a perspective on digital transformation.pdf

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A Perspective on Digital Transformation

Digital Transformation Stay ahead of the curve, serve the consumer, beat the competition,and drive operational efficiencies . The world has changed and theres no turning back.

Author: Werner NelMay 2010

The number of internet users will surpass two billion this year, approaching a third of the world population and theshift to the mobile internet is accelerating with mobile internet users set to exceed desktop internet users within 5years.

In the UK today there are 40 million internet users, with close to 30 million people using the internet for at least 27minutes a day. Between seven and nine percent of GDP is attributable to the commercial internet with close to60 percent of adults buying goods and services online, making it the largest e-commerce market in the world on aper capita basis (British shoppers spent 4.8 billion online during September alone, the equivalent of 120 perinternet user). Mobile commerce is widely adopted in the UK, with 51 percent of mobile owners (around 23million people) using their devices to make payments, redeem coupons and to research products and services.

People who frequent the digital world, social media sites in particular (these sites now attract 11% of all UKinternet visits), are the people you need to know. Consider a few facts about the 800 pound gorilla of social

media, Facebook: If it was a country, it would be the worlds fourth largest with around 125 million unique visitorsa month (there are 25 million active users in the UK alone). Accessing and downloading content from Facebookwhile at work accounts for just over 7 percent of all corporate web activity and 5 percent of corporate bandwidthusage. Nearly 70 percent of the community is over 21 years of age, its fastest growing demographic is 34 to 55years old with the over 55 group just behind. This online community is vast, spanning nearly every demographicimaginable.

Consumer facing organisations that learn how to exploit this vast potential will have a distinct advantage overthose that dont. This is no longer mere rhetoric as there is a wealth of research to back this up. A recent studyamong the Fortune 100 found that the majority of these organisations are now using social media sites(specifically, Facebook, Twitter, YouTube and Business Blogs) for online reputation management. The studyfound that among these leading organisations 65 percent use Twitter, 54 percent use Facebook, 50 percent useYouTube and 33 percent make use of Blogs. Interestingly, the study found that among European companies, 88percent use at least one of these channels and 15 percent use all four.

From a consumer perspective, the internet has become deeply entrenched in our everyday lives. Manyorganisations now offer online-only discounts, we have internet-only banks, and most internet users wont buywithout having performed an online price comparison first (the average online household saves close to 1000annually). Online shopping, booking, check-in and customer service is now widespread and for many consumersa key factor in deciding between service providers.

Its not only consumers that are benefiting. A recent pan-European research project led by the UK Office forNational Statistics looked into the economic impact of information technology and found a strong positivecorrelation between the use of internet technology and organisational productivity. Although the findings vary bycountry and industry, they show a productivity increase of between 1 and 3 percent for every 10 percent increasein the amount spent on internet technology. Unsurprisingly, in the UK manufacturing firms benefit most from theadoption of tools linking them with their suppliers (think e-procurement), while retailers benefit most from toolsthat enable online customer transactions. Services firms (including those in the financial services industry)

gained most from giving staff access to high-speed internet connections.

The digitisation of existing services, the creation of new services and industries, and the information explosion areall factors which are continuing to shape life as we now know it.

Although estimates vary, research suggests that the digital economy could make up 10 to 15 percent of the UKGDP in five years time.


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Are you ready fo r this brave new world?

Change is hard and the unfortunate truth is that despite its vast potential, many organisations have yet tocapitalise on the potential of the internet. In fact, it is my experience that many organisations still cling to oldparadigms, using the internet for one-way flow of marketing messages, instead of capitalising on theopportunity to truly engage consumers, enhance staff productivity and build stronger value-net links. This is amistake that will cost many an organisation dearly if not rectified.

I have identified five digital trends that will increasingly determine who wins and who loses in the new digital age.Only by truly understanding these trends is it possible to achieve the type of lasting transformation that will allowyour organisation to stay ahead of the curve beat the competition, delight the consumer, and operate best-in-class.

In this paper, I explain:

1. How digital technologies are continuing to shape and disrupt the world around us, and the implications fororganisations of all sizes, operating in markets with differing levels of digital maturity;

2. How to harness these changes for top and bottom line growth;

Section 1: How Digital Technologi es shape the globalising world

As we emerge from the Great Recession, organisations across the globe are searching for new sources of growthand many are turning to the internet and other digital technologies as a key growth platform.

The bursting of the dotcom bubble early in the previous decade seemed to herald a period of slower change (atleast as far as in information technology was concerned). Few if any breakthrough technologies akin to the mobilephone have emerged since. Network speeds are nonetheless considerably faster, storage capacity substantiallygreater, and devices decidedly more functional and robust than just five years ago. The applications with whichindividuals and organisations use these technologies, and the value that organisations derived from using them,have also advanced considerably.

