What Now?
Decisive Actions to Emerge Stronger in the Next Normal | 159 pages
What now? Decisive actions to emerge stronger in the next normal. September 2020
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What now? Decisive actions to emerge stronger in the next normal Six months into the COVID-19 pandemic, it is time for companies to act, not react. September 2020
Introduction As many business leaders return from a summer that was far from normal, they may be asking themselves: What now? Over the past six months, they have reorganized supply chains, set up remote operations, and made tough financial decisions. But without a COVID-19 vaccine yet available, not much feels different, and the summer pause hasn’t done much to relieve fatigue. One priority, then, is to reenergize the organization—to act rather than react. Even as the COVID-19 crisis continues to create a world of uncertainty, the goal must be to rebuild for the longer term. Companies that are strong and resilient will be better placed to survive and prosper. Those are qualities that can’t be taken for granted; they need to be cultivated. There are many different ways to lead, but regardless of the type of business or geography, we believe that the ten actions detailed here are those from which a path to emerge stronger can be found. Not only do leaders need to act now, they need to act boldly. Previous McKinsey research has found that companies that made substantive changes fared better coming out of downturns than those that didn’t. In this compendium, our latest curated collection from among the more than 530 articles McKinsey has published on the COVID-19 crisis since March 2020, we present a selection of articles related to Reform, the last of the five stages on the path leading from the current crisis to the next normal. The previous four are Resolve, Resilience, Return, and Reimagination. All ten of the actions we describe in this compendium what companies can—and perhaps, should—be doing. But there is a particular sense of urgency now; moreover, there is also a new sense of possibility. What we labeled as “Reform” back in March may now be considered more accurately as the start of a significant Reset. Companies have had to make so many changes so quickly—often with startling success—that leaders have every reason to believe they can do even more. Of course, not every company needs to take all ten actions; conditions differ. But we believe that they cover the range of possible activities that fit with the situations in which today’s leaders find themselves. We start with an idea—that returning is a muscle that needs to be exercised, not a plan to be executed once or a date to be achieved. We go on to more specific considerations, such as the need to make big moves fast and to be willing to rethink entire portfolios, including where work gets done. People management will be critical both in ensuring that workplace learning gets its due and in taking care of people. The next normal may also mean resetting how companies relate to their governments and how they should address environmental issues. Finally, having a sense of purpose knits everything together. Knowing what your company stands for—and living those values—provides a framework for sound and ethical decision making. You can download the other compendiums we curated on the first four stages on the path to the next normal from McKinsey.com/pathbeyondcovid-19. Our entire collection of individual insights related to the next normal is at McKinsey.com/thenextnormal. Kevin Sneader Shubham Singhal Bob Sternfels Managing Partner Senior Partner Senior Partner Hong Kong Detroit San Francisco 2
Contents 1 Think of the return as 5 Make bold 8 Take the lead on climate a muscle portfolio moves and sustainability 5 Return: A new muscle, not just 59 A blueprint for M&A success 95 Confronting climate risk a plan 106 Addressing climate change in a Focus on high-impact 6 Reset technology plans postpandemic world 2 actions 66 Building the vital skills for the 12 The COVID-19 recovery will be future of work in operations 9 Think about the digital: A plan for the first 90 days role of regulation and government 7 Rethink the global 113 ‘And now win the peace’: Ten 3 Rebuild for speed footprint lessons from history for the next normal 21 Ready, set, go: Reinventing the 75 Supply-chain recovery in organization for speed in the coronavirus times—plan for now post-COVID-19 era and the future 127 COVID-19: Strategies for getting ahead of the pandemic crisis 29 Rapid Revenue Recovery: A road 83 From thinking about the next map for post-COVID-19 growth normal to making it work: What to stop, start, and accelerate 10 Make purpose part of everything 4 Reimagine the 133 Igniting individual purpose in workforce from the times of crisis top down 144 The CEO moment: Leadership for a new era 37 Adapting workplace learning in the time of coronavirus 43 Reimagining the postpandemic workforce 51 HR says talent is crucial for performance—and the pandemic proves it 3
1 Think of the return as a muscle 5 Return: A new muscle, not just a plan 4
© Maskot/Getty Images Return: A new muscle, not just a plan Return is not a phase; it’s a way of operating. A nerve center can help build the capabilities that businesses need in the “next normal.” by Mihir Mysore, Bob Sternfels, and Matt Wilson Return: A new muscle, not just a plan 5
In less than four months, COVID-19 has upended it’s unclear whether once the pandemic recedes, almost all expectations for 2020. Beyond the loss of these customers will return to their old ways or if the life and the fear caused by the pandemic, businesses pandemic will create new types of consumers. around the world have faced disruptions at a speed and scale unprecedented in the modern era. Given these and other uncertainties and the need for experimentation and fast learning to navigate Companies everywhere are now wrestling with the through them effectively, we believe that the next question of how to reach the next normal safely. step in the response of businesses cannot be Many talk about a return to the workplace as a plan thought of as a phase at all. It will be open ended that needs to be implemented: a series of systematic rather than fixed in time. A better mental model steps to reach some kind of stable operating model, is to think about developing a new “muscle”: an in a world where vaccines are adequately available enterprise-wide ability to absorb uncertainty and or herd immunity has been reached. In many cases, incorporate lessons into the operating model these plans suggest a return to some relatable quickly. The muscle has to be a “fast-twitch” one, version of the past. characterized by a willingness to change plans and base decisions on hypotheses about the future— Yet the intrinsic uncertainties that might scupper supported by continually refreshed microdata such plans continue to mount. Executives readily about what’s happening, for example, in each retail admit, for instance, that it is tough to write a deter- location. And the muscle also needs some “slow- ministic return plan because of the likelihood of twitch” fibers to set long-term plans and manage a resurgence, discoveries about how the virus is through structural shifts. transmitted and whom it affects, the nature and duration of immunity, and continued changes in Many companies are trying to hang on until a full the quality and availability of testing and contact reopening, perhaps made possible by a vaccine tracing. The best possible plan today is merely or herd immunity. Meanwhile, they are configuring a strawman that will need near-continuous their resources to be ready by then. That’s risky; recalibration and change. despite promising news from early clinical trials, a full reopening could be many months away—months Another critical uncertainty is the future of remote when companies must adapt to reality if they are to work. Some feel that recent events have driven survive. Already, signs of viral resurgence in Asia a real productivity gain they do not want to lose. are causing companies fixated on plans to rewrite However, they recognize that a wholesale shift to them hurriedly. remote work has had many false dawns. Silicon Valley has experimented with it most extensively, but In this article, we will outline four forces whose after many attempts to implement telecommuting, uncertain outcomes will shape the years to come, as our research found that at 15 top firms, only 8 well as the steps needed to build the return muscle percent of the employees work remotely. These to grapple with these forces—especially the nerve companies do not want to try this again only to roll it center that powers the muscle. Once the center has back in a few years. been built and incorporated into a new operating model across the organization, muscular companies Customer behavior is a third unknown. Companies will be ready for a new era of competition. We won’t see the clear shift to digital among consumers and say that this work will make companies future proof; its inevitable impact: online shopping has expanded the pandemic has exposed the folly of that idea. But by up to 60 percent in some categories, and up to we argue that building a return muscle is the right 20 percent of online consumers in the United States discipline for these times. have switched at least some brands recently. But 6 What now? Ten actions to emerge stronger in the next normal September 2020
With tens of millions of jobs lost, and more to come, the workforce is absorbing the brunt of the economic blow. Four forces that will mold the fallen not only as a result of this greater economic next normal uncertainty but also continuing concerns about Out of the chaos of the first few months of COVID-19, personal health and an increased preference four forces that could shape the next era in business for simpler connections with family rather than are emerging. expensive items or experiences. The economic recovery in China has been one of the world’s The metamorphosis of demand fastest—yet its consumption is still more than No one has failed to notice how the pandemic has 20 percent lower than before the outbreak. shifted demand online. Twice as many consumers now shop online for groceries. Across categories, Rapid changes in the workforce the number of consumers who now use digital With tens of millions of jobs lost, and more to channels has increased by an average of about come, the workforce is absorbing the brunt of the 20 to 25 percent. And first-time digital consumers economic blow. A new McKinsey Global Institute account for almost 40 percent of the growth in study finds that up to one-third of US jobs may be digital goods and services. As consumers shift vulnerable to furloughs, pay cuts, and layoffs. Low- income workers hold 80 percent of those jobs.2 to digital, loyalties are also in play: some 15 to 20 percent of US shoppers have switched websites The single biggest challenge facing employers since COVID-19 started. may be deciding how and when to add workers to the payroll. Yet the shift to digital is by no means universal. In banking, recent McKinsey surveys find that Strangely, with so many sidelined, some industries 13 percent of retail customers expect to use mobile are experiencing shortages. Many people cannot banking services more, 7 percent to use them less.1 return to their jobs because of health-related issues, including workers who are ill, quarantined, Planning for demand is extraordinarily challenging. caregivers, or vulnerable to infection. But employers Many macroeconomic recovery scenarios are on the are also finding that newly needed skill sets are table, from late 2020 to beyond 2023. Each sector in short supply, such as digital sales skills in B2B has its own particular effects from the pandemic field sales forces, productivity-based management and the government response. That translates techniques at a time when productivity is tougher to into wide variations in the timing and strength of measure, and many others. a recovery in demand. Overall consumption has 1 Kevin Buehler, Miklós Dietz, Marie-Claude Nadeau, Fritz Nauck, Lorenzo Serino, and Olivia White, “Stability in the storm: US Banks in the pandemic and the next normal,” May 2020, McKinsey.com. 2 Susan Lund, Kweilin Ellingrud, Bryan Hancock, James Manyika, and André Dua, “Lives and livelihoods: Assessing the near-term impact of COVID-19 on US workers,” April 2020, McKinsey.com. Return: A new muscle, not just a plan 7
Other changes are roiling the workforce. Among to show; at that point, some form of aerosolization white-collar workers, remote work has become the expands the reach of the virus.3 Other studies point new norm. Some are thrilled about their greater to the prevalence of asymptomatic patients. And productivity and flexibility, as well as the time and the sharing of major transmission events affords sanity reclaimed from long, stressful commutes. another window of learning from the virus. A recent Others cannot wait to get back to the office: for case involved an unwitting COVID-19 carrier in a them, the lack of a home-office setup and the restaurant who sneezed into an air-conditioning inability to separate work from life are major sources duct and spread the infection to everyone there. of stress. Dual-career couples have additional stresses, which may increase if schools cannot Other critical recent findings focus on seasonality. open in a few months. Finally, as companies try Hopes for a rapid fall in COVID-19 cases as summer new models of remote and on-site work, novel approaches in the Northern Hemisphere have challenges may arise, such as widely different subsided: in Asia the resurgent virus is once again subcultures for these two groups of workers—with taking hold, despite the onset of summer, and very different norms, expectations from employers, its transmission is increasing in warmer climates and team health. around the world. More economic activity and reduced physical distancing have also driven a Shifts in regulation resurgence of the virus. These developments Regulators and governments around the world are have important lessons for companies: any regime using varied philosophies of public health; Sweden, of interventions that they set up cannot ignore for example, is focusing on achieving herd immunity. presymptomatic and asymptomatic patients. There Many countries do not have consistent national should be a real focus on facilities and how they are health standards; for instance, 13 US states today configured. ban all gatherings, 24 ban gatherings of over ten people, ten or so let about 20 to 50 people gather. Early concerns about significant bottlenecks in The rest have completely lifted their bans or have testing are, slowly but surely, starting to ease. This taken no action. Variation among cities and counties welcome news is coinciding with the arrival of a is even starker. A wide range of societal beliefs, broader range of testing options. Testing will be a economic realities, and political challenges underlie critical question in coming weeks and months as these choices. increasing numbers of employers try to ensure a safe return to the workplace—the core task—by For leaders whose businesses span multiple looking to new polymerase chain-reaction (PCR) geographies, ensuring consistency is highly tests, more informative serological tests (current challenging. Business leaders are understandably versions have known issues), and other new anxious to protect their employees while ensuring developments. All the new information should compliance. They know that they need to establish help companies set distancing guidelines, stagger some level of productivity to preserve the future of shifts, develop new hybrid on-site/remote models, their companies. and so on. Every move will have to be evaluated immediately and refined as necessary—a tough task, Increasing information about protocols for safety but one that the nerve center can accept in stride. The gargantuan medical and scientific effort focused on COVID-19 has already produced important insights that directly affect how Building the muscle for response — companies respond. For instance, newer and resilience studies have suggested that the point of highest Most companies have already established “war transmissibility is the day before symptoms begin rooms” to coordinate the recovery and the return 3 Xi He et al, “Temporal dynamics in viral shedding and transmissibility of COVID-19,” Nature Medicine, April 15, 2020, nature.com. 8 What now? Ten actions to emerge stronger in the next normal September 2020
from the pandemic. But these are not sufficient, others can provide clues about which digital and because they focus, for example, on tactical plans physical journeys people are starting to choose. to get people back into offices, to reopen their retail As stores reopen, microdata can provide granular stores once the lockdown is lifted, or to get their information on footfall at specific sites and on sales reps back on the road. Instead, companies spending there. These data can inform decisions should expand their war rooms into fully fledged about reopening retail locations and ideas for return nerve centers. improving the digital experience. Such a nerve center is a flexible structure that Companies also need some way of understanding concentrates crucial leadership skills and the capability gaps of their sales forces (such as organizational capabilities and gives leaders the digital sales, for reps who work primarily in the best chance of getting ahead of events rather than field). They should then address these gaps quickly reacting to them. It has enterprise-wide authority through virtual training, mentoring, and other levers. and enables leaders and experts to test approaches There is no established playbook on effective quickly, to preserve and deepen the most effective sales in a pandemic. Companies will need to solutions, and to move on ahead of the changing experiment, see what works, and then disseminate environment.4 the findings on their learning platforms. To deliver In the following, we sketch out what the nerve center does, how it works, the technology what customers want, companies will need to it requires, and some of the benefits. build smooth digital and contactless customer experiences, which might require updates to the Anticipation: How the nerve center sees underlying IT architecture. around corners Nerve centers will probably be in place for the Two teams next 12 to 18 months. Their core mission is to listen Nerve centers can realize these needs through two closely for the signals emitted by the four forces. core teams. First, a delivery team works toward a Consider the shifting sands of consumer demand. clearly defined objective and then learns from it. As contradictory signals emerge, companies need to That’s different from the typical approach: crafting know, for example, if they face sandbars up ahead, a supposedly perfect plan and then trying to where the channels are, and where the open ocean execute it. Second, a plan-ahead team learns from is. To plot a course, executives have to monitor the the experience of the delivery team (especially the signals of a digital shift and decide how deeply their failures) and complements this with fast lessons categories are affected. from other sources. A critical role for the plan-ahead team involves basing medium-term strategic moves Other signals might emerge from brand loyalty: the on clear trigger points and pushing the organization propensity of consumers for some brands versus to implement these ideas more quickly than might Companies will need to experiment, see what works, and then disseminate the findings on their learning platforms. 4 Mihir Mysore and Ophelia Usher, “Responding to coronavirus: The minimum viable nerve center,” March 2020, McKinsey.com. Return: A new muscle, not just a plan 9
normally feel comfortable. Examples could include The reward is resilience standing up new sales channels, accelerating new- Getting the return muscle right will be the key to product launches, creating new business models, building resilience throughout the organization. or M&A. Today, for instance, investors and companies are asking increasingly probing questions about The plan-ahead team can also stress-test core parts whether their business partners can truly deliver in of the enterprise operating model by focusing on the more extreme circumstances that seem possible the supply chain’s resiliency, liquidity, assumptions over the next few years. Genuine investments in about customer demand, and the robustness of the resiliency may be an essential part of survival for operating model. many businesses, providing the cushion required by further setbacks that might be in store over the next Processing the signals: The data platform year or two. To function well, nerve centers will need to collect data from a wide range of sources (not only their Many companies are sweating the details of their own operations but also public-health agencies, return plans rather than building the capabilities policy announcements, and economic indicators), needed for a return. They are running spreadsheets synthesize this information in real time, and translate to see how many people spaced six feet apart will it into action. A nerve center with a nimble information fit in an office, planning one-way paths through system can help a company to keep up with rapid the workplace, and figuring out adaptations to rest change in the virus’s spread; to answer questions rooms, lunch rooms, and entrances. All of those are about, for example, what holiday shopping will look critical tasks, but they are not enough. The ability like without a vaccine; or to cope with a resurgence in of top leaders to refocus on the task of building the fall. Companies need an information platform that sustainable capabilities will define the companies captures such data, flags them if certain thresholds that emerge intact from the pandemic over the next are breached, and helps generate responses to two years. problems. Many companies have most of what’s needed; they can organize these resources to form an agile technology capability in a few weeks—not months or years. Mihir Mysore is a partner in McKinsey’s Houston office, Bob Sternfels is a senior partner in the San Francisco office, and Matt Wilson is a senior partner in the New York office. Copyright © 2020 McKinsey & Company. All rights reserved. 10 What now? Ten actions to emerge stronger in the next normal September 2020
Focus on high-impact actions 12 2 The COVID-19 recovery will be digital: A plan for the first 90 days 11
© Dani3315/Getty Images The COVID-19 recovery will be digital: A plan for the first 90 days The rapid migration to digital technologies driven by the pandemic will continue into the recovery. Here’s how to accelerate your organization’s digital capabilities to keep pace. by Aamer Baig, Bryce Hall, Paul Jenkins, Eric Lamarre, and Brian McCarthy 12 What now? Ten actions to emerge stronger in the next normal September 2020
By now, most C-suite executives have led Second, as the economy lurches back, demand their companies to digitize at least some part of recovery will be unpredictable; uneven across their business to protect employees and serve geographies, sectors, product categories, and customers facing mobility restrictions as a result customer segments; and often slow to return of the COVID-19 crisis. As one CEO of a large tech to precrisis levels. While a few sectors will face company recently stated, “We are witnessing what unusually strong demand, leaders in many will surely be remembered as a historic deployment industries must deal with periods of structural of remote work and digital access to services overcapacity. Those companies face the painful across every domain.” need to rightsize the cost base and capital of their operations, supply chains, and organizations overall Indeed, recent data show that we have vaulted five and to transition their fixed costs to variable costs years forward in consumer and business digital aggressively wherever possible. Complicating adoption in a matter of around eight weeks. Banks matters for leaders as they grapple with ways to have transitioned to remote sales and service teams deal with an uneven recovery is that historical data and launched digital outreach to customers to and forecasting models will be of little use to predict make flexible payment arrangements for loans and where pockets of demand will emerge and where mortgages. Grocery stores have shifted to online supply will be necessary. New data and completely ordering and delivery as their primary business. rebuilt analytical models will be essential to steer Schools in many locales have pivoted to 100 percent operational decisions. online learning and digital classrooms. Doctors have begun delivering telemedicine, aided by more Finally, many organizations have shifted to remote- flexible regulation. Manufacturers are actively working models almost overnight. A remote-first developing plans for “lights out” factories and setup allows companies to mobilize global expertise supply chains. The list goes on. instantly, organize a project review with 20—or 200—people immediately, and respond to customer As some regions begin reopening, businesses inquiries more rapidly by providing everything from are considering how to return to some semblance product information to sales and after-sales support of full speed in an unstable environment in which digitally. In effect, remote ways of working have, at lockdowns will ease (and potentially be reinstated) in least in part, driven the faster execution drumbeat waves. In doing so, they will need to confront three that we’re all experiencing in our organizations. structural changes that are playing out. And this step change in remote adoption is now arguably substantial enough to reconsider current First, customer behaviors and preferred interactions business models. have changed significantly, and while they will continue to shift, the uptick in the use of digital Quickly pivoting the business agenda to address services is here to stay, at least to some degree these changes will be critical for a successful (Exhibit 1). Fully 75 percent of people using digital recovery. Digital will undoubtably play a center- channels for the first time indicate that they stage role. We offer suggestions for a 90-day will continue to use them when things return to plan to realign the digital agenda and implement “normal.”1 the enablers for acceleration during the recovery Companies will need to ensure that their digital channels are on par with or better than and beyond. those of their competition to succeed in this new environment. If China offers us any lessons, digital laggards will be substantially disadvantaged during the recovery. 1 McKinsey COVID-19 US Digital Sentiment Survey, April 2020. The COVID-19 recovery will be digital: A plan for the first 90 days 13
Article type and Year Article Title Exhibit X of X Exhibit 1 US consumers are accelerating adoption of digital channels, a trend seen across global regions. Digital adoption, by industry, … of digital access ‹egular users Firsttime users †an‡ing ˆntertainment ‰rocery arel tilities Šelcom Šrael Insurance 73 carriers 21 64 61 24 31 45 13 39 38 37 35 9 11 6 8 51 40 30 31 30 27 31 27 1 Note: Figures may not sum to listed totals, because of rounding. Source: McKinsey COVI1 S igital Sentiment Surey, r €–ƒ, „„ Based on data from countries already in the recovery phase, consumption patterns will be uneven and unlikely to return to pre-CO- levels uickly. Average daily China offline consumption,… Ž1„„… ˜ daily aerage consum tion in ec „1” ›rior to COVIœ1 ›rior to CŒinese uring COVIœ1 ea‡ fter COVIœ1 ea‡ 100 žunar Ne• –ear 39 79 €„ 125 „„ 1€„ 1„„ €„ „ ec „1 Ÿan „„ Feb „„ Mar „„ First šuŒan CŒinese žunar žo•ered emergency confirmed loc‡do•n Ne• –ear res onse leel in case in most localities1 šuŒan 1 On Mar ƒ, „„, 1 CŒinese roinces Žinoling ‘’„… of country’s o ulation” announced lo•ering of e idemicres onse leel. Source: MI–— McKinsey analysis he levels of remote working have skyrocketed during lockdowns and are likely to remain higher than precrisis levels for some time. Share of employees working remotely full time, … Information¥ ›rofessional and Financial Manufacturing ˆducation and ŠMŠ serices1 business serices actiities ŒealtŒ serices 84 74 70 61 ¦’€ ¦§ ¦§€ ¦€ 36 ¦¢£ 9 5 5 2 2 1 ŠMŠ ˜ tecŒnology, media, and telecom. ›reCOVI1 figures for remote•or‡ fre¡uency in sector sourced from internal surey Žunaailable in merican Šime se Surey”. ›ercentage oints. Source: merican Šime se Surey, S †ureau of žabor Statistics, n ˜1¢£— e¤ ert interie•s— ress searcŒ— McKinsey analysis 14 What now? Ten actions to emerge stronger in the next normal September 2020
The digital agenda for recovery Refocus digital efforts toward For many companies, customers have already changing customer expectations migrated to digital. Employees are already working Many companies are accelerating their shifts toward fully remotely and are agile to some degree. digital-first models—at warp speed. One European Companies have already launched analytics variety-store chain, for example, established a fully and artificial-intelligence (AI) initiatives in their functioning e-commerce business in just three operations. IT teams have already delivered months. The online business was interconnected at a pace they never have before. But for most across all functions (warehousing, merchandising, companies, the changes to date represent only the marketing, customer support, et cetera) and first phase of the changes that will be necessary. improved basket size over physical stores by three times as well as delivering nearly 3 percent like-for- We have laid out an agenda that focuses on like revenue growth in its main market. four efforts: refocusing and accelerating digital investments in response to evolving customer But it’s not just about digitizing. Companies must needs, using new data and AI to improve business also reimagine customer journeys to reduce friction, operations, selectively modernizing technology accelerate the shift to digital channels, and provide capabilities to boost development velocity, and for new safety requirements. For example, an increasing organizational agility to deliver more automobile manufacturer now handles functions quickly. For each one, we outline a practical 90-day GES 2020 traditionally performed by dealers, such as trade- plan to make it happen (Exhibit 2). ins, financing, servicing, and home delivery of COVID Digital Exhibit 2 of 3 Exhibit 2 A plan for the first 90 days has four efforts to launch immediately. Refocus digital efforts Use new data Selectiely ncrease 1 toward changing and A to improe modernie technology organiational customer expectations usiness operations capailities drumeat Sprint 1: Align organization to Assess performance of Create rightsizing plan Assess where days 129 new digital priorities critical decision-support for shifting to variable organizational velocity is models cost structure and begin needed and where assessing cyberrisks remote-work models could drive productivity Sprint 2: Bring digital channels ecalibrate andor et up cloud-based data eploy new models days 9 to parity or better vs rebuild models platform and automate leveraging agile and competition software-delivery pipeline remote Sprint : aunch new digital evelop net-generation Begin strengthening pskill organization days 9 offerings or channels data sets and models for technology talent bench for accelerated digital optimal performance world 1 Artificial intelligence. The COVID-19 recovery will be digital: A plan for the first 90 days 15
cars. Airlines are rapidly reinventing the passenger Use new data and artificial intelligence experience with contactless journeys focused on to improve business operations traveler health and safety to make customers feel Hundreds of operational decisions get made on comfortable flying again (Exhibit 3). daily, weekly, and monthly bases. Take an airline, for example, that must make many decisions: In the next 90 days. CEOs should ask their business Which routes should we operate? What crew size leaders to assess how the needs and behaviors of is optimal for each flight? How many meals should their most important customers have changed and we order? What staffing level is necessary in the benchmark their digital channels against those of contact center? their competition. This information should form the basis of a renewed digital agenda that should take Modern businesses have several forecasting no longer than 30 days to establish. and planning models to guide such operational decisions. Organizations will need to validate these Chief digital officers and chief information officers models. In the same way that many companies (CIOs) can then quickly stand up (or refocus) agile had to rebuild risk and financial models that failed teams to execute the most urgent priorities. A during the 2008 financial collapse, models will consumer-electronics company, for example, recently similarly need to be replaced because of the launched an agile war room to improve conversion massive economic and structural shifts caused by rates on its website traffic. That type of project can the pandemic. For example, models that use time- deliver meaningful results in weeks. Changes that series, oil-price, or unemployment data will need to require more fundamental work, like setting up a be rebuilt entirely. The data must be reevaluated new e-commerce channel, will typically take longer. as well. Continually measuring digital-channel performance during the 90 days will be critical so that companies As companies construct these models, analytics can quickly adapt as they learn more. Consider teams will likely need to bring together new data GES 2020 setting up a weekly forum for senior business sets and use enhanced modeling techniques to COVID Digital and technology leaders to process the learnings forecast demand and manage assets successfully. Exhibit 3 of 3 coming in and drive the full agenda at pace and in a One automotive-parts supplier, for example, coordinated fashion. developed a forecasting model that incorporated Exhibit 3 The travel industry is mapping out the customer journey to identify points of health risk and design a contactless experience. Illustrative customer journey with ideas for mitigating risks “Safe-o-meter” Visible Robot using Touch-free ully digital hotels to plan security-tray UV1 cleaning end-to-end medical serices options sanitization for transport journey lined to hotel 1 Ultraiolet 16 What now? Ten actions to emerge stronger in the next normal September 2020
previously unused third-party data. The model will Many companies have found they have the potential help the supplier spot potential issues with its own to free up as much as 45 percent of their IT costs suppliers’ ability to deliver needed items, offering over the course of a year. Our experience suggests a chance to reach out to its suppliers to work out that roughly two-thirds of this potential can be logistics or find another source. achieved through measures such as extending hardware- and software-refresh cycles, rapidly Other business areas can benefit from more renegotiating vendor contracts, and restricting cloud sophisticated modeling as well. A leading financial- workloads by turning off noncritical jobs. Additional services provider, for example, stood up an cuts get deeper into the cost structure and risk AI-powered solution to generate leads for its hamstringing future growth. The right balance will sales agents, with models calibrated to handle the vary by industry, but under any scenario, rightsizing current environment. should expose much needed investment capacity as quickly as possible to fund the 90-day plan. In the next 90 days. As a first step, the chief analytics officer (or equivalent) should mobilize As CIOs consider upgrading their tech stacks, two an effort to inventory core models that support features of a modern technology environment business operations and work with business leaders are particularly important and can be rapidly to prioritize them based on their impact on key implemented: a cloud-based data platform and an operations and their efficacy drift. This assessment automated software-delivery pipeline (commonly is urgent and should be completed as quickly as called “continuous integration and continuous possible. It will essentially define a program of delivery”). Without these, development velocity quick fixes that the data and analytics team can stalls and becomes mired in complexity. The good undertake, working hand in hand with business and news is that cloud technologies make it possible to functional leaders. Once the situation stabilizes, deploy these quickly and at relatively low cost. CEOs and business leaders should push their data and analytics teams to develop next-generation In the next 90 days. First, develop the plan to models that leverage new data sets and modeling rightsize and create a more variable cost structure— techniques better suited for fast-changing the faster the better to free up resources for the environments. The more advanced companies are digital agenda. already creating synthetic data sets using advanced machine-learning techniques, such as generative In the second 30-day sprint, choose your cloud adversarial networks (GANs) to train new analytical partners. While speed is of the essence, CIOs should models when historical data are of little use. thoughtfully consider the contractual structures offered by technology providers. Carefully review those that appear too good to pass up to ensure Selectively modernize that the providers aren’t capturing all the value. And technology capabilities remember to launch appropriate internal efforts Successfully executing the described agenda to train and prepare teams to operate in the new requires investment capacity and development environment. During this sprint, it’s also time to velocity. CIOs can contribute to both by rightsizing modernize the tech stack selectively—“selectively” the IT cost structure to new demand levels and being the operative word. Most companies won’t reinvesting the freed-up resources into customer- have the management bandwidth and resources to facing digital solutions and critical decision-support take on a full-scale modernization in the next 12 to systems, first and foremost. Companies can also 18 months. By focusing on setting up or enhancing dedicate some of the savings to modernizing a cloud-based data platform and equipping agile selectively the technology stack and software- teams with automated software delivery, CIOs can development tooling. double, or even triple, development velocity in the short term. The COVID-19 recovery will be digital: A plan for the first 90 days 17
Remote working can help organizations move at a faster clip as companies tap into new labor pools and specialized remote expertise. (And, yes, agile can be executed remotely.) In the final sprint, it’s a no-brainer to launch the What can realistically be done in 90 days to increase recruiting of additional digital talent and accelerate the organizational drumbeat? Standing up a digital digital upskilling of the entire organization. These factory is largely the best approach right now steps will prepare organizations well for a more because it can be constructed and scaled in three substantive modernization of their application months or less. Many organizations, from banks to landscapes after recovery. Finally, continue to pay mining companies, have accelerated and scaled attention to cybersecurity. Much of the rapid IT work their digital delivery by establishing these internal carried out during the COVID-19 crisis might have factories, with interdisciplinary teams aligned to created new cyberrisk exposures. businesses’ digital priorities. One large global bank, for example, built five such factories to support several locations across the Americas. Increase the organizational drumbeat The current crisis has forced organizations to adapt As previously mentioned, remote working can rapidly to new realities, opening everyone’s eyes also help organizations move at a faster clip as to new, faster ways of working with customers, companies tap into new labor pools and specialized suppliers, and colleagues. Many CEOs wonder remote expertise. (And, yes, agile can be executed what it will take to maintain the quickened remotely.) Remote working can also enable new organizational drumbeat. productivity opportunities, especially for companies with large field forces. One leading provider of Companies that have led the way in adopting residential solar services recently documented flatter, fully agile organizational models have shown record sales using a more remote sales model. substantial improvements in both execution pace and productivity. This has held true during the crisis, In the next 90 days. During the first sprint, identify as we see a direct correlation between precrisis the business areas where digital-execution agile maturity and the time it has taken companies velocity is needed and map out plans for digital to launch a first crisis-related product or service. factories to support them. In parallel, assess where While many companies have at least a few agile remote work models could unleash productivity teams in place, few have successfully scaled to benefits. These two lenses should set the table hundreds of teams staffed with many more “doers” for targeted changes to the operating model. In than “checkers,” which is what’s needed to drive the second 30-day sprint, design the new models the accelerated organizational pace the crisis—and with consideration for staffing level, expertise mix, even the next normal—demands. governance, and operating procedures. Finally, in 18 What now? Ten actions to emerge stronger in the next normal September 2020
the third month, implement and operationalize the support systems, and tune their organizational new designs. We know from experience that three models and tech stacks to operate at the highest months is sufficient to implement and scale a digital effective speed. In other words, C-level executives factory. We have also seen banks, pharmaceutical must point their digital firepower at the right targets companies, and insurance companies pivot entire and quickly execute against them. It’s essential field forces to a remote model in a few weeks. to set these targets at the outset and regularly measure progress against them. Achieving parity or better across digital channels to win the revenue race, rebuilding the most critical decision-support Leaders who want to succeed in the digital-led models, and doubling development velocity are recovery must quickly reset their digital agendas to goals that are all within reach. The 90-day plan will meet new customer needs, shore up their decision- help organizations get there. Aamer Baig is a senior partner in McKinsey’s Chicago office; Bryce Hall is an associate partner in the Washington, DC, office; Paul Jenkins is a senior partner in the Oslo office; Eric Lamarre is a senior partner in the Boston office; and Brian McCarthy is a partner in the Atlanta office. Copyright © 2020 McKinsey & Company. All rights reserved. The COVID-19 recovery will be digital: A plan for the first 90 days 19
Rebuild for 3speed 21 Ready, set, go: Reinventing the organization for speed in the post-COVID-19 era 29 Rapid Revenue Recovery: A road map for post-COVID-19 growth 2020
© Kurmyshov/Getty Images Ready, set, go: Reinventing the organization for speed in the post-COVID-19 era The need for speed has never been greater. Here are nine ways companies can get faster. by Aaron De Smet, Daniel Pacthod, Charlotte Relyea, and Bob Sternfels Ready, set, go: Reinventing the organization for speed in the post-COVID-19 era 21
When the coronavirus pandemic erupted, “I asked on Monday, and by Friday we had a companies had to change. Many business-as-usual working prototype.” approaches to serving cus tomers, working with suppliers, and collaborating with colleagues—or “We have increased time in direct connection just getting anything done—would have failed. with teams—resetting the role and energizing They had to increase the speed of decision making, our managers.” while improving productivity, using technology and data in new ways, and acceler ating the scope “We adopted new technology overnight— and scale of innovation. And it worked. Organi- not the usual years—as we have a higher zations in a wide range of sectors and geographies tolerance for mistakes that don’t threaten have accomplished difficult tasks and achieved the business.” positive results in record time: “We’re putting teams of our best people on Redeploying talent. A global telco redeployed 1,000 the hardest problems. If they can’t solve it, no store employees to inside sales and retrained them one can.” in three weeks. Because of the pandemic, leadership teams have Launching new business models. A US-based embraced technology and data, reinventing retailer launched curbside delivery in two days versus core processes and adopting new collaboration the previously-planned 18 months. tools. Technology and people interacting in new ways is at the heart of the new operating Improving productivity. An industrial factory ran model for business—and of creating an effective at 90-percent-plus capacity with 40 percent of postpandemic organization. the workforce. So is speed. An organization designed for speed Developing new products. An engineering company will see powerful outcomes, including greater designed and manufactured ventilators within a week. customer responsiveness, enhanced capabilities, and better performance, in terms of cost efficiency, Shifting operations. Coordinating with local officials, revenues, and return on capital. The speedy a major shipbuilder switched from three shifts to company might also find it has a higher sense of two, with thousands of employees. purpose and improved organizational health. These outcomes are possible, but not inevitable. Organizational successes forged during the crisis The need for speed: No turning back need to be hardwired into the new operating At the heart of each of these examples is speed— model; and leaders must ensure their organizations getting things done fast, and well. Organizations do not revert to old behaviors and processes. have removed boundaries and have broken down That requires making permanent structural changes silos in ways no one thought was possible. They that can sustain speed in ways that will inspire have streamlined decisions and processes, empow- and engage employees. ered frontline leaders, and suspended slow-moving hierarchies and bureaucracies. The results, CEOs from a wide range of industries have told us, Reinventing the organization for speed have often been stunning: As companies adopt new ways of working at speed, executives are also interested in moving “Decision making accelerated when we cut to flatter, nonhierarchical structures, taking more the nonsense. We make decisions in one radical approaches to decision making and ways meeting, limit groups to no more than nine of working. Gone are the days of waiting around for people, and have banned PowerPoint.” best practices to emerge. CEOs recognize the need 22 What now? Ten actions to emerge stronger in the next normal September 2020
to shift from adrenaline-based speed during is the new annual.” Holding just-in-time, fit-for- COVID-19 to speed by design for the long run. The purpose planning and resource allocation on winners are experimenting now, and boldly. a quarterly instead of annual basis is not only faster Here are nine actions to unleash sustainable but also makes the organization more flexible. speed (exhibit). Finally, non-mission-critical decisions can be The first three actions aim to rethink ways of delegated, so that top leaders focus on fewer, more working. Many leaders have had to do this during important decisions: think “assign to the line” the pandemic and are keen to keep those that have rather than “go to the top.” That means tolerating worked well: mistakes that don’t put the business at risk; a slow decision can often be worse than an imperfect 1. Speed up and delegate decision making. The one. The principle is simple: organizations that pandemic has shown that it is possible to make deci- want to move faster must motivate their employees sions faster without breaking the business. What to be willing to act. this means in practice is fewer meetings and fewer decision makers in each meeting. Some organizations 2. Step up execution excellence. Just because the are taking to heart the “nine on a videoconference” times are fraught does not mean that leaders principle. Others are keeping larger 30- to 40-person need to tighten control and micromanage execution. meetings (so the people that need to implement Rather the opposite. Because conditions are the decisions are present) but cutting the number so difficult, frontline employees need to take on of people with a vote. There is also less detailed more responsibility for execution, action, preparation for each meeting, with one- to two- and collaboration. page documents or spreadsheets replacing lengthy PowerPoint decks. But this isn’t always easy and requires that organi- zations focus on building execution muscle Organizations are also increasing the cadence of throughout the workforce. Leaders must assign decisions, taking on the mantra that “quarterly responsibility to the line, and drive “closed-loop Exhibit Unleashing sustainable speed is a process. Unleashing sustainable speed is a process. Rethink ways of working Reimagine structure Reshape talent 1. Speed up and delegate 4. Flatten the structure . Field tomorro s leaders today decision making 5. Unleash nimle . €earn ho to learn 2. Step up execution excellence empoered teams ‚. ƒethink the role o„ C…†s 3. Cultivate extraordinary . ake hyrid ork ork and leaders partnerships Ready, set, go: Reinventing the organization for speed in the post-COVID-19 era 23
