Digital Transformation in Practice

Here you find some notes from the IMD course “Digital transformation in practice”. I’ll extend the article as I go through the course.

Initiating your digital transformation

Transformation objectives

Every transformation shall have a clear goal. How does a clear goal look like?

It must have some characteristics, that can be summarized with the acronym PRISM :

• Precise: they must be defined in a precise way. This implies setting timelines and goals.
• Realistic: they must be challenging but achieivable. Setting unacheiveable goals leads to low morale.
• Inclusive: the goal should be something undestandable by a broad audience.
• Succint: the goal shall be easy to remember. A bloated goal is not. Less is more.
• Measurable: It must be possible to clearly undestand if the goal has been reached or not, so it must be espressed in a measurable way.

The internal goal from Cisco is a very good example of PRISM in action. IT simply states:

40/40/2020

Which is short for:

40% of revenues from recurring sales

40% of revenues from software

by end of 2020

Aligning the top team

The digital transformation is a top down exercise that spans the whole company. Being top-down, strong alignment in the top team is required.

The top team must be aligned on the why, the what and the how. This is needed because resources have to be dedicated to the initiative. Without this alignement, the status quo gets in the roadmap and hinders transformation.

The alignement doesn’t happen by itself: it must be proactively managed.

To reach it, the top level team must work in a climate of psichological safety, where constructive disagreement is welcom.

The major obstacles to team aligment are broadly categorized in two areas:

Organizational obstacles

• weak leadership
• difference in perspectives (both historical or political)
• short term pressure
• lack of sense of ownership
• mis-aligned incetives

The so-called curses:

• Hippo effect (highest payed person opinion): when there’s someone who has a clear vision and know-how to drive digital transformation that beats on the drum, but nobody actually neither agrees or disagrees… there’s no alignement.
• Underlying assumptions: they have to be debased and exposed to lead to a constructive discussion.
• Averages: the tendency to reach consesus by making decisions that don’t displease anyone. An effective group should do the opposite: take extreme position to foster discussion.
• Undiscussable: topics that cannot be discussed. These are things that people think but don’t dare saying, things that people say but don’t mean, things that people are afraid to say because they have negative connotations and things that people do without realising it.

Building a sense of urgency

To drive the change, a company has to create a sense of urgency. The company must feel the need to change.

To create the sense of urgency, you must take an external point of view (outside-in). No change comes from looking just inside. The need for a change must be framed in a positive way: as a way to seize opportunities and not to avoid threats. You have to shift from burning platform to burning ambitions.

A company should look at both black swans (negative, unpredictable events. E.g.: covid 19) and white rhinos (future negative events, quite likely e.g: climate change) to reflect on it’s ability to survive or even thrive in front of such events.

Executives have to be put outside their comfort zone to make them feel the need from change.

The company shall also give clear signals of changes of directions, like changing incentives schemes, changing funding, etc…

Funding your digital transformation

Transformation initiatives require a funding approach slightly different. An transformation initiative has an exploratory journey, the path is not clear. So funding based on ROI may be difficult. Digital transformation initiatives are more focused on the long term.

These are the main categories of digital transformation investment:

• maintenance investement: they have a clear operational benefit, so they should be funded in a traditiona way (considering ROI, traditional funding cycles).
• fundational investement: they are costly an benefits are distributed. The are usually funded centrally od by IT. Detailed business cases are usually hard, so they require a strong leadership committment.
• exploratory investement: they are innovation driven. The preferred approach is iterative (pilots, PoC, MVP, Incubators). They have to be big enough to succeed, and small enough to manager risk.

Once the kind of investment have been decided, you have to decide the funding model: there are four, which can be combined.

1. Create funding capacity from existing operations.
2. Funding from a central investment pool, with a chargeback model to business unit.
3. Funding from local business unit, where project directly benefit a business unit. They increase operational commitment from business units.
4. Partner supported investment, with dedicated procurement.

The questions one should ask himself regarding digital transformation funding are:

• have you quantified and categorized the kind of investement ?
• are you prepared to stop projects and relecate funds ?
• have you looked at saving from industrializing your it as a source of funding?
• do you have the right governance?
• do you have a balanced portfolio of short and long term goal?
• what risks are you willing to take?

Ramping up Execution

How to get your board onboard

Having the board of director involved in digital transformation is critical for the success of the initiative. Yet this is usually not the case.

The board of director is responsible for value creation, long term sustainability and risk management. To provide guidance on this topics, the board must be digitally savvy. Governance and processes are needed to provide insights on the digital transformations.

