The Science of Change: How to Craft Agile Finance Teams

Welcome back to CFO Weekly, where we're talking with financial leaders about how to build efficiency in their teams, create time for strategy, and ultimately get results. With your host, Megan Weis, let's jump right in.

Megan - 00:00:30: Today my guest is Gaurav Gupta. Gaurav is a managing director at Cotter with two decades of experience working with CFOs and other C-suite executives on implementing successful strategic and operational initiatives. He is also the co-author of Change, How Organizations Achieve Hard to Imagine Results Despite Uncertain and volatile times. Gaurav. Thank you very much for joining me on today's episode of CFO Weekly.

Gaurav - 00:00:58: Thank you, Megan. I'm really looking forward to the conversation.

Megan - 00:01:00: Yeah, today we're going to be discussing the emerging science of change and what that science can teach CFOs about how to build finance and accounting departments that are more agile and able to change rapidly, as well as the importance of adaptability to success and how to build it within teams. And I'm really looking forward to learning more about this topic, so let's jump right in. First and foremost, let's start with you. You have a degree in physics and a Master of Science in aeronautical engineering from Cornell. So can you tell us a little bit about your career path and what drove your move into change and leadership advisory?

Gaurav - 00:01:37: It's a little funny these days when I hear people talk about the masters in aeronautical engineering, it's actually aerospace engineering, but it's been so many years since I've done anything related to it that it almost feels like I'm pretending. So I started my career working with industrial businesses that were looking to make big step changes in performance improvement. So it was a little bit of engineering, it was a little bit of analytical problem solving, a little bit of consulting and I did that for a few years and saw we had some great sort of wins with these organizations, and saw some great step changes and improvement in the work that they were doing. Who, what else, starting to find is that sort of sustaining not the changes that were being made, but sustaining the ability to change and sustaining the ability to continue to adapt and evolve was much more difficult to build into these organizations. And so through various different things that these tend to happen, I managed to connect with Dr. John Goddard, whose work I had actually read and had been using in the work that I was doing previously, and then had some good conversations with him and ended up joining him and working with him on change and transformation. So that's sort of how I got here, I've been doing this now for a few years with him, and it's been a great journey.

Megan - 00:02:44: Why is it that change is so hard? It's a constant in life and we're always facing it. So why is it so difficult for most of us?

Gaurav - 00:02:52: Yeah, you know, the funny thing is, I think some change is hard, but not all change, right? I mean, if we think about our personal lives or even our professional lives, they are changes we embrace. They are changes that we run towards, that we're excited about. And actually, that was part of the motivation for the book that we wrote, was to try to understand exactly that question of why is it that some changes are so hard and we resist and in general, you know, the idea that human beings are resistant to change does have some validity. But at the same time, there are other changes that are not true. And so that's part of the sort of the impetus for the research that we did for the book, which is to really understand the difference and it comes down to whether we see the change as a threat or whether we see the change as an opportunity. And a lot of that is actually hardwired into our biologies. It is part of what makes us human.

Megan - 00:03:40: And this book that you reference is called Change and you wrote it with your colleague, John Cotter of Cotter International. So can you just give a brief synopsis of the book and just kind of an overview of what differentiates it from all the other books out there that are about change?

Gaurav - 00:03:59: Sure. And I should also mention my third co-author, which is Dr. Vanessa Akhtar, who was on the book as well. So, about five or six years ago, there were two things we started to recognize. One was that the level of uncertainty in the world around us was going up significantly and the level of sort of uncertainty and decision-making for organizations was much greater than it had been before. And the other thing was the evolution of brain science and neuroscience in the last few years has been remarkable and the amount that we now understand about how human beings respond to various things, including change, was much greater than it had been before and so that sort of led us to start to explore, as I said earlier, this question of why is it that some changes is embraced and other change we resist so hard and so the book really dives into the science of change. So we started to look at what can we learn from the brain and neuroscience around change how we respond to it and how human beings respond to change. What can we learn from the organizational history and the development of organizations and management systems and how they either facilitate change or inhibit change? And so we sort of dove into some of the history of the modern organization. And then the third stream of research was really around the observational research that Dr. Goddard had been doing for, gosh, he hits it when I say this, but five decades, which was really looking at hundreds of organizations and what worked when they went through large scale change and what didn't, right? So it was very much observational research and really combining those three streams of research to say, what does the science exchange actually tell us about how human beings and organizations can change better? And that's really what the book is about. So the first part of the book is diving into that science and then sort of explaining what some of that science teaches us. And then the second part of the book really takes that science of change and starts to apply it to some of the most common methodologies of change or situations of change that organizations face, right? So things like a large-scale restructuring or merger and acquisition, and how in those situations does the science of change play out and what does it tell us about how organizations can better navigate some of these sometimes disruptive changes in their organization?

