The seven decisions that matter in a digital
transformation: A CEO’s guide to reinvention
A successful digital transformation
requires making trade-off decisions. Here’s how successful CEOs guide their
business’s reinvention.
Being the CEO of a large company facing digital disruption can
seem like being a gambler at a roulette table. You know you need to place bets
to win, but you have no idea where to put your chips.
Of course, digital transformations aren’t
games of chance. But they do require big and bold commitments in the midst of
uncertainty to reinvent the business rather than just improve it.
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Many of the digital initiatives large
incumbents have already tried to date have tended to operate at the margins of
the business. Innovation labs or apps can be useful for learning and can even
provide a boost to the company. Meanwhile, the legacy business remains in
place, largely unperturbed.
Without a transformation of the core—the
value proposition, people, processes, and technologies that are the lifeblood
of the business—any digital initiative is likely to be a short-term fix. The
legacy organization will inevitably exert a gravitational pull that drives a
reversion to established practices. Reinvention of a business is, by its
nature, bold. But it’s one thing to be bold; it’s another to be thoughtfully
bold. A digital reinvention requires the CEO to make tough decisions, which
involve hard trade-offs that it is tempting to ignore, defer, or rush into. Yet
knowing which decisions to prioritize and how to implement them can make the
difference between a successful transformation effort and one that struggles.
These decisions occur in the four phases
of a successful digital transformation program:
·
Discovering the ambition for the business based on where value is
migrating
·
Designing a transformation program that targets profitable
customer journeys
·
Delivering the change through an ecosystem of partners
·
De-risking the transformation process to maximize the chances of
success
In each of these areas, the CEO has a lot
of things to do, from modeling new behavior to driving a change in culture to
executing strategy. But
this article focuses on some of the big decisions CEOs need to make, and how
they can go about making them. Based on our experience with dozens of digital
transformations, we believe these seven decisions are the most important ones.
DISCOVER—Set
the ambition for the business.
Decision
1: Where the business should go
Few decisions are more momentous than
choosing the business direction. While the almost existential nature of this
decision can seem overwhelming, most incumbents don’t have a choice, since they
are already facing disruptions that can threaten their long-term viability.
Data and analysis, as well as a
disciplined framework for thinking through options, provide a helpful structure
for making the decision. As a starting point, we recommend a thoughtful review
of the market and business based on those stalwarts of economic analysis,
supply and demand. It’s
important that any analysis be dynamic and forward-looking, based on an
understanding of how digital technology could lead to changes in the future.
Almost every notable digital innovation
we’ve seen has been based on using connectivity and data to transform the
customer experience or to reshape products and services by allowing customers
to interact with them in new ways. So that’s a good basis for thinking through
the possibilities. Incumbents can also look to approaches used by digital
innovators—both within and outside their sectors—to spur fresh thinking.
While analysis is crucial, it is no
substitute for imagination. C. S. Lewis called imagination “the organ of
meaning,” and CEOs need to tap into it. One approach might be to imagine how
the industry would work if it were completely digitized. Often,
a creative leap is needed to identify how the firm might serve customers in new
ways across their entire journey. We have found 24-hour hackathons with senior
leaders to be a very effective way to break through old thinking and encourage
executives to adopt completely new ways of doing things.
GE is an example of an incumbent that
envisioned how its industry would evolve and acted in response. CEO Jeff Immelt
noted that “15 percent or 20 percent of the S&P 500 valuation is consumer
Internet stocks that didn’t exist 15 or 20 years ago. The consumer companies
got none of that ... If you look out 10 or 15 years ... that same value is
going to be created in the industrial Internet.” Based
on this insight, GE launched GE Digital, a software and analytics group that
works closely with all the company’s business units, and Predix, a branded
digital platform that invites developers to build new applications using GE
data.
DESIGN—Create
a plan for the digital transformation.
Decision
2: Who will lead the effort
A program that will deliver the needed
degree of transformation is not something CEOs can delegate; they must lead the
charge themselves.
