Managing and Mitigating the Costs of Change

Blog post author: Frederic De Wulf, Senior Vice President of Operations, Panalpina Americas

PARC Insight: Change is inevitable and implementing change in a timely, undisruptive way is usually the most desirable option for organisations. However, dramatic and disruptive changes are also sometimes necessary. In either case, the commitment of the executive leadership to six core “change imperatives” is critical to success.

This case study presents observations on the role of executive leadership when managing and mitigating the costs of change. These observations were collected across two continents and six countries in the highly regulated labor-, systems-, and process-intensive international logistics services industry.

The observations discussed here confirm that the speed, impact, and success of change management is directly impacted by executive leadership. This applies across not only cultural and regulatory restrictions, but also the degree of systems’ modernization. From modernizing an antiquated system in a Latin-American country, to tripling capacity in a highly-mechanized North American operation, a boots-on-the-ground approach to leadership makes all the difference to the cost of change.

Today’s finance-driven business environment demands growth with every quarter, implying that any successful business must implement change in a way that supports improvements in Profit & Loss (“P&L”) as well as Key Performance Indicators (“KPI”) results on a 13-week cycle. Achieving significant operational change in 13 weeks is a challenge that requires effective and innovative leaders who pay attention to six crucial “change imperatives”.

The Change Imperatives:

• Optimizing Operations Performance

Understanding the long-term expected revenue and cost impact of change is (relatively) straightforward. However, the leadership team must constantly monitor and adjust costs to achieve the expected P&L results per quarter. One proven optimization method is through modeling performance targets with accurate KPI monitoring.

Often the only variable cost in operations management is labor. Maintaining optimal staffing levels and setting the right expectations amongst team members is core to implementing change. Leadership teams can achieve this through clear, focused communication. The measurable goal should be a burst of individual effort about 10% to 15% beyond the normal day-to-day output. Mid-level leadership and staff need to receive a clear, consistent message to understand the short-term impact of change. This message should come from the highest possible level.

Boots-on-the-ground leaders will make some errors, but these will be forgotten quickly due to additional, personal efforts being made by the leadership team. This extra effort is key to optimizing operations performance.

• Optimizing Operational Processes

Typically, implementing a change equals lost productivity and increased costs. It is reasonable to expect the cost of a particular process to increase at the onset of change and to remain high until that change has been absorbed by the organization. If the change is successful, then costs should stabilize following implementation.

There are times when organizations implement change that increases costs. One example might be the introduction of a security program. In this example, executive leadership has determined that the expected benefits outweigh the increase in costs. Another example could be increasing capacity to support increased customer demand. In all cases, scenario modeling can help set the target operating costs and the post-change “steady-state” operating costs.

To achieve the targeted operating costs, boots-on-the-ground leadership must align resources and find ways to improve both efficiency and the impact of contributions from support functions. One of the key elements in a successful change is to focus on continuous improvement. A well-known way to achieve this is through Lean Six Sigma methodology.

Modeling is a powerful tool to identify inefficiencies, evaluate potential outcomes, and set expectations. Communication amongst the leadership team both between and across layers, and from top to bottom, is critical. When the front line knows that leadership understands “things will get worse before they get better,” then the result is that things get “better” faster.

• Implementing Strategy into Operations

It is imperative that executive leadership understands that strategic decision-making is neither a change process plan, nor an ongoing operating plan. Boots-on-the-ground leaders are obligated to translate strategic decisions into an ongoing operating plan. They must then communicate the implications (both short- and long-term) back to the executive leadership. If, for example, 10 additional employees are required for 3 months in order to effect the change, executive leadership and human resources need to know.

Human resources (HR) should be enlisted to design the temporary organization structure, including staffing plan, recruitment, compensation, and “unwind” plans to ensure the greatest outcome for individuals who make the change happen. If a change has employment implications, then HR, legal, and public relations should handle their areas of responsibility in concurrence with the proposed timeline. Collaboration and agreement between all participating groups is as critical as the strategic decision itself.

Key performance indicators (KPIs) will often also need adjusting. It is imperative that both the executive leadership and boots-on-the-ground understand the need for KIPs to be aligned with achieving the change results in the best way possible.

• Managing the Strategic Assets

“Our people are our most important asset,” is a great corporate slogan. It is even better if it’s true. Strategic change always impacts on people. Company leadership must practise mentoring and coaching. Boots-on-the-ground leadership is often the best at recognizing key talent.

Collectively, an organization needs to run a strong mentoring program to retain and grow talent. An employee who was “key” to the old ways but feels threatened by change needs coaching, not mentorship. Boots-on-the-ground leadership needs the freedom and support of other organizational units to mentor and reward the individuals who prove themselves to be key during and post change.

Proper coaching implies that leadership has access to the proper tools, systems, operating procedures, and qualified trainers. Executive leadership should encourage investment in coaching to ensure the best outcome.

• Driving Change and Transformation

Change and transformation are intimidating to many well-established and “comfortable” individuals who might have been your best performers under the “old” system. Boots-on-the-ground leadership must have either strong communications skills or external coaching and mentorship capabilities.

The goal of communication during change is to build consensus. One of the most successful approaches for consensus building is for first- and second-level leaders to utilize the Talk-Listen-Action (“TLA”) approach. This approach is typically a one-on-one “relaxed” discussion. The leader asks simple, but open-ended probing questions that require more than “yes” or “no” answers. The leader should use their existing knowledge of their employee to identify their concerns, fears, ideas, suggestions, etc.

The primary goal of a TLA session is to encourage the individual to commit to supporting the change with the extra effort it takes to make change happen. Boots-on-the-ground leadership must demonstrate integrity and credibility whilst helping others to develop their skills through coaching and corrective actions.

• Interaction between Suppliers and Customers

During a period of change, executive management must clearly define the message it wants to send to the outside world. The same message must come from operations, sales, marketing, purchasing, and any others with external interaction. The message must be consistent, accurate, timely, and demonstrate both integrity and credibility.

Suppliers and partners can be both supporters and opponents of a change strategy. Most want to offer support, but when left in the dark, they often unwittingly become opponents. Sharing the company’s strategic plans may require a short-term Non-Disclosure Agreement (NDA). Using an NDA with a partner can include them in the change process with “skin-in-the-game.” They often feel privileged to be included in strategic change, but perhaps most importantly, involving suppliers and customers in the early stages of the process allows them to prepare for new process requirements.

Suppliers and partners can be both supporters and opponents of a change strategy. Most want to offer support, but when left in the dark, they often unwittingly become opponents. Sharing the company’s strategic plans may require a short-term Non-Disclosure Agreement (NDA). Using an NDA with a partner can include them in the change process with “skin-in-the-game.” They often feel privileged to be included in strategic change, but perhaps most importantly, involving suppliers and customers in the early stages of the process allows them to prepare for new process requirements.

Change buy-in from external parties requires mutual trust and a solid partnership. Anticipate that whatever could go wrong more than likely will go wrong, and work accordingly with your partners to create contingency plans. Customers who are “in the know” will often have a greater tolerance for service deviations during a change process.

Worldwide, successful change has been proven to depend on these same six elements. Change requires people to think and do things differently. Irrespective of the context, people are people; they like to stay in their comfort zones. Executive leadership and boots-on-the-ground leadership can achieve extraordinary change in relatively little time when they follow these recommended steps.

Edited by: Katy Huckle, Corporate Development Manager, Panalpina