Megan - 00:06:08: And just curious, how has the science evolved in let's say the last 10 to 20 years with the pace of change just increasing exponentially?

Gaurav - 00:06:17: And there are maybe two things that really stand out as somewhat different in terms of our understanding of how to navigate change. The first one is for a long time, the idea was a crisis was the best moment for change and there's some truth to that. But what we're starting to recognize is the idea of a burning platform or the idea that this sort of change coming from a threat that we see in the environment is really good at motivating some immediate action, but it is very difficult at, or it is very ineffective at sustaining change over time. And the reason for that goes back to brain science because what we learned from brain science is hardwired into us are actually two channels, right? The first channel is what we call it the survive channel, but it's what you might be familiar with as sort of the fight or flight response, right? So I see a threat in the environment, autonomously there's chemicals released in the body and it sort of predisposes me to either fight or flee that, that threat that I see in the environment. Now, originally, obviously, this evolved as a mechanism to keep us physically safe, but the same mechanism is now co-opted for threats to our ego, threats to our status, and the sorts of things we might face in the workplace. And so when we are faced with a burning platform or a crisis, if it's a change that just requires extra work or just requires us to, you know, pull an all lighter or do the same thing, but do it a little bit faster, that's that channel works, that system works. If on the other hand, the change requires more creativity, requires more innovation, and requires us to think more expansively, then actually triggering that survival channel does the opposite because it shuts down and it forces us to be very narrow in our problem-solving and it shuts down innovation and creativity. Now, the good news is there is the second channel, which we call the thrive channel, which is really triggered by opportunity and curiosity, right? So this is the part of our human nature where we want to seek out new and novel things and it's similar to the survival channel, which triggered by we see an opportunity, There's a release of chemicals in the body, which does create a spike in energy, though not as much as in the survive, but we can sustain it for longer and it expands our thinking, expands innovation, expands creativity, the exact sort of things you would like to see for change. And so one of the biggest changes in change or in the understanding of change is that we're more effective when we lean much more heavily on opportunities as a motivation for change than on burning platforms as a motivation for change. The second thing that's really changed in terms of our thinking about how to approach change is driven by the level of uncertainty around us and it's driven by the fact that the pace of change is so much greater. And so what that means is our approaches need to be far more agile. They need to be far more iterative. We need to lean in on things like experimentation when it comes to things like strategic planning, our time horizons are shifting, they're much shorter now than they used to be, and using tools like scenario planning, using tools like assumptions, and articulating your assumptions and being able to sort of shift and pivot when those assumptions change, all of that starts to become much more important in how we run businesses, but also in how we actually navigate change itself, right? So our change approaches need to mirror the same level of iteration and same level of agility that we need to see in our business operations now.

Megan - 00:09:32: And let's zero in now on the CFO role. So what do CFOs need to know about this emerging science and why is it important that they know it?

