Why Does It Take A Crisis For Companies to Change?
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The COVID-19 global crisis has forced thousands of companies to switch to a digital first working model — almost overnight. This dramatic rate of change, while painful, is by no means serendipitous. Most companies have had, over the past decade, provided most of their employees with the pre-requisite tools to work from home (like smartphones, laptops, cloud powered shared drives, collaboration apps and chat channels), but neither employees nor leaders in these companies found the will to make the switch to what is arguably a more efficient way of working — until now. Digital transformation change programs, which have historically held failure rates as high as 70%, are seeing a renaissance as success rates have crept up in a time where everything else seems to be falling apart.
It is not just global crises that make companies succumb to change. Any form of existentialist threat seems to be a great enabler for both leaders and employees to shift gears in a company. Apple in 1997 faced an overwhelming crisis — a drop in stock price to a 12-year low and a close brush with bankruptcy — which proved to be enough of a catalyst for its board to bring back Steve Jobs. Steve shifted the company’s focus from exclusively selling computers to selling music players and associated services (and eventually the iPhone). Marvel, on the other hand, did file for bankruptcy in 1996, which led to new ownership as well as a strategic reset away from comic books to a wider slate of entertainment properties. That’s what led to the now-legendary Iron Man film in 2008.
These companies could have changed direction prior to these crises hitting them — there was no lack of data and insight preventing them to do so — yet they remained in stasis until it was too late. While Apple and Marvel were lucky enough to survive their near-death experiences, others like Kodak, Nokia, Blockbuster were not.
So why do companies need a crisis to change for the better? Are they not run by rational, highly qualified managers who are heavily incentivized towards detecting a shift in tides before it ever hits the ship? Are employees not continuously coached to embrace change and improve the company every day? One way of understanding this seemingly irrational behavior of companies is to compare it to the equally bizarre behavior of us humans, who too often wait for a crisis to hit before changing destructive habits.
The following are three common brakes against change for both companies and people:
1. Anxiety relief usually takes priority
In the 1950s, a research group called the Tavistock institute in London tried to understand people’s resistance to change. It had a breakthrough while observing nurses in wards. The nurses followed strict and repetitive medication and checkup procedures, even though that meant waking up patients from what would otherwise be much-needed (and doctor recommended) sleep. The doctors in this ward noticed the problem and gave the nurses new procedures to follow, but the nurses kept on following the old procedures—even though it was bad for the patients. Why? The Tavistock researchers came up with a hypothesis: The nurses were dealing with a very difficult situation, in which sick people could succumb to their illnesses on their watch, and so the nurses shielded themselves from this anxiety by clinging to rituals they were comfortable with. The doctors, meanwhile, hadn’t done any coaching or provided any support to help the nurses adopt the new procedures. The doctors had simply issued the new procedures… and then expected change to happen.
Fast forward to the modern-day workforce, and we see a lot of leaders behaving like those doctors. These leaders realize that a company needs to change in order to survive. However, in most cases, leaders simply dish out recommendations on how to ‘improve the situation’ to the nurses – expecting them to comply and make the ‘switch’. Older procedures (that helped contain anxiety) are aggressively berated while employees are asked to self-design brand new ones without much vision, sensitivity or coaching. This lack of support creates stress, and employees calm themselves by falling back on older processes and practices. That’s what looks like resistance to change.
Crisis changes all this. It creates a tidal wave of anxiety and urgency that’s far harsher than anything the organization faced before. Obsolete rituals are no longer any comfort. It becomes abundantly clear that new procedures and systems are needed. Suddenly the company, from its leaders to its employees, finds the courage, camaraderie, and momentum to change. If they are lucky and the timing is right, the company lives to fight another day.
2. Rewards for change are usually too far off
Every year, in January, gyms see a sharp spike in memberships… only to see them dwindle in the later months. This phenomenon is both amusing as well as baffling. Why doesn’t the average adult invest a small amount of money and time every month to ensure that they have a long and healthy life? The answer to the question is simple: The consequences of not going to the gym for the average 30-year-old will only be felt 20 years down the road. This delayed reward of a healthier longer life in return for a painful session in the gym today pales in comparison to staying at home and binging on Tiger King.
The same holds true for companies. A challenger start up, a new business model, and a major technological breakthrough are all factors that have a measurable impact on the future of a company — sometimes coming in to full force only after a CEO is done with his or her stint in a company. However, bonuses, promotions and pats on the back are all linked to performance today. In theory, stock prices as an incentive should account for both the current performance and expected future performance of a company. However, in real life stock prices are quite volatile and can easily keep management teams focused on quarterly results, with a longer-term view taking a back seat.
A crisis wipes such a lopsided reward system clean. With no immediate bonuses and incentive programs to optimize against, thanks to a dwindling financial status and stock price, managers are forced to go back to the basics and think about the longer-term prospects of the company. Previously protected statuses of various departments become open for questioning. Budgets that have kept rolling along for years are picked apart and the vision and the mission of the company are brought under a microscope. The reward for overcoming the crisis by making fundamental changes in how the company operates and competes becomes overwhelmingly more lucrative thanks to the vacuum left behind by the previous reward system.
3. Social status is valuable
Companies, just like people, find their social status amongst their peers to be quite valuable. Press releases are published like clockwork, waxing lyrical about a company’s financial performance (no matter how incremental) as well as the intellectual prowess of the top leadership responsible for such average performance. Losing face, so to speak, is an uncomfortable prospect from a social value perspective and putting a company through a much-publicized change means owning up to the fact that something has not worked in the plan. The weight of years of carefully manicured public image is a sunk cost that is hard to ignore for most companies. By not owning up to the need to change, top leaders deflate any internal momentum set out by various change programs.
A crisis changes that. It dismantles the public image of a company very swiftly, taking away the burden of ‘saving face’ almost overnight. This holds especially true for the current COVID-19 crisis, where nearly every company is suffering and the shame of admitting that change is the need of the hour has gone away. Similar to seeing a news story about an unrecognizable, post-quarantine Kylie Jenner in sweats, companies have discovered social value and momentum in the knowledge that all of them are like Ms. Jenner in 2020.
The three drivers discussed are a strong lesson for entrepreneurs, leaders and boards everywhere. If you can actively manage organizational anxiety during times of change (instead of avoiding or suppressing it), reward longer term performance and not worry too much about the optics of your business, you can drive change before a crisis does it for you.