MANAGING CHANGE RISK

MANAGING CHANGE RISK Overcoming the silent risk that hinders growth

Ramy FarhaChris DeBrusk Antonio Tugores

Managing Change Risk

© Oliver Wyman 2

EXECUTIVE SUMMARYWhile change is the only constant in life, there are certainly periods where change is more amplified. We currently find ourselves in one of those periods. The world and our key industries are not immune to the ripple effects of the global pandemic. As an example, for the financial services industry, there are many drivers of change: in the short term, retail banks are facing downward pressures on net income due to record-low interest rates and increasing delinquency rates, and the need to trim costs quickly; in the medium term, new remote working routines are further accelerating digitization, automation, and disintermediation. As a result, business and operating models are trying to adapt to the “new normal.”

The firms able to effectively deliver change will thrive and are more likely to emerge stronger from these changes. However, delivering change is no easy task: humans have a natural bias against change.1 Failing to drive change is a challenge to the competitiveness and sustainability of any firm, creating monetary costs, eroding trust with customers and investors, and weighing on culture and employee engagement. On the flip side, firms that successfully deliver change set off a self-reinforcing feedback loop that increases profitability and productivity, builds trust with stakeholders, and attracts top talent.

An often forgotten institutional “muscle” for firms is the ability to effectively manage change risk — the risk that a change program fails to deliver the desired goals. We believe that most firms do not proactively manage change risk in a way that is commensurate with the benefits of success and the costs of failure. Effectively managing change risk is a necessary “muscle” to reduce, preempt, mitigate, and manage the challenges that come with (intents of) transformation, without bringing decision paralysis or stifling innovation in the organization. We refer to change risk as a ‘silent risk’ because this “muscle” is often neglected and, too often, that neglect is one of the root causes behind the inability to drive to the desired outcomes.

In our paper, we present an approach to proactively manage change risk, including

• How to manage change across the end-to-end change lifecycle, to ensure firms develop fit for purpose mechanisms

• How change risk management is a key component of the journey, and the best ways to understand drivers of successful change

• Recommendation for four key change management capabilities, a change risk management framework, change delivery igniters, workforce change capacity management, and a process for initiative prioritization; and actions to help leaders make change management a priority

1 O’Brien and Klein (2017). The tipping point of perceived change: Asymmetric thresholds in diagnosing improvement versus decline. Journal of Personality and Social Psychology.


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THE CHANGE LIFECYLEWe need to first understand the change lifecycle before discussing how to enable more proactive change risk management. One way to define the lifecycle is by thinking about how initiatives typically fail in practice.

In broad strokes, the following offers an illustrative story of change initiative evolution familiar to many firms.

• A leader is inspired to make a change that can increase the bottom line

• Senior management rallies around the idea

• The initiative is invested in and launched

• The initiative is completed, but the result is closer to the starting state than the target state

After senior management engages in the idea, the hurdles to success typically arise. Poor scope definition and conflicts with competing initiatives are common challenges. After the initiative is launched, the “human factor” emerges. The initiative may face employee resistance and apathy in the absence of good communication, understanding of objectives, and/or resource bandwidth. By the end, we are faced with the natural questions: Does the end product align with the target state? And why did we fail if we started with such a strong commitment?

To avoid becoming part of yet another story like the above, management needs a holistic perspective on the change lifecycle. Exhibit 1 provides a typical end-to-end view of a traditional change lifecycle.

Exhibit 1: Typical end-to-end “waterfall” change lifecycle

Go-liveIdeation Design and development

Strategy and budgeting setting

Run-the-bank activities

Implementation

Change-the-bank activities

Typical change management scope

Change initiativelaunched into production

Identification of gaps,opportunities, externalrequirements, etc.

Source: Oliver Wyman analysis

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Change delivery starts from strategy definition and the assessment of the opportunities in the current state, and continues until post-implementation, when the change should be incorporated into business-as-usual activities and become sustainable. However, risk management functions are typically only involved with the implementation and go-live steps.

One insight, from our investigations into struggling change initiatives, is that such a narrow approach exposes firms to unnecessary change risk. Similar insights inform our views on what is needed to achieve successful change.

OUR VIEWS ON SUCCESSFUL CHANGEEffective change boils down to directing energy and aligning efforts toward three key elements.

