Trends Article ‘Digital Transformation is all about Business, not Technology’

A double interview in TRENDS Magazine

Johan Van Looy, CEO INNOCOM and

Dr George Westerman from MIT

 

The full report from the interview

Covid-19 is accelerating ‘Digital Transformation’ in quite a lot of companies. Interesting times for a double interview with George Westerman from the MIT Sloan School of Management, a real veteran in digital transformation, and Johan Van Looy whose daily business as CEO of INNOCOM is exactly supporting companies with their digital transformations.

 

Why the tanker doesn’t need any speedboats

George Westerman from the MIT Sloan School of Management is a real veteran in digital transformation.

Johan Van Looy, CEO of the strategic consultancy company INNOCOM, invited the American as its Keynote speaker and Facilitator at an INNOCOM Conference within the ‘Digital Leaders Competence Center’ initiative (DL2C). An ideal opportunity for a double interview with Trends.

George spoke to us about his favourite subject: “Successful Digital Transformation is like a caterpillar turning into a butterfly”

‘I always think people don’t want to hear that metaphor anymore,’ laughs Westerman when we ask about it. He thinks a successful digital transformation resembles a butterfly. ‘Digital transformation is a bit like a caterpillar turning into a butterfly,’ he says. ‘But in practice you often see managers simply wanting to be quick caterpillars. Unfortunately, however, it doesn’t matter how fast you can crawl if you work in an industry where your competitors are flying; you’ll always be too slow. So a digital transformation needs to be a real transformation.’ And Westerman should know. He’s a researcher at the MIT Sloan School of management, was a pioneer on research in digital transformation, and has three award-winning books on his CV.

 

Technology and business

‘It’s very easy to focus only on the technology involved in a digital transformation’, begins Westerman. ‘And an awful lot of technology companies do exactly that. But the real value, and also the challenge, comes from the “transformation” part. Technology evolves very quickly, of course, but organisations are much slower to adapt. So if you want to get real value from technology, your organisation needs to change too. After all, digital transformation is about business, not technology. This means business leaders need to work together with their technology people; they can’t just make the IT department responsible for the digital transformation and then leave them to get on with it.

‘Technology is the only thing that’s got easier,’ agrees Van Looy. ‘All you need for quick access to the best software in the world is a laptop and a credit card. But it’s start-ups that benefit most from this, because they’re still lean. They can all sit round a table together and adapt quickly, so they have means beyond their dreams. Larger companies, on the other hand, struggle with this reality because they’re stuck with a legacy of old technology and a fixed way of working. They’re frozen in the past, but suddenly need to become agile. And on top of that, digital transformation is also something very transversal; the customer doesn’t care about your internal organisation.’

 

No speedboats

This is why people have believed for some time in the principle that large companies need to set up external spin-offs: the large tanker needs to deploy small speedboats that can manoeuvre much faster in order to keep up. But Westerman opposes this view. ‘That’s the simple answer, and simple answers are often wrong,’ he says. ‘Building a separate start-up allows you to move very fast, but my research shows that you then lose access to all the internal resources in your company. You’re trying to beat start-ups on their own turf, not yours, which is why this approach often fails. You’re much better off setting up an internal group to carry out the transformation within your company.’

‘In the past, for many companies digitisation simply meant developing an app,’ adds Van Looy, ‘which is quite easy to detach from the rest of the company. The sandbox model works very well here, where you isolate a group of people and just let them do their thing. But now we’re in a phase where digital transformation needs to penetrate much deeper in the organisation. The problems that everyone wanted to avoid, such as updating old IT systems and shifting the corporate culture, now really need to change. So we’re faced with a much bigger challenge.’

 

Middle management like clay

So can a large organisation really do this internally, with all the existing structures still in place? ‘Organisations do indeed need to become more agile,’ responds Westerman. ‘The entire company needs to think differently, which means a change in culture, but it’s definitely possible.’

And it doesn’t mean that you simply need to copy Google or Amazon. ‘I’ve been studying corporate cultures in digital companies for a very long time,’ explains Westerman, ‘and I often hear business leaders say they want to have the same culture as Amazon or Google. But these cultures are the result of a very specific combination of HR practices, like paying people a large amount of money, and also getting rid of them very quickly when they become surplus to requirements – principles which don’t work in lots of other companies. So you don’t want to copy them; you want to transform your culture to the point where you’re sufficiently digital, or at least digital-ready. Because that’s how you learn to be agile while still always giving your employees stability.’

