Most top-down, target-driven transformation programs fail to produce lasting results. Bain’s research on over 350 companies worldwide found that only one in 12 target-driven transformations succeeded in delivering sustained performance improvement. Too often, transformations set ambitious targets but fall short of achieving them. Worse, some organizations hit their targets on paper only to discover that a fraction of the theoretically “executed” or “realized” improvements translate to the corporate ledger.
It is possible to utilize targets effectively in transformation, but it requires a different mindset and approach. Our review of successful transformations uncovered the primary differences between companies that succeeded in transforming using targets and those that did not. Four actions helped the winners defy the odds:
1. Change leadership’s mindset around targets
Successful target-setting demands that leadership think about targets differently. Rather than equating targets with something they must hit, executives should view them as a minimum bar they must clear. This preserves the benefits of traditional target-setting while minimizing its shortcomings.
To elaborate, most senior executives strive to hit the bullseye. However, once managers identify the actions required to meet their assigned target, they often stop, seeing no need to identify additional steps or strive to improve performance further. Worse, in companies that have deployed multiple rounds of targets over a short time, executives may have a perverse incentive to avoid exceeding targets, fearing it will raise the baseline and make hitting subsequent targets more difficult.
Successful companies think of targets as minimum performance requirements and often refer to them as such to avoid the stigma now attached to the term targets. In these cases, leadership is explicit about the minimum hurdle the company must clear and encourages executives to deliver even more, typically reinforced through incentives. This new mindset unifies the organization, pushing everyone to identify new opportunities to drive higher levels of performance.
2. Specify targets in absolute — not relative — terms
To be effective, targets should be set as absolutes — e.g., “we will deliver a minimum of $4.5 billion in EBIT in 2025” — rather than relative to a baseline — e.g., “we will deliver $400 million in cost savings in 2025.” Setting targets as absolutes avoids unnecessary game-playing and increases the likelihood that the minimum performance requirement appears in the company’s financial statements.
While common, the approach of setting targets in relative terms almost always fails to produce real performance improvement. To start, relative targets encourage counterproductive behavior among managers. Two behaviors are most common:
Arguing the baseline. Baseline plans are rarely stable, nor are all the actions within them clearly defined. Astute executives know this and, in the face of targets, claim to find “new opportunities” that in fact were already included in the baseline, such as consolidating sales and support locations to save on overhead costs when that was the plan all along. Consequently, the targeted improvements in performance never materialize, even though the executives may gain credit for realizing the opportunity.
Sand-bagging negotiations around the targets. Even when the baseline is undisputed, leaders may deliberately understate the potential for performance improvement to secure lower targets. This often manifests in debates over the applicability of benchmarks or statements regarding the limitations the company faces given its strategy. Haggling over targets takes precedence over finding ways to improve performance.
In short, relative targets too often waste valuable time in discussions around the targets themselves, rather than focusing leadership’s time on identifying new and better options to improve performance.
In addition to encouraging unproductive behaviors, relative targets face a practical constraint: tying them to the corporate ledger. Financial systems are designed to measure performance in absolute terms — e.g., revenues, gross profit, EBIT. Consequently, introducing relative targets creates a disconnect between performance tracking for the transformation and the corporate ledger. Despite the availability of strong tools for tracking transformation initiatives — Bain’s ARC, for example — cost savings or profit improvement targets often face substantial “leakage.” In fact, we find that commonly less than 60% of “captured savings” — even opportunities supposedly reaching “L4 Executed” or “L5 Realized” stage gates — actually show up in the corporate accounts.
Establishing absolute, minimum performance requirements allows leadership to determine whether the transformation is delivering results (or not). Absolute targets minimize squabbles over the baseline and keep managers focused on actions to transform the company.
3. Use the company’s budget or operating plan to monitor success
Successful transformation efforts embed performance targets in the company’s budget or operating plan. Instead of specifying targets as savings relative to some baseline, targets are stated in terms of a maximum budget for a specific business activity or functional area in future years. This allows the company’s existing performance-monitoring process and leadership forums to drive the transformation, rather than relying on a “shadow process” to track results.
To ensure this approach works, management must have (or develop) a robust, multi-year budget or operating plan tied to demand and cost drivers. For some companies, this represents a significant upgrade to their existing process, which may lack the granularity needed to track spending and revenue generation at the level required to drive the transformation. For these organizations, the investment made to improve the company’s budgeting and planning processes will pay dividends beyond the near-term improvement targeted by the transformation. For companies that already have a rigorous planning process in place, this approach leverages the company’s existing operating system and leadership forums to drive the transformation.
Using the company’s budget or operating plan to monitor success also avoids double counting. Because the baseline is inherently subject to interpretation and disconnected from the company’s budget or operating plan, the same dollar of savings can be counted multiple times across different initiatives. Actions taken in one area can often drive savings in other areas, making it contentious where a specific dollar of savings gets counted. Rather than settle these disputes, savings are often counted multiple times, making performance monitoring nearly impossible and leakage inevitable.
4. Set more than cost-based targets
Transformation requires more than cutting costs. Generating superior shareholder returns necessitates sustained profitable growth, which cannot be achieved through cost-cutting alone. Therefore, leadership should set targets across multiple dimensions to prevent managers from making short-term cost decisions that jeopardize the company’s long-term success and, as important, prevent the organization from equating transformation with slashing costs.
We have all seen or heard of companies that have cut costs but failed to see an increase in market value. In years past, Eastman Kodak, Yahoo!, and more recently Xerox, all set aggressive cost targets and even met them, only to see their competitive performance deteriorate and their market values decline. That’s typically because cost-based targets often prompt companies to take actions that generate short-term savings but undermine competitiveness. For example, in 2012, just before its take-private transaction, Dell Technologies was advised to cut its direct sales force by more than 2,000 representatives to match “productivity benchmarks” and boost short-term earnings. A year later, Dell’s competitive position in PCs slid. With fewer sales representatives, the company lost sales momentum and market share. It took three years for Dell to hire 2,000 sales representatives and begin rebuilding a tenured sales force, costing the company three years in its transformation efforts.
Beyond encouraging myopic and counterproductive actions, cost-based targets alone can lead to organizational cynicism about transformation. When managers and employees hear the word “transformation,” they naturally begin to associate it with downsizing, headcount reduction, expense cuts, loss of benefits, and so on. Over time, cost-based targets breed resentment and resistance. Instead of generating energy and enthusiasm, “transformation” becomes a dirty word.
Successful companies establish multiple minimum performance requirements or targets. Typically, they set an absolute revenue target as well as one for EBIT. This approach encourages executives to find ways to increase profit margins without sacrificing growth. Increasingly, companies are also setting non-financial targets, such as a target for growth in relative market share, improvements in customer NPS, minimum Glassdoor ratings, or the company’s future carbon footprint. The combination of multiple, absolute targets sets constraints on the trade-offs executives can make to deliver better performance, reducing the likelihood of detrimental actions.
Although most target-driven transformations fail, targets can be used successfully to accelerate performance improvement. To achieve this, leaders should view targets as hurdles, not bullseyes, and set multiple targets in absolute terms to provide a concrete framework for team members aiming to deliver breakthrough performance. Only by adopting a different approach to target-setting can leadership hope to defy the odds and drive lasting results from their transformation efforts.
By Michael Mankins (Aug, 2024)
Harvard Business Review