Gaurav - 00:09:42: Yeah, so I think that last point around the shift in planning is probably the most important one for CFOs because if I think about the role of a CFO, of course, there is the roles around accounting and reporting and sort of the auditing process but then there's all of the strategic advisory, the planning, the ensuring we have the right plans in place for what we want to be able to execute against as a business. And I was in a conversation with some healthcare CFOs a few weeks ago. One of the examples they were talking about is the difficulty they're having in getting organizations to appreciate the new world that we're living in in terms of the cost of capital, right? Because for so long, the cost of capital was so low that we made decisions that are very different than the decisions we would make now with the cost of capital being what it is. And for a CFO who is in a position of trying to influence the CFO or others in the organization on some of this decision making, that needs to now be able to pivot and change your advice to be able to not have it feel like we did something wrong in the past, but actually be more, look the assumptions have changed, the underlying reasons why we were working in a certain way have changed. That just becomes so much more important and of course, this is one example, right? The change in interest rates. But there are lots of other examples of these sorts of large shifts that are happening externally that CFOs need to respond to. And so I think that's what's driving the need for CFOs to start to pay a lot more attention to change in the external environment and then the implications that has on how you want to communicate and how you want to message on what sort of levers you want to pull when it comes to decision making, how many assumptions you want to actually articulate, all of that changes when you start to appreciate the level of uncertainty in the information as well as the level of change that's happening externally.

Megan - 00:11:29: And how important is it that a CFO has the skills to be able to lead these changes and motivate others to change along with them?

Gaurav - 00:11:38: Obviously, I'm a little bit biased here, right? But I think the most important underappreciated skill for leaders across the board right now is the ability to navigate and lead change. Because when we're talking about the Survive channel earlier and the threats that we tend to detect in the workplace, especially in today's world where the threats we're seeing, it's a constant drum beat, right? Because we're now so connected that what happens in a faraway country impacts how we're feeling. And so we're in a situation where in organizations, most individuals are feeling these threats on almost a constant basis. And that's leading to a lot of the burnout that we're seeing in organizations, a lot of the burnout in employees is because of this constant feeling of, gosh, we've got to change again, we've got to change again there's a sense of change fatigue. And so for any leader to be able to effectively lead their team through change becomes that much more important because change is happening more often and because the employee base is in this point of change fatigue and at this moment of feeling massively burnt out. And so I think it's not just true for CFOs. I think it's true for all leaders across the organization. But change is becoming very much a critical skill. And the ability to lead a team or an organization through a specific change, an episodic change, is not nice to have anymore. It's really a must-have.

Megan - 00:12:57: Do you think this ability to lead change is innate or learned? And if learned, can we get better at it?

Gaurav - 00:13:05: Oh, we can definitely get better at it. It is definitely learned. I mean, part of the reason we thought it was so important to understand the science of change is because there are many different approaches to how you navigate through change out there. And many of them are quite effective because they're based on observing what's worked and what hasn't worked. But until we understand why those approaches work, it becomes very difficult to actually build capability. And so now that we have a much better understanding of why some of the methods work, we can start to build leaders' capabilities and the capability of others to be more effective in navigating change. So as an example, the understanding of the Survive channel and the Thrive channel says, as a leader, the more you can help your organization activate their Thrive channel, i.e. get them focused on opportunities in the environment, get them focused on curiosity, get them working on things in a more collaborative way, all of that is going to activate the Thrive channel which is going to help people embrace change. And so if you're trying to build capability in your leaders helping them around things like how do you message so that, yes, you acknowledge the threats in the environment, but then you also can very quickly pivot your message to talk about the opportunities that that creates. So if there's a competitor we are facing that's new to the market, of course that creates a threat for us. But at the same time, that creates an opportunity because that might help us grow the overall market or that might help us sharpen our messaging in certain areas. And so the capability for a leader to be able to message around an opportunity is one example of the sorts of capabilities that leaders can develop. Another is how much do you, when you message or communicate with your organization, how much do you rely on sort of intellectually compelling and intellectually or rationally fact-based rationales for the change? And how much do you lean into some of the emotional side of things as well? Because all of the research shows that people need both. As we talked about earlier, I'm an engineer by training and honestly, for the longest time, I thought I made most of my decisions entirely based on a rational assessment of all the facts available. And more and more I realized I actually make my decisions based on a gut feeling, and then I use the facts to rationalize the decision I've made, right? And I think that's true of many of us. And so that's another capability for leaders is the ability to connect on both an intellectually and an emotionally compelling basis. So there are definitely some very specific skills and traits that leaders, and not just leaders, all employees can start to develop that create a more change-capable organization and create that sort of change muscle within the organization.

