Success requires the ambidexterity to be both fast and slow — and knowing when to be which. Running in the wrong direction is worse than standing still.
Since a digital transformation is so complex, it’s also important to take some time to determine what you want your operating model to be — essentially, how it’s all supposed to work so the change can last. As companies shift to working in agile teams organized around discrete processes, products or customer segments, leaders need to figure out where those people sit, whom they report to, what talent and systems they need and a myriad of other organizational things.
The expansion of cloud technologies, new microservice architectures and highly automated software creation and deployment processes is fundamentally challenging some long-held beliefs about best practices in technology.
Are you rushing your strategy—and slowing your transformation?
Speed without purpose is just meaningless activity. Nowhere is that truer than in developing a strategy to further your digital transformation.
The digital age hasn’t changed strategy’s primary purpose: identifying value and figuring out how to go after it. But what the sources of value are and how to formulate and execute strategy have changed.
To unlock the full potential of your digital transformation, you need to be purposeful and deliberate in working at two levels. First, you must be diligent in mapping and executing against all the many big and small actions you can take to improve your current operations. At the same time, you need to identify and take on bold new initiatives that open up vast new opportunities.
In the consumer-packaged goods sector, the main source of value is in supply chain management (through improved forecasting, for example) and manufacturing (including practices such as yield, energy and throughput management as well as inventory and parts optimization). In insurance and retail, the biggest source of AI and advanced analytics value is in marketing and sales practices (such as optimizing pricing and promotions and managing customer service).
The best companies are excellent at identifying unmet needs that are big and sustainable enough to be worth the effort.
Being first, of course, doesn’t just mean being the first company to enter a market. It means being first to enter a market with the necessary success factors in place, from talent to tech.
A bold approach is reflected in investment decisions as well. Incumbent companies that are serious about transformation invest triple that of their peers in new technologies. Of the most digitized companies, 19 percent say more than one-fifth of their overall digitization spending goes toward AI, while just 8 percent of other respondents say the same.
Andy Grove, a Silicon Valley pioneer and former head of Intel, had a pithy phrase for dealing with these business vulnerabilities: “Only the paranoid survive”. To maintain a healthy level of paranoia, companies need a person or team dedicated to monitoring and measuring disruptive threats and opportunities in the marketplace.
This kind of rapid iteration happens primarily at two levels and two speeds. At the C-suite or program level, it looks a lot like a dynamic portfolio reallocation exercise. At the project level where individual initiatives are taking place, strategic check-ins happen much more often, sometimes daily.
Learning is a hallmark of the digital enterprise in every dimension. Strategy is no exception
Companies often miss significant sources of value in optimizing current businesses and processes because they have limited expertise in understanding what’s possible with digital.
Are you confident that you have an accurate picture of how your organization is really doing?
We’ve noticed two extremes as companies grapple with what to measure to understand their performance and health: the first is a natural temptation to “measure everything” to get a comprehensive view of the company. This leads to wasted effort. The second is a tendency to put too much emphasis on a narrow set of indicators such as technology, for example, while downplaying the importance of culture and capabilities.
McKinsey’s Digital Quotient® analysis found that there are 18 management practices across four areas — strategy, organization, culture and capabilities — that have the greatest impact on digital performance.
Coaxing meaning from your data requires some heavy lifting, technologically speaking. Broadly, it requires setting common standards (e.g., service level agreements), designing principles (e.g., simplifying the data environment), and a governance model to manage and structure the data itself.
Data management is obviously a massive task, so it’s important to be clear about what the output should be or else you’ll spend years working on data that doesn’t actually help with decisions.
Just as important as getting the data is agreeing on it. Without a single source of truth and a discipline around using common measures, biases run rampant.
Will your strategy work in the real world?
Incumbents routinely underestimate the effort required, leading to squandered value and low adoption rates of technologies that otherwise could have a large impact on the business.
When it comes to analytics, winning companies spend a disproportionate amount of their energies and resources trying to break through the last-mile challenge.
