A retailer sought to build and scale a new digital business, separate from the organization’s existing physical business. The CEO set up the separate unit to build and nurture a digital mindset not constrained by the organization’s existing culture.
However, the biggest challenge turned out to be operating the new digital unit with a digital mindset but from within a traditional organization. Eighteen months later, the writing was on the wall. Digital product releases were delayed. Enterprise IT, business and digital teams blamed each other. Business teams were unhappy as market impact, market share and the customer base significantly fell short of aspirations.
This turn of events is neither inexplicable nor uncommon. Several CEOs have bet the future of their enterprises on digital and rightly so. But they often blindly try to replicate the Amazon, Spotify or Netflix model – setting up a new office with a digital native and agile structure – one that is kept away from the traditional physical organization’s influence.
Such a set up leads to most of the business and IT leaders being kept out of the loop, while the identified ‘digital leaders’ are given free rein. And, everyone in the organization is expected to provide unconditional support to the new initiative. This creates a chasm, with the traditional physical business and the IT organization on one side and the new digital unit on the other.
The reason why this ‘copy-paste of a plan’ does not work is; the digital units of traditional enterprises differ from Amazon and Spotify. The latter were born digital and never had products or markets in the offline world. In contrast, enterprises like banks, retailers and insurers have spent years building expertise and competitive advantage centered on product development, process excellence, logistics and supply chain, manufacturing and distribution.
When an organization suggests a digital business will operate unencumbered from a legacy world, an unintended consequence is the digital unit not being able to leverage the competitive advantages of the core business.
Going digital is a new way of doing business for traditional enterprises, but the core offering / market usually stays the same. The digital unit is expected to take similar offerings to market via new channels, enhancing customer experience.
Unfortunately, a chasm between the legacy business and digital units impacts customer experience. The customer who had certain expectations from the brand based on their offline experiences is frustrated when this does not seamlessly transfer to the online business.
Successful digital efforts for traditional enterprises rest on the business and technical capability of the ‘entire’ enterprise. The creation of isolated units causes a gulf between the existing organization and the new unit while alienating leaders who do not feel part of the ‘team.’
Modern digital units must leverage the parent organization’s existing core strengths to introduce responsiveness. In other words, digital and legacy teams must tango together, leveraging each other's strengths while maintaining the agility required to move fast and adapt.
A few suggestions that will help organizations as they build a digital business are:
Take the physical and digital along and together. The physical business has core strengths that have enabled it to create a strong position in the market. Successful businesses have a loyal customer base developed over time thanks to investments in product, brand, distribution and the overall experience. While these are capabilities that organizations want to carry into the digital business, the organization tends to be slow and not agile enough (during the initial phases of the transformation).
Digital units on the other hand are set up to bring in agility and improve the business’ response to market changes. Keeping digital units separate from the physical business does not allow them to leverage each other's strengths and impedes chances of success.
The combined core strengths of the physical business with the agility of the digital unit is a powerful combination when they work together. Business leaders who are going through this journey benefit from recognizing that organizations involve a number of internal business leaders who are influential in the transformation exercise. Pairing these internal leaders with the new digital leaders will help bring the best of both the worlds together – to the benefit of the business.
Invest in modernizing existing systems and technology infrastructure, not just digital technology. Mobile apps take your products and services to clients making customer experience critical when working on these channels / platforms. However, apps are dependent on existing technology systems and infrastructure, that have been designed for a different world.
When the organization launches digital products and platforms, the existing set up struggles to cope with the scale of the launch of new digital products – resulting in business loss while also leaving an impression that the digital products have not been well designed.
In spite of this challenge, most CEOs and CFOs view modernizing technology infrastructure as a cost, while funding digital technologies is perceived as an investment for growth. From my observation of over two decades, I have seen the reality being; enterprise infrastructure is the backbone of a digital business. Investing in existing technology enables apps to transform customer experience.
In 2017, Lloyds Bank decided to invest in a new cloud native, next generation banking platform that would allow it to create tailored products, have faster development cycles and further digital banking improvements. This is a significant example of how banks are moving their infrastructure to the cloud for better scalability. A lot of these banks' transformational journeys are centered on replacing core systems that are not as futuristic or equipped for scale as they should be.
Digital transformation is a change program. As per a McKinsey report, close to 70 percent of digital transformation fails and companies with failed transformations identify employee resistance or management behavior as a major barrier (72 percent) to success. This is indicative of how, while technology is a critical driver of transformation, people are equally important.
When a large business is trying to pivot, senior executives from legacy businesses often feel insecure. This is a rather important challenge to address as the bulk of an organization’s revenue is still generated by its legacy business.
Quite obviously, digital transformation requires a change in mindset and more often than not it is the mindset of key executives that require the change. Involving internal leaders in the transformation journey and finding among them ‘advocates of change’ is what successful transformations have got right.
Use the right metrics to measure the digital business. Digital transformation brings in new ways of working. The new lexicon of metrics includes terms like velocity, conversion rates and release times as opposed to traditional metrics like revenue, gross margins and sales growth. While financial numbers are critical, product delivery and engineering metrics are equally important to a digital business.
The focus on specific metrics may evolve depending on the life stage of a digital business. During the build phase of a digital product, delivery and engineering metrics take prominence. But the balance needs to shift towards adoption and financial metrics once the product is launched in the market. My recommendation is for leadership teams to agree on a framework to measure progress and a governance model to frequently review the metrics.
A digital business typically grows and evolves faster than the traditional organization is used to, hence it is important to have a model for higher frequency of measurement and review. One of the frameworks recommended for fast growing businesses is OKR (Objectives and Key Results). This framework, popularized by Google and Intel, advocates setting short term objectives and key results for the business. In fast paced transformation, the leadership can set up monthly or quarterly OKRs and evolve the same in the digital business.
A common theme that comes up in my conversations with executive leaders is the struggle to arrive at the right model for digital initiatives. How should the digital organization be structured? Should it be a separate business unit? Usually, companies hire people to roles such as the Chief Product Officer for Digital – a role that did not exist before the transformation program or the new digital unit was set up making the company a little unsure of where this role fits into their organization structure.
There are no easy solutions to a lot of the challenges that arise when companies begin their digital transformation with a new digital native unit. More importantly, there definitely does not exist a one size fits all solution.
My recommendation is to take a first principles approach. Elon Musk describes first principles as a kind of a physics way of looking at the world. It involves building the reasoning from the ground up. It involves looking at fundamentals, 'constructing reasoning' from there to arrive at strategies that may or may not work – which is different from the conventional analogy based thinking – which is often based on prior experience.
The first principles approach guides the business and its leadership to make critical decisions regarding the digital business, while the operating model itself continuously evolves. Leaders will increase their chances of success as long as the leaders (of legacy and digital) are aligned with the (first) principles and there is a low probability of creating dissonance in the system.
Disclaimer: The statements and opinions expressed in this article are those of the author(s) and do not necessarily reflect the positions of Thoughtworks.