• The strategy and thinking

• The people and behaviors

• The underlying infrastructure

We call these elements the Head, the Heart, and the Guts of an organization. Successful change should have risk management embedded into these key elements.

Exhibit 2: Successful change aligns three key elementsAligning the Head, Heart, and Guts of an organization enables staff to commit to the change and adopt new behaviors; ultimately yielding desired impacts

HeadThe business context• Strategic agenda• Market and regulatory knowledge• Business model understanding• Business and financial modelling Heart

The people context• Leadership• Behaviors• Talent and performance• Team effectiveness

GutsThe supporting infrastructure• Governance• Organizational structure• Data, technology and systems• Policy, processes and procedures

Commitment to changeWillingness to try,ability to execute

Belief and behaviorAdopted by staff

Changeresults



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Change is the only constant in lifeHeraclitus, c. 535 BCE-475 BCE

Successful change occurs when the Head, the Heart, and the Guts are fully aligned, resulting in an organization that has: (1) the willingness to change — through leadership, personal drive, and the identification of strategic value; and (2) the ability to execute — through an adequate workforce, the right infrastructure, and a clear roadmap.

Too often, firms facing change tend to focus on the Head at the expense of the Guts and, especially, the Heart. Such firms often struggle to achieve successful change because lasting change requires individuals to collectively change behaviors. For example, a firm does not become more customer-centric when rolling out a new top-down campaign or training module. Rather, the firm becomes customer-centric when the workforce begins adopting customer-centric behaviors — the way customer interactions play out; the way products are configured; and the way senior leadership communicates and makes decisions.

Experience and research indicate that, for change to occur, each level of the organization needs to understand the objectives and purpose of the change, as well as the new behaviors to adopt. Change experts across the globe call these “vital behaviors” — the smallest actions that, if consistently repeated, will lead to the intended outcomes.

In driving change, the ability to manage change risk needs to be developed in the Guts (through risk management capabilities); the Heart (through an understanding of the workforce stoppers and capacity in the firm); and the Head (through the incorporation of change risk into the firm strategy). Our research shows that, historically, neither risk managers nor front-line risk owners have paid enough attention to managing change risk. If firms believe — as we do — that a better managed change risk is a key success factor, firms must pay more attention to driving alignment between Heart, Head, and Guts in order to achieve successful change, and also appropriately embed risk management capabilities across these elements.

We have identified four capabilities for firms that can increase opportunities to drive effective change management:

• Change risk management framework: Adapt the overall risk management framework to cover change risk across the lifecycle

• Change igniters: Clear obstacles to build a change-oriented organization by diagnosing and addressing organizational weaknesses

• Workforce change capacity management: Monitor change load and change fatigue, as well as improve organizational agility

• Initiative prioritization: Develop a process for assessing change initiatives to maximize impact within change capacity

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We believe firms that achieve these four capabilities will see an increased efficacy and decreased risk associated with the change programs. Returning to the change lifecycle in Exhibit 3, we show how these capabilities can reinforce each stage and broaden the role risk management teams play well beyond the implementation and go-live steps.

Exhibit 3: End-to-end change lifecycle — with enhanced change management capabilities

Ideation Design and development

Strategy and budgeting setting

Run-the-bank activities

ImplementationGo-live

Workforcechangecapacitymanagement

Project prioritization

Change risk management framework1

Change delivery enablers2

3

4


In the next section we elaborate on how these four capabilities would operate within the end-to-end change lifecycle, including a series of concrete actions to drive successful change.

FOUR CAPABILITIES TO DRIVE EFFECTIVE CHANGE MANAGEMENT

CHANGE RISK MANAGEMENT FRAMEWORK

We believe risk management leadership plays a significant role in ensuring that the risk management framework is fit-for-purpose to manage change risk. Currently, for many firms, the risk management framework does not adequately incorporate change risk — for example, a firm may not have a clearly articulated change risk appetite or may not have adequately considered change risk within the existing risk identification processes. The current state can expose the firm to risk and make change initiatives less likely to succeed;


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given the inability to identify and intervene in initiatives early on that are on track to fail and potentially improve the probability for success.

