Companies the world over understand they need to integrate digital technology into all aspects of their business and move to platform-based operational and business models – the most efficient way of matching buyers, partners and sellers ever devised. Using these models, customer-centric digital natives have completely altered customers’ expectations about how they interact with companies they buy from. Every sector is being disrupted – from agriculture to virtual events via Zoom.
McKinsey notes that, “Since 2000, over 50% of Fortune 500 companies have been acquired, merged, or declared bankrupt, with no end in sight”. The only way to compete is to adopt these tried and tested practices to become digital too.
The C-suite understands this only too well but is in a tough spot. On one hand, they understand the urgency and importance of digital transformation, which was underlined by the sudden, massive shifts in the way we work, study and socialize due to the pandemic. On the other hand, there are examples of hugely expensive “less than successful!” digital transformations abound. Bain & Company found only 5% of attempted transformations meet or exceed expectations.
There also appears to be a bewildering number of reasons for the failure: lack of top management support; insufficiently clear, consistent and compelling communications; no urgency or deadlines; badly defined goals; resistance from employees; poor coordination across the organisation; and no actionable, verifiable feedback to test and reset the transformation as necessary.
The good news is that on closer inspection, the situation is not as confusing and chaotic as it looks, although it is complex. It turns out that a major common contributor of almost all transformation flops is poor governance. Digital transformation involves every aspect of an organization and everyone in it. Structured governance is essential to ensure that everyone takes the same approach to common goals, in a coordinated, timely way. It also provides mechanisms to constantly check progress, address problems and adjust goals as necessary because no one operates in a static market.
This white paper looks at five key success factors for digital transformation in which good governance has a foundational role. It explores some failure and success stories, and offers recommendations to achieve your transformation objectives.
IDC predicts that in 2023, spending on digital transformation will reach $2.3 trillion globally and account for half of all ICT spending. Traditional companies have been struggling to adopt digital natives’ practices and copy their success for a decade, undergoing digital transformation projects that have mostly failed, at great financial and sometimes reputational cost too.
The most often cited statistic is McKinsey’s 70% failure rate, but Wharton Business Consulting highlights a survey by Couchbase that found 90% of digital transformation projects fell below expectations, or delivered only minor improvements, or failed completely. This was based on responses from 450 CIOs, CTOs and digital leaders at companies with over 1,000 employees in the U.S., U.K., France and Germany.
So digital transformation is essential, but the chances of it succeeding based on evidence to date is extremely low. What’s the answer to what is perhaps the biggest question facing companies the world over? In a word, governance: It might not set the pulse racing, but it should.
Governance has a wide-ranging and foundational role to play in successful digital transformation. Failure to embed governance when planning digital transformation strategy is likely to damage or destroy return on investment (ROI). Governance needs to be applied to every aspect of an enterprise and all its employees, and not just for the duration of a particular program either: it has profound implications for whatever steps the enterprise wants to take next.
This white paper looks at:
- the drivers of digital transformation
- the fundamental attributes of platform-based business and operational models
- how to leverage good governance, starting with the Bezos Edict regarding a disciplined, consistent approach and application of technology
- ecosystems, and the power of scalability and automated integration
- examples of failed digital transformation efforts – and successes
- recommendation to help you succeed at digital transformation
Digital natives’ platform-based business and operational models are the most efficient way of matching buyers and sellers ever devised, giving rise to some of the world’s most valuable companies in just a few years. Their use of technology is always to improve customers’ experience, and they excel at the first rule of being in business – be easy to do business with!
The two tables below show that in November 2020, seven of the world’s most valuable companies were platform-based, compared with one – mobile operator NTT DoCoMo – in 20201 .
|Top 10 Largest Companies by Market Capitalization*|
|2||Saudi Aramco||Saudi Arabia||Energy||1,956|
*As of November 3, 2020.
Their platforms – in different variations – support ecosystems of buyers, sellers, users and partners, and have reshaped and raised customers’ expectations about their dealings with all kinds of companies. And the more successful they are, the more participants they attract which drives greater success. This is known as the network effect and the different types of platforms and the many variations of how they are used are explored in this pioneering book, Platform Revolution.
Another great attribute of platform-based models is that they are so flexible, in Amazon’s case enabling an online book seller to become, among other things, one of the biggest public cloud providers in the world through Amazon Web Services.
Digital transformation projects are immensely complex. “It is like playing three-dimensional chess, because you need to look at the situation from so many perspectives," said Richard Warley, when EMEA Regional President of CenturyLink, (renamed Lumen where he is now Vice President EMEA).
Governance is not a rule book that lives in the back office, developed and consulted by a handful of specialists. It is a coordinated, multi-faceted plan to move an entire organization, and everybody in it, towards the desired business outcomes because that’s what digital transformation involves. Evolving from a product- or service-oriented organization to being a data-driven, customer-centric digital company needs careful, creative thought and planning.
