Six building blocks for creating a digital enterprise

By: Driek Desmet, Ewan Duncan, Jay Scanlan, and Marc Singer
Courtesy: McKinsey

Few companies need to be sold on the benefits of digitization. McKinsey research shows that companies have lofty ambitions: They expect digital initiatives to deliver annual growth and cost efficiencies of 5 to 10% or more than that in the next three to five years. Yet despite the often—substantial investments companies have made in digital initiatives,few see that kind of growth.

That’s because getting the engine in place to digitize at scale is uniquely complex. Since digital touches so many parts of an organization, any large digital program requires unprecedented coordination of people, processes, and technologies. A strategy to increase revenue from high-value customer segments, for example, requires analytics-based insights into which purchasing journeys generate the most value, a clear vision and plan for how to capture that value, and technologies and tools to digitize interactions with customers. New capabilitiesand teams are also needed to manage and coordinate the delivery of those journeys across the organization.

Of course, adapting over time has always been essential to corporate success. Yet while the average corporate life span has been falling for more than half a century— Standard & Poor’s data show it was 61 years in 1958, 25 years in 1980, and just 18 years in 2011—digitization is placing unprecedented pressure on organizations to evolve. At the present rate, 75% of S&P 500 incumbents will be gone by 2027. That means managing your transition to a digitally-driven business model isn’t just critical to beating competitors; it’s crucial to survival.

SIX BUILDING BLOCKS

In our experience, companies that have successfully transitioned to become high-performing digital enterprises are able to orchestrate six building blocks: Strategy and innovation, the customer decision journey, process automation, organization, technology, and data and analytics. Now, not every digital initiative requires each building block to be developed and used to the same degree. Some blocks will also serve as more natural starting points, depending on a company’s circumstances—for instance, a company whose IT constraints make it hard to deliver a cutting-edge customer experience will naturally want to focus on the technology and process elements first. But we’ve found that this framework provides executives with a coherent structure for thinking through and managing large-scale digital programs.

STRATEGY AND INNOVATION

Digital strategy is intrinsic to business strategy today. In fact, 90% of digital leaders (versus 60% of all leaders) have fully integrated digital into their strategic-planning process. The best digital strategies don’t rely on past analyses, but instead start fresh and carve out a vision based on where they believe value is likely to shift over the next three to five years.They assess at a granular level where value is likely to be disrupted within their own business and market, and they isolate where and how they will compete. Effective digital strategies prioritize a handful of interventions where the business can exploit significant opportunities (and divest or reduce exposure in markets where value is declining), then craft a digitally enabled business model around them.

That could mean creating a new way for customers to purchase a product, moving into new businesses, or exploiting competitive advantages such as proprietary data in new ways. For example, one large retailer actively reviewed its portfolio and decided to divest its consumer-electronics business when it saw margins eroding. It then invested in an online retailer when it realized the strong growth trajectory of eCommerce in the sector. When GE identified a strategic goal it needed to work towards—making deeper connections with decision makers—it designed a company- wide social graph that tapped customer connections and relationships across its 300,000-strong employee base. That enormous internal network gave salespeople and account managers a significant leg up in forging new connections and provided marketing with a return that was about 350 times its investment.

A digital strategy also increasingly blurs the boundaries between strategy and execution. In fact, 60%of digital leaders run strategy by experimentation through limited releases and prototyping.

CUSTOMER DECISION JOURNEY

Our research shows that organizations able to understand and skillfully act on complete customer journeys can reap enormous rewards: Increasing customer satisfaction by up to 20% and revenue growth by 10 to 15%, and lowering the cost to serve by 15 to 20%. Understanding those decision journeys and the fundamentally different ways that customers behave—from evaluating products to bonding with brands—is becoming the cornerstone for successful businesses.

That ability is likely to become an increasingly important differentiator, since nearly 50% of all business-to-business purchases will be made on digital platforms by the end of 2015, and $2 tn in retail sales will be influenced by digital by 2016. With so much data available, companies can become much more precise in their outreach to customers. By combining deep data analysis and ethnographic research, digital leaders can identify high-value micro-segments, such as new mothers with full-time jobs who primarily shop online. Understanding how these customers make decisions—how they shop, for example, or what influences them—allows digital leaders to tailor their approaches. One major bank unlocked more than $300 mn in profitability by tapping into underutilized customer data and delivering targeted marketing messages at various points in the purchase-decision process. The bank used the data to inform changes in marketing campaigns.

PROCESS AUTOMATION

Business process automation can result in massive competitive advantage because initial investments, when well implemented, can scale quickly without substantial additional costs. Over time, cost performance can improve by as much as 90% as the automation effort scales across formerly siloed functions, reducing redundant processes. New business models, in fact, are emerging as companies that create revenue from sales of physical assets evolve into service businesses that Digitizing processes has less to do with technology and more with how companies approach development.

While there is often the assumption that process automation is a large project focused on a major platform, digital leaders in fact drive value quickly by focusing on a series of small but important solutions that target high-value customer journeys and expectations (for example, real-time availability and personalized treatment). This is more than just automating an existing process. Becoming digital often requires reinventing the entire business process to cut out steps altogether or reduce the number of documents required.Automating processes at speed requires small teams employing agile development techniques to continuously build out elements of the product as prototypes, then testing and adapting them based on feedback, often within days or weeks. When well executed, digitizing processes can unlock significant value by compressing timelines and eliminating duplication or inefficiencies.

