The blogosphere is awash in buzzwords about digital transformation. In fact, a recent article from CIO Magazine suggests that CIOs are beginning to consider the words almost meaningless. Amidst all the noise, is there any difference between business strategy and digital strategy? Where does IT strategy fit in? And what is really meant by digital transformation anyway? In this article, learn about the relationship between digital and IT strategy. More importantly, from a practitioner’s perspective, learn how IT and IT service management practices can enable an organization’s digital strategy.
Meet Olivia, IT Director
Olivia is an IT Director at a major “white-shoe” law firm. In fact, her firm is rated as one of the top 200 law firms (by revenue) in the world. Recently, the firm was involved in a major effort to scan paper documents and turn them into indexed “soft copy” documents. One of the senior partners touted this effort as a great example of how the firm is prepared for the “digital revolution.”
Olivia recognizes that the digitization of paper documents was a lengthy project and is seen by many as a major achievement, all the more so for a firm that only recently deployed e-fax alongside of paper-based fax machines. Despite the value of the digitization effort, Olivia also realizes that creating soft copies of paper documents is not transformative. In fact, in many ways, it is just “keeping up with the Joneses.” Other firms in the top 200 already “went paperless” (or, frankly, less-paper) several years ago. Olivia believes that IT could support a true digital transformation. Unfortunately, neither the senior partners nor the managing partner have proclaimed a digital strategy. Olivia’s predicament is exacerbated by the attitude of the CIO, who is accustomed to “business as usual.” The CIO envisions an IT organization that supports the whims of the senior partners; but does not suggest or drive new business initiatives.
What is Digital Transformation
The words “digital transformation” have been copiously and recklessly applied to so many technology initiatives that for some they evoke images of the Gutenberg printing press, the first steam engine, or Henry Ford’s Model-T. Others think that moving applications and data to third party clouds is digital transformation. For others, digital transformation sounds like the latest fad, at worse. At best, some imagine that digital transformation is simply a continuation of the computer-aided automation that has characterized industry since the late 1970s (and arguably, going back much further).
In truth, digital transformation is neither entirely new nor is it merely extreme automation. Simply stated, digital transformation is about applying technology to fundamentally change the way organizations interact with customers and how work is accomplished within the company itself. Digital transformation, sometimes (accurately but awkwardly) referred to as digitalization, is using technology to change a business model.
Scanning paper documents to create “soft” copies may be valuable to an organization, but in and of itself does not constitute a digital transformation. Turning paper into electronic documents is more appropriately called digitization.
Digitization v. Digitalization
Digitization is the conversion of text, pictures, or sound into a digital form that can be processed by a computer.
Digitalization is the use of digital technologies to change a business model, which often includes fundamentally changing the relationship between the business and consumers. It is often supported by automation and extreme optimization of operational activities. Despite the confusion, when people talk about “digital transformation,” they are in fact referring to digitalization.
Likewise, selling products online that were previously sold in a “brick and mortar” store may expand the organization’s customer list, which has value; but unless it is paired with mechanisms to gain greater insight into consumer preferences and demand, it falls short of a digitalization effort.
Amazon, Inc. is often cited as the disrupter-in-chief and master of digital transformation. Indeed, it has come a long way from its early days as an online bookseller. Back in 1995, one could hardly call Amazon a leader of digital transformation, though it was nevertheless successful as an online bookstore and reportedly made more than $20,000 per week in the first couple of months. Over time, of course, Amazon grew to be much more than an online retailer. It became the search engine of choice for many shoppers regardless of the product. Moreover, Amazon became a platform company that allows and even welcomes competitors to sell on its platform; and thus makes money even when competitors are successful. In short, Amazon uses technology not only to sell products; it uses technology to drive an ambitious business model that aims to understand and shape consumer experience, re-position competitors, and reimagine the entire marketplace.
Ripe for Disruption
Not every organization aspires to be the next Amazon. At the time of Amazon’s founding in 1994, the product market was ripe for disruption. With the advent of the internet came consumers who were searching for new ways and places to shop.
Olivia’s law firm, though one of the largest in the world, is situated in an entirely different industry. According to McKinsey and Co., law firms have one of the lowest adoption rates of new technology. As one of the oldest professions (indeed, the world’s oldest profession is digitally transforming as well), law firms in general have remained remarkably unchanged in terms of their prevailing business models. Considering the stodginess of the industry, should Olivia’s firm even care about “digital strategy” or “going digital?”.
