Digital Transformation Does Not Have to Be Disruptive

The best results are achieved by adapting your business rather than reinventing it from scratch.

Toward the end of a long lunch overlooking the calm view of Lake Geneva, the senior vice president of a large global company made the following confession: 'We have a dozen committees on digital transformation, we have digital transformation initiatives, we are racing toward digital transformation at full speed... But no one can explain to me what it means.' 

In fact, the answer is quite simple: This widely used term refers to aligning an organization's strategies and structure so they can capitalize on the opportunities offered by digital technology. This is not a particularly new issue; computers and software have been part of our lives for decades and have driven changes both in products and services and in the ways we produce and deliver them. The issue the vice president mentioned is that it is becoming increasingly difficult for companies to turn this answer into an action plan. Today, computers can be carried in your pocket or on your wrist. Moreover, the software running on them is increasingly automating tasks traditionally performed by humans (such as expense management), visualizing hardware, and customizing products and services for target audiences to an unprecedented degree. Furthermore, they can reach people all over the world, and sensors added to devices and interfaces enable real-time data acquisition, increasing information-based decisions and machine-driven recommendations. In short, digital technology is no longer confined to the IT domain; it is used in nearly every part of companies' value chains. Therefore, it is understandable that executives struggle to grasp what digital transformation truly means for them when it comes to deciding which opportunities to pursue and which initiatives to prioritize.

Given this reality, it is not surprising that many executives think digital transformation will cause a radical disruption in their business, require massive technology investments, involve a complete shift from physical to virtual channels, and require them to acquire technology startups. Of course, in some cases such a paradigm shift is indeed at play. But our research and work show that for most companies, digital transformation means something very different from a change in which the new completely replaces the old. Change will occur, and sometimes radical changes will be required in production processes, distribution channels, or business models; however, digital transformation is more about taking incremental steps so that the company can better deliver its core value proposition.

In the following pages, in order to debunk some critical myths about digital transformation and give executives a clearer picture of how businesses should respond to current trends, we present insights from our discussions with more than 60 companies and hundreds of senior leaders with whom we have engaged in our educational activities.

SOME EXECUTIVES believe that digital transformation requires them to significantly change their company's value proposition or risk facing a major wave of disruption. For this reason, at the start of many digital transformation initiatives, companies emulate Apple and try to find a brand-new high-tech flagship product or platform that will serve entirely new customer needs. While some may succeed in this, we believe that the needs most companies will meet in the digital era will not be very different from before. The real challenge is to find the best way to meet those same needs using digital tools. As a senior executive at the French luxury retailer Galeries Lafayette put it: 'Ultimately, this too is a form of modernization. We have been in the market for over 100 years, and we have had to adapt to many changes such as hypermarkets, shopping centers, specialty chain stores, fast fashion, brands moving into retail, and ultimately e-commerce.' 

The container company Maersk provides a good example of what this executive described. Shipping costs are affected by global trade barriers and inefficiencies in international supply chains. The industry also suffers from a lack of transparency. These are well-known challenges. But Maersk found a new way to overcome them. The company collaborated with IBM and governments to use blockchain technology for fast and secure access to end-to-end supply chain information from a single source. Combined with the ability to obtain real-time sensor data, this technology has enabled trusted workflows across organizations in global shipping, reduced administrative costs, and improved risk assessment. This change allowed Maersk to better serve its core customers, but Maersk did not turn into Google. Maersk remained a company whose value proposition is to provide fast, reliable, and economical shipping services, and gained the potential to become more advanced and transparent by intelligently using digital technology. 

Another good example is the Russian airline Aeroflot. The company transformed from being one of the world's worst airlines into one of the best. According to company data, it raised its Net Promoter Score from 44 percent in 2010 to 72 percent in 2016, and its passenger load factor from 64.5 percent in 2009 to 81.3 percent in 2016. How? The company significantly improved its core operations, reporting, reservations, scheduling, and customer services using digital technology. Most importantly, it built dashboards that instantly summarize more than 450 key performance indicators. It started collecting data from sensors installed on aircraft, lowering operational costs by providing visibility into aircraft performance and preventive maintenance. Furthermore, thanks to the dashboards, the company was able to reduce its public relations staff since answering reporters' questions about company data now required less effort. In addition, by reorganizing the digital architecture built to operate its main airline, Aeroflot simultaneously began operating a discount airline, something very few airlines have managed to do. Once again, the company's reason for existence did not change: Aeroflot is still an airline carrying passengers and selling seats on various routes. It has simply become a more efficient and user-friendly company through the use of digital tools. 

