310. The CEO's role in transformation

0:01Kurt Strovink: What is that irreducible core, that undelegatable role of what the CEO themselves needs to do to make transformations actually be effective in diverse company contexts?

0:13Meagan Hill: From McKinsey & Company, I'm Sean Brown and welcome to Inside the Strategy Room. That was Kurt Strovink setting up our discussion about the critical and undelegatable role that the CEO plays in the context of a high-stakes transformation. In today's episode, Kurt, along with his fellow guests, Megan Hill and Matthew Lee, take us on a journey to reveal five collective action problems that are commonly encountered in transformations and that fall directly within the CEO's purview. Drawing on their recent McKinsey quarterly article titled Collective Action, Collective Success, a CEO's Role in Transformation, for each problem, they offer solutions that the CEO is uniquely positioned to address.

0:55Meagan Hill: And now it's my pleasure to introduce our guests. Kurt Strovenk is a senior partner in our New York office. He currently serves on our Shareholders Council and also leads our global CEO services practice. Kurt is the co-author of the New York Times bestseller, A CEO for All Seasons, as well as the national bestseller, The Journey of Leadership. Kurt, it's great to have you here today.

1:16Kurt Strovink: Thanks, Sean, for having us.

1:18Meagan Hill: And Megan Hill is a partner in our New York office and a leader in our transformation, corporate and investment banking, and strategy and corporate finance practices. Megan, it's great to have you here today.

1:27Mathew Lee: Thanks, Sean. Great to be here.

1:29Meagan Hill: And we also have Matthew Lee, a partner in our Miami office and a leader in our transformation and financial services practices. It's great to have you here, Matt. Thank you, Sean. It's a pleasure to be here today. Okay, I'm excited for our conversation. And Kurt, let's start with you. Since we're going to talk a bit today about your recent McKinsey Quarterly article on the role of the CEO in successful transformations, which for our listeners, we'll link to in the episode description, I was hoping that you could share some background on what drove you to write the article.

1:59Kurt Strovink: Thanks, John, so much. And we're excited for this conversation, too, for a number of reasons. We've long, as a firm, talked about transformation and led with many of our McKinsey Transformation colleagues on transformational aspects of client service and working with clients through institutional level change. But we've also spent a lot of time advising and working with CEOs on their roles in leading their companies and leading more broadly, and in particular, leading transformations. And in some sense, we're bringing those two different elements together as part of this discussion. What is the CEO's role?

2:33Kurt Strovink: What is the undelegatable role, if you will, of the CEO in the domain of transformation? We think this is a very important question, which is how do CEOs play? What is their role? Where do they lead? Where do they, if I might coin a phrase, lead leaders? They lead others through things. But what is that irreducible core, that undelegatable role of what the CEO themselves needs to do to make transformations actually be effective in diverse company contexts?

3:00Meagan Hill: Thanks, Kurt. And what are some of the challenges that companies are facing today in terms of delivering that full potential of a transformation?

3:08Kurt Strovink: We know this today, that organizations face more challenges than ever. The data shifts, the speed at which we're creating different ways of looking at the world, the signal to noise ratio, if you will, is probably at an all time low. Company shifts is another element of this dramatic change in the world we live in. You know, the speed, the tenure of CEOs is declining. Also, the tenure of companies remaining on Fortune 500 lists is declining as well. This isn't all bad news. It just suggests important aspects of leadership in our times. So that's a very important piece of the puzzle in terms of leadership.

3:46Kurt Strovink: But in these turbulent times, there's a particular important question of transformation and how to ensure that transformations happen. And we find that most transformations do not.

3:56Meagan Hill: So why focus on the CEO and their impact on a transformation?

4:00Kurt Strovink: If we think about the reasons for, if you will, leakage or drop off in possibility or potential, they trace to a number of things across target setting and the science of really making that stretch happen, implementation and other kinds of leadership across the full funnel. And our central belief is that CEOs play an incredibly important role in setting up the conditions for impact across this full waterfront. And in fact, one of the things that we're going to talk about is collective action problems, which is this circumstance that happens in large organizations where individuals might have certain interests, maybe small groups have certain interests, but the larger enterprise has a different interest.

4:39Kurt Strovink: And oftentimes they're not accessible. You can't get to something that would be the best for everybody because there are smaller interests that collide and that aren't aligned. And our central idea that we've come to through much of our client work with CEOs and transformations is that CEOs play a unique role in breaking or overcoming collective action problems.

5:01Meagan Hill: So we're looking forward to exploring those collective action problems in a bit more detail. But before we do, Kurt, your thesis is that CEOs play a critical role in the success of transformations, but no two transformations are identical and some are led by chief transformation officers. Some may also be directly led by a CEO. So maybe you could just talk a little bit about how the CEO and CTO might split up their responsibilities when both are involved in a transformation.