The board of directors play three roles towards the digital transformation:

• Guiding & Validating strategies
• Oversight of DX programs
• Ensuring data and privacy protection

Research show that companies with a digitally-savvy board outperform competitors in nearly every business outcome… but only 24% of US based large companies have such a board.

How do you get your board onboard?

First of all, you have to take a look at the board composition. Many company complemented their board with people coming from digital native companies. This may be not enough: also experience with digital transformation may be required.

Engaging your board in visits to companies that successfully acheived a good digital maturity can be usefull in providing education, but you also need to give them time to engage with executives for a constructive share. A digital gap between director and executives is something you want to avoid.

Having the board member actively using the new digital services or product, have them get their hand dirty is also a good way to engage them.

Existing governance meetings are a good opportunity to debate digital strategies and engage the board. This requires squizing some time in already crammed agendas. You can complement them with technology commitees or advisory boards. Other tactics that have proven successfull are shadow boards and reverse mentoring. In both cases, the underlying goal is to bring fresh ideas from digitally-savvy employees to the board in a sort of digital fertilization.

Choosing the right digital governance model

The choice of the right governance model depend on

• the DX ambition
  • digitally enhancing existing operations
  • revamping customer experiences & operations
  • reinventing business models
• the complexity of the environment
• the company culture

In most of cases, companies decide to have dedicated team. A first choice regards whether to separate digital teams or tightly integrate them.

A completely separated team allows the team to work outside traditional processes and constraint and can speed up the transformation. On the other hand, it can also lead to the ivory tower syndrome and hinder scaling of digital initiative. This model works best when

• the organization is not mature in DX
• when the ambition is a radical change of traditional business models
• when there’s the need of sharing rare resources (e.g.: ML expertise)

An integrated team provides proximity to business operations and can make transition from digital experimentation to business operation much seamless. However, this can slow down or hinder true experimentation and innovation.

The good news is that you don’t really have to choose. An hybrid approach works best.

The company culture plays a huge role in choosing between separated or integrated DX team. If the company has business units with an high level of autonomy, then creating “digital champions” in each unit may work best. Conversely, a centralized governance approach may better suits a company with a strong central governance model.

As the digital maturity of a company evolves, the governance model may evolve has well. When digital becomes the new normal, a separate DX governance may become useless.

There are 4 main governance models:

1. BAU, power of digital: the digital effort is lead by existing business units, with the digital lead acting as coordinator. This model doesn’t require structural changes, but the focus on DX can be lost.
2. Digital leadership: the effort is coordinated by digital leaders such as CDO with some resources and budget. The risk is linked to the actual power given to the DX leadership vs existing Business Units.
3. Shared digital units: the benefit is to pool scarce resources. This units can harmonize ways of working, provide an integrated roadmap and provide strong cross unit coordination, but entail the ivory tower risk and can lead to tension with other departments (e.g.: marketing or IT).
4. Greenfield ventures: you just start from scratch with a “good digital company”. The risk of competition with existing businesses is high.

Most companies choose an hybrid model. The key to success lies in aligning reporting, authority, decision rights and budgets.

Regardless of the model, some critical success factors are:

• establish a direct line to the top (and to IT)
• build a distributed network of digital ambassadors. They’ll be the DX eyes and ears.
• avoid internal competition between digital team and BUs or IT.
• ensure blended capabilities in the DX team
• evolve your model. As DX maturity increases, the need of a separate team may decline.

IT/Digital alignment

New technologies put a challange to the traditional IT. This has lead to a bifurcation of initiatives: on one side, traditional IT to manage traditional initiatives, with a focus on stability and scalability, on the other digital units to manage new technologies with a more agile approach and a focus on innovation and speed.

This bifurcation seldom works, because in the end, digital initiatives require access to assets managed by IT department. Moreover, this internal competition exacerbate the perception of the IT as the “department of NO”.

In order to have the two teams work together effectively, the short term way is to clearly define boundaries and responsibilities under a strong governance. A RACI can help reaching clarity.

In the long term, the two organizations should converge and become a single one.

How digital can help resilience

In a sentence: forget strategy, embrace agility.

In a chaotic environement you need:

• to be agile, to be able to avoid threats
• to be robust, to be able to absorb those threats you can’t avoid
• to be resilient, to be able to recover quickly.

Agility allows you to avoid threats. Agility requires three capabilities:

• being hyper aware
• informed decision making
• fast execution

But agility is not enough to thrive in a chaoting environment. You can’t always avoid the blows. A company must develop the ability to resist when taking an hit… to absorb.

Even resilience is not enough: a company must be able to accellerate out of the crisis when the lightning stucks.

Agility, Resistence and Responsiveness are enabled by digital tool and technologies.