Of course, this does not mean there will be no disruption. Make no mistake: everything is changing rapidly, and companies that do not take action will either be disrupted or at the very least fall behind those that have transformed using digital tools. But even in classic sectors where disruption is at its worst, if you look closely, the story is always a little more complicated than it appears. Whether you will be disrupted depends on what you do for your customers. If an established company uses digital tools better than a new venture to meet customer needs, it will continue to succeed.

Consider the taxi industry. Uber's impact on taxis is the most frequently cited example of digital disruption. The public will remember that taxi drivers around the world, particularly in Paris, went on strike against what they saw as an existential threat to their livelihoods. But today, taxi companies in Paris are doing very well. 

G7 was a traditional taxi company founded in 1905. Like many taxi companies in Paris, it was once famous for the rudeness of its drivers. Today, just like Uber, it has developed a mobile app that allows customers to order a taxi. The app offers different service levels: shared, standard, green (hybrid or electric), van, and VIP. The app can be used to hail a taxi on the street, or passengers can jump into a taxi waiting at the corner and pay through the app using the driver's four-digit code. 

However, G7 differs from Uber in several ways: its drivers are better trained, its vehicles cleaner, and you can order a taxi for exactly the time you want, not within a 15-minute window. More importantly, although G7 is on average more expensive than Uber, it is significantly cheaper when you need it most: G7's prices are fixed, while Uber uses dynamic pricing, with fares sometimes doubling, tripling, or even multiplying by eight. The arrival of Uber clearly forced traditional taxi companies to improve their services. G7 drivers now attend behavioral training courses. But it is hardly accurate to say that the digital evolution required a complete change in G7's value proposition. 

Similarly, the hospitality industry is among the sectors most affected by the rise of digital technologies. Hotels have been hit first by OTA (internet-based) players such as Expedia, then by platforms such as Airbnb, and now by search services such as Google. In our discussion with Arne Sorenson, CEO of the Marriott hotel chain, about the impact of digital technologies, he did not take this threat lightly. 'Digital dynamics are clearly revolutionary and powerful, and at times intimidating. We are in a full battle over who will capture the customer.'

Sorenson emphasized that technology would be an important factor in winning the battle: 
'We need to leverage technology to make our operations more efficient, to deliver service, and to build a digital platform that creates high customer loyalty, while at the same time building a platform large enough and offering enough value to our customers that people book directly with us. We can never compete with Google, but we want to build a community of customers who can connect with us. And this has to be through a digital platform. But this platform must focus on attracting customers.' Indeed, this is something Marriott has always done. While building platforms to compete with Airbnb and attract customers directly to its own website, the company also does not neglect to focus on what it does best: providing an excellent hotel and an excellent customer experience. Anyone who has stayed at a Marriott or its sister company Starwood knows that the famous luxury mattresses and linens of these hotels cannot be found in a typical Airbnb room.

Understanding that digital transformation does not change your business's reason for existence will also help you identify which technologies to focus on. Executives who think that digital disruption will require their company's core activities to be created from scratch find themselves running in every direction. But if the issue is simply about understanding customer needs better, executives will most likely focus on the technologies that have the greatest impact on customers (such as customer experience or relationship synergies) or on their core capabilities (such as cost synergies). Just like Maersk, Aeroflot, and G7, your company too can continue to serve the same core customer base even in the digital age. These customers' needs will not change, but digitalization will certainly ensure they are better met.

