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Graziadio Business Review | Graziadio School of Business and Management | Pepperdine University

The Business Impact of Change Management

By Natalie Petouhoff, PhD, Tamra Chandler and Beth Montag-Schmaltz

If your company is considering a major change project, anything from a software

implementation to a merger/acquisition, this article may help you as it focuses on the results
of studies (over the last ten years) on organizational change management (OCM) and its
impact on obtaining a high project return on investment (ROI.)

What advice would you give a friend or business associate if they said
to you, “I just heard about this great investment and I am really excited
about it because it has so much potential. In order to get involved, I
have to put a lot of money down. And the only negative seems to be
that the return on investment (ROI) is zero.”

Seeing the absurdity of this potential opportunity, you would probably

tell them not to invest. This scenario, as preposterous as it might seem at
first, actually illustrates a common phenomenon or trend that is
happening to companies worldwide.

What is this trend? Companies are spending millions for business improvement projects whose costs will
far out weigh their realized benefits. At first glance this might even seem difficult to believe much less be
accurate. That is, until you begin to look at the evidence. In this article the authors look at over ten years
of independent studies that show the average rate of return on all large project implementations is
negative. The review of the studies begins with the McKinsey study, in which the projects of over 40
companies were investigated. From the results of this and the other studies, this article will begin an
inquiry that will help to answer the following questions:

1. Why are so many companies making the same mistake?

2. What could companies who do not want to fall into this trap do differently?

The Common Project Success Denominator

The McKinsey study examined many project variables and in particular, the effect of an Organizational
Change Management (OCM) program on a project’s ROI. The study showed the ROI was:

143 percent when an excellent OCM program was part of the initiative;
35 percent when there was a poor OCM program or no program.

What do those these results mean? A 143 percent ROI means that for every dollar spent on the project the
company is gaining 43 cents. On the other hand, a 35 percent ROI means that for every dollar spent they
are losing 65 cents.

The 11 most unsuccessful companies in the McKinsey study had poor change management, which showed
up as the following:

Lack of commitment and follow through by senior executives;

Defective project management skills among middle managers;
Lack of training of and confusion among frontline employees.

The 11 most successful companies in the study had excellent OCM programs:

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Senior and middle managers and frontline employees were all involved;
Everyone’s responsibilities were clear;

Reasons for the project were understood and accepted throughout the organization.

Measuring A Project’s Return on Investment

For a project to get approved, there has to be a compelling business case. A business case looks at the cost
of improvement project and weighs that against the benefits the company will gain. If the benefits
outweigh the costs, the ROI is positive and thus the project is approved.

The formula for calculating Return on Investment (ROI)[2] is:

The Benefit Of Project is based on the project’s purpose. The purpose could range from increasing sales
to reducing the cost of handling customers. One generally estimates that making certain changes to the
business, installing new software, making processes more efficient, etc., will yield a particular project
benefit that has a dollar amount associated with it.

The Project Cost includes hard costs, such as hardware and software, as well as what is sometimes termed
soft costs. While the paradigm for many accounting systems has not shifted, the research also shows that
these so-called soft costs are actually as or more important to a project’s success than the hard costs. As a
result, these costs should no longer be termed soft costs because they have a defined, bottom-line effect.

Soft costs, for example, can include items such as the salaries for the time period people are on the
improvement project. Salaries are important to include because the time employees spend on the
improvement project should be seen as a cost to the organization. The longer the project takes, the longer
employees will be away from their primary job whether it is sales, marketing or manufacturing. If they are
working on an improvement project, they cannot spend the same amount of time they normally would on
their regular job.

If a project experiences delays due to politics, lack of planning, unforeseen issues, or other reasons, as is
often the case, the overall cost of the project increases because the time to implement the project has gone
beyond the original estimate. As the costs increase, any potential benefit starts to be chipped away and in
some cases more money is spent on the improvement than the improvement ends up providing. An
organization that does not consider soft costs as hard costs is putting the organization at a huge financial
risk because the project’s scope, timeline and therefore budget increase (Figure 1). Within this context of
project ROI, the following section will examine more studies that have evaluated the success or failure of
project implementations and their ROIs. Again, in this context ROI is taken to mean that the project
provides more financial benefit than it costs the organization in a reasonable time period.