This three characteristics are embodied by 6 principles

1. Prioritize Speed over perfection (agility, avoidance of threats)
2. Prioritize flexibility over planning (agility, avoidance of threats)
3. Priorityze diversification & efficient slack over optimization (resilience, absorbtion of threats)
4. Prioritize empowerment over hierarchy (resilience, absorbtion of threats)
5. Prioritize learning over blaming (accelerate, get out of crisis)
6. Prioritize resource modularity & mobility over resource specificity (accelerate, get out of crisis)

Transitioning to new business models

Find a partner

A digital transformation shall bring benefits to your business.

Very few companies can do the digital transformation. Finding the right partner is very important for these reasons:

• they have already done it before
• they can fill skill gaps
• they can help you move quickly and reduce costs

but there are risks:

• it’s hard to find a partner with expertise in both strategy and execution
• they may have expertise only in a vertical, where DX requires cross sectoral or cross-organizational skills.
• they may lack skills to scale and integrate (they’re maybe better at kickstarting)

In any case, working with partners requires:

• knowledge & experience. They have to complement your gaps.
• trust, shared vision & patience.
• focus & scalability: better 100% focus on 1% of the company than the other way around. The partner shall help you build your internal capability.
• clarity on contracts, with flexibility on evolution of the contract. A good contract show a long term commitment and foster partnership.

Corporate Digital Responsibility

Two mega-trends are emerging in digital transformation: ethics & sustainability. The two are not separated. We can merge them under the concept of corporate digital responsiblity (CDR): a set of practices and behaviors that help a company using data and digital technologies in way that is socially, economically, technically and environmentally responsible.

So we have 4 areas:

1. social: data privacy, digital diversity & inclusion across multiple dimensions (age, geography).
2. economic: impact of digital on economy, job creation and destruction, taxation.
3. technical: biased algorythms, deep fake videos.
4. environmental: recycling, obsolescence, energy consumption.

Usually these topics are scattered among different units, without poor or no coordination

Managing CDR requires answering 3 key questions:

• Why are you doing it? you have explain the purpose and you must comply with rules… and you have to know them. A “trust, but verify approach” is suggested.
• What are you doing? you can be reactive or proactive. Proactive is best, trying to anticipate trends, and avoid to be locked in with processes that are are hard to change.
• How are you doing it? the tradeoff is between centralized vs decentralized approach. Fragmentation is a problem of CDR management and implies risks. An hybrid approach is best: centralize guidelines and clarify responsibility in business units for enhacting practices within the frame defined by the guidelines.

Principles are impornant, but may result in empty words if practices are not defined.

From product centricity to Services & Solutions

DX blurs the divide between product and service. Moving from product to services is a way to deal with the commodization of products, which implies lower margins. The availability of vast amount of data is enabling new services. The service strategy must focus on customer needs.

Transitioning from product to services is diffucult and risky. A phased approach is required in order to develop the new capabilities. The mentality has to move from cost+ to value generation.

A good example is given by Michelin. Feeling the pressure of low cost competitors despite the superior quality of its product, Michelin leveraged the IoT enabled capability to propose it’s fleet customers a km-based billing model.

In a B2C market, services are designed to:

• enriching customer experience
• build engagement
• increase loyalty
• gather customer data on transaction and behaviour

The shift opens opportunities, but is a difficult journey. It’s a true business transformation.

Building a portfolio of digital initiatives

Digital transformation requires balance between tactical solutions and strategic innovations. The right balance depends on the willingness to take risks, on the competitive environment and on a clear evaluation of strength, weaknesses,opportunities and threats.

Too much focus on short term tactical solutions may bring to a failure to acheive actual transformation. Too much strategic investment may lead to neglecting current business opportunities.

In a sense, is like balancing offense and defense in a sport team. “Offensive” initiative aim at creating value, “Defensive” initiatives on the other hand are needed to prevent threats. An effective digital portfolio focuses on the “what”, i.e. what initiatives have to be implemented or stopped and “how”, i.e. where should we put pressure, choose to leverage internal or external resources, etc…

It is therefore important to have a clear portfolio of digital initiatives. This portfolio will be the link between strategic vision and execution. Not all digital initiatives in a portfolio are born equal: they may have different levels of risk, impact, time frame, etc…

Focusing on the “what” to put in your digital portfolio, digital initiatives may be categorized along two dimension

• value chain reconfiguration breadth
• level of reinvention

in 4 categories:

Digital re-engineering (narrow reconfiguration scope, low level of reinvention) initiatives to modernize or reconfigure existing operations have shorter ROI and can show success.