DIGITALIZATION often helps eliminate inefficient intermediaries and costly physical infrastructure. But this does not mean that physical elements will disappear entirely. On the contrary, as shown in plenty of documented examples, many retailers are finding ways to use the advantages of both by creating a hybrid of physical and digital spaces. Moreover, it is not just retailers doing this; the same trend is taking place in many more companies that have direct contact with customers.

In retail, Galeries Lafayette provides a classic example. Despite intense competition from online stores, GL knows the importance of physical proximity to the customer and that this can only be provided in a physical store. Both models have advantages: the physical model helps build an emotional connection with customers, while the digital space (especially artificial intelligence) enables a better understanding of customer needs. While companies used to over-focus on the product and lose sight of the customer, hybrid models place the customer at the center of the business.
In order to both understand customers well and form an emotional bond with them, the company is harmoniously blending the physical and digital worlds in its new store on the Champs-Elysees. The store will display carefully selected luxury products, and salespeople will be selected based on their ability to interact with store visitors, their expertise in fashion and style, and their social media skills. Referred to as personal shopping assistants or personal stylists, these employees will build emotional relationships with their customers, making the physical store a first point of attraction and contact, after which customers can move on to digital transactions. This new technology also helps salespeople 'remember' customers and their preferences and offer them personalized opportunities that will appeal to them.

GL has partly taken this path by giving tablets to employees at its most important store on Boulevard Haussmann. Customers now come to the store sometimes more knowledgeable about certain products than the salespeople thanks to their online research; the tablets allow the staff to quickly scan the online catalog and become equally informed.

Customers value visiting physical stores because they can see and touch real products there. They can reserve products online and try them at the store without being obligated to buy them. Or they can buy the product online and pick it up at the store. Either way, store staff need to know how to act as personal shopping assistants, and the product and customer information at their fingertips makes this possible.

Many brands that were purely digital at their founding are also moving in this direction. For example, the digital native Bonobos now uses physical stores so that customers can try on clothes. After the sale, products are shipped directly from a central inventory to the buyer's address. Another digital native, Warby Parker, now uses physical stores to create a more intimate customer experience. Like GL, these retailers use technology to generate data and achieve cost efficiency, while also meeting needs that digital cannot serve well, such as building emotional connections and trying on clothes or eyeglasses.
A similar trend is seen in the energy sector. In Europe, some electricity companies effectively combine the advantages of physical and digital in internet-connected home systems that include smart thermostats along with a range of sensors and detectors. Google and Amazon have also entered the smart home device market, but utility companies have certain advantages: the engineers (or selected contractors) who stand behind the value proposition offered by smart thermostats, and customers who trust these people for installation, maintenance, and repair. Some of these companies also offer preventive maintenance services: if a sensor indicates that the heating system is about to fail, the customer receives a warning through the thermostat and can schedule an engineer's visit. The same alert allows the engineer to understand the problem before the visit and bring the necessary equipment to fix it. This seamless integration between physical and digital significantly reduces the number of visits and parts used, while also putting the customer's mind at ease.

The travel agency TUI UK also moved toward a physical-digital hybrid. This was initially very risky because the prevailing view was that the sector was being disrupted. But when the company entered into digital transformation, it discovered that although many customers wanted to plan their trips digitally, they also wanted to interact with people at retail outlets, ask questions, and have complex travel plans explained to them. 

COMPANIES often try to access new technologies or ideas by acquiring startups and absorbing them into their structure. This approach carries the risk of killing the startup culture and losing the talent that plays a role in the creation process. Smart companies that are strong enough to learn from startups and find synergies but weak enough not to destroy that culture prefer to build hybrid relationships. Therefore, even when they own startups, they allow them to operate as semi-independent businesses. 

Avnet, a $19 billion global technology solutions provider, is a good example of this. The company made two important digital acquisitions: Hackster.io, a platform that enables makers from around the world to share new product ideas (such as sensors that measure urban noise and pollution levels, augmented reality headsets, and oxygen monitors for babies), and Dragon Innovation, a startup that helps companies close the gap between custom prototypes and industrial-scale electronic products. These companies operate semi-independently and interact with Avnet through Dayna Badhorn, vice president responsible for new businesses. Badhorn's role is to protect the acquired companies from the parent organization's inefficiencies, such as over-planning or slowness in product development, while at the same time helping Avnet learn the importance of agility and rapid experimentation. Hackster and Dragon Innovation call her their 'guardian angel.'

