Accelerating the shift to a next-generation operating model
Digital-native
companies have captured value by mastering the use of next-generation operating
models. Now established companies must race to catch up.
In the past 30 years, an
array of digitally driven companies have captured enormous value at great cost
to established businesses. Observers often attribute the success of these
challengers to their innovative use and development of technologies, business
models, and customer experiences. But this view overlooks an essential feature
of many digital-native businesses: their next-generation operating models. The next-generation operating model is defined by a
continual effort to improve end-to-end customer journeys and business processes
by applying advanced technologies and sophisticated operational methods in an
integrated manner. The combination typically results in, or is built around, a
business model that is new to the industry and allows the company to move,
adapt, and scale quickly.
A next-generation
operating model provides traditional companies with the agility and customer
focus they need to fend off challenges from digital natives, as companies such
as ING have demonstrated.
When making the transition to a next-generation operating model, speed is
essential. McKinsey research shows that the digital first movers and fast
followers in a market seize a decisive share of the available value, usually at the expense of
slower-footed incumbents. And incumbents have only a narrow window of opportunity to get ahead of their competitors: once industries
near the 40 percent digitization mark, digital attackers have typically secured
large market shares.
For an established
company, the shift to a next-generation operating modelstarts with a clear commitment from
leadership and other enabling moves, such as the formation of a full-time,
cross-functional team to manage the transition and the allocation of funds to
pay for the effort. Those elements enable the shift to take place, but they
alone won’t speed it up. In our experience, an incumbent company accelerates
its implementation of the new operating model by enabling great customer
journeys through three actions that need to be carried out at the same time:
continually improving end-to-end customer journeys with a clean-sheet approach,
integrating technology with operations by testing and learning, and
establishing agile ways of working through teams focused on specific journeys.
An enterprise-wide
focus on customer journeys is crucial because it allows the company to reorient
itself toward customer needs, which can be distinctive sources of value and lie
at the core of the operating model. And pursuing the three activities at once
is important because companies can realize the full value of great customer
journeys only if all three capabilities are firing. In this article, we offer a
closer look at these three actions and how executing all three together can
help incumbents to stay in front of digital natives.
Continually improving end-to-end customer journeys with a
clean-sheet approach
According to McKinsey research, the quality of the customer journeys that a company
provides is much more closely correlated with business outcomes, such as churn,
revenue, and repeat purchases, than the quality of individual customer
touchpoints. Companies that provide the best journeys—entire sets of
interactions that customers have when making purchases or receiving services from
a company—also have stronger competitive advantages than those providing the
best touchpoints (individual interactions). Since digital-native companies have
an inherent focus on customer journeys, optimizing end-to-end customer journeys
is a core priority for incumbents that wish to speed up the transition to
next-generation operating models.
The first step a
company takes toward optimizing customer journeys is streamlining its product
and service portfolio. It’s not uncommon for this portfolio to expand over
time, as a company identifies new opportunities and develops offerings to
address them. But adding to lineups of products and services makes customer
journeys increasingly complicated, and expensive, to support. It can also be
off-putting to customers, who have to make sense of all the products and
services that are on the company’s menu. Shortening that menu will make
customer journeys simpler, and therefore easier to optimize.
In one case, a large
telecom operator made its portfolio simpler for household customers by changing
its digital ordering journey. The company’s website originally showed
prospective customers several Internet-service packages, which they had to
compare and choose from. Now the website asks each prospective customer a short
series of questions about his or her needs, then offers just one service
package. Streamlining the online-ordering journey doubled the conversion rate
for online sales and led to a 50 percent increase in the website’s share of
sales.
Next, companies begin
evaluating and pursuing opportunities to improve their customer journeys. The
conventional approach is to determine which journeys matter most for value creation, identify the worst pain points
through surveys and interviews, estimate the costs and effects of fixing those
pain points, and activate a new journey only when all the major pain points
have been corrected. While this approach is often effective, it is somewhat
slower and more deliberate than is appropriate for a rapid transition to a
next-generation operating model.
A different approach
companies are taking is to “clean sheet” the future experience—to come up with
a forward-looking concept that is unbound from all existing processes and
systems—and rapidly test it to determine whether it works well. With this
approach, companies base their new experience designs on qualitative customer
research. In a matter of days, they develop rough prototypes to try out with
customers. Then they create digital prototypes, show them to customers, and
make several rounds of refinements before launching the prototypes for live
use. Many technology companies are comfortable with all the testing and
learning that the clean-sheet approach involves, but the approach is different
from traditional development methods.
