A fresh perspective on business change.

Barometer on Change 2014

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Opportunity in a dynamic economy

The economy is experiencing a sense of optimism that has not been felt for several years: economic conditions are improving and businesses are seeing the best prospects for innovation and growth since the deepest recession in living history.

Conversely, this is coupled with continued public sector austerity, albeit

against a backdrop of some of the largest government transformation

programmes ever witnessed. This creates a peculiar set of conditions and

challenges for organisations across the UK.

Organisations’ success remains far from straight forward in this evolving

climate. As the pace of change picks up, so too does the importance of

understanding and addressing those obstacles that may inhibit the

realisation of business goals. A dynamic economy presents opportunity;

but organisations may only have a limited amount of time to act if they are

not to be left behind.

Such is the setting to the third annual Moorhouse Barometer on Change,

in which we seek to understand how well equipped business leaders are

for the tests that lie ahead. Through our research with Board members and their direct reports we

have shed light on some of the priorities that are emerging as the long-awaited recovery gains

momentum.

Stephen Vinall Managing Director, Moorhouse

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Contents

3 Introduction

5 The changing picture – emerging trends

8 Theme one: Without strategic clarity, and aligned change initiatives, chances of growth are diluted

12 Theme two: Failure to embrace change remains a significant risk to achieving strategic goals

16 Theme three: Difficulties in accessing the required skills to make change happen will hurt organisations’ ability to successfully realise transformation

19 Conclusion

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Introduction

The Moorhouse Barometer on Change is based on a survey1 of over 200 Board members and direct Board reports, from a range of organisations spanning the private and public sectors. Their total spend on transformation initiatives in the last year is £4.2 billion, with an average project

spend per respondent of over £20 million. This replicates our approach from the past three years,

enabling comparisons between data sets, and the identification of trends at a critical time for the UK

economy.

Barometer Sample

1 Structured telephone interviews were carried out by Illuma Research amongst 203 senior managers and directors in UK public

and private sector organisations during January and February 2014.

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We surveyed those

responsible for

spending £20.8m

per organisation on

strategic change

initiatives. This

represents a total

spend of £4.2bn.

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The changing picture – emerging trends

Our Barometers on Change have identified some

intriguing trends since their inception.

In 2012 our research was conducted during a period when investment was limited and general market

performance poor. Unsurprisingly, given the insecurity of their circumstances, many leaders identified

the ability to conduct change initiatives routinely, as an essential capability and one that was critical to

business success. Furthermore, by not changing, there was a tangible risk of organisational failure in

the harsh conditions of the time.

The following year, the 2013 Barometer on Change suggested a more upbeat message. Success was

seen as achievable despite the lingering impact of the financial crisis, but only for those organisations

who took direct responsibility for creating the necessary conditions to enable this. Investing in growth,

rather than focusing purely on survival, was required to maintain a competitive advantage. However,

the confidence felt by senior decision makers was potentially misplaced since there was also an

observed failure to realise the benefits of their growth investments, in part due to a lack of proper focus

and resourcing.

The past year has seen a blossoming sense of economic optimism. At the end of last year, Bank of

England Governor, Mark Carney, announced that recovery “is taking hold” in the UK and growth in

2013 was the strongest for six years2.

Organisations’ confidence is building, but there are still many risks. Corporate balance sheets remain

highly stocked with cash3. Although talk of mergers and acquisitions or infrastructure investment now

seem more commonplace than previously, there is a long way to go before reticent CFOs let cash

reserves drop to levels seen before the crisis. There is perhaps a sense of consciously avoiding the

overconfidence of 2008.

2 Office for National Statistics – Economic Review March 2014 3 Capita – The FTSE 100: Amassing the Cash 2008-2013

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Our 2014 Barometer on Change shows that optimism around overall economic growth is itself

increasing – 69% of respondents expect at least 6% annual growth in their organisations over the next

three years, compared with 55% in 2013. But as the market becomes more dynamic, new challenges

to success emerge, adding to those that already exist.

Without strategic clarity, and aligned change initiatives, chances of

growth are diluted;

Failure to embrace change remains a significant risk to achieving

strategic goals;

Difficulties in accessing the required skills to make change happen

will hurt organisations’ ability to successfully realise transformation.

There are three key themes that emerge from our survey

and these are explored further in this report:

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In 2013, only 9% of

respondents were

investing in one primary

market differentiator

compared to 38% in

2014.

