How to embrace the digital transformation
Source: The Market Magazine – Enterprise Ireland (Spring 2016); Author: Niall Byrne
In an era when businesses need to stop merely tinkering at the edges in areas like marketing or internal operations and truly go digital across all interactions, Niall Byrne looks at what’s holding companies back and how they can start to set a meaningful digital transformation in train.
Think of a digital company, and you’ll most likely think of a small, innovative start-up employing a high percentage of under-35s, with activity focused on internet-based products and services. You’ll think of a company that has been digital from day one, whose digital strategy is their whole strategy. But today all companies need to be digital companies. Whether it’s mining, fashion, banking, energy, retail, media, utilities, pharmaceuticals, insurance, telecoms, hospitality or agriculture, large-scale disruption is taking place due to technological change.
The next stage
In recent years, the most effective players have already moved beyond using digital simply for marketing and e-commerce, progressing to harnessing technology to transform their internal operations and processes. However, the next stage is for companies to stretch their boundaries to leverage a broader ecosystem of digital businesses and partners that can help them shape the next generation of products, services and business models.
As some companies rise to the challenge, while others sit it out, a divide is emerging. Capgemini’s 2012 report The Digital Advantage: How Digital Leaders Are Outperforming Their Peers in Every Industry showed that among traditional companies, those that embraced a digital technology strategy performed better across a range of metrics, including revenue generation, profitability and market valuation.
Beyond this, Accenture’s 2015 report Technology Vision 2015: Stretching Your Boundaries in The Digital Era outlines how progressive, established non-tech companies are using technology to drive their growth, and with deeper financial resources than their newer tech counterparts, they will become technology leaders in their own right, not just followers.
What’s interesting in Ireland is that while traditional companies might struggle with the idea of a full digital transformation, a core of hi-tech ‘digital transformers’ founded and headquartered here are working across the globe to enable the digital transformation of some of the world’s biggest companies.
Their presence was part of what persuaded Steve Muylle, Professor of Marketing and Digital Strategy at Vlerick Business School, to choose Dublin for a recent international digital strategy event. Vlerick Business School joined up with Enterprise Ireland to host the event, which was aimed at the financial services sector – an industry grappling with the challenge of truly going digital yet under pressure like never before to do so.
Muylle identifies complacency as a major impediment, particularly if a company has remained profitable throughout the digital era so far without embracing it. “Many established companies have a winning formula that’s stood to them for decades so their attitude is why should they change it,” he told The Market. “When the disruption that is taking place in the market is just taking small pieces of business off them, senior management can overlook the threat. It’s death by a thousand cuts. At first you don’t realise what’s happening, then when the bleeding becomes really bad, you can’t stop it.”
Paul Prior, director of the Dublin headquartered management consulting and technology firm Vision Consulting, adds that the existing culture within established companies is an impediment. “If we take the utilities sector, for example, those who run the organisation have usually come up through it in a particular fashion, typically through either process operations or sales,” he notes. “They haven’t been exposed to digital, and, by the time they get to the top, there’s a lack of knowledge and therefore a lack of willingness to take on the challenge of implementing a digital strategy.”
Muylle concurs. “Digital transformation requires an organisation to forget a lot about its DNA, which is a hard thing to do. It requires challenging your established systems, structures and processes. It involves taking a new look at not only your organisation, but at the whole ecosystem you have, your value system, your channels, how you interact with upstream partners, how you interact with downstream customers.” It’s a more open, agile and experimental mindset than traditional companies have historically condoned.
Prior points out that traditional organisations are so used to working in a particular bubble that they are cautious about the types of conversations they can now be having with their client base, conversations that historically wouldn’t have happened. “Take fund administrators, for example, who are engaged in a typical paper-pushing kind of process,” he says. “They speak primarily with their clients on the phone. They’re nervous about giving their client any insight into their operation because their commission and fee base operates on the basis they are an efficient organisation and they can meet their clients’ needs within particular timescales. They create a power-distance relationship between the process and the customer. A lot of the conversations they have are in a very risk-averse kind of environment.”
Open and experimental environment
He says this approach is becoming obsolete. “If you think about how you develop a digital strategy, the types of conversations you need to have in order to really understand the functionality that’s going to create real traction for your customers is very different. You have to understand you’re in an environment where you can be quite candid, you can ask what you really want, and it’s a very different conversation to one where you’re in a support role and speaking to a client or an internal customer.”
