Introduction: The pressure of constant unpredictability
A lot has changed in the last decade and as it draws to a close, many business leaders will no doubt be hoping to pause and catch their breath. But the fact is, in the 2020s the pace of technology-driven change is only set to accelerate.
The key forces that reshaped the enterprise environment over the past 10 years - cloud architecture, artificial intelligence (AI), the platform business model - aren’t going away. Instead, as they proliferate, they’re coming in complex new permutations. The exponential growth in the amount and variety of technology available has arguably been exceeded only by the rise in customer expectations, conditioned by an always-on, and on-demand, economy.
Coping with change
All that leaves many enterprises struggling to make the right choices, and the right changes, at the right time - let alone to use technology effectively or seize on the new opportunities for the value it creates. Signals of the scale of this challenge are everywhere - as are signs that it’s causing some companies to view technology, and transformation, in a less than positive light.
One recent global survey found 94% of business and IT decision makers are wrestling with “hyper-disruption” - a tricky combination of pressure to keep up with customer demands, adopt new business models and deal with shifting workplace dynamics. A poll of CEOs by KPMG, meanwhile, showed a rising number fear that being “too slow” will tip their organization into obsolescence, and that business leaders perceive disruptive technology as the single biggest risk to growth.
Threats to growth, KPMG 2019 CEO Outlook
Why all this negativity, when technology - at least in theory - makes so much possible? It’s not necessarily that executives aren’t aware of the opportunities, or that they fear change itself. Over three-quarters of those surveyed by KPMG, for example, agreed growth depends on the ability to challenge business norms. The issue is a lack of confidence in the internal capacity to change; or in the enterprise’s ability to break out of a cycle of playing ‘catch-up’ with new technologies and more innovative competitors.
More than anything, in the 2020s competitiveness will be defined by the ability to anticipate and embrace change, rather than adapt to it after the fact - a core characteristic of the modern digital business (MDB).
By harnessing technology and undergoing an internal realignment, enterprises can position themselves to manage, even benefit from, the unpredictable. For any company still grappling with inertia or the sheer number of options on their doorstep, becoming a MDB might seem like a tall order. But a new year is all about new beginnings, and in this issue of Perspectives, Thoughtworks experts who have been on the frontlines of multiple transformations introduce the building blocks that can be used to construct a modern digital business.
The mission: Bigger is not necessarily better
As contradictory as it may sound, one of the best initial moves executives can make is to stop thinking of transformation as by definition ‘big.’ The consistency with which transformations are painted as massively complex, ambitious undertakings convinces a lot of business leaders they have to attempt something spectacular - which can result in equally spectacular failures.
“If you’ve taken a ‘big bang’ approach, the first time you learn how adoption works is when you’re done,” says Ange Ferguson, Thoughtworks Group Managing Director for Digital Transformation. “It’s very hard to adjust your product or your approach in order to increase adoption once you’ve actually finished the work.”
Gary O’Brien, Thoughtworks Digital Fluency Principal, and co-author of the new book Digital Transformation Game Plan, puts responsibility for the persistently high rates of transformation failure - around 60-80%, by most estimates - on standardized consulting models that have prioritized cost savings over more foundational change.
“Organizations are sold a cookie-cutter approach to making (transformation) successful, but you can’t just take what another company has done and apply it to yourself,” he says.
Many consultancies, in O’Brien’s view, tend to push big bang approaches with little prior knowledge of the individual enterprise’s context and circumstances.
Sometimes, he says, “the only way for them to make money is to save you money immediately, and the best way to do that is to reorg. So you lose a whole bunch of talent that goes somewhere else, in a reorg based on what another company did, and end up in a state where you can’t change it.”
Another common fallacy, according to Ferguson, is seeing transformation as an end in itself. “People get really stuck on this idea of digital strategy and digital transformation, and sometimes it’s easy to forget that it’s in service of something larger - business strategy, business transformation and ultimately, delivering value to the customer.”
This involves thinking less about what transformation requires and more about what the organization needs - or as Ferguson puts it, the capabilities necessary “to respond at speed, to be able to experiment, to take advantage of all the opportunities that technology brings you, and to deliver on your business goals.”
Since every enterprise defines its own goals and is dealing with a different set of internal and external dynamics, the capabilities it has to develop will inevitably be, to at least some extent, unique. That means, as O’Brien puts it, instead of trying desperately to become the next Netflix, each company needs to find its “authentic digital self.”
