Culture for a digital age
Risk
aversion, weak customer focus, and siloed mind-sets have long bedeviled
organizations. In a digital world, solving these cultural problems is no longer
optional.
Shortcomings in organizational culture are one of the main barriers to company success in
the digital age. That is a central finding from McKinsey’s recent survey of
global executives, which highlighted three digital-culture deficiencies:
functional and departmental silos, a fear of taking risks, and difficulty
forming and acting on a single view of the customer.
Each obstacle is a
long-standing difficulty that has become more costly in the digital age. When risk aversion holds sway, underinvestment in strategic opportunities and
sluggish responses to quick-changing customer needs and market dynamics can be
the result. When a unified understanding of customers is lacking, companies
struggle to mobilize employees around integrated touchpoints, journeys, and
consistent experiences, while often failing to discern where to best place
their bets as digital broadens customer choice and the actions companies can
take in response. And when silos characterize the organization, responses to
rapidly evolving customer needs are often too narrow, with key signals missed
or acted upon too slowly, simply because they were seen by the wrong part of
the company.
Can fixes to culture be
made directly? Or does cultural change emerge as a matter of course as
executives work to update strategy or improve processes?1In our experience,
executives who wait for organizational cultures to change organically will move
too slowly as digital penetration grows, blurs the boundaries between sectors, and boosts competitive intensity. Our research, which
shows that cultural obstacles correlate clearly with negative economic
performance (Exhibit 2), supports this view. So do the experiences of leading
players such as BBVA, GE, and Nordstrom, which have shown what it looks like
when companies support their digital strategies and investments with deliberate
efforts to make their cultures more responsive to customers, more willing to
take risks, and better connected across functions.
Executives must be
proactive in shaping and measuring culture, approaching it with the same rigor
and discipline with which they tackle operational transformations. This
includes changing structural and tactical elements in an organization that run
counter to the culture change they are trying to achieve. The critical cultural
intervention points identified by respondents to our 2016 digital survey—risk
aversion, customer focus, and silos—are a valuable road map for leaders seeking
to persevere in reshaping their organization’s culture. The remainder of this
article discusses each of these challenges in turn, spelling out a focused set
of reinforcing practices to jump-start change.
Calculated risks
Too often, management
writers talk about risk in broad-brush terms, suggesting that if executives
simply encourage experimentation and don’t punish failure, everything will take
care of itself. But risk and failure profoundly challenge us as human beings.
As Ed Catmull of Pixar said in a 2016 McKinsey Quarterly interview, “One of the things about failure
is that it’s asymmetrical with respect to time. When you look back and see
failure, you say, ‘It made me what I am!’ But looking forward, you think, ‘I
don’t know what is going to happen and I don’t want to fail.’ The difficulty is
that when you’re running an experiment, it’s forward looking. We have to try
extra hard to make it safe to fail.”
The balancing act
Catmull described applies to companies, perhaps even more than to individuals.
Capital markets have typically been averse to investments that are hard to
understand, that underperform, or that take a long time to reach fruition. And
the digital era has complicated matters: On the one hand, willingness to
experiment, adapt, and to invest in new, potentially risky areas has become
critically important. On the other, taking risks has become more frightening
because transparency is greater, competitive advantage is less durable, and the
cost of failure is high, given the prevalence of winner-take-all dynamics.
Leaders hoping to
strike the right balance have two critical priorities that are mutually reinforcing
at a time when fast-follower strategies have become less safe. One is to embed
a mind-set of risk taking and innovation through all ranks of the enterprise.
The second is for executives themselves to act boldly once they have decided on
a specific digital play—which may well require changing mind-sets about risk,
and inspiring key executives and boards to think more like venture capitalists.
An appetite for risk
Building a culture
where people feel comfortable trying things that might fail starts with senior
leaders’ attitudes and role modeling. They must break the status quo of
hierarchical decision making, overcome a focus on optimizing rather than
innovating, and celebrate learning from failure. It helps considerably when
executives make it clear through actions that they trust the front lines to
make meaningful decisions. ING and several other
companies have tackled this imperative head-on, providing agile coaches to help
management learn how to get out of the way after setting overall direction for
objectives, budgets, and timing.