We have identified concrete actions risk management leaders should take to incorporate change risk management into their typical firm-wide risk management framework in the short- and long-term horizons.

Exhibit 4: Change risk management actions for leaders

Element MandateShort-term action (<3 months)

Long-term action (3+ months)

Foundational actions

Risk appetite Define the change risk appetite

Provide a transparent, clear risk appetite manifestation to assess initiatives and portfolio change risk

In collaboration with the business, develop approach to optimize change portfolio prioritization

Risk taxonomy and controls

Define relevant risk sub-types and key mitigating controls as enablers for more effective risk identification and mitigation

Identify top change risk types and the associated mitigants

Refine taxonomy — informed by experience in delivering change and change failure post-mortems

Governance Roles and responsibilities

Define roles and accountabilities in the change risk management framework across the three lines of defense

Mobilize the organization to (1) understand change risks and (2) start utilizing common change risk assessment tools

Adequately resource and skill the team up

Incorporation of change risk assessments into relevant forums

Assess initiative materiality and risk to determine the level of oversight and challenges needed

Elevate change risk in the relevant risk management forums, highlighting (and acting upon) key findings identified through these short-term actions

Create or update risk management forums to routinely manage change risk, feeding the change risk assessments, prioritization rubrics, reporting, and metrics

Processes, Systems and Data

Tools and procedures

Develop, maintain, and transfer best practices on change risk management across the change lifecycle

Score all material in-flight initiatives through a change risk assessment and a standardized change risk score

Incorporate change risk assessments and prioritization rubrics as part of business-as-usual routines

Management information (MI) and reporting

Drive transparency and consistency in the tracking and communication of key risks and issues in initiatives

Monitor already-available metrics that are related to change risk; build and socialize reporting with relevant forums

Expand metrics and reporting; enhance MI infrastructure to enable automation and improve responsiveness


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CHANGE IGNITERS

We believe firms need to take a series of preemptive steps to clear the most likely obstacles before launching new initiatives. Currently, in many firms, management is often unaware of weaknesses that prevent organizations from enabling successful change.

We recommend firms adopt a disciplined diagnosis process, rather than following any generic list of the “X number of reasons why your firm is not delivering change.” We suggest that the diagnosis includes the following three steps.

• Hypothesis development: Targeted one-on-one interviews with select team members to understand the status quo, while listening for pain points and underlying root causes. The exercise should welcome divergent opinions

• Vision development: Focused workshops with managers, that have a key role in the end-to-end change lifecycle, to converge on hypotheses. The exercise should inform the development of the target state and a high-level plan to reach such state

• Plan development: Leadership agreement on the transformational levers and a roadmap to set the organization to be ready for stronger change risk management

From our experience, we often see firms fail to employ change igniters due to a common set of organizational weaknesses, summarized in Exhibit 5.

Exhibit 5: Change igniters and commonly observed weaknesses

Change igniter Commonly observed weaknesses

Setting clear and shared objectives for the transformation

• Unclear objectives, goals and end state definition• Absence of continuing Board and/or CEO commitment and support• No robust and compelling case for change demonstrating that the status

quo is not an option

Updating the target operating model to be more effective at managing change risk

• Overemphasis on changes to structure without an adequate consideration of people capabilities or “soft” managerial skills

• Inconsistencies between governance and decision-making attributes and the organizational architecture, creating frictions and/or leading to irrelevance of the new model

Engaging stakeholders and overcoming resistance

• Overestimation of the level of senior team alignment and incentive alignment

• Unclear accountabilities between business leaders and the transformation initiative team

• Insufficient understanding of new operating models by middle management and individual contributors

Planning and managing for excellence in execution

• Design considerations as the end point of the overall exercise• Underestimation of the resources and effort required to manage

the transition• Inadequate follow-through and accountability surrounding execution



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WORKFORCE CHANGE CAPACITY MANAGEMENT

Every team has a maximum amount of change that can be managed at a given time — in other words, its change capacity. When the amount of change that a team and, more broadly, an organization is experiencing (its change load) exceeds its change capacity, the ability to deliver timely, lasting change can be severely hampered. The issue is further exacerbated by change concentration within specific team and/or parts of the organization. While these are not new concepts, what we find is that most teams only manage capacity through budget allocation, which is not a perfect substitute for change capacity and does always address change concentration.