accountability.” That is, everyone working on The two were able to rapidly form a partnership to a team must be clear about what needs to get done manufacture the devices at scale, and the Food by whom, when, and why. Employees must also and Drug Administration gave it an emergency- be equipped with the right skills and mindsets to use authorization. solve problems, instead of waiting to be told what to do. And there must be disciplined follow-up As this example illustrates, partners are increasingly to make sure actions were taken and the desired important in dealing with the pace of change, results achieved. complexity, and disruptions that are becoming the norm. The rate of technological and business- CEOs who are serious about execution excellence model innovation alone makes it nearly impossible are investing in helping their workforces up for any single organization to do everything itself. their execution game—through targeted programs, Furthermore, the connected world is breaking down realigning incentives, and directing rewards and the traditional boundaries between buyers recognition to teams that execute with speed and and suppliers, manufacturers and distributors, and excellence. Building execution excellence does employers and employees. not have to come at the expense of innovation. Quite the contrary: it can help discover powerful ideas For partnerships to be successful, the relationship and innovation from the frontline teams that are must be built on deep trust, for example by adopting closest to the customer. And it can drive excitement a more open-source approach to innovation and and loyalty among the employee base. embedding the partner into everything from strategy- setting to routine operations. Trust allows the Consider the example of a chemical company that is parties to integrate their systems and processes, undergoing an enterprise-wide transformation of enabling them to find solutions, make decisions its business. Every meeting begins with a statement quickly, and execute efficiently. In the case of J&J of objectives and ends with a list of actions to and Prisma Health, they had a shared mission to take, including those who are responsible for help patients and medical professionals. each. Outcomes and milestones are tracked, and employees are rewarded for achieving their goals. The next three actions aim to reimagine structure Leaders communicate the purpose of these actions to go beyond the traditional “boxes and lines” and (the why behind the what and the how) and build toward the development of the kinds of teams that conviction in their employees to do the right thing. work together to deliver value: Employees, in turn, are motivated by a sense of personal ownership and pride. By knowing who 4. Flatten the structure. A speedy organization has exactly is doing what when, at all times, the pace more people taking action and fewer people feeding of execution can be accelerated. Such an approach the beast of bureaucracy—briefing each other, both speeds up and improves execution. reporting, seeking approvals, sitting in unproductive meetings (and then huddling up in the meeting 3. Cultivate extraordinary partnerships. Working after the meeting to have the real conversation). with partners is routine. But the speed of action only Rigid hierarchies must give way to leaner, flatter goes so far if other players in the ecosystem fail structures that allow the system to respond quickly to move just as fast. During the pandemic, we have to emerging challenges and opportunities. There seen companies work with partners in new ways are fewer middle managers and span-breakers to achieve extraordinary impact. For example, Prisma and more doers and deciders. Creating this new Health, a South Carolina–based not for profit, organism requires reimagining structure not as a had a design for an emergency ventilator-expansion hierarchy of bosses, per the traditional organization device but lacked the capacity to build and chart, but rather as a dynamic network of teams. distribute as many as were needed. Johnson & As one CEO told us, “We can finally turn the page on Johnson’s Ethicon division, on the other hand, the traditional matrix and reinvent how we organize had the capacity and distribution infrastructure. and how work gets done.” 24 What now? Ten actions to emerge stronger in the next normal September 2020
Having one fast, agile team is helpful, but having many of them across an enterprise, and enabling them with the right structures, processes, and culture, makes it possible for the entire system to move faster. Real-time collaboration and co-location become Research by McKinsey and the Harvard Business more important, and have even extended to School found that companies that had launched agile the virtual world. For example, putting engineering transformations pre-COVID-19 performed better and product-development specialists on the and moved faster post-COVID-19 than those that had same team can speed up innovation and boost not. Agile organizations had an edge because they output. The role of the corporate center must already had processes and structures available also be rethought. In many cases, central functions to them, such as cross-functional teams, quarterly could become capability platforms deploying business reviews, empowered frontline teams, and skills, tools, and talent where they are needed most, clear data on outputs and outcomes, that proved while also acting as a catalyst for learning and critical to adapting to the COVID-19 crisis. They best-practice sharing. Centers of excellence could adjusted faster, and with less employee turmoil. The be established, with the goal of bringing same was true within companies: those business leading-edge capabilities—such as analytics and units that had gone agile before the pandemic per- artificial intelligence, digitization and process formed better than those that had not on customer automation, and Industry 4.0—to a broad range satisfaction, employee engagement, and opera- of performance units and thus delivering tional performance. “If we had not done this [agile] measurable value. transformation,” one European banking executive told us, “our development would have completely 5. Unleash nimble, empowered teams. The stalled during COVID-19.” pandemic has seen the large-scale deployment of fast, agile teams—small, focused cross-functional For example, telecom companies and banks teams working together toward a common set of that were agile before the crisis were twice as fast objec tives that are tracked and measured. Leaders in releasing new services in response to it. One have made this work by charging each team with European bank tasked cross-functional teams to a specific mission: an outcome that matters for deploy new online services; they did so in a customers or employees, empowering each team to matter of days. Just setting up the teams could have find its own approach, and then getting out of taken weeks, but in this case the bank was ready the way. Having one fast, agile team is helpful, but to act—and to let the team make the decisions having many of them across an enterprise, and it needed to. The study also found that the crisis enabling them with the right structures, processes, forced nonagile organizations to experiment with and culture, makes it possible for the entire the concept. The speed that resulted, including system to move faster. faster decisions, reduced bureaucracy, and better Ready, set, go: Reinventing the organization for speed in the post-COVID-19 era 25
communication, are attributes that many organiza- make decisions and execute rapidly; who is able tions are now working to maintain. to take on new challenges and lead in the face of uncertainty; and who has the grit to persevere. 6. Make hybrid work, work. The next normal will see In many cases leaders have found emerging talent significantly more people working in a hybrid two-to-three layers down, people who rose to way—sometimes in person with colleagues on-site, the occasion and helped lead crisis-response and sometimes working remotely. This model can plan-ahead strategies. In other cases, they unlock significant value, including more satisfied have found that some leaders have become too employees and lower real-estate costs. There comfortable with the slower-moving bureaucracy are other benefits to a hybrid working model, includ- of the past. As one CEO told us, “We have learned ing access to a broader range of talent, greater more about our people in the last 12 weeks than flexibility, and improved productivity. through our traditional HR processes from the last 12 months.” Not only have CEOs gained To achieve these gains, employers need to ensure insight into who the future leaders are, but that the basics are in place to digitally enable remote they have also seen the value of rapidly deploying working and collaboration, while taking care to top talent to the most important work. Organi- create working norms that foster social cohesion. zations that do both things—find future leaders They should precisely define the optimal approach and redeploy talent skillfully—will be able to for each role and employee segment. That move faster. requires understanding when on-site work is better compared with remote interaction or independent One recent example comes from the Ford Motor work. Perhaps more important, hybrid organizations Company. In March, the automaker announced must adopt new ways of working that help build that it would produce face shields for healthcare a strong culture, cohesion, and trust even when workers—something it had never done before. To many employees are working remotely. Companies do so, a team of “unlikely characters” organized that were “born virtual,” many out of Silicon Valley itself and got to work, tapping into their own networks such as GitLab and Mozilla, and have sustained it to solve problems on the fly. One lesson: those successfully have very intentional policies, tech- who step up in a challenge, wrote one team member, nology, and working norms. These include open- “might not be who you expect.” Stepping up to source collaboration models, for instance, for this kind of challenge requires courage and a mind- software development; remote-first practices, set that encourages innovation and learning to such as videoconference by default; and rigorous come together—fast. “We came as beginners, and documentation of everything, from decisions to got smart on the job,” the team member wrote. meeting output to work in progress. Moreover, “Being a band of beginners means if you think of it, they make an effort to bring colleagues together you do it. There is no time for rank.” in person at least a couple of times per year to facilitate more connectivity and deepen relationships. 8. Learn how to learn. Consider the US Navy’s Top talent will leave companies with bad cultures newest “littoral combat ship.” These vessels can and slow responses. complete myriad tasks, such as hunting sub- marines or sweeping mines while operating in the The next three actions aim to reshape talent in shallows. One might think they therefore have a order to get tomorrow’s leadership team operational large crew of highly trained specialists. Not so. In today and to build the workforce capabilities of fact, these ships are run by just 40 “hybrid sailors,” the future. who have proved capable of mastering a wide variety of skills, from handling ropes to firefighting to 7. Field tomorrow’s leaders today. One of the monitoring remote sensors. They need to be skilled, unexpected consequences of the pandemic is that of course—mishandling a rope can cause serious CEOs have seen into a window that shows who injury—but their chief skill is the ability their future leaders are. They have seen who can to adapt and learn quickly. They learn continuously, 26 What now? Ten actions to emerge stronger in the next normal September 2020
and are open to new experiences and flexible in to strengthen the skills related to learning how to their thinking. And that, COVID-19 has demonstrated, learn—just as the US Navy has done with its is what business needs, too. hybrid sailors. Learning and adaptability has been on the CEO 9. Rethink the role of CEOs and leaders. COVID-19 agenda for some time, but even more so during the has brought a fundamental change in leadership in pandemic. In the last few months, some of the many organizations. The leaders that stand out have best leadership teams have been on a steep shifted from directing a command-and-control learning curve: learning how to lead in a time of crisis response to building and unleashing winning crisis, learning to manage rapidly forming agile teams. Several CEOs described their role in the teams, making decisions at a much faster pace, and last few months as energizing, empowering, and learning to adapt. Forward-thinking companies are “unblocking” their leadership teams. They also now accelerating their capability-building efforts overinvest in communicating clearly and regularly by developing leadership and critical thinking skills to build trust, and constantly link their actions at different levels of the organization, increasing to the purpose of the institution. their employees’ capacity to engage with technology and use advanced analytics, and building functional To maintain the speed the COVID-19 crisis has skills for the future, such as next-generation unleashed, organizations need more of this kind of procurement, Industry 4.0 manufacturing, and leadership. The future requires leaders to act digital marketing and sales. as visionaries instead of commanders—focused on inspiring their organizations with a clear vision These companies recognize that the pace and scale of the future, and then empowering others to realize of learning must keep up with that of innovation the vision. It will require leaders who build winning and changes in technology. Skills can and do expire. teams; they coach their players but let them make Organizations need people who can continually the decisions and execute. These leaders will learn and adapt. In many cases, companies will need need to bring energy and passion to catalyze to reskill large portions of the workforce. That will innovation, change, and growth. One CEO told us, require expanding the learning content available to “I measure how I feel every day, because ultimately employees and using technology to deliver what my job is to give energy and empowerment to is needed to each person. It also will mean building the organization.” the organizational and institutional muscle Skills can and do expire. Organizations need people who can continually learn and adapt. Ready, set, go: Reinventing the organization for speed in the post-COVID-19 era 27
Now is the time however, that for many, returning to work will be The coronavirus pandemic is the challenge of our a process that could take a year or more, and that times. The time for organizations to build for speed they cannot go back to the way they were. is now. This will be a long process and leaders must leap into the arena and recognize that many of Instead, companies will want to seize the moment their familiar organization constructs will need to to reimagine and reinvent the future, building new be reimagined. muscle and capabilities to come back strong. Even well-run companies may find that they need to Many companies, at least initially, thought of the reinvent themselves more than once. postpandemic return as an event; they would turn the lights on and go back to work just as they Fortune will favor the bold—and the speedy. has done before. It is becoming increasingly clear, Aaron De Smet is a senior partner in McKinsey’s Houston office; Daniel Pacthod is a senior partner in the New York office, where Charlotte Relyea is a senior partner; and Bob Sternfels is a senior partner in the San Francisco office. The authors wish to thank Elizabeth Mygatt for her contributions to this article. Copyright © 2020 McKinsey & Company. All rights reserved. 28 What now? Ten actions to emerge stronger in the next normal September 2020
© Getty Images Rapid Revenue Recovery: A road map for post-COVID-19 growth Speed, agility, and a new understanding of customer values are the keys to navigating the next normal. by Brian Gregg, Eric Hazan, Aimee Kim, Rock Khanna, Jesko Perrey, and Dennis Spillecke Rapid Revenue Recovery: A road map for post-COVID-19 growth 29
COVID-19 continues to have a far-reaching effect who is left standing when the crisis finally abates.
on people’s lives, families, and communities as During the downturn, for example, consumers and
well as on the global economy. Amid the bleak customers are likely to “trade down,” that is, buy
economic reality, companies in response are less expensive products, resulting in big changes
focused on driving a dual agenda: protecting lives at both the high and low ends of the market. Brands
and livelihoods. As the crisis continues to upend will be repositioning themselves and shifting to
lives, companies are struggling to understand its digital channels, products, and services, opening
full impact on their businesses and how best to up another front in the battle for new and existing
respond. According to our recent B2B Decision customers.
Maker Pulse survey, about a quarter of companies
surveyed say they are redirecting and increasing In this context, it’s not enough to capture revenue;
spend toward emerging opportunities. it has to happen quickly. We’re already seeing first
movers reap significant rewards.
As we outlined in our article Leading with purpose,
marketing and sales leaders need to operate
simultaneously across three horizons: navigating A mental model to enable Rapid
the crisis now, planning for the recovery, and Revenue Recovery
leading the next normal. This article will focus What really stands out is how leaders approach the
on the second horizon and how companies can activities needed to drive revenue at a scale that
accelerate what they do and how they work to makes a difference. The most effective leaders have
capture revenue quickly for the recovery (Exhibit 1). a mental model built around SHAPE, an approach
with five core elements:
That element of speed and agility in particular
is crucial because this once-in-a-generation — Start-up mindset. The start-up mindset biases
challenge is likely to have a profound impact on action over research and testing over analysis.
Web
We’ve seen companies, for example, make — Ecosystems to drive adaptability. The sizable allocations of marketing budget disruptions in supply chains and offline in days and even hours, and launch new buying channels have made adaptability ecommerce businesses in a matter of weeks. crucial not just to survival but to accessing Start-up leaders establish an agile cadence opportunities quickly. In the short term, through daily team check-ins, weekly adaptability may mean how companies 30-minute CEO reviews, and biweekly work with agencies and partners, but in the hourlong sprint reviews. long-term, it will require new partnerships and non-traditional collaborations, — Human at the core. To drive rapid action, including strategic M&A. companies will need to rethink their operating model, building it around how their people work best. Our B2B Decision Maker Pulse Three steps to get started on Rapid survey research has shown that more than 50 Revenue Recovery percent of businesses find a new remote sales Capturing revenue rapidly requires taking a model to be of equal or greater effectiveness combination of actions. What those are will than the old one. Enabling people will clearly depend on each company’s situation. Top require a new set of skills and capabilities, performers, however, take three steps with from facility with tech to working remotely. rigor and discipline: Successful pivots to a remote sales model, for example, will require an entirely new level of 1. Identify and prioritize collaboration and coaching between front- Commercial leaders will need to plan for line sales reps and leadership in order to meet recovery based on a clear understanding of consumer expectations. their starting point and insights into demand patterns ahead of and during the recovery. This — Accelerate digital, tech, and analytics. It’s is crucial for knowing what to do and when. We almost become a cliché to say that the have identified more than a dozen marketing crisis has become an inflection point in the and sales activities that can capture revenue shift to digital, but the best companies are quickly (Exhibit 2). Some are more relevant to moving quickly to enhance and expand their B2C companies, while others make more sense digital channels. They’re successfully using for B2Bs. advanced analytics to combine new and innovative sources of data, such as satellite Once identified, these measures need to imaging, with their own insights to derive be rigorously assessed by their impact on “recovery signals.” EBIT and the company’s ability to execute quickly. That starts with a clear view of — Purpose-driven customer playbook. Putting the market and thoughtful forecasting of customers at the center of the business demand across channels, based on granular is a long-established principle, but post- views of the customer and of the possible coronavirus businesses will need a deep economic scenarios. These will require a recalibration of how customers make more sophisticated approach than those used decisions. Companies will need to rethink traditionally to develop deeply granular insights. decision journeys to understand what Leading organizations are using advanced customers now value and design new use analytic models with multiple sources of cases and customer experiences based on insights (for example, point-of-sale data, those insights. That means a more nuanced primary consumer research, social listening, approach to segmenting customers. Rapid Revenue Recovery: A road map for post-COVID-19 growth 31
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as opposed to the normal two to three weeks it Marketing return-on-investment (ROI) took before the crisis. Within only seven weeks, approaches that use data to make rapid spend the company had recovered about 90 percent of reallocations can often yield great returns in their business compared with 2019 level—almost the shortest amount of time. One large retailer twice the rate of recovery of the number-one freed up millions by eliminating distribution of company in the market. Campaign conversion circulars after granular response data showed rates were five times the normal amount. that 40 percent of customers didn’t change their behaviors because of the circulars. The company That focus on the customer also provided clear reinvested the funds into more successful digital insights for a number of technology companies targeting practices. There are also pockets of with overseas manufacturing. After fielding opportunity in shifting the product mix to more surveys of customers, they learned that “supply- productive stock-keeping units (SKUs), pausing chain assurance” had become a top buying or eliminating promotions known to be inefficient, factor. Their sales teams used this insight to and reinforcing performance-based trade communicate the latest supply-chain status, thus relationships. As consumers increasingly try alleviating customer concerns, and provided new brands, companies should consider shifting some customers with supply guarantees after promotional spend to defend share in categories consulting with their newly established pricing war with surging demand and where there is a risk of room. There are enterprise-software companies switching. that have created three-month promotional offers of virtually unlimited product use for a minimal 3. Develop a rapid-fire agile operating model start-up fee. This has helped the companies gain One important way to speed up decision making market share, preserve the long-term price points is to give agile teams highly focused tasks and of its value proposition, and assist customers in a clear key performance indicators (KPIs), such as critical time of need. This approach helped solve click-throughs or open rates. Instead of waiting a business problem and address customer cash- for approvals and input, these agile squads, which flow concerns. should include agency partners, have the ability to make their own decisions. In our current remote The start-up mindset provides the impetus for world, we’ve found people more able and willing to significant growth, often through the thoughtful embrace agile methods, sometimes by necessity use of digital channels. One company, for but also because they are becoming acclimated to example, was able to launch an entirely new jumping on videoconferences to solve problems or e-commerce business in just 13 weeks by make decisions quickly. focusing closely on what customers cared about most, standardizing features, and building on The various squads are then assigned to specific what they already had. This resulted in twice as areas of focus, from consumer/customer insights many orders as anticipated, a tripling of basket to digital marketing. The sales squad could size compared with in-store purchases, and 2 to steward large and strategic deals and oversee 3 percent revenue growth. execution, speeding deal review for impacted segments and maintaining discipline. Another In another example, one furniture retailer was squad could focus on developing a long-term able to drive a 60 percent improvement in sales view to avoid panic reactions and develop clear in digital channels over just four weeks. It took guidelines and objectives for the commercial team a portfolio approach to campaigns, launching (Exhibit 4). These cross-functional teams or multiple versions to test and learn along the way. squads bring together people with key skills such Through their analysis, they discovered demand as data analytics, sales operations, and design, for baby beds and tailored campaigns to that tailored to the specific area and supplemented customer segment, even offering free child beds with additional experts in legal, finance, risk, HR, for those who had babies born during the as needed. A scrum master oversees the squads, COVID-19 pandemic. allocating and coordinating resources to initiatives 34 What now? Ten actions to emerge stronger in the next normal September 2020
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Reimagine the workforce from the top down 37 Adapting workplace learning in the time of coronavirus 43 Reimagining the postpandemic workforce 51 HR says talent is crucial for performance—and the pandemic proves it 4 3636
© Jose Luis Pelaez Inc/Getty Images Adapting workplace learning in the time of coronavirus Managers can’t push the pause button on capability building, so the moment 4 belongs to virtual learning. Some tactics and strategies can help. by Alok Kshirsagar, Tarek Mansour, Elizabeth McNally, and Marc Metakis Adapting workplace learning in the time of coronavirus 37
As businesses around the world postpone and Set up a COVID-19 learning- cancel in-person meetings in response to the novel response team coronavirus (or SARS-CoV-2), which causes the To create a comprehensive picture of learning COVID-19 disease, workplace learning is emerging offerings and how to adapt them to this new as one of the earliest and hardest-hit business environment, build a cross-functional response activities. Based on our observations as of early team composed of members from all relevant March, roughly one-half of in-person programs stakeholder groups. These include HR business through June 30, 2020, have been postponed or partners, learning-delivery personnel, IT and canceled in North America; in parts of Asia and platform technologists, and vendors. Establish a Europe, the figure is closer to 100 percent. regular operating cadence, and coordinate work with the company’s broader COVID-19-response However, businesses can’t afford to put capability effort. Define clear decision points and be trans- building on hold. Whether the effort is reskilling parent about the criteria for canceling or deferring at the business-unit level or a company-wide a program, including who will make the calls. aspirational transformation, companies can’t Line up the entire team on how communication of simply push the pause button on critical workplace these decisions will happen—for example, centrally learning, even as they move rapidly to put employee or locally. safety first. Conduct a rapid triage of the entire portfolio of To continue enabling and delivering value-creating learning offerings, and set priorities for what will be efforts, learning leaders have a number of tactical necessary to adapt to a virtual or digital-only format. steps they can consider to protect employees, Once you have a clear view of the entire portfolio, adapt programs and delivery, and establish and prioritize what to build. This is important because expand virtual live learning. Digital and virtual you can’t create digital versions of everything, and learning programs were already on the rise before you need to be strategic about the allocation of COVID-19 struck, and we already see a marked scarce design resources. Set triage criteria around increase in such learning programs, which many a combination of impact metrics (How critical is the younger employees embrace. topic? How soon will effects be felt? How many will be affected?) and feasibility (How suitable is the Beyond tactical steps, there are strategic measures, topic for digital delivery?). Right out of the gate, give such as exploring alternative digital learning priority to must-have programs (such as employee strategies, that managers can develop during this onboarding), and then roll out topical programs time of physical distancing. The stronger learning (such as teaching remote-working skills, remote- capabilities that emerge could stand as a positive management skills, and leadership skills in time 1 long-term outcome from this sobering period. of crisis). Six best-practice actions, ranging from the Good decision making in this initial period requires immediate and tactical to the strategic, can help appropriate information and data. We recommend maintain the momentum and benefits of workplace- developing several minimum viable products: a learning programs and help build a new foundation rolling six-week calendar of upcoming programs for effective virtual learning. These actions are and milestones, an exposure heat map (for example, establishing a learning-response team, protecting the number of affected participants by region or employees in in-person programs, adapting delivery, program type), a prioritized list of programs for promoting digital learning, exploring alternative redesigning, and a dashboard showing progress, digital strategies, and practicing and preparing for key indicators, and decision triggers. multiple outcomes. 1 This article reflects a contemporaneous perspective on how COVID-19 could and should impact workplace learning. It is based on McKinsey’s experience in delivering learning programs to our global workforce, as in well as our work supporting clients through McKinsey Academy, which is our entity for client-facing leadership development and functional capability building. 38 What now? Ten actions to emerge stronger in the next normal September 2020
Protect employees in delivery to reduce participant risk. For example, in-person programs consider decentralizing in-person events. This Start by designing and executing a plan to support might mean replacing global kickoff events with employees that is consistent with the most multiple regional kickoff events or replacing a conservative guidelines available from leading large in-person event with multiple small-group local and global health authorities, such as the videoconferencing sessions. US Centers for Disease Control and Prevention and WHO. Communicate clearly and often with If travel restrictions mean corporate in-person employees on upcoming learning programs and facilitation teams are unavailable, consider using include specific criteria for when programs will be local employees, such as managers or alumni of deferred, modified, and canceled. previous programs. Prepare them by using a train- the-trainer approach. This entails would-be trainers If you are moving ahead with in-person learning first going through the program as participants, programs, communicate in advance the precautions being trained on how best to facilitate the sessions, you will take, such as physical distancing, alternatives and finally receiving feedback from an experienced to shaking hands, and enhanced cleaning and trainer after their first facilitating experience. sanitization procedures. For those participating remotely, ensure that they have—and are familiar Recognize that there are limits to what can be with—the available virtual collaboration tools, addressed when using virtual live sessions such including videoconferencing and cloud-based as webcasts, virtual classrooms, and video- and document sharing. audioconferencing. For example, such platforms Insights 2020 may not work well for deep socioemotional- and interpersonal-skill building. To address this shortfall, Adapting workplace learning in the time of coronavirus Exhibit 1 of 1 consider what you can do before, during, and after Adapt in-person learning delivery For those ongoing learning programs with the session to maximize its impact (exhibit). an in-person delivery component, adapt the Exhibit Creating engagement and community feel in virtual live sessions requires planning and follow-up. Tips for delivering an “in person” feel Before the session During the session After the session • Ensure you are comfortable with, • everage technology features to • Distribute any work products or and have tested, the technology keep participants engaged follow-up information as needed • Make participation easy by • eep video on, look at the webcam, • Solicit participant feedback providing local-access dial-ins, as and use gestures as in person on content, delivery, and needed, in addition to any weblink • se online tools such as polling technical eperience • Dedicate a moderator to manage and chat to gather input • Escalate any technical issues and speakers and discussion • onsider features such as virtual identify workarounds or solutions • Send materials in advance via file breakout rooms to encourage sharing, and remind participants participation prior to starting Learning and collaboration technologies for virtual delivery irtual ebcasts ideo- and audio- irtual ile ontent classrooms conferencing coaching sharing co-creation €eg, whiteboards‚ Adapting workplace learning in the time of coronavirus 39
What is clearly different today is that keeping people safe and reducing risk has, for now, displaced cost as the key driver behind digital learning. Good learning sessions of all types begin with a good together and collaborate in virtual formats (such as participant experience. Ensure that the technology videoconferencing and instant messaging). These has been tested, local dial-in numbers are provided are good arguments for placing additional emphasis as needed, roles are clear (consider assigning a on digital learning as the number of people working moderator to manage speakers and participants), remotely because of COVID-19 increases. and prereading materials are distributed well in advance. During the session, use technology to It is too early to say how COVID-19 will ultimately keep participants engaged and energized. For affect the accelerated adoption of digital learning. instance, keep the video option on participants’ What is clearly different today is that keeping people computers active to create a community feel, set safe and reducing risk has, for now, displaced ground rules up front, and use online input tools to cost as the key driver behind digital learning. For facilitate engagement, such as chat and polling. Also learning leaders, that opens an opportunity to consider features such as virtual breakout rooms promote existing digitally enabled portfolios of and postsession feedback to simulate the in-person learning offerings as a way to help colleagues during experience as much as possible. challenging times. Targeted communication that reminds employees that learning doesn’t stop when travel is curtailed, for example, may boost attention Promote and enhance digital learning to available digital offerings. A substantial increase in the use of digital delivery globally is under way across all segments of the The uptake in virtual delivery also provides learning workforce, from frontline managers to senior leaders with an opportunity to enhance the digital leaders. In regions such as Asia, where travel experience of employee learners. One way is restrictions and work-from-home policies for leaders to tie communication to the learners’ have been in place for weeks, digitally enabled individual motivations, such as a sense of personal, experiences have also created new benefits. community, or company purpose. Another is to These include an increased sense of community, have senior leaders model desired behaviors purpose, and focus for people who are no longer through active participation in digital courses. connecting with their colleagues in a co-located When possible, include social-learning components. workplace. Around the world, organizations are These can include discussion boards, along with using digital learning to increase collaboration participant journeys that focus on cohorts of among teams that are working either remotely or people undertaking programs together on a set across different time zones, as they take courses schedule rather than on individuals working at their 40 What now? Ten actions to emerge stronger in the next normal September 2020
own pace. Also consider small (potentially virtual) intentional, meaningful interactions. Finally, support group projects to drive engagement, connectivity, a seamless learning experience from first contact to and application. last and ensure the same learning experience for all participants. Finally, it is important in these rapidly evolving times to reinforce the link between business outcomes As organizations explore the longer-term impli- and longer-term capability building. Learning cations of an increasingly digital environment for doesn’t occur only in one-off, discrete events; it workplace learning, it may be worth considering should be thought of as part of broader learning (or reconsidering) nonmainstream technology journeys that last 12 to 18 months and tie clearly to solutions that could reduce the need for face-to-face business outcomes. Travel restrictions may affect interaction. Some examples include virtual-reality in-person learning programs in today’s environment, training simulations and higher-end moderated but capability building needs to continue in order to virtual classrooms. All of these can enable new and advance long-term goals. different ways to engage learners. Implementing such solutions may take longer than other action items we previously listed, and companies will have Explore alternative digital- to weigh possible outcomes against the evolving learning strategies long-term implications of events such as COVID-19 As organizations increasingly promote their existing on their workplace learning. portfolios of digital-learning options, a handful indicate that they are also considering migrating Practice and prepare for some existing in-person training programs to an all-digital format. Such efforts go beyond merely multiple outcomes applying existing technology solutions to offer In any extraordinarily uncertain environment, virtual classrooms. Rather, they represent a more scenario-planning techniques should be part fundamental rethinking of the learning experience of any approach. A cross-functional COVID-19 to enable collaborative, interactive social-learning learning-response team should focus on practicing experiences for groups of learners. Digital-learning decision making and communication under a providers recognize that COVID-19 is a catalyst for variety of potential scenarios. Is the virus seasonal? this transition and are looking to help their corporate Is it possible that travel restrictions may be lifted customers accelerate their transformation. Some by May or so? If so, the team might consider are even offering reduced or complimentary prebooking post-May capacity to deliver programs services to help encourage new customers to then—perhaps with generous cancellation policies accelerate such a transition. attached. Similarly, if demand for digitally delivered learning shows a sustained increase, the team Adhering to several principles can help migrate an should make sure it understands the underlying in-person course to a fully digital experience. Start capacity needs to deliver it and to address any by reframing the “learning problem” as a design technology limitations in advance. opportunity and rethink the learner’s end-to-end experience as a designer would. Set priorities for To get a sense of how such planning can play out, the essential learning objectives and focus intently consider evaluating the scenarios described in on selecting the content that will meet them. Design “COVID-19: Implications for business,” available for shorter interactions and provide more time on McKinsey.com, and establish a plan for what between sessions to strengthen learning. Focus on workplace learning looks like under each. Practicing human connections whenever possible, creating responses under different assumptions will enable Adapting workplace learning in the time of coronavirus 41
teams to pressure test response plans for COVID-19 Learning leaders who implement a thoughtful and may boost confidence when the time comes to response plan for COVID-19 can minimize the execute them. disease’s impact on capability building and ensure the safety of learners. Expanding learning opportunities—and improving learning overall— can also ultimately serve as a bright spot for organizations through this difficult period. Alok Kshirsagar is a senior partner in McKinsey’s Mumbai office; Tarek Mansour is a senior partner in the Dubai office; and Liz McNally is a partner in the New York office, where Marc Metakis is an associate partner. Copyright © 2020 McKinsey & Company. All rights reserved. 42 What now? Ten actions to emerge stronger in the next normal September 2020
© Sunyixun/Getty Images Reimagining the postpandemic workforce Pandemic-style working from home may not translate easily to a “next normal” mix of on-site and remote working. by Andrea Alexander, Aaron De Smet, and Mihir Mysore Reimagining the postpandemic workforce 43
As the pandemic begins to ease, many companies Now is the time, as you reimagine the postpandemic are planning a new combination of remote and organization, to pay careful attention to the effect on-site working, a hybrid virtual model in which of your choices on organizational norms and culture. some employees are on premises, while others work Focus on the ties that bind your people together. from home. The new model promises greater access Pay heed to core aspects of your own leadership to talent, increased productivity for individuals and and that of your broader group of leaders and small teams, lower costs, more individual flexibility, managers. Your opportunity is to fashion the hybrid and improved employee experiences. virtual model that best fits your company, and let it give birth to a new shared culture for all your While these potential benefits are substantial, employees that provides stability, social cohesion, history shows that mixing virtual and on-site identity, and belonging, whether your employees working might be a lot harder than it looks—despite are working remotely, on premises, or in some its success during the pandemic. Consider how combination of both. Yahoo! CEO Marissa Mayer ended that company’s remote-working experiment in 2013, observing that the company needed to become “one Yahoo!” again, Cutting the ties that bind or how HP Inc. did the same that year. Specific If you happen to believe that remote work is no reasons may have varied. But in each case, the threat to social ties, consider the experience of downsides of remote working at scale came to Skygear.io, a company that provides an open- outweigh the positives. source platform for app development. Several years ago, Skygear was looking to accommodate several These downsides arise from the organizational new hires by shifting to a hybrid remote-work norms that underpin culture and performance— model for their 40-plus-person team. The company ways of working, as well as standards of behavior soon abandoned the idea. Team members who and interaction—that help create a common culture, didn’t come to the office missed out on chances to generate social cohesion, and build shared trust. To strengthen their social ties through ad hoc team lose sight of them during a significant shift to virtual- meals and discussions around interesting new working arrangements is to risk an erosion over the tech launches. The wine and coffee tastings that long term of the very trust, cohesion, and shared built cohesion and trust had been lost. Similarly, culture that often helps remote working and virtual GoNoodle employees found themselves at virtual collaboration to be effective in the short term. happy hour longing for the freshly remodeled offices they had left behind at lockdown. “We had It also risks letting two organizational cultures this killer sound system,” one employee, an extrovert emerge, dominated by the in-person workers and who yearns for time with her colleagues, told the managers who continue to benefit from the positive New York Times. “You know—we’re drinking coffee, elements of co-location and in-person collaboration, or maybe, ‘Hey, want to take a walk?’ I miss that.”1 while culture and social cohesion for the virtual Successful workplace cultures rely on these kinds of workforce languish. When this occurs, remote social interactions. That’s something Yahoo!’s Mayer workers can soon feel isolated, disenfranchised, and recognized in 2013 when she said, “We need to be unhappy, the victims of unintentional behavior in an one Yahoo!, and that starts with physically being organization that failed to build a coherent model of, together,” having the “interactions and experiences and capabilities for, virtual and in-person work. The that are only possible” face-to-face, such as sense of belonging, common purpose, and shared “hallway and cafeteria discussions, meeting new identity that inspires all of us to do our best work people, and impromptu team meetings.”2 gets lost. Organizational performance deteriorates accordingly. 1 Clive Thompson, “What if working from home goes on … forever?,” New York Times, June 9, 2020, nytimes.com. 2 Kara Swisher, “‘Physically together’: Here’s the internal Yahoo no-work-from-home memo for remote workers and maybe more,” All Things Digital, February 22, 2013, allthingsd.com. 44 What now? Ten actions to emerge stronger in the next normal September 2020
Or consider how quickly two cultures emerged decision: Which part of the hybrid virtual continuum recently in one of the business units of a company (exhibit) is right for your organization? The decision we know. Within this business unit, one smaller rests on the factors for which you’re optimizing. Is it group was widely distributed in Cape Town, Los real-estate cost? Employee productivity? Access Angeles, Mumbai, Paris, and other big cities. The to talent? The employee experience? All of these larger group was concentrated in Chicago, with a are worthy goals, but in practice it can be difficult to shared office in the downtown area. When a new optimize one without considering its effect on the global leader arrived just prior to the pandemic, the others. Ultimately, you’re left with a difficult problem leader based herself in Chicago and quickly bonded to solve—one with a number of simultaneous factors with the in-person group that worked alongside her and that defies simple formulas. in the office. As the pandemic began, but before everyone was sent home to work remotely, the new That said, we can make general points that apply leader abruptly centralized operations into a crisis across the board. These observations, which keep nerve center made up of everyone in the on-site a careful eye on the organizational norms and ways group. The new arrangement persisted as remote of working that inform culture and performance, working began. Meanwhile, the smaller group, address two primary factors: the type of work your which had already been remote working in other employees tend to do and the physical spaces you cities, quickly lost visibility into, and participation need to support that work. in, the new workflows and resources that had been centralized among the on-site group, even though First let’s eliminate the extremes. We’d recommend that on-site group was now working virtually too. a fully virtual model to very few companies, and Newly created and highly sought-after assignments those that choose this model would likely operate in (which were part of the business unit’s crisis specific industries such as outsourced call centers, response) went to members of the formerly on-site customer service, contact telesales, publishing, group, while those in the distributed group found PR, marketing, research and information services, many of their areas of responsibility reduced or IT, and software development, and under specific taken away entirely. Within a matter of months, key circumstances. Be cautious if you think better employees in the smaller, distributed group were access to talent or lower real-estate cost—which unhappy and underperforming. the all-virtual model would seem to optimize— outweigh all other considerations. On the other The new global leader, in her understandable rush hand, few companies would be better off choosing to address the crisis, had failed to create a level an entirely on-premises model, given that at least playing field and instead (perhaps unintentionally) some of their workers need flexibility because of favored one set of employees over the other. For work–life or health constraints. That leaves most us, it was stunning to observe how quickly, in the companies somewhere in the middle, with a hybrid right circumstances, everything could go wrong. mix of remote and on-site working. Avoiding these pitfalls requires thinking carefully about leadership and management in a hybrid virtual The physical spaces needed for work—or not world, and about how smaller teams respond to new Being in the middle means sorting out the arrangements for work. Interactions between leaders percentage of your employees who are working and teams provide an essential locus for creating the remotely and how often they are doing so. Let’s say social cohesion and the unified hybrid virtual culture 80 percent of your employees work remotely but that organizations need in the next normal. do so only one day per week. In the four days they are on premises, they are likely getting all the social interaction and connection needed for collaboration, Choose your model serendipitous idea generation, innovation, and Addressing working norms, and their effect on social cohesiveness. In this case, you might be fine culture and performance, requires making a basic with the partially remote, large headquarters (HQ) model in the exhibit. Reimagining the postpandemic workforce 45
