Digital transformation has very little to do with technology. Digital transformation is, first and foremost, about using digital tools to solve new problems and drive new growth. Your conversation should not be about technology; it should be about priorities for growth, innovation and value creation. That has everything to do with strategy, impact and value creation. As you pursue any effort at digital transformation, it is critical to understand that technology can become a distraction from strategy. AI is not a strategy. The same applies to blockchain, NFTs, Web3, or any other technology.
The Digital Transformation Roadmap
That is the message from “The Digital Transformation Roadmap: Rebuild Your Organisation for Continuous Change”. It is very much aligned with the views of AgilePoint. In too many organisations, digital transformation operates in a strategic vacuum, as little more than a collection of individual projects. Digital transformation is not a separate division in the company. It is not a way of delivering the service or product more efficiently. It cannot simply be an effort to “digitise” the legacy business—that is, to upgrade existing technology, cut costs, and improve the customer experience of your current offerings.
Thrive in chaos
It is a way to de-silo, create adaptability, resilience, the ability to experiment, create a singular, unique and optimal customer experience, and become a dynamic organisation ready for the future. To thrive in a world of constant digital change. Digital transformation (DX) is also no longer a question of “if” but of “how fast. It is also perpetual. There is no start or end date.
It is hard
The DX challenge is particularly hard for complex organisations.
- Risk aversion and slow decision-making mean you can’t keep up with digital competitors.
- Your legacy information technology (IT) is inflexible.
- There is no cross-functional architecture.
- You are choked by your technical debt.
- Your data is trapped in silos.
- Your workforce lacks the skills they need.
It is all strategy
The top barriers are all strategic. The main reason the transformation fails is because there is no shared vision. There is no shared understanding of the digital future of their industry, where their business aims to compete, or what gives them a right to win in that future. The company’s digital initiatives are generic, following the moves of peers and reacting belatedly to market trends. Leaders rely on generic “digital maturity” metrics to guide their efforts because they have no clear business metrics to judge their DX progress. There is also no prioritisation for growth (strategy is about making choices). This lack may arise because the company is focused only on “digitising” its past business and not looking beyond. Without a clear set of priorities, DX lacks strategic direction.
The most underestimated part is the lack of focus on experimentation. And though legacy firms may adopt the trappings of experimentation—rolling out agile software teams and enrolling in design thinking classes—they squeeze these iterative methods into a planning-heavy management model. Decision makers wait for benchmarks and best practices rather than validating new ideas directly with customers. That is directly related to the lack of flexibility in governance. Organisations use business-as-usual processes and governance for all initiatives, which does not work when you experiment. And then there are the old reliables such as lack of skill, talent and the wrong culture.
Examples and templates
The book uses a number of examples where DX did work. Companies such as Walt Disney, Mastercard, Dominos, Deere & Company, Air Liquid, Netflix, Uber, Tesla, Amazon, CNN, Nokia, Walmart, CITI, BASF, Google, Adobe, NCB, etc. Not only that, the book also gives you all the templates you need to think this through.
DX = Digital Strategy + Organizational Change
True DX requires a combination of digital strategy and organisational transformation. DX is not a traditional change management project with start and end dates, not a journey with a fixed destination. Instead, it is the way to rebuild your organisation to be ready for continuous transformation in the digital future.
You need to start with empowering employees. To keep up, businesses are forced to shift away from top-down, command-and-control management and embrace a more agile vision of the organisation that prizes employee autonomy and initiative. It does not mean a flat organisation with no hierarchy. It means three things:
- Decision-making is pushed down.
- Market insights flow from the bottom up.
- Innovation starts at every level of the organisation.
It also should include citizen development at an enterprise level and at scale.
DX is not only strategy, it is also innovation
The era of innovation as a separate unit that then hands things over to the business is gone. In the twentieth century, the goal of any company was to find a business model that worked, optimise that model, and exploit it for as many years as possible. In the digital era, however, transformation is the rule, not the exception. The life span of a business model—from when it emerges as a viable means to run a business until its profitability begins to fade—seems to grow shorter every year. This means you have to have an eye on constant business model (re-) invention. Again, digital transformation cannot mean just upgrading your data and technology to optimise the business you have always run. For any established business to thrive, DX must deliver innovation and new engines of growth.
The first challenge for innovation in an established company is managing innovation under great uncertainty. In the business environment of the digital era, uncertainty is only increasing thanks to new technologies, competition across industries, and constantly changing customer needs and expectations. Traditional planning does not work here. In fact, traditional planning is a recipe for disaster.
