A CEO guide for
avoiding the ten traps that derail digital transformations
Transforming your business
has risks. Successful leaders know how to spot them and avoid them.
Business leaders are in a
high-stakes game. Many have
embarked on programs to reinvent their businesses. The rewards for success are
enormous, while the consequences of failure are drastic, even lethal.
They could do worse than look to a
quote from one of the most successful race-car drivers in history, Mario
Andretti: “If everything seems under control, you’re not going fast enough.”
While Andretti’s guidance might
seem unnerving at first, it is appropriate for leaders navigating the digital
world. No race—or transformation—is risk free, of course, but having the
courage to make decisions that push the limits of the organization is a
necessity.
A clear understanding of what
really matters to the success of a change program and what doesn’t, however,
can make all the difference. For this reason, we analyzed dozens of both successful
and less successful digital transformations to get at the root causes of where
they go wrong. This analysis has yielded ten important traps that businesses
frequently fall into during a digital transformation. Often overlooked or
misunderstood, these traps boil down to culture, discipline, and mind-set
issues. Here is what CEOs can do to overcome them and de-risk their programs so
that businesses can capture the full benefits of digital.
Ten traps of a digital transformation
1. Excessive caution
Paradoxical though it may sound, we
believe companies need to take more risk, not less. Many senior executives look
back on their transformation programs1and wish they’d been
bolder. In today’s environment, making incremental changes is like rearranging
the deck chairs on the Titanic.
Data tell the same story. Recent
McKinsey research reveals that the companies that do best follow bold and
disruptive strategies. They make big bets on new technologies and business
models, champion a test-and-learn culture where every failure is an opportunity
to improve, and launch change programs that transform their whole business.
But taking on more risk doesn’t
mean being more risky. Making reckless moves, ignoring common sense, and losing
sight of where the value is can undo bold initiatives.
2. Fear of the unknown
When information is in short
supply, people fall back on experience and gut feeling. Though there’s no such
thing as cast-iron certainty in a digital transformation, developing a
comprehensive fact base can do much to dispel people’s understandable fears.
The best companies start by
identifying where value is created and destroyed, and they don’t confine their
analysis to their own sector and competitors. This external analysis should be
matched with a deep and comprehensive internal assessment. That starts with a
thorough evaluation of a company’s assets—brands, capital, data, customers,
products, people—and capability gaps. The best companies then also develop an
objective picture of their digital quotient,4the elements of their
business that add the most value, and the structural disadvantages they face.
Dispelling the unknown extends as
well to painting a compelling picture for the entire business of what the
future could look like. Experimenting with hackathons and war gaming also helps
not only to develop innovative new models but also to make them more tangible,
so that leadership can align around them.
This extends to use of the overused
term “digital transformation,” which is often not well understood by leadership
or employees. Leaders can address this by thoroughly defining and explaining
what the digital transformation really means—for example,
improving customer experience to become the number-one service in the category
or radically improving productivity across the supply chain.
3. Lack of focus
Many companies have adopted a “let
a hundred flowers bloom” philosophy that encourages broad experimentation. Such
an approach generates excitement and learning, but it can also be
self-defeating if not carefully managed. Running too many competing initiatives
dissipates management focus and starves promising ideas of the resources they
need for a successful scale-up.
We have a rule of thumb that a
successful scaled-up digital initiative at a company with more than $5 billion
in revenues needs funding to the tune of $10 million to $30 million per year,
and a major digital transformation across multiple business units at a global company
might cost as much $100 million. To avoid spreading their efforts too thin,
smart digital leaders prune their portfolios regularly and ruthlessly. Subscale
investment is no way to compete against venture-fund-backed companies.
Focusing on the right kind of
initiatives is equally important. Too often, businesses pour resources into
programs that yield short-term gains but can’t be scaled, aren’t sustainable,
and don’t add value. To avoid this wasted energy, any digital transformation
should start with understanding customer needs and build out solutions that not
only address them but have the potential to generate the most impact.
4. Running out of money
Some digital transformations run
into difficulties because costs rocket while savings or revenue growth take
longer than expected. Leading companies start by targeting quick wins to unlock
value so that the effort funds itself, often within the first three months. In
fact, this approach can be so effective that the most successful companies
generate more savings or revenues than are needed to fund a transformation.