Governance is a guide that shows both: what is required and how it will be achieved. It also provides mechanisms to constantly test the success of the plan and how well it is being followed, and allow adjustments.
Torry Harris Integration Solutions (THIS) designed an Integration Framework, in collaboration with its client Schneider Electric, to help the company manage change during a transformation. The framework had four main strands: Organizational and people; business process; technology; and applications and services. Note that this was just to help organize the thinking into manageable chunks, rather than deal with these areas in isolation: Part of the preparation for digital transformation and a critical element of its execution is understanding the relationship and interdependencies between them, and to identify overlaps and gaps.
This holistic approach is why a company undergoing digital transformation needs a dedicated governance team that looks at the whole picture, not just parts of it. Making staff responsible for oversight of governance on top of their full-time responsibilities results in governance always being their secondary concern. It is advisable to bring external experts into the team who are experienced in transformation to augment the internal team’s understanding of their company and its inner workings.
There is so much to think about with digital transformation, it can be hard to know where to start, but the starting must always be what, precisely, are the business outcomes you want to achieve?
Proctor & Gamble has been accused of embarking on transformation for its own sake rather than to attain specific business goals and its expensive transformation experiments brought the company to grief when the economy nosedived.
Many companies – especially those that are technology- or engineering-oriented – tend to embark on ill-conceived projects triggered by the potential of new technologies, such as artificial intelligence. Often they don’t notice that the building blocks they need to make the technology work aren’t in place, such as usable data for analytics, itself a building block of AI.
As Thomas M. Siebel2 wrote in McKinsey Quarterly, “When I see CEOs who may be experimenting here and there with AI or the cloud, I tell them that’s not enough. It’s not about shiny objects. Tinkering is insufficient. My advice is that they should be talking about this all the time, with their boards, in the C-suite—and mobilizing the entire company.”
Another blind alley that comes of being technology-led is a tendency to think that once the full-stack is in place, transformation is complete. The hard truth is that transformation is never complete – digital natives are permanently preoccupied by how they can leverage technology better to improve customer experience. But also, it reveals a lack of proper understanding about the nature of digital transformation and the fact that technology is just one aspect, not the whole story.
The question is not what the technology can do so much as what you need it to do to achieve your business goals. Apple’s co-founder Steve Jobs said, “You’ve got to start with the customer experience and work back towards the technology”.
This is not an easy mindset to master because many enterprises do not know how to design and implement IT governance, nor understand how it fits into the company’s overall governance and culture. This is essential to the success of a digital transformation initiative, given that integration is foundational to digitalization, and automated integration is a defining characteristic of digital business, along with scalability and platform-based business and operational models – which brings us to APIs.
Kristin R. Moyer of Gartner, observed, “The API economy [the exchange of value between consumers and providers] is an enabler for turning a business or organization into a platform,” which is a major goal of digital transformation.
TM Forum describes APIs as “simple coding instructions that allow disparate software systems to communicate without the need for costly, time-consuming integration… they enable plug-and-play interoperability of components within IT systems and networks”.
Much of Amazon’s success can be attributed to the vision of its founder and outgoing CEO, Jeff Bezos, regarding the use of APIs. According to a former Amazon employee, Steve Yegge, Bezos sent out an edict concerning the mandatory use of APIs in about 2002 to join systems together on pain of being fired. He also wrote, they “must be designed from the ground up to be externalizable. That is to say, the team must plan and design to be able to expose the interface to developers in the outside world. No exceptions.”
And that’s one of the most exciting things about APIs – they enable companies to convert their internal capabilities, assets and data into products and services for third parties to consume by exposing them in controlled, specific ways. This is how an online book seller created one of the world’s biggest public clouds, Amazon Web Services. The company made it easy for individual and companies to rent its idle compute and storage capacity on-demand, in one swoop converting a cost center into a profit generator.
Another example is LUCA, Telefonica’s data unit. It leverages the operator’s own, anonymised data, combined with other data sets and its analytics and AI expertise, to be what Forrester described as a leader in insights generation. LUCA’s sells those services to a diverse range of sectors, including advertising, banking, culture and sport, transport, retail, Industry 4.0, mass media and more.
So although the obvious first step regarding APIs is to identify any existing journeys that could be automated, because done right it’s a great way to cut costs and improve customer experience, the next one is to consider new markets for the company’s unique data or functionality. Then make them available via APIs that can connect previously discrete systems.
Many companies understand what APIs are and the flexibility and speed they have the potential to bring, and spend considerable time and effort developing them. Yet THIS has found it is common to find as few as 5% of the 400 or so APIs created by firms, are reused. Instead, each team builds its own because they are out of touch and synch with other teams in their organization. To keep reinventing the wheel is slow and expensive, and obstructs business and operational agility, scalability and automated integration.
In recent research, TM Forum found that communications service providers (CSPs) main motivations for adopting open (meaning common and freely available, like open source) APIs are to reduce costs and complexity. This is because many report spending about 80% of their IT budgets on integration and customization, leaving only 20% for innovation. They are turning to open APIs (and open IT architectures) to flip this ratio.