However, delegating
authority only works if the employees have the skills, mind-sets, and
information access to make good on it. Outside hires from start-ups or
established digital natives can help inject disruptive thinking that is a
source of innovative energy and empowerment. Starbucks, for example, has
launched a digital-ventures team, hiring vice presidents from Google,
Microsoft, and Razorfish to help drive outside thinking.
Also empowering for
frontline workers (and risk dampening for organizations) is information itself.
For example, equipping call-center employees with real-time analysis on account
profiles, or data on usage and profitability, helps them take small-scale risks
as they modify offers and adjust targeting in real time. In the retail and
hospitality industries, companies are giving frontline employees both the
information (such as segment and purchase history) and the decision authority
they need to resolve customer issues on the spot, without having to escalate to
management. Such information helps connect the front line to the company’s
strategic vision, which provides a compass for decision making on things such
as what sort of discount or incentive to offer in resolving a conflict or what
“next product to buy” to tee up. Benefits include improvements in the customer
experiences (due to faster resolution) and greater consistency across the business
in spotting and resolving problems. This lowers cost at the same time it
improves customer satisfaction. In addition, frontline risk taking enables more
rapid innovation by speeding up iterations and decision making to support
nimbler, test-and-learn approaches. These same dynamics prevail in
manufacturing, with new algorithms enabling predictive maintenance that no
longer requires sign-off from higher-level managers.
Regardless of industry,
the critical question for executives concerned with their organization’s risk
appetite is whether they are trusting their employees, at all levels, to make
big enough bets without subjecting them to red tape. Many CFOs have decided to
shift all but the largest investment decisions into the business units to speed
up the process. The CFO at one global 500 consumer-goods company now signs off
only on expenditures above $250,000. Until recently, any spend decision over
$1,000 required the CFO’s approval.
Making bold bets
At the same time they
are letting go of some decisions, senior leaders also are responsible for
driving bold, decisive actions that enable the business to pivot rapidly,
sometimes at very large scale. Such moves require risk taking, including
aggressive goal setting and nimble resource reallocation.
A culture of digital
aspirations.
Goals should reflect
the pace of disruption in a company’s industry. The New York Times set
the aspiration to double its digital revenues within five years, enabled in
part by the launch of T Brand Studio as a new business model. In the face of
Amazon, Nordstrom committed more than $1.4 billion in technology capital
investments to enable rich cross-channel experiences. The Irish bank AIB
decided customers should be able to open an account in under ten minutes (90
percent faster than the norm prevailing at the time). AIB invested to achieve
this goal and saw a 25 percent lift in accounts opened, along with a 20 percent
drop in costs. In many industries facing digital disruption, this is the pace
and scale at which executives need to be willing to play.
Embracing resource
reallocation.
Nimble resource
reallocation is typically needed to back up such goals. In many incumbents,
though, M&A and capital-expenditure decisions are too slow, with too many
roadblocks in the way. They need to be retooled to take on more of a
venture-capitalist approach to rapid sizing, testing, investing, and
disinvesting. The top teams at a large global financial-services player and an
IT-services company have been reevaluating all of their businesses with a five-
to ten-year time horizon, determining which ones they will need to exit, where
they need to invest, and where they can stay the course. Such moves tax the
risk capacity of executives; but when the moves are made, they also shake
things up and move the needle on a company’s risk culture.
The financial markets
are double-edged swords when it comes to bold moves. While they remain
preoccupied with short-term earnings, they are also cognizant of cautionary
tales such as Blockbuster’s 2010 bankruptcy, just three years after the launch
of Netflix’s streaming-video business. Companies like GE have nonetheless
plunged ahead with long-term, digitally oriented strategies. In aggressively
shedding some of its traditional business units, investing significantly to
build out its Predix platform, and launching GE Digital, its first new business
unit in 75 years, with more than $1 billion invested in 2016, GE’s top team has
embraced disciplined risk taking while building for the future.