Exhibit Optimizing the hybrid virtual continuum Optimizing the hybrid virtual continuum Six models reflecting a mix of on-site and remote working ‹esirable outcome Ability to Productivity Cost of ost to be managed access talent (individual and real estate team) Almost imited ompany leaders entirely on remote work, and employees are premises large centrali€ed in 1–ƒ big principal offices artially ompany leaders and most remote work, employees spend ma„ority, large but not all, of their time in 1–ƒ principal offices artially ultiple proportionate-si€e remote work, offices with leadership and multiple hubs employees dispersed among Hybrid all offices models ultiple eadership and employees microhubs dispersed across small- footprint “microhubs” located in ‡arious geographies artially remote ˆo permanent offices‰ rented work, with flex flex spaceŠ used for periodic space1 in-person collaboration (but not connecti‡ity) Almost ostly remote entirely off work, no office premises sites 1Flex space includes temporarily (eg, monthly) rented space used in select cities for periodic gathering and collaboration If, instead, a third of your employees are working culture less monolithic. Moreover, microhubs can remotely but doing so 90 percent of the time, the often be energizing, fun, and innovative places in challenges to social cohesion are more pronounced. which to collaborate and connect with colleagues, The one-third of your workforce will miss out on which further benefits organizational culture. social interaction with the two-thirds working on-premises—and the cohesion, coherence, and Productivity and speed cultural belonging that comes with it. One solution Now let’s begin to factor in other priorities, such as would be to bring those remote workers into the employee productivity. Here the question becomes office more frequently, in which case multiple less straightforward, and the answer will be unique hubs, or multiple microhubs (as seen in the exhibit), to your circumstances. When tackling the question, might be the better choice. Not only is it easier to be sure to go beyond the impulse to monitor inputs travel to regional hubs than to a central HQ, at least and activity as a proxy for productivity. Metrics for employees who don’t happen to live near that focused on inputs or volume of activity have always HQ, but more dispersed hubs make the in-person been a poor substitute for the true productivity 46 What now? Ten actions to emerge stronger in the next normal September 2020
that boosts outcomes and results, no matter how two cultures emerge. When this happens, our soothing it might be to look at the company parking experience—and the experience at HP, IBM, and lot to see all the that employees who have arrived Yahoo!—is that the in-person culture comes to early in the day, and all those who are leaving late. dominate, disenfranchising those who are working Applied to a hybrid model, counting inputs might remotely. The difficulty arises through a thousand leave you grasping at the number of hours that small occurrences: when teams mishandle employees are spending in front of their computers conference calls such that remote workers feel and logged into your servers. Yet the small teams overlooked, and when collaborators use on-site that are the lifeblood of today’s organizational white boards rather than online collaboration tools success thrive with empowering, less-controlling such as Miro. But culture can split apart in bigger management styles. Better to define the outcomes ways too, as when the pattern of promotions favors you expect from your small teams rather than the on-site employees or when on-premises workers specific activities or the time spent on them. get the more highly sought-after assignments. In addition to giving teams clear objectives, and Some things simply become more difficult when you both the accountability and autonomy for delivering are working remotely. Among them are acculturating them, leaders need to guide, inspire, and enable new joiners; learning via hands-on coaching and small teams, helping them overcome bureaucratic apprenticeship; undertaking ambiguous, complex, challenges that bog them down, such as and collaborative innovations; and fostering the organizational silos and resource inertia—all while creative collisions through which new ideas can helping to direct teams to the best opportunities, emerge. Addressing these boils down to leadership arming them with the right expertise, and giving and management styles, and how those styles and them the tools they need to move fast. Once approaches support small teams. Team experience teams and individuals understand what they are is a critical driver of hybrid virtual culture—and responsible for delivering, in terms of results, managers and team leaders have an outsize impact leaders should focus on monitoring the outcome- on their teams’ experiences. based measurements. When leaders focus on outcomes and outputs, virtual workers deliver Managers and leaders higher-quality work. As a rule, the more geographically dispersed the team, the less effective the leadership becomes. In this regard, you can take comfort in Netflix Moreover, leaders who were effective in primarily (which at the time of this writing is the 32nd largest on-site working arrangements may not necessarily company in the world by market capitalization), prove so in a hybrid virtual approach. Many leaders which thrives without limiting paid time off or will now need to “show up” differently when they specifying how much “face time” workers must are interacting with some employees face-to-face spend in the office. Netflix measures productivity by and others virtually. By defining and embracing outcomes, not inputs—and you should do the same. new behaviors that are observable to all, and by deliberately making space for virtual employees No matter which model you choose for hybrid to engage in informal interactions, leaders can virtual work, your essential task will be to carefully facilitate social cohesion and trust-building in manage the organizational norms that matter most their teams. when adopting any of these models. Let’s dive more deeply into those now. More inspirational. There’s a reason why military commanders tour the troops rather than send emails from headquarters—hierarchical leadership Managing the transition thrives in person. Tom Peters used to call the Organizations thrive through a sense of belonging in-person approach “management by walking and shared purpose that can easily get lost when around”: “Looking someone in the eye, shaking their Reimagining the postpandemic workforce 47
hand, laughing with them when in their physical check-ins. These norms cultivate the habit of presence creates a very different kind of bond than connecting informally. can be achieved [virtually].”3 Role model the right stance. It might seem obvious, But when the workforce is hybrid virtual, leaders but research shows that leaders consistently fail need to rely less on hierarchical and, by doing to recognize how their actions affect and will be so, more on inspirational forms of leadership. The interpreted by others.4 Consider the location from dispersed employees working remotely require new which you choose to work. If you want to signal leadership behaviors to compensate for the reduced that you tolerate virtual work, come into the office socioemotional cues characteristic of digital every day and join meetings in-person with those channels. who happen to be in the building. This will result in a cultural belief that the HQ or physical offices Cultivate informal interactions. Have you ever are the real centers of gravity, and that face time is run into a colleague in the hallway and, by doing what’s important. so, learned something you didn’t know? Informal interactions and unplanned encounters foster Come into the office every day, though, and your the unexpected cross-pollination of ideas—the remote-working employees may soon feel that exchange of tacit knowledge—that are essential their choice to work virtually leaves them fewer to healthy, innovative organizations. Informal career opportunities, and that their capabilities interactions provide a starting point for collegial and contributions are secondary. By working from relationships in which people collaborate on areas home (or a non-office location) a couple days a week, of shared interest, thereby bridging organizational leaders signal that people don’t need to be in the silos and strengthening social networks and shared office to be productive or to get ahead. In a hybrid trust within your company. virtual world, seemingly trivial leadership decisions can have outsize effect on the rest of the organization. Informal interactions, which occur more naturally among co-located employees, don’t come about Don’t rely solely on virtual interactions. By the same as easily in a virtual environment. Leaders need token, despite big technological advancements new approaches to creating them as people work over the years, nothing can entirely replace face-to- both remotely and on-site. One approach is to face interactions. Why? In part because so much of leave a part of the meeting agenda free, as a time communication is nonverbal (even if it’s not the for employees to discuss any topic. Leaders can 93 percent that some would assert), but also also establish an open-door policy and hold virtual because so much communication involves equivocal, “fireside chats,” without any structured content at all, potentially contentious, or difficult-to-convey to create a forum for less formal interactions. The subject matter. Face-to-face interactions create goal is for employees, those working remotely and significantly more opportunities for rich, informal in-person, to feel like they have access to leaders interactions, emotional connection, and emergent and to the kind of informal interactions that happen “creative collision” that can be the lifeblood of trust, on the way to the company cafeteria. collaboration, innovation, and culture. Further approaches include virtual coffee rooms Media richness theory helps us understand the and social events, as well as virtual conferences in need to match the “richness” of the message with which group and private chat rooms and sessions the capabilities of the medium. You wouldn’t let your complement plenary presentations. In between nephew know of the death of his father by fax, for time, make sure you and all your team members are instance—you would do it in person, if at all possible, sending text messages to one another and that you and, failing that, by the next richest medium, are texting your team regularly for informal probably video call. Some communication simply 3 See Tom Peters blog, “The heart of MBWA,” blog entry by Shelley Dolley, February 27, 2013, tompeters.com. 4 Tomas Chamorro-Premuzic, “How to work for a boss who lacks self-awareness,” Harvard Business Review, April 3, 2018, hbr.org. 48 What now? Ten actions to emerge stronger in the next normal September 2020
proceeds better face-to-face, and it is up to the relationships within those priority areas—and leader to match the mode of communication to the then tracking the changes in those relationships equivocality of the message they are delivering. over time. Options for obtaining the necessary information include tracking email, observing In other cases, asynchronous communication— employees, using existing data (such as time cards such as email and text—are sufficient, and even and project charge codes), and administering better, because it allows time for individuals to short (five- to 20-minute) questionnaires. It is process information and compose responses after likely that leaders will need to intervene and create some reflection and thought. However, when connections between groups that do not naturally developing trust (especially early on in a relation- interact or that now interact less frequently as a ship) or discussing sensitive work-related issues, result of the hybrid virtual model. such as promotions, pay, and performance, face- to-face is preferred, followed by videoconferencing, which, compared with audio, improves the ability Hybrid virtual teams for participants to show understanding, anticipate Leadership is crucial, but in the hybrid virtual responses, provide nonverbal information, enhance model, teams (and networks of teams) also need to verbal descriptions, manage pauses, and express adopt new norms and change the way they work if attitudes. However, compared with face-to-face they are to maintain—and improve—productivity, interaction, it can be difficult in video interactions collaboration, and innovation. This means gathering to notice peripheral cues, control the floor, have information, devising solutions, putting new side conversations, and point to or manipulate approaches into practice, and refining outcomes— real-world objects. and doing it all fast. The difficulty rises when the team is part virtual and part on-site. What follows Whatever the exact mix of communication you are specific areas on which to focus. choose in a given moment, you will want to convene everyone in person at least one or two times a Create ‘safe’ spaces to learn from mistakes and year, even if the work a particular team is doing voice requests can technically be done entirely virtually. In person Psychological safety matters in the workplace, is where trust-based relationships develop and obviously, and in a hybrid virtual model it requires deepen, and where serendipitous conversations and more attention. First, because a feeling of safety connections can occur. can be harder to create with some people working on-site and others working remotely. And, second, Track your informal networks. Corporate because it’s often less obvious when safety erodes. organizations consist of multiple, overlapping, and Safety arises as organizations purposefully create a intersecting social networks. As these informal culture in which employees feel comfortable making networks widen and deepen, they mobilize talent mistakes, speaking up, and generating innovative and knowledge across the enterprise, facilitating ideas. Safety also requires helping employees feel and informing cultural cohesiveness while supported when they request flexible operating helping to support cross-silo collaboration and approaches to accommodate personal needs. knowledge sharing. Mind the time-zone gaps Because the hybrid virtual model reduces face-to- The experience of a hybrid virtual team in the face interaction and the serendipitous encounters same time zone varies significantly from a hybrid that occur between people with weak ties, social virtual team with members in multiple time networks can lose their strength. To counter that zones. Among other ills, unmanaged time-zone risk, leaders should map and monitor the informal differences make sequencing workflows more networks in their organization with semiannual difficult. When people work in different time refreshes of social-network maps. Approaches zones, the default tends toward asynchronous include identifying the functions or activities where communications (email) and a loss of real-time connectivity seems most relevant and then mapping connectivity. Equally dysfunctional is asking or Reimagining the postpandemic workforce 49
expecting team members to wake up early or stay Keeping track up late for team meetings. It can work for a short Once you have your transition to a hybrid virtual period of time, but in the medium and longer run model underway, how will you know if it’s working, it reduces the cohesion that develops through and whether you maintained or enhanced your real-time collaboration. (It also forces some team organization’s performance culture? Did your access members to work when they’re tired and not at to talent increase, and are you attracting and inspiring their best.) Moreover, if there is a smaller subgroup top talent? Are you developing and deploying strong on the team in, say, Asia, while the rest are in leaders? To what extent are all your employees North America, a two-culture problem can emerge, engaged in driving performance and innovation, with the virtual group feeling lesser than. Better gathering insights, and sharing knowledge? to simply build teams with at least four hours of overlap during the traditional workday to ensure The right metrics will depend on your goals, of time for collaboration. course. Be wary of trying to achieve across all parameters, though. McKinsey research shows that Keep teams together, when possible, and hone winning performance cultures emerge from carefully the art of team kickoffs selecting the right combinations of practices (or Established teams, those that have been working “recipes”) that, when applied together, create superior together for longer periods of time, are more organizational performance.⁵ Tracking results against productive than newer teams that are still forming these combinations of practices can help indicate, and storming. The productivity they enjoy arises over time, if you’ve managed to keep your unified from clear norms and trust-based relationships—not performance culture intact in the transition to a new to mention familiarity with workflows and routines. hybrid virtual model. That said, new blood often energizes a team. In an entirely on-premises model, chances are you would swap people in and out of your small teams We’ll close by saying you don’t have to make all the more frequently. The pace at which you do so will decisions about your hybrid virtual model up front likely decline in a hybrid virtual model, in which and in advance. See what happens. See where your working norms and team cohesion are more at best talent emerges. If you end up finding, say, risk. But don’t take it to an extreme. Teams need 30 (or 300) employees clustered around Jakarta, members with the appropriate expertise and and other groups in Kuala Lumpur and Singapore, backgrounds, and the right mix of those tends to ask them what might help them feel a socially evolve over time. supported sense of belonging. To the extent that in-person interactions are important—as we guess Meanwhile, pay close attention to team kickoffs as they will be—perhaps consider a microhub in one of you add new people to teams or stand up new ones. those cities, if you don’t have one already. Kickoffs should include an opportunity to align the overall goals of the team with those of team members Approached in the right way, the new hybrid model while clarifying personal working preferences. can help you make the most of talent wherever it resides, while lowering costs and making your organization’s performance culture even stronger than before. 5 See Chris Gagnon, Elizabeth John, and Rob Theunissen, “Organizational health: A fast track to performance improvement,” McKinsey Quarterly, September 2017, McKinsey.com. Andrea Alexander is an associate partner in McKinsey’s Houston office, where Aaron De Smet is a senior partner and Mihir Mysore is a partner. Copyright © 2020 McKinsey & Company. All rights reserved. 50 What now? Ten actions to emerge stronger in the next normal September 2020
©Ayagiz/Getty Images HR says talent is crucial for performance—and the pandemic proves it Five talent-management practices can help steer organizations through new ways of working and into the post-COVID-19 era. by Bryan Hancock and Bill Schaninger HR says talent is crucial for performance—and the pandemic proves it
To say that chief HR officers (CHROs) are busy in this article, we look at how CHROs can take action the COVID-19 era would be an understatement. Now, in those areas to craft a strong and durable talent more than ever, they are central to how companies strategy for the postpandemic world. are reimagining their personnel practices to build organizational resilience and drive value. Finding and hiring the right people In the earliest days of the crisis, CHROs kept During the COVID-19 crisis, changes in customer people safe while fostering connectivity and caring demand have caused a temporary spike in hiring in an intensely stressful time. In planning for and in areas such as grocery while leading to massive implementing the restart, they have been working layoffs in sectors such as hospitality. Even with to maintain morale and productivity for remote those shifts and an overall rise in unemployment, workforces while trying to figure out how and when efficient and effective hiring will continue to be to get folks back into office settings. important—especially for the scarce skills required for the next normal in areas such as IT. Those responses were to circumstances that no one had ever faced before. Now, though, the COVID- In May 2020, we surveyed more than 190 chief 19 crisis is accelerating preexisting trends in five officers and functional leaders across industries areas of talent management that are part of the to find out how they were thinking about spending CHRO playbook: finding and hiring the right people, allocation in the months ahead. Of those leaders, learning and growing, managing and rewarding 67 percent say they anticipate spending less on performance, tailoring the employee experience, permanent hiring in the next 12 months (Exhibit 1). and optimizing workforce planning and strategy. In Web <2020> Exhibit 1 Exhibit <1> of <3> Leaders say they anticipate spending less on permanent hiring in the next Leaders say they anticipate spending less on permanent hiring in the next 12 12 months. months. Expected HR-activity investment for next 12 months, % of respondents¹ Recruiting and „earning and Recogni…ing and †ngaging and Wor‡force planning‚ onƒoarding developent rewarding connecting strategy‚ and change 5 5 5 ’nsure 2 2 2 2 ‹‹ ˆnvest ore ‹‹ Ž‹ Ž‹ Ž‹ Hold flat ‰Š ‹Œ 2 2Ž 1 ˆnvest less „† “”R† 1Question: What are your expectations for how HR will invest over 5 categories in next 12 onths urvey of chief officers and functional leaders across industries n 15 igures ay not su to 1€€%‚ ƒecause of rounding 1 Online Labour Index, Oxford Internet Institute, 2020, ilabour.oii.ox.ac.uk. 52 What now? Ten actions to emerge stronger in the next normal September 2020
While some of that decline is related to a reduction in Learning and growing labor demand, organizations are also rethinking their Learning organizations face a tension between hiring processes more broadly. For example, given continuing cost pressures in a downturn and the successful experiments in remote hiring during the need to deliver training to help workers adapt to a COVID-19 crisis, companies are reconsidering the changing organization and business environment. need to go on campus for interviews (which would That tension was reflected in our survey, which admittedly be more difficult now, with many colleges shows that 29 percent of learning and development and universities planning to use remote learning in organizations plan to invest more in the next 12 the fall). That is an acceleration of a preexisting trend: months and that 38 percent plan to invest less. companies such as Goldman Sachs were using remote interviewing for on-campus hiring before the Our research on reskilling shows that CHROs pandemic. We expect that trend to continue in the need to think about the effects of large workforce postpandemic era. transitions being accelerated by the COVID-19 crisis and how reskilling plays a key role in helping close In addition, temporary labor, which shrank faster talent gaps while keeping employees connected to than overall jobs did (a 29 percent reduction from jobs. The agenda for postpandemic learning and February to May, compared with a 13 percent development extends beyond reskilling, however, to employment drop overall, according to the US three categories of cost-effective training: Bureau of Labor Statistics), is poised for a faster recovery. Organizations should be ready to use that — Broad-based digital training in essential skills. flexible labor in additional ways. Many organizations are expanding remote training to address challenges, such as effective Of surveyed leaders, 63 percent expect to spend leadership of remote teams (a new skill set for the same amount or more on IT-staff augmentation most managers) and building personal resilience in the coming months. The number of online in difficult circumstances. McKinsey Academy, freelancers in software and tech jobs has actually for instance, has updated its Ability to Execute increased significantly during the pandemic, platform with a COVID-19-related edition according to the Online Labour Index. that provides a series of training modules on remote working, leadership during a crisis, and Digital skills are still in short supply, and remote executional capabilities that matter. working for all employees places remote and online freelancers on a more equal footing with — Focused upskilling rooted in changing work. full-time employees. Even in other talent categories, Such forms of upskilling are function and temporary labor usually responds more quickly in a work-group specific and tied to different ways crisis recovery, as employers value flexibility during of working. For example, a sales force that is its early (and uncertain) stages. moving from a largely in-person to a hybrid remote model will need to be upskilled in the Across both permanent and contingent hiring, practices that drive remote success. The right CHROs should take a fresh look at the range of data-driven approach can bolster sales-force tools, including assessments and platforms, that are performance—and help HR departments draw a making it easier to connect people to work. There direct line from talent to revenue. are a large number of up-and-coming organizations in the prehire ecosystem, and innovation is making it According to recent McKinsey research, easier to connect people to employment based on a 77 percent of leaders indicate that retraining deeper understanding of their skills and how those salespeople is very or moderately important. match with available jobs. To do that, some companies are retraining HR says talent is crucial for performance—and the pandemic proves it 53
field sales reps for inside sales roles, including behavior that would be required to keep them those that require an increased use of data and moving in a more focused way. Leaders who analytics and those that provide customers with are working on these skills can spend a small technical expertise via a website’s chat function. amount of their learning time in formal settings In our survey of leaders, IT, marketing, and (in classroom, online, or with a coach) and the supply chain were among the most cited areas majority of it working on real project-based for specific upskilling. That holds true for HR: business problems (which the COVID-19 crisis 61 percent of respondents believe that upskilling naturally provided). will be very or moderately important in the area (Exhibit 2). Managing and rewarding performance — Leadership development. In response to The COVID-19 crisis is speeding up needed shifts the current crisis, the slow pace of corporate in how organizations manage and reward bureaucracy has been replaced by clear goals, performance. As our previous research has focused teams, and rapid decision making. shown, the majority of business leaders don’t CHROs have a key role to play in making sure believe that their performance-management that the change sticks. Leadership-development system accurately identifies top performers—and programs can provide support for faster, more the majority of employees don’t feel that the agile organizations. In particular, organizations performance-management process accurately can identify the three to five shifts in leadership reflects their contributions. Web <2020> Exhibit 2 Exhibit <2> of <3> Leaders say reskilling is very important, but they are focusing on certain areas. Leaders say reskilling is very important, but they are focusing on certain areas. Reskilling importance by function, % of respondents¹ Hˆ inance ‚arketing Supply chain ”• …egal ’ommunications Quality “rocurement Sales 1‰ Œ Ž Ž Œ Œ Œ ‘ Š „nsure 1 ‰‹ ‰Œ ŠŒ ŠŽ ‹1 ƒery ‹ ‹‘ important Š ‹‰ ‹ ŠŒ ŠŽ ‹ Š1 ‰ ‚oderately ‰ important ‹1 ŠŠ ‰ 1 ‰ 1 €ot 1Š 1‹ 1‹ 1Š important …†SS ‚‡ˆ† 1Question: How important will reskilling employees be in this function? Survey of chief officers and functional leaders across industries n 1 igures may not sum to 1 % because of rounding 54 What now? Ten actions to emerge stronger in the next normal September 2020
It is important for CHROs to craft a talent strategy that calls out and recognizes the truly distinctive and the truly lagging. The current crisis has dramatically affected goals The COVID-19 crisis has amplified how hard it is and performance plans, with the added wrinkle of to make distinctions “in the middle,” but those making the people who are working remotely even distinctions have always been hard to make for more reliant on performance management to tell knowledge workers. As a result, a movement them how they are doing. That makes three CHRO toward recognizing the broad range of good actions more relevant now: performance is welcome. At the same time, it is important for CHROs to craft a talent — Transparently link employee goals to business strategy that calls out and recognizes the truly priorities and maintain a strong element distinctive (to motivate and retain them) and of flexibility. Managers should have regular the truly lagging (to boost morale and conversations with their employees to set organizational performance). priorities jointly in a changing environment. Annual “set it and forget it” goal setting was already seeing declining relevance among Tailoring the employee experience knowledge workers before the pandemic, given Employee experience and connectivity have taken the pace of change and need to adapt. And the on whole new meanings as extended work-from- radical shifting of priorities during the COVID- home policies have required organizations to be 19 crisis highlights how challenging the annual intentional about building each. In blunt terms, work system has become. can’t be another source of anxiety or uncertainty for employees right now. They have more than enough — Invest in managers’ coaching skills. Coaching going on. is the heart of managing performance, which is even more critical when workers are remote. The blurring of the line between work and life while Organizations need to invest in managerial working remotely means that employee experience skills—and mindsets—around coaching and is even more critical. For virtual workers, there’s feedback as a continuing process. no commute to the office, no coffee- or snack- room chat, and no in-person gathering after work. — Keep ratings for the very highest—and lowest— Tethered video (or phone) interactions during the performers but also celebrate the broad range course of the work day are going to make it or break of good performance. Instead of investing it for most people. time and energy in making small differentiations in ratings (and pay) for those in the broad One way to handle employee experience in a remote range of good performers, organizations environment is to tailor the approach to individuals should be focused more on having robust or segments of people. Our research shows that development conversations. HR says talent is crucial for performance—and the pandemic proves it 55
experiences vary widely. That is also true for the tools (such as mobile text platforms) to gather and hybrid work environment, with some employees analyze employee sentiment, organizations must be back in the office and others remaining at home. thoughtful about how they track and comprehend employee well-being—beyond an annual CHROs will need to help establish norms of working engagement survey. that foster engagement and inclusion for all employees. There is no one-size-fits-all solution. The answer, different for every organization, will Optimizing workforce planning be based on what talent is needed, which roles and strategy are most important, how much collaboration is Given the shifts in how value is being created in necessary for excellence, and where offices are the post-COVID-19 world (for instance, the shift located today, among other factors (Exhibit 3). to contactless experience in grocery, retail, and restaurants and the change from in-person sales HR departments should also consider the range meetings to remote sales calls), the talent base of analytics tools they can use to understand and required to deliver that value may need to shift as promote connectivity and engagement. From using well. As such, it is natural that workforce planning, social-network analyses to map interactions and strategy, and change is the category of HR spending prompt needed connectivity to using listening that survey respondents cite as the most likely to Web <2020> Exhibit 3 Exhibit <3> of <3> HR is central to helping people across an organization adapt to new roles. HR is central to helping people across an organization adapt to new roles. Communicating change in a remote workplace Individual contributors Managers Senior executives Understanding of and comfort in Effective leadership of virtual teams €lear communication with using virtual meeting platforms through various platforms in lieu of remote and in-person (eg, Zoom) in-person meetings colleagues on changes in working models Adaptation to role-specific trong -wa communication components of virtual work (eg, a skills—clear communication to teams ‚romotion of cohesion and sales rep used to in-person visits and clear channels for teams to unified culture, even while to clients learns how to use other communicate with managers workforces ma have avenues to communicate) in-person and remote le ibilit and willingness to adapt to components Establishment of comfortable team-member needs in conte t of working environments (eg, setting virtual work acilitation of regular virtual up personal preferences for gatherings and town halls work hours, creating phsical ole modeling of new norms and to recogniƒe individual and environment comfortable to work in) policies of new working environments team contributions 56 What now? Ten actions to emerge stronger in the next normal September 2020
increase over the next 12 months, with 76 percent people to jobs. Artificial-intelligence-enabled reporting that they will spend the same or more. tools can help assess an individual’s skills, and There are three important components of workforce performance-management systems can be planning and strategy: realigned to track skills alongside performance. Longer term, interoperable learning records — Critical roles. Our research suggests that can serve as skills transcripts that track the a small subset of roles (less than 50) is skills employees develop across educational disproportionately important to delivering a institutions and employers. business-value agenda. For each of those roles, it is critical to identify the core jobs to be done, In an example of matching talent to jobs, Talent the qualities needed of the leaders, and whether Exchange, an online job marketplace powered the role is set up for success. Given the shifts by Eightfold AI, was launched in April 2020 in the value agenda during the pandemic, it is to help people who are out of work during the important that organizations reassess the roles COVID-19 crisis find the right employment. that are most critical in the current stage of the Based on an understanding of skills across an crisis (for example, new product development organization (and beyond), “smart slates” can and innovation) and in the recovery. be developed for critical roles, agile teams can be staffed dynamically based on matching skills, — Skill pools. In addition to individual roles, and redeployment opportunities can meet talent organizations should look at their major skill gaps while preventing layoffs. Such tools, in the pools (for instance, digital coders) to understand early stages of deployment now, will become the skills required for the future and whether increasingly critical for CHROs and other they are long or short on the required talent. leaders as they meet the challenges ahead. That means embracing a more expansive and dynamic view of their talent supplies—one that tosses out the usual preoccupation with titles and traditional roles, looking instead at the The COVID-19 pandemic has imposed a tremendous underlying skills that people have. Indeed, we cost on people’s lives and livelihoods, and it has find that when companies start with skills (the forced businesses to adjust rapidly to survive. We ones they need, the ones they have, and how the have seen “HR’s finest hour” in managing the radical mix may change over time), they can free up their shifts facing workforces during the pandemic, and thinking and find more creative ways to handle we are excited to see how CHROs reimagine core the mismatches. talent practices during the recovery—and beyond. — Talent systems. CHROs now have more workforce-planning tools to help them match Bryan Hancock is a partner in McKinsey’s Washington, DC, office, and Bill Schaninger is a senior partner in the Philadelphia office. The authors wish to thank Andrea Alexander, Raffaele Breschi, Alexander DiLeonardo, Bonnie Dowling, Neel Gandhi, Talha Khan, Kate Lloyd George, Miriam Owens, and Tom Welchman for their contributions to this article. Copyright © 2020 McKinsey & Company. All rights reserved. HR says talent is crucial for performance—and the pandemic proves it 57
5 Make bold portfolio moves 59 A blueprint for M&A success 58
© Cherezoff/Getty Images A blueprint for M&A success Programmatic M&A can help companies build resiliency, but this approach to deal making requires a solid game plan—one that will guide proactive deal sourcing and opportunistic deal evaluation. by Sophie Clarke, Robert Uhlaner, and Liz Wol A blueprint for M&A success 59
Large mergers and acquisitions (M&A) tend to get The CEO was pushing for a big bet on digital given the biggest headlines, but, as McKinsey research the company’s superior financial position. indicates, executives should be paying attention to Some senior leaders proposed expansion in greater all the small deals, too. These smaller transactions, China, the fastest-growing market for premium when pursued as part of a deliberate and systematic cosmetics. Other business-unit leaders saw poten- M&A program, tend to yield strong returns over the tial in the markets for organic products and men’s 1 grooming. All had their own agendas (see sidebar, long run with comparatively low risk. And, based on our research, companies’ ability to successfully “Undue influences”). manage these deals can be a central factor in their 2 ability to withstand economic shocks. Propelled by a healthy dose of FOMO (or fear of missing out) but lacking a clear set of priorities, the The execution of such a programmatic M&A strategy M&A team made multiple small bets on a range is not easy, however. Consider the situation at of businesses—even on some unexpected targets one global cosmetics company (a hypothetical case in adjacent markets (such as pet grooming). But MoF74 2020 based on real-world experiences). Enthusiastic the team did not have a clear plan for creating value executives all had different ideas about which M&A from these targets nor for integrating them A blueprint for M&A success Exhibit 1 of 1 opportunities the company should pursue (exhibit). into the current business structure. The result? Exhibit When there is no clear connection between M&A strategy and corporate strategy, deals may falter. Enthusiastic ideas Let’s leverage our Let’s epand our business Let’s acuire an organic Let’s enter the men’s for acquisitions … superior financial to greater hina. hat beauty company. grooming business. €en position (healthy balance is the astest-groing onsumers ant organic need products too. sheet) vis-à-vis peers market or premium and e have nothing to make a “big bet” on cosmetics. to offer. digital channel. … wither due to his digital target could „e acuired a e ‡ kno e eren’t ˆur bank managed to lac of underlin have alloed us to eciting high-groth planning on buying a pet- find a ton o targets in all rationale and do online sales … it as targets in …sia. grooming company but it the adƒacent businesses interation plans ƒust too epensive. †nortunately integration turned out to be a great e ere interested took longer than e deal and had a surprising in (organics and men’s had hoped as scaling our amount o synergy ith grooming) and e eisting processes in …sia our business. acuired one o each. as very complicated. 1 Jeff Rudnicki, Kate Siegel, and Andy West, “How lots of small M&A deals add up to big value,” July 2019, McKinsey.com. 2 Martin Hirt, Sven Smit, Chris Bradley, Robert Uhlaner, Mihir Mysore, Yuval Atsmon, and Nicholas Northcote, “Getting ahead of the next stage of the coronavirus,” April 2020, McKinsey.com. 60 What now? Ten actions to emerge stronger in the next normal September 2020
The M&A blueprint prompts business leaders to conduct a thorough self-as- sessment along with a comprehensive market assessment. The organization ended up wasting time and M&A to achieve our corporate strategy? Answering resources on deals that were mostly unsuccessful, these questions will require asking still more and its executives unintentionally created an clarifying questions about specific organizational unwieldy portfolio of businesses. strengths and capabilities, resources available, and other inputs to effective deal making. As this example illustrates, success in programmatic M&A requires much more than just executing on Understanding ‘why’ and ‘where’ a long string of deals. Acquirers must articulate The M&A blueprint prompts business leaders to exactly why and where they need M&A to deliver conduct a thorough self-assessment along with on specific themes and objectives underlying their a comprehensive market assessment. The self- overarching corporate strategies. In addition, they assessment helps establish the baseline from which must give careful thought as to how they plan to to identify gaps in corporate ambitions as well pursue programmatic M&A—including constructing as the opportunities for M&A to fill these gaps. It a high-level business case and preliminary involves examining a company’s key sources integration plans for each area in which they want of competitive advantage and testing their scalability to pursue M&A. to determine whether they would still play to the company’s advantage after a transaction. For its Taken together, these factors combine into what part, the market assessment acts as a “sense we call an M&A blueprint. In this article we discuss check” for business leaders, ensuring that the com- how it can be implemented to help organizations pany’s M&A strategy capitalizes on the most remain unrelentingly focused on their investment recent and relevant trends, accounts for potential thesis throughout the deal process. Having a disruptions, and acknowledges competitors’ likely clear M&A blueprint is even more critical as com- actions and reactions. panies begin to consider how to rebound from COVID-19. Without an M&A blueprint, it will be An M&A blueprint should also define any boundary more difficult for companies to distinguish between conditions, or limits to the company’s use of through-cycle opportunities that are consistent M&A. These conditions, which are typically imposed with their corporate strategy and “low hanging, dis- by the CFO or the board investment committee, tressed asset” deals that are not. provide an important reality check: they define the con straints on certain types or sizes of deals, thereby further narrowing the scope of potential M&A blueprint: The building blocks targets. In setting these conditions, business The M&A blueprint can help executives answer leaders should account for preexisting financial three main questions: Why and where should we hurdles—for instance, a rule that “deals must use programmatic M&A to achieve our corporate be accretive in the first year” likely would not apply strategy? And how should we use programmatic to deals targeting growth and might therefore A blueprint for M&A success 61
overly constrain M&A activity. Establishing these information, organizations and M&A deal teams can boundary conditions at the outset—with explicit continually cultivate potential targets within agreement from the CFO and the board—can help focused M&A themes while still being opportunistic put teeth into investment commitments and align about deals that present themselves. everyone on negotiable and nonnegotiable terms. Once these themes have been identified, business Taken together, the self-assessment, market leaders should test them to ensure that they assessment, and review of boundary conditions can execute against them—for instance, are there can help executives understand the circumstances enough targets available, and do the right targets under which the pursuit of M&A makes the most exist to fill gaps in the company’s capabilities? sense, as well as the markets they are best The M&A blueprint will be particularly critical in positioned to enter. Indeed, the output of business target-rich environments to help narrow down leaders’ discussions about “why and where” will the list of potentials. be a set of M&A themes that reflect the company’s best value-creation opportunities—those A “gold standard” M&A blueprint is detailed and for which the company has the capabilities and focused on critical competitive information resources to achieve intended strategic goals. (value-creation levers, company capabilities, and so on). To understand whether their companies’ What does a good M&A theme entail? For each M&A themes are detailed enough, business leaders theme, senior leaders should identify important deal should consider whether they would be comfortable criteria (categorizing potential targets by geog- broadcasting those themes to competitors. The raphy, sales channel, product type, and so on) as answer should be “no.” If the answer is “yes,” more well as standard screening metrics like company work on the blueprint will be needed, as it and size, number of employees, revenue growth, product the related themes are likely not specific enough to port folio, ownership, and so on. With this detailed be useful to M&A teams. Undue influences The hypothetical case of the global The M&A team at the cosmetics company, if it were a nail.” This is the approach the cosmetics company points to two common for instance, was reactive. It was swayed by cosmetics company favored—establishing cognitive biases that can emerge when deals sourced by third parties, and a well-organized M&A team but then using any company attempts to pursue program- it ended up inventing growth strategies it to drive almost all growth rather than matic M&A: the shiny-object syndrome around possible, exciting targets applying it only to those opportunities best and Maslow’s hammer. without a clear understanding of how suited to be bought, not built. they could generate value. The shiny-object syndrome—also known Without an M&A blueprint to provide as extreme distraction. Companies that Maslow’s hammer. In his 1966 book an incontrovertible fact base and action continually chase down the next new thing The Psychology of Science (HarperCollins), plan, the cosmetics company’s efforts run the risk of pursuing initiatives in the psychologist Abraham Maslow stated, to implement programmatic deal making wrong order, skipping foundational tasks, “I suppose it is tempting, if the only tool you turned into a quixotic, time-wasting effort. or duplicating efforts and investments. have is a hammer, to treat everything as 62 What now? Ten actions to emerge stronger in the next normal September 2020
Understanding ‘how’ M&A blueprint: Putting it all together An M&A blueprint also prompts senior leaders to An M&A blueprint cannot and should not be come up with a plan for “how” they will use M&A developed based on “gut instinct” by a single to further their overarching corporate strategies. execu tive or defined post hoc to validate the theory Specifically, the M&A blueprint should delineate the behind an exciting deal. An executive or business- high-level business case and preliminary integration unit leader should lead its development but plans associated with each M&A theme. should be supported by corporate-strategy and corporate-development executives. The blue- The business case should explain how the acqui- print itself can take the form of a frequently updated ring company plans to add value to the target or and disseminated written report, or it can be a targets within a given M&A theme—for instance, the standing agenda item in every M&A and corporate- capital and operating expenditures needed (beyond strategy meeting. Regardless of format, it can the acquisition price) to integrate and scale the help decision makers assess critical factors relating asset or assets. It should also outline the operational to deal sourcing, due diligence, and integration changes and capabilities that will be required to planning before making any moves and taking steps integrate the new assets—for instance, the creation to identify targets. of a new business unit or a set of new business processes to manage an acquired digital platform. Looking back at the case of the cosmetics company, it becomes clear how an M&A blueprint could One large US healthcare company had committed have helped the organization prioritize a bunch of to a strategy of building scale in its services scattershot ideas into a comprehensive program- businesses through M&A. First, it consolidated matic M&A strategy. existing disparate service businesses under a new brand and organized them into three distinct With its market assessment, for instance, it might units: pharmacy-care services, diversified health have seen that the market for digital cosmetics is and wellness services, and data-analytics and tech- projected to grow five times faster than the market nology services. These became their three M&A for nondigital cosmetics. What’s more, market themes. Then, over a ten-year period, this program- data might have revealed that customers want and matic acquirer closed more than 60 deals, spending expect to buy cosmetics through digital channels, well over $20 billion, as it sought to fill out its and that there is no clear leader in the space. In its portfolio along these three themes. The organization self-assessment, the M&A team might also knew where it wanted to play and how. have seen a gap in the company’s product portfolio com pared with peers. And a look at boundary Of course, the business case should include a condi tions might have revealed the time and latitude preliminary integration plan for the acquired asset required to pay off initial acquisition investments, or assets that is consistent with the deal’s value- enabling the team to look beyond “base hit” deals creation thesis—for instance, all shared services with lower acquisition costs. will be absorbed by the acquirer, and the target company’s product portfolio will be cross-sold to The M&A blueprint would have led the cosmetics the acquirer’s existing customers. company to a different outcome—perhaps a laser focus on acquiring the set of assets and Through their use of the M&A blueprint, business capabilities needed to build a digital platform leaders can stay focused on those parts of the deal for selling cosmetics. that can create the most value—especially impor- tant when companies are pursuing multiple deals within the same M&A theme. What’s more, they can prepare functional leaders, suppliers, and others Spending time up front creating an M&A blueprint well in advance for the actions they may need to will pay off over the long term—particularly given take to integrate an asset or multiple assets. the volume of deals associated with a programmatic A blueprint for M&A success 63
