In my last article, I talked about how the culture and ways of working in Amazon drive innovation and agility that have served the company well in the face of the pandemic.
Let’s now discuss the challenges that many traditional established enterprises face in transforming and how the pandemic creates a much greater sense of urgency for them.
We can then talk about the key attributes of a successful 21st-century Modern Agile Digital Enterprise that has either been born-digital or are pursuing digital transformation.
Traditional structures and operating models
Most well-established organisations were designed in the last century in a functional structure to scale with stability and predictability. The whole focus in each of the business functions was operational excellence, efficiency and cost. This worked well through the 20th century as customer expectations were not expected to change very much – if at all. In these functional organisations, behaviour is intentionally driven by strategy and metrics developed centrally and cascaded down the organisation structure each year.
In my experience, the focus on operational excellence means many organisations have lost their focus on innovation and struggle to swarm around customers as they scale. They often lose what Amazon call the ‘Day One’ focus on customers and innovating. If these organisations think about innovation, transformation or change, they tend to look at a single long-term transformation programme.
Traditional operating models are very much based on ‘command and control’. They are led top-down in each of the functions. Behaviour is driven by strategy rather than culture. Leaders in each function use strategy and metrics to focus on operational excellence despite being a long way away from what’s happening with the customer (internal or external).
These organisational structures were designed for stability and predictability not to withstand a significant change in customer expectations or economic conditions. Still, the pandemic has thrown both at them in an unprecedented way.
A new world order (coming to a market near you!)
This isn’t new news. Disruption has been underway for a while, touching virtually all aspects of our lives. Since the start of this century, we have been experiencing new business models, consumption models and valuation models from innovative digital companies that have emerged over the last 10 to 15 years. Think of these as calculated ‘experiments’ funded by VC’s.
In many ways, these are the experiments that established enterprises could have pursued but didn’t. Digital enterprises like Airbnb and Uber are harnessing data to connect customers to experiences. Airbnb is connecting travellers to empty rooms. Uber connects riders to empty cars and constantly informs the riders before, during and after the experience.
Established enterprises have also been looking at how they can reinvent themselves. Capital One is an excellent example of a financial services company that has been pursuing digital for over a decade to the extent that 75% of its interactions with customers are now digital, and its developed a rich bench of digital talent.
New ways of working
So, what are the key attributes that enable these digital companies to cope with change or drive major disruption?
At the heart of many of these organisations are new work cultures where small empowered teams make lots of incremental changes. These have a high frequency of small iterative changes in small sprints rather than an unwieldy enterprise-wide multi-year transformation programme.
These small empowered teams have technology teams embedded in the business functions. In my experience, where technology and the business work closely together, funded and sponsored by the business, they can make small incremental changes that ultimately accelerate time to value.
As one sprint is completed, the business leaders can dynamically evaluate the next highest priority to address rather than referring to a large multi-year roadmap that can become quickly out of date. That’s what happens in startups, and increasingly we will see these operating models in the enterprises of the future.
Central to these operating models are new ways of working, small empowered business and tech teams that are data-driven and customer-centric, developing new capabilities or products close to internal or external customers.
A great example of this way of working is the clothing and homeware company Zara, which constantly observes the customer’s reaction to their products in stores, gathers feedback and iterate designs within two to three weeks before the revised designs are replenished in-store. They constantly iterate in contrast to many established brands with low-frequency change because they design, manufacture and stock a range for the whole season 2-3 times per year.
Covid hit the fast forward button.
IMD believes there is no hiding from digital disruption, and the pandemic definitely accelerated the process for many organisations. IMD calls out the clear positive correlation between how businesses could respond and perform during the pandemic and their level of digital maturity.
Source: IMD 2021 Digital Vortex Report
“But while companies know they need to transform, they are really struggling with how to do it. This gap between knowing and doing started before the pandemic, but it has been amplified with the rapid transformation brought on by COVID.”
According to Deloitte’s Digital Disruption Index, 28% of organisations surveyed in 2019 were still in the early stages of digital development, and 53% were digitally developing.
Most companies know they need to embark on their digital transformation but are unclear on where to start. The leaders feel very confident leading an organisation through a structure focused on operational excellence in stable conditions.
Mckinsey’s recent survey finds “COVID-19 has pushed companies over the technology tipping point—and transformed business forever”. Sadly, for some, it has been a case of too little, too late, with retail giants such as Debenhams (established 1778 in London) and the Arcadia group amongst the lastest victims.
The only good news is that most companies leaders now recognise they haven’t been able to respond to the crisis with the nimbleness or agility of others.
They are now conscious they have low digital maturity. The leadership team probably feels ill-prepared and lack experience in how to lead change. How can they adopt digital ways of working and technology? They often struggle to assess whether they have the right human capital to change and build transformation as a competency.
How finance can become sponsors of digital transformation
The focus on operational excellence in most organisations doesn’t necessarily result in opportunities to improve their operating model.
Typically organisations are unaware of the scale of how much low value-added work is being performed across their entire organisation or how automation could be applied to improve it in either the front or back office. They are fully aware that there are many manual processes that employees and management struggle with but haven’t quantified the scale. I’ve seen many examples in sales, marketing, wealth management or healthcare organisations where the basic analysis identified the size of the opportunity.
This is a perfect example of where the finance organisation can step up and quantify where people are spending their time. Creating visibility of high and low value-add work will identify the priorities for digital transformation. There are huge opportunities to improve efficiency in many companies by removing the need for crude data mining or automating low value-added tasks.
My next article will discuss how the CFO and Finance team can become true champions of digital transformation and build transformation as a competency.