Competitive viability today requires digital transformation, yet an estimated 70% of all such complex transformations fail. Clearly, the issue isn’t board awareness or buy-in—digital transformation is on the agendas for corporate boards of companies around the world. And calls to bridge the digital “literacy gap” of boards are ubiquitous. Indeed, the boards of leading Fortune 500 companies across diverse industries boast impressive rosters of digitally-savvy directors. But as any CIO will readily tell you, deep technical mastery doesn’t always equate to success in transformative projects. When it comes to transformation, knowing what questions to ask can be as important as knowing the latest technology.
Here are three essential questions directors should keep before them if they are to successfully oversee their companies’ digital makeovers:
Are we genuinely transforming our business or merely using digital to improve it? There’s a huge difference. In the early 2000s, large hotel chains adopted advanced software algorithms and new capabilities to improve many aspects of their operations: demand forecasting, pricing optimization, customer loyalty programs, guest services, and more. Meanwhile, the founders of Airbnb were asking far more fundamental questions about what outcomes travelers were seeking and how the digital mobilization of property owners could deliver those outcomes.
You could argue that Airbnb had the luxury of being unconstrained by huge investments in bricks and mortar, but the fact that a number of hotel chains have added Airbnb-like services to their portfolios belies the reality of such constraints. The real constraint is lack of imagination. When imagination is lacking, digital technologies are used to automate and incrementally improve current business models instead of as fuel for bold new business strategies.
Have we chosen the areas of greatest impact for leveraging digital technology? Digital technology can be applied to virtually every aspect of a business. The question for the board and for management is where digital can create the most disruptive value: in new business models, in new products, in greater agility, and so on. These “digital leverage points” are the strategic areas within an enterprise where technology has the most transformational impact, as opposed to merely providing automation. It is the job of the board to help management make the right choices, not just throw numerous digital initiatives against the wall and see what sticks.
Through a deep understanding of the organization’s capabilities, the industry’s shortcomings, competitors’ advantages, underserved or ill-served customer segments, and technological possibilities, companies and their boards determine where to place their major digital transformation bets. For Walmart, that has meant a new commitment to ecommerce in order to go straight at Amazon. For many healthcare providers, it has meant fully leveraging big data in the interest of outcomes-based treatment. For many financial services firms, it has meant a full embrace of fintech. Many companies have placed equally valid and significant digital transformation bets on internal capabilities like highly efficient logistics (Amazon), R&D (Intel), and supply chain (Apple). The most promising digital leverage points will vary from industry to industry and enterprise to enterprise. Helping determine that promise falls, in part, to the board.
Does our change management model match the urgency and difficulty of the challenge? The bigger challenge in digital transformation isn’t digital; it’s transformation. Without the right change management strategy, even the most highly innovative pilot projects never make it through the innovation “valley of death” to enterprise-wide scale-up. The change strategy you choose depends on the degree of urgency surrounding transformation and the degree of resistance to change that prevails in the culture.
If you have sufficient time, internal capability, and the path to the desired transformation is relatively clear, then it can usually be handled through organic change. After the 2008 economic meltdown, Fidelity Investments decided to increase its investments in digital capabilities while competitors were slashing budgets. That gave the company sufficient time to transform itself organically, pushing it ahead of competition in areas like blockchain, artificial intelligence, and crypto currency.
If existing capabilities, time, and internal resistance to change are all a challenge, then your best bet may be an acquisition, like Walmart’s acquiring Jet.com. It can be risky, given the poor track record of acquisitions. But if you give the acquired entity a strong mandate and change-management support, this approach can jump-start new capabilities.
If time is short and the prevailing organization culture is partly resistant to change, then “edge organizations”—internal groups given full freedom to operate differently from the rest of the business—may be the best approach. To facilitate agility, they may be allowed “amnesty” on purchasing standards, IT architectures, and even some HR practices in the early stages of idea development. At the same time, their familiarity with the culture imbues them with the trust that is such an advantage in organic change.
We are now at the dawn of the Fourth Industrial Revolution, weaving together machines, humans, and organizations to generate entirely new ways of creating value. During such times of dramatic change, boards must necessarily play a disproportionate leadership role in transformation. To do so, they must begin by asking the right questions.