Research suggests that they absolutely should care. According to Forbes, Legal Services is one of the top seven industries where an entrepreneur has opportunities to disrupt. Indeed, mature industries that are slow to change are arguably the most exposed to what the Institute for Risk Management calls Black Swan risks. In other words, they are exposed to the difficult-to-predict risk that a disrupter from an entirely different industry will enter the market place and offer unique products and services that make the incumbent’s offerings less relevant. Along these lines, the curious reader will find the work of professors W. Chan Kim and Renée Mauborgne in Blue Ocean Strategy most gratifying. Notably, in their book, they discuss so-called “Red Ocean Strategy” of many competitors offering undifferentiated services in a crowded marketplace where competition is based on price. Firms pursuing a “Blue Ocean” strategy disrupt these industries by offering substitute products or services that are unique and potentially create an entirely new market, thus expanding the proverbial pie
Although Olivia is unlikely to be able to create a sense of urgency and drive change at the strategic level, executives in her law firm should be very concerned about risk of disruption from firms in adjacent and even entirely different industries.
The Different Levels of Strategy
Counting the endless definitions of strategy, like cataloguing stars in the heavens, is a task better left to the sages. Lauded Harvard Business School professor, Michael Porter, was famously reluctant to offer a concise definition of business strategy. He did, however, offer some insights in the 1996 Harvard Business Review article “What is Strategy?” To the extent one can excerpt from Porter (and still do him justice), strategy is about “choosing a different set of activities to deliver a unique mix of value” and “a combination of the ends (goals) for which the firm is striving and the means (policies) by which it is seeking to get there.” To paraphrase, strategy speaks to the positions or goals a company takes and the plans it creates to achieve the positions.
Not all strategy is created equal. In many organizations at least three levels of strategy co-exist. Business and Organizational strategy (BOS) is the highest-level strategy and provides clarity on which direction the organization wants to pursue. BOS is about choices: determining who the organization’s consumers are and what they want, how the organization will be valuable to consumers, and what plans will be put in place to help accomplish these goals.
Digital cannot stand alone. An organization cannot buy digital, go digital, or be digital, except in the metaphorical sense. Digital is an adjective. An organization can have a digital strategy and a supporting digital business model. Digital Strategy addresses how technology will be applied to support the organization’s business model. “Technology” in this case is not about whether there are enough servers or the fleet replacement lifecycle of laptops. In a law firm, “technology” could mean IT’s capability of supporting e-discovery and a 24×7 legal subscription service for clients. These services not only produce new streams of revenue for the firm, but they also fundamentally change the way lawyers work. In a fully digitalized organization, there is no difference between BOS and Digital Strategy. Although it is likely that digital strategy will eventually collapse into BOS, according to a recent Deloitte-MITSloan study, only about 59% of organizations self-identify as having reached median maturity with digitalization. Thus, it is still useful to identify digital strategy as separate from BOS.
IT Strategy, in the narrowest definition, is about “technology” with a small “t.” IT strategy helps to ensure that the organization has the right technologies and capabilities to support the day-to-day operations of the business and that the infrastructure is sufficiently robust. A primary goal of IT strategy is to ensure that it is aligned with digital strategy and BOS. In this context, IT is firmly positioned as a support organization. At the same time, IT does not have to limit its scope to “order taker.” Arguably, as the gulf between BOS and digital strategy shrinks, so too will the distance between digital strategy and IT strategy become smaller.
In Olivia’s law firm, the senior partners and other lawyers expect IT to be on-hand to fix broken computers, replace telephones, support conference and video calls, and ensure that AV is working in meeting spaces – in short, to take orders. Although IT tends to be short-staffed, it performs reasonably well, especially considering the demanding nature of the lawyers it supports. Although there are no documented service level agreements in place between IT and the rest of the law firm, the lawyers and administrative staff generally believe that IT is responsive to their needs. As the firm grows and internal demand for IT increases, Olivia foresees that it will become more difficult to maintain business satisfaction without increasing human resources capacity. Additionally, much of what IT does now is reactive in nature (even if the response time is apparently acceptable).
Although the role of IT within the law firm traditionally has been a supporting service, Olivia recognizes that the services provided are largely commoditized. Indeed, the value provided by IT in the current context is to minimize response time. If, over the next several years, internal demand from the business exceeds IT’s capacity to respond with rapid response times, IT is a potential target for outsourcing to a third-party managed service provider. In short, Olivia recognizes that IT’s very survival (and maybe the firm’s survival) depends on maintaining or improving IT operations as well as evolving the law firm’s business model.
