Organisational Change Management Volume 1

Section 4 - Rates of return on Investment (ROI)

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Introduction

Can use a cost-benefit analysis with the appropriate sensitivity analysis to identify and test different inputs and outcomes (expected vs actual). When doing this analysis, you need to understand what your key stakeholders want from the change process.

It works on the assumption that the more the change involves people, the higher the degree of uncertainty to predict the expected ROIs. For example, if the change involves renegotiating a lease on an office, the expected ROI is easy to predict. However, if the change is people-dependent, ie involves changing the way people currently work, behave, mindsets, etc, there is a chance of greater variability. On the other hand, the people-dependent (people change) activities have the potential to deliver the most value to the organisation.

In the cost-benefit analysis, the costs are

i. dedicated resource(s), eg people, time, money, facilities, etc

ii. cost of methodology and tools, eg Prosci, etc

iii. purchase of source materials, eg machines, materials, etc

iv. training time and costs, etc

The benefits are

v. human factor, eg speed of adoption, ultimate utilization and proficiency

vi. cost avoidance, eg change management is a cost-avoidance tactic

vii. risk mitigation, eg if the change is handled poorly, the organisation is at risk

viii. benefit realization insurance, eg value of project depends on how successfully the change is handled

ix. probability of meeting objectives, etc, eg how likely is the change project/activity likely to meet objectives

Furthermore, there is the opportunity cost of not doing it.

Human Factors

There are 3 types of human factors that create variations in ROI, ie speed of adoption, ultimate utilization and proficiency. These involve universal questions, ie how fast, how many and how effectively?

i) speed of adoption (expected and actual speed of adoption . how quickly do people adopt the new processes, behaviours, etc?)

This refers to the time taken for staff to first utilize the change, eg new process, systems, technology, etc.

The expected speed of adoption will be based upon the assumptions made about the implementation phase. Some assumptions may be explicit, eg the new system will be introduced to a set percentage of staff in the first month, etc. Other assumptions may be more implicit.

The actual speed of adoption is directly tied to how well the change is handled. If people realize the need for change and are willing to participate, the speed of adoption will be closer to what is expected. On the other hand, if staff have unanswered questions and reservations about the change, they are more likely to resist and slow the adoption

ii) ultimate utilization (expected and actual ultimate utilization . how many impacted staff made the change and how many did not?)

This is the participation rate, ie how many staff are engaged and participating in the change. Remember: staff can opt in or out of the change process. Most change process frameworks imply 100% utilisation. On the other hand, looking at a range of utilizations might be more realistic. Furthermore, the actual utilization is determined by how many staff opt out of the change. For example, how many staff still use the old method rather than the new way of doing things. Reasons for opting out can vary, ie do not understand the rationale for change, do not believe in the change, have not had adequate training to handle the change, etc. Sometimes staff will make a change but without measures to reinforce the new behaviours, they will revert back to the old way of doing things.

iii) proficiency (expected and actual proficiency . how effective were staff at following the new processes, behaviours, etc?)

This refers to how effective staff are when they are implementing the change, such as new processes, systems, structures, roles, etc. It is an ongoing process. Examples include improved rate of sales as a result of the new system, operational time saved when using a new system, amount of waste reduced by streamlining, etc.

Expected proficiency is a measurable that reflects fast adopting andsuccess in a new way of doing business. Actual proficiency refers to the cumulative improvement of each staff member who is performing the job differently. This is linked with ascertaining how much improvement the staff are observing.

This proficiency can conflict with utilisation, ie a 100 percent utilisation can be forced on staff and this can reduce proficiency in the staff who are not ready for the change.

These 3 factors can be used to conduct sensitivity analysis to generate numeric figures for the impact of the people side of ROI

Financial Performance

Need to understand the 7 sources of financial performance, ie revenue, cost and assets

- Increased revenue derives from

i. increased prices for existing products & services (1)

ii. new markets for existing products & services (2)

iii. new customers for existing products & services (3)

iv. new product/services for existing & new customers/markets (4)

v. existing customers for new products & services (5)

- Optimised asset utilization (6)

- Reduced the cost base (7)

Benefits (5)

i. People-side

Identify and prioritise change activities/projects into degree of "people change", ie high, medium and low. Remember: people changes are generally less predictable but have more value.

Realizing that there are no universal benchmarks around the adoption, utilisation and proficiency, fill in the table below

Factor

Definition of your project

How can you measure this?

Speed of adoption

   

Ultimate utilisation

   

Proficiency

   

More details on the human factors

Name of project

 

Name one group that is being impacted by the change

 

Identify the specific changes in behaviours or processes required of this group

 

Speed of adoption:

What does adopting the change mean for this group?

How would you measure if someone had adopted the change in their day-to-day work?

 

Ultimate utilisation

Define utilization for this group

How would you measure how many people in this group have adopted the change?