Value chain transformation (broad reconfiguration scope, low level of reinvention) initiatives are more difficult to execute and may most probably impact existing organizational structures and operations.

New digital value proposition (narrow scope, high level of reinvention) initiatives aim at leveraging digital capabilities to bring new value in the context of existing businesses, like providing additional services or using digital data to drive additional sources of revenues. They require reasonable timeframe and don’t disrupt existing value chains. Can be de-risked by running esperimentations.

Business model reinvention (broad scope, high level of reinvention) initiatives are by far the most complex kind of initiatives, so they are required to face major threats or to follow major opportunities. They require reskilling, a set of partners and changes to your organizations.

There’s no silver bullet for building your mix of initiative. If you are facing significant disruption, focusing mostly on digitizing existing operations doesn’t make sense, and you should focus more on the right side of the diagram above (maybe the upper-right quadrant)

Focusing on the “how” to deliver the portfolio requires balancing speed, risk, financial capacity and skills building.

There are two main dimensions:

1. Time to implementation: influenced by internal factors like skills and knowledge, organizational model, access the key skills
2. Decision to make, buy or find partners

You can follow 4 paths, depending on the nature of the initiative to implement:

edge exploration: when technological uncertainity is high, building sandboxes may reduce risk while discovering sources of value. The path is not fast.

radical course amplification: when success requires major overhaul of existing operations and collaboration across the whole organization. Example are cross channel collaboration, replatforming, etc… This initiatives are hard and not short term

acquisition or partnership: when an initiative is so complex that it would take to long, acquisitions or partnership are a viable option. Main reason are that building skills may be too long or hard… it’s easier to just buy what you need. This kind of collaboration may me as complex as the other ways.

greenfield operations: when transforming is too difficult or new digital mindset is needed, it may be easier to just start from scratch. This initiatives require strong leadership commitment to avoid that the newborn company gets tainted by the parent company.

Engaging Stakeholders: Leading People and Organizations

Digital leadership

Digital transformation requires huge investment in changing people mindset and corporate culture. Leadership plays a role in this change, and the leadership style.

The litarature highlights two stereotypical leadership styles: the traditional style and the emergent style. We can consider them as the two extreme of a continuum. A leader embracing the emergent style asks questions, adjusts goals and rely on data to take decision, and this approach is usually associated with digital leadership.

This is an oversimplification: a digital leader must be able to find the right balance between the two stances. This balance leads to a tention between opposites. There are 7 main tensions

Every leader style lies somewhere in between this two extremes, and that’s fine. The goal of a digital leader is to adapt to the situation in the most appropriate way: as leader, you must enlarge the spectrum of stances you are able to embody. To become more flexible.

To expand the range of behaviour:

1. a leader must understand himself, must know his default position and tendencies. To do so, one can run diagnostinc tests, ask peer opinion, etc…
2. must develop situational awareness: the ability to undestand the environment and respond accordingly.
3. must develop cognitive empathy: the awareness of the emotion of people around you.
4. broaden your range by:
   • practicing micro behaviour: force yourself adopting the stance you want to master una baby step at time.
   • seek out role model: find someone to copy from.
   • look inside and outside of your team do fill the gaps.
   • look for technology solutions, e.g., AI coach.

Succeeding as a CDO

The CDO manages the digital activities and is usally an ill-defined role. His/her “shelf life” is usually 2.5 years, then they leave the company. They go tipically through 5 phases:

• Chief Digital Officer: they start out with a lot of enthusiasm.
• Chief Dazzling Officier: they make a lot of noise speaking about opportunities and threats.
• Chief Disconnected Officier: nobody listens to them any longer, because they hold no real power.
• Chief Depressed Officier: they start losing their confidence.
• Chief Departing Officier: they leave.

The CDO is usually a temporary role.

The main reason for CDO lack of success are:

• they have little credibility.
• they don’t have enough resources
• they don’t have enough time to perform complex tasks
• the relationship with other stakeholder (CxO) is unclear.

Developing a learning culture

Succeeding in the digital transformation requires creating a culture of continuous learning. The company has to launch massive campaign o digital upskilling and also convince its workforce to adopt a continuous learning mindset by incentivizing knowledge sharing.

At some point, the need for new skills will reach a threshold where resources demand can’t be met and zou have to upskill your workforce. To cater for the learning need of the workforce, a strategy addressing a broad spectrum of learning styles has to be created.

Developing a digital mindset

What’s a digital mindset? Let’s see some traits that define this mindset:

• focusing on the benefits technology can provide to your business instead of focusing on the technology “per se”.
• using digital technology to remove traditional constraint.
• creatively expand the boundaries to reinvent customer experiences & business models.

