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The Technology Fallacy: People Are the Real Key to Digital Transformation.

This article is about how digital transformation really happens: how companies go from being traditional, physical, legacy companies to thriving and competing in the digital age. A four-year study, conducted in collaboration with MIT Sloan Management Review and Deloitte, sought to investigate how traditional companies can keep up and adapt in today's digital world. (The full results of the study are available in Kane, Phillips et al. 2019.) (1) The answer is less technological than you may think. In fact, companies must address three business issues if they're going to manage digital transformation effectively: navigating digital disruption, rethinking leadership and talent, and becoming a digital organization.

The Study

The research was conducted in two parts: (a) a survey of executives around the world and (b) a set of interviews of thought leaders and executives who are actually doing this work on the ground. The interviews provided detailed context to the survey data.

The first part of the work was a global survey of executives. The survey drew 16,400 responses over four years--about 4,000 responses each year. Only about one-third of respondents were in the United States.

The survey sought to identify the elements of our key construct for the study--digital maturity. To get to that key construct, we asked respondents to imagine an ideal company transformed by technology, one that is "utilizing digital technologies and capabilities to improve processes, engage talent across the organization, and drive new and value-generating business models," and then to rate their organization against that company on a scale of 1 to 10, with 10 = perfect and 1 = "We're as far as we can be from that digital reality." Those results produced a nice, fairly normal distribution, with roughly 50 percent of respondents rating their companies in the middle and 25 percent on each of the two tails. We defined companies that fell into the first category, with average ratings of 1 to 3, as early-stage companies; those that fell into the 4 to 6 range we designated developing companies, and those that fell in the 7 to 10 range we identified as maturing companies.

One thing that's been really interesting and encouraging over the four years of the research is that we have seen progress in the surveyed companies. The curve has shifted about 5 percentage points to the right--more companies are saying they're more digitally mature. Anecdotal information, gleaned from interviews, backs up this perception. In fact, one of the most rewarding things about this research has been talking to companies that seemed to be hopelessly grounded in the 20th century and finding that they are doing really interesting, progressive things to bring their organizations into the 2010s and beyond. The number of companies that are reimagining themselves as digital companies is astronomical, and it spans industries--from McDonald's to Walmart to Goldman Sachs.

Navigating Digital Disruption

This discussion has at its center two terms: digital disruption and digital transformation. Digital disruption refers to the way digital technologies are upending entire industries, changing the rules of business. Digital transformation is about how companies are adapting to the new reality created by digital disruption. It's an important distinction.

So how do companies navigate digital disruption? To answer that question, consider The Wizard of Oz. How much of the story of The Wizard of Oz is about the cyclone? On one hand, all of it is, because Dorothy would never have been taken to Oz if it weren't for the cyclone. On the other hand, none of it is, because we really don't care about the cyclone; we care about Dorothy making her way through the strange, new world of Oz, a world so different from black-and-white Kansas that it can only be imagined in Technicolor.

The cyclone is a metaphor for technology in digital transformation. This cyclone has ripped across our business landscape. It has disrupted companies like Borders and Blockbuster, and uncountable others. It is changing the whole nature of competition and the business rules I learned in my MBA program in 2000. It is upending everything we think we know.

The question is, how much of digital disruption is about technological disruption--about the cyclone? On one hand, all of it is, because we wouldn't be here if it weren't for the array of devices and technologies that are changing the way we do business. On the other hand, none of it is, because we don't fundamentally care about why we got here; we care about how our companies make it through this strange, new world created by pervasive digital technologies.

Here's where the distinction between disruption and transformation becomes important. Nearly everyone sees the cyclone; few are prepared for its arrival in their companies. In the survey, we asked, "To what extent is your industry going to be disrupted by digital technologies going forward?" The vast majority of respondents--87 percent--said their industries would be disrupted moderately or greatly. That number was pretty consistent across industries. But only 44 percent of respondents said their organizations were adequately preparing for these changes.

So there's a gap, what we call the "knowing-doing gap." We all know it's a problem, but we're not doing enough about it. To find out why, the survey asked, "What are the biggest threats, challenges, and risks that your company is facing as a result of digital trends?" Reponses to that question revealed some interesting trends. Most respondents identified the company as its own worst enemy. The real challenge was organizations that weren't fast enough, agile enough, innovative enough, or couldn't navigate needed culture change. After that the key threats came from the market environment, in the form of product obsolescence, lower barriers to entry and eroding competitive advantage, and competitive pressure, including more intense competition, faster competitors, and new competitors.

Next, the survey asked, "Is your organization going to be in a stronger or weaker position going forward as a result of digital trends?" The results were interesting. As companies become more digitally mature, they are more likely to see digital technologies as an opportunity. At the same time, about 25 percent of companies across the board, regardless of maturity level, see digital technologies as a threat. To us, this makes no logical sense: if the disruption is an opportunity for you and your competitors, then it is by definition a threat to you, as well. I think this indicates that early-stage companies do indeed have their heads in the sand about what's happening and the threat it poses.