 

Proficiency

What would adopting the change proficiently mean?

How would proficiency be demonstrated?

How would you measure it?

 

Cost avoidance (real and tangible costs).

Some of these are hard to measure, such as morale. The aim is to minimize their negative impacts on the project/activity and organisations.

Some examples include impact on

i. Productivity

ii. Key stakeholders such as customers, suppliers, staff, shareholders, etc

iii. Staff turnover, especially of valued staff

iv. Morale

v. Quality of work

vi. Resistance (active and passive)

vii. Stress, confusion, fatigue, etc

Some examples of costs include

i. Project delays

ii. Missed milestones

iii. Expenses not reduced

iv. Efficiencies not gained

v. Revenue not increased

vi. Marketshare not gained

vii. Resources not available when required

viii. Budget over-runs

ix. Unexpected obstacles/challenges appear

x. Too much rework

xi. Unmet objectives

xii. Project abandoned

xiii. Waste not eliminated

xiv. Regulations not met, resulting in fines/penalties,

xv. Loss of investment in results not delivered, etc

Other factors to consider

i. History of failed change activities

ii. Change saturation, etc

Using the above as a guide, complete the table below, ie Identify the cost ($) of poorly implemented/handled change to project and organisation.

 

Activities

Cost ($)

Project

   

Organisation

   

iii. Risk Mitigation

There are many risks involved in change management implementation. In addition to the people-side risk; there are financial, technology, schedule, operation, dependency, project, strategic, etc risks to consider.

if a planned change project has a high people-side risk, then the following table needs to be completed by identifying the 3 main risks for the following risk areas: people-side, non people-side and organisational

 

Risk type

3 main risks

(includes rationale)*i

Trigger*ii

Probability*iii

Impact ($)*iv

Strategies*v

Ownership of strategies*vi

People-side

1.

2.

3.

         

Non People-side

1.

2.

3.

         

Organisational (especially if change fails)

1.

2.

3.

         

 

Notes

- Initially list all the risks that could occur and identify the major few with the rationale for their selection. The list need not be restricted to 3 if there are extra ones that need mentioning

- What would activate the risk happening? What would invoke the potential risk?

- Scale of 1 to 10; with 10 being the highest probability of happening. Focus on the high probability ones

- If unable to put a dollar value , grade as high (H), medium (M) and Low (L)

- Strategies, or risk response, are developed to handle the risks with focus on most probable and highest impact

- Who is going to ensure that the strategy developed to handle the risk is effectively implemented?

- As most risk tables are usually completed based on expert views, historical data from similar projects and inputs from key stakeholders, it is important to regularly review the above table to determine the current risk status and to identify any new major risk elements that are occurring or might, occur. This review will be used to identify any new risk that was not expected at the start of a project.

iv. Benefits Realisation Insurance

This examines the potential benefits of a change project

For each of the objectives of the project ask: "Is meeting this objective dependent on people doing the job differently" Then ask: "What percentage of these benefits result from people doing their jobs differently?"

Applying a good change management approach based on expected benefits is like insurance and any likely benefits that could arrive outside this approach are like being "uninsured".

The table below sets out how to identify and evaluate this approach

How much "people change" will this project require?

 

Identify several of the primary process and behaviour changes required by the project

 

What % of the overall project benefits are tied to people doing their job differently?

 

How effectively have you covered this portion of the project benefits?

 

List 5 of the objectives of the particular change and identify if they are dependent on the people side of change and how much of the benefit is tied to people doing their job differently

Objective

Is meeting this objective dependant on people doing their job differently (Yes or No)?

What % of these benefits result from people doing their jobs differently?

1.

   

2.

   

3.

   

4.

   

5.

   

v. Probability of Meeting Objectives

Research (Prosci, 2010) has shown that the more effective change management approaches result in a higher likelihood of delivering intended results, ie a direct correlation between value delivered to the organisation and the effectiveness of change management. Projects having effective change management deliver value up to 6 times of those with poor change management. Criteria include meeting project objectives, staying on schedule and within budget, etc

An example (evaluating the hidden costs of a "poor" culture on payroll)

A poor culture is associated with

- higher levels of staff turnover

- higher levels of rework

- higher levels of wasted work

- higher levels of stress

(using figures from William Conway, AHRI and Medibank to analyse impact on payroll)

Staff turnover calculation - this calculation is based upon

i) estimated staff turnover rate is around 18.5%

ii) cost estimates vary from 75% to 150% of annual salary depending on

- external recruitment (20% of annual salary)

- time it takes new person to settle in and be productive (can be up to 9 months)

- time spent by other staff helping the person to settle in and be productive.

