In an era of persistent change, how can companies foster an environment that empowers employees to anticipate, respond to, and even leverage unexpected shifts in the business landscape? In this episode of McKinsey Talks Operations, host Daphne Luchtenberg is joined by McKinsey Senior Partners Dan Swan and Ruth Heuss, global co-conveners of McKinsey’s Operations Practice, to explore strategies and approaches to technology, workforce planning, and sustainability that will help organizations remain agile and thrive despite uncertainty in 2025 and beyond.

The following conversation has been edited for length and clarity.

Daphne Luchtenberg: The transition from one year to the next is often a moment to pause and reflect on the year gone by, as well as put plans in place for the next 12 months. I’m delighted to be joined today by Dan Swan and Ruth Heuss, global co-conveners of our Operations Practice, to do just that. We’ll examine the key operations topics of 2024 and think about how they will evolve in the coming year. Will gen AI still be the talk of the town? And how will the approach to productivity differ on both sides of the Atlantic?

Ruth Heuss: Operations was at the core of many people’s minds in 2024, and I think it will continue to be in 2025.

Daphne Luchtenberg: If we look back for a moment, what were the key things that kept our clients awake in 2024?

Dan Swan: 2024 was an interesting year. I saw people consistently wrestle with three things: first, the uncertainty in the world today, whether that’s macro uncertainties like geopolitics, tariffs, and trade, or concerns about what the economy, job growth, and consumer spending are going to look like. A lot of things are making it hard for people to plan their business, plan their operations, and know what moves they should make or consider making.

Second, productivity. Productivity is always important. But the productivity imperative was even more important last year, both because of the uncertainty and the fact that we’re just coming out of once-in-a-generation inflation. Even though inflation came down to 3 percent this year, depending on where you are in the world, that’s on top of pretty outrageous inflation in the last couple of years. So, it’s not deflation; it’s decelerating inflation.

And third, we’ve arrived at an inflection point on some of the technologies that emerged over the last couple of years. 2024 felt like a year where we separated the wheat from the chaff about gen AI and what can really add value. We started to see real differentiation between people who are winning with technology and operations and people who are just spending a lot of money and not getting a ton of value for it.

Daphne Luchtenberg: When it comes to that uncertainty, it’s not like we’ll turn the corner and suddenly things will get clearer.

Now, Ruth, you serve multiple clients across Europe and around the world. What was keeping your clients up at night last year?

Ruth Heuss: First, gen AI and how to use it in products and to increase efficiency. This came up in almost every conversation. Second, the increasing tensions in geopolitics. We had an uptick in clients asking how to build resilient and sustainable supply chains. Third, and this might be an evergreen topic, especially given the low consumer confidence in the market, was the question of how to improve product cost and efficiency and increase productivity. This will continue to be a key issue in 2025 in Europe, as it’s historically lagged behind on productivity compared to the US and China.

Daphne Luchtenberg: What does that mean for leaders who will have to make some big decisions, maybe even investment decisions, about their operations in 2025?

Dan Swan: There’s no easy answer here. But the reality is that there are uncertainties for a reason. We encourage our clients not to guess or try to be smarter than everybody else. People that we see doing this well do three things. First, they try to understand which three or four scenarios could play out. Second, they determine the range of outcomes that could occur in these different scenarios. Third, they look at this information holistically. What are the most likely scenarios? And which options offer the best outcomes over the widest range of scenarios?

Ruth Heuss: I don’t envy anybody who needs to make a plan today. Just in the last few weeks, all the announcements coming from the US make it very hard to come up with a plan. At the same time, you need to make some decisions, and I think there are a few no-regret moves. For example, we have this notion of having supply chains in different regions. I think that will increase significantly.

Risk was a big topic last year. With tariffs and other emerging factors coming into the mix, risk will become a more critical factor for all of our leaders, given the implications that certain regulations will have. This all leads to a push toward making supply chains more local. People will have to figure out how to make this happen.

Daphne Luchtenberg: You talked about productivity continuing to be the imperative. What are some obvious levers for productivity that organizations might overlook?

Dan Swan: Most successful organizations look at productivity every single year. Coming up with something nobody’s ever thought of before is a high bar and probably not a realistic one.

I’ve seen a lot of organizations trying to avoid implementing levers that cut across the entire business. I get uncomfortable when somebody says, “Hey, what should I be doing on AI or machine learning?” But I get really excited when people say, “Hey, we’ve got an issue with planning,” or “We need to drive more productivity from our procurement organization.” When you’re driving procurement, you should keep doing some of the things you’ve always done. What are the best sourcing strategies? How are you leveraging tools like public bids to drive competition? And then look at things like: How are you driving digitization? How are you building the capabilities of your team to operate in this new environment?

When we get down to the core problems and opportunities and figure out how to apply tech, digital, and gen AI solutions to more traditional things, like process improvement and capability building, we can unlock really exciting productivity improvements.