5:32Kurt Strovink: Yeah, the CTO is an incredibly important role, certainly in all the transformation work that we do. And in some sense, sometimes acts as a proxy for the CEO. Certainly, in our humble experience, needs to be very closely aligned with the CEO in order to deliver transformations that work. So the role is critical, Sean, and it is absolutely vital. We recommend that a CTO exist in transformational situations. Not everybody has them, by the way, but the ones that are more successful typically do. But nonetheless, the CEO still plays an important framing role, target setting and helping set true full potential, maximum stretch.

6:06Kurt Strovink: They have to have a strategy for stretch as a CEO. And good transformations are ones where CEOs establish targets that are sometimes higher than those around them believe are achievable because they underwrite the kind of creativity that then follows. CTOs play an incredibly important job in leading that overall change, but they don't substitute for some of the undelegatable roles of the CEO on setting up the transformation for success. Spotlighting certain things that are fully working is another role that CEOs sometimes play. Reinforcing the importance of enterprise-wide norms and behaviors is another that they play.

6:41Kurt Strovink: And so I would say both roles are important. The CTO role is critical for high-impact transformations, but that doesn't obviate the fact that there are elements of the CEO role that need to be played by the CEO. And that's actually something we'd love to explore, Sean, as we go forward here.

6:58Meagan Hill: Sounds great. So let's do that. You mentioned collective action problems earlier, which you define as circumstances in large organizations where individuals or small groups have interests that aren't aligned with the interests of the larger enterprise. So your article describes five of them. Matt, maybe you could start us off by just giving us an overview of the five and how they fit into a given transformation, and then maybe we can explore each of them in a bit more detail. Great.

7:25Kurt Strovink: You know, when we look across industries and looking at successful transformations, we find they follow a pretty consistent arc, right? A three-part arc, starting with setting a high aspiration, then moving to execution against those plans with a high aspiration. And then it's building the mechanisms to sustain that change over a long period of time. But our research show, as we mentioned earlier, that organizations can lose value across each phase of a transformation. And the big reason is the presence of these collective action problems. Now, in the aspiration setting phase, the first phase, the biggest problem we face is the negotiated settlement.

8:02Kurt Strovink: This is the tendency for teams to negotiate down targets to something more comfortable rather than aiming for full potential. During execution, two other issues typically pop up. The first is what we call the aversion to transparency, where people hold on to information because they're not sure how it'll be used or maybe they're incentivized to do so. The next is a me first or local mindset, right? Where individuals or functions and teams optimize for their local goals or own goals instead of enterprise wide goals. And the last arc is when organizations try to sustain the impact and we face to get two other problems here.

8:39Kurt Strovink: One is relying too much on the trustworthy few, right? The folks that everyone knows and trusts, but this creates capacity bottlenecks. And the last one is transformation in a silo, when change is almost on an island where the transformation runs separately from the day-to-day business. And so the changes never truly stick. And what's important across each of these challenges and collective action problems is they each are rooted in human behavior. They each have their own dynamics and root causes. But the good news is that they can all be addressed, right? As long as we're aware of them and we have the right focus and leadership, especially CEO intervention.

9:17Meagan Hill: It's interesting that you point out that these issues are rooted in human behavior and that because of this, it would seem they might be inevitable. So as you thought about these collective action problems, were there any additional issues or problems that didn't make your list of five? and did those align with specific stages of a transformation?

9:37Kurt Strovink: That's a great question, Sean. And look, there's of course a longer list of problems that folks might face, but we do believe that these five are typically the most important ones to address head on. And I think you mentioned the word inevitable. I think that's a great question or point as well. We believe that they're not inevitable, but they're predictable. And because of that, we can actually, you know, address the systems, incentives and culture in place to address that. Right. And the specifics might vary by each organization, each company, of course. Right. But those underlying human behaviors are remarkably consistent.

10:16Kurt Strovink: Right. So the tendency for folks to protect their teams, right, to be loyal to their teams, to trust their past experience and pattern recognition, that'll always exist. But the way to channel that human behavior is very much addressable. And that's why we believe that when CEOs and leaders understand those underlying behaviors, they can intervene much more effectively. Matt, if I could jump in, I think these five represent our synthesis of what we've seen in transformations, where there's moments where you either get to a higher plateau of performance or you don't. And things that, per the earlier discussion, can stop transformations from being successful.

10:57Kurt Strovink: And so in a way, there are probably other things that could intercede here or there, but this is our synthesis from a transformation practice perspective of where typically transformations underperform and where they can be high graded. And they trace to things that the CEO can do. And so I think that's, you think about it as a synthesized list of the intersection between the CEO role and the transformation failure points. So Matt, let's dig into these in a bit more detail. Sounds, why don't we dive into the first collection action problem, the negotiated settlement. And this is the moment where we alluded to earlier.

11:30Kurt Strovink: It's when people, for a variety of reasons, right, negotiate down targets and aspiration even early on. And not because, necessarily because they lack ambition, but, you know, it's often because folks want to ensure that they'll hit those targets and hit those aspirations. And, you know, why does this happen, right? It could be because of a belief that goal setting equates to guaranteed outcomes, right, a promise to deliver something. It could be institutional or personal memories of past failures or missteps and wanting to hedge those risks and hedge those bets. It could also be a fear of consequences for missing targets.

