How to drive successful transformation for long-term value

Firms must avoid various pitfalls to overcome the inevitable business transformation challenge for substantial, sustainable long-term value.

In brief

• Firms know that business transformation is critical for long-term success but face the challenge of how to implement it effectively.
• To realize substantial long-term value from transformation, stakeholder alignment and commitment to invest as well as relentless execution are crucial.
• There is no single solution for successful transformation given different industry archetypes and the pandemic’s varying impact on different sectors.

The COVID-19 pandemic has accelerated many key trends that have been in play over the past few decades. As countries slowly emerge from the pandemic, the push for digital as well as environmental, social and governance (ESG) considerations has gained momentum. Firms across sectors have come to realize that embracing digital, ESG and cost reduction is inevitable, and they must embark on a transformation journey.

Despite the growing clarity of the need to transform, many firms hesitate or are pushing for small experiments on the periphery of their businesses. This may be why academia and consultants have found that not many transformation efforts are successful. Clearly, a chasm lies between the ambition and outcome, illuminating questionable gaps in the actions that lie in between.

Transformation is hard. There are several reasons why firms are reluctant to go for wide-ranging, big transformations. For example, digital transformation requires a firm to make large investments, typically in a lower-margin business, which potentially cannibalizes its primary cash cow and disrupts many existing ways of doing business. The firm’s hope is that these endeavors will offer a new lease of life and position it well for the future.

Yet, these initiatives take time to play out and firms will hope that as they drive their transformation journey, the capital markets will give them some relief and potentially valuation multiple upsides. A strategy consultancy with a deep understanding of balance sheets and valuations can help firms develop calibrated transformation journeys that balance the current pain and future gains.

Successful business transformation demands an astute combination of strategic vision and robust execution as well as concerted stakeholder engagement efforts. During the initial stages, investments in transformation initiatives can put pressure on profit margins. Some companies will therefore need to embark on programs to improve EBITDA and free up cash until they can reap the longer-term benefits of these investments. While transformation programs have delivered great results when executed well, companies in Southeast Asia have been slow to embrace them.

This pandemic has created a rare opportunity for organizations to transform and reposition themselves for long-term growth. Those that do so successfully tend to emerge stronger from crises, stretching the distance between them and their competitors. To achieve this, companies must transact and transform. In these undertakings, they must carefully consider digital, sustainability, cost and culture.

According to an EY-Parthenon analysis, there is a 25% difference in the total shareholder return between companies that transact and those that do not. Companies that transform see between 40% and 120% in median returns against capital expenditure and sales ratios.

Rigor is key from design to execution

Given the high stakes — and potentially strong returns — from business transformation, why do most companies fail to create substantial and sustainable value from their efforts?

One of the reasons is a lack of management alignment between the CEO, management and board. For example, the management may not have clearly identified and articulated the opportunities, or the targets set are not aspirational enough.

Ineffective planning is another major pitfall. In such instances, companies lack a clearly defined plan for implementation, including responsibilities and accountabilities for the transformation program. Others do not have incentives that support the transformation objectives and therefore jeopardize the program’s success.

Even with the best-laid plans, many transformation efforts are tripped up by poor execution. In such instances, companies could be hampered by the absence of necessary skills or proper review mechanisms, or constraints in resources such as budget and infrastructure. This results in the companies losing momentum along the way.

For a company to drive step change and deliver substantial, sustainable long-term value, there must be clear alignment among stakeholders, commitment from shareholders and management teams to invest as well as a focus on relentless execution. There are six key elements of successful transformation: 

1. Board and CEO alignment: both parties must agree on the direction, magnitude of improvement and time and investment required.
2. Alignment on purpose: the CEO needs to rally senior management on the “why” and jointly develop the narrative on how the transformation is creating value for the organization and stakeholders.
   
3. Calibrated journey: transformations must balance the costs with the potential upsides and find ways of communicating with all stakeholders through the process.
   
4. Management targets and incentives: set aspirational yet achievable targets for the management team, along with meaningful incentives that go beyond the usual bonuses.
   
5. Execution rigor and commitment from the top: the leadership needs to conduct weekly reviews to make decisions and address bottleneck issues.
   
6. Capability building: invest to improve functional, technical and leadership capabilities in the organization as well as in the right tools for employees.
   

Having said the above, there is no single formulaic solution to achieve successful transformation. After all, the pandemic has impacted sectors to varying extents and industries can be viewed according to four archetypes — strong, transformed, reshaped and unknown.

Irrespective of where a company fits within the four archetypes, the need to reshape and reinvent itself is more crucial than ever. The ability to scale faster, improve the portfolio of services and offerings, develop an agile operating model as well as drive collaboration and integration between old economy and technology players is important for all companies.

Future-proofing the business

Transformation is not just for companies in distress. Companies that have been resilient through the pandemic should also invest in transformation to position themselves for long-term success. Future-proofing one’s business is absolutely critical to protecting and growing shareholder value.

For example, opportunities for transformation to create value for stakeholders have emerged in the health care sector, such as the rising adoption of teleconsultations, benefiting patients and physicians alike. For hospitals, there are opportunities to protect and increase value in the face of revenue challenges. According to EY-Parthenon analysis, hospitals in Southeast Asia can expect a 35%–50% drop in revenues due to the pandemic, with those that rely on medical tourism to be hit hardest.

To address this, hospitals can implement new or innovative services across the care continuum, optimize the case mix and enhance patient volume by partnering more effectively with other players in the ecosystem, such as insurance companies. Better cost management can also be achieved by optimizing procurement and operational expenditures as well as improving staff productivity through automation and digitalization. Together, these initiatives can go a long way to improve patient care and access, while enhancing value for health care providers.

With the pandemic providing a huge stimulus for companies to transform and as consumers adapt to the fast-changing environment, the impetus for companies to act now is stronger than ever. The question is: can you pivot faster than the speed of change — and most importantly, are you unlocking the full value of transformation that you envisage?