MANAGING CHANGE AS A PREREQUISITE TO MANAGING VALUE

Imagine for a moment a world without change. That was the basis for the 1993 movie Groundhog Day, starring Bill Murray. Every day that the main character awoke was set to become an exact repeat of the preceding day. The only change in that new day would be a direct result of a change that Bill Murray's character introduced. Other than his actions, the actions of everyone and everything around him remained the same day after day.

Putting aside the fact that living such a life might be rather boring, knowing each day how tomorrow's events would unfold would make for much simpler decision-making. The consequences of continuing past actions would be known with certainty. Of course, in the real world, we do not know what events will come with the passing of time, whether that is measured in years, months, or even hours and minutes. The world around us is always changing and is increasingly more volatile, and this of course brings uncertainty in what new challenges we as individuals or organizations will face.

Individuals and organizations both face two general types of change:

1. One is that from the world around us – that source of change that was magically put on hold in the Bill Murray movie. This change in the external environment in which we all live and work, but which is outside of our control and influence, is what has been called first-order change.¹ This is the change that occurs in the world around us external to our organizations, and which drives a need for our organizations to react in order to continue to meet stakeholder needs. We can also call this change “external change,” as it is change in the external environment beyond our control.
2. The other type of change is that which we as individuals – as was the case with Bill Murray – or organizations initiate on our own to influence future outcomes. The effort to influence the future may be in reaction to today's environment, or in preparing to be better situated to meet an expected future environment. This change has been called second-order change² because it is often driven by the need to respond to first-order external change. We can also call this “internal change,” as it occurs within the internal environment over which we have control or strong influence.

We can further differentiate internal change as that which is focused on reacting to today's environment, or change based on expectations of a future environment. In the former case, we will call this “reactive” internal change, because we are “reacting” to the current environment and seek to make changes to improve the effectiveness or efficiency of our actions, or to otherwise more successfully achieve objectives in the current environment. The second type of internal change is change we initiate in order to position ourselves or our organizations to better take advantage of an expected future environment. We will call this change “proactive” internal change, as we are seeking to proactively position ourselves or our organization for success in a future environment. These concepts are pictured in Figure 3.1.

As individuals, we employ both reactive and proactive internal change. For example, we may take actions to perform our work more efficiently or to achieve desired outputs more consistently, not because of external changes, but because of new insights to better meet existing conditions and demands. This is reactive internal change. However, we also employ proactive internal change to meet the needs of an expected future environment. For example, we may take training to prepare ourselves for future opportunities. We may also observe ongoing changes in society and consider how we can be better positioned to take advantage of those changes as they unfold.

Organizations similarly engage in reactive internal change to improve effectiveness and/or efficiency of their current operations. Improving internal controls on business processes is, for example, a reactive internal change intended to more consistently meet current business process requirements. Proactive internal change is also very important to organizations. A strategy is not static; it is dynamic. Proactive change is at the core of strategic planning and the setting of organizational goals and objectives intended to redirect existing and new resources to meet the needs of an evolving future environment and target new opportunities or manage potential problems and risks in that new environment.

Unfortunately, we too often focus our change efforts on reactive internal change to meet the needs of today while failing to position our organizations for success in a future environment. Consider the potential impact of such a limited point of view on change management, as depicted in Figure 3.2.

If we open our minds to considering what changes might best position our organizations for success in the future, we are likely to have more options available to us than if we are simply reacting to today's situation. We will also have more time to plan through our changes so that we are not constrained by an urgency to react. Of course, the worst situation is to have to implement reactive change when in the midst of a crisis.

History is rife with examples of organizations that reached an important level of success, yet failed to sustain that success by not responding to changes in the external environment. Names of American companies like Wang Labs, Circuit City, CompUSA, and Kodak immediately come to mind, and more recently Blockbuster and Toys R Us. Even the international financial crisis of 2008–2009 can be attributed to failing to respond to a changing external environment resulting from the US deregulation of financial institutions and bundling of risky subprime home mortgages as if they were safe investment instruments. While there are countless examples of private sector organizations failing to plan appropriately for the future, that challenge expands greatly in the public sector, including with government agencies.

Private sector organizations generally understand that they will cease to exist if they cannot effectively compete with competitors that better adapt to a changing environment. That dynamic is generally not present, however, in the public sector. Few public sector organizations “compete” for existence against other public sector organizations. While they may indeed compete for a limited overall budget, their very continuing existence is less likely at stake. As a result, a culture of considering only the “here and now” often permeates a public sector organization. As an example, one of this book's authors sat through a panel discussion sponsored by a US federal agency extolling the virtues of real estate investing late in 2008. This was a point in time well after the signs of significant risk in real estate losses were evident. While the risk of such investing was becoming blatantly obvious to the public sector, this particular federal agency went ahead with “business as usual,” totally oblivious to the changing world around them. As Wayne Gretzky, the famous professional ice hockey player, is quoted as saying, “A good hockey player plays to where the puck is. A great hockey player plays to where the puck is going to be.”

