Digital Transformation vs. Incrementalism
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There is way too much chatter on digital transformation.
The excess spin seems to be snapping the needles of BS meters all around.
After all, digitizing business processes has been prevalent for a long time, and the enterprise software industry is almost four decades old.
The skeptical viewpoint is that this is unpolluted poppycock. We have seen it before with earlier generations of technology. This is another buzzword passing by, hoping to attract money and fame.
But the problem is not with the idea; it is just that what most people claim as digital transformation ain’t so.
Let me explain.
Transformation is not “automation” of the status quo.
Transformation is not making your current business model incrementally better through application of new technologies. It is surely not putting digital lipsticks on the pig.
Transformation means mutating your product, company, and business model to deliver the best possible economics and surplus to customers, while providing the sharpest competitive contrast. “Digital Transformation” means accomplishing this through software and data to drive maximum scalability. [1]
Successful DT efforts manifest in one of two ways: a) delivering a superior product experience to the customer at a substantially lower cost in a provably scalable way (a la Uber, Salesforce, or Amazon), or b) delivering a dramatically differentiated and exclusive product experience that customers are willing to pay more for (a la Tesla). If you are doing neither, and you are not a protected monopoly, what are you exactly transforming? Likely nothing.
Venkatesh Rao wrote a brilliant post recently on this topic. His hypothesis is that getting eaten (or) eating others are the only two viable options. Tinkering around the edges of the current business model (or) pretending to adopt enterprise software might prove to be exercises in futility, leading to the company eventually getting eaten by a new-world software player who fundamentally changes the way the job gets done.
But the reality for large companies, unlike startups, is that they need to keep their lights on and make incremental progress, while also figuring out how to deal with the larger existential questions in parallel. The problem is in calling the incremental work “digital transformation”, when there is nothing transformational about it. [2]
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It might be instructive to classify digital innovation projects based on the changes it would involve to the “product and business model” and the subsequent impact on customer outcomes.
For instance, the 2*2 below plots the “change in value realized for the customer” on the Y axis vs. the “changes to the product and business model” on the X axis.
- “Product” is proxy for the entire experience of finding, engaging, buying, and using the product and related services to get the job done.
- “Business model” includes all the building blocks necessary to create and capture value.
- “Customer value Realized” is a compound score that best reflects the metrics that matter to the customer for getting the job done.
- The baseline to calculate the delta for “customer value realized” is chosen depending on what you are trying to disrupt (The current version of self or someone else). [1]
Chimerical projects rarely deliver. They are mostly based on delusional or flawed hypotheses.
Incremental projects add tangible value to both customers and the company. But they are not game-changers. Most traditional enterprise software and IT projects fall in this bucket. It is also not uncommon to see incremental projects end up subtracting value when not well defined or managed.
Misadventures are transformative projects gone wrong. But they can be critical to innovation, so long as they don’t kill you.
Transformative projects have the potential to deliver outsize returns for both customers and the company. GE Digital, Amazon Prime, Netflix Streaming, are all great examples of transformative projects incubated within large companies.
But not all transformative projects need to be super or mega-scale. They can be narrow or well-bounded, and still deliver transformational impact on “customer value realized” for strategic use cases. [3]
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Let us briefly visit the example of an automotive company like Daimler, Ford, or Mack Trucks to frame all of this in a specific business context.
While the automotive company needs to figure out electric cars, IoT, autonomy, etc., and what these mean in terms of future opportunities and risks, it also has to make continuous progress on current products and business model execution. It needs to become simpler and easier to do business with: easier for buyers to find, easier to understand, easier to purchase from, easier to finance, easier to receive on time, easier to use, easier to get service from, easier to sell /trade-in, etc. And do all this in a way that provides a sharp contrast against their competitors.
While some projects (like electric or autonomous vehicles) are clearly super transformative, and some are patently incremental (say updating the HR or Financials system), several others lie in the grey zone. Is a project that streams real-time truck performance data to the cloud to enable predictive maintenance a transformative one (or) an incremental one? What about a new up-sell/cross-sell intelligent agent that increases order size with minimal dealer training? It really depends on the expected delta impact on customer value and differentiation, and how substantive or even dramatic it can be. Transformative projects upend large markets not because of what they are called, but because they change experience and outcomes in a massive way. [10]
Traditionally, digital/IoT projects related to the core product experience(using a car or a truck) are led by R&D; digital projects related to thecontextual experience of the product (sales, service, support, supply chain, etc.) are led by business and IT.
As companies in traditional industries become digital businesses, these distinctions between IT, business, and R&D, and how they work together need to be fundamentally rethought.
The Totality of the Customer Experience = Core Product Experience + Contextual Experience.
A superior customer experience is the primary intended outcome of all innovation across the company including and beyond the product.
Those who accept this as true should indeed consider evaluating and prioritizing all digital projects “touching the customer” as a part of a single portfolio that is overseen by the CEO and the broader management team.
It is too strategic to be decided only by IT, or a CDO, or a CMO, or a head of R&D.
