Transforming Organizations: The Role of Alignment. FEATURE. Achieving Alignment in an. Age of Disruptive Velocity. CHRO
VOLUME 40 | ISSUE 2 | SPRING 2017
SPRING 2017
T H E P R O F E S S I O N A L J O U R N A L O F H R P E O P L E + S T R AT E G Y
TRANSFORMING ORGANIZATIONS: THE ROLE OF ALIGNMENT
Transforming Organizations: The Role of Alignment
FEATURE
Achieving Alignment in an Age of Disruptive Velocity CHRO CONNECTION
Marlene McGrath: Innovation Sticks at 3M
40.2
Executive Roundtable
The Role of Alignment in Transformations: A Successful Case Study Transformations by nature are complex and often messy. What is clear in the C-suite can be ambiguous deeper in the organization. This can significantly increase the execution risk of any transformation, yielding slower results than anticipated, and in some cases failure. So in order to drive a successful execution, who really needs to be aligned with the transformation plan and how deep in the organization must alignment cascade? What does a senior leadership team need to do differently to drive clarity while making a significant pivot? Executive Roundtable Editor David Reimer and colleague Sonja Meighan recently sat down with executives at The AES Corporation to discuss what role alignment played in their previous successful transformation, what lessons they learned, and how they have prepared for the transformation they are experiencing today.
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Participants from The AES Corporation Andrés R. Gluski Chief Executive Officer Tish Mendoza Chief Human Resources Officer Thomas O’Flynn Chief Financial Officer Bernerd Da Santos Chief Operating Officer
Andrés: As we began to develop our five-year vision, it was evident that being in too many countries made us less efficient. We did not have sufficient depth of knowledge and understanding of the market in all of the countries we were in. Therefore, a first step was to simplify the company to make it more manageable. We needed to reduce the number of countries and markets we were in so we could truly understand each business. Our restructuring effort took us from 28 countries to only 17. We had to cut costs drastically, but also find a way to develop a new more efficient growth strategy. We did this via what we termed “platform expansion” in selected markets, which is adding new capacity to our best businesses. That meant targeting having a presence in fewer countries and raising our profile in those countries. We became better operators and stronger developers by having greater focus in a smaller number of markets. That was the essence of it. The final piece of the puzzle was a financial restructuring to match the strategy to our investors’ needs. P+S: Was the restructuring successful?
People + Strategy: To set context, can you provide us with an overview of the AES story since you took over as CEO? Andrés Gluski: When I became CEO there really wasn’t a strong focus on strategy – by design. That more opportunistic approach worked well initially for AES, but had largely outlived its usefulness. It was clear to me that there were two initiatives we needed to undertake as a first priority: 1) create a five-year vision of what we wanted AES to be and 2) rationalize the organization based on a focused strategy. P+S: Can you expand on what those looked like?