Organizations in all industries are more or less at risk for disruption from existing or entirely new competitors. To defend against disruption (Or indeed to themselves be disrupters!), organizations are wise to consider digital positioning. As a subset of digital strategy, digital positioning addresses four high-level stratgies or a combination of strategies an organization can pursue:
- Consumer Experience Shaping
- Operational Excellence
- Industry Transformation
- Market Transformation
Organizations hoping to exploit a particular position often start by using some form of a digital positioning model to analyze their strengths relative to one of the positions above and then develop tactics to improve their strategic position. Alternatively, organizations that recognize positional vulnerabilities often start with a risk analysis to understand where the organization is weak, and to learn which digital position to pursue.
Consumer Experience Shaping in Digital Strategy
Consumer Experience Shaping is of primary importance in business-to-consumer and retail organizations. It involves achieving a deep understanding of customer demand and preferences. Consumer experience shaping, including target marketing, is nothing new. In the pre-digital era, organizations and marketers segmented markets to identify blocks of similar consumers in order to customize and economize marketing efforts. In other words, if an organization could identify the type of consumers who would be most interested in buying the products and services the firm was offering and figure out the best place to reach those consumers, the firm would be more likely to gain the sale. In the digital era, the organization aims to go beyond segmenting the market into consumer-types. Instead, consumer experience shaping in a digital context ultimately attempts to gain deep knowledge of individual consumer preferences and market to individuals exactly where and when they are most likely to consume the products and services. For example, imagine a hotel chain that can identify when an individual’s flight at a particular airport has been cancelled and sends a semi-tailored “room for rent” ad to the person’s mobile phone exactly when they need a room.
Understanding the consumer experience in Olivia’s law firm may take some effort. After all, clients at top-notch law firms are not likely to be amenable to filling out customer satisfaction or marketing surveys. Nevertheless, many corporate consumers of legal services often require some level of legal help beyond internal counsel but less than consulting with a lawyer at a “white shoe” firm. This is often the case when a company is attempting to determine whether it is worthwhile to pursue a legal claim. Consulting a white shoe lawyer is expensive, but internal legal counsel does not have enough experience to determine the probability of winning a particular lawsuit or the likely financial outcome. This potentially offers the opportunity to offer a new service that would be valuable to corporate consumers.
Industry Transformation in Digital Strategy
Some organizations use digital technology to reposition competitors within their own industry. This often results in a fundamental transformation of the industry itself. For example, Codelco, the Chilean copper mining company, transformed the mining industry by installing sensors in drilling equipment. The sensors helped surface-based operators determine the best places to mine and the machines were even able to change their own oil (which was a several days manual ordeal previously). Not only did technology help Codelco make better decisions and mine more efficiently, it also meant that fewer employees needed to travel down into the mines, which improved safety.
A basic goal of industry transformation is to keep competitors playing “catch up” with technological innovation. If competitors refuse to invest in new technologies, they will continue to fall behind. On the other hand, if they attempt to stay up-to-date, they often end up losing focus and spending a large amount of money on technology. In other words, competitors are in a no-win situation.
Although industry leaders tend to enjoy dominance for a short period of time, the benefits of technological leadership are often short-lived. Indeed, if a technology is so revolutionary, competitors will be quick to adopt it, and will often acquire the technology for less than what it cost first-mover to implement it. What’s more, any glitches in the technology are typically corrected by the time competitors adopt it.
In more ways than one, the Legal industry is a rules-based industry. Certainly, top-shelf research tools and services offered by companies like LexisNexis take advantage of this. But what if a law firm developed its own internal research and artificial intelligence. Given enough time and investment, this sort of technology could be a game-changer in the industry.
Transforming the market itself is often a consequence of mastering customer experience and sometimes a result of industry transformation. Market transformation occurs when an organization creates an entirely new market for a product or service or consumer that has not previously existed. Imagine small or mid-size corporations that never considered seeking legal services because the hourly price of in-person consultation is prohibitive (between $600 and $1,000 per hour for top law firms). What if a technology existed to provide some level of legal services on a subscription basis without the high price tag?
Importance of Operational Excellence in Supporting Digital Strategy
Improving operational performance is a worthy end-goal regardless of an organization’s digital direction or positioning. If nothing else, operational excellence often leads to cost reduction or savings and, when waste is removed from processes, can lead to more meaningful work.
In IT, operational excellence often translates into addressing downtime – in other words, preventing downtime, responding to incidents quickly, and minimizing downtime by speedy resolution of issues. The ability to predict potential issues and address them before they impact the business is critical.
For businesses working towards a digital position, operational excellence goes beyond preventing and responding to downtime quickly. This is particularly true for businesses trying to improve the Customer Experience Shaping position. As demand from external customers increases, the cadence of the business becomes more rapid. In turn, IT needs to respond to and even predict requests from the business. Ideally, managers need the ability to view customer experience, sales, and IT operational metrics from the same dashboard through a “single pane of glass.”