What is happening? What is it about digital business that's different? Survey respondents identified several elements that are different (Table 1). By far the most significant is the pace of doing business. After that are differences in culture and mindset. Following those is a list of elements, such as the importance of a flexible, distributed workplace, improved productivity, and other factors.

The pace of business is not necessarily about the pace of technology or about the rate of technological change. The real challenge for organizations is the differing rate of change between technology, individual's adoption of technology, and an organization's ability to adapt to these changes. Technology ramps up fast, but it doesn't matter that technology's evolving quickly if people don't adopt it. Individuals are adopting technology faster than organizations can. And public policy and regulation are the slowest of all to respond to technology changes. Companies are stuck in an in-between zone, needing to catch up to individual adoption of technology, but also needing to keep an eye on the regulators, who are behind them.

Rethinking Leadership and Talent

This article shares a title with the book that reports the study in detail (Kane, Phillips et al. 2019). The technology fallacy both revolve around is the mistaken belief that, because business challenges are caused by digital technologies, the solutions are also going to lie in digital technologies. The fact is that it is your people who will fuel--or thwart--your digital transformation.

Companies too often don't recognize this. In fact, in the companies we examined, the cultural and the talent and the leadership and the strategy and the organizational challenges are almost always far more difficult to resolve than the technological ones. It's relatively easy to implement a new technology; it's extremely difficult to change the way you do business and the way your employees work together. It's far too easy in the rush to implement a new technology to forget about the importance of employees in making it work.

Leadership matters. For all of our survey respondents, whether they saw digital disruption as a threat or an opportunity, leadership was the second most important factor necessary for success. As companies become more digitally mature, they report greater confidence that their leadership has what it takes going forward.

We also asked respondents about the need for a change in leadership, and here's where the responses got interesting. Asked "To what extent do you need new leaders to lead your company into a digital age?", more than half of respondents said they needed new leadership. That response rate never dropped below 50 percent, across all four years of the study, even as companies matured. Even the most advanced companies, even the most mature companies, said they needed new leaders to work in a digital future.

Where we saw differences between maturing and developing companies on the topic of leadership was in response to a different question: "Is my organization developing leaders who have the capabilities necessary to lead?" Digitally maturing companies are developing those leaders;

they are actually doing things to develop digital leadership for the future.

What does digital leadership look like? We often think of it in terms of AI and big data and a host of other technology buzzwords. But in response to an open-ended question about what skills digital leaders most need, respondents didn't point to technology first. Rather, they identified things like having a transformative vision, being forward-looking, and being change-oriented.

Technology understanding was only fourth on the list, identified as important by less than 20 percent of respondents. Clearly, it's hard to have a transformative vision and be forward looking if you don't have a fundamental understanding of what's happening. Leaders need digital literacy; they need to understand what blockchain and AI and VR and AR and autonomous vehicles can do in their relative timelines. But they themselves don't need to develop AI algorithms or do big data analysis. What they need is a working knowledge of the business value and application of these technologies, what I call digital literacy. That's relatively simple to acquire. It's a lot easier to teach executives the technology knowledge they need than it is to teach technologists the leadership skills they need.

Forward vision is a critical part of leading digital transformation. And it's more forward-looking than you may think. Your organization's forward vision needs to encompass a 10- to 20-year timeframe. Of course, you can't think on this timeframe and get it right, but you're not trying to get it exactly right: you just need to make sure that you're thinking big enough. You need to look at where you need to be and assure yourself that you are heading in the right direction, not just taking the next step from where you are.

There are ways to find the right direction even when the various possibilities diverge. One leader of a large healthcare company told us, "What I try to do in this uncertainty is to envision something that's necessary for all possible scenarios." He offered an example from his own industry concerning patient data. He doesn't see any possible scenario going forward that fails to give patients control of their data, so that's something he and his company need to work on, no matter what happens. Having a 10-year strategic discussion with your leadership team at least once a year, identifying the commonalities among scenarios, and thinking about how those inevitabilities guide your direction now is important.

On a similar note, companies need to think about who is leading digital progress. Often, it starts in IT, but ultimately, digital transformation needs to be led from the C-Suite, from the CEO's office. Roles change as organizations mature digitally. In early-stage companies, the most common executive response is, "We just need to talk about it. We don't actually do anything about it (yet)." In developing companies, the response is, "We have one-off initiatives where we're doing some digital stuff, but it's really not core to our business." But in maturing companies, "Digital is core to our strategy and to what we're going to do in the future." The position of digital leadership relative to the company's leadership team reflects that evolution.

