Business Transformation: An Interview with Andrew Klemm, SLKone Partner & Chief Financial Officer
Andrew Klemm is a Founding Partner and the CFO of SLKone, LLC. He has spent his career advising clients through their most difficult challenges. His expertise includes Project Management, Net Working Capital Improvement, Organizational Design, Process Engineering, Dashboarding, Profitability, and Risk Management. Andrew’s experience also includes interim roles in Finance and Operational capacities. Throughout his career, Andrew has had the opportunity to advise, support, and lead Business Transformations across a variety of industries.
Q: You recently wrote a four-part series titled “A Process for Business Transformation”. What was the genesis of this work? Why did you feel it was important to write?
AK: We’ve seen a lot of companies undertake business transformation. The big driver has been the rapidly changing business environment, even before the advent of the pandemic. I recently read a market report on business uncertainty that found the average number of years a company was listed on the S&P 500 in 1958 was 60 years. In 1980, it was down to 25 years. In 2016, it fell below 18 years. It paints a clear picture that the pace and magnitude of change in the business environment is only accelerating. Another great example is Tesla. They were founded in 2013 which makes them just over 17 years old. Their market cap of $796 billion (as of January 19, 2021) is greater than the $627 billion combined market cap of Toyota ($239 billion), GM ($77 billion), BMW ($54 billion), Honda ($50 billion), Ford ($39 billion), Daimler ($72 billion), and VW ($96 billion)!
As the business environment remains dynamic, the ability for organizations to transform is becoming more and more prevalent. These transformations have generated a wide variance of outputs. So, the idea was to define a process, knowing that BT is not going away. In fact, we expect the need for transformative initiatives to increase. So, we set out to define a framework that business leaders can use that will consistently deliver successful outputs. We also delve into some of the common pitfalls we’ve seen from businesses that do not follow this approach.As the business environment remains dynamic, the ability for organizations to transform is becoming more and more prevalent. These transformations have generated a wide variance of outputs. So, the idea was to define a process, knowing that BT is not going away. In fact, we expect the need for transformative initiatives to increase. So, we set out to define a framework that business leaders can use that will consistently deliver successful outputs. We also delve into some of the common pitfalls we’ve seen from businesses that do not follow this approach.
Q: As succinctly as possible, how do you define a business transformation?
AK: Business transformation goes beyond the traditional continuous improvement to provide step-change in organizational performance and capabilities. Companies are seeing shifts in focus, products, geographies, and how products and services are delivered. Broadly, it’s a shift in what we sell, where we sell, how we sell, or who we sell to. In other words, if there is a material change in the business model, there must be a business transformation to accompany it.
Q: What does a successful business transformation at its most basic level?
AK: Transformations can have many different definitions of success and it’s really the management team that determines what success looks like. The ultimate goal for any transformation is continued growth and consistency of earnings. As the market shifts, a business transformation will allow one to take advantage of new opportunities or course correct by (1) adding capabilities to seize different opportunities and (2) adding capacity for new opportunities.
Q: You argue that it is not only needed but required at most American companies. Why?
AK: If I look at US companies, a few things are driving this. First, capital is cheap and readily available. This type of environment allows organizations to invest in infrastructure and develop disruptive products and services. Second, access to information internally and externally has increasingly accelerated the pace of development and, as a result, change. Finally, for capital markets to operate there must be growth either in the form of market growth or productivity. The fact is, the primary driver of market growth is population, and population growth rates are dropping around the world, the alternative growth driver is through productivity.
Q: In other words, population growth as a driver of business growth is fading; therefore, the next best way to drive to business growth is through greater efficiency in your workforce. But the people in the workforce are quickly approaching optimal efficiency, so we must identify other ways to become more efficient as an organization. Correct?
AK: That’s correct. Many organizations are reaching the limits of how well they can do something or perform an activity. At that point only changing what you are doing can drive further productivity and that is where transformation comes into play.
Q: So, what is the next frontier of efficiency?
AK: We are starting to see the early adopters of new tools, especially Cognitive Robotic Process Automation (RPA) to change what activities need to be performed for an organization to operate. My only caution with automation, and further investment in systems as a cure-all for productivity, is that you never realize the potential unless you take the time to integrate people and process. There are various (occasionally comical) examples of this in our series on transformation.
Q: When is a company ripe for a business transformation?
AK: So, I want to dispel a common misconception first. Many people will read these articles and believe that I am advocating for continual business transformation. Some may even think that I am making the point that the only way to win is through continuous change. That is wrong. In fact, constant change will create an unhappy and misguided organization.