“Assessment is important, but context is key,” he says. “Having context on your industry, strategy, competitive position, what’s going on in the world - that’s what’s important to actually work out how far down this digital road you need to go. A very small step is all some organizations need.”
Rather than broad, sweeping, change, the enterprise can start with a ‘thin slice’ - a tactical, targeted initiative that address a single process or capability that needs to be enhanced - but that also cuts ‘deep’ in that it has consequences for every layer of the organization, from senior executives down to developers.
The thin slice “has to be something significant because it has to be impactful, and needs to touch all parts of the business,” O’Brien explains. “Use it to identify the antibodies that exist in your own organization that will stop change, and do something about them. Then do another thin slice to solve something else. Keep going, and by the fourth or fifth slice, the entire company will be part of the program. You build a great culture and let people fold into it, rather than trying to roll it out.”
The building blocks of a Modern Digital Business
The MDB building blocks
Though the ‘slices’ each enterprise tackles may be different, there are building blocks of practices and capabilities that organizations in general can use to attain digital fluency - the ability to seamlessly leverage technology to serve business goals, steer through change management programs and absorb future shocks. They are:
i. A frictionless operating model
As Ferguson puts it, being a modern digital business often has more to do with “how humans work together and line up to deliver value than assembling technology components.” It’s within the grasp of every enterprise to make changes to how it’s organized internally to promote more seamless ways of working and consistent alignment of strategy.
Arguably the biggest shift the MDB requires is the organization of the company around a shared outcome rather than functions - so it’s the necessary result, rather than roles or past practice, that determines who works together and how resources are allocated.
“There’s always going to be silos in your organization,” says Ferguson. “The trick is to work out where’s the least damaging place for silos to be created. A big part of what holds enterprises back from becoming a modern digital business is organizing along reporting lines as opposed to lines that create value for customers.”
A frictionless operating model
The MDB is “a streamlined business model - you understand the outcome, get the right people together who can deliver it, break that down into a cascade of work and build work to move the needle,” O’Brien explains. And, for this approach to work “you need to understand what the outcome is first and what the work looks like before you know the skills you need to bring together. Over time there will be a consistency to that that will signal what your organizational structure will look like.”
This isn’t to say that functions or teams no longer work independently or towards their own goals. Each ‘big’ outcome may be broken down into smaller pieces of work that are carried out autonomously - but direct alignment to the broader strategy is always apparent.
“The key principle around this change is to define the outcome, decide the measure of success and then get a group of people together who know how to deliver that outcome,” says O’Brien. “Traditional firms add the measure after they’ve already decided the work - often squabbling over which measure to use - then game its movement. MDBs start with the outcome measure and design the work to move it, almost guaranteeing the result. It’s like cheating.”
Outcomes may vary but are almost inevitably connected to the creation of customer value - a principle China’s nimble enterprises, often held up as model digital-first, change-embracing organizations, have taken to heart.
“In China, in most sectors, if you’re going to directly engage customers then technology has to be put at the core of your human resource and business strategy,” explains Thoughtworks’ Beijing-based Head of Innovation, Ran Xiao. “That means breaking down the barriers between business, IT, data centers - all the walls that exist in the enterprise”
The elimination of friction and boundaries needs to encompass functions like HR, finance and legal, which may have their own mandates to serve but also need to consider their work in the context of the broader organizational cause.
For example, in a conservative, finance-dominated company, it may be difficult to accelerate funding cycles to develop new or improved products based on customer demands. In an MDB, “these are the kinds of problems you have to face up to,” O’Brien says.
The shift to an outcome-based organization clearly requires more cross-functional communication than some companies or teams may be used to, and regulation or other harsh realities may prevent a complete reorientation. But as Ferguson points out, even “incremental, iterative” progress is better than no advance at all.
ii. Platform strategy
Along with an inner orientation toward outcomes, an MDB is supported by a platform that provides a technology foundation for delivery and is capable of evolving to match the volatile nature of strategic and customer demands.
“You need an architecture that is capable of constant change - but you still have to manage risk, so it’s got to be constant change without breaking anything, where you can roll back if you get it wrong,” O’Brien explains. “This is where legacy modernization comes into play. The use of cloud and micro services become really important to building that flexibility in.”