The danger in considering digital transformation is that you throw out the baby with the bathwater. But the basics of business haven't really changed. Executives need to commit the time, energy, and resources to make digital transformation happen. Digital needs to be a focus. It sounds obvious, but so often it doesn't happen this way; digital is just tacked onto somebody else's job.

One of the challenges that came up with many of the executives we interviewed is the challenge of keeping the lights on, doing your core business, while at the same time transforming digitally and innovating. It's hard. But unless executives carve out that time, it's not going to happen. In fact, our research reveals that even a little bit of innovation goes a long way. An allocation of 10 percent of executive time to digital transformation tends to be the biggest differentiator between those making positive progress and those falling behind.

Digital leadership has implications across the company. Our results show that employees want to work for digitally mature companies, and that finding is not age-related. About 85 percent of employees age 22 to 27 want to work for a digital leader, and 79 percent of employees age 45 to 52 want to do so, as well, as do 76 percent of employees age 53 to 59. This is important because companies need new talent just as much as they need new leadership. The number of respondents indicating a need for new talent never dipped far below 50 percent, for any stage of maturity. Everybody needs new talent and everybody needs more talent. Conversely, digital leaders reported that their embrace of digital was attracting talent.

Digitally mature companies recognize that these employees want to work for them, and they're using it to their advantage. Adobe doesn't advertise a job and wait for applicants. Instead, it finds people with the skill sets it needs on LinkedIn and asks them if they want to work for a digital leader. Adobe's not the only one. In our survey, over 50 percent of respondents said that they had been approached about changing jobs simply from having their digital profile online.

Developing existing talent is also key, and it's another area that distinguishes early-stage from more mature companies. Early-stage companies hire out and build external relationships to access talent. Developing companies bring their own employees along. For instance, Cigna used its traditional tuition reimbursement program, but offers three times the standard reimbursement rate to employees who pursue any of the 15 skill sets the company's leaders have identified as strategically important. In other words, the company is incentivizing its employees to adapt to this new world.

Maturing companies also develop their own employees, but they recruit digital employees, as well. They come after the best of the best at lesser companies, as Adobe does. And that approach works, to some extent--employees are 15 times more likely to leave an early-stage company within a year than they are to leave a maturing one.

But that phenomenon reverses itself once you ask if the company is providing its employees opportunities to develop their skills. In other words, employees don't want to jump ship; they just want to make sure they're marketable going forward. They want to make sure they are developing the right skill sets. But few companies are doing this. Less than 50 percent of companies, even in technology companies, are providing the right types of opportunities for growth. Employees can benefit from lots of different opportunities to develop skills, not just from training. Even something as simple as allowing employees to spend 10 percent of their time working on an open-source software project helps.

The key theme is not that digitally mature companies have more talent. It is that they make better use of the talent they have; they take steps to develop the skills they need among existing employees.

Becoming a Digital Organization

How do traditional companies become digital organizations? They start with culture. I had a hypothesis about this that turned out to be completely false. I thought we would find different types of digitally maturing companies. I thought we'd see some were more autocratic, like Apple, and others were more chaotic, like Google.

What we found was the opposite. There was one path to digital transformation, and it was through a defined set of cultural characteristics that are not unfamiliar: actively increasing agility, encouraging experiments and continual learning, recognizing and rewarding collaboration, accepting an appropriate level of risk of failure, and increasingly organizing around cross-functional teams. If you want to start somewhere, this is where you should start. It doesn't matter what flashy technology you have in place; if you don't have these things, you're not going to get very far.

Digitally maturing companies are spending far more time developing these capabilities; 80 percent of maturing companies said that they are actively working to strengthen these characteristics in their culture, whereas only 23 percent of early-stage companies said so. And maturing companies also report investing more in the coming 12 to 18 months to do so. Finally, they also report that this culture is what drives digital business adoption at their companies.

We asked companies, "How do you go about doing this? How do you create a digital culture?" Here again, the response depended on the digital maturity of the firm. Early-stage companies mandate change. Developing companies seem to just expect employees to adapt. Maturing companies make actively cultivating a strong digital business culture a priority, and they make that culture a primary lever for driving change.

Our research found that there is a single path to a digital culture, and digitally mature companies are not only doing more about it. They're also investing more in it over time and using that momentum to drive change. That points to the potential for a widening gap between those that are ahead and those that are behind. It really can become a virtuous cycle: as you gain momentum, as you become more experimental and agile and iterative, the payoffs increase, and the increasing payoffs make you want to do more.

The difference is also evident in the way companies organize themselves. Digitally maturing companies were more likely to be organized around cross-functional teams, and they reported that these cross-functional teams reduced the friction of the bureaucratic structure. These companies are also using these teams differently. They are more likely to push decision making down into the organization, to give teams autonomy for defining and accomplishing goals, and to evaluate each team as a unit.