Megan - 00:15:38: And when we're hiring, what sort of characteristics should we be looking for in people who are better able to tolerate and succeed with change?

Gaurav - 00:15:50: I always hesitate on this question of sort of hiring, what we look for in hiring, only because I think our ability as human beings to actually evaluate some of this is so limited that it's always a little risky to sort of have a whole list of things we're looking to evaluate. That being said, I think it's a lot of the same things you would look for in general leadership abilities, right? People who are open to being questioned, people who are curious, who are interested in seeking new information, who are willing to change their minds. I think it's not that dissimilar from leadership. And in many ways, change is synonymous with leadership because leadership is all about helping people and organizations get from someplace to a better place and that's really what change is all about as well. So I think a lot of the same characteristics that you would look for in assessing leadership capability would be similar to what you would look for change capability.

Megan - 00:16:38: And in your experience, what do you believe is the most important factor for CFOs when it comes to building agile finance and accounting departments?

Gaurav - 00:16:47: Yeah, I think most of the individuals in finance organizations, very similar to sort of what I was describing with engineers, right, have been incentivized in many ways to be very deliberate and planful and to be,to sort of lean hard on being right the first time. And of course, there are certain parts of a finance organization where that is critically important and where you don't necessarily want to be experimenting or iterating, but then there are other parts where you do. And so I think the most important thing is that recognition and being able to sort of understand where within the finance function do you actually want to try to create more agility and adaptability and where do you actually not? Because what's more important is reliability and consistency and so you want to sort of lean in on that. So I think the first part of it is being able to recognize that and parse that out. I think the second thing then is to create adaptability requires, I think, being very explicit upfront about why we're making certain decisions or why we're doing things a certain way. Because then when that changes, the reason changes, it doesn't feel like, oh gosh, I have to admit that what I was doing was wrong and I have to change direction But rather it feels like, look, we made these decisions based on these assumptions and those underlying assumptions have changed. And so now we're able to pivot and so it makes it much easier for people to accept the need to pivot and accept the need to adapt from what we were doing before. So I think one, understanding where you want that agility and adaptability and where maybe you don't so much. And then two is setting up things like your planning process, setting up things like your budgeting process to be very explicit and articulate about the underlying assumptions that go into the decisions that you're making.

Megan - 00:18:27: And what are some of the challenges that you see for a CFO who's trying to create an agile team, either from their own team or the organization? What roadblocks are in their way?

Gaurav - 00:18:39: Yeah, I think there's some of them are sort of not unique to CFOs, right? Anytime we're talking about agility, some of the things that I think get in the way are things like not being able to clearly connect what agility will bring, right? So greater agility brings us what in terms of better business outcomes. And if we aren't explicit about that, it becomes very difficult to create agility because it feels like we're just doing it for the sake of doing it. I think one of the things that is unique to CFOs is, again, because of the fact that they are parts of the function of finance where the cost of being wrong or the cost of misreporting financial numbers is so high that there is a bias toward greater deliberation and there is a bias towards sort of not being agile, right? And not experimenting. And so overcoming that, I think goes back to what I said earlier, which is really being explicit about where is it appropriate to create agility and experimentation and where is it not. Because by default, I think finance functions tend to be a little bit less adaptable and agile than some of the other functions in the business and for a very good reason, right? Because the risk of mistakes can be much greater.

Megan - 00:19:47: And how can CFOs make sure that their teams are well-equipped to handle rapid change? And also, how do they help their employees prevent burnout from all of these rapid changes?