An application programing interface (API) layer allows teams across the enterprise to draw on and repurpose the same bank of data resources and capabilities, to develop various new products and services in a “plug and play” manner, he adds. “That ability to move and change a business service without impacting the others is critical.”
Digital platform strategy
For all the potential of platforms, just like the rush to ‘transform,’ organizations have a tendency to pursue platform-building as a goal in its own right. But any platform, no matter how advanced, expensive or versatile, is ultimately worth only as much as the customer value it delivers.
“I’ve seen an organization spend millions of dollars on a platform to connect customers to a network that still took 50 days to make those connections, because at no point did someone define the speed of connection as the measure of success,” O’Brien says. “They were building for completion, rather than value to the customer. And that’s why these things fail.”
A platform strategy also doesn’t automatically entail the complete removal or replacement of legacy systems. In many cases these are broadly fit for purpose, and trying to create a perfectly clean slate could create far more problems than it solves. Ferguson cites the example of the decades-old COBOL code, which still capably underpins the majority of global financial transactions.
“Legacy modernization is absolutely a business challenge that everyone struggles with, but the idea’s not simply to replace legacy,” she says. “If you’re going to create massive change and have something that works well, why wouldn’t you spend energy on doing something different or value-add, as opposed to fixing something that’s not broken?”
iii. Experience design and product capability
If it is building for customer value, the MDB will ensure product design and development serve customer experience - a metric that research shows has both internal and performance rewards. And who better qualified to evaluate that experience than the customers themselves?
Customer experience's business and staff impact
Experience driven businesses have:
In many cases, enterprises continue to build according to pre-existing parameters, self-imposed targets, and preconceptions about what the client wants or needs, rather than actual customer input.
According to O’Brien, a shift to development “based on customer value as defined by the customer” is mandatory. “The example I use is homes versus mortgages,” he says. “A traditional financial institution looks to sell more mortgages, a modern digital business tries to put people into a home.”
A truly customer-centric development process will inevitably test an enterprise’s resilience. “You need to bake in responsiveness, because customer expectations constantly change, you have to be able to change,” O’Brien explains. “The only way to do that is to reduce the size of your workloads - tackling smaller pieces of investment and smaller time commitments.”
Even more than knowledge, development and design decisions have to be based on customer understanding. “You won’t be able to touch customers if you have no sense of empathy towards them - and if you’re not where they are, doing things with them, walking in their shoes, you won’t be able to understand them,” says Xiao.
Successful product innovation has to be based on an ‘ear to the ground’ that picks up on customer needs through regular communication and, crucially, data, which should also be collected and applied continuously to drive the evolution of products and services. Xiao points to Chinese e-commerce upstart Pinduoduo, which emerged seemingly from nowhere to become a legitimate competitor to far bigger Alibaba and JD.com, as an example.
Though headquartered in Shanghai, the company made its mark by addressing the habits and needs of customers in China’s smaller cities and rural areas, introducing innovations like group buying and simplifying the delivery model for agricultural goods. “They got those ideas through experimentation and digital technologies that weren’t previously available,” Xiao says.
iv. Intelligence-driven decision making
The digital technologies that make these new levels of customer insight possible - machine learning (ML) and AI - center on the effective management and analysis of data, ensuring it’s a resource that can be used effectively.
China’s digital businesses “are hiring data engineers, data scientists; entire organizations are becoming integrated with the digital means to understand the customer,” says Xiao. “If you’re operating technologies that allow you to look at the data you can use it to continuously improve yourself, and all kinds of phenomena and opportunities open up.”
“Things like machine learning help you identify trends and patterns to capture weaker signals that a change is coming, and to prepare yourself for it,” O’Brien adds. That means one of the MDB building blocks is the ability to “use data as an asset to add value (and) to get knowledge to make decisions.”
Cycle of connected intelligence
Moving beyond data-derived insights to use data as a basis for action requires consistent channels of communication between data scientists/engineers, customer-facing teams, and executive decision-makers. Otherwise, as Ferguson points out, relevant information may never make it to decision-makers intact, or its true value or significance may go unrecognized.
“You need to give the people closest to the work and your customers the power and autonomy to make good decisions - and the information to know what good decisions look like,” she says.