Outside the core
The second challenge for innovation in an established company is managing innovation outside its core business. But for any organisation to grow in the rapidly changing digital era, it is essential that DX include innovation both in and beyond the core. There are many reasons why established companies find it hard to innovate beyond their core:
- Organisational structure
- Metrics—Established business metrics are often poorly suited to judge the success of a new business model.
- Resources—In a typical organisation, executives who generate the most revenue today control the investment of resources for the future.
- Customer focus—Companies are understandably focused on their existing customers.
- Cannibalisation—Promising innovations are actively resisted and even shut down if they are perceived as threats that could cannibalise
- Narrow vision—Over time, success causes a company’s vision of the future to be defined by the products of its past.
The less proximity an innovation has to the core business, the harder it is for the company to manage it to growth.
Innovating under great uncertainty is possible by using two levers available to every manager: experimentation and iterative funding. In business experimentation, your goal is to validate the key assumptions in your business model for any new venture. Experimentation is the defining philosophy of digital-native businesses. With iterative funding, businesses should follow these principles:
- Invest less when uncertainty is higher; invest more when uncertainty is lower.
- Early investments should not be directed toward launching a product but to conduct small, cheap tests that reduce uncertainty.
- Accelerate spending as uncertainty diminishes.
- Maximum upside, minimum downside
Why experimentation matters
Many business leaders mistakenly think that the key to innovation is coming up with good ideas. However, ideas are rarely a source of competitive advantage. The real challenge of innovation is to become great at validation. Modern innovation theories give far less attention to ideation; instead, they focus on the best methods for validating and improving on ideas (by identifying their assumptions, talking to customers, designing MVPs, gathering data, and adapting based on learning). Great ideas are made, not born. The best digital businesses succeed because they learn rapidly from customers and the market and use that learning to revise, pivot, and adjust an idea until it reaches the right combination of factors for liftoff. By mastering the process of experimentation, your firm will be able to validate, test, and learn much faster.
Shift your thinking
Experimentation at the core requires essential shifts in how companies think about and manage innovation:
- Think like a scientist—Avoid debates based solely on opinion.
- Get to market sooner to learn faster.
- Accelerate your learning—Once you have started documenting your assumptions and testing your ideas with MVPs, the next step is to accelerate the whole process.
- Use the right metrics.
- Focus on problems that play to your strengths.
- Make it independent. Many opportunities for digital innovation should be managed in your existing business units because they directly involve your core business and cannot be pursued outside it.
- Keep an umbilical cord. As crucial as independence is, a growth venture beyond the core business should never be left to sink or swim entirely on its own.
- Manage by different rules. New ventures outside the core need more than just separation into distinct units.
- Plan where it will land. Any time a team is set up to start a venture outside the core business, its sponsors should think ahead about where they expect it to land.
The change story
To drive change, leaders must appeal to extrinsic motivation (ROI, profits, cost savings, and earnings before interest, taxes, depreciation, and EBITDA motivate shareholders, not staff). It needs to inspire, and it needs to be compelling as a story. More recently, McKinsey’s research has found that the biggest single factor for DX success is having a “clear change story. Without a clear and compelling answer to the question, “Why must we change?” any DX will stumble. You need to become a trendwatcher. Predicting the future. Providing a North Star and a mission.
The ever-changing demands of the customer
The job of a CEO is to ensure that your organisation is culturally, technologically and strategically living up to the customer’s ever-changing demands. Focus on four broad areas:
- Customers—Focus on understanding your customers’ changing behaviours, expectations, and needs.
- Technology—Identify and learn all you can about new technologies that are shaping the experience of your customers, especially technologies they use to discover, purchase, and use services like yours.
- Competition—Take a broad view of competitors and partners as you seek to understand the business ecosystem that will define your future.
- Structural trends—Be sure to study major trends in the external environment beyond business that may shape your future context.
Your advantage and value drivers
You need to know your unique advantage or not-to-copy, you need to know your reciprocal advantage (growing the core asset), you need to know your strategic constraints, and you need to know your current and future value drivers. Agreeing on expected value drivers will bring clarity to everyone’s digital efforts. It will ensure you get the results you are hoping for. It guides resource allocation. And it can point you toward the right metrics (or key results) to assess your unique digital efforts.
Not technology, but impact
The goal of digital transformation should never be defined in terms of the technology you will use. Nor should it be defined in terms of the capabilities you will build (data analytics, machine learning, cloud infrastructure, etc.) or the processes you will use (customer journeys, agile squads, etc.). Instead, use your story to ensure that your DX efforts are focused on their impact.
