In 2017, Ericsson faced a perfect storm: a flagging stock price, poor profitability, underperforming investments, and the requirement to invest heavily in a 5G network. The incoming CEO felt he not only needed to cut costs—he needed to overhaul the company’s operations and culture.
To lead this transformation, the CEO tapped Larry Mc Donald, who at the time was Ericsson’s head of operations for Northeast Asia and had a track record of turning around underperforming units in the company. In this Q&A, Mc Donald reflects on his five years as Ericsson’s chief transformation officer—what worked, what didn’t, and what companies must do to turn transformation from buzzword into bottom-line reality.
BCG: Why did Ericsson feel the need to transform itself?
Mc Donald: A new CEO, Börje Ekholm, arrived at the beginning of 2017 and began developing a comprehensive plan to address growth and profitability. I was chosen to orchestrate the program. However, the week I was appointed, the second-quarter results came in and the company was now unprofitable. The CEO made a commitment to investors to take 10 billion Swedish crowns (approximately $1.2 billion at the time) out within 12 months. I was tasked with securing that commitment and orchestrating its execution.
What challenges did you encounter that were unexpected, and how did you deal with them?
This was not the first time Ericsson had publicly committed to a cost-out program with investors. In previous programs, the savings targets were met—they were centrally driven, with top-down unit targets, restrictions on hiring, et cetera. So, the organization had a track record in meeting a centrally given cost-cutting target, but these programs hadn’t consistently delivered improved profitability.
The CEO was clear that individual units would be accountable for their business’s P&L, including taking costs out, and it was for them to determine where and what costs should be taken out—albeit with some guardrails. However, people were expecting a cost reduction target. We said, “Well, we can’t give you a target because it’s your business. We know that the business is carrying too much cost, so you need to take what actions you see fit.”
What behaviors or actions did you encourage—or discourage—to foster a culture of accountability?
The culture of accountability wasn’t created by me as the transformation officer. It was created by the CEO because in any change, it’s the CEO’s narrative around why we need to change that is essential to create impact. With that mandate in place, I helped orchestrate the change. We started to track actions that would take cost out, and the operational and financial impact of those activities on the P&L. This allowed us to forecast what cost would go out, where, and when. It gave visibility and predictability to achieve the target.
To maintain our focus on operational performance, we started institutionalizing this new transformation planning into the annual budgeting and strategy planning process. This way, each business unit across Ericsson would have to show the changes and investments they were going to make, and the impact they would have.
It’s all about how you treat the line organization—creating a supportive culture and providing the benchmarks and data support that they need to get the job done.
As a transformation officer, you have a lot of accountability but very few direct levers. That meant creating a culture of respect and a reputation for being fair, having your facts right, and always focusing on seeking explanations, not blame.
So, it’s all about how you treat the line organization—creating a supportive culture and providing the benchmarks and data support that they need to get the job done—but really standing on their shoulders and not on their toes. Then over time, people understand they’re not being excessively governed, and that they have the accountability and latitude to execute their business as they see fit—which is what they want. And they delivered. In terms of the cost savings, they met the target of $1.2 billion and the market recognized there was a significant improvement in profitability. The reward for that was an increase in the stock price.
In many companies with engineering cultures like Ericsson’s, there is a desire to pursue the perfect solution. How did you balance progress with perfection?
Our mantra was “progress before perfection.” In engineering cultures there is a desire to pursue perfection, but that implies a destination—and there isn’t one. It’s about continuous progress from the start, not perfection. You can improve things a lot with good practices like benchmarking, establishing a span of control, removing waste, and creating and monitoring business cases. It’s a lot of hard work, but it gets one there.
Part of the transformation you led was a digital transformation. How did you integrate a digital transformation into the broader business?
One of the mistakes we made is we called it a “digital transformation” and people thought that meant it was an IT-led transformation. As with the cost-out process, our aim was to achieve a business-led transformation of our operations, enabled by technology. I realized we needed to focus on building the tools and infrastructure to leverage AI and data well—and an execution model that would put the business unit leaders in the driver’s seat.
