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     // . //  Insights //  Challenging Times Demand Transformation

    With the world in disarray, businesses are facing an unprecedented set of challenges. European economy is experiencing post-pandemic stress, the highest inflation for decades, and the consequences of the ongoing war in Ukraine. Geopolitical tensions carry risks of further disruption. The impacts of long-term structural shifts around climate, demography, (de)globalization and digitalization are increasingly evident. Companies will face strong headwinds throughout 2023 and beyond.

    Oliver Wyman’s Performance Transformation Survey captures the voice of more than 200 European senior executives and sheds light on how business leaders intend to navigate their company’s transformation through these challenging times.

    Executives expect to see margin decline over the next 12 months in an environment that continues to be highly demanding. On top of what was already a challenging agenda, it is factor costs that keep leaders up at night. Our survey highlights their response. Executives see a massive need for transforming their companies. They set an ambitious strategic change agenda and will need to strike a balance in managing cost and profitability in light of current market challenges. We find that many executives are not yet fully ready to transform. Their transformation plans are in risk of failing to deliver the desired results.

    We highlight the critical success factors for company leaders when designing, building, and implementing the transformations necessary to realize their highly ambitious strategic agenda and achieve sustainable results.

    Executives expect diminishing margins in a challenging environment

    Executives in Europe face a formidable set of challenges in 2023. While the COVID-19 pandemic is no longer the number one concern, with the exception of China, and with few European executives expecting another global pandemic wave, the broader global crisis is not yet behind us. The European economic environment continues to be highly demanding. The Organisation for Economic Co-operation and Development (OECD) estimates that European Gross Domestic Product (GDP) growth will be only 0.5% during 2023. Late post-pandemic effects, combined with the additional disruptions resulting from the war in Ukraine, have caused shortages in supply and brought about unseen levels of inflation unprecedented in recent decades.

    Executives are mostly concerned with the challenges in the here and now. Factor cost increases keep European executives up at night. They consider this their biggest challenge. Ongoing supply chain disruptions remain a second area of major concern this year.

    Unsurprisingly, almost all executives (92%) expect inflation to impact their company’s performance over the next twelve months. Without further tightening of monetary policy and hopefully an end to the war in Ukraine, high inflation is likely to be here to stay, at least in the short to medium term, with a wage-price spiral threatening to turn up the pressure.

    Most executives are already acting on climate change and sustainability, with many starting to also take a look at the entire supply chain rather than just the internal operations. Nonetheless, many leaders are yet to find the key for turning ESG into real business upside.

    Talent shortage is of increasing concern for leaders and has started to weigh heavily on the growth agenda of many companies. The war for talent is unlikely to ease for the foreseeable future. Considering the European workforce demographics, the overall talent pool is expected to shrink even further over the next few years.

    The current disruption and long-term shifts translate into an expectation that costs will increase further. In spite of top-line forecasts being increasingly optimistic, we find cost increases weigh heavily on margins. Few executives expect to continue business as usual in this demanding environment.

    In spite of top-line forecasts being increasingly optimistic, we find cost increases weigh heavily on margins. Few executives expect to continue business as usual in this demanding environment.

    Executives see a massive need for transformation and so set a highly ambitious agenda well beyond cost

    One thing is clear in facing these challenges: there is a massive need for businesses to adapt to ensure their long-term success and value growth.

    Almost nine out of ten executives have seen the signs and plan to transform their company in the next three years. More than one in five are convinced that this will require a fundamental change to the nature of their company in resetting the strategy, adopting an entirely new business model, reconfiguring today’s product portfolio, or altering the entire company set-up.

    Unsurprisingly, given the expected margin decline, the cost agenda is most prominent when addressing the pressing short-term challenges resulting from the recent disruptions. However, executives stay on target in addressing the fundamental and long-term shifts by placing talent and sustainability on the strategic transformation agenda.