Thus the range in impact on the payroll is from 13.8% (75% of 18.5%) to 27.7% (150% of 18.5%)

Rework calculation (rework is defined as work that is required only because something was not done properly the first time and includes making errors, finding errors, fixing errors, increasing complexities, interruptions, inspections, customer complaints, etc). This calculation is based upon estimates up to 30% of staff's time spent on rework

Thus the impact on payroll is up to 30 percent of payroll

Wasted work - this calculation is based upon

- unnecessary work (it is defined as work that does not and add value and is not necessary for the successful operation of the organisation and includes preparing reports that are not used, doing superfluous tasks, attending meetings and reading reports that do not add value, working on the wrong things, etc)

- not working but being paid (it includes holidays, vacations, breaks, waiting time, idle time, etc)

This calculation is based upon

i) unnecessary work up to 10%

ii) not working up to 25%

Thus impact on payroll is up to 35 percent of payroll

Stress calculation - this calculation is based upon

i) average worker loses 3.2 days as a result of stress

ii) 230 working days per year

Thus impact on payroll is up to 1.4% (3.2 of 230 days) of payroll

Thus a possible scenario is

- level of staff turnover 13.8

- level of rework 15.0

- level of wasted work 15.0

- level of stress 1.4

45.2%

Thus just under 50% of your payroll could be wasted.

Image what would be the benefits of saving 50% of this and spending time on productive things. It is better to increase productivity rather than just cut costs

Additional factors that can be costed and evaluated include

- poor customer service as shown by satisfaction, loyalty and advocacy levels

- slow and poor decision-making

- internal turf wars

- lack of inter-department coordination

- "gameplaying" during the budgeting and planning rounds

- lack of creativity, initiative-taking and risk-taking

- focus on self-interest rather than organisational interest

- limited delegation/involvement/impoundment/connectedness, etc

- inadequate processes/systems, etc

Another example would be on the impact of customer service as shown by satisfaction, loyalty and advocacy (see Customer Management in Volume 5). Remember: some facts which could be considered

- a 5% increase in customer loyalty can increase profits from 25% to 85%.

- it has been found that the top 20% of customers not only provide all the profit but also cover the losses incurred in dealing with other customers, and the top 10% of customers are worth 5 to 10 times as much in potential lifetime profits as the bottom 10%

- by reducing customer defections by 5% and increasing products sold by 2% per customer, gross profit increased by 300%

- firms that achieve both customer and staff engagement outpace their competitors by 26% in gross margins and 85% in sales growth

- It is up to 6 times harder to get a new customer than to keep one

- take care of your customers and they will come back, ie

i) over 65% of sales come from repeat customers

ii) around 70% of customers who are satisfied with products and/or services purchased, purchase the same produce and/or service again

iii) a totally satisfied customer is 6 times more likely to repurchase over the next 18 months than a satisfied customer

iv) extending customer life cycles by 3 years can treble profits per customer

- a customer whose complaint is resolved satisfactorily tells 5 other people; a customer who initially received good treatment tells 3 others

- for every 1 customer who complains, there are 26 more who are unhappy. The majority will never again buy from your organisation. Furthermore, they will share their bad experiences with up to 15 other people

- 90% of dissatisfied customers will never return. On the other hand, a happy customer will tell, on average, 6 other people

- the advantages of being the perceived service leader

i) can charge around 10% more for the same products and/or services (as a general rule, a 1% change in margins is equivalent to a 10% change in sales)

ii) grow twice as fast as competitors

iii) improve the market share by up to 6% per year while those poorly perceived lose as much as 2% per year

iv) have a return on sales 12% higher than other providers

- a 5% increase in customer turnover can boost profits by up to 80%

To determine a customer's lifetime value (CLV), use the following formula

organisational development change management

Summary

In the project's ROI is not what you expect, look for gaps between expected and actual values of speed of adoption, ultimate utilisation and proficiency. The specific type of change being implemented defines the speed of adoption, ultimate utilisation and proficiency.

i. Poor change management results in slower speed of adoption, lower ultimate utilization and low proficiency which reduces the ROI. Effectively handling the human side of change can increase adoption, better overall participation, improved benefits, less resistance, reduced turnover of valued staff, etc. All these will improve the ROI.

ii. Tabulated summary of the benefits

Benefits

Details

People-side

"...Change occurs at the individual level. The value that a project delivers to the organisation is ultimately tied to how quickly we can get individuals to make the changes required (speed of adoption), how many of them do their work the new way (ultimate utilisation) and how effective each of them is when they have adopted the change (proficiency)

Cost avoidance (real and tangible costs).

We incur significant and quantifiable costs when changes are fully managed, at both the project and the organisational levels. In addition to the extra costs of fixing the people-side issues that creep in if we ignore the change management upfront, the organisation also fails to derive the value it needed from the project in the first place. Change management is an effective cost avoidance technique we can apply to all our projects.

