Why transformations stall—and where only CEOs make the difference

0:02I think what CEOs can do is they have to flip this culture from one of fear to one of openness. And so I think the question becomes, how do you set the conditions? And one thing we see, successful CEOs will demand radical transparency. That's Kurt Strovink, McKinsey Senior Partner and co-author of the bestselling book, A CEO for All Seasons. Radical transparency is just one way CEOs can pull together all the teams in their organization to achieve collective success. What else can they do? Kurt and our colleague McKinsey partner, Matthew Lee, join me to discuss. This is the McKinsey Podcast, where we help you make sense out of the world's toughest business challenges.

0:43I'm your host for today, Lucia Raheli.

0:50Kurt Strobing and Matt Lee, welcome to the podcast. Great to be here. Thanks, Lucia. Thank you, Lucia. So your research makes the case that the CEO plays both a vital and a singular role in the success of organizational transformations. Talk to us about where CEOs should draw the line between responsibilities that can be delegated and those that can't during a transformation. I mean, these are humans after all. They have a lot on their plate. If I were to put it in one sentence, I would say they set the conditions for enterprise-wide success as opposed to just superintending a program or driving a set of initiatives.

1:33They actually set the conditions in human terms for what makes a transformation successful. And in fact, what led us to this concept that part of the CEO role is to break collective action problems in large organizations trying to change and create transformational change was this idea that there is something undelegatable in the CEO role that's around creating those enterprise-wide incentives and change. And so we'll talk more about it as we go on here, but that's the essence of what we believe is undelegatable. There are many other important folks, chief transformation officers, CFOs, business unit leaders that play vital roles in this, but we think the CEO has a unique enterprise-wide role as the senior most integrating officer of a company.

2:14And I want to get into what these collective action problems are. But before we do, just tell us at a high level, what is a collective action problem? What does that term mean? Yeah, I would say a collective action problem is one where there is an outcome that is clearly superior for an enterprise, for a collective. But it's inaccessible in fancy terms from the standpoint of individual incentives unless you align those incentives so that everybody can achieve that outcome. And the collective action problem is where those interests don't align. And we think a CEO plays a huge role in aligning those individual and institutional incentives.

2:57And that's why we say part of the role of a CEO is to break collective action problems and transformations. You've set out a really helpful model for thinking about collective action problems, categorizing them into five areas. And the five areas are the negotiated settlement, the hoarding habit, the lure of the local, the trustworthy few and the finite program. Do you want to just give us a high level explanation of each of those? And then we can get into a little bit more of the nitty gritty on them. The first one is the negotiated settlement. And that's the tendency for teams to want to negotiate targets down to something comfortable, rather than aiming for what might be the full potential, or maybe what they don't yet see, right?

3:41And we see two other issues show up, which is the hoarding habit, as you mentioned, where people hold on to information, right? Because they're not sure how that information will be used. And maybe in the past, they've shared information that was used in ways that they didn't expect, right? Another one is called the lure of the local, where individuals and functions or teams, right, are of course loyal to people that they work most closely with day to day and have most familiarity with. So they optimize for their own functions, their own teams, sometimes at the expense of enterprise-wide goals.

4:16And the one, which is one of my personal favorites, is called the trustworthy few. Everyone knows the 10, 15, maybe 20 people that we all know and like and trust. And every project, everything that is of consequence goes to those same people. And what happens there is that it by nature limits the capacity to execute to just 15, 20 people. And also it misses out on an opportunity to truly democratize change and to build capabilities deep into the organization. And the last one is we call the finite program, which is where transformation is seen as a finite program and runs separately from day to day.

4:58And a lot of folks may kind of hold their nose right until it finishes, whether that's six months, nine months, two years, and go back to old ways of working. Now, what's really striking is that these patterns are really universal, right? So I think really encouraging CEOs and leadership teams to understand these collective action problems because each of them has different symptoms or signposts when they're emerging, and each of them also has different interventions. And just so I'm clear, should CEOs think about these five categories separately or are they imbricated? Are they really just different manifestations of the same dynamic?

5:39So I would say they're discreet, they're unique, but they are related. They trace to underlying human behaviors that create incentives that are not, again, negatively projected, but they're just felt, they're human. And without being systematically countered, which we think CEOs can do, they end up giving rise to suboptimal outcomes. And so they're related, Lucia, but they're discreet and they follow a pattern across life cycles of transformations. So let's get into some of the how. In other words, how CEOs can address collective action problems to enact transformation successfully. First off, how might leaders spot the potential for one of these problems to be in play?

