During the last few years, digital transformation” is undoubtedly a trending topic in any business conversation. A simple Google search confirms its relevance. At the time of writing this article, when searching for “Digital Transformation,” Google delivered a total of 4,130,000 results. The problem is that the transformation that everyone is talking about is not happening. Gartner already posed the question at its Orlando symposium: “Be efficient or transform?” Harvard Business Review published Gino Chirio’s global study in its June, 2018 issue, “The 6 Ways to Grow a Company,” on the largest companies’ expenses and found that only 5% of the budget is dedicated to digital transformation — to the point where the disruption is found- while 60% of the budget is dedicated to efficiency in current markets, in other words, transformation of operational models.
If filling the company with Pos-It and Design Thinking to generate new products for existing customers and markets, hire a few Agile Coaches and use SAFE to climb, is not enough to transform the company, what is needed?
Digital transformation must have 3 dimensions:
- Operational transformation
- Organizational transformation
- Business model transformation
This is the breaking point for most organizations around the world, and particularly in Peru. It is not an easy change. Agile methodologies are delivering good results by creating efficient internal processes. The advantages are indisputable, such as the Time to Market reduction and improvement of user satisfaction, among others. The Harvard Business Review article, “Is your company ready for the digital future?” states that 23% of global companies are facing this transformation in internal processes and are obtaining a 16% higher income than the sector average, so the impact in the lower part of the balance sheet is bigger than it shows. This is the result of being equipped with modular and agile IT capabilities, considering the data as a strategic asset and having digital services. The nuance is they are competing more efficiently in the same market with the same products (or the same evolved products). This evolution is necessary, but not sufficient for digital transformation, and it also has its shadows. Currently, the perception of the market is that the advantages are evident, but an increase in personnel costs now exists. Scale economies are lost that were available in the traditional IT sourcing model. Two important points to consider are the new methodologies are being measured with parameters adapted to other forms of work, and the hourly cost is measured but not the increase in added value in that same period of time, and new forms of work/technologies’ initial costs flatten over time.
The second dimension is the organizational transformation. Organizations must move towards “flat” models, with fewer levels of hierarchies, approvals, etc. One of the biggest problems when implementing this change is they are using techniques and methodologies designed for collaborative environments where phrases such as “fail quickly, make mistakes early on, and learn quickly“ are constantly used while the corporate culture remains anchored in “if you make a mistake you will be punished, we bid it to the cheapest (not the most innovative), my job is to save costs, and it was cheaper before.” Since techniques and parameters of the 20th century are being used instead of being transformed into the agile forms of XXI, contracting services must be reviewed.
This is not only an organizational change, but also a cultural one. We must evolve towards leadership that arises from the recognition of the team instead of leadership based on the professional contract category.
Organizational change is a complex issue, but we must evolve the reticular organizational models that produced good results in the previous century. Without a doubt, this is also a key factor for success in this century.
Business Model Transformation
The third pillar of digital transformation and the most complex for innovation is the business model transformation. The same business model will be more efficient, but will not face digital transformation.
The twentieth century stands out in terms of globalization, and basically is the same manufacturing but with lower labor cost locations. Companies scale linearly. Singularity University has introduced an interesting concept, exponential companies, that define companies in contrast to linear growth of the last century, achieve exponential growth of the new century.
An example is Motorola’s initiative, IRIDIUM. Following traditional linear thinking, they proposed a system to measure vehicle traffic based on IoT that put sensors on sections of roads, traffic lights, satellites, etc. Motorola went bankrupt after spending $5 billion on the failed project. Waze, an exponential company, did the same but without the traditional way of thinking. Through the mobile app, they obtained in real time the information that Motorola spent $5 billion on. In 2013, Google acquired it for $1.1 million USD.
While this works well in digital companies, the real challenge is with large, established organizations that must be transformed. Unfortunately, neither current business models, current internal organizations, nor processes reach exponential growth.
If large corporation’s current business models are not transformed, Google, Amazon, Facebook or software that is currently being developed by a 20-year-old kid will be next. No barriers exist and a large investment in goods or technologies is lower: the largest retailer in the world has no inventories, the largest taxi agency does not have a single taxi, and the largest hotel chain has a single bed of hotel.
Large corporations are usually not as innovative as startups, and the corporate model of “intra-entrepreneurs” is not delivering the expected results. Rather the solution is creating an ecosystem of startups that nurture innovation for large companies.
Note: At the end of this article, Google delivered 5,760,000 results for digital transformation, 1,630,000 more references than when I started writing it!