Tag Archives: McKinsey

Updates from McKinsey

Managing and supporting employees through cultural change in mergers
By Becky Kaetzler, Kameron Kordestani, Emily O’Loughlin, and Mieke Van Oostende – Mergers create vast organizational anxiety about the future: in most cases, the operating model and culture will change dramatically for one or both merging companies. These changes go far beyond a new name and senior leadership; they challenge the core of an organization’s identity, purpose, and day-to-day work. Even small tactical changes, like new expense policies or cafeteria options, can rattle employees. Anticipating and addressing these “organizational emotions” can set the foundation for seamless, effective integration. Failing to anticipate and address them can lead to poor business performance, a loss of critical talent, and the leakage of synergies.

Merging companies must shift the day-to-day behavior and mind-sets of their employees to protect a deal’s sources of value, both financial and organizational, and to make changes sustainable.

One basic problem is management’s tendency to focus mostly on changes that would directly help to capture a deal’s value targets while largely ignoring those required to maintain and enhance the company’s health. Organizational design, for example, is always top of mind in the early stages of merger planning, but companies often sidestep cultural differences until difficult issues come to light. At that point, the base business will already have suffered, top talent may already have looked for external opportunities, and the capture of synergies may have become more difficult.

A holistic, effective integration program should proactively address the full scope of changes your employees will experience in an integration. Managing through this kind of effort involves two broad tasks: embedding cultural changes and managing operational ones. more>

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Updates from McKinsey

How smart choices on taxation can help close the growing fiscal gap
The growing fiscal gap has policy makers in a difficult position. Swift action in a few areas can help them improve the operational efficiency of fiscal systems.
By Aurélie Barnay, Jonathan Davis, Jonathan Dimson, and Marco Dondi – Governments around the world have implemented a range of fiscal and debt measures to fund policy initiatives over recent decades. As a result, tax revenues as a proportion of GDP have risen four percentage points across Organization for Economic Cooperation and Development (OECD) countries since 1980. However, many governments remain inadequately funded. Despite higher tax revenues, spending is rising faster than income, leading to widening budget deficits and higher levels of debt.

Four distinct trends are playing out: increasing automation in the workplace, leading to pressure on employment; the evolution of global trade through the proliferation of e-commerce and digital business, raising questions over cross-border taxation; rising self-employment; and an aging population. Each of these could further widen the fiscal deficit in the years ahead. Moreover, we see all four accelerating, placing policy makers in an ever-tightening fiscal bind.

Basic economics provides two options for balancing the books: either increase revenues or decrease spending.

The bottom line for governments is that there are no easy answers. Whether they seek to increase taxation or boost efficiency, they are likely to face headwinds. Still, decisive and rapid action is essential to optimize tax collections and keep pace with an inevitable rise in demand for services.

Tax revenues in OECD countries have risen slightly over the past 35 years. However, spending has risen more, leading to widening deficits that governments have bridged with debt. OECD tax revenues were 34 percent of GDP in 2017. Because of tax deficits and the effects of the 2008 financial crisis, the average ratio of gross debt to GDP rose from 66 percent of GDP in 1995 to 88 percent in 2017.

Sources of tax revenue have remained stable over time. Over three decades, personal income and consumption together accounted for 82 to 89 percent of revenues. The biggest single contributor was payroll and income tax, accounting for 50 to 55 percent of revenues (even though the contribution of personal income tax declined by nearly 7 percentage points). Consumption and excise duties remain little changed at 32 to 34 percent of revenues.

More people are working for themselves, either as a contractor to several companies or a single company. This emerging gig economy accounts for an estimated 28 percent of EU and US employment. The proportion would rise to 46 percent if everyone had their preferred working arrangement, according to MGI research.

However, the gig economy creates challenges for tax authorities. First, independent workers are generally less compliant than their employed peers, and in some countries are required to pay less taxes. Evidence from the US suggests that workers subject to limited information reporting, such as the self-employed, have an around 50 percentage point lower rate of tax compliance than traditional workers. There are also ongoing legal debates in some jurisdictions over whether gig economy workers are employees for the purposes of worker classification and social security contributions.

Governments can close the widening gap between revenues and expenditures in a variety of ways through tax revenues, nontax revenues, and spending optimization. In addition, some governments are either implementing or considering approaches based on monetary finance.

The gap between government revenues and spending has widened and is likely to continue to do so. The onus, then, is on tax authorities to act now. more>

Updates from McKinsey

A transformation in store
Brick-and-mortar retail stores need to up their game. Technology could give them significant boost.
By Praveen Adhi, Tiffany Burns, Andrew Davis, Shruti Lal, and Bill Mutell – Now should be a great time in US retail. Consumer confidence has finally returned to pre-recession levels. Americans have seen their per capita, constant-dollar disposable income rise more than 20 percent between the beginning of 2014 and early 2019.