How IT Practices Can Demonstrate the Value of IT to the Business
IT practices support the business by providing consistent service delivery, high-availability, stability and control. As defined in the ITIL glossary, a practice is “a way of working, or a way in which work must be done. Practices can include activities, processes, functions, standards and guidelines.” In other words, a practice is a consistent set of behaviors and activities that are lived on a daily basis. In the ITIL 4 framework, 34 practices are identified, including those that most IT professionals are familiar with, such as: Incident Management, Problem Management, Event Management, Change Management, Service Level Management, and Service Request Management.
Olivia’s law firm performs superbly as a reactive organization. When incidents occur, IT responds quickly and restores service within a short amount of time. Likewise, when lawyers and administrative staff members make requests (for laptops, mobile phones, etc.), IT responds to the customer’s satisfaction.
IT consistently delivers high availability of IT services. Although downtime is rare, it is disruptive and costly when it does occur. Olivia has been reviewing some after-action reports and incident trends for the past six months. She notices that there was only one case when the main case law research system went down and for only ten minutes during the late morning. Even though downtime was reasonably short, an average outage brings down about 1,000 lawyers. At a bill rate of more than $600 per hour per lawyer, a ten-minute outage of an enterprise-wide system has a dollar impact of more than $108,000 (and this does not include the time it takes IT to fix the issue). The firm employs about 4,000 lawyers, so if a major system outage were to last a full hour, the potential impact could be as high as $2,400,000!
The firm does not engage in proactive activities and is not aware of system or technical component downtime until after a business customer reports it as an incident. Currently, the firm has no early warning systems for IT components nor event management in place. IT does not have any formal practices or process around problem management.
Can an Organization Bypass IT Practices and Still be Useful?
In the era of so-called digital transformation, a common question is whether an organization can bypass maturing IT practices and process and still remain successful. The short answer is “Yes.” Despite what many of us in IT would like to believe, the vast majority of businesses did not become successful because they boast great IT shops. Instead, they offer unique products and services that are demanded by the market. The larger of these are sustained over the years by goodwill and brand name recognition.
Practice-hopping (or process-hopping) describes an organization that has managed to achieve success either by offering a remarkably successful product or service or highly developing its digital technology capabilities prior to maturing internal practices and processes. The usual suspects for “practice-hoppers” tend to fall into the latter category – those that saw a technological opportunity and exploited it without shoring-up internal business and IT practices.
Although some practice-hopping firms have been notably successful (think Uber), there are risks associated with practice-hopping. Failure to develop internal business and IT practices often leads to short term gains. Organizations that became wildly profitably over a short period of time may be reluctant to invest in the practices that lead to long-term stability and sustainability. Although the founders of such firms may console themselves with fantastic profits, for the rest of the organization it is often a case of “too much, too soon.”
To be sure, Olivia’s law firm did not earn their “white shoes” because they developed a whiz-bang technology; nor because IT does a great job of fulfilling service requests for new laptops. They rose to the top 200 because they hire some of the best lawyers and provide competent legal advice and “white glove” legal services to their clients. They have mature business practices but their IT practices are mediocre, and they lag in the use of new technology.
“Zone of Confluence” Activities
The “Zone of Confluence” (ZoC) is a term coined by the author to describe IT practices and activities, the development of which often help the organization to achieve improvements in more than one digital position. For example, reporting and measurement and data analytics practices help IT to drive operational excellence by actively measuring and reporting on end-to-end service metrics like availability, incident response and resolution time, and customer satisfaction. The same practices, when focused on improving the consumer experience can enhance the business’ understanding of customer preferences and product and service demand.
Common ZoC practices and activities include the following:
- Develop organizational change management practice
- Develop measurement and reporting practice
- Develop service financial management practice
- Develop project management practice
- Develop strategy management practice
- Develop data analytics practice
- Develop relationship management practice
- Develop workforce and talent management practice
- Develop infrastructure and platform management practice
Olivia’s Great A-Ha!
Olivia’s “a-ha” moment came after performing an internal analysis of IT’s strengths and weaknesses with regard to the operational excellence position. Although IT is not taking proactive measures in preventing issues, business satisfaction is high. When IT plays a reactive role, they tend to respond to incidents and requests from the business quickly. Though outages have a significant impact in terms of lost revenue, IT has maintained high availability of services. They have not, unfortunately, been able to predict technology component failures.
