KPMG Transformation Study 2015 Business Transformation
KPMGTransformationStudy 2015Business Transformation:Driving the Optimum ValueA methodology forsustainable success
“The right approach for atransformation starts witha clear understanding ofhow the transformation issupporting the strategicvision and businessoutcomes.”– Stephen G. Hasty, Jr., Global TransformationLeader, KPMG LLP 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliatedwith KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.
01“The right approach for a transformation starts with a clear understanding of how thetransformation is supporting the strategic vision and business outcomes,” says Stephen G. Hasty, Jr.,Global Transformation Leader at KPMG LLP. However, KPMG’s research reveals that many companiesembark on business transformation only to be disappointed with the actual business results and valuethat the effort and investment achieves.In fact, a third (34%) of CEOs at U.S.-basedmultinationals state that past transformationprograms have failed to achieve the businessbenefits targeted at the onset. While there aremany reasons why programs can fail to attain theirbusiness objectives, KPMG’s research points tothree prerequisites for achieving truly successfultransformation.First, the transformation objectives must be alignedwith the strategic objectives and goals of the business.KPMG’s research reveals that for a majority of companies,the approach to transformation is strategic in scope, ratherthan driven by a specific business function or technologyimplementation. Such an ambitious approachcan either pay off with higher value or failbigger. That is why the aspirational strategyguiding transformation needs to be wellconceived from the start.Second, programs must execute effectively.Effective execution is the means by whichoutcomes are achieved by implementingbusiness capabilities. However, just athird of companies consider themselveshighly capable at executing complex 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliatedwith KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.transformations. Failure to adequately address required operatingmodel changes is one of the chief obstacles to effective execution.Value management is the third prerequisite for successfultransformation. Metrics are indispensable guideposts for reachingthe goal, yet only 14% of businesses currently define metrics andalign them with the strategic vision and desired business outcomesbefore getting the effort underway.These three factors are mutually reinforcing. Missing even one of themcan cause a transformation effort to under-perform and under-deliver.This paper explores how businesses can increase their chances ofsuccess through attention to these three transformation factors.ContentsAlign with Strategy02Execute Effectively05Q&A: Transformative Synergies06Manage for Value08Conclusion09Methodology & Acknowledgments09
02Align with strategyTo arrive at theoptimum valuefrom transformation,start in the future.Transformative valueis derived by lookingahead and setting the rightstrategic aspirations for thebusiness before bringing thespecifics of the transformationto life. “As a CEO, you’realways trying to look aroundthe corner,” says FrontierCommunications ExecutiveChairman (formerly Chairman andCEO) Maggie Wilderotter. “What’snext? Where are the choice points?Where do we have a right to win?”“A successful transformation approach requires strategydevelopment based on iterative scenario planning, looking at thedisruptors inside and outside your industry, and developing anexecution plan unique to your firm’s competitive position,capabilities and cultural environment.”– Robert T. Vanderwerf, Global Transformation Strategy Leader, KPMG LLPFrontier, which offers broadband, voice, video and othercommunications solutions to homes and businessesin 28 states, will become one of the country’s largestcommunications providers upon completion of atransaction to acquire Verizon wireline and FiOS assetsin California, Florida and Texas in the first half of 2016.While the traditional saying is that “execution eatsstrategy for breakfast,” a perfect execution meansnothing if the course is wrong. KPMG’s researchreveals that a majority of executives take a strategicapproach to transformation (Fig. 1). Such an approachis defined as beginning transformation with a strategicplan to address a defined set of high-impact issuesthat require an interrelated set of projects across thebusiness to realize the plan.The stakes are high when it comes to getting thestrategic plan right. The most ambitious transformations,those that start with a strategic plan to address a set ofhigh-impact issues, have the highest incidence (27%)of yielding less value than expected, compared totransformations that begin with a certain function (22%)or technology (19%). Narrowly-focused transformationsseem to be the safer bet.The answer, however, is not to shy away from ambitiousplans and focus narrowly out of fear of failure. Designingtransformation with a competitive advantage in mindpays off. The results of regulatory-based transformationundertaken with three different approaches—rangingfrom a strategic approach aimed at competitiveadvantage to a narrow approach aimed at straight 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliatedwith KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.
