Organizing and Orchestrating Digital Transformation

Organizing for a Digital World

What makes the shift to more robust digital offerings, channels and operations so tricky is the stress it puts on old-line companies’ operating models. Many new activities and capabilities—ranging from advanced analytics and rapid prototyping to cybersecurity and external partnership management—will need to be developed and located somewhere in the organization.

  • Who takes ownership for these activities
  • Who decides investment levels for each
  • And how they will work

are all major operating model questions.

In addressing these choices, companies usually start to realize that their legacy processes don’t move fast enough to keep up with changing customer demands and behavior, which are shaped by digital interactions in other parts of their lives. Decision speed also may be too slow, because it’s tied to budget cycles. Companies may find digital innovations hard to scale up beyond small projects. And certain kinds of digital talent have become very tough to source and hire. As a result, digital transformations are significantly harder to pull off than conventional change programs. Bain & Company recently surveyed 1,000 companies around the world to gauge their level of digital readiness. After comparing financial results for five categories of companies based on their degree of digital sophistication, we found that revenues for the digital leaders grew 14% over the past three years, more than doubling the performance of the digital laggards in their industries. Profitability followed a similar pattern. Yet while the payoff from digital transformation can be impressively high, the success rate is regrettably low. In our survey, just 5% of those companies involved in digital transformation efforts reported that they had achieved or exceeded the expectations they had set for themselves (versus a success rate of 12% for conventional transformations found in an earlier survey). A full 71% of these companies settled for dilution of value and mediocre performance.

Leading companies realize that making the transition to digital 2.0 or 3.0 requires systematically examining and adjusting each element of their operating model— the blueprint for how resources are organized and operated to get critical work done. The operating model encompasses decisions around the shape and size of the business, where to draw the boundaries for each line of business and function, how people work together within and across these boundaries, how the corporate center will add value to the business units, and what norms and behaviors should be encouraged. It entails choices in five areas:

  • Structure involves drawing appropriate boundaries for lines of business and functions, and defining centers of expertise and other coordinating units.
  • Accountabilities describe the roles and responsibilities of the main organizational entities, including ownership for profit and loss statements and a clear, value-adding role for the corporate center.
  • Governance refers to executive forums and management processes that yield high-quality decisions on strategic priorities, as well as budgets and incentives to align behavior.
  • Capabilities refer to how the company combines people, process and technology in a repeatable way to deliver desired outcomes.
  • Ways of working describe the expected cultural norms for how people collaborate, especially across the boundaries between functions or teams.

Executives should consider how each area will change in turn as the organization’s digital intensity rises.

Bain DigOrg

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Orchestrating a Successful Digital Transformation

Among the five categories of companies in the research, the most advanced digitally achieved the best balance between the inner and outer games. Those just embarking on digital transformations typically start from a set of isolated initiatives targeting their most acute pain points (the outer game), but they struggle to translate these prototypes into products and capabilities that can have a meaningful impact on the company’s economics. More advanced businesses do a good job of clustering digital initiatives around a common strategic ambition and start to focus on improving select enabling capabilities, particularly IT. But these initiatives also tend to plateau somewhere short of broad organizational impact or end up creating “two-speed” organizations that are responsive in limited respects but still held back by legacy systems.

The true digital leaders pull away from the competition by linking a bold strategic ambition to the specific inner game capabilities and behaviors that they will need to achieve it. First they translate their strategy into a clear set of digital initiatives that point the organization toward a clear vision of full potential. Then they invest heavily in the fundamental changes to their ways of working and culture that allow them to develop those initiatives rapidly and execute them at scale.

Bain DigOrchestration

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How digital reinventors are pulling away from the pack

Digitization is a long way from running out of steam, since the bulk of company revenues in most industries still come from traditional sources. Yet the results from McKinsey’s latest survey on digital strategy suggest that a digital divide is already taking shape. Companies competing in traditional ways (that is, without applying digital technologies and strategies in their businesses) have seen lower rates of revenue and earnings growth than have companies competing in digital ways—and those rates are tightly correlated with the level of digitalization, or digitization, in their respective sectors. But other players are seeing tremendous growth as digitization advances. The companies making digital moves—digital natives, industry incumbents competing in new and digital ways, and incumbents moving into new sectors—are out-performing their traditional-incumbent counterparts.

