency about performance which we mentioned as being a key driver of success. And so these disciplines often start and are only emphasized within whatever the transformation office has purview over. But the CEO's job is to bring them into the company's muscle memory. And this often means taking some of those best practices and infusing them into the behaviors of the everyday rhythms of the core business. So for example, monthly operating reviews mirror the discipline that you'll see in the transformation meetings or the businesses forecasts on the core business side actually embed the initiative impacts so you can see what the momentum or trajectory of the the organization is. And then uh, lastly there's dashboards that are used across both areas of the business that provide visibility so everyone stays connected on both sides.

Speaker B: So this actually sounds a little challenging Megan, because you're trying to both transform the organization while still trying to run the business effectively. So I have a couple questions here. One, as you endeavor to merge these two efforts, how do you keep people's energy levels up? And two, as a CEO, how do you know when the transformation has actually been fully embedded in the organization?

Speaker C: I think great question and um, very common one, I think the CEO has to be super attuned and monitor uh, both sides of the business. And I think the right moment to determined victory that the transformation practices infused with the core business is when you start to see aspects of the core, uh, when you start to not be able to differentiate between how aspects of the core business are operating versus the transformation. So you start to see operating reviews that are more forward looking and tied to those glide paths that I mentioned. You also start to see initiative owners that own something in the transformation show up in the core business work and they're prepared with facts. They have the same uh, rapid follow through and you also start to see senior leaders using the same cadence and transparency, whether the topic is performance or transformation. And so at this point, you're no longer transitioning away from the transformation. It's actually just that the transformation has been absorbed into the core business and the new behaviors just become our behaviors.

Speaker B: Super. This has been so enlightening and I'm sure very useful for the CEOs and their top team who are in or about to embark on a transformation. So, Kurt, uh, I'd like one more question before we close. Do you have any final words for CEOs after they listen to our podcast and they consider what these five collective action problems mean for them in terms of driving transformation success in their organization?

Speaker A: I would just end by saying collective action problems does not mean they are bad actors or people doing wrong things. This is about people actually trying to do the right things. It's just that they ladder up to something that, as Megan nicely said, is suboptimal for the organization. That's what a collective action problem is. So it's not about punitive, bad, you know, folks motivated badly. It is about the unmanaged outcome of a bunch of things that are quite rational at one level, but then suboptimize at the whole. And we think that's why we've called this for the first time, collective action problems in five forms and ones that uniquely affect transformation for good or bad. But the CEO role itself, one of the big things about the CEO role is that they're in the business of solving collective action problems. Ideally, that is an important role of the CEO as a whole. It's an undelegatable role. It's a very important one. It's powerfully assisted by a Chief Transformation Officer, by a chro, by a, uh, cfo, and by heads of major businesses. But it is something that ultimately the CEO can do, and it's one way of thinking about your role is where are the collective action problems and what can you do to intervene and solve those? And hopefully this has given you five ideas in the context of transformation, where the stakes are the highest.

Speaker B: This has been great. Matt, Megan, Kurt, thank you so much for taking the time with us today. Really enjoyed it and appreciate it.

Speaker D: Thank you for having us.

Speaker C: Thank you.

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