Nevertheless, you’ll still need to overcome certain barriers. ‘In many cases, the problem isn’t with top management, or with the people who actually do the work,’ says Van Looy. ‘The problem is mostly with middle management. They’re halfway up their career ladder and want to carry on in the same system. They’ve almost earned their big reward, so of course they don’t want the rules to suddenly change. And that’s where a lot of the friction and resistance comes from. Success stories often come only when we remove this intermediate layer and can enter into a better discussion.’

‘Large organisations do lots of things well,’ says Westerman. ‘But one bad thing they do is cultivate a layer of middle management, and this layer multiplies itself on a very regular basis. One oil company I used to work for called it their internal layer of clay – the layer which, when you dig into it, clogs your machines up and stops them from working properly. That’s the middle management layer in a large company. A successful digital transformation will mean we don’t need some of these managers anymore.’

 

Clayton Christensen

This of course goes against what Clayton Christensen – the recently deceased inventor of the theory of disruptive innovation and advocate for speedboats – said. ‘I worked with Christensen when he lectured at Harvard,’ says Westerman. ‘I even wrote a paper with him, and he was a great man. In the dot-com period, he believed very strongly that you needed a separate entity to be able to transform. But research showed that you were actually better off with an integrated entity within your company. And Clayton eventually became convinced of this too. He called it dual transformation, so you could continue to carry out your existing activities while also introducing new ones and different ways of working. And that’s the right path to take. Because big companies still mostly reach a point where they need to integrate spin-offs in the larger organisation, and that’s where they often fail. So you need to plan this integration right from the very start.’

 

And Westerman believes there are lots of examples of companies that do this well. ‘There are the well-known examples such as Nike or Lego, but also less familiar ones, such as Asian Paints in India, for example. They’re the country’s largest paint manufacturer, and ten years ago they produced thirteen different types of paint for thirteen different regions. Everything was fragmented, so they started using an ERP system to create efficiency in their operations. This provided them with the basis to improve the way they did things in other parts of the company. They adapted their processes so that customers could order paint from a call center and salespeople could focus more on deepening customer relationships and finding new customers than on taking orders each week.  The feedback and information this provided them with meant they could again improve their processes even further and ultimately develop a completely new business model. Now they don’t just sell paint; they’ve adopted an Uber-like model and can also paint your home. In the space of ten years they’ve changed from being a fragmented company into an integrated multinational that provides paint, paint-related services and renovations across seventeen different countries.’

It’s true however that these types of companies should not put all of their focus on radical business model innovation. ‘Existing companies can of course incorporate new business models,’ explains Westerman. ‘Consider for example the Marriott and Hyatt hotel companies which are now developing Airbnb-like services. At the same time, however, there are also lots of companies that think business model innovation is the only sexy way forward. So they focus on that when there are actually huge opportunities in changing your processes and being innovative in how you serve your customers.’

 

The end of digital transformation?

You might be wondering why we’re still talking about all this. Digital transformation has after all been a buzzword for years, so why is it still so hard to make the transition? ‘There are of course many more companies that are good at it these days,’ responds Westerman, ‘but there are always faster companies and slower companies. And it’s the slower companies that will always encounter difficulties.’

 

‘Lots of companies are indeed very successful at it,’ continues Van Looy, ‘but it’s often smaller companies that can respond to new technology faster. Changing a large company costs more time and energy. Digital transformation is a paradigm shift, after all, and not just a new management style. It requires a lot of coordination between different layers of management, which are often still trained to operate using outdated methods. And furthermore, digital transformation is a moving target. Five years ago a digital project was programming an app, but today the challenge is much broader than that.’

‘But companies can’t wait to become digital,’ concludes Westerman, ‘and lots of leaders understand this. “Technology changes rapidly, but organisations change much more slowly.  The companies that succeed over the next few years will be the ones that build a culture in which transformation is just part of doing business.  These companies can use new and old technologies, in combination, to constantly drive their competitive advantage forward.”

‘It is of course difficult to predict the future,’ adds Van Looy, ‘but I think it’s the ecosystem players who will win – the companies that understand they can no longer do everything in isolation. The future is definitely going to be interesting.’

 

Has reading this interview inspired you to know more? Reach out to us. We’d love to help you with your current and future challenges on Digital Transformation!