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How to calculate the financial value of managing a change portfolio

How to calculate the financial value of managing a change portfolio

Showing the value of change management is something that change practitioners have yearned for.  Some senior leaders do not understand the value of change management and either see it as a normal part of general business management or don’t even understand what it is.  For less mature organisations, change practitioners often need to spend significant time educating stakeholders and explaining why they are doing the work that they are hired for. Calculating and showing the financial value of change portfolio management can be the ultimate ‘proof’.

Calculating the value of change management has been a difficult task to accomplish since a lot of the work of managing change is deemed as ‘soft’ and about people and leadership.  There are various attempts to calculate in financial terms the value of managing change.  These approaches include ROI (return on investment) and cost-benefit analysis.  However, this approach is purely focused on a cost level and does not look at the value of the impact of change management work.

At a change portfolio level, there is even less in the literature.  Not only is there not a lot of content on how to manage a portfolio of changes, but there is also almost no mention in the literature on how to calculate the financial value of managing a change portfolio.

A lot of organisations do not invest in managing initiatives across the portfolio from a change management perspective.  This could be due to a lack of change management maturity or experience.  Managing initiatives across a portfolio requires not only senior leader sponsorship but also having the right change governance, operational routines, change management analytics and decision-making capability in conducting ‘air traffic control’, sequencing, and resource prioritisation.

One of the difficulties is in trying to measure the value of the whole discipline, which may be too complex and wide in breadth to take into account.  A better approach may be to look at the tangible parts of value created from managing a portfolio of changes.  

One of the key values of effectively managing a portfolio of changes is helping the organisation better prioritise the right initiatives, the right sequencing of initiative implementation, and therefore the right resources to support these initiatives.  This includes not just the right resource focus and allocation from a project implementation perspective, but also from a business perspective when it comes to change readiness and adoption.

A McKinsey study showed that companies that are better at prioritising resources to support initiatives can reap an average of 40% more value than other companies.  Note that this is not ‘up to 40%’ but an ‘average of 40%’.  This is a significant finding and shows how much this impacts the value of the company.

How do we calculate this financial value?

Step 1 – Calculating the value of the company

One simple way to calculate the value of a company can be calculated by using this simple equation:

Value = Earning after tax x P/E (price to earnings) Ratio

Earnings after tax = This number you should be able to get from Finance, or for public companies, this figure should be available in the published Income Statement.

Price to earnings ratio = There are several ways to get this figure.  Market value per share divided by earnings per share.  Or if this number is not available you can use the average P/E ratio number of 14 as the average for S&P 500.

Let’s take a few examples.

Your company’s earnings after tax is $100 million.  And if your P/E ratio is not available, then the value of the company is $100 million x 14 = $1.4 billion.

Your company’s earnings after tax is $300 million.  And if you’re P/E ratio is not available, then the value of the company is $300 million x 14 = $4.2 billion.

Step 2 – Calculating the value of prioritising resources to support your initiative portfolio

In the McKinsey study, the 40% increase in company value was over a 15 year period.  Let’s assume this is taking into account the compounded effect of incremental value year in and year out.  Using a reverse compounded interest calculator would equate to 2% per year in incremental value.

In the example where the value of company is $1.4 billion.  

$1.4 billion x 0.02 (2%) = $28 million

In the example where the value of the company is $4.2 billion

$4.2 billion x 0.02 (2%) = $84 million

You can see now that we are talking about a significant chunk of money.  This is because of the increase in the value of the company from making the right decisions in focusing and appropriately resourcing the prioritised set of initiatives and having the right business focus to support these initiatives.  Creating the right focus, the right change sequences, the right change ‘packages’, and changes that are ‘bite-sized’ as needed can all contribute to optimised change outcomes.

Resources and organisational energy are also not wasted on initiatives that are less critical and perhaps more likely to fail or achieve less adoption.  These then translate to enhanced overall benefit realisation, and therefore improved value creation for the company overall.  

This contrasts significantly with the focus on individual projects and the calculation of ROI where change management is viewed as a cost to the business.  At a per-project level this may make sense, however, most companies are executing multiple projects at the same time.  Sure, you can try and calculate the change management ROI for every project and still not capture the total value.  This is because “the sum is greater than its parts” to quote Aristotle.