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Figure 1: Increased scope, timeline, and budget put an organization at risk because they erode the
project’s potential benefits.

The Survey Says: No Change Management Means Poor Project Results

Over the past 20 years of implementing projects, the authors have collected our own data and case studies
as well as collected research from independent groups. Disappointing implementation results are being
reported in all kinds of projects: Customer Relationship Management (CRM), Contact Centers, Enterprise
Resource Planning (ERP), Share Services, Supply Chain, mergers and acquisitions, new pricing strategies,
cost reduction initiatives, and including changes in a university’s method of recording hourly wages. The
following examples show the trend that no project is immune to ROI failure, regardless of who conducts
the study.

Results of a study by Boston Consulting Group that examined 100 large companies found the following:

52 percent reported achieving their business goals

37 percent could point to a tangible financial impact for their projects[3]

A study entitled Six Ways IT Projects Fail[4] published in Darwin (2001) revealed the reasons were due
to the following:

1. Lack of executive sponsorship

2. Lack of early stakeholder input
3. Poorly defined or changing specs
4. Unrealistic expectations
5. Uncooperative business partners
6. Poor or dishonest communication

A study published in DestinationCRM.com (August 2003) entitled Six Barriers to CRM Project
Success[5] showed that the failure of CRM projects was due to the following:

Lack of guidance
Integration woes
No long-term strategy
Dirty data
Lack of employee buy-in
No accountability

In 2004, a study entitled Software Disasters Are Often People Problems[6] was published on CNN.com.
This study showed that at that time serious, preventable errors were related to poor management of the
people part of the project. For example:

Passengers wait at McCarran International Airport in Las Vegas on September 14 for flights
delayed by a communications system failure.
New software at Hewlett-Packard Co. was supposed to get orders in and out the door faster at
the computer giant. Instead, a botched deployment cut into earnings in a big way in August
and executives got fired.
Retailer Ross Stores Inc.’s profits plummeted 40 percent after a merchandise-tracking system
failed.

The study’s conclusion was that even as systems grow more complicated, failures are related less to
technical malfunctions and more due to bad management, communication, or training during project
implementation.

Gartner’s industry analysts report a staggering 55 to 70 percent of CRM projects fail to meet their
objectives. In Bain and Company’s survey of 400 executives, 20 percent of respondents felt their CRM

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initiatives actually damaged customer relationships.[7] When the objective is to build strong relationships
with customers, why is this goal eluding so many companies especially when they are spending millions
and sometimes billions to reach it?

What Is Failing?

In contrast to these studies about the people part of business, a Forrester Research study showed that
companies implementing, for instance, a new technology like CRM, are satisfied with the actual software
application’s functionality and capability.[8]

So, if the technology is not failing, what is? A study done by ProSci, a recognized leader in change
management research, again pointed to the ability of the organization to efficiently and effectively manage
the changes the project was bringing about in the organization.[9] The ProSci results showed that a
project’s greatest success factors are the following:

1. Effective and strong executive sponsorship

2. Buy-in from front line managers and employees
3. Exceptional teams
4. Continuous and targeted communication
5. Planned and organized approach

The ProSci study results also showed that a project’s greatest obstacle factors are:

1. Employee resistance at all levels (Surprisingly, the effectiveness or correctness of the actual
business solution, process, or system changes was cited only 5 times in over 200 responses.)
2. Middle-management resistance
3. Poor executive sponsorship
4. Limited time, budget, and resources
5. Corporate inertia and politics

Another study by AMR Research, a firm whose analysts focus on independent, leading-edge research that
bridges the gap between business and their technology solutions, found companies that had successful
software implementations spent 10 to 15 percent of their project budget on OCM.[10] All of the success
criteria found in each of these studies is what comprises an OCM program that increases a project’s ROI.