She then considered zone of confluence practices. Although IT does not have formal service level agreements, it does enjoy a good relationship with the
business. The organization at-large does not collect significant operational or customer satisfaction data; but IT does have a significant practice reporting and measurement. Additionally, current employees have deep skills with data analytics, database technologies, and artificial intelligence.
Although little data exists regarding the firm’s consumer preferences, Olivia’s conversations with some of the partners reveals that the firm has been searching for additional sources of revenue and is considering marketing to mid-sized firms.
In additional to operational improvements, Olivia decides to propose to the law firm that IT create a service that can help small-to-mid-size businesses determine whether to pursue a law suit prior to contacting a firm lawyer. For a monthly fee, a client could have access to a research database and corresponding tool, to be created in-house by IT, that will use rules and simple artificial intelligence to predict the likely outcome of a case. Building on the recent paper digitization effort, the new tool will make use of the law firm’s rich legal case history. In situations where a lawsuit will likely prove successful, the tool will alert a paralegal, who will reach out to the business client. In turn, this could culminate in an in-person consultation.
To be sure, much more work will need to be done before this new tool is designed and deployed. However, given IT’s current capabilities, creating an in-house tool is certainly within the wheelhouse of Olivia’s law firm.
The Role of Education
Olivia fights both an uphill and downhill battle in terms of making the case for digital enablement. On the one hand, neither the CEO nor the CIO seem to understand what digital strategy is really all about. On the other hand, the fact that little is expected of IT means that mid- and low-level IT staff have grown complacent and have not kept up-to-date with current technologies and trends.
In the perfect world, Olivia would have direct influence on the CEO for whom she could establish an informal education program on digital strategy and digital technology. In reality, going directly to the CEO would likely be perceived as “going around” the CIO. Instead, Olivia will need to make the case with the CIO first. A starting point, which is necessary but not sufficient, is to prepare a briefing on digital technologies and associated digital business models that most directly impact the legal industry. For example, data analytics and artificial intelligence open up the possibility of offering “legal suggestions as a service” to consumers. Of course, a one-time report needs to be followed-up with consistent reminders of the promises of digital technologies and examples of competing firms that are adopting digital business models.
Olivia has more direct influence over the IT staffers who work for her. It would make the most sense to encourage employees on the database team to take additional training regarding data-mining, rules-based intelligence systems, and artificial intelligence. Going a step further, Olivia could include digital technology education as an important aspect of performance reviews.
Human Capital and Talent Management
An organization’s success is less dependent on the skills and characteristics that made it successful in the past and more reliant on developing skills needed in the current environment. Leaders at different levels of the organization will naturally focus on different skills.
The role of the CIO, more than anything else, is to raise awareness about the opportunities and threats presented by digital technologies and to drive the development of a digital strategy. To be sure, the CIO needs to think more like the CEO. In the past, IT was fortunate to gain a “seat at the table” in terms of supporting the business. At the strategy and executive levels, it is now incumbent upon the CIO to gain for IT a “voice in the conversation.”
At the same time, the CIO raises the stakes for all IT employees by creating a sense of urgency around digital enablement.
Consider the following table:
The mid-level IT leader’s (director or manager) primary role is to support the CIO in executing the digital strategy. At the same time, the mid-level IT leader acts as a reinforcing sponsor for digital enablement efforts. Although this level of leadership does not have a primary role in formulating strategy, its importance should not be dismissed since it bridges the gap between senior leadership and operational teams.
Olivia is somewhere in between. Although she is an IT director and can certainly exert influence downwards, she would be wise to acquire skills from the CIO-level as well (after all, given the right circumstances, she, too, could one day be CIO).
Starting the Conversation
Organizations will inevitably develop different approaches when embarking on digital strategy. Even when the CEO and the CIO are “sold” on the benefits of digital strategy, developing the best strategy is no simple endeavor. The more likely scenarios are that the CEO thinks that “digital” is synonymous with “cloud” or “paperless” and the CIO is happy to simply achieve a percent increase in the annual IT budget. Quite often, the onus of evangelizing digital strategy falls on the IT director and IT manager.
The mid-level IT leader is wise to make the case for digital strategy by debunking the fad-label that is starting to attach itself to everything digital. Level-up by learning how digital technology can enable business strategy and provide examples of organizations that have used technology to alter the course of their organizations and generate additional sources of revenue. When necessary, cite examples of numerous companies that ignored digital strategy to their own peril and needed to downsize (or even went out of business).
Last, but certainly not least, use IT intelligently. It is difficult to achieve digital success without getting IT operational basics right. Build a robust service desk. Develop solid incident management, request management, and change management practices. Invest in event management and supplement it with artificial intelligence. When your practices and processes are healthy, deploy automation to free staff to perform high value work.