Customers, customers, customers
Although companies have
long declared their intention to get close to their customers, the digital age
is forcing them to actually do it, as well as providing them with better means
to do so. Accustomed to best-in-class user experiences both on- and off-line
with companies such as Amazon and Apple, customers increasingly expect
companies to respond swiftly to inquiries, to customize products and services
seamlessly, and to provide easy access to the information customers need, when
they need it.
A customer-centric
organizational culture, in other words, is more than merely a good thing—it’s
becoming a matter of survival. The good news is that getting closer to your
customers can help reduce the risk of experimentation (as customers help
cocreate products through open innovation) and support fast-paced change.
Rather than having to guess what’s working in a given product or service before
launching it—and then waiting to see if your guess is right after the launch
takes place—companies can now make adjustments nearly real-time by developing
product and service features with direct input from end users. This is already
taking place in products from Legos to aircraft engines. The process not only
helps derisk product development, it tightens the relationship between
companies and their customers, often providing valuable proprietary data and
insights about how customers think about and use the products or services being
created.
Data and tools
Underlying the new
customer-centricity are diverse tools and data. Connecting the right data to
the right decisions can help build a common understanding of customer needs
into an organizational culture, fostering a virtuous cycle that reinforces
customer-centricity. Amazon’s ability to use customers’ previous purchases to offer
them additional items in which they might be interested is a significant
element in its success. The virtuous circle they’ve created includes customer
reviews (to reassure and reinforce other shoppers), along with the algorithms
that share “what customers who looked at this item also bought.” Of course,
Amazon has also invested heavily in automated warehouses and a sophisticated
distribution model. But even those were tied to the customer desire to receive
merchandise faster.
A unifying force
At its best,
customer-centricity extends far beyond marketing and product design to become a
unifying cultural element that drives all core decisions across all areas of
the business. That includes operations, where in many organizations it’s often
the furthest from view, and strategy, which must be regularly refreshed if it
is to serve as a reliable guide in today’s rapidly changing environment.
Customer-centric cultures anticipate emerging patterns in the behavior of
customers and tailor relevant interactions with them by dynamically integrating
structured data, such as demographics and purchase history, with unstructured
data, such as social media and voice analytics.
The insurance company
Progressive illustrates the unifying role played by strong customer focus.
Progressive’s ability to persuade customers to install the company’s Snapshot
device to monitor driving behavior is revolutionizing the insurance space, and
not just as a marketing tool. Snapshot helps attract the good drivers who are
the most profitable customers, since those individuals are the ones most likely
to be attracted by the offer of better discounts based on driving behavior. It
also gives the company’s underwriters actual data in place of models and
guesswork. This new technology is one that Progressive can monetize into a
business unit to serve other insurers as well.
Busting silos
Some observers might
consider organizational silos—so named for parallel parts of the org chart that
don’t intersect—a structural issue rather than a cultural one. But silos are
more than just lines and boxes. The narrow, parochial mentality of workers who
hesitate to share information or collaborate across functions and departments
can be corrosive to organizational culture.
Silos are a perennial
problem that have become more costly because, in the words of Cognizant CEO
Francisco D’Souza, “the interdisciplinary requirement of digital continues to
grow. The possibilities created by combining data science, design, and human
science underscore the importance both of working cross-functionally and of
driving customer-centricity into the everyday operations of the business. Many
organizations have yet to unlock that potential.”2The executives we
surveyed appeared to agree, ranking siloed thinking and behavior number one
among obstacles to a healthy digital culture.
How can you tell if
your own organization is too siloed? Discussions with CEOs who have led
old-line companies through successful digital transformations indicate two
primary symptoms: inadequate information, and insufficient accountability or
coordination on enterprise-wide initiatives.
Getting informed
Digital information
breakdowns echo the familiar story of the blind men and the elephant. When
employees lack insight into the broader context in which a business competes,
they are less likely to recognize the threat of disruption or digital
opportunity when they see it and to know when the rest of the organization
should be alerted. They can only interpret what they encounter through the lens
of their own narrow area of endeavor.
The corollary to this
is that every part of the organization reaches different conclusions about
their digital priorities, based on incomplete or simply different information.