M&A strategy. With M&A themes and criteria well value. Integration planning can begin early, with defined and understood by all, companies can a focus on realizing the strategic intent of the deal not only be more proactive but also more opportu- rather than just stabilizing companies, people, nistic. The top team will be aligned on strategy and processes in the wake of change. Most impor- and focused on deal must-haves prior to reaching tant, the M&A blueprint can help executives tell out to potential targets. Negotiations with a compel ling story (inside and outside the company) potential targets can be grounded in the business about its deal-making strategy and its vision case. Diligence processes can be accelerated for the future. and focused only on the most critical sources of Sophie Clarke is a consultant in McKinsey’s New Jersey office, where Liz Wol is an associate partner; Robert Uhlaner is a senior partner in the San Francisco office. The authors wish to thank Anthony Chui, Jack Gordon, Steve Santulli, and Lexi Wang for their contributions to this article. Copyright © 2020 McKinsey & Company. All rights reserved. 64 What now? Ten actions to emerge stronger in the next normal September 2020
Reset technology plans 66 Building the vital skills 6 for the future of work in operations 65
© Tashi-Delek/Getty Images Building the vital skills for the future of work in operations Operationally intensive companies have entered a new wave of automation and digitization. That will have a big impact on the skills they need to remain competitive. by Kweilin Ellingrud, Rahul Gupta, and Julian Salguero 66 What now? Ten actions to emerge stronger in the next normal September 2020
Technological progress is enabling machines to makes them particularly suitable for automation complete many of the tasks that once required or digitization. human beings. That new automation revolution will have a major effect on employment in the Our analysis suggests that 39 to 58 percent of the coming years. Nearly every job will change, many worldwide work activities in operationally intensive quite profoundly, and the overwhelming majority sectors could be automated using currently of today’s employees will need to develop new demonstrated technologies. That is 1.3 times the skills. Preparing for the future of work is one of the automation potential of activities in other sectors defining business problems of our time—yet it is one (Exhibit 1). that most organizations are not ready to address. Beyond the scale of the coming changes in work- The transition to the automation revolution has place roles and activities, what matters most is the been accelerated by the COVID-19 pandemic. nature of those changes. Increasing automation will Companies are emerging from the crisis into a world significantly shift the skill profiles of tomorrow’s jobs. of workplace physical distancing and major changes That has implications for employers and employees in customer behaviors and preferences. Recovery is alike. Companies will need people with the right skills forcing organizations to reimagine their operations to develop, manage, and maintain their automated for the next normal. Manufacturing companies equipment and digital processes and to do the jobs are reconfiguring their supply chains and their that machines cannot. Workers will need the skills production lines. Service organizations are adapting that enable them to access employment. to emphasize digital-first customer journeys and contactless operations. Those changes will In Europe and the United States, for example, have significant effects on the requirements for demand for physical and manual skills in repeatable workforce skills and capabilities, from a dramatic and predictable tasks is expected to decline by increase in home-based and remote working to a nearly 30 percent over the next decade, while need for shop-floor personnel to master new tools demand for basic literacy and numeracy skills and newly urgent health and safety requirements. would fall by almost 20 percent. In contrast, the demand for technological skills (both coding and The future of work will require two types of changes especially interacting with technology) is expected across the workforce: upskilling, in which staff to rise by more than 50 percent, and the need for gain new skills to help in their current roles, and complex cognitive skills is set to increase by one- reskilling, in which staff need the capabilities third. Demand for high-level social and emotional to take on different or entirely new roles. Our skills, such as initiative taking, leadership, and research suggests that the reskilling challenge entrepreneurship, is also expected to rise by more will be particularly acute in operationally intensive than 30 percent (Exhibit 2). sectors, such as manufacturing, transportation, and retail, and operations-aligned occupations, such as maintenance, claim processing, and warehouse Leaders are unprepared 1 order picking. Those sectors and occupations will In operationally intensive sectors, leaders recognize experience a magnitude of change greater than the that automation and digitization will likely create global average because they often employ large significant skill gaps, but most report feeling numbers of people and because the predictable unprepared for the challenge. In a 2017 McKinsey and repetitive nature of many operational tasks 1 To investigate the impact of automation on operationally intensive activities, we looked at specific sectors and occupations. Operationally intensive sectors include construction, finance and insurance, food service and accommodation, manufacturing, mining, oil and gas, retail, transportation, utilities, and wholesale trade. Operations-aligned occupations include facilities management, frontline customer service and sales, frontline equipment repair and installation, frontline production, frontline trade work, logistics transportation and warehousing, order and claim processing, procurement, and skilled operations work. Building the vital skills for the future of work in operations 67
Exhibit 1 Operations-intensive sectors have 1.3 times the automation potential of other Operations-intensive sectors have 1.3 times the automation potential of sectors. other sectors. Technologically automatable activities by sector, o total activities ƒperationally intensive sectors verage operationally intensive sectors 1.3× ƒther sectors verage other sectors difference in automation 1 potential Manuacturing 58 ccommodation and ood services 53 etail trade 51 griculture orestry fishing and hunting 50 Mining 48 onstruction 46 tilities 43 €inance and insurance 41 Wholesale trade 40 rts entertainment and recreation 39 ‚ransportation and warehousing 39 dministrative support and waste management 37 eal estate rental and leasing 37 ƒther 35 normation 33 „roessional scientific and technical 33 Management o companies and enterprises 33 …ealthcare and social assistance 32 †ducational 25 1We define automation potential by the work activities that can be automated by adapting currently demonstrated technology. Source: McKinsey Global nstitute analysis survey of 116 executives at large organizations, issue, they cited three main barriers. More than nearly two-thirds of respondents said skills were one in four respondents said they lacked a clear a top ten issue for their companies. Only 7 percent understanding of the impact that future automation of respondents thought that their companies were and digitization would have on skill requirements. fully prepared to address the skill gaps that they Nearly one in four said they lacked the tools or the expected over the subsequent five years. knowledge to quantify the business case for efforts to reskill their workforces. And almost one-third When we asked executives in the survey why their thought that their current HR infrastructure would organizations were not yet ready to tackle the skill not be able to execute a new strategy designed 68 What now? Ten actions to emerge stronger in the next normal September 2020
Web <2020> Exhibit <2> of <5> Exhibit 2 Automation will have a significant impact on skill requirements Automation will have a significant impact on skill requirements. Skill shift in US and Western Europe by category, % of time spent asic €iger Social and ysical and manual cognitie cognitie emotional ecnological 01 48 12 17 12 12 –„% –1„% …†% …‚‚% …‡ˆ% 0‚0 35 10 21 16 1 100% Note: Figures may not sum to 100%, because of rounding. Source: McKinsey Global nstitute analysis to address emerging skill gaps (Exhibit 3). Across required for the digital era, and 80 percent say industries, our latest survey data indicate that these at least half of all new roles should be filled by problems persist today. reskilling existing workers. That question reveals some important geographical differences, however. Among European respondents, 94 percent think The central role of reskilling that the balance between hiring and reskilling would Companies can use several different approaches be either equal or tipped in favor of reskilling, but to address skill gaps. They can look outside the the equivalent figure is only 62 percent among US organization, hiring new staff with the right skills. executives. That may reflect differences in local They can build skills internally, retraining their employment cultures and legal provisions. existing workforces to prepare people for new roles. Or they can take a hybrid approach, including using a To make good on their large-scale reskilling skilled contract workforce to fulfil short-term needs aspirations, most organizations will need to while developing the necessary skills internally. significantly ramp up their employee training and capability-building efforts. A number of Most organizations are likely to adopt a mix of those large organizations have already begun to do so. models. They may look to the external market to fill Global retailer Walmart, for example, is investing certain specialized, highly technical roles such as $4 billion over four years to help staff in frontline data scientists, while aiming to fill new frontline roles, and back-office jobs transition to new customer- such as robot controllers and production-exception service-oriented roles. E-commerce giant Amazon handlers, from their existing workforces. We believe has pledged to spend $700 million on technology that ongoing shifts in societal attitudes will increase training by 2025 to help employees move to the expectation that companies do more to retain higher-skill jobs. Professional-services company and retrain their current workers wherever possible. ManpowerGroup has entered a partnership with education company Pearson and others to upskill Executives in our survey are broadly united in the 130,000 workers over the next five years. view that their organizations have a significant role to play in the skill transition. Two-thirds of It may take several years for these global reskilling respondents think that corporations should take programs to pay back, but they are visible and the lead in the development of the new skills important investments. Some companies are Building the vital skills for the future of work in operations 69
Web <2020> Exhibit <3> of <5> Exhibit 3 Large-scale reskilling efforts must overcome significant barriers. Large-scale reskilling efforts must overcome significant barriers. Reported barriers to reskilling by sector type, ƒperationally intensive sectors 1 ƒther sectors % of respondents „urrent …† infrastructure ‰on’t have a good ‰on’t know how to ‰on’t know how to can’t eˆecute a new understanding of how ‹uantify the usiness evaluate or compare strategy for addressing automation and digitization case for addressing various solutions for potential skill gaps will affect future skill needs potential skill gaps potential skill gaps 30 28 26 32 28 20 18 27 Potential skill gaps keptical of ot aware of any internal aren’t seen as a the return on ‰on’t eˆpect or eˆternal solutions for high-priority issue retraining investments skill gaps potential skill gaps 15 13 8 10 6 10 9 3 1Private-sector organizations with >$100 million in annual revenue that view the skill gap as a top 10 priority. ource cinsey survey ovem er 01€‚ cinsey analysis already reaping returns from smaller-scale digital transformation has many moving parts, with reskilling efforts. Tata Steel’s plant in Ijmuiden, multiple elements that must be addressed together the Netherlands, for example, established an to ensure that new approaches deliver real value, advanced-analytics academy to train and certify are accepted by the wider organization, and can be hundreds of engineers on the application of new implemented and sustained at scale. analytical approaches to manufacturing-process improvement. Using the new techniques helped the In our work with the World Economic Forum’s Global plant to boost its earnings before interest, taxes, Lighthouse Network of advanced manufacturing depreciation, and amortization by more than 15 companies, for example, we found that while percent, despite significant cost pressures across such companies make extensive use of smart the global steel sector. technologies in their operations, they pay equal attention to their business processes, their management systems, and their people. Preparing for the future of work Our analysis of companies that have embarked Second, the programs address every level of the on large-scale, systematic efforts to address organization. Successful companies approach future skill requirements suggests that the automation and digitization as a comprehensive most successful programs share certain core transformation program, driven by top management elements. Above all, they are integral parts of their and involving the majority of the organizations’ organizations’ overall digital strategies. In fact, managerial workforces. senior executives cite talent as the biggest barrier to achieving their digital strategies—those two factors Third, most successful companies tailor and must be deeply connected for success in both. customize their training to match both the Many companies have learned the hard way that a organizations’ goals and the needs of individual 70 What now? Ten actions to emerge stronger in the next normal September 2020
learners, from CEOs to frontline operators. Training Once an organization understands the combination content is made as specific as possible, covering of skills it requires for future roles, it can match the technologies, tools, and business scenarios that those requirements against the skills available individuals will face in their new or changing roles. in its current workforce to plan how staff can be redeployed over time and identify the gaps that Finally, content is delivered using adult-learning must be filled to meet the needs of both existing principles via a combination of classroom or online and new roles (Exhibit 5). During the planning phase, learning and real, on-the-job experience. In addition companies should also assess the underlying to making use of technical content, successful factors that can make or break a reskilling program. reskilling programs are designed to help learners Those include the capabilities of an organization’s alter their mindsets: they teach employees about new existing HR and training infrastructure, as well as ways of working and emphasize the personal- and the willingness of its workforce to embrace change. professional-growth opportunities available to them. Next, an organization should prioritize the skills that affect the largest number of employees and Scout, shape, and shift the roles that require the largest skill shifts and In the coming years, almost every operations- develop content and delivery mechanisms for intensive organization will need a systematic each of its priority cohorts. JPMorgan Chase has approach to the challenge of shifting skill introduced several schemes to develop the digital requirements. Designing, building, and executing skills of current and future workers as part of its such an approach requires three broad steps: scout, five-year, $350 million commitment to skill building. shape, and shift (Exhibit 4). They include a ten- to 14-week immersive coding academy for high-performing technology staff The first step is workforce planning. Companies and a degree apprenticeship that allows people to must scout their future skill needs, analyzing earn a degree while working within the company’s the skills required to deliver on their strategic technology business. A large integrated energy ambitions. As we noted previously, skill demands are company uses a gamification approach to train determined by an organization’s wider technology operational staff in new, digitally enabled working strategy, so understanding the potential impact of methods. Staff are given access to a library of online automation and digitization across an organization apps in which they complete progressively more and developing a robust strategy to capture those challenging tasks. Their results are recorded in an opportunities is a necessary precursor to any individual training account, and high performers “rightskilling” program. receive both public recognition and financial reward. Web <2020> Exhibit 4 Exhibit <4> of <5> An end-to-end skill transformation follows a three-phase approach. An end-to-end skill transformation follows a three-phase approach. Scout Shape Shift Analyze skill demand vs supply Design program architecture Stand up infrastructure and to deliver on strategic ambitions to close demand–supply gap capabilities to reskill at scale Building the vital skills for the future of work in operations 71
Web <2020> Exhibit 5 Exhibit <5> of <5> Creating the right talent pool for a digital and analytics transformation Creating the right talent pool for a digital and analytics transformation combines in-house capability building and hiring for specific roles. combines in-house capability building and hiring for specific roles. Shift in roles ain talent source In-house capabilty building ‰iring external talent Current role Dn role Senior Management team management eneral managers DnA champion Operational roduction and management technology managers ˆunctional-team leaders Production Maintenance- and DnA aare units production-team leaders ection managers ocal I team €uality and process technologists ranslator ‚entral maintenance team Data scientist Functions ‚ontinuous-improƒement- Data engineer pro„ect roles I architect ‚entral supply-chain roduct oner mar…eting and sales agile coach and and technology roles scrum master †ontechnical roles 2 U/UI designer and External ‡xternally hired talent softare engineer 1Digital and analytics 2User experience and/or user interface. At the center of a skill-shaping effort should be a The relationship between an organization and its talent-transition hub and a corporate academy that people is a two-way street, and the design phase oversee the delivery of reskilling programs, allocate of a future-of-work program should also focus on employees to learning journeys, and provide a business’s offer to its staff. Companies need to reskilled staff to the parts of the business that develop clear and compelling value propositions need them most. The hub will also be responsible for employees to ensure that their existing staffs for ensuring that an organization’s reskilling system see the benefits of developing new skills—and so grows and adapts to suit the needs of the business, the organizations can attract external talent to fill tracking the performance and impact of the the specialized roles for which there are insufficient program and using agile techniques to test, adapt, internal candidates. and refine curricula and learning systems. 72 What now? Ten actions to emerge stronger in the next normal September 2020
The relationship between an organization and its people is a two-way street, and the design phase of a future-of-work program should also focus on a business’s offer to its staff. Finally, companies need to shift the skill profiles — How will your digital transformation ensure that of their entire organizations by developing and your people are equipped to meet future skill deploying the infrastructure and capabilities demands? necessary to reskill at scale. While all employees may need to upskill themselves in broad topics, such — Is your reskilling program evolving to make as the business value and applications of digital effective use of new technologies and and analytics, some may need much deeper and approaches to learning? targeted reskilling for particular new roles. — What is your organization offering existing and potential employees to ensure that it can attract and retain the talent it needs? Preparing for the future of work is set to become an integral part of every organization’s digital and automation strategy. The imperative for action in operationally intensive companies and sectors is particularly strong, as technology profoundly alters the way their work is done. Is your organization ready to respond? Kweilin Ellingrud is a senior partner in McKinsey’s Minneapolis office, Rahul Gupta is an expert in the Boston office, and Julian Salguero is a partner in the Miami office. The authors wish to thank Aaron De Smet, Katy George, James Hale, Kate Lazaroff-Puck, Susan Lund, Angelika Reich, and Andrea Westervelt for their contributions to this article. Copyright © 2020 McKinsey & Company. All rights reserved. Building the vital skills for the future of work in operations 73
Rethink the global footprint 75 Supply-chain recovery in coronavirus times—plan for now and the future 83 From thinking about the next normal to making it work: What to stop, start, and accelerate 7 7474
© Westend61/Getty Images Supply-chain recovery in coronavirus times—plan for now and the future Actions taken now to mitigate impacts on supply chains from coronavirus can 7 also build resilience against future shocks. by Knut Alicke, Xavier Azcue, and Edward Barriball Supply-chain recovery in coronavirus times—plan for now and the future 75
Even as the immediate toll on human health What to do today from the spread of coronavirus (SARS-CoV-2), In the current landscape, we see that a complete which causes the COVID-19 disease, mounts, the short-term response means tackling six sets of economic effects of the crisis—and the livelihoods issues that require quick action across the end-to- at stake—are coming into sharp focus. Businesses end supply chain (Exhibit 1). These actions should be must respond on multiple fronts at once: at the same taken in parallel with steps to support the workforce time that they work to protect their workers’ safety, and comply with the latest policy requirements: they must also safeguard their operational viability, now increasingly under strain from a historic supply- 1. 1. Create transparency on multitier supply chains, chain shock. establishing a list of critical components, determining the origin of supply, and identifying Many businesses are able to mobilize rapidly and set alternative sources. GES 2020 up crisis-management mechanisms, ideally in the COVID Supply-chain form of a nerve center. The typical focus is naturally 2. Exhibit 1 of 4 2. Estimate available inventory along the value short term. How can supply-chain leaders also chain—including spare parts and after-sales prepare for the medium and long terms—and build the stock—for use as a bridge to keep production resilience that will see them through the other side? running and enable delivery to customers. Exhibit 1 There are multiple immediate, end-to-end supply-chain actions to consider in response to COVID-19. Supply-chain actions Create transparency on multitier Optimize production and Assess realistic final-customer supply chain distribution capacity demand Determine critical components Assess impact on operations and ƒork wit sales and operations and determine origin of supply available resource capacity mainly planning to get demand signal to Assess interruption risk and identify workforce determine re„uired supply likely tier-2 and onward risk nsure employee safety and clearly Leverage direct-to-consumer Look to alternative sources if communicate wit employees cannels of communication suppliers are in severely affected onduct scenario planning and …se market insigts‚e†ternal regions assess impact on operations based databases to estimate for on available capacity customer’s customers ptimi€e limited production according to uman-ealt impact margin and opportunity cost‚ penalty Tier-2 supplier Tier-1 supplier Plant Distribution center ustomer ustomer’s customer Estimate available inventory Identify and secure logistics Manage cash and net oring stimate inventory along te value capacity capital cain including spare parts‚ stimate available logistics capacity ˆun supply-cain stress tests vs ma‡or remanufactured stock Accelerate customs clearance suppliers’ balance seets to …se after-sales stock as bridge to ange mode of transport and understand wen supply issues will keep production running prebook air‚rail capacity given start to stress financial or li„uidity current e†posure issues ollaborate wit all parties to leverage freigt capacity ‡ointly 76 What now? Ten actions to emerge stronger in the next normal September 2020
3. Assess realistic final-customer demand lead times and inventory levels as an early-warning 3. and respond to (or, where possible, contain) system for interruption and establish a recovery shortage-buying behavior of customers. plan for critical suppliers by commodity. 4. In situations in which tier-one suppliers do not 4. Optimize production and distribution capacity to ensure employee safety, such as by supplying have visibility into their own supply chains or are personal protective equipment (PPE) and not forthcoming with data on them, companies can engaging with communication teams to share form a hypothesis on this risk by triangulating from infection-risk levels and work-from-home a range of information sources, including facility options. These steps will enable leaders to exposure by industry and parts category, shipment understand current and projected capacity impacts, and export levels across countries and levels in both workforce and materials. regions. Business-data providers have databases that can be purchased and used to perform this 5. triangulation. Advanced-analytics approaches 5. Identify and secure logistics capacity, estimating capacity and accelerating, where possible, and network mapping can be used to cull useful and being flexible on transportation mode, information from these databases rapidly and when required. highlight the most critical lower-tier suppliers. 6. Combining these hypotheses with the knowledge 6. Manage cash and net working capital by running stress tests to understand where supply-chain of where components are traditionally sourced issues will start to cause a financial impact. will create a supplier-risk assessment, which can shape discussions with tier-one suppliers. In the following sections, we explore each of these This can be supplemented with the described six sets of issues. outside-in analysis, using various data sources, to identify possible tier-two and onward suppliers in Create transparency affected regions. Creating a transparent view of a multitier supply chain begins with determining the critical For risks that could stop or significantly slow components for your operations. Working with production lines—or significantly increase cost of operations and production teams to review your bills operations—businesses can identify alternative of materials (BOMs) and catalog components will suppliers, where possible, in terms of qualifications identify the ones that are sourced from high-risk outside severely affected regions. Companies will areas and lack ready substitutes. A risk index for need to recognize that differences in local policy each BOM commodity, based on uniqueness and (for example, changing travel restrictions and location of suppliers, will help identify those parts at government guidance on distancing requirements) highest risk. can have a major impact on the need for (and availability of) other options. If alternative suppliers Once the critical components have been identified, are unavailable, businesses can work closely with companies can then assess the risk of interruption affected tier-one organizations to address the from tier-two and onward suppliers. This stage of risk collaboratively. Understanding the specific planning should include asking direct questions of exposure across the multitier supply chain should tier-one organizations about who and where their allow for a faster restart after the crisis. suppliers are and creating information-sharing agreements to determine any disruption being faced Estimate available inventory in tier-two and beyond organizations. Manufacturers Most businesses would be surprised by how much should engage with all of their suppliers, across all inventory sits in their value chains and should tiers, to form a series of joint agreements to monitor estimate how much of it, including spare parts and Supply-chain recovery in coronavirus times—plan for now and the future 77
remanufactured stock, is available. Additionally, — finished goods held in warehouses and blocked after-sales stock should be used as a bridge to keep inventory held for sales, quality control, production running (Exhibit 2). and testing This exercise should be completed during the — spare-parts inventory that could be repurposed supply-chain-transparency exercise previously for new-product production, bearing in mind the GES 2020 trade-off of reducing existing customer support described. Estimating all inventory along the value Supply-chain COVID versus maintaining new-product sales chain aids capacity planning during a ramp-up Exhibit 2 of 4 period. Specific categories to consider include the following: — parts with lower-grade ratings or quality issues, which should be assessed to determine whether Exhibit 2 Built-in inventory in the supply chain will delay the full impact of halted production. Expected stockout for companies in EU/US with suppliers ƒo„range †ighrange in China, by industry, illustrative estimate estimate utomotive …harmaceuticals Consumer Retail (mass Retail (fashion †igh tech emiconductors ar 22 pr ay une uly ug ept ct €ov ‚ec an 221 Inventory, days of stock (including supply in transit utomotive …harmaceuticals Consumer Retail (mass Retail (fashion †igh tech emiconductors 2ndtier 30 40 35 70 20 30 N/A N/A 40 60 N/A supplier (China) (China) (China) (China) 1sttier 7 17 120 140 60 90 60 90 15 35 55 70 70 110 supplier (EU/US) (EU/US) (China) (China) (China) (China) (China) ssembly‡ 2 12 55 100 10 17 10 17 15 29 19 45 60 90 packaging (EU/US) (EU/US) (EU/US) (EU/US) (EU/US) (China) (Philippines) 1 R‚Cs N/A 80 90 14 15 17 15 23 N/A N/A (EU/US) (EU/US) (EU/US) (EU/US) arket 0 30 N/A N/A 7 21 28 24 40 20 30 buffer (EU/US) (EU/US) (EU/US) (EU/US) Toal 40 70 230 320 60 90 70 100 70 110 40 100 130 200 ineno as2 1 Regional distribution centers. 2 Figures for total inventory buffer and expected stockout are calculated assuming production stop at latest link based in China. 78 What now? Ten actions to emerge stronger in the next normal September 2020
the rework effort would be justified to solve — Use advanced statistical forecasting tools to quality issues or whether remanufacture with generate a realistic forecast for base demand. used stock could address supply issues — Integrate market intelligence into product- — parts in transit should be evaluated to see what specific demand-forecasting models. steps can be taken to accelerate their arrival— particularly those in customs or quarantine — Ensure dynamic monitoring of forecasts in order to react quickly to inaccuracies. — supply currently with customers or dealers should be considered to see if stock could be With many end customers engaging in shortage bought back or transparency could be created buying to ensure that they can claim a higher for cross-delivery fraction of whatever is in short supply, businesses can reasonably question whether the demand Assess realistic final-customer demand signals they are receiving from their immediate A crisis may increase or decrease demand for customers, both short and medium term, are particular products, making the estimation of realistic realistic and reflect underlying uncertainties in final-customer demand harder and more important. the forecast. Making orders smaller and more Businesses should question whether demand signals frequent and adding flexibility to contract terms they are receiving from their immediate customers, can improve outcomes both for suppliers and their both short and medium term, are realistic and customers by smoothing the peaks and valleys reflect underlying uncertainties in the forecast. The that raise cost and waste. A triaging process that demand-planning team, using its industry experience prioritizes customers by strategic importance, and available analytical tools, should be able to find margin, and revenue will also help in safeguarding a reliable demand signal to determine necessary the continuity of commercial relationships. supply—the result of which should be discussed and agreed upon in the integrated sales- and operations- Optimize production and distribution capacity planning (S&OP) process. Armed with a demand forecast, the S&OP process should next optimize production and Additionally, direct-to-consumer communication distribution capacity. Scenario analysis can be channels, market insights, and internal and external used to test different capacity and production databases can provide invaluable information in scenarios to understand their financial and assessing the current state of demand among your operational implications. customers’ customers. When data sources are limited, open communication with direct customers Optimizing production begins with ensuring can fill in at least some gaps. With these factors in employee safety. This includes sourcing and mind, forecasting demand requires a strict process engaging with crisis-communication teams to to navigate uncertain and ever-evolving conditions communicate clearly with employees about successfully. To prepare for such instances infection-risk concerns and options for remote and effectively, organizations should take the home working. following actions: The next step is to conduct scenario planning to — Develop a demand-forecast strategy, which project the financial and operational implications includes defining the granularity and time of a prolonged shutdown, assessing impact based horizon for the forecast to make risk-informed on available capacity (including inventory already decisions in the S&OP process. in the system). To plan on how to use available Supply-chain recovery in coronavirus times—plan for now and the future 79
capacity, the S&OP process should determine As the finance function works on accounts which products offer the highest strategic value, payable and receivable, supply-chain leaders can considering the importance to health and human focus on freeing up cash locked in other parts safety and the earnings potential, both today of the value chain. Reducing finished-goods and during the future recovery. The analysis will inventory, with thoughtful, ambitious targets draw on a cross-functional team that includes supported by strong governance, can contribute marketing and sales, operations, and strategy substantial savings. Likewise, improved logistics, staff, including individuals who can tailor updated such as through smarter fleet management, macroeconomic forecasts to the expected can allow companies to defer significant impact on the business. Where possible, a digital, capital costs at no impact on customer service. end-to-end S&OP platform can better match Pressure testing each supplier’s purchase production and supply-chain planning with the order and minimizing or eliminating purchases expected demand in a variety of circumstances. of nonessential supplies can yield immediate cash infusions. Supply-chain leaders should Identify and secure logistics capacity analyze the root causes of suppliers’ nonessential In a time of crisis, understanding current and purchases, mitigating them through adherence future logistics capacity by mode—and their to consumption-based stock and manufacturing associated trade-offs—will be even more models and through negotiations of supplier essential than usual, as will prioritizing logistics contracts to seek more favorable terms. needs in required capacity and time sensitivity of product delivery. Consequently, even as companies look to ramp up production and Building resilience for the future make up time in their value chains, they should Once the immediate risks to a supply chain have prebook logistics capacity to minimize exposure been identified, leaders must then design a to potential cost increases. Collaborating with resilient supply chain for the future. This begins partners can be an effective strategy to with establishing a supply-chain-risk function gain priority and increase capacity on more tasked with assessing risk, continually updating favorable terms. risk-impact estimates and remediation strategies, and overseeing risk governance. Processes To improve contingency planning under rapidly and tools created during the crisis-management evolving circumstances, real-time visibility will period should be codified into formal documen- depend not only on tracking the on-time status of tation, and the nerve center should become freight in transit but also on monitoring broader a permanent fixture to monitor supply-chain changes, such as airport congestion and border vulnerabilities continuously and reliably. Over closings. Maintaining a nimble approach to time, stronger supplier collaboration can likewise logistics management will be imperative in reinforce an entire supplier ecosystem for rapidly adapting to any situational or greater resilience. environmental changes. During this process, digitizing supply-chain Manage cash and net working capital management improves the speed, accuracy, As the crisis takes its course, constrained and flexibility of supply-risk management. By supply chains, slow sales, and reduced margins building and reinforcing a single source of truth, will combine to add even more pressure on a digitized supply chain strengthens capabilities earnings and liquidity. Businesses have a habit in anticipating risk, achieving greater visibility of projecting optimism; now they will need a and coordination across the supply chain, and strong dose of realism so that they can free up managing issues that arise from growing product cash. Companies will need all available internal complexity. For example, Exhibit 3 shows how a forecasting capabilities to stress test their capital digitally enabled clustering of potential suppliers requirements on weekly and monthly bases. shows the capabilities they have in common. 80 What now? Ten actions to emerge stronger in the next normal September 2020
GES 2020 Supply-chain COVID Exhibit 3 of 4 Exhibit 3 Estimating a medtech company’s degree of Cluster maps reveal alternative sourcing connectiveness helped it expand its supplier options for all the materials affected. base by 600 percent, while an industrial-tools maker identified request-for-qualifications-ready Cluster map, durable speaker suppliers, suppliers for highly complex parts that it had been illustrative (n = 87 suppliers) previously unable to source. Company Common capabilities Finally, when coming out of the crisis, companies and governments should take a complete look at their supply-chain vulnerabilities and the shocks that could expose them much as the coronavirus has. Exhibit 4 describes the major sources of vulnerability. The detailed responses can reveal major opportunities—for example, using scenario analyses to review the structural resilience of critical logistics nodes, routes, and transportation Cluster characteristics, % modes can reveal weakness even when individual components, such as important airports or rail Automotive Multimedia speaker Marine hubs, may appear resilient. speakers systems audio GES 2020 27 25 25 14 9 Supply-chain COVID Mobile-phone Exhibit 4 of 3 Professional audio equipment speakers Exhibit 4 Supply-chain vulnerability occurs across five dimensions. Drivers of potential vulnerability Typical focus Full-picture focus Planning and Transportation Financial Product Organizational supplier network and logistics resiliency complexity maturity • How predictable is • How resilient is the • How much financial • re components • How proactive vs demand planning? physical-flow and flexibility does the in the products reactive is the logistics network? company have or substitutable? organiation in • How complex or increased supply- identiying and concentrated is the chain cost or • How flexible is mitigating supply- supply network, sustained the design i chain disruptions? and how resilient is disruption? components are it to disruption? no longer available? • How exposed is the • How vulnerable network to tariffs is the product to and other trade regulatory disruptions? changes? Supply-chain recovery in coronavirus times—plan for now and the future 81
Organizations should build financial models that Triaging the human issues facing companies and size the impact of various shock scenarios and governments today and addressing them must be decide how much “insurance” to buy through the the number-one priority, especially for goods that mitigation of specific gaps, such as by establishing are critical to maintain health and safety during the dual supply sources or relocating production. The crisis. As the coronavirus pandemic subsides, the analytical underpinnings of this risk analysis are tasks will center on improving and strengthening well understood in other domains, such as the supply-chain capabilities to prepare for the financial sector—now is the time to apply them to inevitable next shock. By acting intentionally today supply chains. and over the next several months, companies and governments can emerge from this crisis better prepared for the next one. Knut Alicke is a partner in McKinsey’s Stuttgart office, Xavier Azcue is a consultant in the New Jersey office, and Edward Barriball is a partner in the Washington, DC office. The authors wish to thank Viktor Bengtsson, Chris Chung, Curt Mueller, Hilary Nguyen, Ed Paranjpe, Anna Strigel, and Faaez Zafar for their contributions to this article. Copyright © 2020 McKinsey & Company. All rights reserved. 82 What now? Ten actions to emerge stronger in the next normal September 2020
© Peter Cade/Getty Images From thinking about the next normal to making it work: What to stop, start, and accelerate As businesses step into the post-coronavirus future, they need to find a balance between what worked before and what needs to happen to succeed in the next normal. by Kevin Sneader and Shubham Singhal From thinking about the next normal to making it work: What to stop, start, and accelerate
What’s next? That is the question everyone is quick phone call, not a videoconference. It may also asking. The future is not what we thought it would be help to set “office hours” for particular groups, share only a few short months ago. tips on how to track time, and announce that there is no expectation that emails will be answered after a In a previous article, we discussed seven broad certain hour. ideas that we thought would shape the global economy as it struggled to define the next normal. In Accelerate best practices around collaboration, this one, we set out seven actions that have come up flexibility, inclusion, and accountability repeatedly in our discussions with business leaders Collaboration, flexibility, inclusion, and around the world. In each case, we discuss which accountability are things organizations have been attitudes or practices businesses should stop, which thinking about for years, with some progress. But they should start, and which they should accelerate. the massive change associated with the coronavirus could and should accelerate changes that foster these values. 1. From ‘sleeping at the office’ to effective remote working Office life is well defined. The conference room is in use, or it isn’t. The boss sits here; the tech Stop assuming that the old ways will come back people have a burrow down the hall. And there are In fact, this isn’t much of a problem. Most executives also useful informal actions. Networks can form we have spoken to have been pleased at how well spontaneously (albeit these can also comprise the sudden increase in remote working has gone. closed circuits, keeping people out), and there At the same time, there is some nostalgia for the is on-the-spot accountability when supervisors “good old days,” circa January 2020, when it was can keep an eye from across the room. It’s worth easy to bump into people at the coffee room. Those trying to build similar informal interactions. TED days are gone. There is also the risk, however, that Conferences, the conference organizer and companies will rely too much on remote working. webcaster, has established virtual spaces so that In the United States, more than 70 percent of jobs while people are separate, they aren’t alone. A can’t be done offsite. Remote work isn’t a panacea software company, Zapier, sets up random video for today’s workplace challenges, such as training, pairings so that people who can’t bump into each unemployment, and productivity loss. other in the hallway might nonetheless get to know each other. Start thinking through how to organize work for a distributed workforce There is some evidence that data-based, at-a- Remote working is about more than giving people distance personnel assessments bear a closer a laptop. Some of the rhythms of office life can’t be relation to employees’ contributions than do recreated. But the norms associated with traditional traditional ones, which tend to favor visibility. work—for example, that once you left the office, the Transitioning toward such systems could contribute workday was basically done—are important. As one to building a more diverse, more capable, and CEO told us, “It’s not so much working from home; happier workforce. Remote working, for example, rather, it’s really sleeping at the office.” means no commuting, which can make work more accessible for people with disabilities; the flexibility For working from home to be sustainable, associated with the practice can be particularly companies need to help their staff create those helpful for single parents and caregivers. Moreover, boundaries: the kind of interaction that used to remote working means companies can draw on a take place in the hallway can be taken care of with a much wider talent pool. 84 What now? Ten actions to emerge stronger in the next normal September 2020
Remote working means no commuting, which can make work more accessible for people with disabilities; the flexibility can be particularly helpful for single parents and caregivers. 2. From lines and silos to networks technology quickly toward value-creating and and teamwork value-protecting opportunities. In a 2017 McKinsey survey, agile units performed significantly better Stop relying on traditional than those who weren’t agile, but only a minority organizational structures of organizations were actually performing agile “We used to have all these meetings,” a CEO recently transformations. Many more have been forced to told us. “There would be people from different do so because of the current crisis—and have seen functions, all defending their territory. We’d spend positive results. two hours together, and nothing got decided. Now, all of those have been cancelled—and things didn’t Agile companies are more decentralized and fall apart.” It was a revelation—and a common one. depend less on top-down, command-and-control Instead, the company put together teams to deal decision making. They create agile teams, which are with COVID-19-related problems. Operating with a allowed to make most day-to-day decisions; senior defined mission, a sense of urgency, and only the leaders still make the big-bet ones that can make or necessary personnel at the table, people set aside break a company. Agile teams aren’t out-of-control the turf battles and moved quickly to solve problems, teams: accountability, in the form of tracking and relying on expertise rather than rank. measuring precisely stated outcomes, is as much a part of their responsibilities as flexibility is. The Start locking in practices that speed up decision overarching idea is for the right people to be in making and execution during the crisis position to make and execute decisions. The all-hands-on-deck ethos of a pandemic can’t last. But there are ways to institutionalize what One principle is that the flatter decision-making works—and the benefits can be substantial. During structures many companies have adopted in crisis and after the 2008 financial crisis, companies that mode are faster and more flexible than traditional were in the top fifth in performance were about 20 ones. Many routine decisions that used to go up percentage points ahead of their peers. Eight years the chain of command are being decided much later, their lead had grown to 150 percentage points. lower in the hierarchy, to good effect. For example, The lesson: those who move earlier, faster, and more a financial information company saw that its decisively do best. traditional sources were losing their value as COVID-19 deepened. It formed a small team to Accelerate the transition to agility define company priorities—on a single sheet We define “agility” as the ability to reconfigure of paper—and come up with new kinds of data, strategy, structure, processes, people, and which it shared more often with its clients. The From thinking about the next normal to making it work: What to stop, start, and accelerate 85