12:07Kurt Strovink: So there's a common saying of how do we under-promise and over-deliver. But the real insight here is that we find, and based on our experience and research, that aiming low is actually much riskier in terms of institutional outcomes than it is for aiming high and maybe falling a little bit short of those high aspirations. And so the CEO and leadership team's job is really to create the conditions where people feel safe to seek their full potential and to design incentives that reward that pursuit of ambition, not just hedging against it. And if we think about practically, right, what can a CEO and leadership team do to prevent those negotiated settlements?

12:46Kurt Strovink: It's really two things we'd boil it down to. The first is the CEOs and leaders must hold the line on a full potential thinking. That means setting the aspiration based on facts and analytical truths, right? A fact-driven assessment of full potential rather than negotiated comfort levels. And they should commit to this full potential publicly and role model it consistently. A second, as I alluded to earlier, is really addressing the incentives, the culture, the system that creates this, right? Most companies unintentionally reward caution. Hitting a safe target typically earns praise, right? That someone committed to something and did that.

13:27Kurt Strovink: And stretching and missing those targets actually earns questions, right? Why did that not happen? Why did we not achieve what we set out to achieve? Instead, we believe that we should reward people not just for big wins, but also for fantastic failures, right? And when they pursue the full potential with discipline an effort and a fall short, that we should actually celebrate that. And so when people see the CEO and the top team celebrating ambition, not just safe delivery, it unlocks enormous creativity and guards against the cycle of negotiated settlements. Maybe Matt, if I could just maybe add one thought to here, I think we believe a lot of transformation's full potential is lost at the beginning on target setting, that they just aren't sufficiently high enough.

14:12Kurt Strovink: Usually it's because of a negotiated settlement. It's because of the resultant vector of a bunch of people who are saying what they think they can achieve and that the CEO broadly takes that with a little bit of negotiation, as opposed to creating a fact base for a full potential of an organization and then effectively deciding we're going to go and act as if this is something we can achieve. And I know everybody doesn't think that we can achieve it yet, but let's see what happens. That kind of secondary approach, which kind of underwrites the creativity to follow. and a bunch of people might say, I just don't know how we're going to get there.

14:42Kurt Strovink: That's a constructive tension and first step. That tends to yield more value in time. We sometimes talk about this as the solutioned things that you can imagine that you can do at the beginning and the unsolutioned things that you can't imagine you can do at the beginning. And we often advise CEOs that you need to have both solutioned and unsolutioned components to any appropriately high enough target to achieve the full potential of transformations. A lot of people will just go only with the solutioned in the beginning and they will still optimize performance.

15:10Meagan Hill: So this brings in the concept of bottom-up goal setting versus top-down. And if you ask the frontline what they think they can achieve, you might get some sandbagging, right? But if you ask the CEO, the risk is that they may set aspirations that are either really unattainable or seem unattainable to the organization. So how do you balance this? How do you get to a truly ambitious plan that actually has a really good chance of being accomplished as well?

15:38Kurt Strovink: That's a great question, Sean. And I think we, you know, tying together a few points we mentioned earlier, and that's why we believe that we don't want to make it seem trivial, right? Setting an aspiration is not just simply pushing higher. It's really going back to facts and analysis so that it's grounded in something that's objective, right? As opposed to starting from the get go on making it around what are people comfortable with. It's actually starting with facts and analysis so that we can always go back to something that's grounded and objective. Yeah. And that's part of the reason, Sean, we recommend usually a constrained first phase before transformations where a CEO and top team will try to get objective facts.

16:20Kurt Strovink: Usually, you know, you're better off with something short, 10, 12 weeks that looks at the full potential, maybe with external perspectives, gives you a view of what others are achieving in different functional domains and different businesses. And that allows you to create a fact base, which is rigorous. So it's not finger in the air empiricism, you know, where you're just sort of picking a number out of the air. It is actually grounded, but it is a theoretical maximum because it's based on what everybody else is doing in different functions and businesses. And so it's something that allows a CEO the freedom to be able to put with conviction or at least with with credibility, a target on the table that underwrites the creativity of everything to follow.

16:59Kurt Strovink: And I think it's actually very dangerous to take targets just from bottom up. You should take them top down, but they should be industry-informed, functionally and domain-specifically-informed. And they should have stretch in them, and they should be unsolutioned as well as solutions.

17:14Meagan Hill: That sounds great. So, Matt, let's move to the second collective action problem now. What happens once we've set that aspiration and established those targets?

17:22Kurt Strovink: This second one is really around transparency or the lack of it, right? And, you know, what's at stake if it's not resolved, right? You, without that transparency and full view of information, you get slower decisions, right? You might miss warning signals and problems might grow quietly until it's too late or too difficult to intervene. And so teams often, without that transparency, burn a lot of time debating perception of facts instead of the actual facts. And a transformation may lose momentum because no one actually has a full view of what's going on. Why does this happen? Right. It's, you know, sometimes, again, deeply rooted in human behavior and incentives and systems.