It is now commonplace, for example, for senior executives, sales people and other employees to access e-mailand other data while travelling, by using mobile devices and applications. Data analytics tools are used to gatherinsights from the vast volumes of data and information, generated internally and over the Internet, in order tosupport marketing teams and other decision makers. Supply chain management systems have integrated

suppliers much more closely into manufacturers operations than ever before.

However, these incremental advances in information technology hide a much more fundamental shift that is nowwell underway, the digitisation of traditional business.

Initially, the digitisation focussed on the way products and services were designed, produced or distributed. Thismeant replacing or augmenting physical objects (for designing, testing, etc.) with virtual ones. As a result, designprototypes now often appear as three dimensional rendered models instead of actual objects. It also led to thewidespread replacement or augmentation of physical and human interactions. Think for example of thewidespread use of self service tools at the expense of customer support staff or of the increased use of robots toreplace factory workers.

More recently, the digitisation drive has extended to the product or service itself, replacing it with a virtualequivalent. Digital cameras, e-books and music downloads are just some of the examples.


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Consider also these digital innovations and the impact theyve had on our lives:

Digital Innovation Implications

Online financial transactions

Faster, secure, lights out transacti ons : reduced operating c osts, 24 x 7, global markets

Digital networks have brought the ability to safely execute financial transactions across the globe tothe individual. Instant, 24x7 online shopping is now an everyday part of life, 58% of UK adults buygoods and services online

1, spending an estimated 4.8 billion in October 2010, equivalent to 79

for every Briton2, much of which is transacted without the need for a traditional store, or the costs

associated with one.

Digital travel cards

Product innovation: Improved custom er experience and operational effic iencyThe use of digital technology to monitor travel in London (Oyster) and Hong Kong (Octopus)simplifies the customer experience of travel, reduces operational costs and produces invaluabledata streams. In London over 80% of tube and bus journeys are paid for using Oyster cards, giving

Transport for London is valuable operational data for almost one billion customers a year.Automated fare charging access gates also carries the benefit of reducing lost revenues throughincorrect fare and avoided fares.

Digital distribution

Direct to device downloads: Conquering the traditional distribution challenges

Connected digital devices, and the widespread, global spread of digital networks has created a newmarket in distribution, digital, direct to device download services. Consumer demand for instantsupply and consumption is driving the market for games, apps, films and music. In the US digitaldistribution of PC Games overtook physical sales for the first time in the 2010, eliminating traditiondistribution challenges of cost, packaging, damage and supply. Launch of the Times Online in theUK shows clear indicators of interest in the digital distribution and consumption model, registering21 million users in the first month after launch

3.

Crowd-sourced information

Collective wisdom: Harnessing the power of the consumer

The emergence of the interactive consumer as purchaser, reviewer, critic, advertiser and source ofknowledge is not a new phenomenon but web 2.0 technologies have given them a global voice andpresence. As an extension of this, crowd sourcing has reduced the gap between the amateur andprofessional, where volunteers can provide solutions and answers in their spare time. Wikipedia,the online encyclopaedia, is the perfect example of the power of crowd sourcing; it is now theworlds 7th most frequented website

4,with over 344 million users accessing over 14.5 million articles

contributed by 100,000 active volunteers5.

Apples iPhone appl ic ationsstore and the Smartphoneexplosion

Mobile Apps stores: putting the power and choice back into users hands

The introduction of an open software platform for amateur developers to create applications for theApple iPhone has generated a new industry estimated to be worth $29.5bn by 2013 with over 20bnapps being sold 6. This development has been the most important driving force behind convergencein the last 5 years. The consumer can now access all types of telecom and media

RFID technolog y

Mass automated data gathering: Kn owing w hats where and when

RFID has revolutionised our ability to track and log large volumes of physical objects in highlydynamic environments. A number of shipping and container firms have added RFID tags to their

packages. In the US and across Europe, RFID technology is now widely used by fruit/vegetablegrowers to more closely track their shipments to retailers, helping them monitor the temperature oftheir products at various points along the supply chain. The best know example is Wal-Mart, whichtogether with one of its suppliers - Ballantine (a California based fruit grower) - achieved a 16% dropin out-of-stock merchandise in RFID-equipped stores.