The large telecom
operator mentioned above used the clean-sheet approach to overhaul its customer
journeys. It started by talking with customers about the most frustrating parts
of their experiences dealing with the company. Next, it staged hackathons to
create fresh prototypes for its customer journeys, which it showed to customers
and adjusted according to their feedback. The company then developed digital
prototypes based on its analog models, which it rolled out for testing with
customers. Several cycles of revisions and tests brought the company to the
point where it was ready to introduce the customer journeys for real-world use.
But the testing and fine-tuning didn’t stop there: the company continued
refining its customer journeys, putting out new versions on a weekly basis. It
also modified its other processes to support the new customer journeys. The
company was able to test the new journeys and prove their value in about five
weeks—far less time than the normal IT release cycle of three to six months.
The telecom operator’s
approach to improving its customer journeys illustrates another important
principle of the next-generation operating model, which is to start fixing pain
points as soon as they’ve been identified. The next-generation operating model
involves devising solutions quickly, introducing them as soon as they are
market ready—and promoting the accomplishments internally, to show that the
company has begun to move at a faster pace. The work of optimizing customer
journeys then continues as an ongoing endeavor: correcting known problems,
reevaluating journeys on a regular basis, and refocusing on new priorities as
customer demands change. Other companies set up war rooms to analyze journeys
and pursue continual improvements.
Integrating technology with operations by testing and
learning
In a next-generation
model, companies use advanced technologies to improve their behind-the-scenes
business operations, for this generates cost savings that fund investments in
better customer experiences. As they do when optimizing customer journeys,
companies quicken the transition to a next-generation operating model by
improving a few segments of their most important processes at a time, rather
than tackling each process as a whole. This kind of fast-paced, progressive
approach enables a company to achieve performance improvements much sooner than
it would by remaking an entire process before putting it into action. In some
cases, companies can attain substantial improvements within a matter of weeks.
Brief, rapid change
cycles are particularly helpful when considering the use of new technologies.
Given the speed at which digital tools are advancing, it is seldom practical
for a business to spend weeks evaluating its needs, comparing solutions, and
creating a multiyear technology road map. Instead, next-generation companies
find it more practical to select and quickly try out tools that could help
resolve serious performance problems. Fortunately, the low cost and
straightforward integration pathways for new technologies allow companies to
stage and learn from technology experiments using small amounts of money and
modest commitments of time from an IT function.
At the telecom operator
we described earlier, sales agents had to enter some details of new customer
orders into two IT systems because the systems had not been integrated.
Switching between the systems and reentering order details prolonged the
ordering process, which frequently caused prospective customers to abandon
their orders before completion. And when sales agents tried to compensate by
working faster, they only made more errors. The company attacked these problems
by redesigning and automating their order-entry process. Easy-to-use robotics
applications allowed the company to automate the work of entering the same
information into its two systems, thus enabling sales agents to complete
customer orders in just 7 to 15 minutes, far less than the 30 to 45 minutes
that the ordering process formerly took.
The performance
improvement isn’t the only significant aspect of this change; the manner in
which it was attained is just as noteworthy. Installing the robotics
applications was a small enough job that the company’s IT department probably
would have put it on the back burner. But since the applications were
straightforward to set up, the sales department was able to do that on its own,
and so complete the installation and capture its benefits much earlier.
Managers use two simple
criteria to quickly assess potential changes to business processes. The first
criterion is customer benefit: companies favor changes that have clear
potential to make customers’ experiences better. (The link between customer
experiences and business processes that support them is a further reason why
companies need to work on both at once.) The second criterion is the potential
benefit for the business. Managers and frontline workers typically know which activities
within processes are especially slow, costly, or error prone and have
performance data to prove it. In a next-generation operating model, companies
prioritize changes according to the knowledge they already have, rather than
inducing delays by preparing new assessments. Fixing the most troublesome
activities quickly will produce noteworthy performance gains of the kind that
generate savings and help validate a progressive approach to improvement.
A progressive approach
to enhancing operations requires boldness and speed. Boldness means accepting that not every new process or
technology that is put in place will immediately prove as valuable as expected.
Speed means making adjustments quickly to produce greater performance gains.
Without boldness and speed, companies won’t be able to validate and refine
changes to their operations at the rate required to accelerate their shift to a
next-generation model. Few traditional companies, however, are set up to carry
out bold, rapid approaches to enhancing operations. Most will need to organize
their working groups differently and bring in The new tech talent you need to succeed in digital, such as experience designers and
engineers, full-stack architects, and product owners.
