Acceleration with control

Navigating the journey, choosing the pathway

Enterprises that are plotting their route to future-readiness have multiple pathways to choose from (as also pointed out by the aforementioned MIT CISR research), reflecting the possibility that an organisation may have only limited resources or ability to change. This means there is no one-size-fits-all solution; executives should tailor their approach to fit their specific situations:

1. Prioritise Growth (Customer) above Operating Margin (Core): This route is typically chosen when the top-line growth is below market average and the enterprise needs to secure market share on short term while investing in establishing a digital core (which takes considerable longer time).
2. Prioritise Operating Margin (Core) above Growth (Customer): This route is appealing when there is great potential for operational efficiency, or when cost savings are needed, and customer engagement is sufficient to secure market share.
3. A hybrid approach: An enterprise can take small steps in each direction – improving the customer experience and operations alternately, over several iterations, making quick wins in the early stages and more fundamental changes thereafter.
   It’s worth noting that, for many companies, focusing on Digital Customer may be a viable short-term option, to keep up with customer expectations that COVID-19 changed overnight; however, this is not a sustainable scenario for the long term. To get the operating margin right, a focus on operational excellence/decreasing cost is also necessary.

A carefully orchestrated digital transformation will ensure a business becomes future-ready. A competitive advantage will be created through the ability to innovate and bring new offerings and experiences to the market, rapidly, successively and at scale. Unfortunately, the pandemic has made it obvious that many organisations are not as far along the digital journey as they thought; there is still a chasm to cross.

Deloitte predicts that 18 months from now, successful companies will have institutionalized or “hardened” the lessons they’ve learned when there was no other option, facing “down the barrel” of insolvency. Those that heed the lessons and permanently shift their mindset and ways of working will be those that avoid returning to normal. Right now they are acknowledging the COVID-19–accelerated changes taking place and looking forward, reacting with interventions that will last well beyond the pandemic. Consider the following observations we’ve been making.

• Many changes in consumer behaviour that emerged overnight will prove to be permanent, justifying a shift to digital customer engagement. 
• Actionable intelligence, based on real-time visibility into financial and operational data, was key during the crisis and will remain of strategic importance. 
• Disruptions in global production and logistics demanded the ability to quickly reconfigure supply chains; forward-looking enterprises will retain this ability in preparation for future disruptions. 
• Business continuity depended on digitalised processes when physical locations were not available. 
• Enterprises that took a large hit in revenue need to radically cut costs from their operations. 
• Working from remote locations will continue, and offices will be used in different ways. Generally speaking, this made the ‘future of work’ an imminent reality rather than a distant future.
• Disruption in the marketplace demanded rigorous decision making from (senior) leaders. Where there was inefficiency in clarity on decision making rights and ability to take decisions in a highly ambiguous context, organizations struggled.
• Where leaders paid attention and time to connect with their teams and invest in support for workforce to remain connected (practically with right tools, and mentally in providing clear direction and focus), engagement scores in the first five months of 2020 went up significantly compared to previous years.
  Without a doubt, COVID-19 has accelerated digital transformation.
  

Conquering the domains of digital change

The challenge now is for business leaders to retool their digitalisation strategies to match the pace of acceleration, and tailor them to maximise the insights listed above. Enterprises that have achieved a ‘being digital’, future-proof stage have mastered three domains:

• Digital Customer: Focusing on this domain means innovating – constantly reinventing customer value propositions by adding new digital offerings, extending the reach to new customer segments, and delighting customers through a seamless customer journey. Optimises: top-line growth, market share and net promoter score (NPS) 
• Digital Core: To harness this domain is to enable efficient, predictable, low-cost, effective operations – by digitalising processes, automating work, instilling discipline for business processes and leveraging data to make faster and better decisions. Critical to all of these actions is a platform mindset and the dedication to break down organisational silos, driving the move to a flexible, cloud-based infrastructure. Optimises: operating margin and cost-to-income ratio
• Digital Work: Underpinning both Digital Customer and Digital Core, this domain illustrates that digital success is all about humans and radical changes to how work is done: 
  1. leaders and how they empower
  2. teams and how they work
  3. individuals and how they are enabled
  4. the ecosystem and how it connects
  5. the organisation and how it governs

Relevant actions include appointing new leaders, changing mandates and budgets, evolving ways of working, and retooling the structure. When all interventions are complete, a new culture with its own ‘digital DNA’ will inevitably arise, and the entity realises the full benefits of transformation. Optimises: business agility and employee engagement.

Each of these three domains is vitally important and they’re interlinked, but they contribute to success in different ways. Digital Customer drives top-line growth, Digital Core increases operating margin, and Digital Work is the indispensable link between the first two domains. Enterprises that are lagging on all three often have an organization with functional silos with a complex and fragmented landscape (processes, systems and data). If they show any sign of good performance, it’s often been achieved only through heroics.

Then there are companies that focus their investments in one domain. Those that mainly invest in Digital Customer have a strong emphasis on design and UX (user experience), resulting in a rich, multi-channel experience, including purchasing products. Customers get a (simulated) integrated experience despite complex operations (which are hidden for customers). On the other side of the spectrum, those that mainly invest in Digital Core have digital platforms enabling plug-and-play products/services, and processes are digitalised based on a single, optimal approach to each key task.

Only companies that have invested in each domain, and that have reached mastery level in those domains, are future ready: innovative, customer centric, low cost, modular, agile, ecosystem ready, offering great customer experience and treating data as a strategic asset. There is clear evidence that reaching this future-ready state pays off in terms of superior net margin. MIT CISR research analysed the impact of investments in “Digital Experience” versus investments in “Operational Efficiency (“two categories equivalent to “Digital Customer” and “Digital Core”). The researchers have found:

• Companies lagging in both dimensions exhibit a net margin of only -5.1 per cent, compared to industry average.
• Companies that invest solely in Digital Experience will increase NPS but improve the net margin only slightly, which means the results will still be below industry average (-3.6 per cent). 
• Companies that invest in Operational Efficiency alone will increase cost-to-income ratio which leads to an above-average net margin (+4.6 per cent).
• Superior results (a net margin of +16.0 per cent above market average) are only achieved by investing in both Digital Experience and Operational Efficiency.

Final digital destination

The full journey to digital transformation will always require a comprehensive set of interventions, but specific interventions will be needed at different times in each phase of the journey, depending on the chosen approach. For example, if priority is given to Digital Customer, the early phases will emphasise the technology needed for that, as well as agility in working and an innovation/exploration mindset. On the other hand, prioritising Digital Core will emphasise other technologies and a platform mindset.

Five key questions can help kick off the dialogue about what approach your enterprise will take:

1. Considering the pace at which your digital transformation is taking place, where is acceleration required most? 
2. In terms of making future-ready choices, how do you prioritise top-line growth and operating margin? Which goal will you focus on first? 
3. Acknowledging that superior performance can only be achieved by combining Digital Customer, Digital Core and Digital Work, which blind spots still exist in your digital roadmap and should be addressed? 
4. Given that COVID-19 has created a temporary window of opportunity to get more radical changes accepted in your customer model, operating model and business model, which short-term steps can be made now to take advantage?
5. Which leadership team is best equipped in terms of vision, and turning this into clear actionable priorities for teams? Which leaders have enough risk taking appetite, an ability to cope with ambiguity and ability to bring focus for teams to continue to collaborate effectively through volatile times?