18:04Kurt Strovink: It could be because folks are worried about what might happen with that information. They're worried about being perceived as being behind or how it might be viewed in terms of their competency level if they ask for help. So the CEO and top team's job here is really to flip the culture a bit from fear of sharing that information to openness and a problem-solving mindset instead of a problem identification mindset.

18:32Meagan Hill: And what do you see happening in organizations when this shift towards a more open, problem-solving culture actually starts to happen? Maybe you could bring this to life with a couple of examples.

18:43Kurt Strovink: So when transparency goes up, we consistently see three things happen, right? Speed of decisions increase, the quality of decisions improve, and teams start to identify problems earlier, long before they balloon and when it's, frankly, easier to solve. If you think about how does a CEO break through this transparency barrier, I really think it's a couple of things. The first is really demanding that radical transparency, creating a single source of truth, building a common language around stages, risks, dependencies. So people are speaking the same language, insisting on a rigorous cadence. We often recommend a weekly cadence that focuses on problem solving instead of status reporting.

19:27Kurt Strovink: And so when everyone sees everything and the focus of discussion is how can we help instead of what went wrong, hiding information becomes not only impossible, but frankly, unnecessary. And the second is celebrating asking for help. And one example that we'd love to share is what happened at Ford in the early 2000s. We think it's a perfect example. In the late 2000s, Ford was faced with billions of dollars in losses and needed to turn things around quickly. But despite this burning platform, every initiative that was being shown to the CEO and top team was reporting in the green. Just based on that, you would have thought everything was going fine.

20:10Kurt Strovink: So when one leader finally stood up and showed an initiative that was in the red, the CEO stood up and applauded that leader for showing that things were in the red. And what happened next was a matter of fact discussion to help that executive fix the initiative. And that moment really started to rewire the culture and transparency went up. People were less afraid about showing issues. It's an example of how CEOs and leaders can have an enormous signaling power and a series of well-placed interventions combined with the right incentives and systems can really shift an entire company's norms.

20:47Meagan Hill: Indeed, that sounds really powerful. But it also raises a few questions. So what happens when you set, let's say, for example, a five-year strategy with really ambitious goals? The company is now two years into their transformation, but they're falling short of some of the targets. And some of the people on the top team no longer believe that those really ambitious goals set two years ago are achievable. How do you and do you reset as the CEO to keep things moving forward? How do you keep the team and your organization believing in these goals and motivated to try to still attain them? Yeah, I think, of course, we believe that even though

21:27Kurt Strovink: an aspiration initially set should be ambitious, that it should reflect changing dynamics. And I think we would ask, it's hard to generalize a bit, but it really is situation specific. And we would ask why that is, right? Why are folks no longer able to achieve that initial aspiration and really get to the root cause, right? Is it that the initial facts analysis, maybe the assumptions made were not the right assumptions, or has the environment changed that we would revisit those assumptions if we were to do it again today, but also guard against, you know, is it actually negotiated settlement just manifesting later and later fates as well?

22:08Kurt Strovink: So it really comes down to the root cause and going back to, as we mentioned earlier, some of those objective facts and analyses as well.

22:15Meagan Hill: And those examples you shared earlier really bears that out. So you need that open culture and level of transparency where people are willing to say, these are the things that aren't on track. How do we get them back on track? Kurt, anything you'd add there?

22:29Kurt Strovink: Yeah, it's a great question. And I think Matt mentioned that it's really situation dependent. But the other thing I would add is that there are many, many times in the early going phases, usually a year to a year and a half, even into transformations where senior teams and CEOs will need to remind and kind of almost hold the line on the target. Okay. Despite initial resistance that we're not going to get there, we can't find the way to there, et cetera. It's part of what underrates this creativity. And it is important that it not be sort of immediately rebid because the first sign of circumstances changing.

23:05Kurt Strovink: Circumstances will always change. And yet your goals as a company and your target setting and the heuristic of setting a target for results that will come when you actually act as if is important to hold the line on. And so there'll be many opportunities for CEOs to hold the line in our experience in the first year, year and a half. But ultimately, the facts dictate. And, you know, you need to be mindful of that, too.

23:30Meagan Hill: OK, so while we're still in the planning and implementation phase, Megan, maybe you could take us through the third collective action issue.

23:37Mathew Lee: Great. Thank you. So we'll close out planning with the third collective action problem, which is a dynamic we see in almost every transformation. So even when the organization has a shared aspiration, which we've talked about setting the full potential in the target setting phase, individuals and teams often default to looking at their own priorities first. And we call this the local or me first mindset. And here's why it becomes a collective action problem. Each team or person is acting rationally to maximize their own outcomes. So they may have their own KPIs, their own budget, their own visibility.

24:13Mathew Lee: But when everyone behaves this way simultaneously, the organization underperforms its potential. And so the sum of the rational individual choices leads to an irrational collective outcome. And we often use an orchestra as an analogy. Often when you're constructing the orchestra, you're pulling in the top tier soloists, each accomplished, each loyal to their own section. But unless they all play their parts together, the strings with the strings, the horns with the horns, but then collectively the strings with the horns, the resulting sound will be hollow and incomplete. And so the CEO's role here is really to balance a basic truth about human behavior, which often gets amplified during periods of change.