Ensuring we create time to listen to voices from across our organization is critical to effective leadership Creating a roadmap is a program-level activity, tied to your vision and your long-term goals for the transformation.
Road-mapping is not a “waterfall” exercise but instead provides stability to the transformation by helping to prioritize initiatives and anticipating both needs and roadblocks.
Are you clear about which transformation model is best for your company?
- Transform the core. This is the full monty of transformations. It involves a fundamental rebuilding of the company’s core skills, technology, organization and processes. Change happens at scale across multiple parts of the business at the same time.
- One approach to driving this change is to map out all your customer journeys — those sets of activities your customers undertake to complete a specific goal — and to transform one journey at a time (working up to doing more in parallel). Since each journey touches many parts of the business — operations, marketing, service support, sales, IT — this approach serves as an organizing principle for making changes to core systems that support the customer.
- Start or buy a new business – In this model, the company either builds or acquires a new business. While admittedly there is a significant difference between building or acquiring a business, each has the advantage of providing the new venture with the flexibility to attract and retain talent and to forge its own culture and identity. Recent McKinsey analysis showed that winning companies report spending more than twice as much on M & A, as a share of annual revenue, as their counterparts.
- Transform from the edge – The basic idea here is to nurture a new digital capability that is protected from the company while still taking advantage of the organization’s core competencies and existing resources. Often, this “edge” approach comes to life through a digital factory or center of excellence, a hub for coders and other technology specialists who develop, prototype and launch applications. These are then fed back into the core company and scaled.
- Narrowly focus transformation – In a limited transformation, companies look for a particular lever where digital can increase value. It may be a function, like marketing or logistics, or even a product line or region. Companies using this model look for particular opportunities where they can make gains without affecting the larger organization and culture. This model makes sense for companies in industries that are simply more resistant to digitalization.
Do you know what great looks like?
Many business leaders simply don’t know what they don’t know. In this vacuum, leaders will tend to set their aspirations too low or focus on the wrong elements of a transformation. Understanding what the best companies are doing, and how they’re doing it, can dramatically shift what leaders think is possible.
Understanding what is possible with digital means that quick wins can be even quicker — and bigger — than imagined.
Have you made it safe to fail?
Making it safe to fail is crucial because learning happens through experimentation and experimentation often results in failure.
Technology can minimize the consequences of failing, which can often inhibit people from trying something new. Advances in tech have, in fact, made failure cheap, fast and reversible.
Accepting failure is important as well in encouraging fast decision-making, a key capability in digital companies. The mentality is that a bad decision is better than no decision.
“Most decisions,” Amazon’s CEO Jeff Bezos wrote in a 2017 letter to shareholders, “should probably be made with somewhere around 70 percent of the information you wish you had. If you wait for 90 percent, in most cases you’re probably being slow.”
Do you know what it takes to scale an agile culture?
Agility is the heart and soul of a learn-and-adapt culture. It embodies the idea of people trying something out, testing it in the field, making adjustments based on what they have learned, and then testing it again. Over and over, at speed.
How to organize for agile:
- Tribe Group of squads with shared mission and targets Fewer than 150 people to foster effective collaboration
- Set regular gatherings to share current status and learnings
- Squad Self-organizing group of people that defines its own way of working
- Located physically together
- Have skills and tools to design, develop, test and release their deliverables
- Responsible for discrete product or service
- Led by product owner
- Chapter Cross-functional competence groups (e.g., programmer)
- Meet each other regularly to exchange knowledge
- Guild Informal communities across tribes
- Gather people with the same interests, for sharing practices and knowledge
As a rule of thumb, 60 percent of a company’s budget should be allocated in the usual way, 30 percent through an agile budgeting process, and 10 percent reserved for venture funding.
Agile is often thought of as a process when it’s really a mind-set (supported by processes, of course). Yes, it’s about testing and learning, and new ways of working, but at the heart of agile is the determination to provide the customer with something she or he wants or needs.
The way a true customer-first ethos comes to life is through design — the process of integrating the customer point of view into all development.