Objectives are important. Our north star was to improve both customer experience and operational performance. It was important that the improvements in operational performance do not come at a cost to the customer but are an improvement in how they were serviced.
How did you track, and encourage, adoption?
With digitally enabled transformations, there’s often a focus on project execution. But there’s less tracking of who’s actually using this system.
People would say, “Well, we’ve successfully implemented a project.” Yes, you’ve technically implemented a project, but you don’t have adoption. So, we developed a change management process to get the people on the ground to adopt new ways of working. But more important, we involved people in the design of the solutions.
Another key is to make sure you’re measuring what’s important—and not just making what’s already measured important. Most financial systems are designed to provide accounting and financial statements, rather than management accounting. If you want to measure the progress of your transformation, decide on the metrics that show success. Does the transformation aim to improve customer experience? Then measure that.
Were there any specific changes in processes or behavior that illustrate the successful adoption?
Simple stuff, like getting order visibility from a website—a process that would have taken two weeks could now be done immediately. That took a long time to happen, and then it happened. We had a lot of work around software licenses, saved a lot of money. Using AI to forecast inventory, rather than the team’s estimates, resulted in significant inventory reductions. Using AI-assisted design, we reduced the time to create purchase orders and to send the customer edited purchase orders.
Larry, you’ve said that successful transformations require patience and a multiyear investment. How did you maintain the support you needed?
One of the keys is to keep highlighting the performance. People will question the effort, asking, “Is it really delivering?” The answer is transparency. You need to show what is working. You also need to understand that mistakes happen, but you deal with it, make corrections, and lessons are learned. You reiterate all of this because it takes time.
What were your personal leadership challenges during the transformation?
In my previous roles, I always had a P&L to answer to. I never worked in what they would call a support function. As chief transformation officer, I didn’t have a P&L—but I still had accountability for the results. I was there to help other people improve their P&L.
In this role, you’re accountable for the process and, indirectly, the outcomes, too—but not the execution. So, it means convincing the teams you’re working with to work with the recommended execution model, as you’re deploying a lot of money on this activity. You can create an execution model for them but, as they say, you can lead a horse to water, but you can’t make it drink. Living with that feeling of uncertainty over time was different.
How did you adjust?
I did what the Swedes say: you hold ice in your stomach. You just have to live with it and keep motoring along. Keep the momentum and be willing to step back and review the information and address issues and mistakes early.
What’s the profile of an executive who would make a great CTO?
They need good operational experience, and they need to understand how the business works. I think that’s very important. They need to have credibility and a good reputation within the company. Otherwise, they won’t be taken seriously. They also need to be able to break down the complexity of a large-scale organization.
And they need to be humble and make sure the credit goes to the team, or business unit, delivering the results.
And finally, what advice would you give to a CEO or board of directors considering a transformation? And to a new CTO just stepping into the role?
First, a new transformation officer should also be mindful that the transformation is not about you or your team. If you’re not willing to take a “shadow” role, where your goal is to help the organization shine, then it’s going to be difficult, as there is no room for a rivalry with the operating units. It’s about improving the company’s operations and doing this through the line organization.
Second, it’s essential to integrate any transformation into the existing organizational structure. Transformations can’t be seen as a standalone side project—they just don’t work that way. Transformation and change management plans should be integrated into a company’s strategy and planning process. And then be transparent about what changes you plan and the benefits you envision.
Now, it does take time to put the technical levers and human skills in place to execute a transformation. Unfortunately, many large companies outsourced their IT operations many years ago and now don’t have the competence in-house to execute the technology changes.
It helps to stand up a transformation office, at least during the establishment and initial delivery phases. This office should be light on headcount but not in seniority. The transformation office should provide the execution model—the systems, methods, and tools to make the changes and track progress. The transformation office may need to teach some of the skills needed to change behaviors and actions that will ensure profitability without hindering growth.
And last, as I said earlier, using technology to improve your operational performance should not come at the customer’s expense. Your customer experience also needs to improve. And when the customer experience and operational performance both improve, it’s a beautiful thing.