24:55Mathew Lee: And there are really two interventions we found that break this pattern. The first is creating an organization first incentive. And second, highlighting sources of meaning at work. I'll touch on both of those interventions. The first is around overweighting organizational incentives rather than focusing on the individual ones. So transformations, if done successfully, mobilize large swaths of the organization. And we call this, in many cases, democratizing the change. And in many ways, CEOs and senior management teams need to refine and reframe their incentives to acknowledge that there's now more people involved in changing the organization.

25:38Mathew Lee: And so these incentives often need to be tailored to the specific transformation initiatives. And these can include nudges to adopt new behaviors, to implement new process steps, or to actually reward the individual frontline individuals who are executing each of these specific initiatives. The second intervention is around highlighting sources of meaning. So usually at the outset of the transformation, when you're setting the target, there will be an organizational-wide case for change that everyone's rallying behind. but oftentimes to really get at the heart of what's going to motivate everyone on the front line employees need to attach their own source of meaning to the work that's going on and of course no two employees derive meaning from work in precisely the same way and so rather than adopt a one-size-fits-all approach to motivating employees leading CEOs understand that five sizes actually fit most and they seek to highlight the impact that employees are having in multiple areas.

26:40Mathew Lee: And some of those include society, company, customers, team, and personal success. Got it.

26:48Meagan Hill: And Megan, are there any signals that the CEO can look for that might indicate early on an emerging or prevailing me first mindset, a canary in the coal mine, if you will, that this is starting to happen?

27:00Mathew Lee: Yes. Yeah, I think great question. There are definitely a few early warning signs. So one, you'll start to notice when teams are optimizing for their own KPIs rather than the enterprise. And if you're highly attuned, you'll start to see that their decisions make sense locally, but they actually work against the broader transformation. Another sign is you'll often see duplication of effort. So you'll start to see different parts of the organization solving the same problem in parallel because they're not sharing information or coordinating. And I think if you're especially aware in the transformation cadence, and there's often a set series of structures or tools that we say to put in place, if you start to listen to people's language, you'll hear words like my team, my budget, my goals, rather than our goals, the broader team, the collective organization.

27:51Mathew Lee: And then finally, one of the most challenging aspects of running a transformation, and often the thing that most organizations need to actually cause to happen is to break down silos across the organization. And so if you have teams operating with this me first mindset, you'll see a lack of follow through on some of these cross functional initiatives, which can be extremely detrimental to the overall success of the transformation.

28:19Kurt Strovink: One thing I love to add to this discussion is I think sometimes it's easy for executives to look at those employees who are the loudest in terms of this me first mindset and wonder why that is. And we truly believe that the root cause is around the systems, the incentives, the culture, less about those individuals specifically. In fact, when we see that we rewire the organization to become more enterprise focused, to become more collaborative, we find that those individuals who are the loudest in terms of me first become the biggest supporters of the collaborative effort. So don't write those folks off.

29:00Kurt Strovink: In fact, the loudest folks may be your biggest supporters under the new and improved system.

29:06Meagan Hill: And so where do you see CEOs falling short when it comes to communicating the purpose at the heart of the transformation and really getting it to appeal to the whole organization? Perhaps you could share an example of a CEO who's done this well.

29:21Mathew Lee: Yeah, I think another great question. And I think one thing to emphasize with this particular question and point is that CEOs should continually highlight these sources of meaning as they make the case for change, not just at the launch of the transformation, but throughout the entire lifecycle of the transformation. One trap that organizations fall into is assuming that the purpose needs to be articulated only once. So often when you launch the transformation at target setting, but in reality, the transformation often spans years and people's connection to the work must be renewed and reinforced.

29:57Mathew Lee: And maybe one example of a CEO that I saw this do this especially well was consistently over the course of multiple years in every town hall. he would dedicate a few minutes to invite one or two employees to share a personal story about what the transformation meant to them and which source of meaning it tapped into. And these small moments can easily fall by the wayside if you're trying to get right into the meat of the meeting. But if you maintain them and you have the discipline around maintaining them, they actually have an outsized effect because employees really notice those moments. They see themselves in the journey.

30:34Mathew Lee: They understand that the individual purpose is as important as the organizational financial success. And they then draw inspiration from hearing their peers on a consistent basis. And that often, those little moments, are what sustain and really fuel the transformation over years.

30:53Meagan Hill: And just on those little moments, Kurt, people are motivated by different aspects of work. It could be to have a positive impact on society. It might be to lead an industry or to exceed customer expectations or maybe just to be successful individually or as part of a team. So are there any particular types of purpose or motivation that are most powerful in the context of a transformation? And do they occur in any kind of a sequence?