Continuous improvement is key to success for a digital transformation.
Have you hired digital stars?
Getting digital talent on board is difficult enough, given the shortage of supply in a white-hot market. But it can be harder still to identify the right talent in the first place.
A McKinsey study of more than 300 senior leaders in the industrial sector identified “capability and talent management” as the area where the gap between expected impact and business readiness was largest.
You will need to pay a hefty premium for these rock stars. But the very best people will be well worth the price. In transformations, a core of exceptional talent acts as a nucleus that will ignite change.
The average tenure of digital workers today is barely 36 months, and shrinking. Tenure for the best is shorter still.
The new HR function must be rebuilt from the ground up. Creating a “digital talent war room” is a useful way to make the shift.
Those companies that use innovative recruiting tactics — such as having recruits play games or find messages in code, or hosting hackathons — are twice as successful as their peers in recruiting talent.
Some digital roles to consider Chief product owner. The chief product owner is the ultimate customer champion.
Product owner. Often described as a “mini-CEO” the product owner is part manager, part visionary, part influencer, part technologist.
Analytics translator. This role is crucial to help ensure that analytics deliver impact.
Lead architect/chief technology officer. Often reporting directly to the CDO or CIO, the lead architect understands how the entire technology landscape fits together.
Design lead. The best design lead partners with the product organization to bring the latter’s ambitions to life.
Agile coach. Agile coaches help squeeze every bit of performance from agile squads.
Chapter lead. Chapter leads are functional leaders within their field, often with management responsibilities.
Is your workforce up to the task?
Becoming an adaptive learning organization means approaching reskilling differently. The best training programs today are:
Advanced training programs both ensure content is easy to access and provide many more opportunities to learn in short bursts.
Training programs are being broken up into short, easy-to-use modules for specific tasks that workers can easily access from their desks or on the job. Learning games, e-coaching, virtual classrooms, online performance support and online simulations are all increasingly in demand.
Each learning journey should integrate theory, practice, peer engagement and assessment.
“The great thing about this ‘menternship’ program — where leaders are both mentors and interns — is the learning goes both ways”, says Wilder, formerly at P&G. “The digital experts provide the ‘know-how’ and the senior leaders provide the ‘know-who’ to help junior employees connect with the right people to get things done. Everyone wins”.
What really matters is focusing on which roles are crucial to drive value and then allocating enough money to build those skills.
The best sales organizations embrace this idea through “field and forum” learning. After a training session, sales reps go on customer calls accompanied by senior managers, who provide feedback on key tasks such as relationship building, consultative selling and account planning, for example.
Do digital stars consider your organization a career graveyard?
Companies therefore need to think long and hard about what their target recruits value, and build an employee value proposition (EVP) that will both attract and retain them. Your EVP should help to attract the roles that matter most.
If people management is compulsory for promotion, many committed practitioners — data scientists, AI developers or designers — will want out. The best companies, therefore, create specific career paths for these kinds of “nontraditional” talent.
So give the best people opportunities to work in teams with key decision-makers, making clear you recognize and value their contributions.
The best employees want to keep learning, often acquiring new skills that aren’t immediately pertinent to their roles.
Finding the sweet spot covering both current and aspirational traits requires in-depth research and analysis. Employee surveys, focus groups (internal and external), leadership interviews, competitor analysis and social listening will uncover rich data that forms the building blocks of a new employee value proposition (EVP) — as well as guidance on what needs to change and what needs to be better communicated and to whom.
People are attracted to successful personalities — authentic achievers who are also able to drive cultural change.
In their efforts to revitalize the brand and make it attractive to digital talent, companies can sometimes make false promises that new recruits will quickly spot, prompting them to walk back out the door.
Do you know how to use new tech to rebuild your core IT and data platforms?
Long-standing customer-relationship-management (CRM) or enterprise-resource-planning (ERP) systems might have offered stability and solid performance when they were first installed. However, over time, demands on systems have resulted in growing complexity with new functionality continually added.