Rather, I am saying that organizations need to constantly be prepared for transformation but that transformation itself is a singular activity, not continuous. In fact, we can look at supply chain processes as a good example. Made to stock is a consistent process that is a traditional business operation that is executed continuously. Opposingly, business transformation is more akin to engineer to order; we have the capability to do it, but we wait for the stimulus from the market to do it.
There are three main factors that will tell us when the market is requiring a business transformation. The first is change in customer habits. The second is change in competitor’s performance or a replacement of our competitors by new entrants. And the third is the introduction of disruptive technology, but this is closer to digital transformation. It is the inherent responsibility of management teams to identify these factors and make the decision to take on a business transformation.
Q: Should an organization have an internal business transformation team or should they outsource this capability?
AK: It should be a mix of both. A properly functioning organization must have a base level understanding and capability maintained internally. It can – but certainly does not have to – be a dedicated business transformation team or function. It can also be leaders and managers of various continuous functions (such as finance or supply chain) that have a solid foundation in business transformation. Some of these base level capabilities include reviewing processes, classifying activities, understanding activity consolidation to produce roles, and understanding technology gaps.
That being said, business transformation requires certain capabilities and a certain amount of capacity. This may require organizations to look for external advisors to provide both expertise and work capacity.
I think it’s best compared to a legal department. Traditionally organizations will have an internal General Counsel with a small legal team to support the day-to-day operations of a business, just as an internal business transformation team can handle much of transformation roadmap. However, when a specific legal problem presents itself, such as merger, it is appropriate for the organization to hire outside counsel. Similarly, when it is time for a large-scale business transformation, an organization should judiciously seek external subject matter experts, as needed.
Q: You talk about activity rationalization and the link between roles and activities, why is this so important to understand?
AK: Activities are the base-level work that is being done for the business. So, a classification of activities must be the start of a successful business transformation. For instance, if I do not classify my activities, there is a good chance I will automate or outsource a non-value-added (NVA) or low-value-add (LVA) activity. So, this is where classifying activities and then eliminating and rationalizing the NVA and LVA activities immediately sets an organization up for a successful transformation. The goal here is to eliminate work that has to be done to create a fresh view of work that has to be performed for the business to effectively operate.
The next step is taking the remaining activities and translating groups of activity into roles; A role is just a collection of activities. This can be done by combining activities that overlap, are sequential, use the same systems or have similar skill set requirements. This is extremely powerful link not only in terms of gaining efficiency, but also in the ability to manage people resources; management teams will be able to see gaps and excess capacity of labor at the activity level.
Q: What are some of the larger mistakes and pitfalls you’ve seen?
AK: Not necessarily the most common but certainly the most impactful is failing to establish a direction or a blueprint for the transformation at the outset. Too often this vision is watered down or centers on a very tactical improvement idea (which is better accomplished through a traditional improvement project). The clearer a management team can make the desired future-state the less time and money will be sacrificed to re-work during the transformation project.
Q: How do you give longevity to transformation particularly if there is a leadership change?
AK: There will be a change in decision making, but an organization needs to establish a project management office (PMO) that manages through it. The PMO needs a peer or a direct report to management but requires a level of autonomy that can weather the storm of leadership changes. The key is to keep the number of decision makers as small as possible during a transformation. While you will need decision makers and there can be turnover, the PMO office provides longevity and continuity to business transformations.
Q: Anything we didn’t include that we should have?
AK: I would just emphasize the importance of evaluating activities and process at the beginning of a transformation. From my experience, this is the most difficult area to quantify improvement potential, but typically has the most significant impact on a business. Sure, you can always remove headcount, but that’s just a one-time benefit. And, if done incorrectly, it is also a long-term detriment to the organization. By focusing on the processes and rationalizing activities, organizations can make sustainable positive change.
So, my final takeaway is (1) take the time to learn the flow of activity, (2) critically assess if activities are no, low, or high-value-add, and (3) determine a successful end state.
Q: Finally, what book do you most frequently give as a gift?
AK: “The Goal” by Eliyahu Goldratt. It is an introduction or a pseudo-novel on the theory of constraints. I thought it was just a wonderful book that was really eye-opening to me. It demonstrates the need and, for lack of a better term, cuts out a lot of the BS for process evaluation. It is essentially the story of a fictional plant manager in his quest to turn around his failing plant. I’ve been able to apply the lessons from this book to a wide variety of circumstances with our clients with great success.