Social networking sites

Making the world an even smaller place: Connecting the masses through networking

Social networking and the ability to instantly communicate across the globe, sharing thoughts,pictures and experiences is a relatively new concept and something simply not possible before thebroadband internet revolution. In the UK there are 25 million registered Facebook users, secondonly to the US. And whilst sites such as Twitter have globalised transient thoughts and moments,(with 640 tweets being made every second) sites such as LinkedIn and Facebook are collapsinggeographical boundaries in both the professional and social worlds.

Net border security

Knowledge is power: Strengthening our borders through inform ation

Digital technologies have allowed immigration authorities to strengthen the protection of ourborders, eye scanning and fingerprint recognition technologies allow instant identification ofindividuals and evaluation of the level of threat they represent at the point of entry. In combination

with known security risks, financial transaction and online they are able to identify potential treats tonational security before they unfold.

But, although the digital revolution is ubiquitous it has developed unevenly, and is leaving the global poor and un-educated behind, deepening the divides in contemporary society. The difference in the standards and means ofliving today is clear: in the most developed, richest nations of the world digital life is all encompassing, whilstthose in developing nations struggle to finance the revolution.

1 Eurostat2

IMRG3

http://www.bbc.co.uk/news/uk-116719844http://www.alexa.com/siteinfo/wikipedia.org#5http://upload.wikimedia.org/wikipedia/foundation/a/a4/WMF_Annual_Report_20082009_online.pdf6

http://arstechnica.com/apple/news/2010/01/apple-responsible-for-994-of-mobile-app-sales-in-2009.ars


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However, even in the UK, one of the more sophisticate online nations an increasing divide is developing betweenthe connected masses and those that remain isolated. It is estimated that in the UK over 10 million adults havenever used the internet, a staggering 20% of the population. Worryingly usage and connectivity drops withincome, denying those that could benefit most from the advantages of the digital economy. Nearly 50% of adultsin households with an income of less than 11.5k per annum report never using the internet, compared to 4% onthose with an income of over 30k. The link between social disadvantage and the lack of connectivity iscompelling, with over 1.5 million unemployed not using the internet and 48% of those with a registered disabilitynever having been online, more than twice the national average.

This divide is only set to grow if it is not addressed; online only shopping discounts, preferential online financial

service rates and even access to social support is being pushed online. For those striving to bridge the divide it iseven more essential to become connected, 90% of all advertised jobs now require internet skills and 7 million jobswere advertised through online channels. Even within the education system the benefits of being online are stark;research has shown that children able to use the internet at home can achieve a two grade improvement atGCSE

7. For UK PLC as a whole connecting the population would be hugely beneficial, bringing everyone online

would bring in an economic benefit of over 20 billion according to a recent study by PWC8.

What is clear to see is that digitisation is not taking place at an even pace across the globe or within the UK.Whilst developed nations are forging the technology innovation path the third world nations and the sociallydeprived are lagging behind presenting great challenges for social, business and economic development. Ifthis is left unaddressed, a new social and global underclass will develop completely reliant on others tosupport them.

The challenge facing the global business community today is twofold, firstly how to understand and harnessthe changes arising from digital revolution and secondly how to carry these changes forwards into theinnovative business and government of the future to benefit all, not just those with the benefits of socialadvantage.

7Becta Home Access Study

8

The Economic Case for Digital Inclusion: Report for the Champion for Digital Inclusion, October 2009


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Section 2: How to harness the change

I have observed five trends that will have an impact on all organisations over the next few years, and for which acompelling digital response will be required. Only organisations that invest the time and effort to understand andembrace these trends will emerge as winners in an increasingly digitised world.

1. Disruptive Innovation2. Connected value nets3. Borderless Workforces

4. Distributed innovation5. Consumer activism

The following paragraphs look into these trends and how considered digital responses can realise both top andbottom line growth for the innovative organisation.

Disruptive Innovation

Innovation in the digital space has seen a number ofdisrupt ions to the previously accepted norms, newcommunication channels, commercial models and computing platforms have forever changed the way in whichwe acquire and consume services and goods.

The music industry over the past 10 years presents a perfect example of how afailure to innovate can impact

an industry. At the turn of the century digital music content was becoming more common place and theintroduction of the iPod by Apple in 2001 finally brought it to the masses. As direct to consumer downloadservices, enabled by fast internet access, spawned new and often free consumption models the industry relianton premium pricing for content was slow to respond, favouring policing over innovation. Research agencyForrester calculated that the failure of this strategycost the UK music industry around 180 million in 2008alone from lost revenues.