Some CEOs, like Daniel Gilbert, cofounder
of Quicken Loans, serve as the public face of the company’s
digital-transformation program. Gilbert was the primary evangelist for
Quicken’s Rocket Mortgage initiative, touting it as the “mortgage industry’s
iPhone moment.”
CEOs, however, can’t do this on their own.
Like the conductor of an orchestra, the CEO provides vision and ongoing
direction. But a group of other senior leaders needs to drive the effort
day-to-day. Thus a key decision for the CEO is selection of the members of the
orchestra, based on the skills needed to be harmonious and effective.
One criterion for inclusion, naturally,
has to be skill in and knowledge of digital. That’s why some CEOs turn to a
chief digital officer (CDO). Appointing a CDO is the right answer for many
companies, but it’s only part of the solution.
This decision needs to extend to putting
in place the right team of people to drive the change. Since digital affects
almost every aspect of the business and requires an unprecedented level of
coordination across the entire organization, any leadership group has to
include executives from multiple functions. While it can be important to have
people who are visionary and inspiring, the team will also need respected
executives with a deep understanding of the mechanics of the business, as well
as expertise in change management. In addition, the CEO should select leaders
who embody and will forward the key values of a digital culture:
customer-centricity, a collaborative mind-set, and a tolerance for risk.
This leadership team doesn’t need to be
large. In fact, it can be quite small, as long as its members, and the people
working with them, have the requisite skills. At Starbucks, for example, Howard
Schultz had the CIO and CDO guide a decade-long digitization effort that has
driven widespread adoption of mobile payments at North American stores, tightly
coupled with the company’s customer-loyalty program. At
a European energy company, it was a COO, CMO, and CSO (chief sales officer) who
led the charge.
Decision
3: How to ‘sell’ the vision to key stakeholders
Any change effort requires active
communication of the vision and an explanation of why it’s necessary. For this
reason, the CEO needs to decide not only what to say but also how—and how
long—to communicate.
One approach is to think of the change
program as a product and brand it. When Angela Ahrendts took over as CEO of
Burberry, she launched a bold Art of the Trench campaign and an aggressive move
into digital, which signaled her high level of ambition and rejuvenated the
organization. In early 2014, Ralph Hamers, CEO of ING Group, announced his
vision for the company, called Think Forward, Act Now. Its goal was to deliver
a differentiating customer experience through faster innovation and better use
of analytics. Late in 2016, Hamers updated the vision with Accelerating Think
Forward, which focused on mobile banking.
It’s crucial to decide when to communicate
and with whom. The CEO should focus first on winning over influencers both
inside and outside the company, then on propagating the change to their
networks. CEOs also need to adopt a campaign mentality. This means delivering
crisp and clear messages, in a steady cadence, using all relevant formats and
channels. It’s an influencing program, so messages need to be tailored to each
audience—from employees to the board to shareholders.
A bold, long-term orientation, well
communicated to all key stakeholders, can be a crucial counterbalance against
pressures to hit short-term financial targets once the transformation program
begins.
Decision
4: Where to position the firm within the digital ecosystem
New companies are able to challenge
established businesses because an ecosystem of relatively cheap and plentiful
resources—from technologies to platforms to vendors—is in place. This has been
a boon to disruptive attackers, but the same resources can be used by
incumbents, too.
CEOs need to figure out which
capabilities, skills, and technologies available in the ecosystem complement
and support their business’s strategic ambitions. How much to rely on these
relationships and how to structure them, are also crucial decisions. Making
them requires a clear sense of how to secure the company’s most valuable
assets, such as relationships with customers or data.
Michael Busch, the CEO of Thalia,
Germany’s leading bookstore, systematically evaluated the entire supply chain
before launching his company’s digital book offering. He created a network of
alliances with other book retailers and partnered with Deutsche Telekom, which
provided the technology and digital distribution backbone. He did not, however,
make any agreements that separated Thalia from its customers, which it saw as
its core value.