This contributes to breaks in strategic and operating consistency that
consumers are fast to spot. There isn’t the luxury of time in today’s digital
world for each division to discover the same insight; a digital attacker or
more agile incumbent is likely to swoop in before the siloed organization even
knows it should be mounting a response. So the first imperative for companies
looking to break out of a siloed mentality is to inspire within employees a
common sense of the overall direction and purpose of the company. Data and
thoughtful management rotation often play a role.
Data-driven
transparency.
Data can help solve the
blind-men-and-the-elephant problem. A social-services company, for instance,
created a customer-engagement group to better understand how customers interact
with the company’s products and brands across silos—and where customers were
running into difficulty. Among other things, this required close examination of
how the company collected, analyzed, and distributed data across silos. The
team discovered, for example, that some customers were cancelling their
memberships because of the deluge of marketing outreaches they were receiving
from the company. To address this, the team combined customer databases and
propensity models across silos to create visibility and centralized access
rights with regard to who could reach out to members and when. Among other
achievements, this team:
·
created segment-specific
trainings that offered an integrated view of each segment’s suite of needs and
offerings that would meet them
·
drew on information
from different parts of the organization to give a more developed picture on
engagement, retention, and the total number of touches associated with various
segments and customers
·
showed the net effect
of the entire organization’s activities through the customer’s eyes
·
embedded this
information into key processes to ensure information was accessible in a
cross-disciplinary way—breaking siloed viewpoints and narrow understandings of
the overall business model
Management rotation. Another way to achieve better
alignment on the company’s direction is to rotate executives between siloed
functions and business units. At the luxury retailer Nordstrom, for example,
two key executives exchanged roles in 2014: Erik Nordstrom, formerly president
of the company’s brick-and-mortar stores, became president of Nordstrom Direct,
the company’s online store, while Jamie Nordstrom, formerly president of
Nordstrom Direct, became president of the brick-and-mortar stores. This type of
rotation can be done at different levels in an organization and helps create a
more consistent understanding between different business units regarding the
company’s aspirations and capabilities, as well as helping create informal
networks as employees build relationships in different departments.
Instilling accountability
The second distinctive
symptom of a siloed culture is the tendency for employees to believe a given
problem or issue is someone else’s responsibility, not their own. Companies can
counter this by institutionalizing mechanisms to help support cross-functional
collaboration through flexibly deployed teams. That was the case at ING, which,
because it identifies more as a technology company than a financial-services
company, has turned to tech firms for inspiration, not banks. Spotify, in
particular, has provided a much-talked-about model of multidisciplinary teams,
or squads, made up of a mix of employees from diverse functions, including
marketers, engineers, product developers, and commercial specialists. All are
united by a shared view of the customer and a common definition of success.
These squads roll up into bigger groups called tribes, which focus on
end-to-end business outcomes, forcing a broader picture on all team members.
The team members are also held mutually accountable for the outcome,
eliminating the “not my job” mind-set that so many other organizations find
themselves trapped in. While this model works best in IT functions, it is
slowly making its way into other areas of the business. Key elements of the
model (such as end-to-end outcome ownership) are also being mapped into more
traditional teams to try to bring at least pieces of this mind-set into more
traditional companies.
Start by finding
mechanisms, whether digital, structural, or process, that help build a shared
understanding of business priorities and why they matter. Change happens fast
and from unpredictable places, and the more context you give your employees,
the better they will be able to make the right decisions when it does. To
achieve this, organizations must remove the barriers that keep people from
collaborating, and build new mechanisms for cutting through (or eliminating
altogether) the red tape and bureaucracy that many incumbents have built up
over time.
Cultural changes within
corporate institutions will always be slower and more complex than the
technological changes that necessitate them. That makes it even more critical
for executives to take a proactive stance on culture. Leaders won’t achieve the
speed and agility they need unless they build organizational cultures that
perform well across functions and business units, embrace risk, and focus
obsessively on customers.
By Julie Goran, Laura LaBerge, and Ramesh
Srinivasan McKinsey Quarterly July
2017
https://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/culture-for-a-digital-age?cid=other-eml-ttn-mkq-mck-oth-1712
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