Costs and Benefits of a Transformation
About effort, follow-up costs, effects, risks, and profitability.
An article by Peter Pröll
Lectured by Niels Pfläging and Anke Schaffrek
Reading time ca.15 minutes
Are you thinking about transforming your company's structure and administration, enabling more self-organization, making the organization more agile, and promoting networked collaboration within the company? When the insight to move the organization forward in this way matures, the costs and benefits questions arise.
Now, within the scope of this article, it is not possible to give an exact figure or a precise formula for calculating transformation costs. But it is possible to approach the answer with a few steps, i.e., to develop a particular idea. It is helpful to ask what efforts, follow-up costs, and risks can be expected in a transformation. These can then be compared with the improvements that can be expected or the presumed gains in profitability.
In my analysis, I differentiate between two different approaches to transformation: "agile transformation" on the one hand, and "organizational transformation," i.e., the transformation of entire organizations, on the other. I will play through the latter using the example of transformation with OpenSpace Beta. As I will show, the two approaches differ significantly in their effort, follow-up costs, risks, and profitability potentials.
Agile transformation is usually about changing individual business units or departments. The focus is on specific ways of working in companies. The centrally oriented decision-making structure of the organization, if it exists, remains essentially untouched in this approach.
The Costs of Agile Transformations
- Costs of implementation: If an approach based on change management methods is selected, charges are incurred for external consulting and an internal transformation team, which plays a key role in designing, planning, and coordinating the change. More innovative approaches, such as OpenSpace Agility, are rarely chosen in this context. Occasionally, so-called bottom-up approaches are resorted to, but these are to be discouraged for good reasons.
- Training: In this approach, those affected are usually trained on the new ways of working, tools, and techniques. The extensive experts required for such training can usually only be provided by consulting companies of an appropriate size.
- Duration: The costs of the transformation are influenced by its duration. Serious experts tend to say that an agile transformation "never ends." There's some truth to that. The goal is not to reach a new, seemingly stable plateau but a way of working together that adapts more quickly to changing circumstances. So when I talk about the duration of the transformation, I mean the time during which higher initial expenses are incurred - until significant, tangible changes have been implemented and the transition to the "new normal" with reduced follow-up costs takes hold. In short: At the end of the transformation period, the external service provider ideally leaves your company and from then on is only in the company for individual coaching and training sessions. In an agile transformation, this duration depends on the size of the company. We are talking about just under a year (in the case of successful exceptions) up to several years (usually).
Consequential Costs of Agile Transformations
In agile transformation, the work methods are illuminated, but not the business contexts at the overall organizational level: corporate structure and control, budgeting and compensation regulations are only mentioned here as examples. The new working methods that emerge in an agile transformation are typically incompatible to a large extent with the centralized corporate structures that remain in place in these approaches. This incompleteness of the approach results in consequential costs after the agile transformation:
- Incompatibility: The systemic inconsistencies between unchanged corporate management and the new understanding of work at the level of agile teams must be continuously balanced. This balancing makes additional ongoing coaching and training necessary. A situation arises that is quite reminiscent of the suffering of Sisyphus. Agile frameworks, therefore, provide for roles such as the Scrum Master or the use of Agile Coaches. Expect an additional personnel effort of up to one Agile Coach, Scrum Master, or one person in a similar role per team - with a team size of four to nine people.
- Higher personnel expense: Later independence from this continuous support is not envisaged in approaches to agile transformation and is not achievable because of the inconsistencies to be compensated. The teams remain permanently dependent.
Risk Consideration in Agile Transformations
There is definitely a risk that an agile transformation will fail, and the goal of higher performance or profitability cannot be achieved. There are several reasons for this:
- False frugality: Often, the deployment of accompanying coaches/Scrum Masters is underestimated due to misunderstood frugality - or sufficiently qualified personnel is unavailable. In larger companies, it is common for situations to arise in which teams are left alone. After initial quick training and management's instruction that they should work agilely, confusion increases; contradictory information leads to dissatisfaction, rejection, and fluctuation. The profitability of the company is weakened.