PLAYING TO WHERE THE PUCK IS GOING TO BE

Future success, of course, depends in part on building upon a successful present. If an organization cannot meet today's needs, it is particularly challenging to be successful in meeting tomorrow's needs. However, as has been stated, managing the present through reactive internal change is not sufficient to achieve such future success. We also need proactive internal change.

Because we are seeking to gain insights and make decisions regarding the future, we are operating in an environment of uncertainty. Managing the risk of that uncertainty in a meaningful manner is far too seldom considered a fundamental element of good management decision-making. Frequently, risk is considered only as a starting point for evaluating various options, or as an ending point to allow a decision that has already been tentatively made to proceed. In other cases, risk is treated as an afterthought once a decision has been made, or as a “check-the-box” exercise to meet some management or regulatory directive. Effective risk management requires much more. It requires an appreciation of how risk contributes to making an effective management decision aimed at generating increased, and ideally maximum, stakeholder value.

All organizations and their decision makers understand that organizational strategic objectives must be pursued, and hopefully achieved, while relying on limited resources. Cost-benefit analysis, whether conducted through a formal methodology or simply informal judgment, is always part of making management tradeoff decisions. However, except for certain business sectors, such as financial services and insurance companies, the explicit consideration of risk in arriving at a business decision has often been much less present. One of the challenges for the broader consideration of risk in decision-making has been the number of managers lacking exposure to more recent best practices in risk management. A strong case must be made to managers on the need for effective risk management as part of their day-to-day responsibilities for decision-making. Risk management must be understood to be a core management practice applicable to every decision maker, not simply a set of procedures conducted by a risk management department.

Making tradeoff decisions on the results delivered for products and services versus the costs of delivering those results are the typical cost-benefit considerations that every organization will exercise, even if informally. However, increasing stakeholder demands today in an environment that is more volatile and changing faster than ever (e.g., new and emerging technologies such as artificial intelligence) means that successful organizations will need more than cost-benefit analysis to sustain success. Instead they will need to understand the tradeoffs between results to be delivered through products or services, resources allocated to the delivery of those products and/or services, and the acceptable level of risk that supports delivering maximum value in the face of change.

STRATEGIC PLANNING: AN ESSENTIAL ELEMENT OF NAVIGATING CHANGE

In Chapter 2 we suggested that organizations are established to deliver value to their various stakeholders. However, that stakeholder delivery must be aligned with considerations of the organization's stated mission, and the products and services the organization produces, all while considering the effects of inevitable external second-order change.

The consideration of organizational mission and outputs (i.e., products and services) can often be modified or even radically changed in the private sector if doing so increases overall stakeholder value for the future. However, that is generally not true in government organizations, as missions and outputs are typically written into law or regulation, and significant changes need to come from stakeholders external to the organization.

Nevertheless, it must be recognized that there may be times in a national, state or provincial, or local government that the establishment of a new agency is under consideration. In these instances, the interactive balancing of unmet stakeholder needs, the definition of a proposed agency's mission, and the products or services the proposed agency would deliver are open to broad consideration and tradeoffs. In such a situation, it is likely that the discussion of stakeholder needs and the delivery of products and services to meet these needs would strongly affect the definition of the proposed organization's mission.

With this exception, however, the mission of any existing agency is generally well established and open to only relatively minor modification. Still, within the constraints of the existing mission, there may be opportunities to revise what are considered the primary products and services of the organization. There is certainly a need to understand stakeholder interests and needs as related to the purpose and outputs of the agency, which will in turn likely impact consideration of existing or proposed products and services and the means by which those products and services are delivered.

Regardless of the constraints placed on adjusting mission, outputs, and stakeholder interests, significant thought must be given to how these three factors interrelate, and changes to those relationships that could provide for greater value generation by the organization should be part of a strategic planning process. This is a core objective of the strategic planning process.

LINKING STRATEGIC AND OPERATIONAL PLANNING

The Balanced Scorecard Institute defines strategic planning as:

an organizational management activity that is used to set priorities, focus energy and resources, strengthen operations, ensure that employees and other stakeholders are working toward common goals, establish agreement around intended outcomes/results, and assess and adjust the organization's direction in response to a changing environment. It is a disciplined effort that produces fundamental decisions and actions that shape and guide what an organization is, who it serves, what it does, and why it does it, with a focus on the future. Effective strategic planning articulates not only where an organization is going and the actions needed to make progress, but also how it will know if it is successful.