31:19Kurt Strovink: Yeah, I think if you think about this in a transformational context, you're often focusing on a goal, a customer goal, an outcome, something that's about making something successful in the outside world and our unique ability to do that. And the transformation is part of creating those conditions and those outcomes. So often we see a customer lens or ambition anchors this, and it's closely related to the benefit or the potential for the company. So the company and shareholders piece comes inside of that or connected to that. Usually it's more powerful for sources of meaning and purpose if it's external focused and then there's an internal matching versus it's all about the company alone and one's not taking a position on what's happening outside.

32:01Kurt Strovink: Sometimes that customer view can then ladder up to society and a broader picture of what we're trying to do and what good in the world we're creating, which can be very important and emotional. But I think the importance of team experience and personal success is that usually successful transformations aren't just one and done performance improvement efforts. They are They are deeper, systematic ways of transforming how the companies work and grow and learn. And as part of that, there's a huge human capital dimension for teams and people about growing as executives and leaders. And usually the transformations that succeed and the CEOs that lead those transformations that succeed with the CTOs dialed into that human capital potential and make it is deeply adhesive where people feel like they are themselves growing, their teams are growing, we're working better together.

32:49Kurt Strovink: And that's laddering up to an overall ambition for the company and customers and ultimately society that we, that we esteem and we're excited by.

32:57Meagan Hill: And Megan, if we could now look to the next collective action problem in that next phase of a transformation. So setting up for sustained impact and enduring change across the whole organization. So what are the issues or collective action problems that CEOs should be looking out for there?

33:13Mathew Lee: The fourth collective action problem is another dynamic we see across most large-scale transformations. It's when the stakes are high, CEOs and senior leaders often default to relying on a small group of people they trust the most. And we call this the trustworthy few problem. And the reason it's a collective action problem is that from the CEO's perspective, relying on proven performers reduces risk. From the team's perspective, stepping back and letting the inner circle lead often feels safe and appropriate. Everyone's individual choice makes sense, but collectively, it overloads a few people, it sidelines others, and it limits the organization's capacity to transform.

33:56And

33:57Mathew Lee: what's at stake if this isn't resolved is there's the notable effects, which I just mentioned, progress becomes constrained by limited bandwidth of a handful of leaders, the rest of the organization feels underutilized, so they're not as compelled to participate in the change. And I think what's most important is actually the company misses one of the biggest opportunities of a transformation, which is using the transformation as a leadership factory to build the next generation of talent. And the CEO's role here is to recognize this dynamic and intentionally widen the circle. And we've seen two interventions make a real difference.

34:35Mathew Lee: The first is deliberately tapping and developing high potential but less proven leaders. And the second is around activating a much broader portion of the organization, which often involves them owning what we would call smaller initiatives like the pebble and sand initiatives that collectively drive substantial impact. And so the first intervention, as mentioned, is deliberately cultivating the next generation of leaders. So transformations are often one of the most powerful opportunities a CEO has to build leadership capacity at scale. And so rather than relying on that small group of proven performers, CEOs and senior teams should actively be on the lookout for finding folks deeper within the organization that may not have been tapped with responsibility in the past.

35:23Mathew Lee: The transformation, just given the intensity of change and the broad scope of the effort, often means that it's a proving ground for emerging leaders to develop things like financial acumen, problem-solving skills, and also an ability to influence the organization broadly. The second comes around activating a much broader portion of the organization. And so we've researched across the thousands of transformations that we've done. We actually have a specific hub within the firm that looks at how those transformations perform. And the average transformation engages only about 2 % of employees. And the most successful top quartile transformations activate 20 % to 30 % of the organization.

36:06Mathew Lee: And so increasing from the average to the top quartile, given the magnitude, requires a real deliberate effort to widen participation. And CEOs can do this by structuring the work to honor smaller initiatives. Sure, you'll have a few initiatives that are 1 to 5 million EBITDA in value, but you'll also have initiatives that say are 250K or 500K in value. What we would call the pebbles in the sand initiatives. And those initiatives actually make up the bulk of the transformation impact. And that's what really allows everybody within their area of the business to contribute to the change. And so by bringing more people under the tent and giving them the opportunity to contribute, CEOs shift the ownership from a narrow few to a broad coalition.

36:53Mathew Lee: And over time, that increases the organization's capacity. And it also starts to generate this leadership factory, as mentioned.

37:00Kurt Strovink: Megan, just maybe one thing to add, just tying the conversation back. This is a great example of a role where the CTO can be very useful. the sizing of initiatives at the right level to make sure that you've got surface area for the broader inclusion of people that could be in transformation to Megan's point, because you get to a tipping point, you get 30, 20 to 30 % of people involved. It doesn't mean it's only 20 to 30. Ultimately it could be a hundred, but you get the tipping point at 20 to 30 versus, you know, ones that fail in the low single digits. The CTO often has to define the size of the magnitude of those initiatives.

37:36Kurt Strovink: And that's one of the great roles that chief transformations often play. Sometimes when you take too large initiatives and too few, you kind of, in a way, limit yourself by having less of the organization engaged. And Megan, that was just a build on your point. But it also ties, Sean, to your earlier question of CTO's role.

