Over the course of my career, I’ve had the opportunity to spend time talking with people in all corners of the business world – from enterprise CIOs, industry analysts and academics, to venture capitalists and private equity folks. VCs and PE investors, in particular, share fascinating insights related to the investments they make and the operating guidance they provide. One of the buzzwords du jour that often comes up is “digital transformation” (defined by Altimeter’s Six Stages of Digital Transformation framework as “The realignment of, or new investment in technology, business models, and processes to drive new value for customers and employees to effectively compete in an ever-changing digital economy”). I’ll admit, I tend to groan inwardly when anyone mentions this topic, but lately I’ve noticed these conversations turning more towards how smart companies tackle digital transformation with a purpose.
Many investment firms provide their portfolio companies with a whole lot more than just capital. Their operations support extends from growth strategies to optimizing IT, implementing agile processes, and identifying digital initiatives that create big value. Direction from private equity or venture capital teams often surrounds a macro strategy of business transformation, and in the age of software, that’s all about digital transformation.
McKinsey recently found that on average across all sectors, most industries are still less than 40 percent digitized (“The Case for Digital Reinvention,” McKinsey Quarterly, February 2017). Automotive and assembly companies are seeing a mere 32 percent digital penetration, while high tech is still only at 54 percent and media and entertainment is on the high end at 62 percent.
Of course, companies that have completed their digital transformations are putting lots of pressure on revenue and profit growth for the other 60 percent in their industry. No one wants to be left in the dust, but you shouldn’t embark on digital transformation just for buzzword compliance. To be successful in the long term, your company’s efforts have to be meaningful, with a specific endgame in sight.
Here’s some advice that can help any business on this journey:
1. Make sure you have three crucial transformation ingredients.
You’ll need a target completion date, a business metric, and an owner with clear accountability – otherwise it is not a real digital transformation. Everyone struggles with how to measure digital’s true value, but there are ways to demonstrate success along the way. Thoughtful technology executives are monitoring interesting KPIs like the percentage of development effort going into innovation vs. maintenance, developer productivity, and cycle times for releasing code. Through transparent project management, IT teams will better focus their efforts, quickly identify new opportunities, and reduce the risk of failed projects. This kind of visibility can also be especially helpful for PE firms, because they are usually buying either tech or talent, and find both very hard to quantify.
2. Don’t forget to manage cultural change.
In the past, companies would adapt their business model every decade or so, while in the age of digital transformation, competitive advantage is based on your pace of innovation. This necessitates major cultural change in most organizations. Old-school waterfall org structures and broadly scoped 2-year plans simply aren’t conducive to the kind of business agility required for a successful transformation.
In order to move faster, many CIOs are encouraging more entrepreneurial, “agile” mindsets by restructuring their development organizations away from big, interdependent groups into small, flexible, autonomous teams. For example, companies like BMW are establishing tight, interdisciplinary teams that encompass business and IT roles. This kind of org structure facilitates a culture of constant communication between business stakeholders and IT, and propagates an “us” not “I” team mindset from the top of the organization on down. Smaller teams have a more focused scope, which encourages accountability, eliminates finger-pointing, and speeds decision-making.
Everyone in the organization should accept that there are multiple ways to achieve a goal. Leaders especially need to demonstrate acceptance for errors as a chance to learn, not a reason to blame, and take a strong stance in order to nurture the kind of culture that fuels innovation velocity.
3. Avoid chasing an innovative competitor (this is rarely a winning formula).
A great example of this is pitfall is retailers that are being disrupted by Amazon. Even if you could catch up to where they are today, they’ve already started working on what’s next, so you’ll perpetually be one step be behind. Sometimes it’s better to step back and look at the big picture, assess your model, and figure out how to avoid the existential threat of those digitally born companies in your industry. As you do this, be sure to keep your customer at the heart of your strategy and your data at the heart of your decisions.
4. Prepare for risk.
While moving fast is more important than ever, it’s crucial to stay on top of the potential risks that digital transformation presents. Security breaches like those at Equifax and Yahoo are very real and can do massive damage to customer loyalty and corporate reputation.
5. Look outside your organization for expertise.
Although some executive teams have a deep technical bench who already ‘get it,’ many companies struggle to select the right leader for their digital transformation initiatives. Investing is all about trend lines, so if you don’t have people with an established track record of success, that’s a red flag. Transformation programs are not a good opportunity to let someone learn on the job. Rather, bring in an outside expert with proven playbooks (which are far more predictable) for this mission critical initiative.
All of this relates to the broader trend of faster and faster business decisions, being made by teams that are getting smaller and smaller, all while markets are becoming increasingly competitive. The pressure to transform and increase business model sophistication – especially in recurring revenue environments – has never been greater. Few would argue that in the age of digital transformation, fast time-to-delivery is crucial for every business in all industry domains. As leading management expert and author Gary Hamel noted, “The world is becoming more turbulent than organizations are becoming adaptable. Organizations were not built for these kinds of changes.” Only companies that can quickly react to new business opportunities will survive, and today this requires never-ending transformation.
That’s why, although it’s often invisible to most, software is the new, ubiquitous fuel that is quietly creeping under the hood of all companies. Every industry will depend on it, and every business should leverage it for competitive advantage. But there are some massive roadblocks to this transformation, especially in large, established organizations. To overcome them, CEOs and CIOs alike must recalibrate their mindset when it comes to hiring, firing, inspiring, and selecting the right metrics to manage to.
Oliver Muhr, CEO, Seerene
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