Digital Growing Pains: Why Businesses Must Accelerate Change

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McKinsey's Anand Swaminathan discusses the need to speed up digital transformation.

61pYjiQ3W+L2222Nearly every company realizes that shifting to digital is key to their future. But many struggle with the process. Anand Swaminathan, senior partner with McKinsey, helps companies rationalize digital efforts. He is co-author, with Jürgen Meffert, of a book titled Digital@Scale: The Playbook You Need to Transform Your Company. Swaminathan spoke with Knowledge@Wharton about why speed is key to transforming companies in the digital age on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111.

An edited transcript of the conversation follows.

Knowledge@Wharton: How often do you find that this digital thought process is not part of the overall culture of a company?

Anand Swaminathan: It’s an interesting question because with digital we believe it’s prevalent; it’s in the mindset of every executive in every organization. However, what we find sometimes is organizations are still figuring out what digital means to them. Why should they think about it? How should they think about it? We do find at times that organizations see themselves as either being ahead of the curve and not needing to think about digital and the effects on their organization, or perhaps they’re not ready yet. Their industry is not there yet, and they’d like to wait it out to see what happens.

Knowledge@Wharton: It’s difficult to believe there are people who would say their industry is not yet ready for it.

Swaminathan: It’s a real challenge when organizations believe that digital may not be affecting their industry or their industry is immune from it. What they need to do is figure out where digital can play a role and how it can unlock value for their customers as well as for their enterprise. It’s tough if they’re not ready for it or they’re not thinking about it.

Knowledge@Wharton: I’m guessing this is a top-down mindset, that you need buy-in from all of your managers if your company is to have this total digital transformation.

Swaminathan: Absolutely. As we mention in the book, someone like Jeff Immelt, the former CEO and chairman of GE, led the change around thinking about digital for an industrial business like GE. We find in many cases that the CEO and the C-suite are the true change agents when it comes to digital, especially when driving the digital transformation at a scale perspective.

“Organizations are still figuring out what digital means to them.”

Knowledge@Wharton: When you think about the scope of business in general, digital is still fairly new.

Swaminathan: That’s right. It’s important to define what digital actually means for the organizations because it can have a different manifestation in every organization out there. It can be a technology-led capability. It can be customer-experience based. It can be something around channels. The first part that executives are really doing is to translate what does digital mean for me, for my employees and for my customers? Once they figure that out, they’re able to say where they need to drive to get to real scale.

Knowledge@Wharton: Part of it is understanding the pluses and the minuses of the company in terms of transforming to a digital mindset.

Swaminathan: I think you’ve hit an important point around understanding strength and areas for development in an organization. There are many organizations that have a core set of capabilities that we don’t want to lose or disrupt as we think about embedding digital capabilities into that organization. We address this in the book to say, how do you identify those core competencies for your employees, for your organization and for your customers? How do you then think about the intersection where digital can play a role to accelerate things like business models?

If you take GE just as an example, GE is an industrial juggernaut. What they did is use digital to create a new business model to say, “I want to now be in the data and services business. How do I get data from these incredible assets that we create and deploy for our customers, then serve our customers even better?”

Knowledge@Wharton: You are looking at this from a global perspective, correct?

Swaminathan: “Global” is digital. At the end of the day, digital has no boundaries. It’s got no language restriction. There are organizations trying to figure out how they go global, how they have that impact on customers across geography, how they leverage digital to do that more effectively. I think about retailers here in North America as an example, major retailers who are really trying to sell their goods and services but have taken the capability from digital to reach customers in different markets and do different things. Whether it’s Amazon competing in Asia or Alibaba competing in the United States, we’ve got retailers who’ve gone digital to reach customers and it is a global challenge.

Knowledge@Wharton: We’ve seen a shift, especially in the last decade or so, where employees feel more comfortable having the type of relationship with leaders in the C-suite where they can speak up about issues. Do you see that as well?

Swaminathan: Yes. In the early 1980s, an engineer at Kodak took the idea that digital images would be the future and created a device that would capture and reveal digital images. The CEO and the executives at that time said, “No thank you, we make film.” Today, that mindset is quite different. The leaders in organizations are looking to their teams to drive the innovation, to actually create the next set of ideas they need to think about. ING looks to these squads or tribes, as they refer to them, which are cross-discipline teams, to drive that innovation and bring ideas forward so the organization can serve customers better, invent new products and enter new markets. It’s a very different mindset than what we had seen in the 1980s and early 1990s.

“The leaders in organizations are looking to their teams to drive the innovation, to create the next set of ideas….”

