If an organization adds cloud, mobile, analytics and sensors, does that make it a digital organization?
The short answer is no, cautions Dr. Jeanne W. Ross, principal research scientist at the MIT Sloan Center for Information Systems Research, and co-author of Designed for Digital: How to Architect Your Business for Sustained Success. In a recent chat at an MIT Sloan Symposium, Ross pointed out that becoming “digitized” is different than becoming “digital.”
“You’re digitized, and you might be making a lot of money on this,” Ross explains. “You might have very happy customers. In the short term, if you’re in retail or media, in most industries that’ll be enough for you to perform better and better and better. But if you want to look at the long term, then you have to recognize what companies that are Uber-like in their thinking are going to do to your value proposition. What they’re going to do is wrap what you do in information, and they’re going to steal your margins by taking what you do and making it better. And basically, for you to be digital, you want to beat them to that.”
So what is an operational backbone? It’s putting the right structure in place capable of underpinning a digital migration. A successful digital enterprise not only requires operational backbone, but also the flexibility to act on innovation and opportunity.
“There’s an impatience to get going and show results, but becoming a successful digital business is not easy,” Ross said in a related article. “Our research suggests the reason why it’s so hard is that most established companies do not yet have the capabilities they need to become digital.” Ross and her Designed for Digital co-authors found that, on average, only five percent of the most advanced companies’ revenues are coming from new digital value propositions. “That’s five years of having a vision and pursuing that vision, and revenue from digital offerings is accounting for just 5% of their [total]. Any of these companies will tell you there is a level of capability development and customer development that has to be done, and it’s not easy.”
Including the need for operational backbone, Ross explained in her talk that there are five components needed to ensure success in the digital economy:
Operational backbone: “This is what we’ve been after for the last 20 years,” says Ross. “Now we have to get serious about it, and we have to take advantage of digital technologies. So getting that so our current business is solid it’s predictable, it’s efficient, it’s still enormously important. It’s table stakes.”
Shared customer insights: “The ability to constantly understand better and better and better what a customer will pay for.”
Digital platform: “We have to recognize that we’re all going to become software companies, and we’re going to need the kind of digital platform — a Salesforce.com, a Microsoft — that allows us to succeed as a business. We’re creating repositories of business data and infrastructure components so we can constantly reconfigure what we create for the next customer need. That’s a digital platform.”
Empowered teams: “We need the ability to create all those components and reuse them. We are not able to do that in most of our businesses today. It is not about hierarchical structures, but rather, empowered teams who are aligned to pull off the delivery of the customer solutions that we want to deliver. That, of course, is very different from the way we run our businesses today — understanding ownership and how we assign that accountability will be core to success in the digital economy.”
External developer platform: “As we’re developing our digital platform and configuring solutions, we’re going to find that our customers love us so much they’re going to ask for more and more and more. Realistically, we’re not going to be able to deliver it all. You can find a partner to deliver it. But that has to be a digital connection. We need an external developer platform to pull that off.”
In her MIT Sloan Symposium talk and book, Ross cited the example of Schneider Electric, which made the transformation from a supplier of electrical equipment. “What it started to realize is that it could put alerts on its big equipment switchboards, transformers, to recognize when they were dying or over capacity,” she related. From this, they designed an energy management solution, called Resource Advisor, which leverages the data coming out of these devices.
However, Ross added, it took time for Schneider to be recognized in its market for these new services. “When you’re developing our first solution, especially in B2B, you’re going to think it’s brilliant when you just come up with the idea. Unfortunately your customer probably won’t.” When Schneider Electric said “‘we’re going to give you energy management solutions,’ their customers said, ‘Schneider, we don’t think of you that way.'” To resolve this, the company built its new offerings in conjunction with partners such as Hilton, on reusable features such as dashboards and analytics algorithms. “It takes a while to build, it takes a while to sell, it takes a while to recognize how you’ll reuse. The good news is that Schneider now has 20 Resource Advisors with different names and they will soon have 40. Once you get going, you do gain momentum in and this really starts to sell.”