story illustrates the new organization paradigm: The argument for more flexible and shorter supply empowerment and speed, even—or especially— chains has been building for years. In 2004, an when information is patchy. article in the McKinsey Quarterly noted that it can be better to ship goods “500 feet in 24 hours [rather Another is to think of ecosystems (that is, how all than] shipping them 5,000 miles across logistical the parts fit together) rather than separate units. and political boundaries in 25 days … offshoring Companies with healthy ecosystems of suppliers, often isn’t the right strategy for companies whose partners, vendors, and committed customers can competitive advantage comes from speed and a find ways to work together during and after times of track record of reliability.”1 crisis because those are relationships built on trust, not only transactions. Start redesigning supply chains to optimize resilience and speed Finally, agility is just a word if it isn’t grounded in Instead of asking whether to onshore or offshore the discipline of data. Companies need to create or production, the starting point should be the accelerate their analytics capabilities to provide the question, “How can we forge a supply chain that basis for answers—and, perhaps as important, allow creates the most value?” That will often lead to them to ask the right questions. This also requires an answer that involves neither offshoring nor reskilling employees to take advantage of those onshoring but rather “multishoring”—and with it, the capabilities: an organization that is always learning reduction of risk by avoiding being dependent on is always improving. any single source of supply. Speed still matters, particularly in areas in which 3. From just-in-time to just-in-time consumer preferences change quickly. Yet even and just-in-case supply chains in fashion, in which that is very much the case, the need for greater resilience is clear. In a survey Stop optimizing supply chains based on conducted in cooperation with Sourcing Journal individual component cost and depending on a subscribers, McKinsey found that most fashion- single supply source for critical materials sourcing executives reported that their suppliers The coronavirus crisis has demonstrated the wouldn’t be able to deliver all their orders for the vulnerability of the old supply-chain model, with second quarter of 2020. To get faster means companies finding their operations abruptly adopting new digital-planning and supplier-risk- halted because a single factory had to shut down. management tools to create greater visibility Companies learned the hard way that individual and capacity, capability, inventory, demand, and transaction costs don’t matter nearly as much risk across the value chain. Doing so enables as end-to-end value optimization—an idea that companies to react well to changes in supply or includes resilience and efficiency, as well as cost. demand conditions. The argument for more flexible and shorter supply chains has been building for years. 1 Ronald C. Ritter and Robert A. Sternfels, “When offshore manufacturing doesn’t make sense,” McKinsey Quarterly, 2004 Number 4. 86 What now? Ten actions to emerge stronger in the next normal September 2020
One area of vulnerability the current crisis has placed near customers to meet local needs and revealed is that many companies didn’t know the accommodate variations in demand. The second suppliers their own suppliers were using and thus is to define what needs to be done near innovative were unable to manage critical elements of their supply bases to keep up with technological value chains. Companies should know where their change. Nextshoring is about understanding how most critical components come from. On that basis, manufacturing is changing (in the use of digitization they can evaluate the level of risk and decide what and automation, in particular) and building the to do, using rigorous scenario planning and bottom- trained workforce, external partnerships, and up estimates of inventory and demand. Contractors management muscle to deliver on that potential. It should be required to show that they have risk plans is about accelerating the use of flexible robotics, (including knowing the performance, financial, and additive manufacturing, and other technologies to compliance record of all their subcontractors, as create capabilities that can shift output levels and well as their capacity and inventories) in place. product mixes at reasonable cost. It isn’t about optimizing labor costs, which are usually a much Accelerate ‘nextshoring’ and the use of smaller factor—and sometimes all but irrelevant. advanced technologies In some critical areas, governments or customers may be willing to pay for excess capacity and 4. From managing for the short term to inventories, moving away from just-in-time capitalism for the long term production. In most cases, however, we expect companies to concentrate on creating more flexible Stop quarterly earnings estimates supply chains that can also operate on a just-in- Because of the unprecedented nature of the case approach. Think of it as “nextshoring” for the pandemic, the percentage of companies providing next normal. earnings guidance has fallen sharply—and that’s a good thing. The arguments against quarterly For example, the fashion industry expects to shift earnings guidance are well known, including that some sourcing from China to other Asian countries, they create the wrong incentives by rewarding Central America, and Eastern Europe. Japanese companies for doing harmful things, such as carmakers and Korean electronics companies were deferring capital investment and offering massive considering similar actions before the coronavirus discounts that boost sales to make the revenue outbreak. The state-owned Development Bank numbers but hurt a company’s pricing strategy. of Japan is planning to subsidize companies’ relocation back to Japan, and some Western Taking such actions may stave off a quick hit to the countries, including France, are looking to build stock price. But while short-term investors account up domestic industries for critical products, such for the majority of trades—and often seem to as pharmaceuticals. Localizing supply chains and dominate earnings calls and internet chatrooms—in creating more collaborative relationships with fact, seven of ten shares in US companies are critical suppliers—for example, by helping them owned by long-term investors. By definition, this build their digital capabilities or share freight group, which we call “intrinsic investors” —look capacity—are other ways to build long-term well beyond any given quarter, and deeper than resilience and flexibility. such quick fixes. Moreover, they have far greater influence on a company’s share price over time than Nextshoring in manufacturing is about two things. the short-term investors who place such stock in The first is to define whether production is best earnings guidance. From thinking about the next normal to making it work: What to stop, start, and accelerate 87
Moreover, the conventional wisdom that missing an replace their CEOs. The average tenure of a CEO at estimate means immediate retribution is not always a large-cap company is now about five years, down true. A McKinsey analysis found that in 40 percent from ten years in 1995. A recent Harvard Business of the cases, the share prices of companies that Review study of the world’s top CEOs found that missed their consensus earnings estimates actually their average tenure was 15 years.3 One critical rose. Finally, an analysis of 615 US public companies factor: close and constant communication with their from 2001 to 2015 found that those characterized boards allowed them to get through a rough patch as “long-term oriented” outperformed their peers in and go on to lead long-term success. earnings, revenue growth, and market capitalization. Even as a way of protecting equity value, then, Like Adam Smith, we believe in the “invisible earnings guidance is a flawed tool. And, of course, hand”—the idea that self-interest plus the network there can be no bad headlines about missed of information (such as the price signal) that helps estimates if there are no estimates to miss. economies work efficiently are essential to creating prosperity. But Adam Smith also considered the Along the same lines, stop assuming that pursuing rule of law essential and saw the goal of wealth shareholder value is the only goal. Yes, businesses creation as creating happiness: “What improves have fundamental responsibilities to make money the circumstances of the greater part can never and to reward their investors for the risks they be regarded as an inconveniency to the whole. No take. But executives and workers are also citizens, society can surely be flourishing and happy, of parents, and neighbors, and those parts of their which the far greater part of the members are poor lives don’t stop when they clock in. In 2009, in and miserable.”4 A more recent economist, Nobel the wake of the financial crisis, former McKinsey laureate Amartya Sen, updated the idea for the managing partner Dominic Barton argued that 21st century, stating that the invisible hand of the there is no “inherent tension between creating market needs to be balanced by the visible hand of value and serving the interests of employees, good governance. suppliers, customers, creditors, communities, and the environment. Indeed, thoughtful advocates of Given the trillions of dollars and other kinds value maximization have always insisted that it is of support that governments are providing, long-term value that has to be maximized.”2 We governments are going to be deeply embedded agree, and since then, evidence has accumulated in the private sector. That isn’t an argument that businesses with clear values that work to be for overregulation, protectionism, or general good citizens create superior value for shareholders officiousness—things that both Smith and over the long run. Sen disdained. It is a statement of fact that business needs to work ever more closely with Start focusing on leadership and working with governments on issues such as training, digitization, partners to create a better future and sustainability. McKinsey research defines the “long term” as five to seven years: the period it takes to start and build Accelerate the reallocation of resources and a sustainable business. That period isn’t that long. infrastructure investment As the current crisis proves, huge changes can take Business leaders love words like “flexible,” “agile,” place in much shorter time frames. and “innovative.” But a look at their budgets shows that “inertia” should probably get more attention. One implication is that boards, in particular, should Year to year, companies only reallocate 2 to 3 start to think about just how fast, and when, to percent of their budgets. But those that do more— 2 Dominic Barton, “Capitalism for the long term,” Harvard Business Review, March 2011, hbr.org. 3 “The best-performing CEOs in the world, 2019,” Harvard Business Review, November–December 2019, hbr.org. 4 Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, London, UK: W. Strahan and T. Cadell, 1776. 88 What now? Ten actions to emerge stronger in the next normal September 2020
Environmental management is a core management and financial issue. on the order of 8 to 10 percent—create more value. to be a core skill—one that current systems, mostly In the coronavirus era, the case for change makes designed for a different era, aren’t very good at. itself. In other areas, companies can use this sense of urgency to change the way they put together their budgets. Sales teams, for example, are used to 5. From making trade-offs to getting new targets based on the prior year’s results. embedding sustainability A better approach is to define the possible, based on metrics such as market size, current market Stop thinking of environmental management as share, sales-force size, and how competitive the a compliance issue market is. On that basis, a company can estimate Environmental management is a core management sales potential and budget accordingly. and financial issue. Lloyds Bank, the British insurer, estimated that sea-level rises in New York increased In previous economic transitions, infrastructure insured losses from Hurricane Sandy in 2012 by 30 meant things such as roads and pipelines. In percent; a different study found that the number democratic societies, governments generally drew of British properties at risk of significant flooding up the plans and established safety and other could double by 2035. Ignore these and similar regulations, and the private sector did the actual warnings—about cyclones or extreme heat, for building. Something similar needs to happen now, example—and watch your insurance bills rise, as in two areas. One is the irresistible rise of digital they did in Canada after wildfires in 2016. Investors technologies. Those without access to reliable are noticing too. In Larry Fink’s most recent letter to broadband are being left out of a sizable and CEOS, the BlackRock CEO put it bluntly: “Climate surging segment of the economy; there is a clear risk is investment risk.”5 He noted that investors case for creating a robust, universal broadband are asking how they should modify their portfolios infrastructure. to incorporate climate risk and are reassessing risk and asset values on that basis. The second has to do with the workforce. In 2017, the McKinsey Global Institute estimated that as Start considering environmental strategy as a much as a third of workplace activities could be source of resilience and competitive advantage automated by 2030. To avoid social upheaval—more The COVID-19 pandemic froze supply chains around high-wage jobs but fewer middle-class ones— the world, including shutting down much of the displaced workers need to be retrained so that United States’ meat production. Rising climate they can find and succeed in the new jobs that will hazards could lead to similar shocks to global supply emerge. The needs, then, are for more midcareer chains and food security. In some parts of Brazil, the job training and more effective on-the-job training. usual two-crop growing season may eventually only For workers, as well as businesses, agility is going yield a single crop. 5 Larry Fink, “A fundamental reshaping of finance,” BlackRock, January 2020, blackrock.com. From thinking about the next normal to making it work: What to stop, start, and accelerate 89
As companies reengineer their supply chains for costs of maintaining an asset, adapting it—for resilience, they also need to consider environmental example, by building perimeter walls or adding a factors—for example, is a region already prone to backup power supply—or investing in a new one. flooding likely to become more so as temperatures It is as true for the environment as any part of the rise? One of the insights of a McKinsey climate value chain that what gets measured gets managed. analysis published in January is that climate risks This entails creating sound, sophisticated climate- are unevenly distributed, with some areas already risk assessments; there is no generally accepted close to physical and biological tipping points. standard at the moment, but there are several works Where that is the case, companies may need to think in progress, such as the Sustainability Accounting about how to mitigate the possible harm or perhaps Standards Board. going elsewhere. The principle to remember is that it is less expensive to prepare than to repair or The principle at work is to make climate retrofit. In January 2018, the National Institute for management a core corporate capability, using all Building Sciences estimated spending $1 to build the management tools, such as analytics and agile 6 resilient infrastructure saved $6 in future costs. To teams, that are applied to other critical tasks. The cope with the COVID-19 pandemic, companies have benefits can be substantial. One study found that shortened their supply chains, switched to more companies that reduced their climate-change- videoconferencing, and introduced new production related emissions delivered better returns on processes. Consider how these and other practices equity—not because their emissions were lower, but might be continued; they can help make companies because they became generally more efficient. The more environmentally sustainable, as well as correlation between going green and high-quality more efficient. operations is strong, with numerous examples of companies (including Hilton, PepsiCo, and Procter Second, it makes sense to start thinking about the & Gamble), setting targets to reduce use of natural possible similarities between the coronavirus crisis resources and ending up saving significant sums and long-term climate change. The pandemic has of money. created simultaneous shocks to supply chains, consumer demand, and the energy sector; it has hit It’s true that, given the scale of the climate challenge, the poor harder; and it has created serious knock- no single company is going to make the difference. on effects. The same is likely to be true for climate That is a reason for effort, not inaction. Partnerships change. Moreover, rising temperatures could also directed at cracking high-cost-energy alternatives, increase the toll of contagious diseases. It could be such as hydrogen and carbon capture, are one argued, then, that mitigating climate change is as example. Voluntary efforts to raise the corporate much a global public-health issue as dealing with game as a whole, such as the Task Force on Climate- COVID-19 is. related Financial Disclosures, are another. The coronavirus crisis has been a sudden shock that essentially hit the world all at once—what we 6. From online commerce to a contact- call “contagion risk.” Climate change is on a different free economy time frame; the dangers are building (“accumulation risk”). In each case, however, resilience and Stop thinking of the contactless economy as collaboration are essential. something that will happen down the line The switch to contactless operations can happen Accelerate investment in innovation, fast. Healthcare is the outstanding example here. partnerships, and reporting For as long as there has been modern healthcare, As usual, information is the foundation for action. A the norm has been for patients to travel to an office data-driven approach can illuminate the relative to see a doctor or nurse. We recognize the value 6 “National Institute of Building Sciences issues new report on the value of mitigation,” National Institute of Building Sciences, January 11, 2018, nibs.org. 90 What now? Ten actions to emerge stronger in the next normal September 2020
of having personal relationships with healthcare diminished sharply. There will always be a place professionals. But it is possible to have the best for the lecture hall and the tutorial, but there is a of both worlds—staff with more time to deal with huge opportunity here to evaluate what works, urgent needs and patients getting high-quality care. identify what doesn’t, and bring more high-quality education to more people more affordably and more In Britain, less than 1 percent of initial medical easily. Manufacturers also have had to institute consultations took place via video link in 2019; under new practices to keep their workers at work but lockdown, 100 percent are occurring remotely. In apart—for example, by organizing workers into self- another example, a leading US retailer in 2019 contained pods, with shift handovers done virtually; wanted to launch a curbside-delivery business; staggering production schedules to ensure that its plan envisioned taking 18 months. During the physically close lines run at different times; and by lockdown, it went live in less than a week—allowing training specialists to do quality-assurance work it to serve its customers while maintaining the virtually. These have all been emergency measures. livelihoods of its workforce. Online banking Using digital-twin simulation—a virtual way to interactions have risen to 90 percent during the test operations—can help define which should be crisis, from 10 percent, with no drop-off in quality continued, for safety and productivity reasons, as and an increase in compliance while providing a the crisis lessens. customer experience that isn’t just about online banking. In our own work, we have replaced on-site Accelerate the transition of digitization ethnographic field study with digital diaries and and automation video walk-throughs. This is also true for B2B “Digital transformation” was a buzz phrase prior to applications—and not just in tech. In construction, the coronavirus crisis. Since then, it has become a people can monitor automated earth-moving reality in many cases—and a necessity for all. The equipment from miles away. consumer sector has, in many cases, moved fast. When the coronavirus hit China, Starbucks shut Start planning how to lock in and scale the down 80 percent of its stores. But it introduced crisis-era changes the “Contactless Starbucks Experience” in those It is hard to believe that Britain would go back to that stayed open and is now rolling it out more its previous doctor–patient model. The same is widely. Car manufacturers in Asia have developed likely true for education. With even the world’s most virtual show rooms where consumers can browse elite universities turning to remote learning, the the latest models; these are now becoming part of previously common disdain for such practices has what they see as a new beginning-to-end digital There are four areas to focus on: recovering revenue, rebuilding operations, rethinking the organization, and accelerating the adoption of digital solutions. From thinking about the next normal to making it work: What to stop, start, and accelerate 91
journey. Airlines and car-rental companies are also For offices, the planning will be about retaining developing contactless consumer journeys. the positives associated with remote working. For manufacturing, it will be about reconfiguring The bigger opportunity, however, may be in B2B production lines and processes. For many services, applications, particularly in regard to manufacturing, it will be about reaching consumers unused to online where physical distancing can be challenging. In interaction or unable to access it. For transport, it the recent past, there was some skepticism about will be about reassuring travelers that they won’t get applying the Internet of Things (IoT) to industry. Now, sick getting from point A to point B. In all cases, the many industrial companies have embraced IoT to once-routine person-to-person dynamics devise safety strategies, improve collaboration with will change. suppliers, manage inventory, optimize procurement, and maintain equipment. Such solutions, all of which Accelerate digitization can be done remotely, can help industrial companies Call it “Industry 4.0” or the “Fourth Industrial adjust to the next normal by reducing costs, Revolution.” Whatever the term, the fact is that enabling physical distancing, and creating more there is a new and fast-improving set of digital flexible operations. The application of advanced and analytic tools that can reduce the costs of analytics can help companies get a sense of their operations while fostering flexibility. Digitization was, customers’ needs without having to walk the factory of course, already occurring before the COVID-19 floor; it can also enable contactless delivery. crisis but not universally. A survey in October 2018 found that 85 percent of respondents wanted their operations to be mostly or entirely digital but only 18 7. From simply returning to returning percent actually were. Companies that accelerate and reimagining these efforts fast and intelligently, will see benefits in productivity, quality, and end-customer Stop seeing the return as a destination connectivity. And the rewards could be huge—as The return after the pandemic will be a gradual much as $3.7 trillion in value worldwide by 2025. process rather than one determined by government publicizing a date and declaring “open for business.” McKinsey and the World Economic Forum have The stages will vary, depending on the sector, but identified 44 digital leaders, or “lighthouses,” in only rarely will companies be able to flip a switch and advanced manufacturing. These companies created reopen. There are four areas to focus on: recovering whole new operating systems around their digital revenue, rebuilding operations, rethinking the capabilities. They developed new use cases for organization, and accelerating the adoption these technologies, and they applied them across of digital solutions. In each case, speed will be business processes and management systems important. Getting there means creating a step-by- while reskilling their workforce through virtual step, deliberate process. reality, digital learning, and games. The lighthouse companies are more apt to create partnerships Start imagining the business as it should be in with suppliers, customers, and businesses in the next normal related industries. Their emphasis is on learning, For retail and entertainment venues, physical connectivity, and problem solving—capabilities distancing may become a fact of life, requiring that are always in demand and that have far- the redesign of space and new business models. reaching effects. 92 What now? Ten actions to emerge stronger in the next normal September 2020
Not every company can be a lighthouse. But all Businesses around the world have rapidly adapted companies can create a plan that illuminates to the pandemic. There has been little hand- what needs to be done (and by whom) to reach a wringing and much more leaning in to the task at stated goal, guarantee the resources to get there, hand. For those who think and hope things will train employees in digital tools and cybersecurity, basically go back to the way they were: stop. They and bring leadership to bear. To get out of “pilot won’t. It is better to accept the reality that the future purgatory”—the common fate of most digital- isn’t what it used to be and start to think about how transformation efforts prior to the COVID-19 to make it work. crisis—means not doing the same thing the same way but instead focusing on outcomes (not favored Hope and optimism can take a hammering when technologies), learning through experience, and times are hard. To accelerate the road to recovery, building an ecosystem of tech providers. leaders need to instill a spirit both of purpose and of optimism and to make the case that even an uncertain future can, with effort, be a better one. Kevin Sneader, the global managing partner of McKinsey, is based in McKinsey’s Hong Kong office; Shubham Singhal, the global leader of the Healthcare Systems & Services Practice, is a senior partner in the Detroit office. Copyright © 2020 McKinsey & Company. All rights reserved. From thinking about the next normal to making it work: What to stop, start, and accelerate 93
Take the lead on climate and sustainability 8 95 Confronting climate risk 106 Addressing climate change in a postpandemic world 94
© Getty Images Confronting climate risk The changing climate is poised to create a wide array of economic, business, and social risks over the next three decades. Leaders should start integrating climate risk into their decision making now. Confronting climate risk 95
After more than 10,000 years of relative stability— potential impact on their organizations in different the full span of human civilization—the Earth’s locales around the world. climate is changing. Since the 1880s, the average global temperature has risen by about 1.1 degrees Celsius, driving substantial physical impact in The new climate reality regions around the world. As average temperatures Some climate change is locked in. rise, acute hazards such as heat waves and floods grow in frequency and severity, and chronic The primary driver of temperature increase over hazards such as drought and rising sea levels the past two centuries is the human-caused rise intensify. These physical risks from climate change in atmospheric levels of carbon dioxide (CO2) and will translate into increased socioeconomic risk, other greenhouse gases, including methane and presenting policy makers and business leaders with nitrous oxide. Since the beginning of the Industrial a range of questions that may challenge existing Revolution in the mid-18th century, humans have assumptions about supply-chain resilience, risk released nearly 2.5 trillion metric tons of CO models, and more. 2 into the atmosphere, raising atmospheric CO 2 concentrations by 67 percent. Carbon dioxide To help inform decision makers around the world lingers in the atmosphere for hundreds of years. so that they can better assess, adapt to, and As a result, nearly all of the warming that occurs is mitigate the physical risks of climate change, the permanent, barring large-scale human action to McKinsey Global Institute (MGI) recently released a remove CO2 from the atmosphere. Furthermore, report, Climate risk and response: Physical hazards the planet will continue to warm until we reach and socioeconomic impact. (For more on the net-zero emissions. methodology behind the report, see sidebar “About the research.”) Its focus is on understanding the If we don’t make significant changes, scientists nature and extent of physical risk from a changing predict that the global average temperature may climate over the next three decades, absent possible increase by 2.3 degrees Celsius by 2050, relative to adaptation measures. the preindustrial average. Multiple lines of evidence suggest that this could trigger physical feedback This article provides an overview of the report. We loops (such as the thawing of permafrost leading explain why a certain level of global warming is to the release of significant amounts of methane) locked in and illustrate the kinds of physical changes that might cause the planet to warm for hundreds or that we can expect as a result. We examine closely thousands of years. Restricting warming to below four of the report’s nine case studies, showing 1.5 or 2.0 degrees would reduce the risk of the earth how physical change might create significant entering such a “hothouse” state. socioeconomic risk at a local level. Finally, we look at some of the choices most business leaders will have to confront sooner than later. The nature of climate-change risk Stakeholders can address the risk posed by climate Our hope is that this work helps leaders assess change only if they understand it clearly and see the the risk and manage it appropriately for their nuances that make it so complicated to confront. company. The socioeconomic effects of a changing We find that physical climate risk has seven climate will be large and often unpredictable. characteristics: Governments, businesses, and other organizations will have to address the crisis in different and often — Increasing. Physical climate risks are generally collaborative ways. This shared crisis demands a increasing across the globe, even though shared response. Leaders and their organizations some countries may find some benefits (such will have to try to mitigate the effects of climate as increased agricultural yields in Canada, change even as they adapt to the new reality it Russia, and parts of northern Europe). The imposes on our physical world. To do so, leaders increased physical risk would also increase must understand the new climate reality and its socioeconomic risk. 96 What now? Ten actions to emerge stronger in the next normal September 2020
About the research need to adjust assumptions about long-term mortgages. This article was adapted from the McKinsey Global Institute — Nonlinear. Physiological, human-made, and (MGI) report Climate risk and response: Physical hazards and ecological systems have evolved or been 1 socioeconomic impacts. Its authors are Jonathan Woetzel (a optimized over time to withstand certain director of MGI and a senior partner in McKinsey’s Shanghai office), thresholds. Those thresholds are now Dickon Pinner (senior partner in the San Francisco office and global being threatened. If or when they are breached, leader of McKinsey’s Sustainability Practice), Hamid Samandari the impact won’t be incremental—the systems (senior partner in the New York office and chair of McKinsey’s may falter, break down, or stop working knowledge council), Hauke Engel (partner in the Frankfurt office), altogether. Buildings designed to withstand Mekala Krishnan (senior fellow at MGI), Brodie Boland (associate floods of a certain depth won’t withstand partner in the Washington, DC, office), and Carter Powis (consultant floods of greater depths; crops grown for a mild in the Toronto office). climate will wither at higher temperatures. Some The 131-page MGI report, released in January 2020, measures the adaptation can be carried out fairly quickly (for impact of climate change based on the extent to which it could affect example, better preparing a factory for a flood). human beings, human-made physical assets, and the natural world. But natural systems such as crops may not Most of the climatological analysis performed for the report was be able to keep pace with the current rate of completed by the Woods Hole Research Center. There are a range temperature increase. The challenge becomes of estimates for the pace of global warming; we have chosen the even greater when multiple risk factors are Representative Concentration Pathway (RCP) 8.5 scenario because it present in a single region. enables us to assess physical risk in the absence of further — Systemic. Climate change can have knock-on decarbonization. Action to reduce emissions could delay projected effects across regions and sectors, through outcomes. Download the full report on McKinsey.com. interconnected socioeconomic and financial systems. For example, flooding in 1 See “Climate risk and response: Physical hazards and socioeconomic impacts,” McKinsey Global Florida might not only damage housing but also Institute, January 2020, McKinsey.com. raise insurance costs, lower property values, and reduce property-tax revenues. Supply chains are particularly vulnerable systems, since they prize efficiency over resilience. They might quickly grind to a halt if critical production hubs are affected by intensifying hazards. — Spatial. Climate hazards manifest locally. There are significant variations between countries — Regressive. The poorest communities and and even within countries. The direct effects of populations of the world are the most vulnerable. physical climate risk must be understood in the Emerging economies face the biggest increase context of a geographically defined area. in potential impact on workability and livability. The poorest countries often rely on outdoor work — Nonstationary. For centuries, financial markets, and natural capital, and they lack the financial companies, governments, and individuals means to adapt quickly. have made decisions against the backdrop of a stable climate. But the coming physical — Unprepared. Our society hasn’t confronted climate risk is ever-changing and nonstationary. a threat like climate change, and we are Replacing a stable environment with one of unprepared. While companies and communities constant change means that decision making are already adapting, the pace and scale of based on experience may prove unreliable. adaptation must accelerate. This acceleration For example, long-accepted engineering may well entail rising costs and tough choices, parameters for infrastructure design may need as well as coordinated action across multiple to be rethought; homeowners and banks may stakeholders. Confronting climate risk 97
How climate risk plays out on a lead to more frequent breaches of these thresholds, local level making outdoor work far more challenging and There is already plenty of evidence of the extensive threatening the lives of millions of people. damage that climate risk can inflict. Since 2000, there have been at least 13 climate events that have As of 2017, some 380 million of India’s heat-exposed resulted in significant negative socioeconomic outdoor workers (75 percent of the labor force) impact, as measured by the extent to which it produced about 50 percent of the country’s GDP. disrupted or destroyed “stocks” of capital—people, By 2030, 160 million to 200 million people could physical, and natural. The events include lethal heat live in urban areas with a nonzero probability of such waves, drought, hurricanes, fires, flooding, and heat waves occurring. By 2050, the number could depletion of water supply. rise to between 310 million and 480 million. The average person living in these regions has a roughly More frequent and more intense climate hazards 40 percent chance of experiencing a lethal heat will have large consequences. They are likely to wave in the decade centered on 2030. In the decade threaten systems that form the backbone of human centered on 2050, that probability could rise to productivity by breaching historical thresholds roughly 80 percent. for resilience. Climate hazards can undermine livability and workability, food systems, physical India’s productivity could suffer. Outdoor workers assets, infrastructure services, and natural capital. will need to take breaks to avoid heatstroke. Their Some events strike at multiple systems at once. bodies will protectively fatigue, in a so-called self- For example, extreme heat can curtail outdoor limiting process, to avoid overheating. By 2030, work, shift food systems, disrupt infrastructure diminished labor productivity could reduce GDP by services, and endanger natural capital such as between 2.5 and 4.5 percent. glaciers. Extreme precipitation and flooding can destroy physical assets and infrastructure while India does have ways to adapt. Increased access to endangering coastal and river communities. air-conditioning, early-warning systems, and cooling Hurricanes can damage global supply chains, and shelters can help combat deadly heat. Working biome shifts can affect ecosystem services. hours for outdoor personnel could be shifted, and cities could implement heat-management efforts. At The best way to see how this will play out is to look the extreme, coordinated movement of people and at specific cases. MGI looked at nine distinct cases capital from high-risk areas could be organized. of physical climate risk in a range of geographies These would be costly shifts, of course. Adaptation and sectors. Each considers the direct impact and to climate change will be truly challenging if it knock-on effects of a specific climate hazard in a changes how people conduct their daily lives or specific location, as well as adaptation costs and requires them to move to areas that are less at risk. strategies that might avert the worst outcomes. Let’s look at four of those cases (see also sidebar Will mortgages and markets stay afloat in “Global problem, local impact”). Florida? Florida’s expansive coastline, low elevation, and Will it get too hot to work in India? porous limestone foundation make it vulnerable The human body provides one example of the to flooding. The changing climate is likely to bring nonlinear effect of breaching physical thresholds. more severe storm surge from hurricanes and The body must maintain a relatively stable core more tidal flooding. Rising sea levels could push temperature of approximately 37 degrees Celsius salt water into the freshwater supply, damaging to function properly. An increase of just 0.9 of a water-management systems. A once-in-100-years degree compromises neuromuscular coordination; 3 hurricane (that is, a hurricane of 1 percent likelihood degrees can induce heatstroke; and 5 degrees can per year) would damage about $35 billion in real cause death. In India, rising heat and humidity could estate today. By 2050, the damage from such 98 What now? Ten actions to emerge stronger in the next normal September 2020
an event could be $50 billion—but that’s just the To adapt, Florida will have to make hard choices. beginning. The accompanying financial effects may For example, the state could increase hurricane be even greater. and flooding protection, or it could curtail—and perhaps even abandon—development in risk-prone Real estate is both a physical and a financial areas. The Center for Climate Integrity estimates store of value for most economies. Damage, and that 9,200 miles of seawalls would be necessary the expectation of future damage, to homes and to protect Florida by 2040, at a cost of $76 billion. infrastructure could drive down the prices of Other strategies, such as improving the resilience exposed homes. The devaluation could be even of existing infrastructure and installing new green more significant if climate hazards also affect infrastructure, come with their own hefty price tags. public-infrastructure assets such as water, sewage, and transportation systems, or if homeowners Can supply chains weather climate change? increasingly factor climate risk into buying decisions. Supply chains are typically optimized for efficiency over resilience, which may make them vulnerable Lower real-estate prices could have significant to extreme climate hazards. Any interruption of knock-on effects in a state whose assets, people, global supply chains can create serious ancillary and economic activity are largely concentrated in effects. Let’s focus on two such supply chains: coastal areas. Property-tax revenue in affected semiconductors, a specialty supply chain, and heavy counties could drop 15 to 30 percent, which could rare earths, a commodity. lower municipal-bond ratings and the spending power of local governments. Among other things, The risk to each is slightly different. Key parts of that would make it harder for cities and towns to semiconductor supply chains are located invest in the infrastructure they need to combat in the Western Pacific, where the probability of climate change. a once-in-100-years hurricane occurring in any given year might double or even quadruple by The impact on insurance and mortgage financing in 2040. Such hurricanes could potentially lead to high-risk areas could also be significant. There’s a months of lost production for the directly affected duration mismatch between mortgages, which can companies. Unprepared downstream players—for be 30 years long, and insurance, which is repriced example, chipmakers without buffer inventories, every year. This mismatch means that current risk insurance, or the ability to find alternative signals from insurance premiums might not build suppliers—could see revenue in a disaster year in the expected risk over an asset’s lifetime, which drop by as much as 35 percent. could lead to insufficiently informed decisions. However, if insurance premiums do rise to account Mining heavy rare earths in southeastern China for future climate-change risk, lending activity for could be challenged by the increasing likelihood new homes could slow, and the wealth of existing of extreme rainfall. The probability of downpours homeowners could diminish. so severe that they could trigger mine and road closures is projected to rise from about 2.5 percent When home values fall steeply with little prospect of per year today to about 4.0 percent per year in 2030 recovery, even homeowners who are not financially and 6.0 percent in 2050. Given the commoditized distressed may choose to strategically default. One nature of this supply chain, the resulting production comparison point is Texas: during the first months slowdowns could result in increased prices for all after Hurricane Harvey hit Houston, in 2017, downstream players. the mortgage-delinquency rate almost doubled, from about 7 to 14 percent. Now, as mortgage Mitigation is relatively straightforward for both lenders start to recognize these risks, they could upstream and downstream players. Securing raise lending rates for risky properties. In some semiconductor plants in southeast Asia against cases, they might even stop providing 30-year hazards, for example, might add a mere 2 percent mortgages. to building costs. Downstream players in both the Confronting climate risk 99
Global problem, local impact Will it get too hot to work in India? Increasing risk: in India, the probability of anyone experiencing a lethal heat wave is effectively 0 today, but by 2030, 160 million to 200 million people could be at risk Degree of exposure: as of 2017, heat-exposed work in India produced ~50% of GDP, drove ~30% of GDP growth, and employed ~75% of the labor force Effect on labor productivity: by 2050, some parts of India may be under such intense heat and humidity duress that working outside would be unsafe for ~30% of annual daylight hours Adaptation: adaptation measures for India could include providing early-warning systems, building cooling shelters, shifting work hours for outdoor laborers, and accelerating the shift to service- sector employment © uniquely india/Getty Images Will mortgages and markets stay afloat in Florida? Increasing risk: rising sea levels, increased tidal flooding, and more severe storm surges from hurricanes are likely to threaten Florida’s vulnerable coastline Physical damage to real estate: in 2050, a once-in-100-years hurricane might cause $75 billion worth of damage to Florida real estate, up from $35 billion today Knock-on effects: in Florida, prices of exposed homes could drop, mortgage rates could rise, more homeowners may strategically choose to default, and property-tax revenue could drop 15–30% in directly affected countries Adaptation: adaptation measures in Florida could include improving the resilience of existing structures, installing new green infrastructure, and building seawalls © Warren Faidley/Getty Images 100 What now? Ten actions to emerge stronger in the next normal September 2020
Case studies based on the Representative Concentration Pathway (RCP) 8.5 scenario Can supply chains weather climate change? Increasing risk: a once-in-100-years hurricane in the western Pacific, which will be 4x more likely by 2040, could shut down the semiconductor supply chain Potential damage: supply chains are optimized for efficiency, not resilience, so production could halt for months; unprepared downstream players could see revenue dip 35% in 1 year Upstream mitigation: protecting semiconductor plants against hazards could add 2% to building costs Downstream mitigation: increasing inventory to provide a meaningful buffer could be cost-effective © Design Pics/The Irish Image Collection/Getty Images Can coastal cities turn the tide on rising flood risk? Increasing risk: increased flooding and severe storm surges threaten to cause physical damage to coastal cities, while knock-on effects would hamper economic activity even more Infrastructure threats: ports, low-lying train stations, and underground metros could be at risk, as could factories close to the coast Total damage: in Bristol, England, a once-in-200-years flood in 2065 could cause ≤$3 billion in damage; in Ho Chi Minh City, Vietnam, a once-in-100-years flood in 2050 could wreak ~$10 billion in damage Adaptation: it would take up to $500 million for Bristol to protect itself now from that scenario; Ho Chi Minh City might need seawalls, which could be very costly © Tan Dao Duy/Getty Images Confronting climate risk 101
rare-earth and semiconductor pipelines could overwhelm the defenses, in which case water would mitigate impacts by holding higher inventory levels reach infrastructure that was previously safe. and by sourcing from different suppliers across multiple regions. This can be done efficiently. We estimate that a 200-year flood today (that is, a For buyers of semiconductors, for example, flood of 0.5 percent likelihood per year) in Bristol raising inventory to provide a meaningful buffer would cause infrastructure-asset damage totaling could be cost effective, with estimated costs for between $10 million and $25 million. This may rise warehousing and working capital increasing input to $180 million to $390 million by 2065. The costs costs by less than 1 percent. Nonetheless, the of knock-on effects would rise even more, from price of climate prudence will almost always be $20 million to $150 million today to as much as $2.8 some decrease in production efficiency—for billion by 2065, when an extreme flood might shut example, by creating limitations on lean or just-in- down businesses, destroy industrial stores, and halt time inventory. transportation. Can coastal cities turn the tide on rising We estimate that protecting the city from this 2065 flood risk? scenario would cost $250 million to $500 million Many coastal cities are economic centers that have today. However, the actual costs will largely depend already confronted flood risk. But the potential on the specific adaptation approach. direct and knock-on effects of flooding are likely to surge dangerously. Vietnam’s Ho Chi Minh City is prone to monsoonal and storm-surge flooding. Today, the direct Bristol is a port city in the west of England that has infrastructure-asset damage from a 100-year flood not experienced major flooding could be on the order of $200 million to $300 for decades. But without major investment in million, rising to $500 million to $1 billion in 2050. adaptation, extreme flood risk there could grow Here, too, the knock-on costs in disrupted economic from a problem potentially costing millions of dollars activity are expected to be more substantial, rising today to a crisis costing billions by 2065. During very from between $100 million and $400 million today high tides, the Avon River becomes “tide locked” to $2 billion to $8.5 billion in 2050. and limits land drainage in the lower reaches of the river-catchment area. As a result, Bristol is Many new infrastructure assets in the city, vulnerable to combined tidal and pluvial floods, particularly the local metro system, were designed which are sensitive to both sea-level rise to tolerate an increase in flooding. Yet the hazards and precipitation increase. The likelihood of both are to which these assets may be subjected could be expected to climb with climate change. greater than even the higher thresholds. In a worst- case scenario, of 180 centimeters of sea-level While Bristol is generally hilly and most of the urban rise, these thresholds could be breached in many area is far from the river, the most economically locations, and some assets might be damaged valuable areas of the city center and port regions beyond repair. are on comparatively low-lying land. More than 200 hectares (494 acres) of automotive storage near the Compared with Bristol, Ho Chi Minh City has many port (often harboring up to 600,000 vehicles) could more adaptation options, as less than half of the be vulnerable to even low levels of floodwater, and city’s major infrastructure needed for 2050 exists the main train station could become inaccessible. today. But adaptation may carry a hefty price Bristol has flood defenses that would prevent the tag. One potential comparison is Jakarta’s major vast majority of damage from an extreme flood event coastal-defense plans, which have a potential cost today. By 2065, however, more extreme floods could of roughly $40 billion. That is comparable to Ho Chi Minh City’s current GDP. 102 What now? Ten actions to emerge stronger in the next normal September 2020