We call these companies digital reinventors. While most respondents say that their companies are making at least marginal investments in digital, we found last year that few had achieved top-quartile growth and high returns—not surprising, given the lukewarm response to digitization the average respondent reports in this year’s survey. Digital reinventors, in contrast, are embracing digital with both their investments and their strategic decision making. Our results indicate that companies in this group are not only investing more in digital but also investing and executing differently. The reinventors are investing at scale in

  • technology,
  • analytics,
  • and digital talent

—not just playing on the margins—and investing much more aggressively in business-model innovations or entirely new business models. They make more digital-related acquisitions and divestitures than traditional incumbents do; they are likelier to accelerate changes in their own businesses; and they are using more advanced, innovative technologies. The results indicate that their efforts are paying off: the reinventors are seeing larger gains in revenues and earnings than are traditional incumbents that have yet to embrace digitization.

Growing pressure on incumbents

As digitization continues to progress, its expected effects on revenues seem pronounced. When respondents were asked how much of their companies’ revenues would be at risk in the next three years if those companies took no further action to address digital pressures, they estimated that almost one-third could be lost or cannibalized. Consistent with our earlier research showing that increased levels of digitization produce shrinking profit and revenue pools at the industry level, the revenues at risk are even greater in the industries (high tech, as well as media and entertainment) experiencing the highest levels of digitization.

But the level of digitization is only part of the industry picture. Despite a common belief that digital natives are the greatest threat to an industry’s existing market share, the results indicate that incumbents competing in digital ways pose just as great a threat to other companies, if not a greater one.

The correlation between the market share owned by digital natives and revenues at risk is on par with that of incumbents playing digitally. This finding is consistent with other work suggesting that incumbents can have a strong effect on the market and on the pace of digital disruption in a given industry, and this effect is only magnified by the more powerful positioning of these incumbents. Since those competing in digital ways already own a larger market share than digital natives do, on average, they can also make larger shifts in the economics of their respective markets.

To date, the loss of revenues as digitization has expanded is already clear. Nearly 20 percent of all respondents report negative revenue growth in the past three years. But some companies can thrive in a more digitized landscape: specifically, those trying to reinvent themselves by embedding digital technologies in the core of their business models and by launching new digital businesses. Respondents at incumbents playing digitally are twice as likely as traditional incumbents to report exceptional financial growth (that is, an average compound annual growth rate of more than 25 percent) during this same period.

Digital Reinventors

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Digitizing IT

Digital transformation is the new strategic imperative—no longer just a handy source of competitive differentiation but a must-do for every company, in every industry, and across every geography.

The challenges involved, however, are testing leadership teams to their limits: how can they best

  • wrap digital services around existing products and services,
  • launch new ones that capture customers’ hearts and wallets,
  • and find innovative ways to interact digitally, both internally and externally?

And how can they achieve their goals against a backdrop of stretched budgets and competing priorities ?

In the eye of the storm sit the chief information officer (CIO) and the IT team.

As digital technology becomes embedded in almost every aspect of doing business, IT is increasingly called upon to advise the C-suite

  • on the feasibility of new approaches and to deliver new applications and services,
  • while continuing to perform the day-to-day tasks that keep existing systems up and running.

This report explores both the challenges and the opportunities facing IT in an era of digital transformation. Written by The Economist Intelligence Unit (EIU) and sponsored by SAP, it is based on a survey of more than 800 business and IT leaders across Europe, North America, Latin America and Asia-Pacific, along with desk research and interviews with C-level executives at major international organisations.

The key findings are as follows:

  • Digital transformation lacks strategic co-ordination. Digital transformation is firmly on the agenda for the majority of companies, and they are busy with a variety of digital initiatives. They are investing in a range of technologies and pursuing a wide array of objectives, most commonly improving products and services and boosting the customer experience. But only a minority of organisations have devised and implemented a digital transformation strategy to direct these initiatives. Those that have done so are substantially more likely to see their digital initiatives as being effective (93%) than those that have not (63%).
  • The way in which digital transformation is implemented varies considerably between firms—and even between departments. The CIO is the most likely executive to take ownership of digital transformation (37%), but CEOs (20%) and chief operating officers (15%) are also likely owners—and 16% say that digital transformation is not owned by one individual member of the C-suite. Meanwhile, 29% report that digital initiatives are led by individual business units, 24% say they are led by a dedicated digital unit, and 22% say they are led by IT. Interestingly, respondents from IT are more likely to believe their digital initiatives are centrally coordinated than those in other functions, revealing a distinct lack of “joined-up thinking” on the matter.
  • Both IT and non-IT executives believe that the IT department should take a more active role in digital transformation. Executives both inside and outside the IT function consistently report that IT should ideally play a more active role in key capabilities that support digital transformation than is currently the case. The biggest discrepancy concerns innovation—just 7% of executives say that IT leads their organisation’s attempts to identify opportunities to innovate, while 35% believe that it should. The fact that IT executives agree shows that it is not for want of ambition that they do not currently lead these capabilities. Instead, the data suggest that they are constrained by the obligations of their current role.
  • Digital transformation is a test of the IT department’s ability to collaborate. Digital products and processes require input from multiple departments. As a result, digital transformation is a test of an organisation’s ability to work across departmental lines. The majority of executives of all stripes agree that collaboration between IT and non-IT management will provide the greatest opportunity for success in digital business initiatives. “Everyone has to succeed together,” as one digital executive puts it.
  • IT departments are evolving for the era of digital transformation, but there is much more to be done. IT departments have begun to adapt their working practices to meet the needs of digital transformation—and their peers in other functions are noticing. Almost half (45%) of non-IT executives say the IT department has changed the way it works “completely” or “significantly” to support digital transformation, while 40% report “limited” changes. However, IT executives themselves report limited adoption of key methodologies associated with digital delivery, such as Agile software development (17%) or DevOps (15%). These new ways of working are by no means easy to adopt, but this implies a degree of inertia that few companies can afford.

Digitize IT

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Achieving Digital Maturity Adapting Your Company to a Changing World

Adapting to increasingly digital market environments and taking advantage of digital technologies to improve operations are important goals for nearly every contemporary business. Yet, few companies appear to be making the fundamental changes their leaders believe are necessary to achieve these goals.

Based on a global survey of more than 3,500 managers and executives and 15 interviews with executives and thought leaders, MIT Sloan Management Review and Deloitte’s third annual study of digital business reveals five key practices of companies that are developing into more mature digital organizations. Their approaches, which may offer valuable lessons for companies that want to improve their own digital efforts, include:

  1. Implementing systemic changes in how they organize and develop workforces, spur workplace innovation, and cultivate digitally minded cultures and experiences. For example, more than 70% of respondents from digitally maturing companies say their organizations are increasingly organized around cross-functional teams versus only 28% of companies at early stages of digital development. We discuss how this fundamental shift in the way work gets done has significant implications for
    • organizational behavior,
    • corporate culture,
    • talent recruitment,
    • and leadership tactics.
  2. Playing the long game. Their strategic planning horizons are consistently longer than those of less digitally mature organizations, with nearly 30% looking out five years or more versus only 13% for the least digitally mature organizations. Their digital strategies focus on both technology and core business capabilities. We discuss how linking digital strategies to the company’s core business and focusing on organizational change and flexibility enables companies to adjust to rapidly changing digital environments.
  3. Scaling small digital experiments into enterprise-wide initiatives that have business impact. At digitally maturing entities, small “i” innovations or experiments typically lead to more big “I” innovations than at other organizations. Digitally maturing organizations are more than twice as likely as companies at the early stages of digital development to drive both small, iterative experiments and enterprise-wide initiatives rather than mainly experiments. Digitally maturing organizations also can be shrewd and disciplined in figuring out how to fund these endeavors and keep them from languishing in the face of more immediate investment needs.
  4. Becoming talent magnets. Employees and executives are highly inclined to jump ship if they feel they don’t have opportunities to develop digital skills. For example, vice president-level executives without sufficient digital opportunities are 15 times more likely to want to leave within a year than are those with satisfying digital challenges. Digitally maturing organizations typically understand the need for and place a premium on attracting and developing digital talent. Their development efforts often go far beyond traditional training. These businesses create compelling environments for achieving career growth ambitions while acquiring digital skills and experience, which make employees want to stay.
  5. Securing leaders with the vision necessary to lead a digital strategy, and a willingness to commit resources to achieve this vision. These leaders are more likely to have articulated a compelling ambition for what their digital businesses can be and define digital initiatives as core components to achieving their business strategy. A larger percentage of digitally maturing companies are also planning to increase their digital investment compared to their less digitally mature counterparts, which threatens to widen an already large gap in the level of digital success.

DigitalMaturity

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