Gaurav - 00:20:00: Yeah, that's a great question. I think the burnout piece, at least in my mind, goes back to if the change is felt very much as a have to. So if I feel like all of the changes that we're undergoing are things that I have to do as opposed to things that I want to do Right?. And so as much as CFOs can, again, message the change around, here is the opportunity in this, here are the benefits, here is how life is going to be better when we make this change, here are the benefits we're going to be able to drive for our customers, for our employees, and really start to move that messaging from a we have to make these changes towards we want to make these changes, the less it's going to drive fatigue, because I'm going to embrace it, as opposed to I'm going to resist it, because the fatigue, of course, comes from feeling like you're constantly having to fight against something that's happening to you, as opposed to making a change that you're making and that you want to make. So that's the first part of it. I think on the fatigue part, there's also a question of prioritization, and ensuring that we actually are making changes where they are necessary, as opposed to making changes that maybe don't have that big of an impact. And part of that is engaging the organization more broadly and understanding where the threats and opportunities are because CFOs don't always have full visibility. And sometimes it's the people who are closer to the front lines who are able to have visibility to what threats and opportunities need to be addressed so that prioritization piece and engaging people in that prioritization is important. The other part of engaging people in the change early is that there is a sort of the IKEA effect. If you built the furniture, you tend to like it more or the endowment effect, if you already own something you tend to value it more. And so if you engage people earlier in the change process, so they feel like they've had a say in it because they have, and they feel like they've been able to influence the direction, they are much more likely to value it, to see the benefits in it, and hence feel less fatigue from it.

Megan - 00:21:52: Great advice. So are there any common factors that cause change efforts to fail? And can you suggest strategies to help leadership overcome those?

Gaurav - 00:22:02: Yeah, there definitely are some very strong patterns that we see in our research. And the first one is a lot of change does not get connected to the outcomes that we're trying to drive. So an example of this, I remember many years ago, actually, I was talking to a head of supply chain and they were in the process of building a manufacturing facility in China and we were just having a conversation about what the rationale was and why. And what he said to me was, well, we sort of have to do it, because all of our competitors are doing it and if we don't, we feel like we're behind. And investors sort of expect us to have this presence. But that's not a good rationale for change, especially if it's disruptive change because it doesn't really articulate the outcome that you're trying to drive for the business. And so I think that's the first one, is being really, really careful about ensuring that the change you are undertaking, you can draw a very clear line to the business performance that you're going to see from it. Another example of this today that we see a lot is digital transformations and new system implementations. There's usually a very good rationale for why we undertake these but then often, once you get into it, that sort of gets forgotten a little bit, and it becomes all about implementation, as opposed to the actual improvements in the business that you're trying to drive from it. So that's the first pitfall that seems fairly obvious, but unfortunately, we've seen happen over and over again. The second one is about engaging people and waiting too long to engage people in a change and feeling like, as leaders we have to have all of the decisions made. We have to have as much clarity as possible before we actually tell people about it, because otherwise, we're just going to create anxiety and fear. And at least in my experience, most people sort of figure it out anyway and know there's a change coming, and it actually creates more anxiety, because they don't know what's happening. And the secrecy leads to rumor mills and generally, what people think of as the worst-case scenario is worse than reality, right? So that would be the second one, is waiting to engage people and not bringing them into the fold early. The third one is about how we view progress and how we celebrate success. So the idea of we will build it and they will come, sort of thinking where you've got this large change we're going to undergo, and two years from now, we will see the benefits from it but in those two years, it's going to take a lot of effort. That's very difficult to motivate people around. And so instead, thinking about it what are the interim results that we want to celebrate? What is the interim progress that we want to make sure we're communicating and celebrating so that people can start to see benefits from the change early so that people can start to feel like there's some momentum behind the change? So that would be the third one. And then the final one I'd point to is just underestimating the impact that most changes can have in terms of the anxiety and fear that they can cause, right? So sometimes, as leaders, we don't appreciate that any significant change is probably going to cause disruption in all parts of the organization, not just in the people who are directly impacted. And so I think just planning for that, making sure we're messaging clearly around that, making sure when we do things like change impact analysis, where we're not considering only the direct impacts, but also the indirect impacts, and ensuring we're taking a broader view to how this change might play out in the organization. So that would be the fourth one, is really making sure we're not underestimating the impact of the change on people in the organization.

Megan - 00:25:24: And I'm just curious, but in change efforts, do you think everyone should play a part so that they feel some amount of ownership, or is it possible to have too many hands in the pot?

