Most firms prefer to focus on technology delivery rather than cultural change and business alignment. It’s time to reset the mindset
To appreciate the changing nature of business success across the decades, consider the S&P 500. It is an index that measures the fortunes of some of the largest companies in the world by market capitalisation. Back in 1958, the average tenure of a listed company was 60 years. Today, S&P 500 firms are replaced in a matter of months. Why? Predominantly because of the pace of technological change and technology’s impact on the business model. The increased volatility of the S&P 500 is, in other words, a symptom of digital transformation.
In the digital age, firms require different capabilities that allow them to remain competitive. To understand the role digital platforms can play in delivering these capabilities to both front- and back-office operations, it’s important first to understand the merits of digital transformation and how adoption requires a level of digital maturity. This paper – the second in a series of two – will address each in turn.
Let’s start with digital transformation.
The case for digital transformation
A well-executed transformation strategy integrates digital technologies into the various areas of the business. In doing so, it dramatically changes the way a firm operates, makes money and delivers value to its stakeholders. Pursuing digital transformation is advantageous, as well as a survival strategy; at once offensive and defensive. It creates opportunities to shape markets and build a new customer-base but also acts as an insurance policy against obsolescence and irrelevance in the business world.
Research suggests that digital transformation offers significant advantages around customer experience, operational processes and business models. For example, social media and analytical tools have helped firms better understand customers, while automating mundane and labour-intensive work has allowed managers focus on higher value activities.
Accept that not all change will succeed first time. Use failure as a learning opportunity.
Digitally transformed firms also change the way functions interact as well as expand the boundaries within which value is created. One prominent example is the growing revenue e-commerce platforms have recorded over the last five years. Some firms have achieved more adapting operational processes while others may have invested more in improving the customer experience via digital assets.
Digital transformation is not just about implementing the latest technologies, however. It requires a cultural and a mindset shift throughout the firm. It demands that a firm introduce digital leadership, and an experimental and learning attitude, whether through an internal capability or by partnering with others.
Moreover, it is imperative that firms first develop digital maturity as measured by the level of investment in technology-enabled initiatives and in digital leadership. Firms are likely to develop different degrees of digital maturity subject to their needs.
The road to digital maturity
Developing digital maturity and digital capability is not easy. Take a recent study of spending intention. While companies were planning to spend $1.2 trillion on digital transformation in 2017, less than half (44 per cent) of IT decision makers were confident in their organization’s ability to deliver on their digital vision. Spending money and spending it strategically are not necessarily the same thing.
To reach a level of maturity where spend matches vision, firms must be willing to:
1. Reset corporate culture: Today, most firms prefer to focus on technology delivery rather than cultural change and business alignment. It’s time to reset the mindset. Remember: digital maturity is there to serve a business purpose.
2. Put customer needs first: A successful company needs to align its strategic objectives, value proposition and competitive response to the value it creates. That means putting its key stakeholder – the end-user or the customer – at the centre of the digital transformation process.
3. Make the case for change: Leaders of digital transformation will need to explain to internal and external stakeholders the logic of transforming existing operations and revenue generation channels, especially when these do not seem to be poorly performing. An overhaul of resourcing and capabilities, therefore, requires small leaps but also clear milestones. The milestones must demonstrate value in order to generate momentum, traction and buy-in within the firm.
4. Embrace failure: Accept that not all change will succeed first time. Use failure as a learning opportunity. For example, recent reports have indicated that firms experimenting with robotic process automation (RPA) have struggled to achieve their financial goals. While such results are disappointing, the experimentation delivers its own value for the firm.
5. Acquire external capabilities: Digital maturity is unlikely to be completely developed in-house. Smart leaders acquire skills and talent from external service providers. Given the complexity and progression of technology, it is inefficient for firms to develop and retain service platform capabilities in-house. A new approach is therefore needed.
From mouse-trap to mouse-catcher
Business leaders have been trained to think that by building a technologically superior product, service or operations, they are more likely to outperform their competition. This strategy is insufficient in today’s networked world.
The reality for many businesses is that outperforming the competition is the result of network strength rather than the individual firm’s abilities and market position. For example, the Apple iPhone – technologically and features-wise on par with other smartphones – delivers value not through the device alone but through the App Store, a platform of applications. Similarly, dominance in the video game industry between Nintendo, Microsoft and Sony has been achieved mainly because of the superiority of game developers’ platform at the launch of the hardware.
While traditional ecosystems were based on the idea of pushing services and products to markets, digital platforms are based on a pull strategy in which users are attracted to an environment where value is created from the exchange and the network effect. Indeed, high-performing digital platforms tend to be characterised by easy connectivity, transactability and value creation for both providers and end-users.