Organizational Change Management (OCM)

These studies show that many different analysts and research companies have found very similar results.
Clearly, continuing to deploy projects without change management is not a profitable way to do business.
The purpose of OCM is to mitigate the risks of a project, including costs, scheduling, and performance.
OCM does this by facilitating greater economic value faster by effectively developing, deploying, and
aligning the company’s assets for a given project.

As businesses face shrinking margins, global competition, and the need to deliver on loyalty-creating
customer experiences, they will also face the need to change the way they do business. As companies
evaluate improvement projects they should consider the financial contribution that OCM makes.

While there has been some skepticism on behalf of the business community to accept OCM as a necessary
business discipline, as seen in the McKinsey, ProSci, and AMR studies, as well as from the authors’
collective experiences and research at Hitachi Consulting,[11] clearly some OCM methodologies work. In
a future article the authors will address why not all OCM methodologies produce the high rate of return
for the money spent on them, and how OCM actually reduces the risk of a project and keeps it on
schedule with regard to budget and scope.

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[1] “Change Management That Pays,” McKinsey Quarterly, 2002.

[2] Integrating, People, Process and Technology. by Anton, Petouhoff and Schwartz, Santa Maria, CA:
The Anton Press, 2003.

[3] Boston Consulting Group. (2003). Research study. In Integrating, People, Process and Technology.
by Anton, Petouhoff and Schwartz, Santa Maria, CA: The Anton Press, 2003.

[4] Ulfelder, Steve. (2001). “Six Ways I.T. Projects Fail And How You Can Avoid Them.” Darwin
magazine. Retrieved June 2001, http://www.darwinmag.com/read/060101/dirty.html.

[5] Myron, David. (2003). “6 Barriers to CRM Success And How to Overcome Them.”
DestinationCRM.com, August. Retrieved from http://www.destinationcrm.com/articles
/default.asp?articleid=3316.

[6] “Software Disasters Are Often People Problems.” Retrieved Tuesday, October 5th, 2004, CNN.com.

[7] Research study by Bain Consulting Group. Integrating, People, Process and Technology. by Anton,
Petouhoff and Schwartz, Santa Maria, CA: The Anton Press.

[8] Ibid. Research study by Forrester Group.

[9] ProSci. (2003). “Best Practices in Change Management.”

[10] AMR Research Report, 2003.

[11] Change Management Case Studies, Hitachi Consulting, http://www.hitachiconsulting.com

/page.cfm?SID=2&ID=searchresults&searchString=change+management.

About the Author(s)

Natalie Petouhoff, PhD(a.k.a. Dr. Nat) is a thought leader in Hitachi Consulting's Customer and Channel
20 20 SM Solutions Group. There she helps companies not only gain a clear vision of their customers
today, but also takes them beyond the year 2020 to continue to understand their changing needs and the
bottom-line value of acquiring and retaining customers in a very competitive marketplace. Dr. Nat is the
author of Integrating People, Process and Technology (2003, Anton Press) and Reinventing Your Multi-
Channel Contact Center (Prentice-Hall, 2006). Before joining Hitachi Consulting, Petouhoff was a
thought leader at Benchmarkportal and a change management and contact center and software
implementation consultant at PricewaterhouseCoopers. She teaches organizational change management,
CRM, project management and leadership courses in Pepperdine University's MBA program.

Tamra Chandler, is the managing vice president of global solutions and people for Hitachi Consulting.
Chandler is accountable for establishing and executing the company's global solution strategy. She has
been involved in strategy execution and organizational improvement since 1990 and is considered a
firm-wide expert in organizational change management and strategy execution.

Beth Montag-Schmaltz, is the national leader of Hitachi Consulting's Organizational Change Management
practice. Montag-Schmaltz, alongside teams of consultants, has built a comprehensive and structured
approach to implementing change that is critical to project success.

Issue:
Topic: Operations Management
Tags: change, organizational change, risk, Strategy

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