Risk Mitigation

Ignoring the people side of change results in numerous risks to the project and to the organisation. We leave ourselves exposed to these people risks if we do not use a structured approach for managing the people side of change. When applied effectively, change management can help to mitigate or eliminate many of the numerous risks associated with the people side of management.

Benefits Realisation Insurance

For the most important and most strategic changes in the organisation, much of the value that is expected is tied to how people do their jobs. Applying a structured change management approach is like taking out an insurance policy against the goals and objectives of the project.

Probability of Meeting Objectives

There is a growing body of data showing that the more effectively the people side of change is managed, the more likely the project is to meet objectives. Prosci's benchmarking data and the McKinsey quarterly article "helping employees embrace change" show that projects with effective change management were five to six times more successful than projects that did not address the people side of change effectively..."

(sources: Prosci, 2010; PMI, 2010; Bernard Thorpe, 2010; William Conway, 1992; Fiona Smith, 2011g)

Sections of business case/plan

The purpose of the business plan used to describe and communicate a particular project and how it will be implemented
One sequence is

i) executive summary (presentation of pivotal information that is expressed succinctly, clearly and concisely)
ii) situational assessment and problem statement (identify direct connections between results and outcomes - include the people side of change like behaviours, etc; identify individuals/groups impacted by the change. Identify dependencies for benefit realisation and value creation; identify the organisational benefits and project objectives; show the dependencies on adoption and usage)
iii) project description (description, scope and objectives)
- description (inputs; define change, technical solution; understand individual change management work streams (including individual milestones needed to make change successful and define deliverables, eg strategies and plans. In outputs, look for people ones (adoption, usage, etc) and project/organisational outputs (results, outcomes, benefits, value, etc)
- scope (identify and define individual changes, creating a change management strategy(ies); develop customised, scaled, targeted, best-practice based plans around communications, sponsoring, coaching, training, resistance management, etc; creative adaption and use metrics. Out of the scope will evplve defining the change and creating a technical/people solutions)
- objectives (improve staff's adoption  and usage of new solutions to drive project results at outcomes; create a customised and scale approach that aligns with the change project life cycle and milestones; create deliverables, like strategy and plans, that support individual attainment of the key milestones of successful transition
NB adoption (staff are doing their jobs in new ways, eg adhering to new processes, exhibiting new behaviours, using new systems/tools, etc)
       usage (staff are effective in their new ways of doing things, eg proficiently, completely, minimal errors, etc)
Some elements of a person's job that change can impact include
- processes
- systems
- tools
- job roles
- critical behaviours
- mindsets/attitudes/beliefs
- reporting structure
- performance reviews
- compensation
- location, etc
iv) solution description (preparing for change, managing change and reinforcing change)
- preparing for change ( change management strategy(ies), readiness assessments, etc)
- managing change (plans on communications, sponsorship roadmap, coaching, training, resisted management, etc)
- reinforcing change (adoption and usage, measurement, sustainability, lessons learned, etc)
v) cost-benefit analysis (detail all benefits & costs with monetary values, like inputs and outputs, eg people, time, etc; cost of methodology & tools, purchase of source materials, training time and costs, etc)
vi) implementation timeline (start with key, already-established project milestones and work backwards; align organisational life cycle; define milestones by outcomes rather than by activity, etc
vii) critical assumptions and risk assessment (list them to understand the complexity and risk associated with people side of change)
viii) conclusion and recommendations
NB Successful change (results outcomes, success) requires both covering technical and people, ie
- technical (design, develop, deliver, etc) so that it is installed
- people (embrace, adopt, use, etc) so that it is realised

Or an alternative way is

Sequence for business plan (team, business model, financial analysis, external environment, implementation roadmap & risk analysis)
- executive summary
- the team

i) management profile, ie past experience (successful track records in similar projects, etc), knowledge, connections, etc
ii) strengths and weaknesses (highlight why the team is the right one for the project implementation)
- business model (see 10/12 building  blocks framework, eg value proposition, customer segment, channels to market, key activities, key resources, challenges, etc)
i) vision and mission and values
ii) how business model works
iii) value proposition
iv) target markets
v) marketing plan
- financial analysis (see financial spreadsheets, eg how many customers can be acquired, etc)
i) breakeven analysis
ii) sales scenarios and projections
iii) capital spending
iv) operational costs
v) funding requirements
- external environment (environmental analysis, eg PESTLE)
i) the economy
ii) market analysis and key trends
iii) competitor analysis
iv) competitive advantage of our business model
- implementation roadmap (implementation schedule, ie what it takes to implement and how you will do it)
i) projects
ii) milestones (GANTT chart)
iii) roadmap
- risk analysis (SWOT and uncertainty analysis)
i) limiting factors and obstacles
ii) critical success factors
iii) special risks and counter-measures
- conclusions
- annexes

 

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