Andrés: On all of the key strategic thrusts we were successful, but we have faced greater headwinds than we expected. The problem was a drop in foreign exchange, energy and commodity prices that combined affected almost 40 percent of our profits. As a result, many of the improvements we made over the last five years were masked by the declines from those headwinds at our existing business. If we were graded on a basket of currencies representative of our business, our successes would be much more evident. We have announced almost three times the amount of cost savings we said we would and we sold four times the amount of assets we said we would. We accomplished all this while initiating the largest construction program in the company’s history. Having achieved all of the above, one would expect our stock to have shot up. Our total shareholder return over the past five years is around 30 percent, but when compared to purely U.S.-based utilities, theirs is 80 percent. In the past, we were compared
to independent power producers, and in that case, their total shareholders’ return is down 40 percent. Compared to emerging markets, we have greatly outperformed our closest peers. But at the end of the day, people who bought stock can say they could have done better by buying stock in US utility companies. P+S: When you went through your first transformation of the company, how did you attack aligning the organization? Andrés: In my first year as CEO, I changed 60 percent of my most senior leadership team. Bringing in new people created the different mindset we needed to make the transformation a success. Tish Mendoza: We placed emphasis on ensuring information was cascaded throughout the organization. This was a challenge we had to overcome because we were so decentralized. It’s funny to hear people talk about AES being decentralized now, when in reality they have no idea where we started from and the progress towards centralization we have made thus far. When we started, we were in 28 countries and had multiple businesses in many of those countries. Each of those businesses aligned to and identified with its own unique culture. It was challenging to get people aligned around a single vision and mission because they identified with the culture of the specific country and business in which they were residing. To overcome this, we were relentless in our efforts to create, align and implement a common mission and vision, and we created a community of One AES. In our efforts, we constantly discussed the culture we wanted to have at AES and the behaviors necessary in every person to foster that culture. P+S: Did you physically have to change the shape of the organizational structure? Tish: Yes. In 2013 we created six Strategic Business Units (SBUs) in an effort to be more aligned as an organization. Each SBU was grouped with business VOLUME 40 | ISSUE 2 | SPRING 2017
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markets that had similarities. Not only did this drastically change our organizational structure, but it also allowed us to start looking at talent and capability development more robustly at a global level. There is no question that Andrés getting his leadership team right and getting the right organizational design in place were two key factors for success in our last transformation. Thomas O’Flynn: To build off of that, we talked a lot about finding a balance between leveraging the SBUs without it becoming overbearing. Bernerd Da Santos: When I look back, the transformation we initiated was a necessary change to implement the strategy, which required a holistic
stant and transparent in our communication and 3) getting the right people in key leadership roles. Bernerd: One of our key elements is focus. The business environment is highly complex today with multiple drivers pressing all at the same time and intensity. As Tish mentioned, having a clear vision and strategy and having the right leadership to execute was the hardest part of the transformation. It has also helped us to accelerate our efforts. Considering the complex and fast changing business climate and operating models, the impact of those changes across our people, process, technology, and the challenges of regulatory compliance, having a clear strategy and focus on execution keeps the right boundaries in achieving our goals.
It is all about having the right people, the right incentives, and the brutally honest conversations.
process for aligning the SBUs with clear roles, responsibilities and accountability. Incorporating a complete leadership team to execute in their markets gave AES a way of thinking globally and acting locally, where all of our people are focused on executing on one shared corporate vision or way forward. Andrés: Overcoming the organizational resistance to the structural changes we undertook when moving to a matrix organization was quite possibly the most challenging aspect of managing people’s behaviors and mindsets. We had to get key people in the organization aligned and comfortable with having more than one boss. P+S: Were there things that went really well that helped accelerate your first transformation? Tish: There were three key factors we capitalized on: 1) using our strategy as a driver for change, 2) being clear, con54
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Tish: We also established working groups, which have helped develop networks across the matrix. These working groups are comprised of people who have similar jobs across various platforms and markets within the company. The goal behind these groups is you always have a group that you belong to where you can share knowledge and information. P+S: Were there things that did not go well that you would do differently going forward? Tish: I would change the pace at which the change occurred. In some cases, I wish we could have moved faster and in other cases I think we would’ve benefited from moving slower. At the end of the day it comes down to the audience and I think we could have done a better job of managing that with regards to our pace. Andrés: I agree. I also think sometimes our message got lost in translation at