Galeries Lafayette's experience with its startup accelerator Lafayette Plug and Play (a venture co-owned with many large traditional retailers such as Richemont, Carrefour, Lagardere Travel, and Kiabi) illustrates the importance of such a guardian angel. GL executives spent plenty of time engaging with startups in the accelerator program, but they initially had difficulty turning these interactions into concrete projects within GL because no project leader had been appointed to follow the process. The situation was improved when GL appointed an executive to take on this role. GL does not acquire startups in the accelerator program in order to avoid killing their innovative cultures. Therefore, having a dedicated person to engage with them was useful for maintaining close relations with accelerator members and implementing the resulting projects. Other member companies did the same, and the number of collaborations increased.

In each of these examples, a guardian angel works to leverage the best of both organizations. They help ensure not only that the startup stays true to its mission (which is largely what prevents talent from leaving), but also that while connecting that mission to the larger organization's mission, the startup team is protected from all the bureaucracy and reporting tasks that traditionally consume the company's time. Meanwhile, the large company can fully benefit from the startup's ideas, processes, culture, and technology.

EXECUTIVES OFTEN think digital transformation is primarily about technology change. Of course, technological change is involved; but smart companies know that the transformation is actually about better meeting customer needs, whether through more effective operations, mass personalization, or new opportunities. Because digitalization makes it possible, and indeed requires, that activities previously dedicated to this purpose be interconnected, a company often needs to reorganize both its human capital and its technology. 

In practice, this can mean changing the structure (for example, building in-house teams with the skills and authority to follow projects from beginning to end when a more agile structure is needed). While every team is a group, these teams differ from those seen in most large companies in that they have the power to quickly solve core problems like entrepreneurs.

The credit card giant Mastercard has a systematic process for building such teams, managed by Mastercard Labs. Employees from different units can submit their new ideas to a three-stage award system: Orange Box, Red Box, and Green Box. The first stage, Orange Box, gives employees a chance to develop and present an idea. The winner of this award receives a $1,000 gift card and coaching to prepare a presentation for executives on the solution to a particular customer problem. In the Red Box stage, people turn their ideas into concepts; the established teams receive $25,000 for testing, prototyping, and research, plus 90 days of mentoring to outline the steps required to elaborate the concept. Green Box is designed for the creation of a commercial product from a formal incubation project within Labs. At this stage, the team leaves their company jobs for six months to work on the project.

The experience of large global bank ING offers important lessons on how such teams can be operated in more traditional organizations. ING realized that it had to support these intrapreneurs' transitions between roles so that the right employees could be assigned to cross-company initiatives and would not stay longer than necessary in initiatives that should be ended. The bank developed a set of internal processes called PIE: the P for Protect means that employees who leave their jobs to work on a team project can return to their roles if the initiative fails; the I for Independence means that team members are allocated their own resources and can make their own decisions; and the E for Encouragement means that if team members succeed, the team's work will receive significant recognition within the company. 

Of course, the failure of these teams should not be a problem. Failures, even relatively late-stage ones, should not put a career at risk. As ING CEO Ralph Hamers explained, 'We have to be honest about failures. Moreover, we have to be honest that, by using a different approach, we learn these lessons much faster than our competitors about everything we learn in the process.'

How these changes are framed also matters. The Norwegian telecom giant Telenor, which Nathan has consulted for, also experimented with job descriptions while carrying out its digital transformation. Instead of calling people who oversee their functions and income statements 'product owners,' the company now refers to them as project managers responsible for designing the customer's journey. This change encourages employees to act like mini-CEOs who look at customer problems from the outside and can quickly cross internal boundaries to bring solutions.