The book becomes an innovation management book. Levels of MVPs, validation techniques, sequencing validation, market research, asking the question, keeping the customer focus, stage gating, the metrics in each stage (ultimately down to path to profit, LTV and CAC), how a growth board functions and the importance of option value (staying in the race). Read https://www.ronimmink.com/intrapreneurship-as-a-transformation-tool/
Old structures do not work
Embedding constant innovation will require a change in how many leaders see their role. No more HIPPOs (highest paid person’s opinion). In too many organisations, new ventures are green-lit based on a single executive sponsor. Ventures move slowly, managed by teams that sit in traditional silos. Resource allocation is also slow, and promising projects wait weeks or months for their next approvals. Because each project is backed by an influential executive, no one wants to shut it down, even when it shows little promise. Meanwhile, risk aversion leads businesses to fund only their low-hanging fruit—incremental improvements in the core that bring a guaranteed, quick ROI. This path will never lead to DX.
The example to examine is Haier, a manufacturer of home electronics, from refrigerators and washing machines to televisions. Taking advantage of modular IT, Haier has reorganised its entire company into 4,000 microenterprises (MEs) of ten to fifteen people. Each operates independently and autonomously, and all coordination is managed through an internal cloud-based platform. See https://www.ronimmink.com/haier-beyond-strategic-intrapreneurship/.
Each venture must be supported by the right governance model to succeed. That means developing not one but a mix of different structures—like Citibank’s mix of internal accelerator, external investing, university partnerships, and innovation studio—designed to manage different growth opportunities. Governance rules must be carefully designed for each structure to address several issues. The first is oversight.
- Who approves new projects?
- To whom do they report? And who shuts them down?
Next is funding:
- How will you allocate resources across ventures and avoid “comparing apples to oranges?
- How to approve and start new ventures with minimal deliberation and minimal investment?
- How do you systematically manage your pipeline of ventures and free up resources by shutting innovations down smartly?
- How will you measure the progress of new ventures?
- How will you help new ventures move fast while respecting safety, regulations, risk, and integration with existing technology?
Great innovation teams are:
- Multifunctional—Great innovation teams have diverse members who cut across functional silos.
- Single-threaded—The best innovation teams have all their members dedicated full-time to the team’s work.
- Autonomous—Innovation teams should have clear decision rights that give them the authority to work under their own direction.
- Accountable—Every innovation team must be accountable for the results of its work.
- Have a clear definition of success—which is defined in terms of outcomes, not deliverables.
- Are fully transparent. At any time, the team’s results must be visible to anyone inside or outside the team.
Three paths to growth
Ultimately, there are three paths to growth:
P1 ventures are innovations within your core—that is, they improve or solve a problem for an existing business unit or division.
P2 ventures are also innovations to your core business, but they involve too much uncertainty to be managed effectively by the business units alone.
P3 ventures are innovation opportunities that do not fit within the current core business of your firm.
- P1 innovation is the easiest path in some ways because it faces neither the challenge of uncertainty nor proximity. The first trap is to pursue only P1—innovation aligned to your core business and with low uncertainty. The other mistake is the opposite: to neglect P1 innovation and focus exclusively on big-idea innovations.
- P2 is inherently more difficult because it involves more uncertainty. P2 innovation is sometimes taken out of the hands of the core so it can be managed by innovation experts. This “build it and throw it over the wall” approach leads almost inevitably to disappointment. Other challenges for P2 innovation relate to funding. The core business almost always lacks a process for iterative budgeting, which is essential for innovating under uncertainty. When you treat a P2 innovation as if it were P1, you send it to the core to die. When you manage a P2 innovation as if it were P3, you spin it out on its own to die.
- The first challenge facing P3 ventures is that they do not fit anywhere within the existing organisational structure. In addition, P3 ventures often breed resentment or backlash in the organisation.
The most innovative companies use multiple innovation structures to support P2 and P3 while continuing to pursue P1 innovation in their core. If you want to learn more about P1/P2/P·, this is the book to read https://www.ronimmink.com/an-intrapreneurship-playbook-for-ceos/.