We recommend that leaders understand and proactively assess the factors that underlie change load, change concentration, and change capacity to maximize the ability to deliver successful change. From a conceptual standpoint, Exhibit 6 below highlights the key factors that drive change capacity utilization.

Exhibit 6: Change capacity utilization

Change load5 dimensions of change drivers

Change capacityUnderlying ability to engage with change

Type Magnitude Velocity Volume Timing

Organizational agility Change baseline

Type is the nature of the change, for example,a human capital reduction vs. a businessprocess redesign

Magnitude is the size of the change, for example, one new leader vs. an entirely new team

Velocity is how quickly any individual change needs to be operationalized

Volume is the cumulative number of changesas part of the portfolio

Timing is the frequency, intensity, and duration of changes across the portfolio

Organizational agility is the degree of comfort to lead, evolve, and adapt in the existing organization and culture

Change baseline is the existing relative degreeof change and change fatigue in the organization


The good news is that the change capacity of a team is by no means set in stone — in fact, we believe there is an opportunity to actively manage these factors to maximize change capacity. We have identified seven levers that leadership can pull to tune the organization for change.

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Exhibit 7: Levers to increase change capacity

Leadership alignmentand involvement

Program governanceand journeymanagement

• Top team makes case for change and decides on priorities and solutions• Sponsors are actively engaged with teams• Leaders take accountability for change success

• Formal “building blocks” of the organization are aligned: decision, rights, motivators, metrics, information

• Expectations for participation and results built into performance management; desired behaviors reinforced

• Build awareness of rational and emotional case for change• Use stories and proof points, linking change to sources of employee pride

• Design and deploy training related to acquiring new skills, processes, policies, systems, etc.

• Gap analysis to identify skill shifts required; plan to close gaps

• Cross-functional, cross-level, dedicated teams• Strong program management to track progress; change is measured

• Engage and energize stakeholders directlyand indirectly; top-down and bottom-up, informally and formally

• Leverage change agents, exemplars, trusted nodes and key influencers

• Work with and within the organization sub-cultures; draw on sources of pride to fuel commitment to change

• Identify critical behaviors that must be exhibited to increase adoption and shape mindset

Organization andtalent alignment

Communication

Educationand training

Stakeholderengagement

Cultural “savvy”and behavioradoption


Risk teams should work with business owners, and human resources to develop each of these levers. Here are some specific examples where risk teams should play a role.

• Leadership alignment and involvement: For high-priority initiatives with material change risk, the risk management leader or direct report should, at a minimum, be playing a review and challenge role in the decision-making forums.

• Communications: Risk management leadership should contribute a risk-based perspective to internal communications that “sell the case for change.”

• Organization and talent alignment: Ensure change risk is adequately considered in the risk management component of performance management programs.

INITIATIVE PRIORITIZATION

Every organization faces change capacity and resource constraints that require leadership to prioritize certain initiatives. While organizations typically conduct prioritizing efforts during the quarterly or annual budgeting processes, most of these organizations limit change risk considerations to the bucketing of initiatives as either run-the-business versus change-the-business.


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At a high-level, organizations should prioritize programs along the two following primary dimensions to truly maximize impact within change capacity, although a more detailed prioritization framework should be developed down the road.

• Strategic importance: How well does the program align to the strategic vision, goals, and objectives of the organization?

• Change risk: How much change risk does the program bring? And does the program unbalance the overall change portfolio through excessive change concentration?

An example framework for such a prioritization is presented below.

Exhibit 8: Example change program prioritization frameworkDriving change starts with the construction of change portfolio that aligns to the strategy of the organization, using clear and trackable metrics; Risk plays a key role defining the approach for assessing change delivery risk

Strategic importance1

Change risk2

(i.e., Large-scale remediation)Tier A - Higher priority

(i.e., Introducing AI in credit)Tier B - Moderate priority

(i.e., Risk model infrastructure upgrade)Tier C - Lower priority

(i.e., Change in regulatory reporting)Tier B - Moderate priority

Program size

1. Includes consideration for strategic alignment, regulatory interest and shareholder value. 2. Includes consideration for innovation/technology, impact on customers, operational/systems resilience, implementation complexities. Source: Oliver Wyman analysis

Strategic importance is crucial to consider in prioritizing change initiatives. While senior management defines strategic objectives in broad terms, these objectives eventually must be left to lower-level leaders to interpret and implement. Without a disciplined process to map each initiative to the strategic goals that the initiative will achieve, firms may find that portfolios lack focus. Limited transformation resources may be spread too thin, increasing the risk that initiatives fail and that the firm cannot achieve these strategic goals.