03Figure 1: Approach to transformation57%My organization is most likelyto begin with a strategic planto address a defined set ofhigh-impact issues35%My organization is mostlikely to begin withtransformation of aspecific functioncompliance—reveals that the most ambitious approachyields the most value.The most ambitious approach to regulatory-basedtransformation resulted in just 14% of companiesreporting value less than anticipated and 28% reportingmore value than expected. These results were almostreversed in the case of the least ambitious regulatorybased transformation approach, with 35% getting lessvalue and only 13% getting more than they expected.Scenario planning is a critical practice in setting the futurestrategy. All CEOs need to ask themselves: “What arethe disruptors that could occur, and what do we do as aresult of those disruptors?” says Robert T. Vanderwerf,Global Transformation Strategy Leader at KPMG LLP.The next step is to identify the cross-over competitiveadvantage present in multiple scenarios. And to set theirstrategic aspirations, smart companies keenly observenot just peers within their own industries, but companiesacross all sectors, including new industry entrants andsmaller companies. The latter is crucial, consideringthat scale itself is no longer a competitive advantage.8%My organization is mostlikely to begin withtransformation of aspecific technologyToday, smaller companiescan leverage technologyand analytics to achievescale similar to their muchbigger competitors, notesVanderwerf.KPMG’s research hasshown that to stay relevant,smart companies compete with entrenched rivals as wellas with newly-emerging competitors, whether withintheir industries or across industries. Joseph R. Swedish,CEO of WellPoint, a health insurance company, believesthat companies such as Amazon and Uber have changedthe way customers think about services and productdelivery for all companies.“Transformations triggered bynew or emerging competitorslead to significantly more valuethan transformations triggered byexisting competitors. 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliatedwith KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.”Competing with a newly-emerging competitor—which is presumably leveraging disruptivetechnologies or new business models—yieldsbetter results in business transformation as well.The new entrants have generally identified an areaof competitive advantage over existing marketparticipants, and they are able to successfullycompete in all or some portion of the market.Transformations triggered by new or emergingcompetitors lead to significantly more value thantransformations triggered by existing competitors.In fact, 90% of transformations triggered by newor emerging competitors have resulted in achievingthe anticipated value or more, as compared with70% for transformations triggered by existingcompetitors.“A successful transformation approach requiresstrategy development based on iterative scenarioplanning, looking at the disruptors inside andoutside your industry, and developing an executionplan unique to your firm’s competitive position,capabilities and cultural environment,”says Vanderwerf. continued on next page
04It’s only when you set the course—clearly answeringthe “why transform?” question and identifying yourbusiness outcomes and execution path—that you canrealize the value from your vision. Following that, “theright value methodology starts with a clear understandingof how the transformation is supporting the visionand contributing to business outcomes. Future-statescenarios are changing rapidly. Your business andoperating model designs must allow for agility duringexecution, to make sure you adapt to the changingenvironment,” says Vanderwerf.“Our starting point [of any transformation] is to definewhat is our why. Then we transition into defining highimpact issues,” agrees Tupperware CEO Rick Goings.KPMG’s research found customer demand to be thetop trigger for transformation over the next three years.“Why transform?” will most often be answered with:“to meet customer demand” (Fig. 2). In this typeof transformation, the ultimate value lies in deliveringon your value proposition to your customers.National Instruments helps scientists and engineersautomate the world around them and develop smarterproducts and technologies: “the convergence oftechnology among networking, processing and softwarethat enable people to do things in their domains thatthey weren’t able to do before,” says Eric Starkloff, NI’sExecutive Vice President of Global Sales and Marketing.“We are trying to teach our customers a new way ofsolving an old problem.”Mapping a customer-driven transformation starts atthe end result—the delighted customer. “You needto look at the journey—the value chain that leads tothat ultimate customer value—and how it’s achievedthrough the organization,” says Vanderwerf. “A lot of thiscomes down to connecting the dots from the strategicaspiration—the delighted customer—and the executionof that aspiration through the business and operatingmodels.” 132%Customer demand34%28%Changing/expandingglobal environmentFigure 2:Top fivetransformationtriggers over thenext three years37%24%Industry consolidation21%23%Comply withgovernment policy23%23%Disruptive technologies21%Next three yearsPast three yearsPercentage of respondents who answered yes. 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliatedwith KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.
05Execute EffectivelyHow capable are organizationsat executing transformation?While about two-thirds ofcompanies believe that theircapabilities in these areas areabove average, just a third considerthemselves highly capable (Fig. 3).Capabilities correlate sharply withvalue realized from transformationinitiatives. In fact, low-performers’transformations fail—or realize lessvalue than anticipated—twice as often asthose of highly capable organizations (40%versus 20%).What stands out is that executives believetheir organizations’ capabilities are higher interms of strategy, and lower when it comesto developing business and operating modelsor extracting value from transformation.These findings correlate with KPMG’sobservations that execution is the hardest partof transformation.Translating strategy into action is a tall task. Itdemands a strong interconnectivity betweendeveloping strategy and developing the approach forits execution. “All organizational capabilities, from thecustomer through the value chain, must move in syncand be driven by the same ultimate strategic goals toachieve success,“ says Vanderwerf.This interconnected design of the transformationmust be clearly understood and communicated.“What is challenging about the vision is finding a wayto communicate it at an appropriate level so that theentire organization can get a feel for what it is andwhat it means,” says Greyhound CEO David Leach.“The execution can definitely be harder. We are astrong, vision-driven company. The challenge is thatdifferent groups can interpret that [the strategic vision]in different ways. They believe they are executing thestrategy, but in fact it can be that they are slightly offbecause they have a different interpretation of it,”agrees NI’s Starkloff.Vanderwerf notes that the growing disconnectbetween strategic vision and execution outcomesis leading some CEOs to get closer to the executionof the business. Far from lacking trust in theirmanagement team, these leaders understand that torealize their strategic vision, they must quickly achievecultural acceptance, integrate their organizationalcapabilities, and be flexible in adapting to the currentcompetitive environment. To this end, leaders needto make sure that all aspects of a transformationremain aligned and in support of the strategy. “Thisensures that there is one voice, one strategy, andeverybody is pulling in the same direction to achievethe ultimate value outcome, and that they understandhow everything fits together,” he says. “In this highlycompetitive, fast-moving environment, there is noroom for wasted effort, dead-ends or delays.” 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliatedwith KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.At NI, aligning everybody around the vision andmaking sure that it is being executed on the groundis at the forefront. “We have been in a process ofcommunicating the strategic vision and making surethat the top-level strategic principles are understood.We have to get into the meat of what it means foreach group and department,” says Starkloff.Figure 3: Transformation capabilityIn regards to business transformation, my organizationis highly capable at:37%Continuouslyimproving theimplementedmodel36%Executing onimplementationplanDevelopingbusiness andoperating modelsDeveloping a businesstransformation strategy32%29%29%27%Designing atarget modelExtracting andmaintainingplanned valuePercentage of respondents who answered yes.