Banking these savings and revenues
can often happen using the tools and data already to hand coupled with a
willingness to do things differently. Take the three-person team that carried
out a microsegmentation of the customer base at a US telecom company. Their
effort improved the efficiency of the company’s targeting by more than 40
percent while halving its digital-marketing spend. Similarly, an online
retailer upped conversion rates by 35 percent simply by having one person
optimize page-loading times again and again until they shrank from 16 seconds
to six.
Often these opportunities can be
identified as early as a week into a project. Evaluating the customer decision
journey is a good place to start. In consumer sectors like banking and
telecoms, the joining and onboarding processes for new customers often offer
plenty of opportunities for significant improvement.
5. Lack of talent
Most companies embarking on digital
transformations underestimate how long it takes to build capabilities. They
know they need digital talent, but not what kind or how much. A digital
transformation at a large company can require as many as 150 full-time
employees in the first year. Hiring a chief digital officer5is a good start but is
not enough.
Any effective talent search should
begin with identifying the problems that need to be solved. This helps clarify
the skill sets you need. After a preliminary analysis, for example, one company
determined that it needed 11 people with specific skill sets—“leaders” and
“doers”—to complete a core project as part of a transformation. It found the
right people at a leading tech company and paid a 100 percent premium to hire
them. Later in the transformation, the next 50 people came at just a 20 percent
premium because they were eager to work with the first hires. In less than nine
months, the team generated $1.4 billion in incremental annualized revenues, a
massive payoff for what had originally seemed a disproportionate investment.
Creating a start-up-like working
environment with informal spaces where people can gather and share ideas can
help attract the right talent. Developing a mechanism for integrating these
external hires is also crucial. We’ve seen some large companies hire lots of
digital talent, put them in a start-up environment, and then more or less
forget about them. Left to their own devices, new people will start to work on
their stuff, not yours.
6. Lack of discipline
Agility and speed are second nature
to a digital organization, but energy can turn to chaos if it isn’t channeled
purposefully. Leaders need to be systematic about identifying and capturing
business value, which begins with creating transparency into, and useful
metrics to track, the progress of digital initiatives.
Many companies focus on
output-based KPIs such as EBITDA growth, digital revenues as a percentage of
total revenues, or reduction in capex. But such broad metrics don’t isolate the
factors that contribute to a given result. It’s more productive to develop a
set of simple input metrics tracking elements such as SEO conversion and app
traffic, while making it clear who owns each item and is accountable for the
result.
Another way to inject discipline is
to invest like a venture-capital firm. Hold frequent check-ins with explicit
expectations and clear governance; don’t release the next tranche of finance
until the project reaches milestones or meets KPIs; and show no mercy in
killing off underperforming efforts. The best companies ensure that simple
governance, escalation, and response procedures are in place, as well as
mechanisms to allow course correction when experiments miss the mark (which
many of them inevitably do).
Discipline should not be confused
with rigidity. Having a flexible resourcing model to move people and funds, for
example, to promising developments and address key issues quickly is necessary.
7. Failure to learn
A surefire way to sink a
transformation is to stop learning. Successful companies reward experimentation
because learning from mistakes helps a company get it right the next time,
which in turn fosters more creativity. A review of teams at Google found that
when employees felt they could take risks without being shamed or criticized
for failure, they did better work.
Effective learning, however,
doesn’t just happen on its own. Companies need to invest in systems to capture
lessons and learn from them. Amazon has invested in systems designed to make
learning as transparent as possible, with dashboards showing what tests are
running, who is doing them, and how customers are responding. The
best-performing and longest-running tests are crowned “King of the Hill.”
Where tech is concerned, some
companies are keeping tested and approved code in a software-development
repository like GitHub, which enables later developers to learn from others,
capitalize on their successes, and put code into new solutions without further
testing.
Organizations that embrace learning
typically develop inexpensive prototypes, test them with customers, and
repeatedly refine them until they reach a minimum viable product (MVP). They
seek feedback on new features from small groups of customers through simple
surveys or by gauging their responses to specific elements such as the wording
or layout of a web page. One business that used to have conversion rates of 22
percent has now hit 29 percent—yielding growth of 5 percent—through this kind
of test-and-learn process.
