Transformation process: emerging stronger from crisis

With the financial crisis of 2008, terms such as change and transformation took on an existential strategic significance in companies. Since then, those with leadership responsibility have had to meet complex global interconnections with a new attitude and competence.

An example from this period shows how a transformation process begins. The board members of a very successful bank meet for a session. With great charisma and skill, one of them had brought the bank to a top position over the years. The challenge now is to hold the position achieved when the chairman leaves.

The problem: the entrenched procedures and patterns within the company must change dramatically and fundamentally. The fixation on the chairman and dependence on him, which can be felt everywhere, must be replaced by a new inner attitude and changed procedures of a very fundamental nature. Those responsible have clearly recognised this and are taking action. The coming crisis mood is foreseeable. A transformation process begins.

During the session, the board members repeatedly withdraw. They are in close contact with employees who constantly monitor stock market movements, and they make decisions after a brief internal discussion. They act and react to the banking crisis day by day. Rarely was the word “trust” cited as often as in those days, and rarely did this term come into view so clearly as a “hard factor”.

The topic of change or change management is on many people’s lips, and every organisation practises change of the most varied kinds. A well-known saying goes: “Nothing is as constant as change.” Seemingly everyone has something to say on the subject. Practice shows, however, that a large proportion of major change processes fail.

An essential factor is how such major change processes are viewed and assessed. It is no longer about change per se, it is about transformation, that is, about fundamental change. The genetics of the systems change, and by definition this process is not possible without crisis.

Crisis means “decision”, and every decision triggers effects. In the transformation process, a crisis is the chance to open up new future possibilities if it is steered correctly. However, crisis as an essential element of transformation processes is not to be confused with classical crisis management.

There have always been financial crises and economic upswings and downturns. What is new is the degree of interconnection. Never before have organisations and people worldwide been so interconnected, and never before have entrepreneurs’ decisions had such incalculable consequences as in modern global systems.

Panic reactions, political appeasement, uncertainty and clinging to what has proven itself are typical widespread reactions to lateral transformation processes in business and society. Anyone who approaches the challenges ahead as “business as usual” misses the point. A transformation process follows different rules from the changes that every previously successful organisation has mastered.

Technically speaking, first-order changes are commonplace. They are noted like the weather report and concern dealing with the phenomena of everyday operations. Here, strategies and processes follow logical patterns of thought, are controllable and quickly changed.

One example is activities under the banner of continuous improvement. They can be planned according to clear principles and implemented successfully in a short time with the help of numerous tools. It is about improving what already exists and exploiting the potential in the company or in individual areas, in the sense of best practice. In such cases one speaks of phenotypic changes, first-order change or single-loop learning.

A transformation is a second-order change. It shakes the foundations of a system or an organisation. Such radical transformations affect the identity of an organisation and intervene in deeply anchored patterns, practices and structures of expectation. As a rule, these are very painful cuts.

Carrying out such a change requires great sensitivity in dealing with the social system and the complexity anchored in it. In this context one speaks of genotypic changes or double-loop learning.

A transformation is a process with a run-up, crisis management and follow-up. It is triggered in three ways: by a rapid chain reaction of complex events, as in the banking crisis, by foreseeable personnel changes such as the departure of charismatic and formative personalities, or by a gradual process such as changing global markets. What matters is that such complex processes are recognised and steered strategically.

If one looks at the logic of transformation processes, it becomes clear that instrumental approaches based on cause-and-effect models do not work. Increasing system complexity and dynamism show that organisations and their environments are themselves complex structures that are hard to see through.

This complexity of organisations, their environments and the transformation process is underestimated in most cases. If one follows these assumptions, a management of uncertainty is needed. This means two things: the goals of the change must be clear, and at the same time great flexibility is needed in dealing with the process as such.

Another, certainly underestimated factor is the inherent logic of companies. Companies are capable of failing because of their own success, because they tend to project past successes into the future in a linear and unreflected way. Such assumptions then manifest themselves for a certain period in so-called strategies.

The CEO of an organisation once said, in essence, that they had assumed they could carve time and environmental dynamics in stone in order to operate in peace for the next five years.

In every transformation process, decisive cohesive forces must be taken into account within and alongside the organisational framework: trust, responsibility and setting an example. They take shape above all in a company’s leadership culture.