06SIDEBAR:Transformative SynergiesQ&A with Greg Guidry, Executive Vice President, Unconventionals, Americas, Royal Dutch ShellWhat is the goal of your transformation? Whatis your approach?We are repositioning the business into theunconventionals (tight/shale oil and gas onshoreexploration opportunities). We are working on threeelements of the transformation: repositioning theportfolio, enhancing our capabilities and enhancing theculture. Other integrated oil and gas companies choose tokeep the unconventionals business separate, spin it off orrun it as a regular piece of their whole organization.We made a conscious decision against the spinoff. Partof the motivation behind this decision is to create anopportunity for the whole organization to learn aboutbecoming nimble from the unconventionals experiencethat we are working on. At the same time, this will allowthe unconventionals business to leverage some of thestrengths that the mothership brings, such as valuechain integration, the global scale and the ability to bringtechnology to the table.What are the challenges and benefits of thisambitious approach?The biggest challenge is that the control frameworkthat works for the totality of Royal Dutch Shell does notnecessarily fit a nimble unconventionals business. Thequicker alternative would be to spin off and create ourindependent control framework. But it’s proving to beworth it. We’re already seeing some of the applicationswe developed being adopted in other parts of globalShell. That’s the kind of synergy that we hope to gain.Where are you on the transformation journey?The first stage was getting the portfolio where it neededto be. We completed it in less than a year. We reducedthe number of active exploration plays in half. Weexceeded the value we expected to get for those assets.The other element, happening in parallel, was creating amore cost-competitive, but more capable, organization.Cost leadership was a big piece of that. The last element,which we are starting to work on now, is culture.How are you measuring progress?We are measuring outcomes and progress-relatedmetrics, roughly half and half. We are measuring progresson milestones and implementations. Over time, myexpectation is that we will have fewer progress-relatedmeasures and much more outcome-based measures. Weprobably measure a bit too much. I’ve got a philosophythat if you can’t measure it, you’re not going to get it. 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliatedwith KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.
07The top barrier to a successful transformation initiative isunderestimating the significance of the operating modelchanges necessary to effect transformation (Fig. 4). Andinterestingly, other top barriers are all components of aneffective operating model.“Companies are not doing as good a job as theycould on connecting their strategic vision with theirbusiness and operating models,” says Todd Lohr,Global Transformation Enablement Leader, KPMGLLP. “Often organizations look at their operatingmodel as a cost to reduce versus an asset to createvalue. Organizations should make a direct connectionbetween their strategic and financial aspirations and theset of integrated, aligned and motivated capabilities thatwill achieve it.”At Royal Dutch Shell, the strategic outcome of enteringthe unconventionals business was the addition of asubstantial new supply source to Shell’s portfolio.28Figure 4: Top five barriersto a successful iatemetricsInadequateor legacytechnologyUnderestimatingsignificance ofoperating modelchangesThat is the case at Greyhound, where the strategy ofbecoming a technology-savvy, customer-demand-drivenoperator has led to new business and operating models.Analytics-based management of seat inventory resulted inprices that reflect the changing demand by day-of-week andtime-of-day. This in turn enabled the company to offer lessexpensive tickets while improving profitability. “Moderntechnology has enabled us to change our business modelfrom an on-demand, walk-up business to one more similarto airlines,” says Leach. “Furthermore we are embracingnew web and mobile technologies to better serve ourcustomers while they shop, and before, during and afterthey travel.”Frontier Communications follows through on its visionof being a leader in communications by employing anoperating model tailored to the task at hand. Frontierrecently acquired AT&T’s wireline, U-verse andbroadband operations in Connecticut. The acquisitionstrategy was in line with leadership’s philosophy offocusing on where the company can win.But Frontier does not take w
he right approach for a transformation starts with a clear understanding of how the T transformation is supporting the strategic vision and business outcomes,Ó says Stephen G. Hasty, Jr.,
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