Tuesday, January 6, 2009

Change Management: Return on Investment

There are few studies about how much organizational change management (OCM) contributes to return on investment (ROI) of large projects. What we know, however, is that many change projects fail to meet their original targets and milestones. A few years ago, McKinsey pubished a study based on 40 large scale industrial change projects. They found out that the ROI of such projects was 143% when an excellent OCM program was part of the initiative; but only 35% when there was a poor OCM program or no program. PricewaterhouseCoopers' 2004 study of 200 companies found a clear link between change management, high performance and a high project management maturity level. Source: “Boosting Business Performance through Programme and Project Management”, September 2004. They found that 59% of project failures are caused by organizational aspects.

Natalie L. Petouhoff, PhD, Tamra Chandler, and Beth Montag-Schultz published a nice article on the topic: The Business Impact of Change Management. Citing the above mentioned McKinsey study, they write:

The 11 most unsuccessful companies in the McKinsey study had poor change management, which showed up as the following:

* Lack of commitment and follow through by senior executives;
* Defective project management skills among middle managers;
* Lack of training of and confusion among frontline employees.

The 11 most successful companies in the study had excellent OCM programs:

* Senior and middle managers and frontline employees were all involved;
* Everyone's responsibilities were clear;
* Reasons for the project were understood and accepted throughout the organization.
Prosci has developed an ROI model for change projects. They say that there are three decisive human factors in such a project that determine the ROI:
  • Speed of adoption (how quickly employees begin using the new process, system, technology or tools the change introduces)
  • Ultimate utilization (how many employees are engaged and practicing the 'new way of doing things' created by the project or initiative)
  • Proficiency (how effective employees are when they do implement the change)


Here is a little fictual scenario / case study:

A global fruit exporter wants to implement a software that helps them to analyze the international market trends for their products. For the sake of the example let's say it is all about bananas. The new software would allow them to better track local retail prices in their markets, as well as forcast productivity changes, producer prices, the impact of changing weather conditions, consumer trends, etc. The implementation costs of the software without change management intervention are estimated at around US$ 4 million.

The core of the software is a user interface that is integrated with the existing company's enterprise system (ERP), but is basically based on a web 2.0 functionality - the employees of the company are required and requested to enter all kind of information into a system that is acessible to them. Through intelligent filters, those data are converged and condensed. Weekly reports are available to the decision makers in the company.

Originally, all levels of the company welcomed the idea of the new software. However, when it came to implementation of the system it turned out that the employees did not contribute to the dynamic data base. Half a year after after the official launch of the software, results were far beyond expectations, and adoption rates were low.

Management called in a consulting company which carried out a change management programme including the following steps:

a) a stakeholder analysis, involving 500 employees worldwide,
b) an internal communication campaign,
c) 10 smaller workshops, each involving 20-30 employees, and management staff,
d) one larger workshop involving 400 employees plus the entire top management level

The investment for these intervention was US$ 1 million, so the entire investment for the implementation of the software was US$ 6 million.

As a result, utilization rate of the new system doubled, finally leading to a 10% increase of profit of the banana trade. At an annual turnover of US$ 100, and a profit before taxes of US$ 30 million, profit rose by US$ 3 million. For simplicity reasons we assume that opportunity costs and deprecitation for the investment were US$ 1 million. The total investement plus opportunity costs plus depriciation was US$ 6 million showing that the investment was profitable after 2 years. Without the change management intervention, profitability increase from the intervention would have been US$ 1.5 million annually. So, the change management intervention was clear justfiable and profitable.

Change management interventions are needed in good or bad times. When proporly planned and adequately funde, they increase adoption rates, utiliztation and proficiency. However, most companies believe that one shot workshop, glossy brochures etc. do the trick. I believe that in future - given rising uncertainty and complexity - projects will need roughly 10% of their original budget for change management interventions. Time is money!

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