How do we use this value?

There are many ways to use this financial calculation:

  1. Business leaders who don’t understand the value of managing change across the portfolio and struggle to see the relevance or business benefit of investment in this area
  2. Project portfolio managers who would like to better understand and articulate the ‘prize’ in focusing on change portfolio management beyond the existing project portfolio management focus areas
  3. Operational leaders who would like to understand the value of ‘air traffic control’ of the various initiatives that impact their business units
  4. Change practitioners who have been asked to prove the value of managing across the portfolio and why this is needed across multiple initiatives

To read more articles about managing a change portfolio please visit here.

Approaches in deriving a single view of change

Approaches in deriving a single view of change

What are the different approaches in deriving a single view of change? And what business impact do they have?

A single view of change is often mentioned as the ‘nirvana’ for change practitioners. Having a clear view of all changes impacting people helps to better plan and execute on the changes.

In our experience there are 3 key approaches:

1) ‘Estimate the pulse’ – A quick and easy way of coming up with a simple heatmap or chart where impacts are estimated overall.  

2) ”Periodic pulse checking’ – Periodic work, usually monthly, in documenting change impacts. Some governance and reporting operating rhythms setup. Some element of charting tools used.

3) ‘Hand on the pulse’ – An operating system where the data capture and analysis is embedded within regular business process. Data is utilised by various parts of governance and business planning routines. Fully digital in sustaining data maturity and insight generation.

Organisations may start out in the first or second approach in building on their change maturity and ability to generate change-related insights.  

However, to reap the required business impact and to support an agile organisation where change is fast and constant, the first approach is best.

To download the infographic table click HERE.

Is it useful to label change as positive or negative?

Is it useful to label change as positive or negative?

You may have been asked to rate change into either a positive or negative change to classify initiatives and thereby use the classification to aid change implementation.  After all, we all know of initiatives that nearly everyone sees as negative and other initiatives where it’s going to make people’s lives easier, and therefore viewed as mostly positive.  So, is it useful to classify every initiative as either positive or negative?  Let’s examine this closely.

What is the usefulness of classifying change into either positive or negative?

Some managers believe that if we are able to classify change as either positive or negative then we are able to focus on those changes that are perceived as negative since they may require significant managerial effort to drive through the change.  Also, negative changes may face more resistance.  Therefore, knowing this helps to plan for change implementation.

Negative changes could include significant restructures where employees are losing their jobs, and where there are significant cost-cutting outcomes targeted.  On the other hand, a positive change could be a process improvement where the new process makes work easier for impacted employees, requiring less approval and less paperwork. 

However, there are many issues with this assumption.  Let’s break things down….

Differences in individual perception

Every individual has a different perception of the same change initiative.  After all, we are all individuals with different upbringings, personalities, life experiences, and preferences.  In a major restructuring, whilst most impacted employees losing their jobs may see this as negative, there could be those who are eager to receive the redundancy payout, possessing long tenure at the company.  Others may initiative find the change negative, however found that this was a great opportunity to launch a career they had always wanted.

On the other hand, even for a seemingly positive change that could make most employee’s lives easier, not everyone may see it that way.  There are always some that simply do not like changes at all.  It could be that they are so used to the old ways of working that any change and adjustment would be perceived as negative.

You may recognise this Rubin Vase picture – either an old woman or a young lady.

Different perceptions in stakeholder groups

It is also important to note that not every stakeholder group would perceive the same initiative in the same way.  It depends on various factors.  For example, with a phone upgrade, younger employees or those groups more familiar with technology would welcome the change with open arms.  New phones with new features, exciting functions, faster responses, and better quality cameras – how could anyone view this as negative?

Well, it could be that for those who are not ‘early adopters’ and are used to using the same phone for the long term, this may be a negative change.  They may not even want to use most of the features of the phone and in fact, more features could mean more confusion and more time required to learn the functions of the phone.

There are positives and negatives in most changes

Inherent in every change, there could be both positive or negative aspects of the change for the same stakeholder.  Implementing a new system in order to improve response time and incorporate greater digital features may be initially painful.  The significant work required to understand why the change is required, the long time spend in preparing for the change, only to find that releases often get pushed back. 

