9 Part Blog: The Reasons Transformational Change Can Fail – Reason 9.
When implementing any type of transformational change, the words “over budget” is something no CEO, Executive or Project Manager wants to hear. Should this occur, a company has two courses of action. The first is to absorb the additional costs. The second is to cut what it deems as non essential costs, such as training. This is often reduced without considering the immediate impact it can have on workforce adoption and performance.
Should the budget shortfall be significant and the company is not able to increase its budget, in some instances, this can lead to scrapping the entire initiative. Several studies done by McKinsey (here) and Harvard Business School (here) suggest that between 25% to 40% of all large digital transformations go over budget. Other less established sources claim the rate is even higher, above 60%.
With respect to sales and performance transformations, there doesn’t seem to be any reliable statistics. However, given the direct impact these types of change have on the workforce, additional consulting fees are very often incurred to assist management as they struggle with employee adoption.
So going over budget seems to be a reality for a sizable number of companies. Moreover, is there a way to avoid this before it happens? The answer is maybe.
What Leads to Going Over Budget?
There are two factors which lead to companies going over budget when implementing transformational change.
1. Uncontrollable Factors
The first are uncontrollable factors. These are events that occur outside of the project planning process. They usually occur once an initiative is well under way. The 4 most common ones are:
i. Vendor(s) not meeting their contractual obligation.
This occurs due to issues with vendors and 3rd party providers which are beyond the control of the company. They can often arise with little notice. Consequently, the best way to mitigate these is to have regular update meetings with all parties. Thus, if an issue emerges, the company can quickly engage the vendor to resolve it.
ii. Shifting objectives and priorities of the initiative.
This usually happens when the strategic plan is weak, or nonexistent. When this occurs, it is because there is lack of clarity on what the transformational initiative is to accomplish. A well developed plan clarifies objectives and priorities and avoids this confusion. The role of the strategic planning process cannot be overstated.
iii. Scope creep.
Scope creep is common with digital transformations. Understandably, once executives begin to understand the benefits a new software provides, they want to acquire additional functionality. One effective way to prevent this is to establish a control process to document requested changes. Unless the change being requested is a core function that has been overlooked, it should be documented as a change request and accommodated at a later date as per established guidelines.
iv. Loss of key team members.
Although this is outside of the company’s control, it often occurs when employees feel they do not have adequate support, and there is no recognition for their efforts. As a result, Executives and Managers need to ensure proper support is provided when required, along with employee recognition to strengthen employee engagement.
2. Controllable Factors
As I wrote in my previous blog, most companies do not implement transformational change on a regular basis. Consequently, they may not be aware of the various activities they need to budget for. As well, vendors assume clients will perform these activities at their own cost. Usually, this results in going over budget due to hidden costs arising.
Having an external consultant or experienced Project Manager with prior experience in the transformational change from the outset, provides important
guidance to avoid hidden costs which lurk pre and post implementation.
More on Controllable Factors and Going Over Budget
Non Measured Impact Initiatives1
Digital transformations are usually the most expensive type of change that an organization can undertake. A significant amount of planning goes into the development of the project scope and business case to support the implementation of new software. Despite this, the most common areas that are sometimes not identified and crop up as hidden costs, include:
Process Mapping:
- “AS IS” process maps, to identify current processes and activities.
- “TO BE” process maps, to identify desired functionality.
Annual Vendor Costs:
- Yearly licensing costs and fees, if not included in the purchase price.
- Annual maintenance, if not included in the purchase price.
Periodic Costs:
- Software version upgrades, if not included in the purchase price.
- Additional software modifications (change controls)
- Staff training, for software version upgrades.
Additional Hardware and Software Requirements:
- 3rd party software integration for existing systems.
- Additional software purchases to support implementation, which are outside of the vendor’s responsibility.
- IT hardware, required to support the new software.
- Handheld technology (if used), to support the new software.
- Local/remote communication, to support employees.
- Cloud options, as part of the company’s IT strategy.
Implementation Expenses:
- Project Manager, hired externally.
- IT staff training, if not included in purchase price.
- Software customization, which is not part of purchase price.
- Data hygiene (structuring and cleansing), for integration with the new software.
- Guidance consulting, if required.
- Training development, if not included in the purchase price.
- Travel and hoteling for any employees that need to travel.
Operational Expenses:
- General expenses not included above.
- Headcount increase.
- Administrative costs required to support the transformation, not included above.
Measured Impact Initiatives2
The second type refers to sales and performance management transformations. When compared to digital transformations, they usually do not require extensive upfront planning and development costs. Some of the most common areas where additional costs can be overlooked include:
Annual Vendor Costs:
- Usually there are none, as licenses are one-time costs, but this needs to be verified.
Periodic Costs:
- The addition of new staff that need to receive training.
Implementation Expense:
- Travel and hoteling costs associated with the development of customized training cases.
- Hosting of the training event.
- Development of internal training materials, including manuals, videos, etc.
Operational Expenses:
- General expenses not included above.
- Headcount increase.
- Administrative costs required to support the transformation, not included above.
Post Implementation Expenses:
- Additional consulting costs to assist management with challenges they experience post implementation.
Some Concluding Thoughts
Knowing the additional costs required for your transformational change is critical to developing a proper budget. Many companies will include a contingency in their budget. Depending on their level of comfort, this can range anywhere between 10% to 20% of the total cost, to cover unforeseen events.
Proper planning and proactive management can go along way to avoid an inadequate budget and cost overruns.
This article is based on my forthcoming book Rethinking Change Management; How To Implement Transformational Change For Long Term Success, which will be publishing later this year. If you find this article helpful, please share and subscribe to our blogs and newsletter. Stay tuned for further details.
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