Establishing agile ways of working through teams focused
on specific journeys
With its emphasis on
continually improving journeys, the next-generation operating model calls for
organizing teams and work groups according to different principles from those
followed by most established businesses. The typical established company
organizes people by function, line of business, or geographic region. Such
structures slow the transition to a more digital way of working, which requires
collaboration across different working groups. Companies can accelerate their
shift to a next-generation operating model by assigning their employees to
customer journeys or internal journeys (end-to-end processes, such as those
involved in talent management, for which the customers are inside the
company).
While just a few
companies have reorganized themselves in this way, their experiences suggest
that the benefits can be significant. ING, the Dutch financial services giant,
embarked on an extensive transformation after its leaders recognized the need to focus on
customer journeys rather than products. It eliminated its hierarchical
structure and installed a more flexible one in which many autonomous working
groups, known as squads, are grouped into 13 functional tribes that share
missions. Each squad is formed to achieve a client-related goal, with all
members located in the same place to facilitate collaboration, and disbanded
once the goal is achieved. ING’s new structure has allowed the company to
shorten the time-to-market for new products, increase employee engagement, and
boost productivity. It now stands out as a leading practitioner of the agile
model. Other banks and technology-enabled service businesses have followed
ING’s lead, adopting some or all of its approaches to become more agile.
To speed their
transition to a next-generation operating model, companies start by forming
teams responsible for identifying, prioritizing, and making improvements to a
few of their most important journeys. Each semiautonomous journey team
comprises representatives from the business functions that are directly
involved in a journey, so they can highlight pain points and devise ways of
addressing them. Teams also include user-experience designers, software
developers, and other IT specialists who can help come up with digital features
that support new customer or operating requirements. Finally, each journey team
is headed by a journey leader who has a diverse skill set: someone who is equally capable of
understanding business objectives, overseeing technology-development efforts,
and directing the day-to-day activities associated with a customer or internal
journey.
One large insurance
company initiated its transition to a next-generation operating model with a
pilot effort focused on multiple journeys. The engine for its reorganization
was a cross-functional transformation labresponsible for studying customer
journeys, with special attention given to customer needs and pain points, and
for locating inefficiencies within its internal journeys. The lab then
redesigned customer and internal journeys and conceived digital products to
support the new journeys. Cross-functional teams of about 15 employees were
formed to launch the journeys and participate in the creation of minimum viable
software products that were improved in subsequent rounds of testing and development.
Two months into its pilot of the next-generation operating model, the company
has seen productivity gains of 30 to 50 percent, higher levels of employee
engagement, a 50 percent reduction in the time required to bring new customers
on board, and substantial cost savings.
A major factor enabling
the success of the insurance company’s operating-model pilot was its move
toward agile methods for software development, by which IT specialists use short, high-speed cycles
of prototyping and real-world deployment to test and refine software. Agile
methods are all but essential, because they are compatible with bold experimentation
and rapid, continuous improvement. That said, many companies have IT systems
that aren’t suited to agile development. At such companies, a two-speed IT architecture enables agile development while preserving the
stability of the legacy systems. A two-speed IT architecture puts software
which needs to be updated frequently on different platforms from legacy
systems, so that software can be modified without throwing legacy systems into
flux.
Next-generation
operating models provide traditional companies with big improvements in cost,
effectiveness, and customer experience that help them compete with
digital-native competitors. Speed is of the essence, for first and second
movers capture most of the value. To race ahead of the pack, traditional
companies must take action in three areas: continually improving end-to-end
customer journeys with a clean-sheet approach, integrating technology with
operations by testing and learning, and establishing agile ways of working
through journey-focused teams.
Working on all three
areas at once, rather than one or two at a time, is crucial because each area
supports the other two. To optimize customer journeys, companies must make
their operations more efficient and responsive. And the ability to make
improvements quickly requires integrated teams that understand all facets of
customer journeys and business operations and are comfortable pursuing
incremental gains on a continual basis. By modifying their customer journeys,
business operations, and working methods simultaneously, incumbents move
quickly toward the next-generation operating model that will enable them to
withstand disruption and expand their shares of the value in their markets.
By Albert Bollard, Ewan Duncan, Petko
Rangelov, and Marta Rohr December 2017
https://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/accelerating-the-shift-to-a-next-generation-operating-model?cid=other-eml-alt-mip-mck-oth-1801&hlkid=0d6fafaa98a144408ce51e993cb1a8c2&hctky=1627601&hdpid=fa875a66-38be-4c27-a523-ca188a9c7110
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