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The issue can be mitigated by mapping each change initiative to the strategic vision, goals, and objectives of the firm. Initiatives that map to the highest-priority goals and objectives should be prioritized. Initiatives that do not have a clear strategic case are good candidates for de-prioritization.

Exhibit 9: Mapping of change initiatives to firm goals and objectives

Overarching vision/purposeThe clear North Star for theorganization/function

GoalsThe 2-3 “big picture” strategicambitions we need to achievein the context of our vision

Strategic objectivesThe 10-30 business outcomesand key capabilities/enablerswe need to deliver to realizeour goals

Change initiativesThe key projects, programsor activitiesthat will deliverversus our objectives

Overarching vision/purpose

Cost andEfficiency

Clientexperience Goal 3

Examples

...

Techinfrastructuremodernized

Clientonboardingtransformed

Objective 3 ...

Initiative 1 Initiative 2 Initiative 3 ...

Bottom-up mapping of the full spectrum of in-flight and planned change initiatives (>100, covering tens of thousands of employees)


Beyond prioritization, a clear mapping between each initiative and the firm strategy has two additional benefits: (1) Enables management to clearly see the “critical path” of actions to take to achieve each objective; and (2) Helps align the Heart with the Head by helping employees understand how buying-in to the initiative will achieve a “big-picture” impact.

In order to adequately incorporate the change risk dimension into the framework, organizations should incorporate some of the capabilities described in previous sections to build clear, traceable metrics, including:

• Expanding the risk appetite statement to be inclusive of change risk and define the appetite for change at the enterprise and/or line of business level

• Leveraging the risk taxonomy to develop a transparent weighting mechanism of change risk as an input for prioritizing the overall change portfolio


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Overall, firms that succeed in incorporating change risk management into processes and culture will become more agile and more resilient, while firms that lag will run the risk of being caught flat-footed when the next disruption arrives. Firms that proactively manage change risk will be able to overcome the silent risk that hinders growth and emerge as winners.

ACTIONS FOR EFFECTIVE CHANGE RISK MANAGEMENTGiven both the necessity of achieving successful change in the current tumultuous world and the high cost of failure, organizations cannot afford to take a reactive or narrow approach to change risk management.

We recommend front-line and risk management leaders:

Highlight that change risk is real: Make change risk tangible by building a clear, compelling case of the failure events that the organization is exposed to, and the need to build an organization that has (1) the willingness to change — through leadership, personal drive, and the identification of strategic value — and (2) the ability to execute — through an adequate workforce, the right infrastructure, and a clear roadmap.

Diagnose the problem and execute on a vision of the capabilities to better deliver change: Understand the status quo, pain points and root causes through interviews; build a vision of the target state; and agree with leadership on the transformational levers and a roadmap to set the organization to be ready for stronger change risk management.

Develop a change risk management framework: As part of the transformation levers, we expect the need to build upon the existing risk management framework, including a change risk appetite; change risk taxonomy and controls; governance mechanisms; and processes, systems, and data to better manage change delivery risks.

Lead and support a robust change culture: Understand and proactively assess the factors that underlie change load and change capacity to maximize the ability to deliver successful change. To increase change capacity, encourage key stakeholders to be willing and prepared to adapt, (re-)designing organizational and talent structures to enable change.

Provide the change risk “lens” for portfolio prioritization: Ensure that periodic efforts of prioritization of change-the-business initiatives balance strategic importance with a structured view of change risk.

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AUTHORS

Ramy [email protected]

Antonio [email protected]

Chris [email protected]

Oliver Wyman – A business of Marsh McLennan www.oliverwyman.com

CONTRIBUTION

The authors would like to acknowledge and thank Jonathan Lee and Rutger von Post for their contributions to this paper.

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