To thrive in the digital age, companies must undergo two distinct digital transformations. They must become digitized by incorporating digital technology into their core operations, like accounting and invoicing. They also need to be become digital, which means developing a digital platform for the company’s digital offerings.
Though both rely on embracing new technologies like analytics, artificial intelligence, and the cloud, becoming digitized and becoming digital are two different transformations and require very different rules and strategies to deploy, according to a new research brief from the MIT Center for Information Systems Research. Becoming digitized relies on traditional business methods. Becoming digital requires breaking old rules and embracing new thinking.
One transformation, becoming digitized, relies on the company’s operational backbone, which supports core operations like delivering goods and services, maintaining books, and completing back office processes. Enterprise systems like customer relationship managers and core banking engines traditionally served as base technology for the operational backbone, while today it might be enabled by software-as-a-service. Either way, it targets core functions like accurate invoicing, accounting, and logistical processes. Companies design an operational backbone by articulating a desired target state for their processes. Done right, it creates stability and scalability.
The other transformation, becoming digital, requires creating a digital platform — a foundation for a company’s digital offerings and their rapid innovation. This platform, a combination of different software components that can link with partners and connect with customers, enables a company to quickly develop and add new digital offerings, and targets revenue growth. (It is distinct from the more commonly discussed multi-sided digital platform — employed by companies like Amazon and Facebook to facilitate interactions between users.) A company’s digital offerings evolve as it learns what technology is possible and what customers value. A successful digital platform will enable speed and innovation.
Managing different sets of rules
To carry out both transformations, leaders need to be comfortable managing different sets of rules for those managing the operational backbone and those working on the digital platform. Here are three things to keep in mind:
Leadership differences. Managing an operational backbone depends on senior leaders making clear decisions, dictating processes and standards, and overseeing their adoption. But a successful digital platform relies on empowered teams shaping and delivering new ideas. Leaders are responsible for defining a digital vision, but top-down decision-making impedes success.
Operational differences. Changes to the operational backbone can be planned and evaluated using traditional methods like metrics and customer satisfaction, while people responsible for digital innovation, like creating a digital platform, are frustrated and impeded by traditional methods.
Cultural differences. Digital technology is not changing the fundamental role of the operational backbone, the researchers found, nor the rules for managing it. But managing a digital platform means radical changes in how decisions are made and work gets done. This can be uncomfortable for people at every level.
And here are three actions the researchers suggest to manage the transformation teams smoothly:
Separate the teams
Companies managing digitization and building digital platforms should clearly distinguish responsibility for each area. According to the research brief, companies including Schneider Electric, Toyota, and Principal International Chile, a subsidiary of the Principal Financial Group, have implemented this strategy. At PI Chile, the chief information officer manages the operational backbone while the chief digital officer is responsible for the digital platform.
Funding should also be distinct. Operational backbones need stable investment from year to year, while digital innovation often requires funding for short-term experiments that can be easily increased or discontinued.
Established companies also need to maintain their success, so they should start with tasking a few dozen people with digital innovation, not a few hundred.
Let digital leaders break the rules
Companies achieving digital innovation are breaking old rules and making new ones, the researchers found. This includes subverting traditional budget methods, circumventing established customer relationship management approaches, and ignoring longstanding product development methods.
While this might seem disruptive, the rule-breaking is limited to a small part of the business: the digital team tasked with creating new revenue.
Develop new leaders
Some leaders who have successfully led traditional businesses are not well-suited to digital leadership, the researchers found, because of belief in the old rules or difficulty operating in an uncertain environment. Companies that don’t have leaders comfortable with creating new rules should use coaching to develop those capabilities in leaders, or hire new talent.