On the other side of the coin, harnessing the power of disrup tive innovation is able to bring substantialrewards to organisations bold enough to embrace it. Reacting to the same pressures as the whole UK musicindustry, Last.fm, the online radio station, began to innovate and challenge the markets it operated in. Combiningwith the innovative Audioscrobbler technology it revolutionised music consumption, providing listeners withpersonal radio stations customised to their individual tastes; harvesting user data and preference tocontinuously improve. While the record labels struggled to defend their outdated empires, Last.fm built a userbase of over 40 million active subscribers. In 2007 Last.fm founders realised the fruits of their innovation, selling

to CBS Interactive for 140 million in late May, ironically close to the losses the UK industry would make thefollowing year from ignoring the opportunities innovation could present.

Ensuring that an innovation strategy is in place with an organisation is no longer required simply to be the firstwith the next big thing, it must be considered anessential part o f co rporate strategy unless the organisation iswilling to be left behind by its competitors.

Connected value nets

Data collection, consumer analysis and segmentation, and product and price differentiation have become a hugeadvantage in the race to win over the modern consumer. The key to understanding the consumer is the abilityto capture, analyse and exploit data and information about the consumer as possible. Unsurprisingly, customercentric best practice has grown from the retail sectors, with organisations such as Tesco, and Sainsburys leadingthe charge, leveraging vast consumer databases not only to optimise retail operations but tobranch out into

new markets such as financial services. Logistics firms that have long relied on accurate tracking to optimiseand monitor their core business have extended this capability. World leaders in the sector such UPS and FederalExpress pioneered using this information to allow customers to know exactly where their goods were at any givenmoment creating a significant commercial advantage in an industry where certainty and confidence isparamount.

The music and film industries are perfect examples of how theactive consumer has changed the marketplace.Firstly, consumers have, through YouTube, MySpace etc, been allowed to distribute content to aglobalaudience, which has previously been the role of a label, promoter or distributor. Secondly, consumer reviews andviral marketing have become established as important tools in promoting new releases, so much so that recently,start-up organisation Posse has harnessed the power ofsocial networking and viral marketing to allow fans tobecome ticket agents by adding links to their favourite bands to their social networking accounts and earn up to5% commission on ticket sales9.

9

http://springwise.com/entertainment/poss


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The digital transformation of these industries hasblurred the value chain and allowed existing players to take onnew roles, and new players to gain market share.

Borderless Workforces

The increasing availability of high speed residential connectivity, remote working solutions and crossorganisational, international teams has enabled organisations to leverage their IT investments to reduce theirreliance on co-locating teams and employees. The challenge of sharing knowledge and effectivecollaboration between these borderless workforces has now become a real challenge to the modern

organisation.

Whilst social networking exploded onto the web early in the 21st century through the likes of MySpace andFacebook, organisations have taken a more cautious approach and have been slow to embrace these digitalplatforms. However, since 2008 enterprises have started to adopt social media to bring far flung employeescloser together and to create a sense of togetherness and community.

To understand how organisations have leveraged digital platforms to enable their workforces, consider theseexamples:

o Having realised the challenges faced bydisparate locations and the traditional boundaries forced byorganisations NASA established its NASASPHERE programme toshare and foster collectiveintelligence. Byaccelerating communications amongst its research centres it enabled its researchersto capture and centralise knowledge making it readily available for others to use, creating a

collaborative and collective intelligence network.o In early 2010 realising that their corporate and operational information was not flowing as it should,

Severn Trent Water moved to bolster its content and co llaboration services by implementing a newdigital collaboration and information management platform. By centralising content into managedstores with widespread and easy user access employees began to duplicate effort less and work moreeffectively with corporate resources. Through the new collaboration and networking tools they were ableto share and contribute more easily than before and a culture of innovation and agility was brought toSevern Trent.

By breaking down the traditional barriers of the corporate workforce and by providing the environment and eco-system in which knowledge can be discovered and shared modern businesses are able to create an increasingcompetitive advantage over competitors that doggedly stick to rigid traditional models. With increasing relianceon not only knowledge but its effective distribution and discovery this advantage is only set to growth at an everincreasing pace.

Distributed innovation

Complexity is all around us, it is an intrinsic part of modern social and business life and as processing power,miniaturisation and digitisation continue to advance it shows no sign of retreating. In such technically complexenvironments it is increasingly hard for anyone organisation to own and contain an enti re value chain. Giventhis position the challenge now being faced by those leading innovation is how to access and leverage theknowledge and expertise that residesoutside the bound aries of the organisation and integrate that with theinternal know-how.

The Linux operating system provides acontrarian model for inno vation to the traditional corporate R&D labthat deals with all innovation from start to finish. In 2001 when Linus Torvalds released version 0.01 of theoperating system he had created it contained 10,239 lines of code10, by August 2010 the globally distributeddevelopment community had grown this to a staggering 13,545,604

11lines. However during this time no formal

R&D organisation had been created, no single company controlled a team of developers, instead contributionsflooded in from all over the globe from anyone with the skills to help in a self policing and validating approach.Often cited as the most developed example of decentralised problem solving and collaboration , the opensource software (OSS) community and their achievements have brought the concept distribution innovation to afar wider audience.