We asked interviewees why: what is it about this particular mode of organization that's attractive? The answers had some thematic consistency. The CIO of an auto manufacturer said, "It's just how digital functions. If we don't act cross-functionally, there's no way we're going to have an integrated digital product." A leader at a financial services company said, "We have to organize differently to think differently. If we have the same structures, we're not going to have new ways of thinking." The CMO at another financial services company noted, "We had to create a team and protect that team from the organizational bureaucracy so they could actually be innovative and not be squashed by 150 years of history." The CIO of a large retailer said, "The teams allow us to be more experimental. We assign this team with Task A and that team with Task B, and then we evaluate them after eight weeks. If A is being successful, we learn and give them more resources. And if B is being unsuccessful, we re-task them to a new purpose, and we figure out why. What did we learn from that team's work?" As these examples illustrate, cross-functional teams have a number of different strengths to help companies operate more effectively in a digital world characterized by a rapid market pace.

This doesn't mean everything is fine in maturing organizations. Organizational challenges persist. Some of the biggest include encouraging experimentation and appropriate risk-taking. Some companies struggle to understand what appropriate risk-taking looks like. In a culture shaped by Six Sigma, where success is measured in terms of errors per millions of executions, how do you learn new ways of doing business? Experimentation is about increasing the variance, not controlling it. A VP from Google said, "We run a thousand experiments every day, and it doesn't really matter if they're successful or not; it matters if we learn something from it." That's not a Six Sigma system. Six Sigma works very well when conditions are stable, but when conditions are turbulent, you need new ways of doing business and you need to learn to do things differently.

Experimentation alone is not enough. 1 had another hypothesis, an idea that maturing companies would be more experimental, but we didn't see that. Early-stage companies do plenty of experimentation. As John Hagel at the Deloitte Center for the Edge told us in an interview, "Everybody has an innovation lab in Silicon Valley. It just doesn't actually affect the business." It's innovation theater.

Digitally mature companies don't just innovate; they don't just experiment: they use those experiments to drive change across the organization. Risk isn't just about small failures; it's about also having the courage to succeed. When you see what's working, when you've learned something about how to do business differently, you then use it to change the fundamentals of the core business.

Conclusion

The key takeaway of my work is that digital transformation is something all companies can and should do, but they often go about it in the wrong way. The most successful digital transformations start with a shift in mindset at the employee, leadership, and organization levels. This shift produces a culture change that allows the company to be more agile, risk tolerant, experimental, and collaborative. In contrast, companies that start with technology are often disappointed; their investments and efforts don't have the intended impact, leaving the company in a worse position going forward. I firmly believe that all companies, leaders, and employees can learn to thrive in a digital world, if they learn to do so in the right way. But it won't happen automatically; companies must decide to learn to do business differently for a digital world and invest time, energy, and resources in the right places to make it happen.

Gerald Kane is currently a visiting scholar at Harvard Business School. He is also Professor of Information Systems and Faculty Director of the Edmund H. Shea Jr. Center for Entrepreneurship at Boston College's Carroll School of Management. He teaches undergraduate, graduate, and executive education students worldwide about how companies can respond to digital disruption, and he has published more than 100 papers, articles, and reports on these topics. He is lead author of The Technology Fallacy: How People are the Real Key to Digital Transformation (MIT Press, 2019). This paper is based on his keynote talk at IRI's 2019 Annual Conference, in Philadelphia, PA. gerald.kane@bc.edu

DOI: 10.1080/08956308.2019.1661079

Published by Taylor & Francis. All rights reserved.

References

Kane, G. C., Palmer, D., Phillips, A. N., Kiron, D., and Buckley, N. 2019. Accelerating Digital Innovation Inside and Out: Agile Teams, Ecosystems, and Ethics--Findings from the 2019 Digital Business Global Executive Study and Research Project. MIT Sloan Management Review and Deloitte Digital, June 4. https://sloanreview.mit.edu/projects/accelerating-digitalinnovation-inside-and-out/

Kane, G. C., Phillips, A. N., Copulsky, J. R., and Andrus, G. R. 2019. The Technology Fallacy: How People Are the Real Key to Digital Transformation. Cambridge, MA: MIT Press.

(1) The analysis of 2019 data is available from MIT Sloan Management Review (Kane, Palmer et al. 2019).

Caption: Gerald Kane led a four-year study to examine how traditional companies undergo digital transformation.
zzzTABLE 1. What makes digital business different?

Factor *                            %

Pace of business                    23
Culture and mindset                 19
Flexible, distributed workplace     18
Improved productivity               16
Improved access to, use of tools    13
Greater connectivity                10
Other/no difference                  1

* Derived from 3,300 open responses
via coding and categorization.
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Title Annotation:FEATURE ARTICLE
Author:Kane, Gerald
Publication:Research-Technology Management
Date:Nov 1, 2019
Words:4118
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