Many companies fail to develop a digital mindset due to some common pitfalls:

1. Straightjacket of industry norms: every industry and company has norms and habits that you should constantly challenge, using why, what if and why not questions.
2. Substitution vs Transformation: adding technology to existing processes is unlikely to bring significant benefits.
3. Hybrid trap: many company fail to fully commit to new ways.
4. Second guessing customers wants and needs: now we have plenty of data to know what the customer wants. Digital mindset means being able to leverage the insight from your data.

Data analytics is a key capability in the digital era for three reasons:

1. you can understand the whole population instead of relying on sampling.
2. you can see what the customer does instead of relying on what he says.
3. you can clearly see the lifecycle, the whole history instead of just seeing a snapshot frozen in time.

A leader in the digital era must develop four key capabilities:

1. have a good grasp of digital technology: it doesn’t mean knowing all the details, but you should develop an understanding of how digital technologies remove impediments.
2. data and analytics: you need to understand the power of data to get customer insight and be evidence based in your decision making.
3. creativity and curiosity: you have to cultivate diversity and create partnership.
4. empathy: put yourself in your customer shoes.

this four traits have to be cultivated and everybody can improve.

Anchoring digital momentum

Building a digital culture

The evolution of a company culture goes hand in hand with the digital transformation (strategy). The two have to happen at the same time. Culture is a fundamental element of a company performance. Strategy and Culture are two sides of the same coin.

A strong culture provides consistency of choices. On the other hand, a strong unfit culture, roots a company to practices that are not aligned with need of the digital world.

Most companies follow a three step process to change their culture:

First comes the Translation phase: define the “what”… define what “good” looks like. To run this phase, you must start by analyzing the existing culture:

• Centralized vs decentralized
• Top down vs Bottom up decision making
• Prominent leadership style
• Behaviours that will be rewarded

The you have to define the target state. What are the traits that you have to improve? There’s no single recipe, but some traits are commonplace (speed of innovation, data driven decision making, etc…)

Then you have to map yout cultural pathways: what existing traits you want to keep or improve, what needs to be changed or completely acquired from scratch.

Second comes the Activation phase: define the “how”… define the practical activities that will start the digital transformation and the culture change. When launching digital initiatives, you should define both the business and the change goal of the initiative.

Last comes the Anchoring phase: relates to the “how”, but focuses on establishing the new ways as the new normal. This is a long term project. To measure the progress of this phase, metrics such as employee engagement, hours of digital training of number of certified employees come in handy.

Once you find new ways of working in line with your culture change goals, some practices help in scaling them:

• formalize new ways of working
• redesign processes
• align rewards and incetives

Scaling Digital Initiatives

Kickstarting digital PoC is easy. Scaling is not. Some common suggestions are:

• plan for scaling since the beginning. What do we need to integrate the limited initiative in the existing system? Where are the likely source of resistance? Is there any hard constraint?
• don’t do cut and paste. A digital initiative may be replicated, but may also require adaptation. Think about core parts and modifiable parts. Follow a cut, adapt, paste, adjust.
• push, pull, push. A digital initiative starts usually for a push from the management. Then, when momentum and results are achieved, other parts of the company want to jump in (pull). But in the end, when you need to spread the initiative throughout the whole company, a second, much harder push is needed.

Measuring the performance of digital initiatives

You can’t manage what you can’t measure. In some fields there are well established metrics to be considered to measure performances: unfortunately digital transformation is not one of such fields. One must ask himself:

• what’s the right thing to measure
• hot to use the metrics to drive the digital agenda.

Common pitfalls are using measure too vague or to specific, or just borrowing metrics from other fields without asking if they fit.

Once you have picked the right metrics, you can use them to bring forward the digital agenda. This requires creating dashboard and scorecard to show results. These information radiators shall be customizable enough to fit the needs of different stakeholder.

Unfortunately, often line managers resist measument for fear of blaming. Measures bring transparency and the best ones are those you can relate to, or use as a proxy for, business results.

The road to becoming a digital organization

The endgame of digital transformation for a company is becoming an organization who is able to constantly adapt to new technological challenges and competitive situations. The few companies that got there, share these common traits:

• digital mindset first: this means systematically think about the role of digital technologies in business opportunities.
• digitally savvy and technologically augmented workforce: since technology innovation never stops, this implies creating an ever-learning culture.
• data-driven decision making: the core mindset in fact based.
• workforce can self organize in cross functional teams and orchestrate digital solutions at scale: this requires setting clear goals, reward collaboration, provide transparent access to relevant information and trust your employee.