- Resistance: The more the transformation is centrally planned and controlled - i.e., it is not self-organized - the greater resistance (to the inappropriate change method) can be expected and the weaker the teams' adoption of the new ways of working will be. The transformation efforts as a whole can come to a complete standstill despite - or better: because of - precise planning. This is especially true if corporate decision-making structures are not adapted to the teams' agile ways of working as part of the transformation.
- Delegation: Significant risks arise when management does not actively support the transformation and is not part of it. Or if those responsible even delegate it entirely in extreme cases. In this way, managers quickly lose an understanding of the changing processes in the company. There is a risk of alienation.
- Duration: Due to the long duration of regularly more than a year, ambiguities in time management, and delays in the course of a transformation, the probability increases that personnel changes will occur at decisive points. As a result, transformation efforts may be questioned and revised in whole or in part by executives.
- Other "risks". Other frequently mentioned risks are an "inappropriate corporate culture" or "resistance to change" per se. However, both points are mainly popular myths that testify to a misunderstanding of systemic and behavioral science. Resistance is not directed against change itself but inappropriate change methods. On the other hand, corporate culture is primarily an indicator, a reflection of the current situation, and not a prerequisite for change.
Profitability of Agile Transformations
- Collaboration: Ideally, through the appropriation of agile and lean approaches, there is improved cooperation within teams and occasionally across team boundaries. The better the balancing of inconsistencies by coaches and scrum masters in continuous operation, and the more everyone in the company itself is involved in the transformation, the more potential improvements can be expected in quality and throughput.
- Cost recovery: In most cases, it is possible to cover the costs for continuous, accompanying coaching and training and increase satisfaction within the company. However, this largely depends on the quality and skill of the Agile Coaches and Scrum Masters and the quality of the consulting.
- Profitability: "Higher profitability" should not be one of the reasons for which one strives for an agile transformation. Due to the generally inadequate integration of team agility and business aspects of corporate management, economic gains can hardly be expected from such transformations.
Is an agile transformation at all sensible and advisable from these points of view? From the perspective of entire companies, it is rather not: High risks and distinctly high follow-up costs speak against it. An agile transformation is only justified from the point of view of individual departments or divisions if there is no authorization to adapt the entire company's processes. In this case, it is necessary to proceed extremely carefully. This will only succeed beyond top-down or bottom-up approaches - it also requires more expertise than just "agile" know-how.
However, you are left with the follow-up costs. Cutting corners here leads directly to chaos or to all change efforts being reversed after a short time. In these cases, people often stick to the new nomenclature, e.g., they speak of the "product owner" instead of the "project manager." However, nothing more than an empty shell remains of such failed agile transformations.
An organisation-wide transformation - e.g., with the help of the OpenSpace Beta approach - means more than just optimizing and changing the ways of working in departments and divisions: Corporate management, corporate structures, and business aspects are not only considered, but also changed along with it. This integrative approach is based on the understanding that only all these aspects taken together form the basis for successful, consistent transformation.
Costs of an Organizational Transformation
- Consulting: The management authorizes the transformation, and it is carried out jointly by everyone (including the management). The self-organization desired can only be achieved through a transformation process that is also self-organized - this is the logic of this approach: For painting a white wall red, it is best to use red paint; more white will hardly ever lead to the desired result! Due to the consistently self-organized nature of this type of transformation, the need for external consulting is minimal.
- Training & Coaching: The self-organized approach forces all organizational members to acquire the required knowledge and skills themselves in workshops or to learn in a self-organized and independent manner. Positive side effect: The adoption rate of new knowledge and skills is high. At the same time, the number and deployment of coaches is significantly reduced. New approaches in the area of Learning & Development can help here - e.g., qomenius. In addition, interaction formats release targeted internal knowledge and make it usable within the company, reducing further training costs.
- Duration: The duration of an initial transformation (e.g., an OpenSpace Beta Chapter) is clearly defined by various time boxes: Two months for preparation time and invitation; three months of self-organized "change by flipping" with an adaptation of the company structures during ongoing operations and in fit with the company's peculiarities; one month of resonance time, during which the company operates independently without consultants, coaches and trainers and reflects on the changes. Since the transformation is entirely self-organized and takes place in the entire organization simultaneously, the duration of the transformation here is independent of the company's size.