An effective response stability. We are not accustomed to planning for Local climate threats are increasing in most of a world with a changing climate. For example, the world. The changing environment is steadily statistical risk management is often not part of ordi- altering the very nature of regions around the nary processes in industrial companies. With the world. At the same time, the likelihood of “long tail” changing climate, it will be important to understand climate events that create cascading systemic and embrace the probabilistic nature of climate risk risk is growing. Physical climate risk will affect and be mindful of possible biases and outdated everyone, directly or indirectly. mental models; experiences and heuristics of the past may no longer be a reliable guide to the future. We think there are three steps that stakeholders The systemic nature of climate risk requires a holistic could consider as they seek an effective response approach to understand and identify the full range to the socioeconomic impacts of physical climate of possible direct and indirect impacts. risk: integrating climate risk into decision making, accelerating the pace and scale of adaptation, One of the biggest challenges from climate risk will and decarbonizing at scale to prevent a further be rethinking the current models we use to quantify buildup of risk. risk. These range from financial models used to make capital-allocation decisions to engineering Integrate climate risk into decision making models used to design structures. There is some Climate change needs to become a major feature in uncertainty associated with a methodology that corporate and public-sector decision making. As we leverages global and regional climate models, have noted, physical climate risk is simultaneously makes underlying assumptions on emission paths, spatial and systemic, nonstationary, and nonlinear and seeks to translate climate hazards to potential in its effect. Potential impacts are regressive and physical and financial damage. But exploring new rising over time, and stakeholders today may be ways to quantify climate risk is not the highest underprepared to manage them. Decision making “model risk.” Continued reliance on current models will need to reflect these characteristics. based on stable historical climate and economic data may be even riskier. For companies, this will mean taking climate considerations into account when looking Indeed, current models have at least three potential at capital allocation, development of products or flaws. First, they lack geographic granularity, at services, and supply-chain management, a time when companies need to know how their for example. Large capital projects would be key locations—and those of their suppliers—are evaluated in a way that reflects the increased exposed to different forms of climate threat. Second, probability of climate hazards at their location: How they don’t consider that the climate is constantly will that probability change over time? What are changing, a critical factor in determining such the possible changes in cost of capital for exposed things as how resilient to make new factories, what assets? How will climate risk affect the broader tolerance levels to employ in new infrastructure, market context and other implicit assumptions in and how to design urban areas. And third, they are the investment case? Cities will have to ask similar subject to potential sample bias, since decision questions for urban-planning decisions. Moreover, makers are accustomed to trusting their own while the MGI report focuses on physical risk, a experience as they make decisions about the future. comprehensive risk-management strategy will also need to include an assessment of transition and Accelerate the pace and scale of adaptation liability risk, as well as the interplay between these The pace and scale of adaptation will likely need to forms of risk. increase significantly. But adaptation is challenging. With hazard intensity projected to Changes in mindset, operating model, and tools increase, the economics of adaptation could worsen and processes will be needed to integrate climate over time. Technical limits may crop up. Difficult risk into decision making. For centuries, we have trade-offs may need to be assessed, including who made decisions based on a world of relative climate and what to protect and who and what to relocate. Confronting climate risk 103
Many instances may require coordinated action by global inventories to mitigate the risk of food or multiple stakeholders. raw-material shortages, building inventory levels in supply chains to protect against interrupted Despite all that, many stakeholders will have to production, establishing the means to source figure out ways to adapt. Key measures include from alternate locations or suppliers, and securing protecting people and assets, building resilience, backup power sources. reducing exposure, and ensuring that appropriate insurance and financing are in place. Reducing exposure. Adaptation strategies for many physical assets will have to reflect their full life cycle. Protecting people and assets. In response to For example, it may make sense not only to invest in the record-breaking 2010 heat wave in India that addressing asset vulnerabilities for the next decade killed 300 people in a single day, the Ahmedabad but also to shorten asset life cycles. In subsequent Municipal Corporation developed the country’s decades, as climate hazards intensify, the cost– first heat-action plan. Its measures included benefit equation of physical resilience measures establishing a seven-day probabilistic heat-wave may no longer be attractive. At that point, it may early-warning system, developing a citywide become necessary to redesign asset footprints cool-roof program, and setting up teams to altogether by relocating employees and assets. distribute cool water and rehydration pills to We have already seen some examples of this, such vulnerable populations during heat waves. Steps as the buyout programs in Canada for residents such as these are crucial for protecting people. in flood-prone areas. Quebec prohibits both Stakeholders must also be prepared to prioritize the building of new homes and the rebuilding of emergency response and preparedness, erect damaged homes in its floodplain. cooling shelters, and adjust working hours for outdoor workers who are exposed to heat. Decisions will need to be made about when to focus on protecting people and assets versus when Measures to make existing infrastructure and to find ways to reduce their exposure to hazards, assets more resilient can help limit risk. Some of this which regions and assets to spend on, how much would address “gray” infrastructure—for example, to spend on adaptation, and what to do now as raising the elevation level of buildings in flood- opposed to in the future. Companies need to prone areas—while other moves would protect develop a long-term perspective on how risk and “green” infrastructure. The Dutch program Room adaptation costs will probably evolve, and they will for the River, for example, gives rivers more room to need to integrate voices of affected communities manage higher water levels. into their decision making. On the other hand, it will sometimes be more cost Rethinking insurance and finance. People are effective to erect new buildings than to retrofit old reluctant to carry insurance for unlikely events, ones. Some $30 trillion to $50 trillion will be spent even if they can cause significant damage. Today, on infrastructure in the next ten years, much of it in only about 50 percent of losses are insured. That developing countries. These infrastructure systems percentage is likely to decrease as the changing and factories could be designed to withstand the climate brings more—and more extreme—climate withering storms of the future, rather than what events. Without insurance, recovery after passes for a once-in-200-years event now. disaster becomes harder, and secondary effects become more probable. Underinsurance Building resilience. Decisions about strengthening reduces resilience. assets will need to go hand in hand with measures to drive operational resilience in systems. An To adjust to constantly changing physical risk, important aspect of this is understanding the impact insurers will have to reconsider current data and thresholds for systems and how and when they models, current levels of insurance premiums, and could be breached. Examples of resilience planning their own levels of capitalization. Indeed, the entire for a world of rising climate hazards include building risk-transfer process (from insured to insurer to 104 What now? Ten actions to emerge stronger in the next normal September 2020
reinsurer to governments as insurers of last resort) Decarbonizing at scale may need examination, looking at whether each There is one critical part of addressing climate constituent is still able to fulfill its role. Without change that the MGI report does not examine: changes in risk reduction, risk transfer, and premium decarbonization. While adaptation is urgent, financing or subsidies, some risk classes in certain climate science tells us that further warming and areas may become harder to insure, widening the risk increase can only be stopped by achieving net- insurance gap that already exists in some parts of zero greenhouse-gas emissions. Decarbonization the world. New questions will have to be asked, and is a daunting challenge that leaders will need to innovative approaches will be needed. address in parallel with adaptation during the years ahead. For a closer look, see “Climate math: What a Finance will also have to adjust if it is to play a 1.5-degree pathway would take,” on McKinsey.com. significant role in funding adaptation measures, especially in developing countries. Public–private partnerships or participation by multilateral institutions is needed to prevent capital flight from To prepare for the climate of tomorrow, stakeholders risky areas. Innovative products and ventures have will have to learn, mitigate, and adapt. Individuals, already been developed to broaden the reach and businesses, communities, and countries will need to effectiveness of such measures. They include recognize physical climate risk and integrate it into “wrapping” a municipal bond into a catastrophe decision making. The next decade will be critical, bond, to allow investors to hold municipal debt as decision makers rethink the infrastructure, without worrying about hard-to-assess climate risk. assets, and systems of the future, and the world collectively sets a path to manage the risk from climate change. Copyright © 2020 McKinsey & Company. All rights reserved. Confronting climate risk 105
© Manish Kumar/EyeEm/Getty Images Addressing climate change in a postpandemic world The coronavirus crisis holds profound lessons that can help us address climate change—if we make greater economic and environmental resiliency core to our planning for the recovery ahead. by Dickon Pinner, Matt Rogers, and Hamid Samandari 106 What now? Ten actions to emerge stronger in the next normal September 2020
A ferocious pandemic is sweeping the globe, What follows is our attempt at providing some initial threatening lives and livelihoods at an alarming answers to these questions, in the hope that they rate. As infection and death rates continue to rise, will inspire ideas and actions that help connect our resident movement is restricted, economic activity immediate crisis response with priorities for recovery. is curtailed, governments resort to extraordinary measures, and individuals and corporations scramble to adjust. In the blink of an eye, the Potential lessons from the current coronavirus has upended the world’s operating pandemic assumptions. Now, all attention is focused on Understanding the similarities, the differences, and countering this new and extreme threat, and on the broader relationships between pandemics and blunting the force of the major recession that is climate risk is a critical first step if we are to derive likely to follow. practical implications that inform our actions. Amid this dislocation, it is easy to forget that just Fundamental similarities a few short months ago, the debate about climate Pandemics and climate risk are similar in that change, the socioeconomic impacts it gives rise to, they both represent physical shocks, which then and the collective response it calls for were gaining translate into an array of socioeconomics impacts. momentum. Sustainability, indeed, was rising on the By contrast, financial shocks—whether bank runs, agenda of many public- and private-sector leaders— bubble bursts, market crashes, sovereign defaults, before the unsustainable, suddenly, became or currency devaluations—are largely driven by impossible to avoid. human sentiment, most often a fear of lost value or liquidity. Financial shocks originate from within Given the scope and magnitude of this sudden crisis, the financial system and are frequently remedied and the long shadow it will cast, can the world afford by restoring confidence. Physical shocks, however, to pay attention to climate change and the broader can only be remedied by understanding and sustainability agenda at this time? Our firm belief is addressing the underlying physical causes. Our that we simply cannot afford to do otherwise. Not recent collective experience, whether in the public only does climate action remain critical over the or the private sector, has been more often shaped next decade, but investments in climate-resilient by financial shocks, not physical ones. The current infrastructure and the transition to a lower-carbon pandemic provides us perhaps with a foretaste future can drive significant near-term job creation of what a full-fledged climate crisis could entail in while increasing economic and environmental terms of simultaneous exogenous shocks to supply resiliency. And with near-zero interest rates for the and demand, disruption of supply chains, and global foreseeable future, there is no better time than the transmission and amplification mechanisms. present for such investments. Pandemics and climate risk also share many of the To meet this need and to leverage this opportunity, same attributes. Both are systemic, in that their we believe that leaders would benefit from direct manifestations and their knock-on effects considering three questions: propagate fast across an interconnected world. Thus, the oil-demand reduction in the wake of the — What lessons can be learned from the current initial coronavirus outbreak became a contributing pandemic for climate change? factor to a price war, which further exacerbated the stock market decline as the pandemic grew. They — What implications—positive or negative—could are both nonstationary, in that past probabilities our pandemic responses hold for climate action? and distributions of occurrences are rapidly shifting and proving to be inadequate or insufficient for — What steps could companies, governments, and future projections. Both are nonlinear, in that their individuals take to align our immediate pandemic socioeconomic impact grows disproportionally response with the imperatives of sustainability? and even catastrophically once certain thresholds Addressing climate change in a postpandemic world 107
are breached (such as hospital capacity to treat In climate change as in pandemics, the costs of a pandemic patients). They are both risk multipliers, global crisis are bound to vastly exceed those of its in that they highlight and exacerbate hitherto prevention. untested vulnerabilities inherent in the financial and healthcare systems and the real economy. Both are Finally, both reflect “tragedy of the commons” regressive, in that they affect disproportionally the problems, in that individual actions can run counter most vulnerable populations and subpopulations to the collective good and deplete a precious, of the world. Finally, neither can be considered as common resource. Neither pandemics nor climate a “black swan,” insofar as experts have consistently hazards can be confronted without true global warned against both over the years (even though coordination and cooperation. Indeed, despite one may argue that the debate about climate risk current indications to the contrary, they may well has been more widespread). And the coronavirus prove, through their accumulated pressures, that outbreak seems to indicate that the world at large is boundaries between one nation and another are equally ill prepared to prevent or confront either. much less important than boundaries between problems and solutions. Furthermore, addressing pandemics and climate risk requires the same fundamental shift, from Key differences optimizing largely for the shorter-term performance While the similarities are significant, there are also of systems to ensuring equally their longer-term some notable differences between pandemics and resiliency. Healthcare systems, physical assets, climate hazards. infrastructure services, supply chains, and cities have all been largely designed to function within A global public-health crisis presents imminent, a very narrow band of conditions. In many cases, discrete, and directly discernable dangers, which we they are already struggling to function within this have been conditioned to respond to for our survival. band, let alone beyond it. The coronavirus pandemic The risks from climate change, by contrast, are and the responses that are being implemented (to gradual, cumulative, and often distributed dangers the tune of several trillion dollars of government that manifest themselves in degrees and over stimulus as of this writing) illustrate how expensive time. They also require a present action for a future the failure to build resiliency can ultimately prove. reward that has in the past appeared too uncertain Healthcare systems, physical assets, infrastructure services, supply chains, and cities have all been largely designed to function within a very narrow band of conditions. 108 What now? Ten actions to emerge stronger in the next normal September 2020
and too small given the implicit “discount rate.” This been seen by some as a full-scale illustration of is what former Bank of England Governor Mark what drastic action can produce in a short amount Carney has called the “tragedy of the horizon.”1 of time. Satellite images of vanishing pollution in China and India during the COVID-19 lockdown are Another way of saying this is that the timescales of a case in point. Yet this (temporary) impact comes both the occurrence and the resolution of pandemics at tremendous human and economic cost. The key and climate hazards are different. The former are question is how to find a paradigm that provides at often measured in weeks, months, and years; the once environmental and economic sustainability. latter are measured in years, decades, and centuries. Much more easily said than done, but still a must-do. What this means is that a global climate crisis, if and when ushered in, could prove far lengthier and far more disruptive than what we currently see with the What could happen now? coronavirus (if that can be imagined). While we are at the initial stages of a fast-unfolding crisis, we can already start seeing how the pandemic Finally, pandemics are a case of contagion may influence the pace and nature of climate risk, while climate hazards present a case of action, and how climate action could accelerate the accumulation risk. Contagion can produce perfectly recovery by creating jobs, driving capital formation, correlated events on a global scale (even as we now and increasing economic resiliency. witness), which can tax the entire system at once; accumulation gives rise to an increased likelihood Factors that could support and accelerate of severe, contemporaneous but not directly climate action correlated events that can reinforce one another. For starters, certain temporary adjustments, such This has clear implications for the mitigation actions as teleworking and greater reliance on digital they each call for. channels, may endure long after the lockdowns have ended, reducing transportation demand Broader relationships and emissions. Second, supply chains may be Climate change—a potent risk multiplier—can repatriated, reducing some Scope 3 emissions actually contribute to pandemics, according to (those in a company’s value chain but not associated researchers at Stanford University and elsewhere.2 with its direct emissions or the generation of energy For example, rising temperatures can create it purchases). Third, markets may better price in favorable conditions for the spread of certain risks (and, in particular, climate risk) as the result infectious, mosquito-borne diseases, such as of a greater appreciation for physical and systemic malaria and dengue fever, while disappearing dislocations. This would create the potential for habitats may force various animal species to additional near-term business-model disruptions migrate, increasing the chances of spillover and broader transition risks but also offer greater pathogens between them. Conversely, the same incentives for accelerated change. factors that mitigate environmental risks—reducing the demands we place on nature by optimizing There may, additionally, be an increased public consumption, shortening and localizing supply appreciation for scientific expertise in addressing chains, substituting animal proteins with plant systemic issues. And, while not a foregone proteins, decreasing pollution—are likely to help conclusion, there may also be a greater appetite for mitigate the risk of pandemics. the preventive and coordinating role of governments in tackling such risks. Indeed, the tremendous costs The environmental impact of some of the measures of being the payor, lender, and insurer of last resort taken to counter the coronavirus pandemic have may prompt governments to take a much more 1 “Breaking the tragedy of the horizon—climate change and financial stability—speech by Mark Carney,” Bank of England, September 29, 2015, bankofengland.co.uk. 2 See Andrew Winston, “Is the COVID-19 outbreak a black swan or the new normal?,” MIT Sloan Management review, March 16, 2020; and Rob Jordan, “How does climate change affect disease?,” Stanford Earth, School of Earth, Energy & Environment, March 15, 2019. Addressing climate change in a postpandemic world 109
active role in ensuring resiliency. As for the private update and enhance historical models that are sector, the tide may be turning toward “building back used for infrastructure planning, and enable the better” after the crisis.3 use of climate stress testing in funding programs. Second, devote a portion of the vast resources Moreover, lower interest rates may accelerate the deployed for economic recovery to climate-change deployment of new sustainable infrastructure, as resiliency and mitigation. These would include well as of adaptation and resilience infrastructure— investments in a broad range of sustainability levers, investments that would support near-term job including building renewable-energy infrastructure, creation. And lastly, the need for global cooperation expanding the capacity of the power grid and may become more visible and be embraced increasing its resiliency to support increased more universally. electrification, retrofitting buildings, and developing and deploying technologies to decarbonize heavy If past is prologue, both the probability of such shifts industries. The returns on such investments and their permanence are likely to be proportional encompass both risk reduction and new sources of to the depth of the current crisis itself. growth. Third, seize the opportunity to reconsider existing subsidy regimes that accelerate climate Factors that may hamper and delay climate action change. Fourth, reinforce national and international Simultaneously, though, very low prices for high- alignment and collaboration on sustainability, for carbon emitters could increase their use and inward-looking, piecemeal responses are by nature further delay energy transitions (even though incapable of solving systemic and global problems. lower oil prices could push out a number of Our experiences in the weeks and months ahead inefficient, high-emission, marginal producers and could help inform new paths toward achieving encourage governments to end expensive fuel- alignment on climate change. subsidy regimes). A second crosscurrent is that governments and citizens may struggle to integrate For companies, we see two priorities. First, seize the climate priorities with pressing economic needs moment to decarbonize, in particular by prioritizing in a recovery. This could affect their investments, the retirement of economically marginal, carbon- commitments, and regulatory approaches— intensive assets. Second, take a systematic and potentially for several years, depending on the through-the-cycle approach to building resilience. depth of the crisis and hence the length of the Companies have fresh opportunities to make their recovery. Third, investors may delay their capital operations more resilient and more sustainable as allocation to new lower-carbon solutions due to they experiment out of necessity—for example, with decreased wealth. Finally, national rivalries may be shorter supply chains, higher-energy-efficiency exacerbated if a zero-sum-game mentality prevails manufacturing and processing, videoconferencing in the wake of the crisis. instead of business travel, and increased digitization of sales and marketing. Some of these practices could be expedient and economical to continue, What should be done? and might become important components of a In this context, we believe all actors—individuals, company-level sustainability transformation— companies, governments, and civil society—will one that accompanies the cost-efficiency and have an important role. digital-transformation efforts that are likely to be undertaken across various industries in the wake of For governments, we believe four sets of actions the pandemic. will be important. First, build the capability to model climate risk and to assess the economics of climate When it comes to resilience, a major priority is change. This would help inform recovery programs, building the capability to truly understand, 3 María Mendiluce, “How to build back better after COVID-19,” World Economic Forum, April 3, 2020, weforum.org. 110 What now? Ten actions to emerge stronger in the next normal September 2020
qualitatively and quantitatively, corporate shifts that are likely to persist after the crisis (such vulnerabilities against a much broader set of as working from home) to reduce the demands we scenarios, and particularly physical events. In place on our environment—or, more precisely, to that context, it will also be important to model shift them toward more sustainable sources. and prepare for situations where multiple hazards would combine: it is indeed not difficult to imagine By all accounts, the steps we take in the decade a pandemic resurgence coinciding with floods or ahead will be crucial in determining whether we fires in a given region, with significant implications avoid runaway climate change. An average global for disaster response and recovery. The same temperature rise above 1.5 or 2°C would create risks holds true for public entities, where resilience that the global economy is not prepared to weather. thinking will have to take greater account of the At an emission rate of 40 to 50 gigatons of CO2 combination and correlation of events. per year, the global economy has ten to 25 years of carbon capacity left. Moving toward a lower- For all—individuals, companies, governments, and carbon economy presents a daunting challenge, civil society—we see two additional priorities. First, and, if we choose to ignore the issue for a year or use this moment to raise awareness of the impact two, the math becomes even more daunting. In of a climate crisis, which could ultimately create short, while all hands must be on deck to defeat the disruptions of great magnitude and duration. That coronavirus and to restart the economy, to save lives includes awareness of the fact that physical shocks and livelihoods, it is also critical that we begin now can have massive nonlinear impacts on financial and to integrate the thinking and planning required to economic systems and thus prove extremely costly. build a much greater economic and environmental Second, build upon the mindset and behavioral resiliency as part of the recovery ahead. Dickon Pinner and Matt Rogers are senior partners in McKinsey’s San Francisco office, and Hamid Samandari is a senior partner in the New York office. Copyright © 2020 McKinsey & Company. All rights reserved. Addressing climate change in a postpandemic world 111
Think about the role of regulation and government 113 9 ‘And now win the peace’: Ten lessons from history for the next normal 127 COVID-19: Strategies for getting ahead of the pandemic crisis 111212
9 © Proxyminder/Getty Images ‘And now win the peace’: Ten lessons from history for the next normal We are not at the end of the COVID-19 crisis, and maybe not even at the end of the beginning. But it is not too soon to build the strategies that will foster broad-based growth. by Kevin Sneader and Shubham Singhal ‘And now win the peace’: Ten lessons from history for the next normal 113
Two months after Germany surrendered, Britain always different, and always uncertain. The past is held a general election. “And now win the peace,” less so. Considering the lessons of history can help exhorted the Labour Party, which promised massive business leaders and policy makers figure out how social and economic change. The words struck to manage the challenging years ahead. a chord and Labour won big, sweeping Winston Churchill out of leadership. With that in mind, we looked specifically at the post– World War II era—a time when much of the world Western Europe, Japan, and the United States did rose, quite literally, from the ashes. Not everywhere, win the peace, enjoying more than two decades of of course, or to the same degree. Indeed, many broad-based economic growth that not only raised countries would not want to revisit the decades living standards and brought a better quality of life after the war. Eastern Europe went behind the to their citizens but also helped to fuel global growth iron curtain; China suffered civil war, starvation, (Exhibits 1 and 2). and the Cultural Revolution; much of Africa, Latin America, and the Middle East was unstable and As the world considers how to navigate the post- wracked by conflict (although there were bright COVID-19 future, the only certainty is that it will be spots in these regions, too). So the following different, or as we wrote in a prior article, “the future discussion draws chiefly on the experience of Japan, is not what it used to be.” But then, the future is the United States, and Western Europe, which Web <2020> Exhibit 1 Exhibit <1> of <6> Economic growth was strong from 1945 to 1970 in Western Europe, North Economic growth was strong from 1945 to 1970 in Western Europe, North America, an apan America, and Japan. GDP, constant 1990 $ trillion Western Europe North America1 apan2 4 4 4 ‡ ‡ ‡ 2 2 2 1 1 1 0 0 0 194 190 19‰0 194 190 19‰0 194 190 19‰0 5 5 –2 4 9 10 AG, ˆ AG, ˆ AG, ˆ 1Canada and United States. 2Data unavailable for 1941–49, and so GDP as estiated usin 1940–0 coound annual rot rate CG€‚. Sourceƒ „addison Pro…ect Database 2010‚, Universit† of Groninen 114 What now? Ten actions to emerge stronger in the next normal September 2020
Web <2020> Exhibit 2 Exhibit <2> of <6> Per capita GDP growth also was strong from 1950 to 1970. Per capita GDP growth also was strong from 1950 to 1970. 1 Per capita GDP, constant 1990 $ thousand CAGR, % 1† nited States ƒrance „ nited …ingdom 10 ‚erman † ‡tal † † ˆapan ‰ 0 19†0 19‹0 19Š0 1Compound annual growth rate. Source: Maddison Project Dataase 010 ni ersit o€ ‚roningen were conspicuous in their success. Technologies The French have a phrase for it—“les trente developed for war were adapted for peace-time glorieuses,” or the “glorious 30”—the period use. Poverty, government debt, and inequality fell, from 1945 to 1975 in which faster growth, greater while living standards improved and prosperity productivity, higher wages, and generous social spread broadly. benefits transformed the country. The German term is “wirtschaftswunder,” or economic miracle, and In this article, we address two questions. First, the Italian is similar, “il miracolo economico.” In what accounted for this record of inclusive growth, 1964, a rebuilt Japan successfully hosted the sustained for more than two decades? And second, Tokyo Olympics. while acknowledging that the world has changed enormously since 1945, are there ideas and actions The coronavirus pandemic is not nearly on the scale taken then that can inspire us now? of the tragedy of World War II, in which an estimated 60 million people died and many cities were leveled. But COVID-19 has killed more than 600,000 people The lessons of the past: Factors behind so far and shut down huge swathes of the global postwar recovery economy, with all the suffering that implies. By any standard, that constitutes a global catastrophe. So When everybody else thinks it’s the end, we have it may be useful to think about how Western Europe, to begin. Japan, and the United States recovered from a —Konrad Adenauer, chancellor of West Germany, previous catastrophe. We think the following factors 1949–1963 were particularly relevant. ‘And now win the peace’: Ten lessons from history for the next normal 115
Considering the lessons of history can help business leaders and policy makers figure out how to manage the challenging years ahead. There was a sense of purpose around rebuilding billion today) to get European economies back lives and livelihoods on their feet. Assistance went to everything from In June 1941, when Britain was near its wartime nadir, funding the French aircraft industry (to help buy a British civil servant named William Beveridge propellers) to fighting tuberculosis to bringing was tasked with writing a report on the country’s European specialists to the United States to social-insurance programs. In November 1942, he learn new industrial and agricultural techniques produced something much more substantive. What to financing Portugal’s cod-fishing fleet. By 1952, became known as the Beveridge Report made the when funding ended, each participating country’s case for eradicating what Beveridge called five economy had surpassed prewar levels. Japan “giant evils”: want, disease, ignorance, squalor, and also received considerable aid and other support idleness. The report had both a sense of urgency, that fostered the structural adjustments it needed and of possibility: “Now, when the war is abolishing to transition from a war-focused to a peacetime landmarks of every kind, is the opportunity for using economy. All told, US economic aid totaled $44 experience in a clear field. A revolutionary moment billion by 1954—the equivalent of $420 billion today. in the world’s history is a time for revolutions, not for patching.” The report argued for “cooperation No two countries are alike, and there were no magic between the State and the individual” but without multinational bullets that solved these countries’ stifling “incentive, opportunity, responsibility.” problems. What can be said, however, is that after These principles, adapted to local conditions, to a World War II, there was a broad sense that it was large degree describe the basis for the development time to do better for the millions of people who of many of the postwar European welfare states. had suffered so terribly and whose leaders had previously failed them so badly. The United States also played an important role. It suffered little physical destruction during the war Global institutions created the structures to and endured nothing like the postwar distress of promote technology sharing, economic growth, Japan and Europe, where even several years after and political stability the war, tens of millions of people remained hungry It’s a veritable alphabet soup: EAEC, ECSC, GATT, and cold. The United States recognized that, for 1 IMF, NATO, UN. All of these were created in the both humanitarian and geopolitical reasons, it years after the war in an effort to forge a more needed to help. The most famous effort to meet constructive economic and international order. The these pressing needs was the Marshall Plan. From creation of GATT, for example, created a framework 1948 to 1952, the United States gave $13 billion in that liberalized international trade. As trade barriers aid to 16 European countries (equivalent to $126 fell, technological transfer between industries and 1 European Atomic Energy Community, European Coal and Steel Community, General Agreement on Tariffs and Trade, International Monetary Fund, North Atlantic Treaty Organization, United Nations. 116 What now? Ten actions to emerge stronger in the next normal September 2020
countries rose. Global foreign direct investment school. What this translated into isn’t just better- grew eight times from 1950 to 1970. At the same educated people—a good in and of itself—but a pool time, the formation of NATO in 1949 created the of workers capable of excelling in the fast-changing geopolitical security that allowed Western industrial economy. European governments breathing room to reconstruct their countries. Business adapted Once the basics were established, such as stable The creation of these international institutions currencies, relatively open trade, antitrust laws, allowed individual economies and businesses to workforce training, and land and labor reforms, get on with the job of deploying the capital and business was able to get back to business. Public technology available to rebuild their countries—with and private investment had no difficulty finding far-reaching effects. The European Coal and Steel commercial applications, and the private sector Community, for example, eventually evolved into absorbed it productively. In 1948, when West what is now the European Union. Germany scrapped price controls and created the Deutsche Mark, industrial production immediately There was sustained investment in human and responded, rising 50 percent. physical infrastructure Governments took a long-term view, with effective Wartime economic policy also played a role, as it planning teams that implemented multiyear forced selected companies to scale up, make new initiatives in areas such as education, energy, products, and innovate faster than they would have infrastructure, R&D, telecom, and transportation. otherwise. For example, Pfizer was a citric-acid These were sustained through changes in political manufacturer when the US government asked it leadership and included the expertise of scientists to participate in the production of penicillin. After and economists. the war, the company adapted what it had learned to create an improved, deep-tank fermentation War-torn countries needed to fix their roads production process that enabled it to create new and replace their bridges, and they did, often antibiotics and become a major pharmaceutical remarkably quickly. France restored more than player. Wartime investments in areas like nuclear 80 percent of its coal capacity by the end of 1945 energy, rocketry, synthetic rubber, and automotive and doubled its steel capacity between 1947 and engineering all had positive spillover effects 1950. The US interstate highway system, begun in during peacetime. 1956, contributed to higher productivity and lower transportation costs. “We needed them [highways] With reduced postwar government controls, for the economy,” noted one of the system’s business also consolidated, creating larger units architects, “Not just as a public-works measure, but that were able to make sizeable investments for future growth.” in innovative technologies; the chemicals, pharmaceuticals, and high-tech industries are The infrastructure efforts went well beyond bricks notable examples of this effect. At the same time, and mortar. Japan introduced reforms that both a stable political and social environment, along demilitarized and broadened education. In the with flexible working conditions, also encouraged United States, the GI Bill more than doubled the new business formation. With investment coming number of college graduates between 1940 and in, and liberalized trade rules fostering the transfer 1950. Britain mandated free secondary education, and expansion of technology, the stage was set and France extended how long children stayed in for sustained growth with broad social benefits, as ‘And now win the peace’: Ten lessons from history for the next normal 117
workers moved from lower-paid sectors, such as recovering from the coronavirus crisis. Not the same agriculture, into more productive and higher- policies, of course—the conditions are too different. paid ones. Trade flows are much bigger, international travel is routine, information is transferred seamlessly, and the use of digital tools is only going to get much Drawing the right conclusions: The greater. But there are broad themes that we believe limits of the postwar analogy are pertinent. It is not often that nations learn from the past, even In the postwar era, international institutions 2 rarer that they draw the correct conclusions from it. (GATT, Bretton Woods, Marshall Plan ), domestic —Henry Kissinger, A World Restored government policies (education, training, infrastructure, currency reform), and private-sector There was no postwar miracle; the actions that actions (innovation, technology partnerships, forged recovery were all human made. Good structural change) worked together to create the policies, political commitment, and hard work made conditions for broad-based growth (Exhibits 3, 4, 5). it happen. The same will have to be the case in Web <2020> Exhibit 3 Exhibit <4> of <6> In the United States, employment remained robust after 1945, while national In the United States, employment remained robust after 1945, while national debt and inequality declined. debt and inequality declined. Unemployment rate, National debt, of €‚ Inequality, share of wealth held by top 1 percent 1 1 1 194 19 19 19 194 19 19 19 194 19 19 19 Source: Federal Reserve Bank of St. Louis 2 The Bretton Woods Agreement, negotiated in 1944 by delegates from 44 countries at a UN conference held in Bretton Woods, New Hampshire, stated that gold was the basis for the US dollar, and other currencies would be pegged to the US dollar’s value. The system came to an end in the early 1970s when President Richard Nixon announced that the United States would no longer exchange gold for US currency. The Marshall Plan, formally approved in 1948, was a US initiative that provided foreign aid to Western Europe. 118 What now? Ten actions to emerge stronger in the next normal September 2020
Web <2020> Exhibit 4 Exhibit <5> of <6> German unemployment dropped after 1950, while debt and inequality also German unemployment dropped after 1950, while debt and inequality also declined. declined. Unemployment rate, % National debt, % of GD Inequality, share of wealth held by top 1 percent 1 1 1 1 1 1 1 1 1 1 1 1 Source: German Federal Bank; German Ministry of Finance Web <2020> Exhibit 5 Exhibit <6> of <6> France saw significant improvements in levels of both debt and inequality after 1950. France saw significant improvements in levels of both debt and inequality after 1950. ational debt of Inequality share of wealth held by top 1 percent 100 5 75 25 50 15 25 5 0 0 1950 1960 1970 1950 1960 1970 Source: International Monetary Fund ‘And now win the peace’: Ten lessons from history for the next normal 119
And in fact, the same factors were also critical in they will emphasize will be globalization—the more recent success stories, such as Estonia, Israel, world’s growing connectedness, in both cultural Singapore, South Korea, and Taiwan, all of which and economic terms. Globalization is a long-term emerged from difficult circumstances to create phenomenon: exports of goods as a share of advanced economies and prosperous societies. In global GDP doubled from 4 percent in 1945 to 9 the postpandemic world, there needs to be a similar percent in 1970 and doubled again in the 1980s. cohesiveness of action. By 2017, the cross-border trade in goods and services had reached 28 percent of global GDP. In addition, the continued emergence of China, India, Adapting the lessons of the postwar era and other economies, plus the rise of seamless to the coming post-COVID-19 era communications, in the form of the mobile phone and the internet, have quickened the pace and Part of being optimistic is keeping one’s head deepened the effects of globalization. On the pointed toward the sun, one’s feet moving forward. whole, this has been a very good thing: the spread There were many dark moments when my faith in of globalization has helped lift billions of people humanity was sorely tested, but I would not and out of poverty. But there have been losers, in both could not give myself up to despair. That way lays environmental and social terms. defeat and death. ―Nelson Mandela, Long Walk to Freedom: The Global problems need global attention, something Autobiography of Nelson Mandela the architects of the postwar world recognized. Today, we need to do the same, reshaping To win the post-COVID-19 peace, today’s policy globalization and its institutions to meet modern makers and business leaders need to channel needs. The good news is that doing so may be a the optimism and imagination of their postwar matter of pushing on an open door. A 2019 poll equivalents—but differently. In many ways, we live by the World Economic Forum, with respondents in the world created then. While keeping what is from 29 countries, for example, found that at least worthwhile, it is time to do better. Here we suggest 72 percent in all regions agreed that “all countries ten ways to win the peace. can improve at the same time”; and majorities in all regions (and 76 percent overall) believe that it Reform and reshape globalization is important for countries to work together. Here When future historians look back on the first two are some ways to address some of the discontents decades of the 21st century, one of the themes associated with globalization. When future historians look back on the first two decades of the 21st century, one of the themes they will emphasize will be globalization. 120 What now? Ten actions to emerge stronger in the next normal September 2020
Create trade policies that take into account how framework within which companies can operate; globalization is changing without it, regulation will be fragmented, which One change is that trade in services is now growing raises costs and irritation to no good effect. Again, much faster than trade in goods—60 percent faster the COVID-19 era is showing the possibilities, with overall, and two to three times as fast in specific new and nimble partnerships producing equipment sectors, such as information technology. In fact, and working together to find and develop a vaccine. depending on how the figures are calculated, trade in services may already be more valuable than that in goods. Digital flows exert a larger impact Renew the role and effectiveness of on GDP growth than the trade in goods, and even the public sector the trade in goods often has a digital component. In many countries, there is rising distrust of Another departure from the 20th century is that established institutions, fueled by a sense that labor-cost arbitrage is less important, accounting the young, minorities, and low- and middle- for only 18 percent of the trade in goods from poorer 4 income earners are losing out. There is widening to richer countries. A third is that more trade is economic inequality within many countries and happening regionally, particularly within Europe a sense that the next generation is growing up and Asia; the COVID-19 crisis could well accelerate in a more dangerous, less financially secure, and this development, as many companies will want generally unsettled age. The COVID-19 crisis has to bring critical parts of their supply chain closer only exacerbated these concerns. To increase to home. Trade disputes have been a constant trust, governments need to show that they are feature of the international environment, and they serious about fostering economic inclusion and still are. But they have generally been related to making technology work for everyone. And they goods. Recognizing that intellectual property- and need to do so effectively; only 10 percent of those tax-related issues will likely be more complex with surveyed in 2019 believed government executed its services and digital technologies than with goods, it duties competently; more than half characterized makes sense to get ahead of the action before these government as unfair and often corrupt. Just as in also become mired in endless conflict. business, execution matters. Global institutions need to be modernized so that Modernize social policies these (and other technologies and trends) can The reality is that many countries offer more become the basis for inclusive growth. International insecure work, higher housing costs, and greater agreements that enable a balanced and safe flow of economic polarization. Yet social policies related data and services, including standards for taxes on to work, unemployment, and income support have digital products and services, intellectual-property not changed nearly as much as the circumstances protection, data privacy, and security, all need to around them. That said, some initiatives are worth be developed. evaluating to see how well they work (or not). For instance, some governments are legislating new Promote the diffusion of technology labor laws to address the needs of temporary, The McKinsey Global Institute (MGI) has identified gig, and other unconventional working patterns. a dozen technologies3 that could create $33 trillion Australia, France, Georgia, and Massachusetts a year in value by 2025. For technology to continue are considering or have passed legislation that to advance and thrive, there must be a global extends unemployment insurance to independent 3 Mobile Internet, automation of knowledge work, the Internet of Things, cloud technology, advanced robotics, autonomous vehicles, next- generation genomics, energy storage, 3-D printing, advanced materials, advanced oil and gas exploration and recovery, and renewable energy. 4 Trust in government fell in more than half of the Organisation for Economic Co-operation and Development (OECD) economies between 2006 and 2016, and almost half the people polled in 16 OECD economies believe the average person in their country is worse off today than 20 years ago. “What worries the world,” Ipsos, September 2018, Ipsos.com. ‘And now win the peace’: Ten lessons from history for the next normal 121