Strategic clarity

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Theme one:

Without strategic clarity, and aligned

change initiatives, chances of growth

are diluted

Strategy development is a difficult balancing act

between defining direction whilst maintaining

flexibility.

The relationship between these two elements depends on a variety of factors, including

external economic conditions, and confidence about future growth. This year we witnessed an

increase in some organisations’ strategic differentiation and a shift in their approach to

delivering change, and noted an intriguing correlation with predictions of growth. Specifically:

Greater strategic clarity and focus on differentiation tend to correlate with higher growth;

Higher growth is also predicted for those organisations that are better able to align their change

initiatives to their strategy.

Being all things to all people is no longer seen as the optimum approach to take

In 2013 only 9% of organisations were focused on one primary market differentiator. This

figure is now 38%, indicating a marked trend away from hedging bets and a move towards a

distinct and defining market position. Being all things to all people is no longer seen as the

preferred approach to take.

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In addition, when we look at the differences between low growth organisations (growing by

under 5%) and their high growth counterparts (growing by more than 5%) an interesting

division becomes apparent. In short, high growth organisations tend to have had greater

confidence in their strategic clarity.

Looking forward, the difference is even more pronounced. In 2013, 37% of low growth

organisations claimed their business strategy was extremely clear for the next three years.

This figure remains largely static in 2014. Over the same period, however, the same measure

of strategic clarity for high growth organisations rises from 50% to 59%.

In other words, there is evidently a beneficial link between strategic clarity and the level of

expected growth. And this gap is widening between those organisations that anticipate

expansion and those that do not.

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Misalign your strategy and change portfolio at your peril

Moreover, misalignment of the organisation’s vision and the programmes commissioned to

deliver it is bound to cause confusion which in turn impacts growth. In 2013 we found that high

growth organisations displayed a greater association between their strategies and their change

initiatives than low growth organisations. This continues to be the case this year.

Why might it be that so many organisations are continuing to struggle with the alignment of

their change initiatives to their strategy? Whilst many organisations are maturing in the way

that they manage programmes and projects, a large proportion appear still to be struggling to

get to grips with effective portfolio management, which can help define, prioritise and provide

balance across initiatives. How can organisations be certain their change initiatives are

responsive to changes in their strategy? Working to develop mechanisms to weed out pet

projects, and ensuring leadership incentives are aligned with the strategy of the organisation

are important steps in developing a productive synchronization of efforts across the

organisation.

In summary, something is preventing low growth organisations from catching up with higher

performing competitors, and this appears to be linked to their strategic clarity. This is

happening regardless of the economic recovery, presenting a real risk that low growth

organisations will get left behind. At a time when expansion is seen as UK CFOs’ top priority4,

instead of reaping the benefits, they may find their organisations increasingly marginalised.

If your organisation’s strategy is not focused or clear, and if your change initiatives are not

aligned to your strategic direction, this is likely to have a tangible impact on the growth you can

expect over the coming years.

4 Deloitte CFO Survey: 2014 Q4 Results

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Less than one in five

organisations is

currently seen by senior

management as

change-embracing.

Embrace change

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Theme two: Failure to embrace change remains a significant risk to achieving strategic goals

This year’s Barometer on Change indicates that

leaders feel the pace and pressure of change is

increasing as they seek to prepare their organisations

to exploit improving economic conditions.

They expect this to continue in the short term. Our research identified three distinct areas that must

be embraced in order to successfully enable a strategy.

A corporate culture that welcomes change goes hand-in-hand with the likelihood of achieving

growth;

Readiness for change needs to be reflected in the organisation’s investment initiatives;

Ongoing cost cutting may be detracting from important proactive investment decisions.

Less than one in five organisations is currently seen by their senior management as change-embracing First, the ability to change is anchored in corporate culture, and currently less than 20% of

organisations surveyed have the required behaviours in place amongst their leadership team and

workforce. Although there is a positive trend in this area compared with 2013, still less than one in

five organisations is currently seen by their own senior management as change-embracing. Indeed,

two in five are even described as anti-change (“change-sceptical”, “change-resistant”, or

“entrenched”). Without a culture that fosters support for change, and the benefits to delivery

associated with this, a strategy remains a theoretical concept detached from operational reality. The

2012 Barometer on Change outlined that a “lack of ownership from staff / stakeholders” was seen as

the biggest threat to the successful outcome of an organisation’s projects, and in 2014 it still remains

amongst the top three threats to delivery.