Daphne Luchtenberg: Do you see some of those use cases being documented already? Is the playbook growing? We saw gen AI advance at a very fast pace, and I think your point about scale is important. So, how many people are testing and piloting versus having a real playbook for a scaled application?

Ruth Heuss: It’s hard to say. We’ve done comparisons in some industries. Everybody has been experimenting with gen AI. Between a quarter and a third of companies are really on the journey: They have more use cases. They know exactly which areas they want to scale up and know which use cases to implement first.

It’s impossible to say how much of the potential we’ve already captured because even for those who have a real plan, the technology is advancing so quickly that you have to add use cases every quarter. I think this journey will take a few years.

Daphne Luchtenberg: The leading companies will be those that remain curious, that are not afraid, that are bold, and that are continuing to constantly learn and build on their experience.

Ruth Heuss: That’s a fair summary.

Daphne Luchtenberg: When you’re thinking about the way Dan described those productivity levers, are there any differences for European organizations?

Ruth Heuss: One lever that organizations pull quite often in Europe is footprint reallocation. Both to access lower labor costs and to adapt to changing markets and new entrants. This is a strategic operational topic that has become more important in recent years.

Daphne Luchtenberg: Do you get a sense that the approach to building from scratch as you explore your footprint has become more efficient? Or is that something industry could focus on in terms of using innovation to get faster at mobilizing and achieving footprint changes?

Ruth Heuss: In general, companies understand fairly well where to play and how to quickly set up production facilities. We’re doing a lot of capital excellence work, which involves reducing the cost and time to complete those plans. There’s a lot of potential in some industries. For example, in the building sector, you’re often waiting for things; you don’t have good visibility on when parts will be ready and on-site. I think we will see a big revolution in transparency and speed in the sector. For subcontractors and suppliers, better coordination and digital enablement can really increase productivity.

Daphne Luchtenberg: Dan, when we talked last year, you said that the COO should be having lunch once a week with the CIO [chief information officer] because there’s so much they have in common, and they need to join forces to really move their organization forward. Have you seen that happening more?

Dan Swan: Well, I was ambitious. I’m not sure that COOs and CIOs are even eating lunch every day given how busy most senior executives are these days.

But I do see a lot of these worlds and roles colliding and overlapping more. Five or ten years ago, driving a planning or manufacturing transformation was purely the domain of the head of manufacturing or a COO. Now, every planning transformation has a meaningful technology bent to it, which means the CIO has to have a perspective on which tool to select, how to support it, how to integrate it into the broader tech stack, and what is core tech versus the apps and capabilities that sit on top of it. So, these days, planning is both an operations function and a technology function. We see people thrive when those different parts of the organization come together to figure out what it’s going to take, and they each bring their individual expertise.

Daphne Luchtenberg: And that really is right across the organization—breaking down those silos, collaborating with the CFO, the CHRO [chief human resources officer], the CMO [chief marketing officer], and risk leaders.

Dan Swan: Certainly. A lot of companies still have a long way to go on functional excellence. Nobody’s perfect. But we’re seeing exciting value being created at intersections. For example, how are people using design to value or growth by design to get the right product design and specs? That’s an intersection between innovation, product development, sourcing, and manufacturing. When you want to plan and understand the resiliency that you need in your supply chain, you have to look at functions like procurement, manufacturing, logistics, commercial, and even finance.

So many of the things that we do today are cross-functional. In a way, technology makes it much easier to do that, but in other ways, it makes it harder. Because you need to understand how the technology is ingesting data and using it to give you the information to make decisions. Sometimes, it’s easier for people to see that when it’s in a spreadsheet or they’ve had to do it manually. Technology is a massive enabler, but it can also be a real hurdle to getting the buy-in and mindset you need to drive performance in these cross-functional endeavors.

Ruth Heuss: Thinking across functions is something many companies have struggled with, as it requires you to collaborate really well and reach out to colleagues in other departments. This is especially true in the supply chain, where you need to collaborate with sales, purchasing, logistics, and plant logistics. Historically, that’s been very difficult.

In the past, you would do sales planning and then translate it into the different functions until it ends up in manufacturing. Some successful companies these days are integrating the whole view into a better planning mechanism that reduces the amount of working capital needed. It also provides a better customer experience because your time to market is much faster. So, I agree that cross-functional collaboration is very much needed.

And the operating model is critical because if gen AI can reduce the amount of time you need for any given task, that doesn’t mean that you can improve performance by 50, 60, or 70 percent on all the tasks. You’ll have a differentiated view of where you can pull which levers, which means you’ll have to redesign your organizational model. In some areas, you’ll be able to get rid of 50 percent of tasks, while in others it’ll only be 10 percent. So, in creating this new view of how we work together, leveraging technology in a much better way will be an ongoing source of change.