6:24Are there early warning signs that a transformation is beginning to drift before maybe the quarterly numbers reveal a problem or earnings reports? I think CEOs should really look and observe whether teams begin setting targets that are rooted in what feels safe and achievable and maybe very much anchored on prior year or prior period results rather than a fact-based, kind of less constrained or unconstrained full potential view, Right. That's when we see that the negotiated settlement may be taking hold. Right. If a lot of energy is spent on saying why we can't do things as opposed to what needs to be true to get something done.

7:03That's an early symptom. Or we tried it before and it had this outcome and it's received wisdom in the organization. That can be another kind of constraint. Maybe things have changed since. Absolutely. An early symptom of the hoarding habit is when we see duplication of effort across teams. this duplication of effort is a sign that there isn't communication or information sharing between those teams. Another symptom could be maybe opposing efforts, right? We've seen instances where different teams in the same business unit are doing things that are directly opposing each other. And again, that's a sign of information not being shared, the hoarding habit.

7:39Another is the lure of local that we talked about. When people say things like my goals, my budget, my team, rather than enterprise outcomes or something bigger than just my own local team. That's an example of the language surfacing an early warning signal. If I could just add to that, it's a great point. I was spending time with one CO recently who had a beautiful distinction that he used. He said increasingly it's going to be about not ownership, but stewardship. It's an interesting semantic correction, too, because for so long we heard about folks on an upward trajectory have an ownership mindset, right?

8:20And this is a kind of modification that's so interesting. Yeah. What we want is we want the proactivity. We want the taking responsibility for. We want the stewardship. But what we don't want is people policing the perimeter of their control authorities. Yeah. And absolutely. We're not saying that people shouldn't have that personal drive and team-oriented drive. It's rather how do we make sure the incentives are aligned in such a way that what they're doing builds on that stewardship. I mean, I'll just mention one more early warning signal because we see this happen almost in every transformation that we're involved in is the trustworthy few.

8:56This one is the most common one, right? It's really the obvious symptom is seeing who's in the room if it's always the same small group of people. But one less obvious one is not just who's in the room driving initiatives or driving the discussion, but also if we see people almost waiting for a certain small group of folks to approve or opine or have a view before they're willing to move forward. That's another form of the trustworthy few, creating bottlenecks in the organization. So this one is very important to address early on. And one of the common threads across all these early warning signs is that, as I mentioned earlier, right, they show up way before the financial results deteriorate, right, and that it's really much easier to address early on before actually some of these potentially bad habits continue to become the norm and deeper in the organization.

9:46I'm just going to add a few others that might be warning signs, as you were asking, Usha, besides the good ones that Matt described. I think sometimes when people say that things are not achievable, straight out of the gate, that is a warning sign, that there hasn't been instituted a culture of challenge or full potential thinking. Other example of a marker is when people can't spare leading talent for transformation roles, that they need them for other purposes, and that they can't find enough people to actually populate a transformational set of objectives with quality people. It means that either they are not allowing folks to develop in the direction of some of the most important things for the enterprise and transformation, or they don't have enough of them, back to Matt's point, and they haven't figured out yet how to get more people in the leadership factory, as we sometimes call it, developed towards being able to be fully contributing members of the transformation.

10:37Very helpful. Okay, let's turn to the interventions. And let's start with negotiated settlements. How can, both of you spoke to this idea of full potential. How can CEOs create an environment where folks can actually pursue their full potential rather than negotiating down on ambition? Look, a negotiated settlement, I think, as we mentioned, right, it's one of the most consequential collective action problems because it happens at the onset, right, of any transformation. Its impact compounds over time. People have been trained over many years, and this is the way a lot of incentives work in the corporate environment, to treat goal setting as a promise because people have been trained that if I don't hit or achieve what I said I would, that's bad, right?

11:25And that shows up in my personal incentives and financial incentives and for my team as well. And so that has naturally gotten folks to sometimes maybe under promise and want to over deliver, right? Because that's just natural. That's naturally what people would do. Right. That's the time tested talent, Maxim. We all use that, right? Or we have at some point, right? Yeah. A second is this is human psychology. Again, we've talked about this is all, again, not bad actors. It's all rooted in human psychology. we know through a lot of research that failures often loom larger than successes. And so how do we actually push past this really human nature to fear failures and the repeat of past failures is again another root cause.