This does not mean “centralizing” the execution and taking away autonomy, or adding layers to decision-making ; just that everything impacting customer experience, and thus differentiation and perceived value, needs to be viewed holistically, and not as silo’d projects spread across the company. The trade-offs in terms of risk and return are better understood at the corporate where the dots connect, and not at the functional level
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In the universe of digital projects initiated and funded within a large enterprise, some are transformational, some incremental, some chimerical, and a subset of the first eventually degenerates into misadventures. The real question is do you know which is what at any point in time. This cannot be answered without seeking to understand the current evidence and the probabilities related to if/how each project will change the fundamental equation in terms of value delivered and captured.
The most consequential leadership challenge of this age is for CEOs and management teams to make the right bets for the company by smartly managing the digital innovation portfolio. Understanding and balancing the dichotomy between incrementalism vs. transformation without confusing the two is truly a big deal.
Incremental is critical to constantly move the status quo forward, but it will be silly to bet the farm on it.
The chimerical posing as transformative is a travesty to be wary of, given how much it can hurt companies in terms of complacency, lost time and opportunity. Turns out the only thing worse than not being transformative enough is thinking that you are when you are not.
And in today’s software and internet centric world, it is hard to be transformative if: a) the core product or service is not software-centric, b) the product does not take advantage of new asymmetric advances in technology, and c) the company does not pursue bold and new business models enabled by a) or b). [3][4]
Yes, transformation is inherently uncertain and risky, and means serious and even painful changes to the core of the product and business model.
But history shows us that great things happen only from betting boldly and bigly;those who play it safe risk the real possibility of being made irrelevant by those who do.
Are you making the bets that truly matter? [8]
Foot Notes:
[1] Something is deemed transformational not by its cost, scope, or name, but on the basis of how it changes the customer economics (perceived value minus TCO), and the customer surplus (what they are willing to pay for it minus what they actually pay). Unfortunately, most firms focus disproportionately on value captured by the company relative to understanding the customer value realized. *
*“Customer value realized” and “Customer economics” are used interchangeably in this post. Perceived value is both quantitative and qualitative spanning functional, monetary, psychological, and social dimensions.
[2] Of course, the timing matters greatly. If you are Blockbuster in 2002, or Blackberry in 2008, the only thing that matters is the transformation, assuming it wasn’t too late already. No new point-of-sale or order management system would have stopped the demise of Blockbuster! There are some times, places and industries, where investing in any type of incrementalism is a really bad idea. Knowing so is easy only in hindsight!
[3] Some projects and ideas may be narrow in execution and scope,but transformational in customer impact and differentiation. Examples include: a) A heavy equipment manufacturer transforming its pricing for select products based on ongoing usage vs. upfront purchase, b) A digital advertising company pricing its service based on actual conversion vs. clicks or impressions (of course, this is a hypothetical!), or c) A telecom company offering month-by-month plans in an industry dominated by 2 year contracts.
[4] GE’s use of digital twins for their engines, Industrial manufacturers using IoT for predictive maintenance and servitization, telecom operators deploying self-optimizing network algorithms that auto-detect/ auto-correct service issues to deliver exceptional QoS, are all digital transformational projects at their core: Why? Because they use data and software to modify the product and service in a very fundamental way, changing customer value by an order of magnitude. This is the primary litmus test.
[5] The vast majority of so-called “digital transformation” projects related to implementation of enterprise software are “incremental”. They may even represent substantial improvement in status quo metrics, if executed well, but the mode is one of “using software to help run the business” vs. becoming a “software driven business” that fundamentally reshapes the landscape.
[6] Some would say that moving the entire IT infrastructure and application stack from on-premise to a public or private cloud is a digital transformation. I would respectfully disagree. While this may indeed rearrange IT costs and how they are paid out, it is really not a meaningful business transformation accomplished through data and software, until customer economics or surplus is deeply altered.
[7] Incrementalism is the natural course for how things iterate and improve and is a critical segment of the innovation portfolio. Mistaking it for transformation is the disconnect.
[8] A great comment from my friend Tom Schryver: “How do you tell if your digital transformation efforts are sufficiently aggressive and open-minded? Think like the competitors you may or may not yet have. Knowing what you know about your business, your customers, and your eco-system, what would you do if you were given sufficient capital and told to put your current company out of business? You may want some outside perspective as to what is possible and how it might occur. You are trying to self-cannibalize before someone else does it to you.”
[9] The transformation vs. incrementalism debate is at the very core of all innovation in established firms and decomposes to further questions like: a) how best to allocate financial and human capital between the two streams, b) how to deal with the dichotomy in culture, skills, and tempo, c) when to use M&A and acquired talent vs. organic development?, d) how to manage the lifecycle of transformative projects, e) How to use misadventures as stepping stones to successful transformations, and f) how to spot, challenge, and kill the chimerical? These are all subjects worthy of additional discussion.
[10] Fair to say that there are at least two discrete classes of transformative projects: a) Super-transformative projects that upend the entire industry and value chain and b) micro-transformative projects that dramatically change outcomes of strategic use cases.