As I have discussed in depth on the disruptor and incumbent dilemma, I want to dive deeper into the incumbent’s world. We define the incumbent to be the current status quo with the traditional businesses which generates 80-95% of the revenues of the company and 10 to 30% on the profitability of the company.
The challenge for every digital transformation is to break into the current systems, processes and rules of the company. The traditional company have built these systems, processes and rules over a period of time, stemming from mistakes which they sought to correct and at the same time, protecting the company from harm in the form of compliance. One must appreciate and understand that these systems, processes and rules are there for a reason and they erode over time because the internal and external environments have changed due to circumstances or technologies which disrupt the company’s business model as a whole.
The best way to understand these systems is to use a biological perspective. The role of the disruptor is often similar to how a virus attacked the biological system from the outside. When a human being contracted the flu virus, the medication prescribed by a doctor are not meant to be counter-attacking the invader, but rather to excite the immune system within the body to react and counteract against the external virus. That’s why your doctor often asks you to sleep and drink more water and your body need time to recover against an external virus attack. How does this analogy translate to the company? The people within the company, typically who have been in the establishment for at least 5 years or above, constitutes the cultural DNA of the company. They have adhered to a set of values that best described the company, but the systems, processes and rules are set in place like an immune system of the body. The moment the disruptor enters into the company, it is no surprise that the immune system will react against you. Hence most digital transformations don’t last very long, typically on the average of 2-3 years. In fact, the CEOs were the ones who introduced you as the virus and they might be later bounded by the systems, processes and rules to reduce the amount of support given to the disruptor. Hence, you see the disruptor is also being thrown under the bus as a result of internal politics of the company.
What do the disruptor needs to do in order not to trigger the immune system to attack you? There are few things you should do.
The first is not to rush into the digital transformation but first assess the state of digital in the company which you are supposed to perform the digital transformation. Most digital leaders enter into the arena and started the war without fully understanding the constraints and parameters of the effort required. Assessing where the company is at the moment is important. Let me use a very simple example, a digital leader might be very fluent with suites of apps such as Microsoft Office or G-suite for collaboration, communication and connectivity for successful companies out there. If the organization did not have those tools, the imperative task is first equip everyone with the digital tools in place.
The second is to focus on education and win over the independents of the company and not the cynical or skeptical. You will never be able to convert the remaining 25% of the people who are stuck in their ways. What most digital leaders do not do, is to focus on the education for the rest of the company. Of course, we will love our digital tools to be like Apple products with very little instructions and very intuitive means of learning to use the features by yourself. However, reality is complex. The digital leader’s task is not just external transformation but also an internal one.
That being said, there are always counter examples in the form of anomalies. One such successful digital transformation anomaly was the Developmental Bank of Singapore (or DBS in short), where they focused on converting the incumbents to be disruptors and focusing on bringing their current staff with them. It’s a slow but rather effective process because you empowered the staff with tools of innovation where they already understood their customers’ pain points and problems at the very start. Sometimes, education can be accelerated. Most people under-estimated how their frontline workers can be empowered easily. The growth is exponential where more and more of the incumbents are converted to disruptors. If you are thinking of building a shared services app which allow your frontline workers to apply for leave, book rooms or get their pay slips, you should at least accept that there are at least >80% who have smartphones in their pockets. That becomes easier to make that conversion. Some companies short-tracked the education by bringing external people in at a quick pace. The challenge is not in retaining the incumbent but the disruptors, because the environment may not be build to allow the disruptors to survive for a very long time.
The third strategy is to minimize costs while dealing with a two speed system. Minimizing the costs is not a simple task because it requires the tradeoffs. Most digital leaders’ instinct are to build. Sometimes, it might be better to buy, enhance the organization and let the users understand the benefit, and then make one more switch to build. The two speed system problem for digital leaders is that you need to straddle between the legacy systems while trying to push ahead with a new and effective system which everyone wants to be on. Instant gratification dictates that most digital leaders will focus most of their time on the new system and devote least of their time on the legacy system. Part of the problem is cost, and what happens usually, is that the legacy system will suffer and implode in the form of security hacks. Hence it’s important to make the transition for both old and new systems concurrently and that usually takes about 1.5 to 2 years (based on my experience).
The most significant use case for many digital transformations have to go through in the recent years is the shift from owning your own physical servers (which follows a capital expenditure or CAPEX model) to cloud computing (which you must first suffer with the CAPEX being amortized and take depreciation damages follow by an operating expenditure or OPEX model). Usually, everyone says that it’s a cost savings exercise. This is easily dispelled because very few have ever dared to factor in the transition costs of switching into the mix, otherwise their numbers don’t look so good. That’s where leadership from the executive team has to come in to price the longer term goals against the short term ones.
The two speed problem is extremely real because the digital leader’s instinct is to accelerate the development and deployment of the new digital assets while not focused on the current old legacy system that is a pain in the neck. You need to solve both problems at the same time, but putting emphasis on different things at different times. Most digital leaders did not have financial controllers on their teams and that’s why their costs are often higher than expected. The cost management system should be in place for the entrance of the digital leader, and this is something that the CEO or the board should put in place before things get awry in the process.
Once you have these three perspectives in place, how does one perform the digital transformation?
- Start from the top and bottom: A digital transformation does not start with the digital leader, but start from the CEO. It is important that the CEO must set the agenda from the very start. It is important to adopt a middle out approach, from both top and bottom. If you have frontline operations that can be enhanced by digital capabilities, you can push the digital transformation from both ends and eventually propagate to the middle management level. The battle is already half won if the c-suite and board level demonstrates that they can use the digital tools.
- Customer Centricity: The problem with most people is that they are only focused on the external customer. Most digital transformations often forgot about the internal customer, and do not build an aligned user experience flow from the internal to external customer. The best way to how digital leaders can do this, is to live the life of the customer facing roles and see the reality before putting the digital capabilities in.
How do you know when a digital transformation works? It is when you transition from building or managing the existing systems to true blue sky innovation. For me, at least, in Singapore Post, was to switch from building and revamping the existing digital assets to drone delivery. One might be surprised that the most difficult digital project for me is the corporate website of the company. I will leave that story to another day, and will explain how I have eventually solved it with the help of learning from others.
Oftentimes, when I am asked about why digital transformations work for certain companies and failed for most companies, I have an answer that I truly believe and often related both in humility and perspective. I have often narrated my opinions in the following, “My view is that neither I am nor my team are the reason to why our digital transformation were really successful. The best way is to think about the DNA of the company. The company must have some innovation DNA that led them to succeed in the distant past or made it work with the external environments. Only if the company can accept my DNA in the process, that will allow the process for the disruption to integrate and build change within.”
Note: You can also read Part 1 of the series.