Observers of strategy have long recognized the tension between operations and transformation: How to balance the present and the future? Finding a balance between the two polarities is a core challenge of strategic management.
The dilemma for managers is this: On one hand, there are endless operational challenges. A common jargon is the “lights on” project, which is a project intended to accomplish just that: keep the lights on so the business can keep running. On the other hand, companies need to experiment and innovate with business models. Failing to do so puts the future of the enterprise at risk.
How HSBC Balances Operations and Strategy
HSBC is one of the largest banks in the world. HSBC categorizes projects as either 1) run the bank (I often substitute the word business), or 2) change the bank (business). How sensible!
The guiding philosophy of HSBC’s portfolio management strategy is this:
- Most projects fall into the Run the Bank (Business) category. These are projects that are meant to support the function of the bank as it stands today, often with the acronym BAU for Business as Usual. Current HSBC examples are supporting the bank’s goal of “ever greening” and another is compliance with new regulations.
- A few, focused projects fall into the Change the Bank (Business) category. These business transformation projects are changing the way HSBC performs a process – or adding a new functionality. Compared to the “run the” projects, these projects require more sophisticated project management.
Interestingly, the “ever greening” that is now a run-the-business concept is the operationalization of a strategic initiative: to become the first major bank in the world to commit to going carbon neutral (announced in December 2004).
Funding the Project Portfolio
HSBC has used this “run the” and “change the” to align its $5 billion annual spend in IT with its business drivers. Examine the nearby graphic for one example. Notice that the “run the” proportion of Information Technology funding from 2005 to 2008 was approximately 70%.
HSBC’s use of the “run the” and “change the” continues and is recognized at the highest levels of the organization. For example, its May 2011 presentation to investors reported performance improvement opportunities in both Change the Bank and Run the Bank categories.
Aligning with Strategy for Growth
Smart companies prioritize for strategic alignment for growth in targeted sectors. A HSBC manager explained to me,
“The Bank gives priority to Change-the-Bank projects because the Bank wishes to be able to grow in new market sectors. The classification allows our organization to start projects that will provide the greatest benefit to the Bank.”
Managerial and Leadership Lessons
Consider these three points:
- The HSBC model provides a simple first cut for identifying the role of strategic initiatives: Strategic initiatives are a change-the-business tool. They compete with run-the-business imperatives for resources. Thus,….
- Budgeting for operations must be balanced with budgeting for strategic change. From the data in the prior graphic, I infer that HSBC invests about 30% of its budget in transformation. Budgeting and accounting decisions and conventions have consequence! A strategic initiative is likely to be found somewhere in the 30%, and it is in competition for funding with operational imperatives. If the strategic initiative leader understands the follow-the-money story (see the link below), they can better create a compelling benefits proposition for operational leaders.
- All organizations face and must answer the question: What is strategic alignment? Is it operating within the current business model? Or is changing the model? This is a big challenge for strategic management within organizations.
Do you agree that there is a tension between “run the business” and “change the business?” How else can this tension be managed?
- Know The “Follow-The-Money” Story. How was Your Strategic Initiative Funded? (leadingstrategicinitiatives.wordpress.com)
Could not agree with you more. The attempt to manage both Run and Change creates, at best, a fractured model, at worst a starved Change team.
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I would like to clarify onething.
What are the common “Change the bank” processes?
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Back in the 90’s we used to use the Acronyms RTB (run the business) and ITB (improve the business) as a simple way of presenting options in the development funnel. The the word transformation came into vogue and the simple categories were abandoned. I still like them and think a simple binary means of the overall objective of the initiative into either focus on what we have/do vs. create something do is a very effective means of not only categorizing your work, but defining the benefits and risks.
This is Rajeev and while I can not agree more with the concept of separating RTB and CTB from a portfolio management perspective. Also, the amount of funding that should go into either of the initiatives should be driven by where the company and industry is in the overall life cycle. An innovative and changing industry (e.g., technology) will require more funding for CTB.
My question is: what is the implication of this separation on groups that lead both the initiatives. Will you recommend that RTB and CTB should be completely separate teams? My thought will be that there has to be a very big overlap between RTB and CTB teams for the following reasons:
1. Better quality answer: Working teams know their business the best and listening to them and problem solving with them on potential change will get you the better answer fast. An answer developed in vacuum is not likely to be practical and will not account for current ground realities
2. Change management: When front line people feel ownership and are part of the decision making process they are multiple times more likely to adapt
3. Innovation and testing: CTB team should own developing and testing innovative ideas and then work with the frontline teams to showcase the results and further improve them before a broader roll out.
Will love to get your thoughts on this thinking.
Thanks for your thoughtful comments and questions, Rajeev. In large organizations, there is a lot going on, and unless attention is paid to strategy, RTB projects tend to prevail in the portfolio mix. Strategic initiatives are those programs that change the business.
I’ve written elsewhere on the blog about the need to have only a very small number of strategic initiatives, but each needs to have CTB impact. Specifically, that means that there will be many members and will be well lead. Many team members of a strategic initiative would be exclusive to it. You are correct with your listed points (1, 2, 3) that the strategic initiative needs to include the voice of the business in it, as the business will end up transformed by the strategic initiative.
Regarding, RTB projects, there can easily be thousands of them if we are talking about a large organization. Some of those RTB projects will be very small in size and the team size will only be 2 or 3 people.