You’ve decided to digitally transform your organization. You’re not alone. In the 2022 Global Tech Outlook report sponsored by Red Hat, only about 10 percent of the over 1300 IT leaders surveyed said they had no plans, had not yet started, or were just beginning their digital transformation process.
However, even if you have some objectives in mind and understand that people and processes will be as important as any specific technologies, you still have questions to answer. And one of the most important questions is which path you should take to gain the most value from your digital transformation efforts.
Perhaps unsurprisingly, there is no single correct answer. However, in a new book from Harvard Business Review Press, Future Ready: The Four Pathways to Capturing Digital Value, Stephanie L. Woerner, Peter Weill, and Ina M. Sebastian at the Center for Information Systems Research (CISR) at the MIT Sloan School of Management identify four specific “pathways” that organizations can follow as they pursue their business transformations.
[ Also read Digital transformation: 6 tips to stay on track. ]
The ultimate goal is to become “future ready.” The authors found that firms in this state were top performers with estimated annual revenue growth of 17.3 percentage points and a net margin of 14 percentage points above their industry average. However, the path to that end goal will vary depending on where companies are starting from and where their immediate priorities lie.
The basic framework that the authors developed is a 2x2 matrix, with customer experience transforming along the vertical axis and operational efficiency improving along the horizontal one. Future-ready is in the upper-right cell – but getting there won’t always be a straight line. Instead, the authors propose the four pathways described below.
An industrializing path focuses on operational efficiency. This approach has a great deal in common with early thinking around cloud computing – and standard operating environments before that.
As Irving Wladawsky-Berger, now a Research Affiliate at MIT’s Sloan School of Management at Cybersecurity at MIT Sloan (CAMS), wrote in 2009: “Most of all you want to virtualize complexity, so the users, many of whom will be accessing services from their mobile devices while on the move, can get what they want in as simple a way as possible.”
The authors of Future Ready argue that success in this pathway “requires instilling a platform mindset of silo integration, automation, clean data, and efficiency.” They note that “Cloud computing, application programming interfaces (APIs), microservices, better solution architectures, software/product as a service, and agile IT teams make this industrialization process quicker, less risky, and less disruptive than before.”
In general, firms take this approach when they offer a “good enough” customer experience today and their more pressing strategic goal is to improve operational efficiency. The necessary cleanup of legacy systems and data that kick off this approach can lead to a feeling that not a lot of progress is happening at first – which can lead to disillusionment and failure. The key is to press on because launching new services and innovating once a new platform is established becomes easier. But the work to simplify and reduce costs needs to come first.
2. Delight customers first
Conversely, a company might focus primarily on customer experience out of the gate. This is more satisfying in the early days, with customer satisfaction scores and sales potentially rising in the short term. That’s because transforming can take the form of local innovation projects that simultaneously tackle needs from mobile apps to improved call centers to new customer services. There isn’t the same need for a singular platform that there is in the case of industrialization.
The challenge, however, is probably obvious. The authors write: “The problem is that the improvements often involve new, stand-alone systems that add more complexity to already complex systems, data, and processes, increasing the cost to serve a customer and challenging employees to perform more heroics to deliver what was promised.”
The key is recognizing when you’ve achieved important customer experience objectives and focusing on operational efficiency and a platform mindset.
3. Alternate the focus
At this point, it’s reasonable to ask: “Why focus so intently on operational efficiency or customer experience? Given that we ultimately need to deal with both, why not tackle both from the beginning?”
You can. The authors describe this pathway as “stair steps” that “alternate focus from improving customer experience to improving operations and back again until they reach their goal – with well-defined smaller projects.”
[ Also read IT leadership: What to prioritize for the remainder of 2022. ]
The risk is that alternating focus can end up effectively not having any focus. Discipline and a clear sense of the decision-makers matter for any business transformation project. However, it’s particularly important and central to this approach’s success. The authors suggest that a good way to tell if a firm is sufficiently disciplined is “to ask a manager to describe how a specific project fits into the overall plan, especially how coordination between customer experience and operational efficiency initiatives happens.”
4. Create a new unit
Modernizing and transforming while recognizing that many legacy systems serve critical business needs that can’t be seriously disrupted isn’t a new tension. It was a common enough theme in 2015 for terms like bi-modal IT (coined by Gartner), 2nd/3rd platform (IDC), and fast/slow IT to be in common circulation. The basic idea was that you might want to modernize (or not) traditional IT while freeing new cloud and container technologies from having to deal with legacy entanglements.
A similar approach to digital transformation – with similar pluses and minuses – is in play with this pathway. The authors write that the motivation for this approach is when senior leaders “believe transforming their current firm will take too long and will require a very different culture, skills, and systems than exist today.” They point to similar organizational hurdles that bimodal IT critics pointed to: The cool new organization gets all the attention and focus while the traditional organization slowly trudges along.
However, they also point to successes, such as when ING Group, a multinational banking and financial services firm based in Amsterdam, launched ING Direct as a much more digital-first banking entity without branch offices. This is an example where a new style of company can largely complement and exist alongside a more traditional entity. However, in other cases, creating a new unit can kick the question of how to reintegrate down the road.
Firms are not necessarily limited to following just one pathway. Indeed, “Alternate the Focus” is explicitly a blend of improving customer experience and operational efficiency. However, the authors found that companies choosing multiple pathways who said they were well-coordinated had made about twice the progress of those who chose multiple uncoordinated pathways.
When might multiple pathways make sense? Another banking example is instructive: Like ING, Bancolumbia, the largest commercial bank in Columbia, created a new digital bank, Nequi, in their innovation lab and operated it as a startup. However, at the same time, Bancolumbia undertook a transformation of its traditional bank using an alternate focus approach.
The vital point that the authors highlight is that while different approaches may be more or less applicable for a given firm, whatever path or paths are chosen, everyone needs to understand the strategy and how the different pieces fit together.
[ Discover how priorities are changing. Get the Harvard Business Review Analytic Services report: Maintaining momentum on digital transformation. ]
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