He says companies interested in digital transformation have to set up an environment that allows that level of candidness. “A lot of the time digital strategies are based on creating cross-functional, high-performing teams between the customer and the technology expert.”
“When people get outside their comfort zone, that’s when real advantages accrue,” agrees Maeve Kneafsey, CEO, Marketfinder. The Dublin-based software service provider offers cloud-based tools to help companies increase their online sales and quickly monitor performance and spot opportunities. Kneafsey says that a huge part of the mind-set that underpins any successful digital strategy is a willingness to experiment.
“It used to be the case that when you were making the decision to use a new management tool or build up an information repository, it was a big decision that took a long time. Now, technology is so fast and easy to adopt and test that if an organisation is more open and agile and comfortable with experimenting, they’re going to find the right tool more quickly at a much lower cost.”
She cites an example of a large mobile operator that decided to hive off a decent chunk of its budget each year to test new tools and try different things internally. The outcome was new ways of doing things with new digital tools that really worked at low cost and no risk.
“Now, you can get three or four employees to test the solutions and find out the one that suits the company best before you commit to the tools,” she says. “The experimental phase becomes part of strategy.”
Fears over security and fraud
Headquartered in Cork, Trustev provides technology that scans online transactions in real time to prevent fraud. Diarmuid Thoma, Trustev’s VP of Fraud and Data, cites fears over security, data privacy and fraud as other major concerns for established companies.
“There are regular reports in the media of organisations getting hacked. These aren’t ‘mom-and-pop stores’ either, they’re some of the biggest organisations in the world. If you’re an institution with a good reputation for security in the high street environment, making the leap to digital can seem like a big risk.”
Delaying making the transition for reasons such as this is a mistake, however, believes Thoma. “The reality is a lot of companies are getting dragged into it whether they like it or not. The consumer demographic today wants to do everything online – banking, shopping, communicating. Understanding the customer need is the one thing that’s really going to drive digital. If you don’t have that presence online, you’re going to fail.”
“Fear of fraud can actually cost you more than the fraud itself,” he adds. “When some companies set up an e-commerce site for the first time, they decide to be cautious and take only the safest transactions. It isn’t unheard of for some of these companies to be turning away 25-50 per cent of their transactions. In e-commerce, you’re talking about a fraud attempt rate of about 5 per cent. With fear of fraud, you could be rejecting 25
per cent of your business, so the fear and reality don’t equate.”
Muylle argues that there are two drivers for change. “One is when the industry is really feeling the heat and being disrupted, such as the newspaper industry or the energy sector, and there’s no choice but to adapt. The other driver is visionary leadership, where someone senior in the organisation acknowledges this disruption going on in the market and decides they’re not going to wait until it hits them.”
How to lead the process
Companies that take this proactive approach before they’re at the cliff edge have a huge advantage, and Muylle says they can take one of three routes to manage and lead the process.
The first is to establish a digital team within the existing organisation structure. The second is to launch a new spinout business independent of the core business. The third, and the one Muylle says yields the most benefits, is a hybrid approach between the first two.
“If you’re going to keep digital within the boundaries of the established company, it’s crucial to make it a new department that reports directly to the CEO. It’s important not to silo it off in another department, such as marketing, ICT or innovation. The digital department should have a mandate for change and be at the same level as the other departments to be taken seriously.”
A wholly separate digital spinout business will have advantages similar to other start-ups – it will be small, flexible, have greater freedom to act, can match the size of the opportunity in the market – but Muylle warns it won’t have any significant advantage over any other start-up in the space if it doesn’t leverage the scale and expertise the parent company can provide.
For this reason, he extols the virtues of the third option, the hybrid approach. “With the hybrid model, you start in the core business, launch a separate disruptive business, then look at the backend between the two and see how you can exchange resources and expertise.”
In the 1990s, the New York Times was an example of an established organisation setting up a new digital business and nearly losing out because of properly failing to integrate the two from the start.
“When existing customers said they wanted to buy digital advertising, the salespeople would offer to sweeten the deal for paper ads by throwing in digital as an add-in. This is not what you want as it dilutes the value of online advertising. The CEO had to step in and tell them to sell online advertising at the market rate and not to include it as a freebie. While at the time online might have been 1 per cent of the business, in years to come he saw it was going to grow to 10 per cent, then 20 per cent, and so on.”
It’s an example that reinforces the point that an effective digital strategy is a long-term strategy that needs to be driven from the top. Ultimately, disruption is coming, and those not surfing the digital wave will be swept under.