12:07And CEOs should really pair these achievable bottom-up goals that come from different teams with a fact-based top-down view of the full potential, right? That kind of bottom-up top-down combination is typically what we see as most successful to get to that full potential view. And if we don't feel that the ambition is enough of a stretch, right, beyond what feels immediately attainable, then we know we haven't found that constructive tension that we're looking for. And we haven't found that aspiration that encourages greater creativity. So that's number one. Matt, if I could interject, I would go so far as saying that if a target has not been set where the team says we're not sure how we're going to be able to achieve that today.

12:48It's probably not an ambitious enough target. Kurt, can I follow on that briefly? Sure. Yeah. It's maybe partially selfish, but I think it's also widely applicable. How does AI change the calculus here? In other words, the advent of AI has meant that leaders and their teams may not actually be sure what a realistic stretch is. In this current context, is it harder to set an aspiration that is bold and breaks through organizational inertia that's also achievable and brings folks along in a way that doesn't burn them out? Yeah, I would say it's actually potentially easier. And here's why. one of the things we often talk about in target setting with COs is that they're well advised to think about things that are solutioned, meaning we know how we're going to get it to do it today.

13:46We haven't done the execution, but we're pretty sure we have a line of sight into how we're going to deliver. Let's call that the solution portion. And that they should also have an unsolutioned portion, meaning they do not know how they're going to get to that target. And a target set by a CO should be solutioned plus unsolutioned. That was true, we believe, three years ago and five years ago, but it's going to get even more expensive not to do that going forward with AI. And it conditions the organization to know that it's in a space that's going to be fairly loosely wired and nobody's going to have a perfect crystal ball as to this.

14:18And so we're going to have to lean into an uncertain future and we're going to have to use our wits and our ability to learn and continuous improvement and work together as teams to be able to hit higher targets that may not be clear today. And I think that's the discipline that a CEO and the mindset that a CEO wants to get the organization committed to emotionally as well as kind of conceptually or substantively. That's super interesting. Okay, so let's turn to what you've talked about as the hoarding habit. How can CEOs foster a culture where transparency and asking for help becomes the norm rather than something employees find difficult or are resistant to?

15:01I think what CEOs can do is they have to flip this culture from one of fear to one of openness, and they have to give the incentives and the conditions back to this notion of setting conditions, not doing everything that's required is the CEO's role. The CEO's role is to set conditions for enterprise change and transformation, not necessarily to govern each of these different changes as a protagonist. And so I think the question becomes, how do you set the conditions? And one thing we see, successful CEOs will demand radical transparency. So they will demand a single source of truth, that usually they'll demand something that's technologically available in a tool that's always on that they can look at three in the morning and that everybody else can too.

15:38And everybody else knows that they can look at it three in the morning. That is radical transparency. I think number two, you run meetings as problem solving sessions against things that are in the dashboards that are always on with radical transparency, not arguing about, is this a real phenomenon or not? By that point, the meetings are actually about solutioning. They do not blame. they solve and they actually reward people who are bringing forth ideas, especially when they're about themselves and shortcomings and they're asking for help. And that's the last thing I would say is you incentivize asking for help.

16:10You create the conditions so that people feel sponsored. They feel rewarded in some sense, not just financially, but in the way that you look upon their kind of leadership. You might embed this into a leadership practice with your CHRO. And I think you can also as a CEO spotlight successes. When you see somebody's doing this in a great way. You're spotlighting and you're staring stories. You can say, Matt did this great thing. Nobody told him he had to come forward with this. He did. By the way, this is what happened. This is what I observed. This is the change that it created. You can spotlight as a CEO.

16:40Matt, talk to us about the lure of the local. You've talked us through what that looks like in practice. What can CEOs do about it? We really see two major interventions that CEOs should and can do. Many organizations often overemphasize the star quality, right? Our actions of individual overachievers and not always on those that are kind of toiling behind the scenes in support of broader organizational goals. And what's at stake here if we don't solve it is that you see that things are optimized locally and often sometimes not in sync with enterprise-wide goals. So it's making sure that we're translating enterprise-wide goals locally in ways that resonate with everyone.

17:23The second is incentives, right? Here we're talking about how do incentives tie individual actions to enterprise-wide and organizational-wide goals. We've actually done research and we looked at close to over 50 organizations and looked at their incentive plans. And we found that when there are goals, intensives linked to enterprise-wide financial goals, that we see much better results, right? This is not surprising. But what is surprising is that most folks only do this at the executive and senior management level. So the question becomes, how do we make sure that even with the middle management layer, with a broader organization, how do we make sure that their incentives as well also is linked to broader organizational-wide goals?