Eventually when the system gets launched there is excitement and everyone is saying how much easier the new system is to use.  However, like all systems, there are bugs that need to be ironed out and this could take at least a few months.  So, you can see that it’s not as easy to just label the whole initiative as positive or negative.  It depends on which angle we are viewing the change and at what phase of the initiative.

Changes may be neither positive nor negative

Some changes may be neutral.  Think of the slew of regulatory changes impacting the financial services sector.  Many of these are process changes that are geared to provide more oversight, transparency, and to benefit customers. 

Small process or policy changes may not be difficult to understand nor to implement.  Employees may not find it a difficult change, however, it doesn’t really benefit them in their roles.  However, they do understand why this was implemented and that this is important to abide by or the company may be fined by the regulator.  So, this is an example of how some changes don’t need to be necessarily positive or negative.

Perception may not be either positive nor negative. Humans are more complex than that.

Perception toward the change could be altered during the implementation

Change management is about influencing stakeholder perceptions.  If perceptions toward change cannot be altered then what is the point of change management you may ask?  Absolutely. 

Stakeholders may initially have a negative perception of the change due to preconceived ideas about the ‘why’ of the change.  Or it could be that managers’ roles are impacted negatively and therefore they then painted a negative image for their teams.  It could also be that insufficient communication and engagement have been in place and therefore the change came as a surprise – leading to negative perceptions, more towards the senior managers that are driving the change, than the change itself. 

Effective change managers are able to skillfully diagnose stakeholder perceptions and anticipate their potential reactions to change.  The change intervention is therefore designed to effectively influence and collaborate with impacted stakeholders to build rapport and consensus toward the change.  What may have started out as a negative change, can be turned around into a neutral or even positive one.

Time it takes to embed the change for positive/negative changes

It is a fallacy to assume that positive changes always take less effort than negative ones.  This is not always the case.  If we go back to our example of the new system, like any new system, whether perceived in a positive or negative light, effort and time are required to learn the new system.  Focus and effort are required to understand why this change is needed, what it is aiming to achieve, and the impacted stakeholder’s role in this.  Therefore, it is not necessarily the case that positive changes require less effort and focus.

But would negative changes face more resistance?  Maybe yes and maybe no.  Again, it depends.  For example, we know from the below involvement and commitment curve that there more someone is involved in crafting the change the more committed they will feel to the outcome of the change.  So, resistance could be the result of insufficient or ineffective engagement, rather than a necessary result of a perceived ‘negative’ change.

So, you can see that it may not be so useful to try and label change as positive or negative in order to aid change planning.  A much more useful angle to look at planning for change is to look at aspects such as impact, stakeholder readiness, behaviour changes required, level of complexity, etc.

To read more about measuring change check out our Ultimate Guide to Measuring Change.

Planning for change during COVID19

Planning for change during COVID19

Is your business re-planning existing initiatives or in the middle of reverting to business continuity plans? 

What is the role of the change practitioner in the midst of coronavirus? In all the chaos and sudden shifts in organizations around the world in response to the implications of the virus comes significant opportunities. The change practitioner can be well-positioned to provide significant value to guide the organization in planning for change. 

Listen to our recorded webinar to gain a broader understanding of…

  • How to help your business re-plan a portfolio of changes
  • How to ensure that your project’s timeline fits in with business changes
  • Helping your project to deploy and maneuver around limited business capacityTweaking your change approach when everyone is working from home
  • Engaging various stakeholder groups during these times
  • Plan for change scenarios to anticipate impacts from coronavirus on your organization

Sign up below to access our webinar.

What I learnt about managing multiple changes came from finance

What I learnt about managing multiple changes came from finance

The concept of managing a set of projects of initiatives may be new in the area of change management, it is commonplace for a lot of large financial services firms in the project management arena.  The idea is that across a large number of projects, these are then divided into a few portfolios in order to better manage the outcomes within each portfolio, versus a scattered, project by project approach.

Where did the concept of portfolio management come from?  And how do we best apply this within a change management context when there are multiple changes going on at any one time?

Portfolio in Finance refers to a combination of financial assets such as stocks, bonds and cash.  The goal of managing a portfolio is to get the best outcome according the risk tolerance, time frame and investment objectives.