Consequential Costs of an Organizational Transformation
- Organizational hygiene: The high degree of holistically understood self-organization, as well as consistent decentralization, leads to a slimming down of bureaucratic, over-regulated organizational structures. The actors previously bound in these structures can once again actively participate in the value creation process.
- Reduced personnel requirements: "Supervised work" by coaches or Scrum Masters does not exist in this approach. Due to the high degree of self-organization, it would even hinder the teams' assumption of responsibility.
In an organizational transformation, "negative follow-up costs" or real savings can be realized in this way.
Risk Assessment of an Organizational Transformation
- Management participation: An actual risk area of this transformation approach concerns top management. Those responsible must first understand the transformation project and its fundamentals and form a clear conviction and decision. Both understanding and sentence must not be limited to myths and opinions but must be based on logic, evidence, systems knowledge, and behavioral research. The realization that business administration is not a science of numbers but that organizations are social systems at their core means that a scientifically based view of people can be considered an indispensable prerequisite for business transformation. This view differs significantly from common opinions about human behavior and usually has to be worked out first. If these prerequisites are not created, corporate transformations are unlikely to succeed.
- Personnel changes: Corporate transformation can only be initiated by a management team that has the power to authorize it and is willing to exercise that power. Are you firmly in the saddle - at least for the next six months required for transformation? Or are you even planning a career change in the next few months? That would be detrimental to a transformation. Especially when companies are not owner-managed, questions like these need to be illuminated before the transformation begins. Aborting the transformation halfway through or a change in personnel at the top management would be a worst-case scenario and potentially harm the company.
- Other "risks": Resistance to change is always resistance to externally determined change or inconsistencies in the organizational model. Since there is no externally determined change in a self-organized transformation, this risk is essentially eliminated. Instead, a sense of shared accomplishment emerges.
Profitability of an Organisational Transformation
- Systemic alignment: The goal of this approach, as well as its means, is a high degree of self-organization and thus maximum agile coordination, which will result in higher commitment, higher assumption of responsibility, and therefore higher profitability.
- Market orientation: Decentralization of corporate administration results in consistent orientation to the market - without detours via central management. Structurally and operationally, a precise fit is ensured with agile working methods within individual teams. This enables significantly higher quality and performance with the same number of staff.
It may sound counter-intuitive, but enterprise transformation is easier and faster to implement than an agile transformation due to its greater consistency and higher fit. It also has a much higher potential return on investment, as there is no need to limit the transformation to individual parts or sub-aspects of the organization.
Today, comparatively more companies are choosing the path of agile transformation - despite high costs and follow-up costs, high risks, and moderate profitability potential. One could almost speak of a fashion: "Are you also already running your agile transformation?" The realization that "things can't go on as before" is widespread. And that's a good thing. Depending on your industry and your job market alone already demands a minimum of agile working to be attractive as a company at all. At the same time, it is observable that grassroots movements are developing in corporations from within the workforce that want to change specific working methods but cannot bring about any significant structural changes.
Despite these developments, management is generally hesitant to challenge the "tried and true" at all levels. "We have to become more agile now" - this appeal usually refers exclusively to departments and divisions, without questioning corporate management and decision-making structures in equal measure. There is talk of "agile HR", "agile sales", or "agile IT" - and that is what it is then limited to. For many executives, the comparatively expensive and risky approach of agile transformation, "hesitant and only as far as necessary," currently seems even more enticing. Yet, the groping forward and trial and error itself ultimately cause well-intentioned change efforts to stumble and fall in many places.
A consistent, integrative and holistic approach is easier, less expensive, involves far fewer risks, and is more profitable. Instead of the frequently demanded "trust" or a different "culture," what is needed above all is a better understanding of systemic interrelationships within organizational models - not only at the team or department level but also from a business perspective. In this way, cost-saving, fast, effective, and profitable transformation can succeed, which can be realized during ongoing operations and whose costs are amortized after only a short time.