Particular attention should be paid to the idea that effective strategic planning is not only determining where an organization is going, but also to some extent “the actions needed to make progress.” Too often organizations consider these steps as completely independent of one another by first setting direction, and only then giving any consideration to how to progress. For these organizations, “actions needed to make progress” are relegated to operational planning and the execution of a strategic plan already established. However, to develop an effective strategic plan, operational impacts and capabilities must be considered. The flaw in not considering operational impacts is that the development of operating plans is constrained by a strategic plan that did not consider operational capabilities. Establishment of any strategic goals must be set in the context of the abilities of the organization to deliver against those goals. This requires that strategic planning not be viewed solely as a boardroom or executive-level exercise that is not informed by lower levels of the organization, and as an exercise that is a top-down establishment of requirements without any bottom-up consideration of organizational capabilities, capacities, and need for change. To illustrate this two-way conversation that must take place in any large organization, let's reconsider Figure 2.5, repeated below as Figure 3.3.

The setting of top-level, long-term organizational objectives is certainly part of a strategic planning process. However, as potential strategic objectives are considered during the strategic planning process, consideration should also be given to the subobjectives that must be achieved in order to successfully accomplish the highest-level objectives. As subobjectives are tentatively defined, those proposed subobjectives must be communicated to the next lower organizational level for review of feasibility of accomplishment with proposed resources and desired levels of risk. Pending preliminary agreement on subobjectives, those subobjectives should then be further decomposed and in turn discussed with the next lower organizational level to share expectations and agree on the proper balance of results sought, resources to be allocated, and risks deemed acceptable. As these top-level strategic objectives get decomposed and passed down to lower organizational levels for review and discussion, two important tasks are accomplished.

First, discussing objectives with those whose support is required to achieve the objective communicates the need for and rationale of the proposed change. This engagement helps ensure that lower-level actions on achieving objectives are informed by higher-level intents for those objectives. Second, these discussions may identify obstacles or challenges to accomplishing the objectives that were not identified and considered when originally proposed. Such a discussion by those who will be responsible for taking actions to achieve the objective may bring added insight into the challenges to achieving the proposed objectives. By potentially increasing clarity on the level of results achievable, resources required, and risks to be faced, a more effective evaluation of the potential value to be delivered is likely. Moreover, such engagement between organizational levels can build support from those at lower levels from whom commitment will be required. Lower organizational levels typically want to know that their capabilities and concerns are understood by their next higher level of management, and that these capabilities and concerns are in turn taken into account in shaping higher-level objectives. This dialog thus becomes an important part of organization behavioral change to be addressed in more detail in Chapter 16.

It must also be noted that this passing of proposed requirements downward, and responding with capabilities and proposed adjustments to requirements upward, does not end at the top level of the organization. Conceptually, this movement could continue to the lowest levels of the organization. In large organizations, however, the number of conversations down through the organization and then back up to the executive level can take significant time, because these conversations must take place in series. The larger the number of organizational levels connected through these subsequent requirements/capabilities discussions, the more robust the final understanding and balancing of results, resources, and risks. However, this more robust understanding will require more time to achieve.

Careful consideration must be given to the time taken to plan for proactive change, as the external environment continues to shift in the meantime. In a rapidly changing environment, decisions made after passing discussions back and forth through many organizational levels may be out of date by the time those decisions are reached. Consideration must thus be given in balancing the improvements to understanding of the optimal balance of results, resources, and risks, and to the possibility that the optimized balance is applicable to when the strategic planning process started, but has since become inconsistent with a new external environment.

THE QUEST TO OPTIMIZE STAKEHOLDER VALUE

While the determination of what constitutes value may be more challenging in the public sector than in the private sector, it is certainly no less important. Public sector organizations are generally faced with increasing demands for services in the face of ever-increasing budget challenges. While customers of private sector businesses can shift from one provider of products or services to a competitor when expectations are not met, that is generally not possible for citizens in the public sector. Expectations by customers of businesses can be high, and tolerance for failure low. Increasingly, citizens are having similar expectations as customers. There is an increasing impatience by taxpayers and governance boards with waste and inefficiency that is leading to demands for evidence of outputs, outcomes, transparency, and accountability. Terms like “more for less” are commonly heard.

It is thus essential that public sector managers understand the concept of stakeholder value and consistently seek to deliver that value. Simply spending the allocated budget – without concern for the outcome – is a certain road to failure. Accomplishing this objective requires considering that we are in a world of constant change, and future success will depend in part on successfully understanding future needs. A strategic planning process that vertically engages a sufficient part of the organization to ensure alignment between organizational objectives and capabilities will be required to successfully establish objectives delivering value in a world of constant change.

Chapter 4 describes in more detail one of the more popular strategy management methods that has the purpose of aligning the priorities and actions of managers and employees with senior leadership's strategy.