contractors. Others allow recipients to continue there are many different options to learn from. The to receive benefits if they are working part-time or role of government is to identify the best ideas, test starting a business. Governments from Germany to them, and then expand (or discard) them. Nebraska to Minneapolis are considering changes to zoning laws to encourage the construction of Institute measures to increase productivity denser and cheaper housing. Others are looking There can be no inclusive growth without economic at restricting rent increases. Making benefits growth, which means productivity has to grow, too. portable—that is, attached to individuals, rather Productivity was the foundation of the economic than workplaces—is another option. For example, success of the postwar era (Exhibit 6). Led by rising New York State’s Black Car Fund provides workers’ business investment and technology diffusion, compensation, paid for by a fare surcharge, for Germany, Japan, and other war-torn economies built livery and rideshare drivers. Lifelong training world-class industries in sectors ranging from cars accounts, funded by business, government, and and luxury goods to steel and energy. It is still true individuals, could encourage workers to invest in that only through greater productivity do wages and themselves, and also boost productivity. These are living standards improve, particularly in markets just some of the ideas that countries and states are where population growth ranges from little to none. experimenting with; we cite them to illustrate that Web <2020> Exhibit 6 Exhibit <3> of <6> Strong productivity contributed to Japan’s postwar growth, even when Strong productivity contributed to Japan’s postwar growth, even when population growth slowed after 1960. population growth slowed after Real GDP, constant Year-over-year change Real GDP per capita, 1990 $ trillion in population, % constant 1990 $ thousand 1. ‡ 1 0.„ „ 0.ƒ 1 ƒ 0 0 0 19ƒ… 19…0 19†0 19ƒ… 19…0 19†0 19ƒ… 19…0 19†0 9.4 9.6 1.9 1.1 7.4 8.4 GR, % GR, % GR, % 1Compound annual growth rate. Source: Maddison Project Dataase 010 ni ersit o€ ‚roningen 122 What now? Ten actions to emerge stronger in the next normal September 2020
In many advanced economies, however, productivity investment. In four sectors alone—mobility, growth has slowed—to 0.5 percent in 2010 to healthcare, manufacturing, and retail—McKinsey 2014, down from 2.4 percent a decade earlier. has identified use cases that could boost global We recognize that economists discuss whether GDP by as much as $2 trillion by 2030. productivity gains are well measured and why digital technology does not translate in expected Beyond the implications for industry, connectivity productivity gains. Nevertheless, to do better, also has ramifications for equity and society— there are proven “catch-up” approaches, such something that has been proved emphatically true as removing barriers to competition in services, during the pandemic, in which the use of online cutting red tape that impedes business formation education and telemedicine has skyrocketed. (and dissolution), and allowing more effective However, even in advanced economies, not everyone reallocation of human and financial resources as has access to high-speed internet, and those new technologies emerge and productivity gains without digital connectivity will have less access shift across industries. The productivity of public to economic opportunity. Governments can play a and regulated sectors, such as healthcare, has been role in expanding access, with the goal of universal notably slow to improve. connectivity. For example, they can illustrate the possibilities in their own operations; encourage its The other way to boost productivity is to “push use in the development of smart cities; and establish the frontier” of innovation and technology. This is a regulatory framework that ensures privacy, security, where sustained, long-term growth will come from. ownership, and interoperability. It will not come from industry as we knew it in the 20th century but from Industry 4.0, meaning the Invest in reskilling use of advanced technologies such as artificial Industry 4.0 and the knowledge economy could intelligence (AI), robotics, genetics, biomedicine, bring significant economic and social benefits. and the Internet of Things. The latter, for example, McKinsey has estimated that AI adoption alone has a wide range of uses, from detecting production could raise global GDP $13 trillion by 2030—but errors early to boosting crop yields by measuring only if the right talent is available. The change could the moisture of fields to monitoring the health be wrenching. By 2030, according to MGI, as many status of patients. Fulfilling the potential of these as 375 million workers—or roughly 14 percent of the technologies, however, requires supportive global workforce—may need to switch occupational regulation and a well-prepared workforce. categories as digitization, automation, and advances Otherwise, the danger is that those who are in AI disrupt the world of work. One out of 11 jobs displaced by technological change will end up in 2030 could be in occupations that didn’t exist in in lower-paid or casual work—the opposite of 2015. There will be more jobs that require tertiary inclusive growth. education and fewer available to those with only a high-school education or less. Build digital infrastructure After the war, countries built physical assets, such The case for change is clear. But educational models as Japan’s high-speed railways or deepwater ports have not changed much over the past century, and in Europe and the United States, to accelerate their in the countries that are part of the Organisation economies. In the 21st century, digital capabilities for Economic Co-operation and Development are likely to be the most important infrastructure (OECD), government spending on training has ‘And now win the peace’: Ten lessons from history for the next normal 123
COVID-19-riddled 2020 is not war-wracked 1950. But history can still provide useful lessons. actually fallen. The public sector will need to devise by 15 percent. Investment in health, MGI suggests, new unemployment income and worker-transition is also sound economic policy, with a return of support programs and work more closely with $2 to $4 for every $1 in spending on known the private sector and organized labor to develop health improvements. effective ways to build capabilities. The GI Bill and other postwar education reforms helped to create In emerging economies, poor health is a drag on a workforce capable of excelling in a sophisticated productivity. In advanced economies, the benefit is industrial economy. Now the need is to work with subtler: the possibility of creating a longer, healthier business to invest in a workforce that can do the middle age. As MGI put it, 65 would be the new same in Industry 4.0. One priority: compile the 55. The value of improved health to the happiness data—a problem cannot be fixed if it is undefined. of individuals is, of course, incalculable. In strictly The European Union is creating a tool that can be economic terms, a healthier late middle age used by all its members to consolidate information would allow more people to work longer and more on what skills are in demand where; and Denmark is productively. In the United States, where population compiling detailed information on the skills required growth is slowing, delayed retirement could add 675 for hundreds of occupations. Another area to look million work hours per week. We understand that at is extending educational support into adulthood this would require changes to retirement laws and through the creation of lifelong learning programs, pension systems, and that this could be contentious such as the individual training accounts established (to put it mildly). Strictly in economic terms, however, in France and Singapore. increasing labor-force participation in this way could bring big dividends. Expand the labor force In the postwar era, population growth was an important factor in the period’s economic and Reimagine and reinvigorate the productivity success. In today’s context of aging private-sector social contract populations (and in many countries—notably Japan, As individuals assume more responsibility (and but others, too—absolute population decline), there the state less) for their careers, benefits, and is no new baby boom in sight, and women can only retirement, the role of the workplace becomes more enter the workforce in big numbers once. In this important. In January 2020, the Edelman Trust context, how could the labor force be expanded? Barometer found that more than half (56 percent) of respondents in 28 markets (and majorities in 22 of One way is through better health. According to new them) agreed that “capitalism as it exists today does research from MGI,5 poor health reduces global GDP more harm than good in the world.” Almost three- 5 Prioritizing health: A prescription for prosperity, McKinsey Global Institute, July 8, 2020, McKinsey.com. 124 What now? Ten actions to emerge stronger in the next normal September 2020
quarters said CEOs should take the lead on change, is, equipping existing workers to do higher-level rather than waiting for government. Pressure on jobs—would appear to be an area where the role of businesses to serve their communities in variegated business is straightforward. But the record is patchy. ways will only build, given the substantial aid In a 2017 survey of executives, only 16 percent governments have provided to the private sector to said they felt “very prepared” to address potential cope with the COVID-19 crisis—double the scale skills gaps. About twice as many said they were of that related to the 2008 financial crisis. Just as “somewhat” or “very” unprepared. While training business stepped up after the war, so must it do now, budgets have risen over the past few years, that is but in different ways. not the same thing as reskilling; much of the former goes to leadership conferences and showing new Embrace ‘stakeholder capitalism’ workers the ropes. The term encompasses the idea that companies consider the interests of their employees, Reskilling is essential if businesses are to deliver on customers, suppliers, and communities, as well as the promise of Industry 4.0—and if workers are to shareholders, in their decision making. In a general benefit from it. Amazon, for example, is spending sense, few CEOs would disagree (and even fewer $700 million to upskill as much as a third of its publicly). But the good intentions embodied in this workforce, or 100,000 people. One program trains phrase must be accompanied by action. Again, there nontechnical staff to transition them into software- are many examples, such as Walmart’s education engineering careers; in another, warehouse workers and training programs and global software company can earn an A+ certification that qualifies them for IT SAP’s extensive reskilling initiatives. Others, such support positions. as Unilever and Bank of America, have voluntarily raised wages for lower-paid workers; in high- Altruism may be an element in this and similar cost Silicon Valley, a few companies are building efforts, but there are also economic benefits: it housing for some of their workers and also funding can be much more profitable to reskill a valued affordable housing in their communities. But it is fair employee than to find a new one. And as labor to say that business can do more. forces grow more slowly, or even shrink, a company’s existing pool of workers can be a source The research is limited, but there is evidence to of new talent. As one executive told the Wall Street suggest that companies that execute the “triple Journal, “Executives have this idea that ‘as my bottom line” well—meaning economic, social, and people become obsolete, I’ll just hire new people.’ governance programs—create positive financial Well, they won’t be there.” value through greater efficiency, innovation, risk management, and access to markets. In the future, Reskilling can be expensive, particularly for smaller regardless of the bottom-line effects, actively companies; and it’s true that sometimes employees participating along all three dimensions may be seen take their new skills elsewhere. One approach is to as part of the social license that business needs to work with other institutions—community colleges, operate. This is a curve that the best companies will government agencies, even companies in the want to get ahead of. same sector—to spread the costs, as winemakers have done in Washington state. And it’s worth Invest in employees remembering that while reskilling carries cost—so When it comes to the social contract between does having a less adept and discouraged workforce. companies and communities, reskilling—that ‘And now win the peace’: Ten lessons from history for the next normal 125
Deploy productivity-boosting technology The good old days, in many ways, weren’t all that During the COVID-19 crisis, companies have used good. People all over the world today are richer and technology in new ways to cope, often with a speed healthier, with more access to information, culture, and success that surprised them. For example, retail and education. From 2004 to 2018, more than 300 stores cut down on the number of in-store cashiers million people in India alone have lifted themselves but added more people to deal with online-enabled out of poverty. Global life expectancy in 2016 was curbside pickup and delivery. On the whole, however, 72 years—up from 46 years in 1950 and higher than there are big gaps between what is being done in any single country then. In Africa, life expectancy and what could be done. In 2017, MGI found that increased by almost a decade from 2000 to 2016 (to on average, industries were less than 40 percent 62.1 years). digitized; China, Europe, and the United States, other research found in 2019, had tapped into only In one sense, however, the 1950s and ’60s do look 20 percent of their digital potential. That matters, pretty good, as many economies enjoyed sustained because just as technological diffusion powered and inclusive growth. COVID-19-riddled 2020 is postwar growth, digital capabilities will likely be a not war-wracked 1950. But history can still provide major factor in fueling post-COVID-19 growth. useful lessons. One is the need for international institutions and the public and private sectors to pull An analysis of the effect of digital on productivity in the same direction. Another is the importance of is compelling—70 percent of those identified as health, education, and training. “digital superstars” achieve higher-than-average productivity, and the most digitized sectors are There are also lessons in what not to do. Countries also the ones that are the most productive. Even that cut themselves off from global flows of so, only a quarter of global sales and supply-chain technology, trade, and information generally operations were digitized in 2019, less than a third underperform. Controls on capital, wages, and of operations volume was digitally automated, and in prices suppress growth. Nationalizing industry is a 2018, only 12 percent of companies had invested in productivity dud (with rare exceptions). Even with AI in domains where the business case to do so was the right goals and the best of intentions, making strong. There is particular potential in supply-chain the wrong choices can hurt productivity—as digitization, where the process has barely started. happened in postwar Britain—and thus make it less Some companies are getting it right, by closely likely that the desired outcomes occur. tying their digital and corporate strategies and creating a healthy organizational culture. But Imagination, leadership, and a dash of inspiration not nearly enough are doing so, meaning that will be required to figure out the right policies for the the economy is not benefiting from these proven 21st century. During the COVID-19 crisis, there have productivity technologies. been many examples from the public, private, and social sectors to prove that these qualities are alive and well. What is needed now is the commitment to make the changes and investments that will create a future of broad prosperity. Kevin Sneader is the global managing partner of McKinsey and is based in the Hong Kong office; Shubham Singhal is a senior partner in the Detroit office. The authors wish to thank Scott Moore for his contributions to this article. Copyright © 2020 McKinsey & Company. All rights reserved. 126 What now? Ten actions to emerge stronger in the next normal September 2020
© Johannes Hulsch/EyeEm/Getty Images COVID-19: Strategies for getting ahead of the pandemic crisis Even as organizations focus on the immediate business shocks, they need to plan for the postcrisis world. Here is how to respond to a disruption for which there are no playbooks. COVID-19: Strategies for getting ahead of the pandemic crisis 127
In this episode of Inside the Strategy Room, a sense of which ones are most affected by the we share an excerpt from a webcast session on coronavirus and, based on that exercise alone, COVID-19’s implications for business resilience. It you can start to evaluate which regions are likely was recorded at the 2020 Global Business Leaders to return in some form sooner than others. You Forum, which had been scheduled to take place won’t know this 100 percent; a lot will depend on in New York in early April but was instead held government regulations and how the virus evolves. virtually. In conversation with Sean Brown, director of But it is nevertheless useful to engage in the communications for strategy and corporate finance, planning exercise. two McKinsey experts offer their perspectives on how businesses can develop strategies for responding Then, for regions that are critical to your company, to the pandemic crisis and preparing for the “next start breaking down the impact into a finer level normal.” Mihir Mysore is a leader of McKinsey’s of detail. You should pick some indicators that will work on crisis response and recently coauthored provide a compass for your decisions. First, think “Responding to coronavirus: The minimum viable about how much time passed in a particular region nerve center.” Shubham Singhal is the global leader from the moment community transmission started of the healthcare practice who co-wrote “Beyond to when the region got serious about physical coronavirus: The path to the next normal.” This is distancing. You can measure that in different an edited transcript. For more conversations on the ways—reduction in traffic congestion or the level of strategy issues that matter, subscribe to the series on restaurant bookings—but what is important is how Apple Podcasts or Google Play. much time that took. Combined with the region’s population density, this will give you a clue to how Sean Brown: Mihir, why don’t you take us through large a caseload of COVID-19 infections that region what business leaders should be doing in the is likely to face. You won’t have a perfect answer coming weeks. but directionally you should be able to rank your different business regions. Mihir Mysore: Thank you, Sean. There is, of course, a large amount of uncertainty today, especially Secondly, you can start to get a sense of the on the economic front, which makes it hard for length of the disruption based on how quickly business decision makers to start taking action. A governments and policymakers are addressing lot of information is floating around, and depending both the lives and the livelihoods part of the on what you choose to pay attention to, you can be problem. Addressing them quickly will mean you an optimist or a pessimist. By the time it becomes primarily have to worry about demand drawdown. fully clear which of the several possible scenarios Addressing it slowly will mean that you need to be ends up being the reality, many strategic actions concerned not only about the demand drop now but you could have taken while the scenarios were still the recession that follows, when even with no new emerging will be either not feasible or too expensive. cases there will a continued impact on the economy. You want to measure that. One way is to look at the You have to make sure to remain flexible where daily changes in the rate of new cases. If that rate is you can be flexible, but you also have to make dropping quickly, it effectively means the region is certain choices and commit to them in the face of reacting quickly. uncertainty. So how do you balance that? This is not a muscle that many organizations have developed. Then you can look at the economic side, breaking So, we have created some guidelines for how you it down by sector in each region. For example, late can start to think about the future (exhibit). payments or credit defaults, volatility indices—these are all early warning indicators of whether the First, we recommend you identify the regions initial demand drawdown is translating to a broader most relevant to your business—ones where you recessionary impact. Again, these are not perfect have large workforces or that represent your metrics, but they are valid early indicators of what biggest markets. At this point, you should have could happen. 128 What now? Ten actions to emerge stronger in the next normal September 2020
GES 2020 COVID-19 Strategies for getting ahead of the pandemic crisis Exhibit 1 of 1 Exhibit Business leaders should consider these indicators in the coming weeks. Depth of disruption Length of disruption Shape of recovery How deep are the How long could the What shape could demand reductions? disruption last? recovery take? Finally, you look at the recovery. The question of Mihir Mysore: Definitely. So far, we are seeing what shape the recovery will take is still up in the companies put in place project-management offices air, but there are lessons we can already glean. We (PMOs) to oversee the biggest operational issues. know that some countries are finding ways to get How do I protect my people? How do I stabilize healthy populations back to economic activity. We my supply chain? How do I make sure to physically also know there could be a virus resurgence in the protect any customers who may come onto my fall, and the level of preparedness by public-health premises or, in a B2B situation, be transparent with systems for that resurgence could provide a clue to my customers about our situation? A crisis nerve the recovery’s shape. Thinking about the recovery center is not an operational PMO. By definition, it will allow you to begin detailed planning now rather needs to include a plan-ahead team—plan-ahead than waiting until it’s clear that the epidemic has teams, actually—that do two very important things. passed and economic activity has restarted. At that point, you may be behind your competitors. The first is to discover the truth about what lies ahead and then determine the portfolio of strategic Sean Brown: How can leaders get a handle on actions that respond to whatever truth the team these indicators? At last year’s Global Business has uncovered. Most of the strategic actions will be Leaders Forum, you did a presentation on business trigger-based, meaning that when a certain leading resilience that included the idea of creating a nerve indicator lights up, this is the moment to launch center. Is doing that now important? the action—or at least the detailed planning that will lead to that action’s execution. It’s important “It’s important that the plan-ahead team consider every possible scenario. Optimism bias can be a big problem in this situation.” –Mihir Mysore COVID-19: Strategies for getting ahead of the pandemic crisis 129
that the plan-ahead team consider every possible horizons across which business leaders should scenario. It should ideally have red teams and blue be planning. teams to make sure there are no biases in how it assesses the scenarios. Optimism bias can be a big Shubham Singhal: Thank you, Sean. Businesses problem in this situation. are obviously experiencing a significant shock, so leaders need to think through the stages this crisis, At the end of this process, the organization needs and by extension their companies, will go through. to settle on a planning scenario that includes a There are five stages we see, and whether you are set of simple assumptions that delivery teams can a public-, social-, or private-sector institution, you take as their go-to assumptions. For example, the need to be thinking about all five horizons, because scenario may take the view that Region A will be they blend into each other. And they can move up and running by a given time. The delivery team very fast. does not get to question that assumption; the scenario-planning and the strategic-actions team, The first stage is Resolve. This is where we find together with the decision-making team, define it. ourselves now—all the choices around public-health However, the truth-discovery team needs to make measures and the expansion of the healthcare sure that the strategic-actions team has the benefit system and testing capacity by a factor of four of all the different scenarios they have come up or five in a few weeks. If you are a private-sector with. Confining the portfolio of strategic actions institution, you face decisions about business to only one possible scenario creates too narrow continuity. What are the critical functions that a planning effort. You need a series of possible must continue? What could close? The second futures as inputs into strategic actions, which then state is the Resilience category. That involves get translated into triggers for each of those actions. significant planning around liquidity, solvency, and economic sustainability. One last point: operational-risk teams usually become very tactical very quickly, for the simple Next comes planning for the Return. Vaccines reason that we do not regularly update goals for and other treatments are fairly far away, and just operational teams. A critical part of a crisis nerve gaining control of rising infections and treating center’s role is making sure the scenario-planning critical cases does not mean the virus won’t resurge. team, together with the strategic-actions team, So how do you think about returning to normal feeds into the operational-risk team on a weekly business? How do you get employees back? What basis, so you can update goals, start new teams distancing measures do you keep in place? Which when needed, and reallocate resources as required. geographies and parts of the economy can return to business? For a lot of businesses that shut down, Sean Brown: Thanks very much, Mihir. Shubham, it is not that easy to open again. You may have lost now I turn it over to you to discuss the various the workforce along the way, need to bring on new “We are in a wartime period, if you will, questioning how information is being used, what opens when, who gets what money. What part of that will sustain into peacetime?” –Shubham Singhal 130 What now? Ten actions to emerge stronger in the next normal September 2020
people, train them, get employees back to peak governments intervene and want to put something productivity. Then there is the issue of global supply else in place? Whether you are a policymaker, a chains. Companies in China are finding that they can business or an institution, you have to think about restart an automotive plant there, but if the parts the future regulatory construct, and therefore are made in Mexico, they have a problem. The return the competitive construct. This is not just a few is a challenge for governments and healthcare weeks, let’s hold our breaths and we will come back. organizations as well. How do you, as a hospital Organizations need to think through the implications system, think about bringing back some degree of across all these stages. normalcy to operations? And how much capacity should you keep open for possible future critical- Sean Brown: Have you seen indications that leaders care surges? are already rethinking their supply chains, their manufacturing, their logistics, and other aspects of Senior leaders, meanwhile, need to be thinking that third horizon? further out still. We hear executives say, “When we do return, I would like to come back into a Shubham Singhal: Yes. What we see on the Return reimagined future.” That is important, because so far is addressing the practical part, which is, the fundamentals will likely be different. You may where are we exposed? What is the weakest link be able to run some operations with fewer people. in the chain? Will the weakest link prove to be What can you do remotely? How much more getting our employees back or will it be where our productivity can you gain? How do you move to a parts or raw materials come from? Those who are digital, contactless world? The crisis is an accelerant ahead already have a clear plan that helps them to the Reimagination horizon of the business. Do analyze that. Executives are also beginning to ask we return to where we were, or to the next normal? themselves how to build supply chains for greater Management teams right now are busy with crisis resilience, and what choices they should start response, but most have a chief strategy officer, making now. At a minimum, that will mean not having for example, who, along with their team, could be concentration risk in one area and diversifying away thinking about this. that risk. The final one, particularly relevant to more heavily This presentation was recorded on April 2, 2020. regulated industries, is the relationship between The situation surrounding COVID-19 is evolving government, business, and individuals. We are daily. For the most current information and in a wartime period, if you will, questioning how insights on the implications of COVID-19 for information is being used, what opens when, who your business, please visit Coronavirus: Leading gets what money. What part of that will sustain through the crisis, a regularly updated collection into peacetime? After the financial crisis, banks of McKinsey briefing notes. had to change their capital and liquidity policies. Will something similar happen here? Can we have supply chains designed globally for efficiency, or will Mihir Mysore is a partner in McKinsey’s Houston office, and Shubham Singhal is a senior partner in the Detroit office. Sean Brown, global director of communications for strategy and corporate finance, is based in the Boston office. Copyright © 2020 McKinsey & Company. All rights reserved. COVID-19: Strategies for getting ahead of the pandemic crisis 131
10 Make purpose part of everything 133 Igniting individual purpose in times of crisis 144 The CEO moment: Leadership for a new era 132132
© Getty Images Igniting individual purpose in times of crisis Creating strong links to an individual purpose benefits individuals and com- panies alike—and could be vital in managing the postpandemic uncertainties that lie ahead. by Naina Dhingra, Jonathan Emmett, Andrew Samo, and Bill Schaninger Igniting individual purpose in times of crisis 133
In these stressful, surreal times, it’s And if this wasn’t enough, individual purpose understandable for CEOs to fixate on urgent benefits organizations, too. Purpose can be an corporate priorities at the expense of more important contributor to employee experience, intangible, personal considerations. How important which in turn is linked to higher levels of employee is getting your people to think about their “purpose engagement, stronger organizational commitment, in life” right now when you’re worried about their and increased feelings of well-being. People who well-being—not to mention corporate survival? find their individual purpose congruent with their jobs tend to get more meaning from their roles, It’s more important than you think. During times of making them more productive and more likely to crisis, individual purpose can be a guidepost that outperform their peers. Our own research finds a helps people face up to uncertainties and navigate positive correlation between the purposefulness of employees and their company’s EBITDA4 them better, and thus mitigate the damaging effects margin. of long-term stress. People who have a strong sense of purpose tend to be more resilient and exhibit Against this backdrop, CEOs and other senior 1 better recovery from negative events. Indeed, our executives should pay more attention to individual research conducted during the pandemic finds that purpose as companies return to operations and when comparing people who say they are “living begin feeling their way into the subsequent phases their purpose” at work with those who say they of the “next normal.” aren’t, the former report levels of well-being that are five times higher than the latter. Moreover, those in It’s a sure bet your employees will be doing just the former group are four times more likely to report that. People seek psychological fulfillment from higher engagement levels.2 work, and, as the crisis recedes and companies ramp up new ways of working, some people will Purposeful people also live longer and healthier experience friction, and even dissonance, around 3 issues of purpose. Workplace interactions that lives. One longitudinal study found that a single standard deviation increase in purpose decreased felt meaningful and energizing face-to-face, for the risk of dying over the next decade by 15 percent— example, may feel much less so over a video call. a finding that held regardless of the age at which Meanwhile, other employees will be looking to people identified their purpose. Similarly, the Rush see if their companies’ actions during the crisis Memory and Aging project, which began in 1997, matched their companies’ high-minded words finds that when comparing patients who say they beforehand—and basing their career plans on have a sense of purpose with those who say they the answer. And at companies where employees don’t, the former are: excelled during the crisis, business leaders will want to find ways to recapture, and sustain, the sense of — 2.5 times more likely to be free of dementia organizational energy, urgency, and speed—without the accompanying fear and stress. — 22 percent less likely to exhibit risk factors for stroke In this article, we explore the organization’s role in individual purpose by highlighting results from an — 52 percent less likely to have experienced a ongoing research project into the intersection of stroke organizational purpose and individual purpose, and 1 Stacey M. Schaefer et al., “Purpose in life predicts better emotional recovery from negative stimuli,” PLoS One, Volume 8, Number 11, 2013, ncbi. nlm.gov. 2 See Jonathan Emmett, Gunnar Schrah, Matt Schrimper, and Alexandra Wood, “COVID-19 and the employee experience: How leaders can seize the moment,” June 2020, McKinsey.com. 3 See Patrick L. Hill and Nicholas A. Turiano, “Purpose in life as a predictor of mortality across adulthood,” Psychological Science, Volume 25, Number 7, pp. 1482–6, May 8, 2014, journals.sagepub.com. 4 Earnings before interest, taxes, depreciation, and amortization. 134 What now? Ten actions to emerge stronger in the next normal September 2020
examine how the two interact and fuel each other until he can quit and begin nursing school, where he through the medium of the employee experience. expects to start truly living his purpose. Along the way, we highlight ways that companies can help employees find or articulate their purpose, As these examples suggest, what people need explore how it applies to their working life, and from work and what drives them personally can be seek to make purpose a tangible part of people’s complicated. Sometimes an individual’s purpose jobs. Finally, we hope to provide an occasion for aligns perfectly with organizational purpose, as with deeper introspection on the parts of CEOs and other Alice. But other times it’s only a partial match, as leaders themselves. After all, if we don’t reflect on with Maya and Peter. And for still other employees, life’s direction and meaning when life as we know it it may be a poor match or none at all.5 As CEO, feels so threatened, when will we? part of your job as organizational architect is to ensure that these two different forms of purpose— organizational and individual—are connected Get personal and mutually reinforcing, and are ultimately a Individual purpose can be thought of as an consideration in everything from hiring, feedback overarching sense of what matters in our lives, and and incentives, and learning to matching individuals we experience purposefulness when we strive or to jobs they will find most fulfilling. work toward something personally meaningful or valued. Research shows that most people say they Before you can do any of that, however, you need have a purpose when asked, although it’s often to help your employees better understand their difficult for them to identify or articulate. own purpose and how it operates, starting with the general types that help describe and characterize Yet even when a person’s purpose is clear, it it. And don’t forget: this applies to you, too. The can intersect with an organization’s purpose more purposeful, open, and empathetic the leader, in counterintuitive ways. Consider Alice, Maya, the more likely that he or she can instill the trust and Peter—fictitious composites drawn from our necessary to encourage people to leave their experience. All three work for a global healthcare comfort zones and explore how their purpose might organization with a strong, well-communicated be better met at work. purpose: to transform the lives of patients and their families by developing lifesaving therapies. This is music to Alice’s ears—she sees her purpose as What we measured alleviating the suffering experienced by people Human values are an important factor when defining living with chronic diseases; the company’s purpose individual purpose, as they help people determine is a big part of why she joined. Maya appreciates the what is personally important to pursue in life and company’s purpose, but it’s much less inspiring for work. Therefore, to better understand how people her than it is for Alice. Maya feels a deeper sense think about and experience purpose, we developed of meaning from taking care of her family and a survey to map the type and intensity of a range of supporting it financially. Peter, meanwhile, clearly universally held human values including tradition, sees his purpose as caring for others and alleviating 6 security, power, and achievement, among others. their suffering. Yet unlike Alice, who loves her job because of how well it aligns with her purpose, Peter Subsequent statistical analysis of the survey is saving his paychecks and counting the months responses highlighted nine common ways that people 5 To learn more about designing work to be more meaningful, see Dan Cable and Freek Vermeulen, “Making work meaningful: A leader’s guide,” McKinsey Quarterly, October 2018, McKinsey.com. 5 Our survey was adapted from the academic work of Shalom Schwartz, whose theory of basic human values identifies ten values that subsequent research has demonstrated are universally recognized across cultures. For more, see Shalom Schwartz, “An overview of the Schwartz Theory of Basic Values,” Online Readings in Psychology and Culture, Volume 2, Number 1, scholarworks.gvsu.edu. Igniting individual purpose in times of crisis 135
orient themselves toward purpose (see sidebar “Nine Academic research and our own experience tell types of purpose”). While an individual’s purpose may us that an individual’s sense of purpose isn’t fixed hew quite closely to one of these nine types (Exhibit or static—it can be clarified, strengthened, and, 1), it may instead arise from combinations of them, for some, may serve as a lifelong aspiration, or with the relative emphasis and priority of elements North Star. And, while what people find meaningful varying from person to person. Exhibits 2, 3, and 4 tends to evolve over long timeframes, it can shift show three such patterns (or purpose archetypes) relatively quickly, particularly in response to the that arose from our research. kinds of life-changing events that many people are QWeb 2020 Individual purpose Exhibit 1 of 4 Exhibit 1 Your individual purpose (that is, where you find meaning) will likely Your individual purpose (that is, where you find meaning) will likely map to map to some combination of the values below. some combination of the values below. Nine types of individual purpose Agency Achievement Conservation Caring Self Freedom Respect Tradition Others Enjoyment Staility Equality justice Integration The vertical axis reflects the target of our or activities hether directed toard ourselves or toard other people We ay find either or both orientations eaninful The hori€ontal axis reflects the underlyin motives for our or activities ranin fro our drive to expand our sense of self to our drive to cooperate and unite ith the orld around us ‚oth diensions ay be experienced siultaneously and in cobination 136 What now? Ten actions to emerge stronger in the next normal September 2020
experiencing now as a result of the pandemic, or What to do about it the more recent racial-justice protests. A leader The pandemic has been a cruel reminder for previously fueled by personal achievement, for companies everywhere of how important it is to never example, might emerge from the trauma of these take healthy or motivated employees for granted. times more motivated by issues of equality or by Since individual purpose directly affects both health contributing to community. Or a leader formerly and motivation, forward-looking companies will be motivated by freedom and independence might focusing on purpose as part of a broader effort to find the tug of stability meaningful. ensure that talent is given the primacy it deserves. QWQWeb 2020eb 2020 Individual purposeIndividual purpose Nine types of purpose Exhibit 3 oSidebar 1 off 4 2 Nine types of purpose We surveyed 509 people representing a range of personal demographics (gender, age, ethnicity, and education) and occupational characteristics (industry, sector, and role). We asked them about the type and We surveyed Œ0Ž people representin a rane of personal deoraphis ‘ender‹ ae‹ ethniity‹ and intensity of their life values by having them rate the importance of a series of statements, each related to eduation’ and oupational harateristis ‘industry‹ setor‹ and role’“ We asked the about the type a value that academic research has found to be universal. Statistical analysis of the results showed that and intensity of their life values by havin the rate the iportane of a series of stateents‹ eah respondents’ life values clustered in one of nine categories. Taken together, our results suggest that an related to a value that aadei researh has found to be universal“ Statistial analysis of the results individual’s purpose maps to one of the nine—or is formed by combinations of them. shoed that respondents’ life values lustered in one of nine ateories“ Šaken toether‹ our results suest that an individual’s purpose aps to one of the nine—or is fored by obinations of the“ The nine types of purpose, and examples of their characteristics, are as follows: Achievement Conservation Caring avin a sense of authority Workin aainst threats elpin the people lose ein the ost influential to the environent to e person in any roup aisin aareness of the Sarifiin for y loved ones avin hih status and iportane of preservin ein responsive to the poer the environent needs of y faily and avin a hih inoe arin for the environent friends Freedom Respect Tradition ‚earnin thins Not bein shaed espetin y ulture’s for yself in front of others history ƒorin y †voidin huiliation ‰ratiin the rituals of on opinions y ulture or reliion hoosin y ‰reservin the established on oals values of y ulture or reliion Enjoyment Stability Equality and justice avin ne and espetin authority ‚istenin to people ho different experienes fiures are different than I …oin on adventures avin order and Šryin to understand avin exiteent stability in soiety people‹ even hen in life †dherin to standard I disaree ith the rules Ensurin everyone is treated fairly Igniting individual purpose in times of crisis 137
QWeb 2020 Individual purpose Exhibit 2 Exhibit 2 of 4 ‘Free spirits’ tend to find meaning in situations where they control what they ‘Free spirits’ tend to find meaning in situations where they control what do and when they do it. they do and when they do it. Archetype 1: The free spirit Higher importance Loer importance Agency Achievement Conservation Caring Self Freedom Respect Tradition Others Enjoyment Staility Equality justice Integration rimary type Secondary type Freedom Respect tradition Purpose activators: Purpose blockers: Woring independentl hile eing micromanaged or stuc having opportunities to stress test ith inflexible processes ideas ith others eing censured in public hoosing ho I accomplish m goals eing pressured to tae a direction hile still observing the traditions of that goes against established m famil and culture practices 138 What now? Ten actions to emerge stronger in the next normal September 2020
QWQWeb 2020eb 2020 Individual purposeIndividual purpose Exhibit 3 Exhibit 3 oExhibit 3 off 4 4 ‘Achievers’ find purpose in accumulating social or material resources; they often ‘Achievers’ find purpose in accumulating social or material resources; find meaning in self-improvement. they often find meaning in self-improvement Archetype 2: The achiever igher iportance ƒo er iportance Agency Achievement Conservation Caring Self reedom Respect radition Others Enjoyment Staility Eqality jstice Integration Primary type: Secondary type: Achievement, tradition Enjoyment, respect Purpose activators: Purpose blockers: Opportunities to increase earnings eeling invisible or lacing influence and gain stature in the eyes of others in a group eing the authority on a subect ear that failure ill lead to huiliation and ipressing others aving to act out of sync ith one’s Opportunities for fun and exciteent culture‚religion Igniting individual purpose in times of crisis 139
QWQWeb 2020eb 2020 Individual purposeIndividual purpose Exhibit 4 Exhibit 3 oExhibit 4 off 4 4 ‘Caregivers’ find meaning in choosing how and when they care for others; they ‘Caregivers’ find meaning in choosing how and when they care for others care less about material gain or what others think of them. they care less about material gain or what others think of them Archetype 3: The caregiver Higher importance oer importance Agency Achievement Conservation Caring Self Freedom Respect Tradition Others Enoyment Stability Eality stice Integration Primary type: Secondary type: Caring Stability Purpose activators: Purpose blockers: eing able to help others or mentor eing pulled aa from famil and colleagues friends or isolated from colleagues orlife balance that provides ncertaint € or lac of an orderl path opportunities to respond to the needs of famil and friends sense of securit and order 140 What now? Ten actions to emerge stronger in the next normal September 2020
While it may be early days in understanding the immediacy of the crisis to focus on the bigger precisely how an individual’s purpose connects picture and what matters to them. to what he or she wants and needs from work—or how these tie to an organization’s purpose—now One effective way to do this is through periodic, is the time to start figuring it out. Start by simply guided conversations with your direct reports. discussing these matters with your team openly, Don’t think of these as project check-ins, or even honestly, and thoughtfully. By treating this as as purpose check-ins, but rather as empathetic the beginning of an ongoing conversation about check-ins—a chance to understand how employees purpose, meaning, and what your employees want are doing and learn how you can support what they from work, you can help people better identify and need. Have your company’s managers make these articulate their purpose, and even start finding ways meetings a recurring part of how they lead as well. to help them live it more fully at work—an outcome that will benefit everyone. Make personal reflection a business priority By creating a space for honest discussions about And as you get started, remember that your actions purpose—including your own—your team will and your capacity to lead with compassion play hopefully be more willing to explore the topic for an outsize role now. You will have access to only themselves. A “purpose audit” can help. Create what your people give you access to. Treat these the time that people need to consider how their conversations and resulting insights as the gifts that work is fitting into the bigger picture, using the they are, and you’ll increase the odds of seeing more nine types of purpose as a starting point to explore of both. what elements resonate and why. When people can articulate a purpose, do they feel they are living it? Start the conversation—yesterday What barriers prevent them from living it more fully? During times of crisis, effective leaders are How—if at all—have recent events changed the way important sources of trust, stability, meaning, and they think about purpose? One deceptively simple resilience. They also play a vital “sensemaking” role ice-breaking question that we’ve seen elicit rich for those around them. For many people in your conversations is: “When do you feel most alive?” organization, the urgency of this time is to blend exhilaration with extraordinary stress. Those who Sharing purpose with others can build accountability compartmentalize the pressure and trauma may and act as an accelerator that helps people consider face stress, anxiety, and burnout later—and purpose where and how to bring more of their purpose to will be a catalyst in these dynamics. work. With your help, the crisis may provide new opportunities for employees to take action in line Consider, for example, the teammate who with their purpose. It may even motivate you to feels tension between the imperative to meet further explore your own sense of purpose and see foundational needs by earning a paycheck, and the how you could benefit as well (see sidebar “One frustration (which may be unconscious) of not having CEO’s story”). the time, opportunity, or license to focus on their purpose. Or the colleague who thrives on face-to- Help people take action face interactions with customers and coworkers There are many things leaders can do to help ignite but finds days filled with video interactions draining purpose for their colleagues. For example, one large and deadening. People need empathetic and caring retailer dedicates time for a regular “purpose pause,” leadership to help be aware of, understand, and where teammates are encouraged to celebrate grapple with such tensions as they develop. their involvement in local community projects and to identify new ones to support. The company uses an Simply talking about the pressures can help app to spur connectivity and increase the odds that heighten your colleagues’ sense of purpose at work, good ideas are applauded and shared. as will encouraging your team to step back from Igniting individual purpose in times of crisis 141