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This observation around culture is especially pertinent to those organisations described as low

growth, where only 48% describe themselves as pro-change (compared with 72% amongst high

growth organisations). Whilst the low growth cohort report improvements in strategic clarity over the

last twelve months, they still remain largely anti-change. This cultural distinction between low and

high growth organisations appears to be an important and causal differentiator in determining ability

to enable a strategy and deliver growth.

Consideration therefore must be given to the challenge of how to achieve change in an anti-change

environment, or how to create a more pro-change culture. Good programme and project

management is not enough – organisations need to invest in developing their change leadership

and change management capabilities. Intriguingly, the proportion of organisations describing

themselves as “change-able” has actually declined over the past year, whilst there is now a greater

number defining themselves as “change-embracing”. In other words, those that are pro-change are

becoming more so, but there is a genuine risk that a sizeable percentage will get left behind.

The second factor relates to the willingness of senior management to support ambitious investment.

Even though some sectors may be in better shape than others, there is a common theme here.

High growth organisations were more likely to have increased their investment in change initiatives

over the past year.

A willingness to invest in proactive change initiatives is important in achieving growth Moreover, there is an additional divergence to be observed that offers clues to the relationship

between investment and growth. Those organisations that saw a 5%+ increase in investment tended

to invest in targeted proactive projects to get ahead of the market (e.g. new products and services).

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Those which spent at a lower rate typically made more reactive investment decisions aimed at

keeping pace with the market. They did not necessarily take the bold steps required to access new

markets or increase their share of existing ones.

It is apparent too that access to capital budgets plays a key role in investment decisions – twice as

many of the high investment organisations cite this as a factor in their decision-making. It seems

that a willingness to put one’s money where one’s mouth is has an important role to play in the

overall attitude towards change.

Cost reduction is not an end in itself The third point relates specifically to cost reduction. Cost reduction programmes remain an

important focus for many organisations (irrespective of improving conditions), albeit marginally

declining as a priority. That said, as levels of investment increase, and as savings from cost

reduction are realised, decisions must be made as to where to allocate funds. The 2014 Barometer

on Change shows that low growth organisations are still more focused on cost reduction

programmes than high growth ones (49% compared to 32%).

Where cost reduction continues for too long we see a likelihood that certain organisations will be left

behind, as their competitors take calculated risks to alter their change initiatives in order to facilitate

growth. Whilst each senior management team must understand their organisation’s (and market

sector’s) specific context, a paradigm shift in investment planning is required at some stage, and

this means actively embracing change.

To conclude, a pro-change culture can be self-perpetuating. However, whilst many leaders can

speak with greater strategic clarity it would appear that a significant number sit atop organisations

that are not suited to enable this. Culture starts at the top, and leadership has an opportunity to

demonstrate what it wants from its staff through bold decision-making that embraces uncertainty

and promotes ambition.

An organisation’s vision needs to be tied closely to the investments leaders are willing to make. Is

the investment profile fit for purpose in terms of scope and scale? Now is the time to reassess the

corporate culture that might have been valuable and necessary during the recession, but which may

not be suitable for your ambitious requirements going forward.

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Accessing skills

Only 35% are very

confident they will be

able to access the skills

they need.

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Theme three: Difficulties in accessing the required skills to make change happen will hurt organisations’ ability to successfully realise transformation

There is confidence amongst our survey respondents that they will increasingly be able to

deliver the transformation programmes they have been planning. But accessing the capability

to make change happen is not straightforward and careful planning is needed.

Buoyancy about the future may be at odds with organisations’ capacity to access the skills they need to

transform;

Innovating to secure skills in a timely manner must be a priority for senior management.

Almost 60% of senior leaders claim they are now at least very confident in their organisation’s

ability to effect successful transformation (compared with 41% in 2012). Based on

performance in the past year there is every reason to be positive – after all, where in 2012 only

19% claimed that 80%+ of their transformation programmes were successful, in 2014 this

figure has doubled to 38%.

The future challenges require different capabilities from those of the past

However, there is a need for a degree of caution. Organisations may be giving themselves a

false sense of security if they fail to consider how the challenges of the future differ from those

of the past three years. We have already observed how the size and nature of their

investment is going to change in order to target opportunities presented by a strengthening

economy. The more outwardly focused activity predicted for the coming years requires a

different approach and set of skills from the previous focus on cost reduction.