Although it is possible to build new solutions on legacy technology stacks, the burden of maintaining and working around legacy tech will consume money and manpower that might otherwise be devoted to boosting productivity or pursuing innovation.
While end-to-end renewal is ideal, a dose of reality is necessary. There will be a transition period where new and old systems work together for a time.
What we often see is that by systematically cleaning up core transaction systems, removing redundant functionality and simplifying processes, significant system improvements and cost savings are possible.
“Follow the money”. It’s easy to get lost in the data — every company has lots of it — so we recommend starting with identifying the sources of value.
For most companies, it is practical to renew core technologies gradually. In some cases, this gradual approach is not feasible or advisable, and more radical action is needed. This “big bang” approach requires ample funding and the ability to rapidly build technology capabilities.
Whether companies choose gradual renewal or aggressive wholesale replacement, we find that the key determinants of success are the ability to take a strategic view of where the real value lies across all of IT and a commitment to go after it.
Are your own people developing your most important tech?
In the rush to outsource functions, many businesses have chosen to assign significant shares of their technology work to external vendors.
We think this needs to change, because it’s getting tougher for tech vendors to give large companies what they need most: the flexibility to learn and adapt at speed.
Some 52 percent of the most digitized companies build AI capabilities in-house, for example, compared with just 38 percent of other companies, according to a recent McKinsey survey.
On average, top-performing companies use 30 percent of their M&A investments to acquire digital capabilities, compared with just 24 percent for other companies.
Years back, there were only a handful of companies capable of providing integrated solutions for application support. The main strategic decision that companies had to make was which kind of ERP or core system transaction platform they would use, and only a few major credible suppliers existed. In today’s world of modular technology, companies must make more choices about which software components to use, and there are dozens of potential vendors to evaluate.
Most companies will benefit from building their own tech capabilities in those areas that contribute the most to creating and deploying digital solutions, driving differentiation and capturing incremental value:
Enterprise architecture – to maintain a current, iterative view of how technology supports the company’s operating model.
Application development – according to agile and DevOps approaches, to stimulate innovation in software creation.
Data science and engineering – to enable companies to extract crucial business insights (e.g., predictions) from a wide range of sources and to make data accessible for business purposes.
Experience design – to ensure that new and differentiated digital solutions are created with customers and users in mind.
Analysis shows that the productivity of a top engineer is eight times greater than a novice though our own experience suggests the number can be much higher.
Is cybersecurity part of your IT transformation team or simply a control function?
Cyber risk is becoming an ongoing battle as companies embed new technologies into more of their operations and build digital links to applications, servers and other devices. The head of security or CISO needs to be part of the executive team planning the transformation.
Integrating cybersecurity teams in transformation planning and development can radically speed up the process by keeping cybersecurity aligned with the company’s needs and responding to issues more quickly. Developers need training to learn more about cybersecurity.
Is your transformation team filled with change bureaucrats or builders?
A digital transformation invites a world of complexity. You’ll be fundamentally changing how your company works and even what it does.
A good way to think of the DTO is as a translator between program-level thinking — that is, the overall vision for the organization — and the project-level activities, where individual initiatives are planned and executed.
To handle the complexity and scale of change within large organizations, the DTO must create a new operating model.
A good DTO should have the pattern-recognition skills to anticipate and address problems before they materialize and the judgment to decide whether the right approach is to work through a problem or to pivot to a different solution. To be effective, the DTO needs to work closely with key leaders in the organization. A digital transformation needs to implant learning DNA throughout the organization.
“While the size and makeup of a DTO can vary (10 — 20 people), it often includes technologists and project managers as well as agile coaches, designers and data scientists. These are people who are skilled at working with independent teams, translating their needs into business requirements, and then developing and iterating solutions.
Who actually leads the transformation varies by company based on their specific needs. Some bring in a chief transformation officer (CTO), who is often more focused internally on improving the business. Others have hired a chief digital officer (CDO), who generally tends to be more outwardly focused on developing new products and business models.