the middle management level. While I was quick to make some tough decisions regarding personnel changes at top management, I take responsibility that I was somewhat slower to make changes at the second and third tiers. Part of this was because so much change was occurring that I was looking for some islands of stability in the organization. If I could do it over again, I would make faster decisions regarding middle management. Tom: I would also say we shouldn’t have over-estimated how good we were at communicating. At corporate, we sometimes see change occurring, but we forget that we have more data than those not at corporate. It is important that we bring people along and address any issues that arise immediately. Bernerd: It was a challenge through the implementation and the speed at which we underwent the transformation to keep all the moving parts and processes that needed to be connected, actually connected. In reality, we were simultaneously conducting six transformations within the six SBUs. As we gained standardization and synergies within each SBU, we sometimes lost consistency across them from a global perspective. Even though we had a common vision and strategy, we wound up acting on that strategy in slightly different ways. This was a clear obstacle to fully capturing standards, economies of scale and synergies across the whole organization at a larger scale as well sharing leading practices within AES. Tish: I also learned that you can never be too systematic in your introduction or approach to something new. Having structure and being systematic helps with accountability and standardization of processes. I wish we had implemented more of this during our last transformation. If we had, we would be further along because there would be fewer areas of confusion or disconnect. We have been very hands-off in the past and have asked the SBUs to deliver. In some cases delivery fell short not because of bad intent, but because of gaps in our communication regarding
expectations and/or explanation. Having a more systematic approach may have helped alleviate some of this. P+S: How have you set yourself up to transform for what the future requires? Andrés: The truth is AES is constantly evolving. It is not like we did one transformation five years ago and have been stagnant ever since. We are now just beginning to ramp up for another transformation to be a more customerand commercially-oriented organization. We have to be constantly evolving to meet changing market demands. Tom: The culture at AES is a strong asset for us as we enter this next trans-
formation. All of our people are looking to be proactive and move in a unified direction. This is an advantage for AES because many organizations find their people stuck in the old ways of doing things because that is what is known and easy. This is not the case here. Our people want to move forward and adapt to the changing environment. As leaders, we just need to ensure we are helping to identify that direction and articulating how they can contribute to a combined direction. The obstacles that we have faced the past five years have resulted in AES playing a lot of defense. As we prepare for this next transformation, we will continue to face challenges that may put us on the defense, but hopefully these will be fewer and we will spend more time playing offense.
Andrés: AES has played incredible defense, but we have not been equally effective at playing offense. What I mean by offense is growing into a new business or technology and getting investors excited about it. We have cut costs, paid down debt, changed our culture, bought out mismatched shareholders, etc. If you put that all together it is quite an amazing track record, but we haven’t become the leader in solar or wind development for example. The challenge for AES for the next five years is to prove we are as good on offense as we are on defense. P+S: What is the biggest lesson learned for you regarding a successful transformation?
Andrés: Compared to the last pivot, the next pivot is much more centered on the commercial arena. There is also an ongoing pivot in the technology arena. While these pivots are the most challenging we have done, AES is culturally in a much better place to handle this pivot than it was five years ago. Tish: The challenge we have to overcome is managing the level of change to ensure our people do not experience too much change fatigue. There will never be a time that AES stands still, so it is all about striking the right balance between staying ahead in the market and not exhausting the organization in the meantime. Tom: Despite all of the change, we have come a long way culturally from the time of our last transformation, which will help us during the pivot. Before we had players on the field who were not working as a team, and as a result, we had major inefficiencies. When I look back on my global finance meetings in the past, we always focused on how we could stay out of each other’s way. This has completely transformed into a discussion around what resources could be a value-add for everyone and what additional business resources we want to focus on collaboratively to further grow AES as an organization.
Andrés: For me it is all about timely information sharing. In order to succeed, we need to ensure AES has an environment where intellectual honesty is expected 100 percent of the time. The biggest mistakes we have made in our past stem from people sitting in their ivory tower and not doing their utmost to share information. As we have worked towards greater team alignment, we have created a culture of sharing and transparency and stressed global AES success over individual business unit successes. It is all about having the right people, the right incentives, and the brutally honest conversations. P+S: What is the order of magnitude of the pivot required to set you up to win in the future?