In old economic theory, trust was taken along as a pleasant extra. At the latest, the analysis of the 2008 financial crisis revealed that trust between business partners is the key to lasting cooperation. When it evaporates, an organic social system in which people do business with one another collapses.

The image of evaporation is chosen deliberately. The emergence and decline of trust cannot be accounted for like a commodity or a piece of information that passes or is passed from A to B. Whether trust exists or not can be measured qualitatively. Trust has two components: personal trust and trust in the system.

The basic prerequisite for a successful transformation is recognising the need to change something. The guiding question is which need has to be averted. Only when the need is recognised and there is clarity that it must be averted is the ground prepared. What matters then is transparency about the urgency of the change project and the existing pressure to act.

Clarity about the crisis must be brought about. Rudolf Wimmer speaks of being able to face the crisis together. Only when there is a shared understanding of the crisis and the problem can such a process be designed and carried out effectively.

Especially in the initial phase, it must be clear that there are not yet concrete answers to many questions. Answers and guard rails take shape in the course of the process or may have to be corrected.

This difficult situation must be led through with a strong hand. Otherwise the organisation loses itself in the ambiguities between change and the existing state. In the end, a great deal of effort and energy has then only been spent parading yet another topic around, without any lasting change having taken place.

In his book “Good to Great”, Jim Collins describes several factors that are essential to the success of transformations: confronting reality, the hedgehog concept and discipline.

Confronting reality means facing the truth openly. Uncomfortable issues are put on the agenda and discussed openly and controversially. Questions are asked and answers are demanded from the management circle. Existing differences of opinion and, where necessary, disputes are not avoided.

At the same time, the organisation fosters an unshakeable belief in success despite unpleasant facts, without allowing doubt about success. Collins calls this the Stockdale paradox: retaining faith that you will prevail in the end, regardless of the difficulties, and at the same time confronting the brutal facts of the current situation, however unpleasant they are.

The hedgehog concept requires organisations to find out what they can become better at than anyone else. Four key dimensions provide orientation. The first is becoming the best. It is about recognising what you can be the best at, not what you would like to be the best at. The questions here are: what can the organisation become the best at, and what can it not?

The second dimension is finding the economic engine and using it consistently. The organisation needs a clear understanding of what its economic engine is and is guided in the transformation by these insights and requirements.

The third dimension is developing passion. This means concentrating on the business areas that ignite passion in the organisation. It is not about what enthusiasm would have to be created for. It is about recognising what there is already enthusiasm for today and how it can be used.

The fourth dimension is leaving well-worn tracks. Tracks that do not lead to the desired goal have to be identified and changed. Routines following the pattern “in order to” and “if, then” are checked for meaningfulness and changed where necessary.

Discipline is necessary to achieve the goals of a transformation. Success is associated with qualities such as consistent, persistent, determined, conscientious, precise, demanding, systematic, methodical, coherent, focused and responsible. It requires a culture of discipline in which disciplined people think and act in a disciplined way.

A transformation deals with profound ruptures and questions of an organisation’s identity. Building on Niklas Luhmann, it can be said that organisations, as operationally closed systems, are difficult to influence from outside. Their inherent logic determines the tune organisations play. Not infrequently, it leads to formerly very successful organisations failing at some point for seemingly inexplicable reasons.

A typical mechanism in organisations is what Dietrich Dörner and Harald Schaub describe as central reduction: concentrating on a seemingly central variable. All other variables are blanked out and are no longer part of the consideration.

Organisations have a high level of dynamism every day in order to maintain existing processes, routines and structures. Social systems know no lasting stability in which calm prevails and one can simply get on with one’s work. Every organisation has changed more or less over time in order to keep meeting the requirements of its various environments, and in doing so has found its own way. The art of steering in the transformation process therefore essentially consists of three points.

First, the organisation’s identity has to be recapitulated and this “genetic make-up” used strategically as a stabiliser in the crisis-ridden process. Identity and genetic make-up refer to the defining character of an organisation. These are the people and processes that have shaped it over the decades.

Second, a quality of leadership competencies has to be built. Those with leadership responsibility must learn to deal with dynamic environments, to produce measurable effects in doing so, and to create new areas of communication and fields of synergy.

Third, the realignment of the organisation has to be staged so that new structures are planned as a process and meaning is conveyed. This means aligning and adapting linear and non-linear factors.