For its part, Zappos created a customer-service Keep in mind that some people view their purpose line to answer questions and help find solutions as caring and providing for those closest to them— for people dealing with the pandemic. The kicker? and practically everyone else in your organization Callers need not be Zappos customers, and the will be feeling anxiety around these issues right now. topics can be anything—from food delivery and Be sure to tailor your communication to address finding essential supplies to literally anything on their needs, too, so that this time takes less of a toll a caller’s mind. To be sure, with business slower on their personal purpose. and call volumes down, the hotline gives the company’s customer-service reps something to do between their regular calls. Yet it also offers reps Reimagine a purpose-led future the chance to help others and connect with them, As much as the pandemic is testing your leadership which is one way that people can help satisfy the right now, the real test with purpose starts as psychological need for belonging. And research the immediate crisis fades and the hard work around job design suggests that even simple of reimagining and reforming your business for tasks are perceived as more meaningful when our a postpandemic world begins. Embedding and psychological needs are satisfied. activating individual purpose more thoroughly in the various elements of the employee experience will As these examples suggest, purpose and meaning take hard work and commitment. While it’s too soon can be valuable considerations in adjusting day-to- to say what best practice will look like, it’s safe to day routines or even in designing roles. But even if say that the more you can connect purpose to the you’re not ready to go as far as Zappos, there are following areas, the more likely the benefits will build other ways to give people license to be purposeful upon one another: now. When possible, create opportunities, such as the following, for people to live their purpose — Recruiting. Explicitly connect the purpose of during this time by tailoring projects, support, the organization to the personal contributions communication, and coaching to suit different an individual in the role could bring to the needs, values, and situations: company. By backing it up with real, purpose- rich stories from hiring managers who have — F or the up-and-coming leader who views seen this in action, you will increase the odds of her purpose as freedom to learn, grow, and attracting people whose purpose fits well with experiment, empower her to try new things the organization and the work, and help them be in service of customers and stakeholders, productive sooner. keeping projects within guardrails but without multiple layers of oversight. Be sure to frame any — Onboarding. Make purpose part of the first negative outcomes as learning, not failure. conversation with both the manager and the team to build a shared vocabulary. Start people — For a team member who values preserving off right by helping them reflect on how the and upholding tradition, invite him to help plan work and the organization connect with their important organizational or community rituals own purpose. In fact, applied research finds (like team events or company days). Such events that encouraging new employees to focus on create connection and can be critical to build expressing personal values at work allowed and maintain culture. them to significantly outperform peers, be more satisfied at work, and increased retention by — For colleagues whose purpose is aligned with 7 more than 30 percent. equality and opportunity for others, consider connecting them to the forefront of company — Feedback and performance management. initiatives and projects where your organization The value of strengths-based feedback is is helping the communities in which you operate. well known; purpose is a natural extension 7 D aniel M. Cable, Francesca Gino, and Bradley R. Staats, “Breaking them in or eliciting their best? Reframing socialization around newcomers’ authentic self-expression,” Administrative Science Quarterly, Volume 58, Number 1, pp. 1–36, February 8, 2013, journals.sagepub.com. 142 What now? Ten actions to emerge stronger in the next normal September 2020
One CEO’s story One CEO found that articulating his sense of purpose was the first step to becoming a more observant, empathetic leader. Here’s his take. “I want the relations I form to be true, to have relevance, depth, meaning. This is a big part of how I see my purpose. I’m willing to make myself vulnerable and open to connect with people in a truthful and meaningful way. “[Since articulating my purpose,] I believe I’m more honest with myself and faster to recognize if I might be doing something that’s motivated by my own vanity, fear, or pleasure. I know I’m more open to feedback and criticism. I spend less time talking about weekend or vacation plans and more time exploring what motivates, frustrates, or scares people—the things that really matter. I make faster connections with people now—in part, I think—because of this. “With my team, I do my best to check in emotionally during meetings, and not be afraid to share my own weaknesses and doubts. If I don’t know the answer, I’ll say so, and I find all of this strengthens my impact and credibility as a CEO. The idea of being vulnerable in front of a group of people is no longer something to be ashamed of, but rather a strength. I’m a better listener now. “Whenever I feel disconnected from my purpose, I get flustered, lose sleep, and generally feel stressed out. This is a biological signal for me to stop, get back to what matters, and search for whatever it is that feels untrue so I can make it truthful.” that can help connect an individual’s broader self to their work. Activating purpose during feedback sessions may even help buffer people These are challenging times, and people who are against the uncomfortable aspects of receiving able to draw energy and direction from a sense of negative feedback. Try starting a performance individual purpose will weather them with more conversation with a reflection on purpose and resilience, and will recover better afterward. how the work the individual has been doing—as Companies that embed and activate individual well as their performance—illuminates their purpose in the employee experience can benefit as purpose and values. well, including through improved performance. And, of course, purposeful work and a purposeful life are Other employee journeys present moments for enduring benefits in and of themselves—ones that purpose as well. Ask yourself at each point: How everyone should have the opportunity to seek. could we make purpose part of this conversation or interaction? What unexpected benefits might result? How might the accumulation of these small moments build a purpose movement in my team and organization? Naina Dhingra is a partner in McKinsey’s New York office, Jonathan Emmett is an associate partner in the New Jersey office, Andrew Samo is consultant in the Montreal office, and Bill Schaninger is a senior partner in the Philadelphia office. The authors wish to thank Svetlana Andrianova, Cristina Escallón, Helen Hu, David Mendelsohn, and Amy Vickers for their contributions to this article. Copyright © 2020 McKinsey & Company. All rights reserved. Igniting individual purpose in times of crisis 143
© Getty Images The CEO moment: Leadership for a new era Challenged by the global pandemic, CEOs have made four shifts in the way they lead that hold great promise for both companies and society. Will they build on this unique moment, or return to the ways of the past? by Carolyn Dewar, Scott Keller, Kevin Sneader, and Kurt Strovink 144 What now? Ten actions to emerge stronger in the next normal September 2020
COVID-19 has created a massive humanitarian CEOs embraces and extends what they have learned challenge: millions ill and hundreds of thousands of during the pandemic, this CEO moment could lives lost; soaring unemployment rates in the world’s become a CEO movement—one that is profoundly most robust economies; food banks stretched positive for the achievement of corporate, human, beyond capacity; governments straining to deliver and societal potential. As Rajnish Kumar, chairman critical services. The pandemic is also a challenge of the State Bank of India, reflects, “This will be for businesses—and their CEOs—unlike any they a true inflection point. I think that this pandemic, have ever faced, forcing an abrupt dislocation of in terms of implications, will be as big an event as how employees work, how customers behave, how World War II. And whatever we learn through this supply chains function, and even what ultimately process, it must not go to waste.” constitutes business performance. Confronting this unique moment, CEOs have shifted Aspire 10x higher how they lead in expedient and ingenious ways. The global health crisis and its resulting business The changes may have been birthed of necessity, dislocations have unlocked change at a pace and but they have great potential beyond this crisis. In magnitude that has made even the boldest and most this article, we explore four shifts in how CEOs are progressive of CEOs question their assumptions. leading that are also better ways to lead a company: From what we have observed, there are at least unlocking bolder (“10x”) aspirations, elevating two related areas that are ripe for innovation: goal their “to be” list to the same level as “to do” in their setting and the operating model. operating models, fully embracing stakeholder capitalism, and harnessing the full power of their Think bigger and faster CEO peer networks. If they become permanent, During the pandemic, many organizations have these shifts hold the potential to thoroughly accomplished what had previously been thought recalibrate the organization and how it operates, impossible. Cincinnati Children’s Hospital Medical the company’s performance potential, and its Center (CCHMC), for example, scheduled 2,000 relationship to critical constituents. telehealth visits in 2019. It is now handling 5,000 a week—a goal that, prior to the pandemic, it Only CEOs can decide whether to continue leading had estimated would be accomplished several in these new ways, and in so doing seize a once-in- years from now and only after a large-scale a-generation opportunity to consciously evolve the transformation. At Dubai-based Majid Al Futtaim very nature and impact of their role. Indeed, as we (MAF), attendance at movie theaters fell (as a result have written elsewhere, part of the role of the CEO of government-mandated closures) while demand is to serve as a chief calibrator—deciding the extent for its online supermarket soared; in two days, the 1 and degree of change needed. As part of this, CEOs company retrained 1,000 ushers and ticket sellers must have a thesis of transformation that works to work for the online grocer. Without the crisis, in their company context. A good CEO is always that speed and magnitude of reskilling to leverage scanning for signals and helping the organization talent across MAF’s portfolio of companies would deliver fine-tuned responses. A great CEO will never have been contemplated. Best Buy, which had see that this moment is a unique opportunity for spent months testing curbside pickup at a handful of self-calibration, with profound implications for the stores, rolled it out to every store in just two days. In organization. four days, Unilever converted factory lines that were making deodorants into ones making hand sanitizer. We have spoken with and counseled hundreds of Life insurers have wrestled ingeniously with a unique CEOs since the pandemic first hit. It is clear to us COVID-19-related problem, says Jennifer Fitzgerald, that they sense an opportunity to lead in a new, CEO of Policygenius, an online insurance broker: more positive and impactful way. If a critical mass of “Some consumers don’t want the examiner in their 1 See Carolyn Dewar, Martin Hirt, and Scott Keller, “The mindsets and practices of excellent CEOs,” October 2019, McKinsey.com. The CEO moment: Leadership for a new era 145
house. We’ve seen a lot of flexibility from carriers. forward telehealth will account for up to 50 percent Some have moved quickly on the electronic medical- of visits in certain ambulatory settings, and perhaps record side. We’ve also seen carriers increase the 30 percent of visits overall. Before COVID-19, less face amount that they’re willing to underwrite using than 1 percent of visits were telehealth. Says Fisher, data instead of the medical exam. . . . Overall, I think “I keep pushing myself and our team to think about this has pushed the industry to adopt some changes how we use this inflection point to reimagine our much more quickly than it otherwise would have.” potential together, as opposed to allowing our In a week, companies went from having 100,000 organization to just go back to the comfort of ‘Let’s people working in offices to having 100,000 people do what we’re doing.’” working from home—a shift requiring systems and policy transformation that under normal Research by our colleagues in McKinsey’s Strategy circumstances might have taken years. and Corporate Finance Practice has long shown that CEOs making bold moves is vital to achieving Of course, the unprecedented scale and speed outstanding performance, which itself is elusive— of the pandemic have created “burning platform” only one in 12 companies goes from being an impetus for these feats, but it is still remarkable that average performer to a top-quintile performer over organizations have been able to make it happen. a ten-year period.2 Making one or two bold moves These achievements have come partly from people more than doubles the likelihood of making such working faster and harder, although this is not the a shift; making three or more makes it six times whole story, and many CEOs are taking the long- more likely. Our research has also shown that CEOs term view. Says Guardian CEO Deanna Mulligan, who are hired externally tend to move with more “We’ve been worried about our broader team in boldness and speed than those hired within an general because they’ve been working very hard. organization, partly because of the social pressures We’ve found that people are substituting their that constrain internally promoted CEOs. As a commuting time with working. Our IT guys are telling result, we often advise CEOs who are promoted us that they’re getting three extra hours a day out from within to ask themselves the question that of the coders. We’re mandating across the whole famously prompted Andy Grove and Gordon Moore company that they can’t work after a certain hour to focus Intel on microprocessors: “What would an at night or that they have to take vacation because outsider do?” Given the performance we have seen nobody’s taking their vacation days; they don’t want during the pandemic, we would now encourage to waste their time off hanging around at home. But CEOs to ask themselves and their teams a follow-on it’s going to be this way for a while, and we don’t question: “What would your COVID-19 answer be?” want them to go a whole year working at this pace The power that these frames of reference hold, to without a break.” reimagine the possible and recalibrate what can be achieved, is profound. CEOs are recognizing that the barriers to boldness and speed are less about technical limits and more Other questions for CEOs to reflect on to help about such things as mindsets toward what is calibrate their aspirations include: possible, what people are willing to do, the degree to which implicit or explicit polices that slow things — Where should we be aspiring 10x higher and/or down can be challenged, and bureaucratic chains of 10x faster? command. — What beliefs or long-held assumptions do I need Realizing this, CEOs are appropriately celebrating to explicitly reset in the organization and with the magnitude of what their organizations have stakeholders to achieve this? achieved and considering how to stretch for more. Michael Fisher, CEO of CCMHC, thinks that going — What do we say no to, or stop doing, to create the additional space to go bigger and faster? 2 See Chris Bradley, Martin Hirt, and Sven Smit, “Strategy to beat the odds,” McKinsey Quarterly, February 2018, McKinsey.com. 146 What now? Ten actions to emerge stronger in the next normal September 2020
Many CEOs have since adapted by booking “flight time” into their schedule so as to avoid spending all day, every day, on videoconference meetings. Zero-base how work gets done for the future. Arvind Krishna, the new CEO of IBM, In addition to the mindset shifts mentioned earlier, tells us that his company has recently relied on a there are any number of more tangible reasons two-speed model of decision making. “Your CMT why companies have been able to drive this kind [crisis-management team] will handle all of the of progress so quickly. Some CEOs, such as Vivek stuff around health, safety, employee confidence, Sankaran of Albertsons and Lance Fritz of Union and client confidence,” says Krishna. “That lets Pacific, have noted that remote work and bans the others focus on running the business. I think on travel have opened up banks of time that give it’s a reasonable model for three to nine months. them the opportunity to focus more on what really The bigger question is, ‘How do we learn from this matters. As Natarajan Chandrasekaran, chairman and evolve better for the future? What structural of the Tata Group, says, “[As a consultant,] I used changes do we make?’” One significant aspect of to fly to meet a customer, even if it took all day or structural change that most CEOs are grappling with more, for a one-hour meeting. Now I know that is how much of a physical footprint their companies the amount of time that goes into traveling is not need, now that the ability to work virtually and necessary. That’s the way people used to live, but I productively has, by and large, been proved.3 If think that that will come down now.” Unilever CEO companies do move to a more virtual model Alan Jope tells us, “We’re all discovering what a (50 percent or more virtual, up from 20 percent, for capacity trap travel is. I feel a quite calming sense example), what does that mean for team building, of control over my own time.” Others, however, like compliance, distribution channels, and so on? BlackRock CEO Larry Fink, discovered early in the crisis that not having travel time took from them The magic of the moment is that both the CEO valuable reflection, focus, and restoration time. Fink and the organization’s operating models have reminds us that downtime at the water cooler with been unfrozen, perhaps more than in any time colleagues and travel by oneself can be creative in a generation. There is an opportunity to reset openings and outlets for new thinking. Many CEOs how work gets done in ways that make it multiple have since adapted by booking “flight time” into their times more efficient and effective—free of the schedule so as to avoid spending all day, every day, burden of historical norms. Our colleagues have on videoconference meetings. In either case, the found, in their research on innovation “essentials,” COVID-19 experience has made it clearer than ever that breakthrough moments arise when leaders that CEOs must be extremely intentional about how dramatically raise their sights, and then commit to they use their time. the operating implications (particularly with difficult resource-allocation and portfolio choices) needed Beyond personal time and energy management, 4 to achieve those aspirations. Operating-model organizational adjustments that CEOs have made to issues loom large for CEOs as individuals, too: our decision making and execution hold great promise research shows that CEOs who focus their scarce 3 Andrea Alexander, Aaron De Smet, and Mihir Mysore, “Reimagining the postpandemic workforce,” McKinsey Quarterly, July 2020, McKinsey.com. 4 S ee Marc de Jong, Nathan Marston, and Erik Roth, “The eight essentials of innovation,” McKinsey Quarterly, April 2015, McKinsey.com. The CEO moment: Leadership for a new era 147
time doing work that only the CEO can do, and step into a ministerial role—extending hands who manage their energy with the same rigor and virtually, truly listening, relating to and connecting discipline with which they manage their time, deliver with people where they are—there is enormous higher performance. potential to inspire people and strengthen bonds and loyalties within the company.” Adds Alain As CEOs begin to seize the unique opportunity Bejjani, CEO of MAF, “The people you are leading at hand to recalibrate their personal, team, and have big expectations of you. They want you to be company operating models, they should reflect on perfect and often forget that you are human. But the following questions: the more human you are with them, the more trust and empathy they lend to you. They understand you — How have we worked differently to enable the better. That gives you the ability to do so much more, impossible to happen during the pandemic as people give you the benefit of the doubt.” (including our decision making, processes, resource allocation, communication, and Many CEOs we have spoken with have been location)? positively surprised that bringing more of themselves into the workplace has created — What learnings and new muscles should we connection and motivation. Says Steve Collis, CEO bring forward into the organization for of AmerisourceBergen, “One of the smartest things the future? that we did the very first week was to set up a daily executive-management meeting at 5:00 p.m. That’s — How will this change my day-to-day as I run the important from a decision-making point of view, company as CEO? but it’s even more important for touching base and showing empathy. We’re now in each other’s homes—you’re seeing my study, and we’ve met each Elevate ‘to be’ to the same level other’s families. . . . I asked all my direct reports, as ‘to do’ ‘Is there someone who wants me to reach out to In a moment of crisis, everyone looks to their leader. someone who’s doing a great job or someone who’s CEOs have felt this acutely during the pandemic. struggling? Maybe someone who has a relative David Schwimmer, CEO of London Stock Exchange with COVID-19?’ Sometimes all that’s needed is a Group, says, “People are looking to me for a different word of encouragement to show you care. It’s been kind of leadership. In a normal environment, it’s a great gift to be able to do that for the people in about business leadership and setting up strategy, AmerisourceBergen.” as well as culture and people decisions. In this environment, it’s about helping people maintain Showing up isn’t only about opening up more of morale. It’s about people being prepared for oneself to others, however; it’s also about being the whatever may come in the face of uncertainty.” As a organization’s rock during a time that’s fraught with result, leaders have shown up differently and have anxiety and uncertainty. “[Employees] need to see starting using a different lens to take notice of how that their leadership is vulnerable, empathetic, and members of their senior team show up. We see both making decisions in accordance with our values, of these areas as candidates for permanent change which I’d better be the living proof of,” says Lance in the future. Fritz, CEO of Union Pacific. “Our people are expecting me to be transparent, to have a grip on the situation, Deliberately choose ‘how I show up’ and to be reasonable about what I do know, what I Perhaps the most notable feature of how CEOs don’t know, and what we’re doing about it.” are showing up differently is that they are showing more of their humanity. As Paul Tufano, CEO of Michael Fisher of CCMHC has begun to AmeriHealth Caritas, explains, “This has been operationalize these insights by being explicit about a sustained period of uncertainty and fear, but what is on his “to do” and “to be” lists. As Fisher also a great opportunity to forge a stronger, more explains: “I never purposefully gave thought to cohesive and motivated workforce. If CEOs can whether there’s a way to be really intentional about 148 What now? Ten actions to emerge stronger in the next normal September 2020
how I want to show up every day. So I’ve added a ‘to — Going forward, is there an opportunity for me to be’ list to my repertoire. Today, for example, I want manage a “to be” list with the same rigor as my to be generous and genuine. I hope I’m that way “to do” list? every day. But today, I want to make sure it stays top of mind. On a different day this week—and look, — How, practically, should I hold myself you can see it here in my calendar—I knew that part accountable? How will I ensure that others help of my job was to be collaborative and catalytic. So hold me accountable? I pick out two qualities, two kinds of ‘to be,’ every morning as part of my normal routine.” Recalibrate how I expect leaders and employees to show up Choosing how one wants “to be” is yielding concrete Just as the “being” side of the CEO has come to results. Deanna Mulligan, CEO of Guardian, says, the fore during the crisis, the same is true for other “Like many New York financial-services firms, our leaders in the organization. At his recent top-300 culture and corporate communications tend to executive meeting, Verizon Communications CEO be a bit more formal. Pre-COVID-19, when I was Hans Vestberg shared a visual showing how he’s preparing for a company-wide video or speech, that spent his time over the past three months during the formality, in the form of rehearsals and professional crisis and how his energy has changed: “Ultimately, staging, was standard practice. That culture had to my job is to give energy, empowerment, and vision change overnight because everyone’s at home. Now, to the organization. If I’m down, I’m not really using I’m more casually dressed, and it’s more intimate and the only asset I have as a leader. And I have bad days personal. I’ve made some of my videos outside with like anybody else. I tell my leaders, ‘You need to self- the dog, something that we’d never have thought assess so you know what you’re good at, and double to do before. The feedback has been terrific. Our down on that in your own leadership.’” employee engagement scores, confirmed by regular pulse surveys, have been consistently on the rise Several CEOs have told us that they have learned since going remote.” a lot about their leadership teams during the pandemic. “This environment offers some terrific By reflecting on the following questions, CEOs can empirical evidence,” says Union Pacific’s Lance use this moment as an opportunity to recalibrate Fritz. “This is a great environment if you’re prone how they show up every day: to saying, ‘Not in my sandbox.’ You can really shut others down. It’s a challenging environment if — What qualities am I bringing to being and you’re prone to be inviting, but if you can do it in showing up today that I should continue to bring this environment, you’re probably going to do it in into the future? the normal world, too. I’m seeing behaviors like that bubble up, and it’s very informative.” CEOs are noticing aspects of their people that had always been there but perhaps had gone overlooked or weren’t considered important until the pandemic helped make those characteristics more pronounced. The CEO moment: Leadership for a new era 149
CEOs are noticing aspects of their people that believe and take action accordingly—something had always been there but perhaps had gone we believe all CEOs would benefit from, given the overlooked or weren’t considered important until moment at hand. the pandemic helped make those characteristics more pronounced. Most job descriptions list what Decide what you really believe is expected in terms of skills and experience, but The COVID-19 pandemic has emphatically affirmed during COVID-19, CEOs have seen the critical the interconnection and interdependence of importance of other attributes and qualities of businesses with their full range of stakeholders. character. As Alain Bejjani, CEO of MAF, states, “I As Robert Smith, CEO of Vista Equity Partners, a think we’re moving from a world of specialists toward private-equity firm with some 60 companies in its a world of generalists. Leaders need to adapt to all portfolio, says, “At the beginning of COVID-19, CEOs kinds of different circumstances, and generalists zipped right to thinking about shareholders above can succeed when life is so fast and volatile. We will everything. It was almost a muscle memory. But then need more generalists to lead in disruptive times, they realized that at every turn they were bumping whether they’re caused by technological shifts or up against different stakeholders: partners, this unimagined pandemic.” governments, suppliers, employees. They were experiencing the interconnectedness of stakeholder A conscious, deliberate choice to adjust people capitalism in everything they did.” expectations to include “to be” as well as “to do” considerations will change how CEOs and their CEOs are being called upon to make decisions they organizations select, train, coach, recognize, and have never been trained for. Few have any expertise reward leaders. As CEOs decide how to make this on the general health of their employees, yet they shift permanent, they, together with their chief are called upon to decide when it is safe to return human-resources officer, should consider to the office. Tough decisions with profound human the following: consequences are confronting CEOs every day. CCHMC’s Michael Fisher told his board leaders that — What will I look for differently in leaders as a he was willing to repurpose a beautiful, relatively result of what I’ve learned during the pandemic? new satellite hospital already being fully used to care for children to instead serve adult patients exposed — What actions should I take in the near term to COVID-19, if that’s what the community needed. to reinforce what “being” attributes will be of “That would not have been a popular decision elevated importance going forward? with some important stakeholders, for a range of reasons, and, thankfully, we haven’t had to do it. — How can these attributes be hardwired into our But if that was the right way for our community to people model to ensure they are institutionalized respond to this crisis, I would have been ready to do in how we develop, reward, and promote? it again.” Throughout the crisis, Fisher says, “What went through my mind was the range of issues that needed to be dealt with—and the range of Fully embrace stakeholder capitalism responsibilities that we had to patients, to families, Over the past few years, many CEOs have begun to to our employees, and to the community. How would embrace the idea that their companies’ obligations we take this moment and not only preserve trust to shareholders should not come at the expense of with stakeholders but also strengthen it?” other stakeholders—that is, employees, customers, the community, suppliers, and society. The most Starting with the needs of their employees, public affirmation of the idea came just last summer, stakeholder capitalism moved from an idea talked when 181 CEOs committed to the idea by signing about at conferences to a rapid-sequence decision- on to the US Business Roundtable’s “Statement making reality for many CEOs. Unilever’s Alan Jope on the purpose of a corporation.” The pandemic tells us, “We realized after the event that we had has brought this issue to the fore in powerful ways, followed our multistakeholder model. Week one was prompting many CEOs to gut check what they really all about our employees. We secured everyone’s 150 What now? Ten actions to emerge stronger in the next normal September 2020
jobs and income for three months. The next week, Once you have made the decision, make we started thinking about our community response. it happen We donated products, got into a big partnership Determining how to manage the short-term costs for handwashing, and made €500 million available of stakeholder capitalism practically is one of the as working capital to pay small suppliers early. most daunting challenges for CEOs who have And after we had taken care of people and the chosen to fully embrace the ideal. Consider, for community, that’s when we thought fundamentally example, the issue of job reductions in the face of about the business, about the fact that we make declining revenues. It may be the right thing to do things and collect cash for them. That’s when we for shareholders in the near term, but it can also be secured supply lines and built extra resilience into catastrophic for employees who lose their jobs at a our supply chain.” time of human-health and economic crisis. Research has made it clear that tending to multiple At Union Pacific, rail traffic dropped during the stakeholders and managing for the long haul is good early days of the pandemic, although it has since for not only stakeholders but also the company.5 slowly recovered. As CEO Lance Fritz explains, Exposure to customer and stakeholder-related “I made the conscious decision to spread the risks are minimized, and new opportunities present impact across the whole organization, so that themselves. For example, 87 percent of customers our frontline professionals—the transportation say that they will purchase from companies that employees, mechanical employees, and engineering support what they care about. Ninety-four percent employees—wouldn’t be the only ones feeling it. of millennials say that they want their skills to benefit Every manager is taking a one-week unpaid leave of a cause. Sustainable investing has grown 18-fold absence every month [for four months]. Every board since 1995. These facts are not new to CEOs, but member and executive has had their pay docked the COVID-19 pandemic has laid bare the profound 25 percent for those four months. We don’t need interconnectedness between businesses and the to do that for liquidity. We need it to demonstrate broader world in which they operate. Furthermore, to the entire workforce that we’re in this together. our early research indicates that consumers will be We’re not riding the backs of our frontline team—or even more committed to social responsibility coming doing anything that would appear that way. We are out of the pandemic. keeping an open line of dialogue with our frontline team and doing our best to listen.” In this context, we encourage CEOs to reflect on issues such as: Important stakeholder questions are also intrinsic to CEO decisions regarding returning to the workplace. • On what stakeholders should I explicitly recalibrate On one hand, the economic downturn is having a my personal focus and our company’s overall catastrophic impact on many of the most vulnerable focus? groups in our society. The sooner economic activity can resume, the sooner unemployment can be • How would I convince my shareholders that the addressed and goods and services can be delivered long-term benefits of shifting the company’s focus to those who need them. At the same time, the more outweighs the short-terms costs? that people are brought together, the higher the risk that lives are put in jeopardy. • Do my answers to the questions above implicitly show that I’m not yet ready to embrace CEOs acknowledge that these and many other stakeholder capitalism, and, if so, what is holding multistakeholder decisions become more difficult me back from having true conviction? the worse your business gets. Says Fritz, “When 5 See “Where companies with a long-term view outperform their peers,” McKinsey Global Institute, February 2017, McKinsey.com; and Marc Goedhart and Tim Koller, “The value of value creation,” McKinsey Quarterly, June 2020, McKinsey.com. The CEO moment: Leadership for a new era 151
Employees, customers, and stakeholders expect a CEO to articulate where the company stands on critical issues—it’s increasingly becoming an expectation of the CEO role. the chips are down, you’re going to find out just Harness the real power of peer how strong your values are.” Robert Smith puts it networks simply: “When the bills come due, we’ll see what Here’s one of the most noteworthy changes we CEOs do—it is not guaranteed that there has been have seen during the pandemic: CEOs are talking a full shift to stakeholder capitalism yet.” Still, more to one another much more and are seeking to do CEOs are stepping out in front vocally, making their so at a much greater rate. Says Lance Fritz, “Two views known on topics ranging from values to ethics. months ago, the business community was thinking, Employees, customers, and stakeholders expect ‘If we don’t figure out a thoughtful path, we could a CEO to articulate where the company stands wallow in this for a long, long time.’ So CEOs started on critical issues—it’s increasingly becoming an thinking, ‘Let’s learn from each other. Let’s hold expectation of the CEO role. Some, such as Larry hands.’ There’s even a little bit of commiseration. I Fink, expect that this shift will continue to gain haven’t put enough value on the ability to be with a strength: “Going forward, there is going to be a lot couple of other CEOs on one of these Zoom calls, more focus on society, customers and clients, family, or on the phone, and talk about any number of and employees.” The moment of the pandemic things that are unique that you can’t talk to anybody offers CEOs the opportunity—and increases their else about.” We believe that having CEOs spend obligation—to acknowledge this reality. more time laterally will prove useful not only for responding to the current pandemic, but also for CEOs who believe in the opportunity of stakeholder addressing emergent issues and unlocking higher capitalism should ask themselves the following levels of business performance, innovation, and questions to help turn beliefs into action: multistakeholder impact in an ever more complex and uncertain world. — Based on the stakeholder interests that I need to recalibrate, what practically must look different Invest further in building relationships with in the next six, 12, and 18 months (including other CEOs the frequency and nature of interactions, CEOs are communicating more, and expanding management processes, and resource their networks, in part because only another allocation)? CEO confronting the pandemic can fully identify with today’s leadership challenges. As Laxman — How and when will I reset expectations with my Narasimhan, CEO of Reckitt Benckiser, puts it: shareholders? “I find talking to other CEOs about how they are handling the crisis extremely helpful—this shared — How will we measure progress as we transition? experience connects us and gives me added 152 What now? Ten actions to emerge stronger in the next normal September 2020
perspectives.” Says AmerisourceBergen CEO Steve In light of the newfound connectivity among CEOs Collis, “From an external perspective, I’ve been a within and across industries happening in this beneficiary of amazing calls with other CEOs who moment, CEOs will benefit from reflecting on the have been willing to share their knowledge. This has following questions: been such a growing experience.” — What peer networks should I continue to It’s no surprise that CEOs are seeing the benefits create beyond the crisis (in particular, those in of connecting in new ways during this crisis. analogous but not identical situations)? The urgency of the moment has given focus and urgency to the nature of the dialogue. Kate Walsh, — What makes for a valuable peer interaction, and CEO of Boston Medical Center, started talking how can I ensure that these conditions are in to her peers early in the pandemic, when Boston place when I interact with other CEOs? was becoming one of the country’s COVID-19 hot spots. “Hospital CEOs realized we were chasing — Beyond role modeling, how can I encourage my each other around the supply chains,” says Walsh. senior team and other leaders to enrich their own “We began to coordinate, so at least we could let networks and the velocity of learnings with their people know that we’d give everybody a mask peers across industries? when they come to work on Monday morning. It became almost a daily call [with other hospitals] as Leverage networks to tackle a broad set of issues we tried to figure out how to respond to the volume CEO networks also have a unique potential to enable of cases.” Leaders are less focused on showing up some of the other things we have talked about thus to large group meetings and putting on a corporate far in this article. CEOs in noncompetitive industries face that suggests “We’ve got it under control.” are well positioned to both challenge and support Instead, they are intent on accelerating problem their peers in aiming higher; in sharing learnings, solving together by building on one another’s ideas, best practices, and encouragement regarding iterating novel solutions to use in the workplace, elevating “to be” to the same level as “to do”; and in trading notes, and moving forward having learned working through how to fully embrace stakeholder what works best. They are also encouraging one capitalism. another to conduct bold experiments, taking advantage of the current environment to do A/B The pharmaceutical industry’s “10x” rush to counter testing on a massive scale and trying new ways of COVID-19 bears witness to this. As Christophe operating virtually and digitally. Weber, CEO of Takeda Pharmaceuticals, explains, “We started the development of a plasma-derived In order for CEOs to leverage such interactions medicine for COVID-19 by ourselves. But our head in the future and accelerate impact on shared of Plasma-Derived Therapies realized that if we challenges, they will have to continue to approach formed an alliance with other plasma companies, we such opportunities—both formal and informal— could go much faster and would have the potential with humility, a learning mindset, and an open- to produce a product on a bigger scale. So now we minded commitment to ongoing development. The have a pro bono, not-for-profit alliance. And we benefits of doing so are more significant than one have a very good alliance with other major plasma might imagine: role modeling this has the potential companies, smaller ones, and also nonplasma to create more open learning organizations for companies, like Microsoft. When everybody saw that companies, and to identify the cross-industry it was a true alliance to do good for society, we were analogies that often provide the touchstone for able to get the convergence of many companies.” innovation. Without the pressure of a crisis, however, leadership resolve will be required to maintain such This interest in shared success can create wins for an approach—research makes it clear that none of multiple stakeholders. “Part [of the adjustment to 6 this is easy for people in powerful roles. COVID-19] is focusing even more on partnering with 6 See Jennifer Garvey Berger and Zafer Gedeon Achi, “Understanding the leader’s ‘identity mindtrap’: Personal growth for the C-suite,” McKinsey Quarterly, January 2020, McKinsey.com. The CEO moment: Leadership for a new era 153
and supporting the community,” says CCHMC’s COVID-19 has brought with it a pressurized Fisher. “For example, CEOs of major employers, operating environment the likes of which few including P&G, Kroger, Fifth Third Bank, Cincinnati of today’s CEOs have ever experienced. It has Children’s, and others, initiated a task force to focus necessitated a reappraisal of how much is on a robust and inclusive restart of our economy and possible and in what time frames. It has forced region. Being part of those things is more important personal disclosure at levels previously considered than ever to me, our institution, and our community.” uncomfortable and, in doing so, has increased awareness of the importance of how leaders Alain Bejjani of MAF frames the potential for CEOs show up personally. It has shined a light on the to work together in ways that change the world interconnectivity of stakeholder concerns. It has for the better. Says Bejjani, “Employers enjoy the prompted a level of substance-based, peer-to- highest level of trust compared to governments and peer CEO interaction that has elevated all involved. even NGOs [nongovernmental organizations]. This Ultimately, it has “unfrozen” many aspects of the capital of trust is very important and something CEO role, making possible a re-fusing of new and CEOs should leverage going forward. We should be existing elements that could define the CEO role of at the bridgehead for change. Governments cannot the future. win, cannot deal with the complex issues of our time, without business. Business, in turn, cannot win When the pressure decreases, will CEOs go without government and civil society.” As COVID-19 back to operating as they did before? Or will the has made clear, changing the world for the better is role at the top be thoughtfully reconsidered and good not only for society but also for business. reconceived by those who occupy it? Clearly, not every CEO will choose to make permanent the four As CEOs look forward to decide what issues to shifts we’ve discussed. The more that CEOs do, tackle with their peers, they can build on their however, the more the moment has the potential pandemic experience by considering the following to become a movement—one that could create questions: higher-achieving, more purposeful, more humane, and better-connected leaders. Judging by the — On what issues has peer connectivity most evolution underway, many companies and societies benefited my business, now and in the future? stand to benefit. — On what societal issues (such as inequity and racism, climate change, porous social safety nets, weakened healthcare systems) should peer connectivity be directed, and how can I maintain the same level of intensity that I did during the pandemic? — What issues will I take personal leadership on and convene others around? Carolyn Dewar is a senior partner in McKinsey’s San Francisco office, Scott Keller is a senior partner in the Southern California office, Kevin Sneader is McKinsey’s global managing partner and is based in the Hong Kong office, and Kurt Strovink is a senior partner in the New York office. The authors wish to thank Monica Murarka for her contributions to this article. Copyright © 2020 McKinsey & Company. All rights reserved. 154 What now? Ten actions to emerge stronger in the next normal September 2020
Acknowledgments McKinsey Global Publishing would like to thank, Social Media/Video first and foremost, the many authors of these Devin Brown, Chelsea Bryan, Stephanie Grayson, articles, for their insights and analysis. Mona Hamouly, Lauren Holmes, Simon London, Puneet Mishra, Kathleen O’Leary, and Rita Zonius And we want to acknowledge the many direct contributors who offered vital energy and expertise— McKinsey colleagues under extraordinary personal and professional Hana Abbas, Missy Babcock, Charlie Barthold, circumstances—to the development, editing, risk April Bell, Zavie Berenbaum, Anne Blackman, review, copyediting, fact checking, data visualization, Marianne Blum, Daniel Bocian, DJ Carella, design, production, and dissemination of “The Next Adriana Clemens, Julie Coppo, Elliot Cravitz, Normal” content. Peter Dahlstrom, Rafael Daraya, David DeLallo, Kevin Drennan, Paula Duran, Daniel Eisenberg, McKinsey Global Publishing Paul Feldman, Michelle Forrest, Cabe Franklin, Publisher Marcelo Garza, Max Gleischman, Jane Goehring, Raju Narisetti Vasudha Gupta, Christen Hammersley, Keri Hattich, Kate Hegarty, Andria Hutchins, Michael Idinopulos, Editorial Kristen Jennings, Christian Johnson, Sue Lavin Jones, Nicole Adams, Julia Arnous, Mike Borruso, Connie Jordan, Ben Ko, Steve Lackey, Stephen Diane Brady, Richard Bucci, Lang Davison, Landau, Glenn Leibowitz, Frank Lenhart, Rob Tom Fleming, Torea Frey, Roberta Fusaro, Mathis, Hannah McGee, Kelly McLaughlin, Kerry Mary Halpin, Eileen Hannigan, Heather Hanselman, Naidoo, Elizabeth Newman, Christine Nguyen, Drew Holzfeind, David Hunter, Justine Jablonska, Cuckoo Paul, John Pratt, Ramiro Prudencio, Bill Javetski, Eleni Kostopoulos, Jason Li, Rahul Rawal, Lisa Renaud, Rebeca Robboy, Cait Murphy, Lucia Rahilly, Josh Rosenfield, Marcel Rogowski, Jesse Salazar, Alison Segura, Astrid Sandoval, David Schwartz, Daniella Seiler, Barr Seitz, Michael Silber, Michelle Sing, Holly Skillin, Mark Staples, Dennis Swinford, Rick Tetzeli, Margaret Swink, Natasha Wig, and Leah Zennario Barbara Tierney, and Monica Toriello Editorial partners Copy desk Colin Douglas, Uma Khan, Mary Kuntz, Heather Byer, Nancy Cohn, Roger Draper, Joanna Pachner, Darby Films, and Leff Julie Macias, LaShon Malone, Pamela Norton, and Katya Petriwsky Visual Storytelling Victor Cuevas, Nicole Esquerre, Richard Johnson, Maya Kaplun, Janet Michaud, Matthew Perry, Dan Redding, Mary Reddy, Jonathon Rivait, and Nathan Wilson Editorial and digital production Andrew Cha, Paromita Ghosh, Gwyn Herbein, Chris Konnari, Milva Mantilla, Philip Mathew, Charmaine Rice, Dana Sand, Venetia Simcock, Sneha Vats, Pooja Yadav, and Belinda Yu Acknowledgments 155
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