37:53Meagan Hill: Thank you. And so we can acknowledge the importance of gauging the entire organization. But are there any countervailing forces at play here? It obviously takes time to deeply engage more people versus engaging a small, tight team. So how does the CEO balance the need to engage the organization broadly with building the capabilities that those people would need to be involved and really drive impact? And what's the right pace to do that? Megan? Yes.

38:22Mathew Lee: And I think, great question. And, you know, as mentioned, often the CEO or senior leaders are drawing on the select few because they think it actually reduces risk. And perhaps in the short term, if you were trying to implement a small project within the organization, that would be true. But given that it's a transformation and organizational wide effort, that's actually you're actually introducing more risk if you don't think about bringing more people on board from the beginning. And so often CEOs are balancing the pressure to move fast, but also build these capabilities, as you mentioned. And so I think the CEOs that really invest time in going potentially a little bit slower at the beginning, making sure that people are building capabilities in parallel with actually executing over time actually reduces things like bottlenecks, burnout, linear progress.

39:16Mathew Lee: and it's actually doesn't take that much time. You know, we're talking, you know, weeks, potentially months before you get the next layer of leaders who are slightly less proven, but with a little bit of capability building support can actually elevate and take on roles that you never thought possible before because they just didn't have the exposure, the visibility.

39:36Meagan Hill: Thanks. And Matt, anything you'd like to add here?

39:38Kurt Strovink: A couple ideas I would add to this and agree with Megan completely. I think one is that viewing the kind of big, bold or big initiatives that we would have done, right, with the small essential team, that's not mutually exclusive with the larger set of initiatives of activating the organization. So we have seen and you can often have those big initiatives and many of them are often in flight when we start a kind of transformation programs. How do we accelerate those? How do we make those even better? but that's not mutually exclusive with also activating the 20 to 30 percent or more of the organization and coming up with a longer list of the pebble and sand right so that's the first idea i might add is they're not mutually exclusive it's actually incremental and additive the second is viewing this capacity to execute capacity to transform as a core competency of the organization and as megan mentioned of course with building any muscle it will take some time But once that muscle is built, the speed, the quality, the rigor of all execution pays dividends for many, many years to come.

40:40Kurt Strovink: And we've seen often, as an example, organizations that maybe start a transformation with a certain set of objectives and have success with those objectives about 18 to 24 months in, often use that same capability and muscle to do additional objectives, whether it's launching a new business or throwing in new markets, new products, new channels. So we often see this pay dividends in many ways over time.

41:07Meagan Hill: Super. So just to build on this, as you're engaging more and more of the organization and the transformation, it also speaks to the opportunity for changing the culture at the same time. So in what ways can the CEO engage other leaders to support this? And is this something maybe they partner with the CHRO in addition to the CTO?

41:28Kurt Strovink: Yeah, I'll let Matt and Megan comment. But yes, yes, yes. And also the CFO. We can talk about a couple other roles, but go ahead, Megan.

41:35Mathew Lee: Yes, yeah, I was. I think that's right. Yes, yes, yes. And I think the culture changes. It really, because it's potentially one of the most critical aspects of actually getting the transformation to sustain, you really need the whole executive team, but then also those new ways of thinking to cascade throughout the entire organization. So often one way that we do this in our transformations is you'll actually have a separate work stream, call it, that'll lead part of this cultural change movement. And we often say, treat the soft stuff like you would the hard stuff. So just like we would size a financial oriented initiative to improve sales and track that with rigor, we would do the exact same thing on the culture side of things.

42:23Mathew Lee: So if we want to introduce a new mindset or new behavior or values need to change within the organization, there would be an initiative that would be owned with KPIs and metrics that we would evaluate and it would be managed with the exact same rigor as that financially oriented initiative. And we found that that's, as mentioned, the culture piece is such a huge component to the success of transformations that you have to have, you know, do focus on it throughout the duration like you would any other set of initiatives.

42:53Meagan Hill: Wonderful. So we have one more collective action problem to discuss before we close our podcast. Megan, can you take us through this fifth one?

43:01Mathew Lee: Yes. So it arises when organizations run the transformation off to the side and it's separate from daily operations. So we call this the transformation in a silo problem. And the reason this is a collective action problem is that leaders believe they're protecting the business by keeping change contained, while the transformation team believes that they're helping by pushing ahead independently. And each group is acting in what they perceive to be the organization's best interest. But together, their actions actually prevent the transformation from becoming embedded in how the company operates.

43:36Mathew Lee: And often a useful analogy is if you think about it's a company as a group of people trying to learn a new language, if only a few people take the lessons while everyone else continues speaking the old one, the transformation team and the core business team never become fluent in these new ways of working. And as we know, if you don't practice a new language, the ability to speak it gradually disappears over time. And so what happens is these organizations end up with transformations that look successful on paper, but you don't actually see the results materialize in the P &L. So for example, costs may come down in one area while there's other issues creeping up in another.