A typical example is the short-notice closure of production lines in the automotive industry, combined with the dismissal of hundreds of employees. In purely arithmetical terms, this is an understandable act. Linearly measurable factors such as production costs are the basis of such rational decisions. The non-linear measures are acknowledged, but in the economic calculation the bishop beats the pawn.

In a transformation process, non-linear factors play a decisive role. Crisis scenarios create an atmosphere of uncertainty and fear. The result is immense losses in willingness to perform. Rational decisions made in the interests of economic efficiency have a contagious effect on the social environment. These effects are what is meant by non-linear factors.

“Meaningfulness” stands as shorthand for employees’ need to experience coherence in and alongside a company’s existing structures and functions. Experiencing meaningfulness is regarded as a health factor. If it is missing, this has unforeseeable effects on the individual and the social environment.

The transformative process can be described with the image of the wave, the “Wave of Change”. The different phases of change in organisations are fluid and dynamic like a wave. A wave builds up, towers, breaks, runs out and ebbs away, in countless complex patterns and cycles.

Those responsible who initiate such a wave with a change process have to manage, keep in view and shape two things at the same time: the planned success of the implementation, and the concerns and needs of people and organisational structures.

The energy of the change cycle can have a transforming effect. Participants learn to engage again and again with new adaptations in the change process, and they learn to value and use the transforming energy. In every restructuring or realignment, the challenge lies in locating which phase of the process the individual, the team, the business unit or the organisation is in.

Six elementary phases can be identified for this assessment of position. In each phase, the focus is on different issues. It is like a surfer: in each phase of the wave, he has to adopt a particular posture and view, focus differently and constantly adapt to the dynamics of movement. The transitions from one phase to the next are dynamic and smooth.

In phase 1, awareness of and meaning for the reorientation are created. A sense of direction is developed, and a vision emerges in the minds of those involved and affected. The basis is that people depend on structures of meaning in their social environment. They need guiding mental patterns that can be meaningfully connected with their own experience, such as language, culture, contexts, products and organisational structures, and that at the same time generate new images and ideas.

A vision must link to existing ideas and patterns of thinking and culture and at the same time create an attractive future. It is not enough to convey the direction and corporate strategy on paper, in slides or in categorical announcements. Clear “images of meaning” must emerge in people’s minds. The meaning of the realignment must be conveyed in an understandable way.

In phase 2, personal identification with the change process emerges. This is the decisive phase for lasting success. If those involved do not “buy in”, willingness to perform and identification fall significantly in difficult phases of the process, up to and including inner resignation.

The basis is that people demand trust and are not wired for the survival of the fittest. Research on game theory by Reinhard Selten and neurobiological research findings point to this. Aggression and refusal usually arise from a lack of trust, as does the sealing off of insider groups against management.

What is decisive in this phase is listening to one another, less so discussion. Different experiences are not discussed; they are met with acceptance. It is desirable for those affected to also talk about their emotions. People’s values are located in emotions; values always have an emotional attachment.

Values are the basis for people to “buy in” to an idea or a project. In this phase, the foundation is laid for a culture of trust. Trust is a hard factor in the change process.

In phase 3, the concrete projects and strategies of the change process are discussed. After the first two phases have gone well, knowledge and information must be brought in at this point. Knowledge management, project management and strategic competence are called for.

In phase 4, the discussion leads to concrete plans. Those involved take responsibility for the success of the agreed measures. Coordination and synergetic models are agreed in line with the vision and strategy.

Most measures fail because of a lack of commitment or because framework conditions change during the process. What is decisive in this phase is therefore the binding nature of decisions and plans. It exists if the process has led to empowerment up to this point. That means the individual has been more important in the process than the group, and shared success is more important than the individual’s task.

In phase 5, the agreed measures are implemented on site. It is important to install a monitoring system, with meetings, current metrics and information on the implementation of the projects.

Realities are always messy. In practice, only some of the agreed goals are achieved. A “culture of learning from mistakes” cannot be taken for granted, but it must be named as a real factor. Strategies and tactical measures must be tested against reality and, if necessary, included in the correction of goals in the next phase. The implementation process is a learning process and serves to optimise the targeted goals.

In phase 6, the process that has been completed is evaluated, and above all the results achieved so far are celebrated. Celebrating successes at this point is an important impetus for the next wave cycle.