Finally, it is worth recalling that the transition to a team system can be painful. To give an extreme example of reorganization: ING eliminated all the units and functions within its body and instead adopted an agile organizational structure with teams charged with delivering improved customer experiences. During the weekend of this reorganization, all staff were laid off and had to reapply for jobs in the context of the customer needs they were solving. With the help of this and similar initiatives, ING plans to reduce its workforce in the Netherlands and Belgium by 30 to 40 percent over five years. Not every transformation has to be this dramatic, but in most cases a degree of friction is inevitable as jobs are redefined.

DIGITAL TRANSFORMATION may ultimately require a radical change of legacy back-office systems, but starting the work with a comprehensive overhaul of the IT system carries great risks. Smart companies find ways to rapidly develop front-end applications while gradually replacing back-end systems in a modular and flexible way. This can be achieved either by building middleware that connects the front and back ends, or by allowing business units to immediately adopt the solutions they need while the IT department transforms the back end on two fronts. Pieces of the old system can be phased out over time, but progress in meeting customer needs does not have to wait until then.

For example, when TUI UK undertook digital transformation, it faced a major challenge: its retail, telephone, and online operations were geographically and operationally separated, and the reservation systems in the United Kingdom were 35 years old. Technology was very critical for the company at that time: the rise of Expedia and other OTA channels threatened to shake up the travel agency sector. In this context, it was very tempting for TUI to start its digital journey by completely overhauling its IT systems. But experience showed that attempts to replace multiple complex and mission-critical systems simultaneously almost always ended in disaster. Instead, as Jacky Simmonds, a member of the leadership team, said, 'The key is to envision the ideal customer experience and then see how it can be made reasonable from a business perspective with a digital perspective.'

Rather than a complete overhaul, TUI developed a three-year plan to renew its technology and primarily worked with custom solutions to focus on better customer experiences. The company used this period to learn from customers what they wanted in a digital world. Then, using a middleware interface, it connected the front-end application to the old back end. Then it split the back end into modular subsystems and gradually replaced them, adding front-end functionality at each step. When the company updated a component on either the back or front end, it first tested it in one market, then iterated the prototype to improve it before working with other business units.

Although TUI decided not to roll out its reservation system more broadly, given the diversity of its markets, a consistent digital strategy enabled these markets to work together, maximizing technology investments. By digitalizing the customer experience, the company entered a 10-year period of steady growth.

The role of middleware interfaces in filling gaps is particularly visible in the financial services sector. In 2015, the European Parliament enacted a new Payment Services Directive (PSD2). One of the objectives of this legislation is to allow third-party developers to build applications and services around a financial institution. If an individual is not satisfied with their bank's money transfer fees, PSD2 makes it easier for them to use alternative services offered by third parties. Despite the challenges posed by PSD2, organizations such as Deutsche Bank and Hungary-based OTP, instead of waiting for legacy infrastructure to change, have moved toward building APIs (application programming interfaces) that can connect external service providers, such as TransferWise and the AI-powered wealth advisor Wealthify, to their legacy infrastructure.

We are not saying that large companies can avoid updating their legacy systems forever. But it is dangerous to postpone digital transformation until you can update your systems completely or all at once. If you break the problem into modules and create a middle-layer interface, you can experiment with meeting customer needs while also maintaining operational stability at the core of the organization. 

DIGITAL TRANSFORMATION, for most companies, including those genuinely at serious risk of disruption, generally does not mean redesigning your business model or value proposition from top to bottom. Rather, it involves both transforming the core using digital tools and discovering and seizing new opportunities offered by digital. Each of the companies discussed here added different digital elements to its business model, and not all of the changes were disruptive or invasive. The secret to success is focusing on customer needs, organizational flexibility, respect for incremental change, and awareness that new skills and technologies need not only to be adopted but also to be protected. Indeed, these are the things that the best traditional companies have always succeeded at.

In summary
PROBLEM
When it comes to digital transformation, many executives think that things will be radically disrupted, that new investments will be made in technology, that there will be a complete shift from physical to virtual channels, and that they will have to acquire technology startups.

WHY
Digital technology is being applied to nearly every link of the company's value chains, which makes it difficult for executives to set priorities.

SOLUTION
The authors debunk five important myths about digital transformation and offer executives a clearer picture of how to respond to current trends. 

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