Over the past decade, BBVA Compass, a
Spanish bank with a growing global presence, has aggressively remade itself
into a digital organization. In
2016, it launched an API marketplace, which allows fintech start-ups to build
apps that interface with BBVA’s back-end systems. This arrangement channels the
energy and creativity of entrepreneurs while ensuring that BBVA retains a
leadership position within the ecosystem.
Decision
5: How to decide during the transformation
As boxer Mike Tyson once said, “Everyone
has a plan ’til they get punched in the mouth.” No
matter how well a transformation effort is designed, there will be surprises
and unforeseen developments. To deal with this reality, the CEO and top team
need to decide on governance and escalation rules to allow for inevitable
course corrections.
Frequent check-ins—at least weekly—with
senior leaders should be planned to gauge whether the digitization effort is on
course and institute changes if it is not. That sounds like a lot, but devoting
even one hour a week to a program that transforms the company is just 1 to 2
percent of a CEO’s time. The challenge is to book this time and stick to it.
To support this approach, the CEO needs a
dashboard developed to track progress on key initiatives that reflect the
ambitions of the transformation. A digital transformation is a long-term
effort, and as a result, yardsticks that focus on the short term, like ROI, can
be misleading. Nontraditional metrics that evaluate digital adoption, such as
new registrations on digital channels or digital-engagement levels, are better
gauges of the progress of a digital transformation.
DELIVER—Execute
the transformation plan, allowing for ongoing adaptation and adjustment.
Decision
6: How to allocate funds rapidly and dynamically
The key lever CEOs and senior teams have
to drive a digital transformation is resource allocation. This isn’t just about
making sure resources get to the right places, a decision CEOs already make as
part of their everyday work. With a digital transformation, the CEO needs to
decide what the allocation process should be and at what tempo it should
operate.
Our research shows that raising a
company’s Digital Quotient, or DQ®, requires targeted allocation of both
capital and operating expenditures. The
CEO and top team should act like venture capitalists by following a digital
initiative’s progress closely, pulling the plug for projects that lag
expectations, and investing more in those that do well.
This requires speeding up budgeting
processes, which at large companies tend to follow annual cycles. During a
digital transformation, budgeting should shift from annual to quarterly or even
monthly cycles.
Succeeding with a digital transformation
often requires cutting budgets for legacy operations. In the midst of its
transformation effort, a large bank realized that even after making massive
investments in digital, branches still accounted for 90 percent of its
operating expenses—and that 70 to 80 percent of the transactions done in
branches could be executed digitally. In response, they shifted almost all future
capital spending to digital, closed a number of branches, and launched a
program to migrate customers who relied on branches for routine services to
ATMs or web/mobile channels.
DE-RISK—Increase
the transformation’s prospects for success.
Decision
7: What to do when
More than 70 percent of transformation
programs fail. While
the decisions covered in this article go a long way toward improving the odds,
loss of momentum can undo even the best transformation efforts. To forestall
that possibility, CEOs should carefully decide how to sequence the
transformation for quick wins that yield revenue payoffs and reduce costs,
gains that can then be reinvested. One e-tailer, for example, unlocked $300
million in just five months by prioritizing initiatives with the fastest
payback. That turned into more than $800 million within a year, thanks to
momentum from the early windfall.
Effective sequencing requires clear
criteria to evaluate the potential payoff of various parts of the
transformation initiative. These should include a hard-nosed assessment of
projected benefits, the time needed to capture them, dependencies, investments
required, and impact on the overall transformation journey. Sequencing with an
eye toward cumulative effect is also necessary, so the business builds towards
a cohesive digital whole rather than a jumble of loosely affiliated programs,
which can undermine the ultimate benefits of scale.
Digital is the defining challenge for today’s generation
of CEOs. And the decisions they make will determine whether their businesses
thrive or fade.
By Peter Dahlström, Driek Desmet, and Marc Singer
http://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/the-seven-decisions-that-matter-in-a-digital-transformation?cid=reinventing-eml-alt-mip-mck-oth-1702
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