Finally, we get to technology. Organisations need to assess three main areas: IT infrastructure, data assets, and tech and data governance. Any organisation must constantly evaluate its technology infrastructure to identify the capabilities it needs to support its future strategy. It includes system architecture, such as microservices and application programming interfaces (APIs) that connect to different parts of the business and outside partners. Data storage, using models like data lakes or data warehouses, is crucial to storing data for effective use and retrieval. Just as critical are the applications that run vital business processes
NCB as an example
The biggest obstacle to technical transformation was the bank’s legacy IT, which operated on a snarl of 160 different systems with a complex web of integration. Multiple points of integration failure called for constant intervention by back-office personnel. In a multiyear effort, NCB rebuilt its core banking technology in a modern architecture of just fifteen systems supporting seamless digital operations. The result was a reliable, best-in-class customer experience that made NCB’s banking app number one in the country.
The NCB’s story clearly illustrates the concept of technical debt. Technical debt is any future cost to the business caused by suboptimal technology. Technical debt has many causes, from deferred maintenance of ageing systems to changing technology standards to poor initial design. It can even be the result of an intentional decision to “move fast and fix later.” Left unaddressed, the costs of technical debt are many. It saps resources, diverting IT budgets into maintenance rather than supporting new growth. It slows down business teams and entire organisations. Most importantly, technical debt impedes strategy.
A common mistake is for companies to fix infrastructure problems with patches and workarounds that sustain inflexible legacy systems. Paying down technical debt is hard. It means spending resources without gaining any new products or functionality. But the benefit of rebuilding is to make your IT faster, more reliable, more secure, more flexible to updates, and better able to integrate with other systems. This process, called refactoring, takes time and investment, and the payoff is not immediate. But as NCB learned in refactoring its IT systems, it is essential to future growth.
Monolithic versus modular IT
The enterprise computing systems from the 1990s and 2000s are famously hard to customise or adapt to changing business needs. In modular architecture, the same software is rebuilt as a set of modules called microservices. Within a single company’s architecture, hundreds or thousands of microservices can interact this way, each managed and developed by a single team. With microservices, everything one team needs from another can happen through an automated software interface. You are able to innovate for your customers at a much faster rate. For example, Amazon has gone from deploying dozens of feature deployments each year to millions. Modular computing is now used in all kinds of legacy businesses, from large enterprises like Walmart to smaller players like Acuity that have built their own technology stack and APIs.
Data and governance
Data is now a key strategic asset for any business. If it doesn’t capture data effectively and grow data as an asset, any organisation’s DX will stumble. The third area of tech capabilities essential to DX is governance systems for your data and your technology assets. Another critical function of governance is to help large organisations establish a common set of data on which to make decisions—what is commonly called a single source of truth. Shared KPIs are incredibly powerful in aligning an organisation around a strategy, but they hinge on everyone agreeing on the same shared data. One more critical aspect of governance is how much to centralise key assets and capabilities. In too many organisations, there is an overcentralised model where all projects must go through a central IT division located at a distant headquarters. The result is innovation rigor mortis.
Build versus buy
One of the most common questions around technology in DX is this: Should we build the capability we need (e.g., a new microservices architecture) with our technology teams, or should we procure it from an outside partner via technology purchase, license, or SaaS? In the digital era, we have seen a significant shift in thinking as technology capabilities have become core to every business strategy. Jeff Lawson, the cofounder of Twilio, reframes the choice for incumbents as “build versus die.” In other words, no company will survive long term if it does not develop the capabilities to build its essential technologies. PepsiCo’s chief strategy and transformation officer, Athina Kanioura, found that even the best software it purchased was too generic. Kanioura followed a “build” strategy and established digital hubs for the company in Dallas and Barcelona to bring more capabilities in-house. Another benefit of a “build” strategy is that it allows the business to retain ownership of technology IP. Anand Birje, president of digital business at global services firm HCL Technologies, suggests that you start by asking which technology capabilities are most important to your competitive differentiation.
Finally, be sure to assess the technical uncertainty around any solution you are considering. If technological uncertainty is high, pursue a “try before you buy” approach—whether this means a limited early deployment with a service provider (before an ongoing contract) or a pilot project with a tech start-up (before buying them or building your own version). As you plan your journey, remember to put a premium on modularity. A more modular design will allow for more flexibility and quicker updates as your needs continue to change.
The last part of the book is about culture, guiding principles, storytelling and internal communication. With again lots of examples and templates. Dovetails many books. Dovetails my book about books about intrapreneurship, innovation, transformation and strategy perfectly. See https://www.ronimmink.com/product/building-the-in-company-change-muscle-intrapreneurship-innovation-transformation-strategy/.
Back to the original premise of the book. Transformation is not about efficiency and cost savings but about experimentation, innovation and capturing future opportunities. This book will help you to think it through. Read the book and then check out AgilePoint.