44:17Mathew Lee: Growth initiatives stall because daily operations don't shift to account for the new way of working. And then if you have all these cultural improvements or new ways of working, they dissolve because once the transformation office steps back, there's no one driving that new way of thinking. And so the CEO's role here is to really break down this separation between what many organizations call run the organization versus change the organization and make sure there's alignment there. And we found that there's two interventions that matter most here. The first is around creating a common operating model with a focused set of enterprise metrics that tie the transformation to the day-to-day operations of the business.

45:00Mathew Lee: And the second is around embedding the disciplines of the transformation. So things like transparency, accountability, fast decision making, directly into the core business routines so that they become the organization's default way of working. I'll maybe just touch briefly on the second one that I mentioned, which is embedding the transformation disciplines into the core business routines. So oftentimes the transformation introduces a new level of rigor to the organization. So there's often fact-based perspectives. There's rapid decisions. There's not quarterly follow through. There's weekly and monthly follow through.

45:36Mathew Lee: There's also transparency about performance, which we mentioned as being a key driver of success. And so these disciplines often start and are only emphasized within whatever the transformation office has purview over. But the CEO's job is to bring them into the company's muscle memory. And this often means taking some of those best practices and infusing them into the behaviors of the everyday rhythms of the core business. So, for example, monthly operating reviews mirror the discipline that you'll see in the transformation meetings or the business's forecasts on the core business side actually embed the initiative impacts so you can see what the momentum or trajectory of the organization is.

46:19Mathew Lee: And then lastly, there's dashboards that are used across both areas of the business that provide visibility so everyone stays connected on both sides.

46:29Meagan Hill: So this actually sounds a little challenging, Megan, because you're trying to both transform the organization while still trying to run the business effectively. So I have a couple of questions here. One, as you endeavor to merge these two efforts, how do you keep people's energy levels up? And two, as a CEO, how do you know when the transformation has actually been fully embedded in the organization?

46:52Mathew Lee: I think great question and very common one. I think the CEO has to be super attuned and monitor both sides of the business. And I think the right moment to determine victory that the transformation practices fuse with the core business is when you start to see aspects of the corporate, when you start to not be able to differentiate between how aspects of the core business are operating versus the transformation. So you start to see operating reviews that are more forward-looking and tied to those glide paths that I mentioned. You also start to see initiative owners that own something in the transformation show up in the core business work, and they're prepared with facts.

47:35Mathew Lee: They have the same rapid follow-through. And you also start to see senior leaders using the same cadence and transparency, whether the topic is performance or transformation. And so at this point, you're no longer transitioning away from the transformation. It's actually just that the transformation has been absorbed into the core business and the new behaviors just become our behaviors.

47:59Meagan Hill: Super. This has been so enlightening and I'm sure very useful for the CEOs and their top team who are in or about to embark on a transformation. So Kurt, I'd like one more question before we close. Do you have any final words for CEOs after they listen to our podcast and they consider what these five collective action problems mean for them in terms of driving transformation success in their organization?

48:25Kurt Strovink: I would just end by saying collective action problems does not mean they are bad actors or people doing wrong things. This is about people actually trying to do the right things. It's just That's what a collective action problem is. So it's not about punitive, bad folks motivated badly. It is about the unmanaged outcome of a bunch of things that are quite rational at one level, but then suboptimize at the whole. And we think that's why we've called this for the first time collective action problems in five forms and ones that uniquely affect transformation for good or bad. But the CEO role itself, one of the big things about the CEO role is that they're in the business of solving collective action problems, ideally.

49:08Kurt Strovink: That is an important role of the CEO as a whole. It's an undelegatable role. It's a very important one. It's powerfully assisted by a chief transformation officer, by a CHRO, by a CFO, and by heads of major businesses. But it is something that ultimately the CEO can do. And it's one way of thinking about your role is where are the collective action problems and what can you do to intervene and solve those? And hopefully this was giving you five ideas in the context of transformation where the stakes are the highest.

49:37Meagan Hill: This has been great. Matt, Megan, Kurt, thank you so much for taking the time with us today. Really enjoyed it and appreciate it. Thank you for having us.

49:46Mathew Lee: Thank you.

49:47Meagan Hill: And thank you to all of our listeners for joining us today. We hope you enjoyed the conversation and we welcome your feedback and ideas for future podcasts. Just email us at itsr at mckenzie.com, which stands for Inside the Strategy Room. You can also share your ratings and reviews on any podcast player with many thanks to all who've already done so. We really appreciate the comments and feedback we receive every week and encourage you to keep them coming. And if you enjoyed this episode and you'd like to subscribe, you can easily follow our weekly series on any podcast player where you can also access our entire library of more than 300 episodes.

50:22Meagan Hill: And finally, if you'd like to automatically receive our latest publications and insights, we encourage you to visit our transformation practice at McKinsey.com slash MT and our strategy and corporate finance practice at McKinsey.com slash SCF. You can also connect with us on LinkedIn, and we've included those links for you in the show notes as well. Thanks again for listening. We look forward to having you join us again next week inside the strategy room.

50:52Thank you.