Yet despite the buoyant economic environment, many brick-and-mortar stores are struggling. In the last three years, more than 45 US retail chains have gone bankrupt.

Yet rumors of the physical store’s death are exaggerated. Even by 2023, e-commerce is forecast to account for only 21 percent of total retail sales and just 5 percent of grocery sales. And with Amazon and other major internet players developing their own brick-and-mortar networks, it is becoming increasingly clear that the future of retail belongs to companies that can offer a true omnichannel experience.

Retailers are already wrestling with omnichannel’s demands on their supply chains and back-office operations. Now they need to think about how they use emerging technologies and rich, granular data on customers to transform the in-store experience. The rewards for those that get this right will be significant: 83 percent of customers say they want their shopping experience to be personalized in some way, and our research suggests that effective personalization can increase store revenues by 20 to 30 percent.

Several new technologies have reached a tipping point and are set to spill over onto the retail floor. Machine learning and big-data analytics techniques are ready to crunch the vast quantities of customer data that retailers already accumulate. Robots and automation systems are moving out of factories and into warehouses and distribution centers. The Internet of Things allows products to be tracked across continents, or on shelves with millimeter precision. Now is a great time for retailers to embrace that challenge of bringing technology and data together in the offline world. more>

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Updates from McKinsey

Why isn’t your transformation showing up in the bottom line?
The success rates of large change programs vary widely. Finance teams can make a big difference in the outcome of these initiatives by articulating and validating the link between transformation efforts and long-term value.
By Ryan Davies, Douglas Huey, and David Kennedy – “Transformation” is the buzzword of the day for companies in most industries, but for many it carries an asterisk: studies show wide variation in companies’ rates of success with organizational transformations—whether they are changing how they go to market, updating back-office processes, automating production systems, or otherwise making significant changes in how their businesses are structured and run.

In some cases, this variation exists because executives propose fundamental changes in how the business operates but don’t go through the hard process of setting commensurate performance targets. They often set targets too low, aiming for incremental change. When they do set their sights appropriately high, they often fail to adequately make clear to key stakeholders who owns the goals and responsibilities associated with various elements of the transformation. As a result, value can end up “leaking” even from good initiatives, which can sap companies’ efforts to meet bottom-line targets, drain momentum from good investments, and impede buy-in for change efforts generally.

CFOs and finance teams have a critical role to play in not only setting ambitious targets but also providing the discipline to mitigate value leakage and fully deliver transformational benefits to the bottom line. more>

Updates from McKinsey

Digital transformation: Improving the odds of success
By Jacques Bughin, Jonathan Deakin, and Barbara O’Beirne – or established companies, the pressure to digitize business models and products has reached new intensity. McKinsey research shows that the best-performing decile of digitized incumbents earns as much as 80 percent of the digital revenues generated in their industries.

Ascending to that elite group is far from easy. In a new survey of more than 1,700 C-suite executives, we learned that the average digital transformation—an effort to enable existing business models by integrating advanced technologies—stands a 45 percent chance of delivering less profit than expected. The likelihood of surpassing profit expectations, on average, is just one in ten.

The good news is that executives can decisively increase the chance that a transformation focused on digital enablement will beat performance expectations.

Our latest research shows that exceptionally effective digital transformations are distinguished mostly by the practices that executives choose to follow. Adhering to a well-defined set of transformation practices lifts the likelihood of exceeding profit expectations to more than 50 percent—about five times better than transformations that involve none of these practices. What’s more, the same combination of practices works for every type of digital-enablement effort that our survey covered. more>

Updates from McKinsey

Bias busters: Avoiding snap judgments
Despite their best intentions, executives fall prey to cognitive and organizational biases that get in the way of good decision making.
By Tim Koller, Dan Lovallo, and Phil Rosenzweig – The board of a mining company thinks it’s time for a new CEO, one who understands the increased role of technology in the industry and can inspire the next generation of mining leaders. The hiring committee has a few internal candidates in mind—namely, the heads of the copper, nickel, and coal divisions.

All three have similar years and types of industry experience and comparable P&L responsibilities. But the front-runner in the minds of many on the committee is the head of the copper division. After all, copper has contributed the most to the bottom line over the past few years, while the other divisions have been lagging. It must be because the unit head is a tech-savvy people person, with a good understanding of industry trends, they reason. “Seems like a no-brainer,” the head of the hiring committee notes.

But how can the board be sure that it is picking the best candidate for the top job?

These distortions don’t apply only to company performance; the halo effect can also alter how we view individual performance. That’s what happened in the case of the mining company. The front-running CEO candidate’s division had performed well in large part because of a significant spike in the price of copper, something over which he had no control. Yet the halo of high profits shined on the business-unit leader, the hiring committee’s initial impressions of him stuck, and he was appointed CEO.

Much to the board’s dismay, the new CEO did not demonstrate either skillful use of technology or strong leadership, two capabilities that were critical for this role. Early in his tenure, the company incurred billions of dollars in losses. more>