BT is a pioneer of the use of APIs in telecoms (and the Forum’s work in APIs). After the acquisition of the mobile operator EE, it worked with THIS to develop an agile API farm approach to integration which enabled different lines of business to reuse APIs from a centralized library. The results are shown in the infographic below.
Arguably, managing cultural change and people through the transformation process is the most difficult yet, the most important element. Unless companies achieve employees’ buy-in, it is a foregone conclusion that their digitalization journeys will not reach the intended destination.
Setting out the goals, priorities, beneficiaries and timelines for the projects and embedding them in governance helps to clarify thinking, but just as importantly, it will help you draw up a communications plan. In general, people are suspicious of change and their default position is to resist. If employees do not understand why they are being asked to change the way they work, resistance is guaranteed.
There are two overarching principles for success: First is visible and ongoing support by C-level executives. Lack of top management support is the most frequently cited reason that transformations flop. The BBC in the UK was quick to understand how digitalization could transform how it produced TV and radio content, but its Digital Media Initiative was halted and £98.3 million ($135.7 million) written off in unusable technology assets in 2013, five years after it began. It lacked the technical capabilities needed, but plowed on as there was no senior top executive oversight to steer the effort and keep it on track.
Without that input and oversight, transformation journeys can take on a life of their own, with their goals eclipsed. In addition, to remain confident, the ‘troops’ need to see, and frequently, that their leaders are invested and embracing change themselves.
Second, transformation needs a program of compelling, clear and consistent communications tailored to specific groups of employees (see graphic below) at particular stages.
This needs to work in parallel with another aspect of governance, a Resistance Management Plan, which should cover every level of employee from top executives to function-oriented employees. Schneider Electric’s entire workforce was guided across the stages shown in the diagram above, which is part of the Integration Framework designed by the company along with THIS that we referenced earlier.
Given the large-scale and well-publicized failures, it’s not surprising that people can be skeptical. A good approach to help them over the initial hurdle is to choose a relatively discrete area that is comparatively easy to tackle, then celebrate attaining the goals. This builds confidence and enthusiasm, so make sure that all milestones, no matter how small, are celebrated and recognition given to those who made them happen.
It is important to identify pockets of resistance and address them creatively, avoiding conflict wherever possible. A common problem is that if a manager at whatever level in is against some or all the changes, likely their subordinates will be too. Corrective action is required through communication, using a different mode than previously: So, the CEO’s presentation and updates haven’t worked their magic, try a workshop or gamification.
A resistance management plan needs to garner constant feedback from a variety of sources – conversations, checks to see if work patterns have altered and so on – that can be verified and analysed, then addressed. It is an example of a closed loop, which is our next subject.
If you can’t measure and verify progress, it’s impossible to know how well, or badly, the transformation journey is faring, and take corrective action. This applies to people, as we’ve seen above, but also to priorities, timing and budget, among other things, which are going to change over time as markets and situations change. The current pandemic is a sad but spectacular example of companies having to deal with unforeseen circumstances, and quickly.
A common mistake is to classify savings made on the reuse of assets such as APIs or enabled by them as return on investment, which will obviously be one important measure of success. It is not. RoI is the continuous measurement of the transformation’s value, which if the transformation is successful, will change over time, as shown in the diagram below.
GE Digital planned to own the industrial internet but instead fell apart. It had substantial investment and big-scale activities on many fronts, when smaller, more focused teams would have been more efficient, effective and instructive. To reel in the spiralling transformation, GE made the mistake of introducing profit and loss to manage the transformation performance, thereby redefining success as short-term growth not long-term strategic objectives midstream.
As mentioned above, corrective action is needed constantly, based on feedback, analysis, verification of the feedback and verification of the governance plans. This constant checking is essential to ensure the digital transformation meets its objectives. This is a complex undertaking and constant recalibration as the unexpected happens and resistance persists need to be addressed in a timely way.
THIS has discovered that the tendency of project teams to bypass integration is one of the greatest organizational challenges. There is a perception that the services-based approach inhibits project delivery and should be more of a ‘black box’ – with API-enabled integration seen as an internal mechanism rather than exposing a service for consumption. This thinking also leads those teams to have poor processes for engaging with the project and API integration teams.
Surprises are common during integration testing due to mismatched interface specifications, changes that have been made but not recorded, poor inter-team communication and dealing with ‘moving targets’ as the project progresses.
These and other lapses can be caused by deliberate violation of standards and guidelines – many people find it hard to ‘unlearn’ a way of doing things that is native to them from long familiarity. However, as automated integration is fundamental to a digital company, governance to identify and deal with these issues has to be well thought out and carried through consistently. If there are not sufficient governance team resources to do this, saving on governance staff could well turn out to be a very expensive, false economy further down the line. Customization, manual changes and retro-engineering are exactly what digital natives avoid.