    Leaders recognize the complexity of the task at hand and aim to pull multiple transformation levers simultaneously in order to achieve their ambitious strategic priorities. Doing so makes eminent sense. Cost reduction, for example, is more likely to deliver sustainable results when the new way of working is embedded in the company’s operating model and organization.

    Many transformation efforts are doomed to fail as the programs are not set up for success

    Executives are clear and ambitious about what they want to achieve. We find they are less sure footed when it comes to designing and implementing the required transformation.

    Many transformation programs are not set up for success. Zooming in on the detail of senior executives’ transformation plans, we are primarily concerned about five fundamental design flaws.

    Although widely recognized as one of the top strategic priorities, executives have not yet translated their talent ambitions into an actionable agenda. Executives need to do much more on their talent agenda if they are to turn the current challenge into a future competitive edge.

    While we recognize that executives need to be cautious, so as not to sacrifice investment in the future, reducing cost is one of the important levers for freeing up the resources needed to achieve the company’s strategic growth objective.

    The unclear link to either cost or revenue side runs the risk that the changes being made may not translate into tangible benefit. The lack of clear targets also makes it difficult to explain the business rationale necessary to create buy-in, as well as to measure progress and, ultimately, to celebrate success.

    From our experience, companies have a higher likelihood of ensuring their performance improvements are sustainable when the changes are embedded in the organization’s ways of the working, including its organization and processes. In this regard, the current transformation plans of executives are of concern.

    We sense an overall neglect of what is often called the “soft factors” in executives’ transformation plans. Our experience suggests that culture makes a huge difference to company success when used to competitive advantage.

    Asked about why they think previous transformation efforts failed, executives admit there are a number of primary barriers on the journey to success.

    How executives will succeed on transformation in 2023

    Most executives have now recognized the need to embark on transformation and have articulated bold ambitions. Based on our experience and analysis of the hundreds of challenging and often fascinating transformation journeys we have made with clients, we have compiled Seven Truths of Transformation. Following these will improve the chances of success. Executives need to be rigorous when designing and implementing transformation. We consider three factors critical to their success in the current situation:

    Design a holistic transformation aligned to your strategy. Successful transformation starts at the top in setting the right strategic priorities for long-term success in the market environment. Focus on tangible impact, showing how the transformation enables strategy and creates value for shareholders and all stakeholders. Ensure you realign the entire company, your organization, capabilities and resources towards the new targets through a comprehensive program that creates sustainable value growth.

    Strike the right balance between cost reduction and investment in profitable growth. With most companies facing imminent margin pressure, they will need to cut cost to survive and to thrive and outpace the competition. Cost reduction starts with no-regret moves that deliver fast results and that help fund the transformation. Equally, focus on shifting investments from bad costs to good, funding new capabilities while driving performance relentlessly. To ensure the impact is sustainable and lasting, anchor the implementation in structural enablers and capabilities, including those embedded in organization and processes, people talent and systems – and culture.

    Align leadership, rally the organization behind the transformation and manage complexity. Seeing through a complex transformation over a sustained period is demanding of time, resources, and energy, while also freighted with a high risk of failure. Focused C-suite attention and a consistent tone and emphasis are essential. Pick an “A team” of top talent that includes future leaders to lead the transformation and invest the time early on to co-create an inspiring transformation story. Equally, empower the local managers who will be implementing the transformation in the field and assign clear accountabilities for success. Finally, be pragmatic about the transformation in order to manage complexity. Put in place a transformation office that is sufficiently agile to help you manage the complexity. Establish proof points to build momentum and demonstrate to your people that the transformation is generating impact.

    Having helped many businesses transform over the years, we know that achieving transformation is much harder than it looks – and is harder than ever in the current business environment. The hard fact is that leaders cannot afford to wait for conditions to become more favourable. Considering and applying the Seven Truths of Transformation will help improve the odds of success when setting up your business for the future.

    Take a closer look to detailed insights in our PDF report.

     

    Niklas Steinbach, Till Stoeckmann, Markus Schmitz, and Susann Scheich also contributed to this report.

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