Digital Success Requires Breaking Rules

In an earlier column, I discussed how digital technologies (social, mobile, analytics, cloud, internet of things, artificial intelligence, blockchain, and many more) are instigating two different transformations at established companies: one to become digitized (for operational excellence), the other to become digital (for rapid innovation). Both transformations are essential to sustained business success, but the technologies are the only thing that digitization and digital transformations have in common.

Companies need to continue to run much of their business with the top-down, disciplined approaches and accountabilities that are essential for digitization — but which don’t work for digital. There’s an inherent dilemma in this: Management needs to implement strict standardized processes, while also hoping the company will be agile and constantly able to change. These are basically opposites.

Our research at the MIT Center for Information Systems Research has found that companies cannot scale new digital business models if they have not digitized. In other words, they need core systems, processes, and data that provide operational excellence. That may not seem surprising. But this digitization embeds management approaches that won’t work for digital innovation. Specifically, carrying over the business rules that lead to operational excellence — process optimization, business case development, performance metrics — actually impedes execution of digital business models.

Developing and adopting new rules for the digital age is proving uncomfortable for people at every organizational level. Much of the discomfort arises from the speed at which digital business demands organization change. In particular, the need for speed requires redesigning accountabilities. That’s because while digitization requires top-down leadership principles with centralized accountabilities, digital business success requires local empowerment with distributed accountabilities. It’s easy to get caught in the middle of these dueling requirements.

If you want to digitize and become digital — and I would argue that, in the long run, you have no choice — you’ll need to address the challenge of redesigning accountabilities. There are three things you can do to get started:

  1. Distinguish digitization from digital initiatives.
  2. Give digital business leaders space to invent new rules and metrics.
  3. Identify and train new leaders.

Distinguishing Digitized From Digital

Using digital technologies for digitization is simply an extension of enterprise improvement initiatives that started with enterprise resource planning and customer relationship management implementations. Digital technologies — internet of things, data analytics, robotics, and artificial intelligence — are raising the bar on operational excellence. These technologies have helped extend visibility into a company’s operations all the way to customers’ mobile devices. Verizon, for example, must have seamless operations that enable a customer to open an account, pay for service, change service plans, and view charges — and customers expect those tasks to be easy to do while sitting on the subway with only a smartphone.

Digitization involves disciplined adoption of appropriate standardized business processes to ensure reliability, predictability, security, and visibility into customer interactions. Although input can come from all parts of the organization, digitization is ultimately a top-down effort. To ensure standard processes are implemented across geographies or business verticals, senior-level process owners dictate process and data standards and oversee their implementation. Everyone else is responsible for implementing the standards. Individual discretion is bounded by tight decision rules. Although people throughout the organization might be held accountable for implementing standards, process owners are ultimately accountable for the impacts of process standards. Their performance can be measured in cost savings and customer service ratings. Investments can be guided by traditional business cases.

It is important to consistently enhance core operations, but it is also important not to let digitization efforts be the sole application of digital technologies. Digital companies find success by delivering new information-enriched customer value propositions. They create new customer solutions (that is, digital offerings) that introduce new sources of revenue.

But identifying viable digital offerings — solutions that customers will be willing to pay for — requires experimentation. The people at the top of the company may have a vision of what’s possible in the digital economy, but because digital offerings were not part of prior value propositions, they cannot know exactly what they can deliver that will excite customers. Top-down management, reliance on traditional business cases, metrics focused on cost cutting or near-term profitability, and other traditional management practices will derail a digital transformation by limiting the experimentation it depends on.

Because the management requirements for digitizing and becoming digital are so different, it is important to clarify who is responsible for what throughout the company. People who think they are responsible for digital innovation but must prepare traditional business cases to justify their efforts face perpetual frustration. People expected to sell new digital offerings but whose performance evaluation depends on traditional metrics are receiving mixed messages.

Thus, it’s important to isolate your digital business people from the rest of the company. Put only a small number of clearly designated people on the task of experimenting with new digital offerings. Then give them the autonomy and freedom to learn how to succeed digitally.

Giving Digital Leaders Space

As we’ve studied digital initiatives at companies such as Schneider Electric, Philips, Toyota, Ferrovial, and DBS Bank, we’ve found that much of the challenge in delivering digitally inspired customer value propositions lies in acquiring new business competencies. To develop and sell digital offerings, these companies have had to relax some of the management practices that support digitization and historical business success.

We know of no company that feels it has nailed the challenge of developing new rules and metrics. We do know that people within these companies who are experiencing some success invariably tell us they had to break some rules. They “cheat” on performance evaluations of salespeople (to preserve commissions); they subvert traditional budget processes (to secure needed resources); they ignore usual price lists (to experiment with value propositions); they circumvent established customer relationship management approaches (to cocreate offerings); they ravage traditional product development methods (to apply agile, iterative development approaches).

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