DIGITAL TRANSFORMATION: FROM KEEP UP TO STEP UP 21/04/2016 Every year, the Wall Street Journal and Dow Jones VentureSource compile the billion dollar start-up club. In 2014, it had 43 members with Dropbox topping the list at a 10 billion dollar market value. One year later, the club comprised 130 companies and Uber led the bunch with a $ 51 billion valuation. And 4 months into 2016, the number stands at 146. That’s the pace at which digital disruptors are growing. Significant new economic value is being created over very short periods. There’s a longlist of former top companies that have lost market share or totally disappeared. Digital disruption may be a threat to your company as well. Do CEOs realize it? According to a PricewaterhouseCoopers survey, 86% of them acknowledge the importance of digital, but a mere 56% see it as an asset for increased competition and disruption in their markets. Only 45% see it as a growth strategy. As a result, most or 83% of the CEOs don’t have a clear strategy. That’s scary. Scary for us CIOs, too, because we can help tackle our companies’ challenges and build changes around a strategy, but this should be outlined by the CEO or the board. It’s strategy and not technology that drives digital transformation. So we have to make sure the CEO is on board. HPE strategist Ian Henderson confirms: “The CEO support is vital for your transformation because you’ll get the automatic buy-in from all the business segments. If the transformation is fuelled by IT, that scale is much more difficult.” HPE strategist Ian Henderson: “The CEO support is vital for your transformation because you’ll get the automatic buy-in from all the business segments. If the transformation is fuelled by IT, that scale is much more difficult.” How to define a digital strategy? There are many reasons to invest in digital: increasing the interaction with customers, improving the supply chain, improving operational excellence, and so on. How to prioritize? Ultimately, it is back to basics. You first need to define the value a digital strategy will deliver to the bottom line. That’s why you need to involve the CEO in your discussions, to define what your transformation should focus on: customer centricity, operational efficiency or capital productivity. “I was talking to a Belgian company today”, says Joao Baptista, President Eastern, Central & Southern Europe at CGI Group. “They are making 100 million in profit and are spending a lot in operational efficiencies. I asked him how many of that is going to add to the hundred million. About 4%, the company replied. That’s another 4 million. Shouldn’t they invest in growth instead, for example via new customer services? That could allow them to perhaps double the profit. You need to outline your Digital Transformation programme.” Identify opportunity areas Baptista did such an analysis for a telco company. “We compared the company’s financial metrics against other industry players to identify the potential ‘value gaps’ and opportunity areas. Its contribution margin was above the industry’s benchmark and its capital productivity as well. The issue was growth, we could add another 240 million pounds in earnings if it would grow as fast as the sector. Therefore we advised the telco to invest in customer centricity, which is very dependent on the workforce and how fast they activate telco lines.” He developed a process that is fully automated and at the same time improves customer satisfaction. The operator is guided to the next job via GPS integration, has access to digital maps of the installed network and can immediately request for team assistance if needed. The process efficiency increased by 29% and the company decided to charge for missed rendezvous. In the end, the telco went from 2.4 to 3.1 jobs per day per engineer, a 14 million pound increase in annualised benefits. “The secret is to focus on the end to end process of a business, instead of doing a bit of digitalization all over the company”, says Baptista. Financing your digital transformation A great majority is maintaining or increasing its IT budget in 2016, according to a CGI survey. But even if extra budgets are created, is there room for digitization investments? “The trick is to make a segmentation of keep-up and step-up capabilities. You want to minimize the keep-up costs, such as infrastructure, and invest in activities that will really differentiate your company in the marketplace. The telco company we are working for was able to reduce their run-the-business budget with 60% over the years, and that budget was reused for transformation”, Baptista says. In 2006 we had 7,000 applications to run and maintain, today we have 1,400Ian HendersonWhen Hewlett-Packard split in HP Inc. and HPE, the company seized the opportunity to reshape its IT service too. “In 2006 we had 7,000 applications to run and maintain, today we have 1,400. On the hardware side, we used to have up to 90% traditional data centre technologies. Going into next year, we believe just 10% will still run on traditional hardware. All the rest will be in hybrid cloud. We have 38,000 VMs on our private cloud and are trying to squeeze that further. As a result, we were able to reduce our footprint of 85 data centres to just 4 today. Our total IT spend dropped from 4% to 2% of the revenue”, says Ian Henderson. Those savings were reinjected to innovate IT, enabling the business to transform as well. Henderson gives an example: “We went from selling ink to introducing a pay-per-page model where you automatically ship out new cartridges. Customers now have different expectations. They don’t want products anymore, but solutions. Secondly, the market dynamics are changing. Our company needed faster, more frequent new product introductions because our competitors are changing as well, in cloud for instance. Finally, our own employees are changing too.” Talent for your step-up Indeed, transformation isn’t solely about technology. The British online bank First Direct has a reputation for customer service. When asked for the biggest driver for their success, CEO Tracy Garrad replied: “People and culture. Our number one priority is the people we hire and the people we retain.” You need to keep pace with technology, but also invest in the best talent to drive your differentiation program. Do not distract them with undifferentiating tasks. Ensure your talent understands how the keep-up engine works. When asked for the biggest driver for their success, CEO Tracy Garrad replied: “People and culture. Our number one priority is the people we hire and the people we retain. Is there time pressure? “Do you remember Blockbuster? It was a company that recognized the threat – Netflix – but it couldn’t find a way to react to it. In fact at a certain time they were talking to each other about ways of collaborating. But Netflix sensed they were getting stronger and claimed to take over Blockbuster. The CEO didn’t have the support of the shareholders to accept and they vanished”, says Baptista. Smart CIOs invest in strategic differentiation, and not in keeping the green lights on. Avoid becoming the next Blockbuster. “The role of IT as a traditional service provider is long gone”, Ian Henderson states. “And it should be long gone, because then you’re perceived as a cost centre. If you can shift the IT department to enabling business performance, driving innovation and retaining talents, you’ll be seen a value creator.”