In this article, I want to focus on a specific problem that is common with the mindsets of incumbent operators about digital assets. This mindset problem has a drastic effect on the P&L and how the failure to fund digital assets can be detrimental to digital transformation. Using a simple example of how a hypothetical traditional news media company often fail with digital transformation in that mindset.
Here’s a simple situation that every digital leader will face in a traditional corporation: suppose you have implemented a digital solution, for example, building a set of social media assets for the whole organization for distribution of marketing content across them, there are costs from hiring a community manager and implementation of digital advertising campaigns that need to be borne. Typically, the process will go in the following way: the digital leader will have to get the other business unit leaders to pay for it. You will hear this from an incumbent business unit leader who often make this snarky comment, “Why should I pay for the social media management tool for distributing onto Facebook, LinkedIn and Twitter where it is so simple that the digital team should do it for free?” Of course, there will be a budget conversation between different people and it will always be unresolved. It will slowly snowballed into the other digital asset implementations. The consequence is that the company’s P&L for digital teams will always be negative, and then the board will question. Then the incumbent business leaders will accuse of the digital teams for sucking money, and then, the board pulls the plug on the digital teams.
What has happened in the whole process, is a type of mindset which incumbent business leaders with no digital mindset have. They assumed the zero marginal costs for digital distribution to be zero business costs, and of course, if you are doing P&L math for your business, you will know that it’s obviously not true. The “digital assets are free” mindset is one that occurs at least 70% of the time, and often appears as an insignificant cause until much later, when every cost needs to be scrutinized and the negative P&L of the company is blamed on the digital teams.
Let’s try to take the perspective of the incumbent business leaders here on why they think that digital assets and distribution are free and why their businesses should not pay. The first argument is relatively simple, assets such as Facebook and Linkedin Pages and twitter accounts can be registered for free, and with the Internet, you can distribute digital content at any time and any where with a press of the button. What they often ignored is that the digital asset for marketing is similar to the television ad that the company is buying. The effort to create the content that will make the social media pages viral has a cost, and given that there are so many social media platforms to manage, you need a tool that can help your community manager to work effectively and efficiently, that also has a cost. Of course, hiring a social media community manager, that itself is also a cost. What happens next is that these incumbent business leaders will make a leap of faith argument which borders on the preposterous. Since it’s free to acquire digital assets and the efforts to manage them should be free, then why should I pay you to build mobile and digital apps to connect the internal and external customer? That is one of the key reasons why digital transformations fail. The failure to assign a digital cost to a P&L of the incumbent business unit simply postpones the problem till a later date.
The best way to illustrate how this problem is to use a traditional media company. Suppose we have a traditional media which prints newspaper and build their revenues via subscription and advertising. For subscription, the business model online and offline are similar, but in the case of advertising, that calculus changed significantly. The reason is that advertisements are priced differently for both offline and online distribution. When a traditional media company brings in a chief digital officer, they typically need three things: first, building an online presence with a digital version of the newspaper; second, set up digital communities via social networking tools and distribution of content across different digital channels and third, find a business model for the digital newspaper. The problem is that both the decision maker and the incumbent business leader from print will believe that the digital leader’s role is to augment the physical paper and turn it digital. If you look at a piece of newspaper content written by a journalist from the physical paper business unit, then it should be free for the digital channels to distribute it. The problem is that there should be a cost assigned to the distribution of the article in the digital world, the management of the content brand in the digital space and last but not least, it’s human endeavor to curate before sending the content out.
In the end, the incumbent did not pay the digital a single cent because the digital assets are for free, and of course, finance comes into the way because the incumbent needs to look good with the revenue numbers. Hence the digital unit becomes the loss leader. It is obvious that where this is heading.
How can this issue be resolved? The best approach is to do a shadow P&L where the reporting for the digital work unit is accounted and paid for. The digital leader should set pricing to how much it costs to distribute content. In order for the marginal costs to be zero, the incumbent should churning out at least a high number of them. However, most newspaper have limited amounts of content due to cost pressures. Hence it is important to understand and take into consideration, why the digital unit is a loss leader for the organization.