Often, she points out, it’s not the most senior executives in an organization that see the problems first, so data needs to be transparent enough, or the lines of communication strong enough, to enable business leaders “to read those fainter signals from customers, team members or the market, to be able to see those changes coming.”
v. Engineering culture, delivery mindset
Technical excellence and strong engineering culture are as critical a building block for the MDB as organizational seamlessness; in fact each supports the other and both need to be cultivated in tandem. “Companies have to further uplift their engineering skills - not just software practices and technologies, but capabilities and culture, so engineering is more integrated with the business,” says Xiao.
O’Brien makes it clear that the responsibility isn’t exclusively on the technology team to explain itself to the business; technology is now so integral to every business model that there’s also an onus on leaders to “bring technology into the boardroom.”
“The minimum set of knowledge all execs now need to have in technology has changed completely, since every company is now a software company,” he says.
According to Ferguson, solid engineering culture is based on a form of mutual respect and autonomy when it comes to the business. Technology supports business decisions and outcomes, while the business is capable of giving technology a relatively free hand to innovate - based of course on data-derived insights and with an eye firmly on creating customer value.
“There are organizations that I’m quite familiar with that have an amazing ability to create products, incredible user experiences and strong engineering culture, but every additional dollar they invest in that space is a potential waste because they haven’t been able to line up their organization to get out of the way of those amazing products and services,” she says.
A certain amount of autonomy for technology may be desirable, but this doesn’t need to extend to the creation of the dedicated units or labs created by some companies in an effort to jump-start innovation or change. Such a separation can undermine not only technology-business alignment but also overall morale, according to O’Brien.
“The separation of digital as if it’s some kind of special child is counterproductive,” he says. “Culturally, it’s demoralizing for a lot of really talented people who aren’t chosen to participate.”
“This is one area where Chinese companies are actually more flexible than those in the West. Innovation is incubated internally, not externally. And technology isn’t just an enhancement to the business or business model - it’s creating new business models altogether.”
Ran Xiao, Head of Innovation, Thoughtworks China
Instead of special incubators, enterprises need to remember the best ideas may emerge from the people on the frontlines of technology and customer interaction, and provide opportunities (and funding) for engineering/software talent to innovate and thrive wherever it’s housed.
“Technology has to be a first-class business concern,” says Ferguson. “Bringing it closer to the center means thinking about how to grow technology people. As a service provider technology has often been thought of as a cost center, rather than a value creator, and as a result things like training programs, capability and leadership development have been seen through a very different lens.”
A sufficiently independent, highly supported yet customer value-aligned technology practice can ultimately lead the business to new opportunities - as the experience of China’s digital champions has demonstrated.
“One of the most effective lessons we’ve seen (from Chinese enterprises) is their enthusiasm for internal innovation, and willingness to allow people to run with it,” says Xiao. “For instance a couple of times a year they give their full-time employees the chance to make their own teams and run hackathons. And I don’t mean for 48 hours; if a business idea is legitimate, they’re willing to invest three months to half a year on it.”
Conclusion: New year, first steps
If the building blocks of the MDB share a central trait, it’s that they all involve the enterprise making meaningful change. Yet it’s also clear that starting the ‘construction’ process in 2020 does not necessarily require full-scale reinvention or colossal investments.
Nor does the enterprise have to tackle all the building blocks at once. They can - and should - be flexibly adopted and prioritized according to each organization’s needs and circumstances, with the initial focus on boosting the specific blocks or capabilities that directly serve primary business goals.
The focus on different blocks mean the digital fluency pattern of each MDB will vary. Yet the journey can always begin with a few initiatives likely to produce fruitful results in the near- to mid-term - whether tweaking the operating model, developing a cloud strategy or beginning to adopt a platform approach - before moving on to more complex endeavors like full-scale adoption of value-driven portfolio management.
Digital fluency roadmap
Of course, sticking to tradition or carrying on like the previous decade never ended are also options. But as customers grow more and more accustomed to digital experiences and digital velocities, O’Brien believes most businesses understand the opportunity costs of inaction are simply too high.
“2020 is the year when companies realize they have to do this, and it becomes business as usual,” he says. “Transformation suggests there’s a beginning and an end, when what we’re teaching is how to be this way all the time - constantly evolving, constantly watching, constantly sensing and constantly changing to meet customer needs.”
Another way to look at it is that “you can change and grow based on a fear of what might happen, or you can do it based on the exciting thing you actually want to achieve,” says Ferguson. Given all the opportunities MDBs are poised to not only seize but create, the choice seems an easy one to make.