18:06So that actually makes an interesting segue to the next collective action problem, the trustworthy few, just because we're talking about organization-wide incentives And then we're moving to talking about this group that is super high achieving that leaders really trust. How to address that collective action problem? I can suggest one important action I think that CEOs can take for the trustworthy few. It has to change the frame from not who do you trust in these roles to execute well today only, but who are you going to build into the next generation that you're going to trust? and who is that larger list of people that we can develop through this program because this is a beautiful opportunity for skill development.

18:53And so CEOs can insist on a broader group of people. Matt and I usually find with our co-authors that when transformations engage 5%, 7 % of the organization, they don't do as well. When they engage 20 to 25 plus, that's where there's an inflection point and they really take off and they tend to succeed. And so you have to democratize, you have to get more folks involved, but you should be trying to look at this as a human capital elevation. program. Does either of you want to say more on the finite program and how leaders can counter that challenge? I think two or three thoughts for CEOs. One is to never speak of it as a program that is coming to its end.

19:29It's not something we did for a year or two, and then we're going to go back to the old way of doing things. So I think in everything one says, teaches, frames, coaches to emphasize the ongoing nature of improvement. We're going to get better each year and we're going to keep refining our management system. We're going to get better and better at it. I think that's a mindset that CEOs can take through and really burn into organizations. The second thing is to really think about how the transformational work integrates in core business execution and performance and make sure that those are merged so that transformation is not happening in one part of the organization and core business performance is happening in another.

20:05Can you share an example where changing one CEO behavior fundamentally altered the trajectory of a transformation? One was moving from a way of thinking in the target setting phase that was full potential oriented, was profound for one CEO, who I think whose practice was to get senior leaders together and discuss what was possible to achieve and maybe negotiate back and forth a bit with them and try to push them for higher goals. And I think he experienced a different shift when he called it acting as if, as opposed to just full potential, as if we can achieve this. And he learned that by thinking that way and by pushing the organization down that line of thinking, a lot was unlocked, a lot more possible to be achieved, was achieved, and that the organization itself discovered that and then felt a second boost of energy because they felt more confident that they had outrun a previous version of themselves.

21:01I think a second example is this idea of flipping from thinking about ownership to stewardship. I think the education and coaching of many people in the organization that we are all here for a short period of time. You and I are not going to be here as long as this company is going to be here. But in the time we're here, we have responsibilities that are very deep and abiding as stewards. That change was a way that I saw this particular CEO use throughout the organization and make a kind of an indelible part of his leadership. but it was also something that reinforced the kind of leader and the long-term orientation that they were after.

21:39And so there was a humility in it. There was a sort of ferocious kind of courage in it. And there was a sustainability in it. Matt, if there is one mindset that you hope CEOs take away from this article and this research, what is it? It's that transformation and change is fundamentally about people and culture, not programs, not tools, right, or initiatives. Of course, all those things are important. But these five collective action problems that we talk about today in our article, they're not necessarily signs that people are not committed or don't have the capability to achieve. These are just predictable responses to incentives, to systems, to identity, to uncertainty, right, to the status quo.

22:19And that's why we think precisely the CEO is so important and has an undelegatable role, because transformation isn't determined by whether these things emerge. We know they will emerge, right? We've seen these collective action problems emerge over and over again. It's really determined by whether the CEO recognizes them early enough and can help shape the conditions to help the organization and individuals overcome these collective action problems. Matt and I've spent a lot of time with different organizations on this. One of the things I've observed for CEOs is those CEOs who succeed at governing and shaping transformations over time often grew most in the experience themselves as leaders.

22:59And there was a link between how they evolved, how they grew, maybe the grace they gave themselves to experiment, how they embedded and learned what's possible from the role, maybe even explored the structural potential of the CEO role in new ways that weren't apparent to them when they first took the position. But there is a huge correlation. Inspiring. Kurt and Matt, thanks so much for joining us today. Thanks for having us. Thank you. Thanks so much for listening to the McKinsey Podcast. I'm Lucia Raheli. And I'm Roberta Fasaro. Find us on McKinsey.com. We'll have a transcript of this episode up shortly.

23:35And if you have any questions based on this episode, please email them to us at themckinseypodcast at mckinsey.com. If you enjoyed the show, we'd love for you to leave a rating and a review. We'll see you next time.

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