Gaurav - 00:25:35: Yeah, it's a great question. And I think part of that goes to what's the role that they're playing. So maybe the first thing I'd say is our research suggests that you do need to get a majority of the organization. We often talk about it as 50% plus one, who are truly, truly committed to the change. That doesn't mean that they're necessarily playing a large part in it, or they have a lot to do. However, it does mean that they are, and I say committed to mean something different than supportive, right? Supportive means, hey, that's a good idea for somebody else to do. Committed means this is a great idea, and I will help if I can, or I will help if I need to. And so our research does show that you need a majority of people to get to that point of commitment to the change for it to be successful. But that doesn't mean of course, that everybody has to have a big role in it. And what percentage of the population needs to be involved depends a little bit on the type of change. If it's something that requires some specialized skill sets, then it might be a very small number, but certainly our experience has been it's generally, organizations generally involve too few people. I have yet to see an organization that has involved too many people in a change.

Megan - 00:26:38: And what advice would you give to CFOs who are just starting to build an Agile department?

Gaurav - 00:26:44: We talked about this a little bit earlier, but for me, it's really this idea of ensuring this clarity around where you want agility. What does agility mean? What are the benefits that you expect to see from that? Why do you want to create greater agility? I think answering those questions very explicitly for yourself and for the team is probably the best place to start because there will be some anxiety around or there will be some tension between this idea of reliable, consistent performance and agile iterative. And there is some tension there and I think being explicit about where those tensions lie and how you want to navigate them is critically important.

Megan - 00:27:18: And how can CFOs measure the success of their adaptability strategies? Is there a way for us to tell that we're getting better at change? Or what KPI should we be looking at?

Gaurav - 00:27:30: Yeah, I think this is why it's so important to tie the change or the desire for agility to business outcomes. Because at the end of the day, that's what matters. And if we can't see it in the business outcomes and the lagging indicators, then it's sort of, I don't want to say it doesn't matter, but in a way, it doesn't matter. And so that's one part of it, right? Is the lagging indicators, which are what are the business performance metrics that you expect to see, whether that's retention, whether that's greater revenue, whether that's better profitability, but being able to actually track it to those lagging indicators. On the leading indicator side, I think there are definitely ways that organizations can start to track this. So one of the things we've seen organizations do is actually have a part of their what is done through an employee survey or through other mechanisms, but actually taking a pulse check on how ready do we feel for change? And how well do I understand where the opportunities lie for the organization? And how well do I understand what's critical for our decision-making process? Because all of those are indicators of an organization that's more ready for change. And so there are ways to do it through survey mechanisms. There are also ways to track things like change capability. If you have a very deliberate intentional approach to how you're building capability in the organization, then there are ways to track individuals' propensity for change, or how often have they explored new ideas, or how often have they, or what percentage of the organization actually moves across silos, across departments. So there are various metrics that you can use based on the kind of organization you're trying to build. And those are all the leading indicators that give you some confidence that you're making some progress. And then of course, the lagging indicators are important as well.

Megan - 00:29:05: And last question, but as a business leader and a change expert, what is keeping you up at night?

Gaurav - 00:29:12: Oh gosh, you know, I think it's that, certainly from my point of view, the pace at which change is happening in the external environment is greater than most organizations' current capability to keep up. And that gap is growing and if we don't find better ways to create agility in organizations and adaptability, and if we don't find ways to start to close that gap between the external need for change or the externally imposed need for change and our internal ability as organizations to change, that's going to lead to significant disruption in many organizations, right? So I think that it's the, how fast can we start to close that gap and can we close it fast enough, given all of the sort of promise for disruption that's happening around us and whether that's driven by AI, whether that's driven by the experience we've had since through the pandemic has certainly created impetus for this as well. And the supply chain disruptions that came out of that, I think the recognition for or the recognition of this level of uncertainty and disruption in the external environment has gone up. And now it's a question of how quickly can we create more change-capable, more adaptable organizations that can actually start to close the gap between what's needed and what we can do.

Megan - 00:30:24: Gaurav, thank you so much for being my guest today.

Gaurav - 00:30:27: It was my pleasure and thank you for the conversation. And I hope your listeners find something useful in the discussion we've just had.

Megan - 00:30:33: Yeah, I know. I really enjoyed speaking with you and learning from you. And thank you for finding the time to be here with us today to share your experience and your knowledge. To all of our listeners, please tune in next week, and until then, take care.

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