Knowledge@Wharton: The ability to do that means bottom-line benefits for the company over the long term.

Swaminathan: Bottom-line benefit is critical. But they’re looking for top line as well. It is actually tremendous that organizations are saying that with digital you can affect both top line and bottom line very quickly. The second thing is the speed at which you are able to affect those different metrics. CEOs no longer sit there and just say, “Well, let me look at my profitability or my revenue.” They now ask about ROA, which is return on advertising spend. What is my MROI, my marketing return on investment? They’ve got new metrics to measure the impact of digital, and they’re doing it at speed.

Knowledge@Wharton: But is the idea of change within a company one that employees still walk gently around?

Swaminathan: There are many organizations that continue to have to reinforce the importance of digital and the importance of change with their employees. Employees aren’t buying into the concept blindly because they are better informed. They want a better understanding of what is happening in that business before they just blindly accept that digital means positive change. They want to know exactly what the change will be, how it will affect the organization, how it will affect their day-to-day jobs before they fully commit.

There is that challenge to overcome. But what’s interesting is that challenge is being overcome at a faster and faster pace in organizations. Time is running out. The time is indeed now to make that change. Organizations are seeing that the velocity with which they are looking to drive that change is actually accelerating.

Speed is a key part of the equation today. As we thought about the organizations we spoke with as we wrote the book, we found as the common theme that we are running out of time. Our competition is coming at us from a whole new set of angles. We have new competitors that we never even imagined before. How should we reimagine our business models? How should we re-architect our business capabilities and look at our foundations? We need to act now and at speed.

Knowledge@Wharton: Does the freedom that some employees feel open the opportunity for more innovation?

Saminathan: About 90% of the world’s data has been created in the last three years alone. That means employees and customers have a significantly larger volume of data that they can analyze and can interpret. How are organizations using that plethora of data? We’re finding that they are accelerating their pace of change because they’re better informed. Employees always think, “If I have better data, I am better informed and am going to make better decisions, and I’ll make it quicker.” That’s the trend we see.

Knowledge@Wharton: We still don’t have a total understanding of what can be done with all that data.

Swaminathan: It’s indeed very early days, and that timeline is quite accurate. Most organizations use about 5% of the data they have access to and the data they generate in order to inform their decisions. Organizations are just at the beginning of understanding how to use the data and even understanding what data they have. So you’re right, it will take a decade perhaps to fully unlock the potential from all of the data that these organizations have.

“’Global’ is digital.”

But again, there’s one point we mention in the book around the land of artificial intelligence and machine learning. While humans may not be able to keep up with that volume of data and analyze everything in order to inform their decisions, what role are artificial intelligence and machine learning capabilities playing to help you make those decisions faster? While Elon Musk and Mark Zuckerberg seem to be having a Twitter debate for the ages around the effects of artificial intelligence right now, we are indeed at the beginning stages of the true capabilities of artificial intelligence. Do we have the tools to ingest, store, compute and enrich that data in order to then drive the right type of analysis from it? What role will AI and machine learning play in making our business decisions tomorrow? I do believe it’s early, but the fact is that the momentum is there — just like digital about a decade ago — and perhaps that momentum will stream into the next wave.

Knowedge@Wharton: How are CEOs reacting to these changes?

Swaminathan: CEOs have done a few things that are quite interesting. First, they have changed the dynamic of their teams. Their leadership teams have evolved to become individuals who fundamentally understand the new capabilities, new data sets and new technology that are out there in order to drive their businesses more effectively.

Second, CEOs are changing the makeup of their boards. Public companies, as well as private companies, are re-thinking and re-imagining who’s on their boards of directors. Do they have the right individuals who have the backing and the knowledge? Third, they have moved from experimentation, which is what digital was a few years ago, to now thinking about it as scale. Hence, the timing of our book is to say it’s no longer about what digital is but how you deploy it at scale so you can start to see the value in your organization.

Knowledge@Wharton: How much do you think this shift will be driven by the managers and employees?

Swaminathan: I think managers and employees play a very important role, which is the role of innovators inside the organization. They play a second role, which is the executors of the vision and of the capabilities that we’re going to go bet on. While the C-suite is certainly the change agent and the champion to fund these changes and drive the culture effect, what the employees and managers are doing is to say, “Can we out-innovate our competition? How do we think about that? Can we execute at speed in order to drive these changes through the organization?” They remain and will be an incredibly important part of making sure that the vision actually comes to life, otherwise we’re going to be stuck with a great vision without the execution.

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