Yet digitizing is as much about customer satisfaction as efficiency. A leading energy player, for example, reduced by 40% churn among customers who moved houses by making service renewal a simple two-click process accessible from the company’s website. Similarly, a bank cut its cost per new mortgage by 70% and shortened pre-approval times from several days to just one minute by digitizing its mortgage-application and decision processes.

ORGANIZATION

Companies know that rigid, slow-moving models no longer cut it. The challenge is to move toward a structure that is agile, flexible, and increasingly collaborative while keeping the rest of the business running smoothly. Successful incumbents become agile by simplifying. They let structure follow strategy and align the organization around their customer objectives with a focus on fast, project-based structures owned by working groups comprising different sets of expertise, from research to marketing to finance. While companies are often obsessed about the ‘boxes and lines’ of organizational structure, it’s more important— and significantly more difficult—to focus on processes and capabilities. Having a clear view of what we call a company’s digital quotient is critically the first step to pinpoint digital strengths and weaknesses and highlight those management practices that can bolster financial performance.

Some 65% of digital leaders have a culture that isn’t afraid of risks and have a high tolerance for bold initiatives. Many companies have set up incubators or centers of excellence during the early stages of a digital transformation to cultivate capabilities. To be successful, however, these capabilities need to be integrated into the main business. AT&T opened three AT&T Foundry innovation centers, in Dallas, Silicon Valley, and Tel Aviv, to serve as mobile-app and software incubators. Today, projects at these centers are completed three times faster than elsewhere within the company. And having tested that innovation model externally through its incubator, AT&T established a technology innovation council and a crowdsourcing engine to infuse best practices and innovation across the rest of the organization. Other companies, such as Nike, transform organically from within. The company has long recognized the need to have focused resources for digital initiatives, and it established a direct-to-consumer division that oversees both in-store and online activities. That function then created a dedicated e-commerce group with its own leadership structure, which has worked to deepen and expand its digital expertise, drive greater commerce for Nike online, and connect across the Nike organization to create market-beating consumer experiences, from the SNKRS app to the Nike+ community, which has tens of millions of users. Those efforts have paid off with double-digit ecommerce revenue growth rates and annual web sales topping $1 bn in summer 2015.

Regardless of what model a company chooses, the adage ‘what gets measured gets managed’ still holds true. The most successful digital companies are zealous about metrics that focus on the customer journey, such as customer lifetime value, omni-channel behavior, and share of influence across stages of the decision journey.

TECHNOLOGY

Most incumbents have been through waves of IT transformation in the past and understand that overhauling legacy architecture is a multiyear process. Yet today’s fluid marketplace requires technology that can drive innovation, automation, and personalization much more quickly. So, the best are moving to a two-speed IT model that enables rapid development of customer-facing programs while evolving core systems designed for stability and high-quality data management more slowly.

This typically means that high-speed IT teams are charged with rapidly iterating software, releasing updates in beta, fixing kinks and bugs in near-real time, then rereleasing. Their goal is to continually fuel an accelerated development infrastructure that can support near-instant cross-channel deployment and real-time decision making. One European bank, for instance, created a new team that used concurrent-design techniques (in which multiple development tasks are completed in parallel) to create a prototype of an account-registration process, while using existing technology where it could. By testing this process with real customers in a live environment, the team was able to make constant refinements until it succeeded in cutting the process down to 5 steps from the original 15. In under five minutes, customers can now use a mobile device to open an account, as opposed to waiting in a bank branch and filling out paperwork.

New developments in DevOps (the integration of technical development and operations) and continuous delivery (the automation of testing, deployment, and infrastructure processes) have introduced capabilities that radically increase speed to market and lower costs. An international travel company used these approaches to reduce time to market by moving to the cloud, fully automating its testing, and rolling out a one-click deployment process.

DATA AND ANALYTICS

Companies that make extensive use of customer analytics see a 126% profit improvement over competitors. Companies that see that kind of return are adept at deciding which data to use (both inside and outside the organization), focusing the analytics on delivering on goals with clear and useful insights, and having the right capabilities and processes in place act on them. That requires people with the right kinds of skills—particularly ‘translators’ who can articulate business goals and use cases with respect to analytics requirements and turn data output into business insights.

With the Internet of Things and new technology developments, analytics are opening new doors for growth. Analysts have predicted that the installed base for Internet of Things devices will grow from around 10 bn connected devices today to as many as 30 bn devices by 2020. Real-time monitoring and visualization, for example, are fundamentally changing the relationship of insurers and the insured. Telematics are being used in auto insurance to monitor driving habits in real time; this resulted in a 30 percent reduction in claims at one UK insurance company, which reported that customers had developedbetter driving habits. Similarly, data monitors on UPS trucks are used to help configure the most efficient ways to load a truck and send alerts when a part needs a repair, before it breaks.

While each of these building blocks is important, the real value is in being able to integrate them and manage the cross-business contingencies and dependencies of a large-scale digital initiative. The digital revolution has given birth to an interconnected world that binds customers, employees, managers, and systems together in a network of unprecedented complexity and opportunity. Making sense of those connections and building value requires a new interdisciplinary model of work that is redefining how companies succeed today.