Whoever it is, this person should have the technical skills to manage the transformation as well as the people skills to rally the organization to the digital cause.
Can everyone in your company easily access everything your people have learned?
Too often, solutions created at great expense are used briefly, then lost inside the organization until someone with a similar need comes along and reinvents exactly the same solution — wasting time and money.
Overcoming this learning deficit is absolutely critical for your transformation.
New capabilities such as semantic search and cognitive computing help to make knowledge more accessible, while social collaboration and gamification tools — such as awards, points, badges, and leadership boards — create more incentives for contributing to knowledge sharing.
“Communities of practice are knowledge management’s killer application.”
The big idea is to shift our culture from knowing it all to learning it all.
In siloed companies, star employees are jealously guarded and moving to other internal roles can be political minefields. Digital companies, in contrast, make it easy to try out new roles and new locations.
In fact, companies that are prepared to shift people around are 63 percent more likely to have higher total returns to shareholders than those where talent is static.
Does your commitment match your bold statements?
But while bold aspirations are important, they are worth little if not accompanied by bold actions. And these require CEO commitment.
CEOs who have been in the job for a number of years are there because they have a track record of being successful. Trying something significantly different — like making a large business as agile as a digital start-up — puts their reputations at risk.
Are you spending at least 20 percent of your working day on your digital transformation? It cannot be a sideshow.
The cautious approach of placing many small bets ultimately starves all initiatives of the resources needed to scale and break through.
Commitment to a transformation is also reflected in a CEO’s willingness to adopt a new leadership style.
They get comfortable with uncertainty. It is impossible to know the precise outcome of a digital program. That’s why creating an organization that learns and adapts is so important.
The CEO has to set bold targets and lay down plans that guide initial decisions, such as where to allocate funds. But then she needs to give the digital teams considerable leeway to find the right way forward, learning along the way.
Are you communicating in a way that’s meaningful to your people?
Our research suggests that good communication — particularly about progress — is often perceived as the single most important ingredient of a transformation.
“When you meet Nadella, you’re struck by his interest, how he listens, his humility. As a result, you can’t help thinking differently about Microsoft”, said a company insider.
Search out successes and communicate them obsessively.
Are you ready to see your transformation through to the end, no matter what?
Concern about what the future might hold often results in a wave of passive resistance. The counterattack is to focus on the changes that can benefit your people, not just the business.
A VC – style process ensures that projects only receive a tranche of funding if they have met strict criteria. If they haven’t, funds are reallocated to more deserving initiatives. If they have, more funding is guaranteed. Besides helping protect transformation funds, it’s a fluid, dynamic process, designed to support the building of an agile organization by assuring funds can be injected quickly into promising initiatives.
If you are impatient for results, you need to put performance indicators in place. According to a McKinsey survey, 51 percent of respondents reporting successful transformations said the company monitored KPIs, compared with 13 percent of respondents at companies where transformations were judged to be unsuccessful.
Some of these longer-term investments — such as renewing your IT architecture or launching a new product or business — may take 12 months or more to pay off.
How to drive a digital transformation through a downturn?
Digitize the business processes that are most scalable.
Accelerate the pace of the transformation by cutting underperforming programs or businesses.
Acquire assets. There will be opportunities to acquire good assets much more cheaply.
But as we grew and started making more money, we realized we were only spending it on growth, rather than capabilities.
How much and what have you learned today?
A leader who is constantly overbooked, frantically going from one appointment to the next and struggling to find time to learn about even the most interesting perspectives, is an early indicator of a company in trouble.
Curiosity is a crucial element in this learning mind-set. In fact, this trait is emerging as an important one in business leaders since it directly leads to new ideas and solutions.
A dedication to learning is especially important when it comes to technology. It’s no longer practical for CEOs, CFOs, chief strategy officers and other executives to leave technology to CIOs alone. Tech is an integral part of any true digital transformation, making it a core element of business strategy and core operations.
In a technology-fueled world where disruption is the norm, adaptive learning is the winning currency because every new insight is a chance for renewal and reinvention.
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