8. Change fatigue
Companies can often summon the
resources and energy to pull off a few experiments with new approaches. But
sustaining the momentum of a major change effort against the gravitational pull
of the legacy organization7is a challenge of a
different order. No transformation is immune to change fatigue, but certain
steps can help stave it off.
Teams can become overwhelmed by the
sheer scale and complexity of the change. Effective leaders, therefore, design
small projects with frequent milestones so that teams feel a sense of
accomplishment. They also focus on keeping things simple, for example by
limiting the number of KPIs. One consumer business chose three: amount and
source of traffic to digital assets, quality of traffic, and conversion rates.
Business leaders can “grease the
skids” of the process by sequencing tasks thoughtfully to build on one another. Some businesses, for example,
develop “horizontal” components such as business-process management layers or
central administration platforms that can be shared across multiple initiatives
to accelerate future projects.
Leaders should also address
turnover in their senior ranks. This effect undermines continuity and leads to
cynicism among workers on the ground. While senior-level turnover is a fact of
life for most businesses, companies have managed to create continuity in their
change programs by recruiting a dozen or so influential middle managers as
evangelists for change. By elevating their profiles in the business, giving
them real responsibilities, such as leading agile teams, and rewarding them
generously for their efforts, leaders can build continuity at the level of the
business where the work gets done.
9. Going it alone
If the old world was about keeping
things proprietary and closed off, the new world is about engaging with an
ecosystem of partners and vendors. This approach can help accelerate access to
markets, talent, capabilities, and technologies. Agile businesses build digital
capacity at speed by using existing resources, such as open-source software,
that can be customized to their needs. Working thoughtfully with vendors or
partners to access new capabilities can jumpstart activity, and help businesses
get smart quickly about how to “do digital.”
In this new world of ecosystems,9success relies on having a detailed understanding of
the capabilities and advantages you already have and the ones you need.
Investing in a strategy around APIs (the links that allow disparate systems to
“talk” to each other)10is crucial so that businesses develop the means to
integrate with many different partners, vendors, and platforms. Leading
companies are also building out ecosystem relationship-management capabilities,
from negotiating teams who track potential partners to people dedicated to
managing partner and developer communities.
10 . Going too slowly
However quickly you think you are
going, chances are it isn’t fast enough. Speed is of the essence when it comes
to reacting to market changes and capturing revenue opportunities before
competitors do.
One way to gain speed is to
automate time-consuming processes and tasks. For instance, adopting
“test-driven development”—writing automated tests for code before writing the
code itself—can greatly accelerate development. One international hotel company
consolidated its sales and catering systems by moving to a single
version-control repository, integrating code twice a day, and insisting that
developers write automated tests for new changes in their code. As a result,
the company reduced its time to market with new software by 25 percent.
With speed in mind, a team of
developers at another company adopted a collaborative tool to track performance
across sales, apps, and service. Every ten minutes the tool spits out new
metrics—sales, cash or credit, numbers engaged, size of basket—and the team can
see at a glance how the system is performing. An alert channel enables project
leaders to identify whether an issue is new or known, big or small, so that
they can plan how best to deal with it. The focus is on reacting quickly rather
than making sure everything is “perfect.”
The most effective businesses
ingrain speed by making agile a way of life. They use short development cycles
to address specific needs, try out rough-and-ready fixes repeatedly with
customers, and produce “good enough” solutions. In marketing, for example,
agile organizations can test multiple new ideas and run hundreds of campaigns
simultaneously and get ideas into the field in days rather than weeks or
months.
To build real value, business leaders
need to take risks. But those who succeed will be the ones who understand how
to manage the risks that matter and avoid the traps that can scuttle a
transformation—all while pushing their organizations to the limit.
By Arun Arora, Peter Dahlstrom, Pierce Groover, and Florian Wunderlich
November 2017
November 2017
https://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/a-ceo-guide-for-avoiding-the-ten-traps-that-derail-digital-transformations?cid=other-eml-alt-mip-mck-oth-1712
No comments:
Post a Comment