Bernerd: AES is in a much better place culturally and more agile than ever before. There are a few things that come to my mind about pivoting AES for the future: 1) leveraging our core strengths, values and capabilities such as safety; 2) driving forward by innovating in technology and robotics to be a safer and more effective work environment; and 3) building on the lasting changes we’ve made over the past years. We’ve earned trust and credibility by delivering results today and keeping an eye on the long-term play. We now need to run toward innovation as a way to leapfrog in some areas, like commercial and predictive analytics, and be confident in our transformation journey. Of course, we will hit some bumps along the way and we need to stay focused and agile to make the necessary decisions to deliver on our strategy. VOLUME 40 | ISSUE 2 | SPRING 2017
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Tish: We are fortunate in that through all of the change, we are left with a workforce of entrepreneurial and innovative spirit, which is a huge asset. We need to tap into this to ensure we capitalize on our first-mover instincts from our first transformation, and apply that innovation in this new world. P+S: In a highly-matrixed organization, what is the balance between alignment from corporate and alignment in the businesses? Andrés: During the next transformation, it is going to be key to have alignment and strategic understanding across the different business units and within corporate departments. I believe that much of the challenges and resistance we faced in our previous restructuring, centered on which
As opposed to jumping to conclusions, we are much better at having each other’s back and asking for clarity before passing judgment or disagreeing.
know I do not have a hidden agenda. Compared to other organizations, the low level of politics is a competitive advantage for us.
Andrés: Trust is key. We have worked enough with each other to realize we are all on the same page. Additionally, it is important that we keep an open mind for why people may have differing views. We sit in different roles, so providing different perspectives is important. As a team, I do not think we have ever made a major decision without hashing-out disagreements and coming to some form of consensus.
Tish: Our relationship with the board is a key asset. We are not just satisfying governance needs, we are truly partnering for the success of AES.
Tom: We need to make sure that we understand the differing opinions, but come together in a unified team view and ensure we each follow up according to where we landed as a team.
Our relationship with the board is a key asset. We are not just satisfying governance needs, we are truly partnering for the success of AES.
P+S: As you have described the AES journey, have some of the changes that you have made required you to work differently as a leadership team?
Bernerd: We have a very good working environment of trust, openness, and transparency to express ideas and thoughts constructively. Once a decision is made, we align quickly and move as one team to execute. I also think we need to continue our journey on giving more execution responsibilities and accountability to our SBU leaders. It’s about finding the right balance between corporate and global thinking with local understanding of the markets and orientation towards results at the SBU level. The focus we put on aligning and clear understanding of the strategy will make us more resilient in achieving our objectives.
Tom: There are two things that come to mind: 1) staying in touch and 2) trusting each other. There are times when we hear messages fourth hand and many times the essence of the message has been diluted or altered.
Andrés: We also have a great relationship with our board. We think of them as an asset that helps our team be successful. A key factor in this positive relationship is the open communication. I can argue with the board and they
businesses we were going to sell, were due to miscommunication or misunderstandings. Just because we understand something at corporate does not mean all of the leaders at our different businesses have the same level of understanding. We have so much exposure to some sets of information at corporate that we can easily forget that our business unit leaders do not always have that same level of visibility into these issues.
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Andrés: This openness extends to the team. For example, when Tom or Tish or other senior executives have meetings with directors, there is no need for me to be present. I know they have the right intentions and are having the right conversations. Tish: Additionally for me personally, the biggest key to our success is the alignment we have amongst each other. There is 100 percent alignment between Bernerd, Andrés, Tom, and me. We are constantly working on projects together and we have created a dynamic where we can be completely honest and open with each other. Without this level of alignment, we would not be successful. This is the differentiator. It took a while to get here, but it is ultimately the key to our success as a team and as a global organization. P+S: What do you want stakeholders, investors, the board, and employees to understand about AES in the future? Andrés: AES is an efficient company in a market that is rapidly changing and becoming more competitive. We are well-positioned to take advantage of those changes, if we establish ourselves as the leaders in the application of new technology. Furthermore, by being international, we can be a bridge between more developed American markets and less developed ones, where there is more growth and higher profit margins. If you are solely in the American electricity market, you are looking great today, but you are in a market in which demand is not growing. On the other hand, we have a more diversified portfolio as well as the chance to really be an important agent of change in many markets.
