DIGITAL SPECIAL .....Culture for a digital age PART I

DIGITAL SPECIAL Culture for a digital age PART I

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? In 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, 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.

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