Daphne Luchtenberg: I’m getting the sense that getting buy-in and getting leadership to commit to big investment decisions is becoming harder and harder. When we were talking to CIOs recently at a conference, many of them were asking, “How do I build the business case for the next level of investment?” What’s your advice for them, Dan?

Dan Swan: It’s kind of funny. Often, when people go to build business cases, the ones approving the business case say, “Let’s build in this flexibility. We need to understand the resilience.” But when the cost ends up being too high, all that resilience and flexibility gets stripped out. So, that’s one complexity.

The second complexity is that a lot of CFOs and CEOs are scarred by past technology investments. There’s a lot more scrutiny about the actual benefits of these investments and how to capture those benefits. Recently, a client was discussing capturing massive SG&A improvement from technology. It is possible, but it will come from 10 or 20 percent of the workforce, not 100 percent. So, how do you think about monetizing that?

We’re trying to get people to be more thoughtful and exhaustive in allocating investments. There’s nothing more frustrating for people than feeling like they have to come back to the well to get more investment. We’re also trying to get them to be really clear on where value can be created and how to ensure that value enters the bottom line. In this SG&A example, it wasn’t necessarily about getting rid of jobs, but about how to repurpose that extra capacity into something productive instead of losing it in the system.

Think not just about what the benefit is—digitizing part of somebody’s job, for example—but how will that benefit make it into the profits and losses, where the CEO, CFO, COO, and everyone else can actually see and feel it in a tangible way?

Daphne Luchtenberg: It’s not just about the leadership and the folks who are making the budget decisions; it’s also about the people who need to make the transformation work. How can you continue to bring those folks along with you? What’s the role of the worker and the front line in making the transformation happen?

Dan Swan: It’s a big challenge. Our research suggests that when you have transformations go awry, at the core of it is employees’ motivations, capabilities, and mindsets. This is getting even more acute in technology-based transformations. Often, clients will say that they’ve implemented a tool even if adoption is low or people are just pulling the data out of the tool and manipulating it in their spreadsheets. However, I think a lot of companies are getting more sophisticated in terms of how they think about this.

Daphne Luchtenberg: Ruth, I know the topic of sustainability is close to your heart. In fact, you had a leadership role in sustainability in our Operations Practice for several years. Where do you think that is going when we think about operations productivity?

Another exciting development is the increase in dual-mission initiatives. Transformations in operations and heavy-industry processes are being made to improve productivity and efficiency, and they’re increasing decarbonization at the same time.

Ruth Heuss: From my point of view, a lot of times there’s no conflict between the two. For example, in production, energy costs are a driver of production effectiveness. And when we increase energy efficiency, energy consumption goes down, and so do CO₂ emissions. That happens often; one idea serves both purposes.

However, switching to more sustainable processes can increase costs sometimes. For example, if you want to completely replace your natural gas consumption with hydrogen, it’ll be more expensive. Then you’ll have to make a trade-off between sustainability and cost. But 60 to 70 percent of the time, these goals actually align.

Daphne Luchtenberg: Ruth, what should our listeners be thinking about as they decide on their path forward?

Ruth Heuss: Never stop being curious about new technologies. And start making productivity increases now because there’s a lot of competition coming.

Daphne Luchtenberg: Dan, what should leaders be thinking about as they shape their plans for 2025 and beyond?

Dan Swan: First, set a high aspiration for what you can achieve from enabling your operations with productivity and tech. People tend to be more successful when they set big aspirations because technology enablement and cross-functional collaboration require having a disruptive mindset rather than aiming to just get a little bit better.

Second, invest in your people and their capabilities. Jobs are changing rapidly. The people, organizations, and individuals that have talent around them understand “the way things used to be” but are also equipped to be successful in the brave new world we’re in. It’s just going to accelerate from here.

Daphne Luchtenberg: What is there to be optimistic about when it comes to the operations agenda for 2025?

Dan Swan: I’m a glass-half-full kind of person, so I’m optimistic about a lot of things. But if I had to pick just one, I am optimistic that we’re reaching the tipping point on people getting a lot of value from their tech-enabled operations investments—that is, if they’re done the right way: by focusing on people and building capabilities.

Daphne Luchtenberg: Ruth, what are you most optimistic about for operations in 2025?

Ruth Heuss: New technologies are going to deliver enormous impact, the likes of which we haven’t seen in recent decades. For an operations person, it’s always great to make a step change in levers like cost out and time to market. It’s super exciting to start leveraging all of this.

Daphne Luchtenberg: That comes back to your point about curiosity. Are you optimistic that some of these solutions are really around the corner?

Ruth Heuss: They’re already here, starting with digital twins for supply chain and what we discussed earlier on scheduling optimization. These are things that weren’t possible a few years ago, which means that if you have a target that seems impossible to hit, now there are tools you can use to make that target realistic.

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