Celebrating needs symbols. For every social group, symbols describe the shared history and the interdependence experienced, and they affirm a shared future. In this phase, it is important that the positive esprit can be felt. At the same time, the process is evaluated.

An organisation’s management plays a role critical to success in transformation processes. To realise change projects, clarity is needed about two things: the stabilisers in the organisation, and the so-called cybernetic levers of change, that is, those points that promise the greatest leverage. These essential elements should be tackled in the process.

The stabilisers are the backbone of an organisation. They help to find stability and support in the uncertainty of change. The most likely starting point for interventions is the system’s “critical variables”. One such variable is usually the state of the leadership team that bears main responsibility for the organisation or organisational unit to be changed. Comparably important starting points are the formal and informal formative communication patterns that steer internal events and relationships with the outside.

Management’s capacity for change is a decisive factor for successful transformation. It can also become the decisive bottleneck if management does not lead the change by example.

In the course of a transformation process, management has to answer a series of questions for itself and for the units of the organisation to be changed. How do we ensure that we are working on the right issues? What structures, particularly communication structures, do we need? What communication routines are needed so that regular reflection and exchange on operational issues can take place in line with the goal of the change?

Do we have the right processes to achieve the goals, which ones do we focus on, and are they efficient and effective? What routines, that is, conditional and purpose programmes, exist, and which do we need to achieve the goals? What frame of observation and evaluation do we have to assess the implementation of the change correctly?

Where are our boundaries between “inside” and “outside”? How do we observe what happens inside and outside, and how is the information processed inside? Do we have the right people, and who is developed and who is not?

Once these questions have been answered, it is important to close ranks with the next levels of leadership and achieve shared ownership of the goals of the transformation, as Rudolf Wimmer describes. This is an essential prerequisite for leaders to engage with the implementation, to see the change as an integral part of the new operational day-to-day business and not to get bogged down in the previous day-to-day business.

A typical attitude in such phases is: “I have to take care of day-to-day business, after all we still have customers.” It is therefore essential that the picture of the new is firmly anchored at all levels of leadership. Leaders engage with the attractiveness of this vision of the future and believe in what is to come. According to Wimmer, this is an important prerequisite for energy for change in the organisation.

On the evening of 9 November 1989, Günter Schabowski announced at an international press conference that travel restrictions for private travellers would be eased, to take effect “immediately, without delay”. That same night, thousands streamed to the border with West Berlin, where the border guards, without a clear order, opened numerous crossings.

This was the result of a transformation process. The original slogan “Wir sind das Volk!” (We are the people!) increasingly became “Wir sind ein Volk!” (We are one people!). A paradigm shift had taken place. A transformation process is by definition a paradigm shift: a basic image changes, in this case from a socialist to a democratic system. Such a process is accompanied by emotions, critical debate, tensions and completely new perspectives that open up.

In retrospect, it becomes clear that the idea that everything will now be different is an illusion. Six things happen in a transformation process. First, new basic images are set against the background of turbulent developments in the environment. Second, genotypic changes are initiated on the basis of one’s own core competencies. This concerns structures. Far more decisive for success or failure, however, are the inner attitudes of those involved, which have to be addressed and steered against the background of the culture that has grown over time.

Third, networking processes are stimulated in which synergies are created and put to fruitful use innovatively and effectively. Fourth, commitment and the will to act are fostered, and an awareness is created that everyone is responsible.

Fifth, in practical implementation, cooperative behaviour is fostered in which trust is an essential factor and the basis for the necessary willingness to take risks. Sixth, successes are celebrated together, and the forthcoming goals and visions are refocused and adjusted again and again.

These components must be steered intelligently in the process of transformation. Otherwise blockages and dilemmas arise, expressed in clinging to the familiar routines that were able to offer security in the past. The new perspectives and paradigms must form structures of meaning. They can be conveyed by leaders who, beyond managing, can think laterally and inspire, for the good of the whole.

Looking ahead leads to a clear finding: there is no way around transformation. When companies and entire industries come under pressure, those involved and affected must think and act transformatively. Where institutions no longer meet the requirements of the 21st century, a new set of rules has to be worked out, together, globally and locally, rather than in an ivory tower. No one can opt out.

The core problem is the crisis of trust. Trust is not a mechanism; it is a human undertaking. The open question remains how the non-linear rules of human encounter, in which trust grows, can be combined with the linear movements of economic activity, in which successes are shaped.