Leaders anticipate investing in a range of programmes, including product development and

launches, new IT infrastructure, and new operating models. Organisations will need to put in

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place the required delivery capability, and this may require a fresh approach.

For all the other positive steps high growth organisations have taken (such as developing

strategic clarity and enabling the strategy through culture, investment and a balanced set of

initiatives), success will not be possible if the strategy cannot be delivered. From 2013 to 2014

the proportion of leaders saying that they need new skills and capability to deliver the strategy

has more than doubled. Given that demand for a finite skills pool is growing, it is not surprising

that over this period the percentage of respondents that are very confident they will be able to

access these skills has dropped from 47% to 35%. Additionally, whilst in organisations

describing themselves as low growth this figure is lower than in high growth equivalents, the

drop in confidence over the past twelve months has been more marked in high growth

organisations. In other words, access to the right skills to deliver the strategy is a common

challenge. A lack of dedicated resource and a deficiency of experience and skills within

project teams are stated as the two most important threats to the successful outcome of

transformation activity.

Typically change is more enduring when it is driven and owned by leaders within the

organisation – consideration should be given to whether the necessary change leadership

capability is in place or if it should be recruited and developed. Whilst interim leadership

capability can be hired on a temporary basis, this can impact negatively on the sense of

organisational ownership of the transformation.

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Where does capability come from?

Aside from leadership, the delivery of large change programmes requires capacity and

capability that may have been trimmed down over several years of cost-cutting. Furthermore,

it may not be desirable to recruit delivery expertise for a finite transformation programme, no

matter how strategically valuable it is. Outsourcing the entire delivery of an enterprise

transformation programme is equally unlikely to be viable. This may have worked ten years

ago, but in the current climate it appears there is neither the appetite nor funding to do this.

This points towards a need to think differently about how to make change happen. Does the

organisation have the capability currently (and does it have the time to develop it?) and, if not,

what is the optimum approach to sourcing it in a timely and sustainable manner?

Organisations may want to plan their desired future resource profile now. Understanding and

managing the resourcing supply chain will become increasingly important, particularly as

demand increases in line with economic recovery. New models may allow management to

mitigate their risks better. Maintaining the balance between in-house ownership of

transformation and a subtly evolving mix of delivery resource presents a different challenge

from the pre-financial crisis approach. Traditional methods of securing capability may no

longer always be optimal.

Developing your resourcing strategy should be an immediate priority, since access to

capability is set to become a major bottleneck in the delivery of transformation programmes.

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Conclusion

There is growing confidence in the UK’s economic

performance, and this is borne out by our survey

results. To be best placed to take advantage of the

opportunities associated with growth however,

organisations need to act decisively.

More than two thirds of respondents state that they expect a minimum of 6% growth for their

organisations over the next three years. However, respondents also indicate that the scale

and rate of change their organisations face in the coming year is going to increase, and if they

want to enjoy a share of the economic growth they must act decisively to address the

challenges this presents. Change and uncertainty are closely linked, and require careful

planning to ensure that risks do not impact performance in a negative manner.

The Moorhouse Barometer on Change 2014 sheds light on many of the concerns shared

across senior leaders from all industries. From these findings, we identified three key themes:

If you fail to develop a clear strategy or fail to reflect your strategy in your change initiatives

it is likely to put a brake on your ability to grow;

If your organisation is not ready to embrace change, or is not thinking proactively, there is

a risk that it will fall behind the competition;

Without swift action to develop an innovative approach to securing your required

capability, you may struggle to resource your transformation programmes with the talent

you need.

Of course every organisation is faced with a unique set of circumstances, and these themes

must be interpreted with reference to these. That said, a failure to grow in these improving

conditions may result in a widening of the gap between those organisations that are able to

confront these difficulties successfully and those that cannot; and for the latter group this may

present a challenge to their long term survival. Our challenge to senior management is to look

at their own organisation and see how it fares against our themes. How well equipped are

they? How ready are they to take advantage of the change in the country’s economic

fortunes?

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About Moorhouse

Moorhouse helps organisations design and deliver

successful transformation.

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Moorhouse helps organisations design and deliver successful transformation. Moorhouse is committed to sharing its knowledge and improving the effectiveness of transformation programmes across all industries. As part of this commitment, Moorhouse regularly surveys those responsible for transformational change and has produced insightful publications and articles which can be found at: www.moorhouseconsulting.com

Published May 2014 ©2014. Moorhouse. All rights reserved.