This really is not all that different in change management.  Change interventions and activities are designed to maximise the return on investment and the embedment of change. 

  • Change measurement and reporting focus on leading risk indicators such as change readiness, stakeholder engagement levels and progress of capability development in terms of training completion rates.

  • Like finance investments, initiatives also have different priorities and risk exposures.  Those that are higher priority and have higher risk exposures need greater focus than those that are lower priority and less risk exposures.  Therefore, clear prioritisation is critical to ensure clarity of focus

  • The timing of initiatives is also a notable comparison.  Some initiatives take a long time to implement and embed, and require significant continued sustainability to execute on.  Other initiatives may be much faster to implement to reap the benefits.  From a change management perspective, focusing on the people requirement as a result of the speed of implementation is key.  A project for the long-haul requires continuous updates and engagement, versus something that is more intense and quick in roll out

So what can we learn from financial portfolio management approach?

  1. Focus on data

Data is king in finance.  The goal of the overall portfolio can only be assessed in terms of its financial performance.  Imagine trying to understand the performance of a financial portfolio without being able to look at its performance?  It is the same for change management.  We need to be able to assess the outcome of various initiatives within the portfolio.  For example:

  • What are the impacts across initiatives?  How do they impact the same business unit or stakeholder groups?  Which business units are at risk due to change volume planned?  How can the risk be managed or mitigated?

  • How is the change embedment tracking?  This can be measured in terms of change readiness or in terms of more project-specific measures such as specific behaviours or any efficiencies or savings targeted

  • Speed of implementation is also key to measure.  Is there a clear sense of the speed in which different projects within the portfolio are operating at?  What are the short and sharp ones versus the long and arduous projects?

2. Focus on risk

In a way, managing change can be seen as an investment in risk mitigation as mentioned previously.  In overviewing the various projects within the portfolio, be aware of their corresponding risk exposures.

Some of the ways in which we can value the risk exposure of initiatives related to change include:

  • Projects that are deemed higher risk because the quantum of change impact is higher and more complex than others? 

  • Stakeholder support and drivership level

  • Sponsor style and level of involvement in breaking through any obstacles and being visible

  • Project team health.  Is the team cohesive and high performing or plagued with conflicting personalities and siloed work streams?

  • Level of awareness across impacted employees

3. Focus on analysis and reporting

A finance portfolio manager spends his/her time on understanding the performance and risks or each investment and the overall portfolio.  In the same way, in order to understand how the overall change portfolio is performing it is key to review the whole group of initiatives regularly. 

There are routines that can be designed into business-as-usual activities.  For example, as a part of regular business planning sessions, one aspect could be to review the performance of the change portfolio metrics and reports.  This would involve various stakeholders in the planning process, thereby focusing their attention of managing change and giving them accountability in this regard.

The Project Management Office could also benefit from incorporating change management metrics into their regular planning and review routines.  Change metrics and reports would then sit alongside of other cost and schedule data to form a holistic view of making portfolio decisions regarding prioritisation and project roll out.

In all of these cases the change practitioner has a crucial role to play – the analyst and story teller.  Simply by presenting a set of data is not necessarily going to add value to the business.  The change practitioner needs to analyse the data, look for patterns, risks and opportunities.  Are there ways in which the projects could be better sequenced or packaged?  Are there key risks in embedding change looking at the overall picture?  What would particular parts of the business be going through across the initiatives?  Using data visualisation will convey the story powerfully.  Check out digital tools such as The Change Compass to support you in crafting and telling the change story to your stakeholders.

To read more about change portfolio management read our article The Ultimate Guide to Change Portfolio Management.

How to better manage a change portfolio – Infographic

How to better manage a change portfolio – Infographic

Most organisations are implementing a series of changes at the same time. It is no longer possible to simply focus on one or two initiatives. Most are executing concurrent inititaives at any one time.

As a result, the ability of the organisation to manage a whole portfolio of initiatives will be key to landing all of these changes.

From the end impacted user perspective, it is important to be able to visualise what the collect changes look like. This collective view will provide the ability for organisations to make better risk assessments, planning decisions and mitigation strategies to maximise the benefits for all initiatives.

To read up more download this infographic.