There are advantages here for both front- and back-office operations. Front-office, ‘plug and play’ service components attract customers to the platform, thus increasing transactions and value. In this scenario, firms must design their business architecture accordingly and consider the conditions for value co-creation in a network effect setting. However, there are transformational opportunities at the back-office, too, where firms are consumers of digital platform services.
Service-on-a-platform: A new partnership
Back-office operations now account for around $6 trillion of enterprise expenditure, 60 per cent of which is spent on maintaining existing infrastructure. Legacy systems not only prohibit IT innovation, they lack the flexibility needed to benefit from advanced tools such as analytics. As a result, business leaders should resist transforming customer-facing systems without addressing back-office change.
True digital transformation requires interconnectedness between back- and front-office operations. Why? Because back-office data relating to pricing, product availability, logistics and quality is essential for delivering customer-centric, front-office operations. The two are mutually dependent.
Traditionally, firms have been more reliant on the market for the back-office solutions. Now, there are opportunities to use existing digital offerings as part of the firm’s service architecture. Indeed, back-office architectural design should now consider an outward search no less significant than the traditional inward investment. Analytics, automation and reports are already offered as service components. Moreover, they can be far better integrated and digitally interconnected with business services provided by a digital platform than the firm’s legacy system.
Digital platform strategy for the back-office operations
Much has been written about how to develop a digital platform strategy for front-office operations. Back-office digital platform strategy is no less important. It needs the firm to develop digital leadership and pursue a mindset change similar to the fundamentals of the front-office platform strategy. However, to produce an effective back-office platform strategy, chief information officers (CIOs) need to consider how to achieve the following goals:
1. Process improvement. Service architecture needs to be designed with attention to near-future and long-term process improvements. This is a challenging task for the CIO as the greater dependency on service providers reduces control over process improvements and innovation. Hence, the back-office platform strategy must be dynamic, treating service modules as black boxes in which the interface with other service modules is standardised. Such a design approach means back-office service components can be replaced as modules improve.
2. Collaborative providers. Interaction between providers of service modules should be actively encouraged. First, greater interconnectivity between service modules is likely to enhance value created by the digital platform. Second, it is likely to increase the service providers’ commitment to support their individual offerings. Put simply, greater interdependency is likely to lead to an integrated innovation on the parties involved.
3. Collaborative consumers. The conventional rules of competition advise against making the sources of advantage transparent to rivals companies. These, however, are not conventional times. A digital platform requires learning loops from various users, across sectors and geographies, in order to gradually evolve its architecture, realise untapped sources of value and improve inter-connectivity between service modules. That requires both collaboration and transparency.
As business ecosystems expand, supporting architecture and interdependencies between services will increase. It is the CIO’s responsibility to develop an internal partnership capability that allows for the integration of business partners into the firm’s service architecture and fosters a learning culture within the ecosystem.
Digital maturity first, then transformation. The S&P 500 awaits.
This is part two of a special report on digital platforms. Read part one: The CIO's guide to the platform-service strategy
About the authors:
Dr Ilan Oshri is a professor at the Graduate School of Management at the University of Auckland. He is the author/co-author/editor of 20 books on technology, sourcing and work and has extensively published on the future of work in both academic and managerial journals. He has acted as a consultant to numerous organisations in Europe, the United States and Asia. He is also the co-founder of the European and Chinese global sourcing conferences and a regular speaker in trade and academic events.
Dr Julia Kotlarsky is a professor at the Information Systems and Operations Management group at the University of Auckland. Julia’s research and consultancy work revolves around sourcing and innovation of knowledge-intensive business services. Julia has published 15 books on technology, sourcing and work and has written extensively about these topics in both managerial and academic journals. Julia is the co-founder of the European and Chinese global sourcing conferences and a regular speaker in trade and academic events.
Srikanth Iyengar is Group Chief Executive – Europe, Conduent. A highly regarded industry executive, Srikanth has a strong track record of driving growth and operational excellence. He joined Conduent from Capgemini, where he was a member of the Group Executive Committee and Group Sales Officer, responsible for annual global sales bookings of more than Euro 13B. He also had direct oversight of Capgemini's strategic global accounts, with annual revenues in excess of Euro 2B. He was a board member of Capgemini Canada and the company’s Innovation Exchange Steering Committee. Srikanth is based in London and was previously a member of the Confederation of Indian Industry (CII)’s India Business Forum in the UK, and of the International Association of Outsourcing Professionals (IAOP)’s Regional Advisory Board. The views expressed in this article are the author’s personal views and not necessarily the views of Conduent.
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