Even in the more physical world of classic manufacturing, distributed innovation is becoming morecommonplace. European car manufacturer Fiat was amongst the first of the automotive sector companies tobegin outsourcing its new product development to suppliers traditionally only involved in the manufacturing andsupply of components on license. They empowered their partners to design and engineer entire modules oftheir vehicles, positioning them at the core of the value chain. At its peak, 85% of the value of Fiats vehicles was

10http://groups.google.com/group/comp.os.minix/msg/2194d253268b0a1b?pli=1

11

http://www.h-online.com/open/features/What-s-new-in-Linux-2-6-35-1047707.html?page=5


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engineered by its suppliers12

operating in completely separate organisations and in many cases differentgeographies.

Whilst this style of distributed innovation has the ability totransform an organisations agility and vastlyincrease its accessible knowledge talent and resources it brings with it new challenges. Most notably thesecentre on controlling and managing information and effort across disparate organisations, protecting ownership ofintellectual property and the protecting against the risk of degrading internal skills and developing an over relianceon external providers.

Consumer activism

The impact of the digital revolution has resulted in amore informed consumer, creating a much more savvy andcompetition-aware marketplace in which the individual has very much taken back the power to influence themasses. GlaxoSmithKline, the UK based global pharmaceutical, firm found this out to their considerable costafter legal rulings demanded they make available to the public all of its testing data for the diabetes drug Avandia.When a subsequent study based on this data from a cardiologist at the Cleveland Clinic highlighted the potentialheart risks from the drug, GlaxoSmithKline sales losses were quantified as $600 million from 2002 to 2004alone13.

In 2008, realising the potential of the informed consumer the Chinese central government ordered a cover up ofthe bad news of the melamine contamination of milk fearing for the effect on social stability during theopening of the Olympic Games

14. Predictably, when the news of the 6 infant deaths

15and some 300,000

16report

cases of illness broke, it spread rapidly across the globe. Fronterra, the worlds largest dairy produce traderwas forced to write off two thirds of its 107 million investment in Chinese dairy products firm Sanlu as consumers

voted with their feet.

Whilst major incidents like these demonstrate the power of consumer activism there is agrowing army ofconsumer platforms involved in everyday events with the potential power to radically impact modern life.Mumsnet.com, the UK based community website by parents for parents has created such an influentialconsumer group, reaching far beyond its virtual boundaries, that the UK 2009 general election was dubbedthe mumsnet election in many press as political parties sought to win over the vocal, but undecided massestypified by its users.

The digital world hasbroken down the traditional flows of information, giving each and every consumer avoice that can be heard on a global stage that organisations would be foolish to ignore, knowledge has onceagain become the active consumers best and most effect weapon.

Although the exact scope of the change will differ from organisation to organisation, we believe that in order forthe change to be effective and enduring organisations need to approach the change holistically, via adigital transformation programme that focuses on three key dimensions: technology enabled innovation,

operating model alignment and business platform enablement (see figure 1).

12Coordinating distributed innovation processes: The case of the automotive and open source software industries, M Becker, F Rullani & F Zirpoli, 2009

13 http://www.nytimes.com/2010/07/13/health/policy/13avandia.html

14http://www.telegraph.co.uk/news/worldnews/asia/china/3074986/Chinese-ordered-cover-up-of-tainted-milk-scandal.html

15Toxicological and Health Aspects of Melamine and Cyanuric Acid, World Health Organisation, 2009

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http://news.bbc.co.uk/1/hi/7720404.stm

Based on my experience in both the public and private sectors, I believe that once a management team has invested thetime and effort to understand these digital trends and what it means for their organisation, they have a distinct strategicand operational edge.

However, as is always the case, the extent and longevity of the advantage depends on the organisations ability toconvert this insight into action a focussed digital transformation. It is my view that successful execution requires strongcapabilities in three key areas:

1. The ability to sense and interpret changes in the market and competitive landscape and to determine whatadjustments are required across the organisation and in the supply chain

2. The ability to rally the organisation around a change agenda and to deliver a large-scale transformationprogramme

3. The ability to innovate and to get these innovations to market. This increasingly involves information technologyand requires the IT organisation and its suppliers to get much more involved in the innovation agenda

The unfortunate reality is that very few organisations have a disciplined approach to innovation or business

transformation and changing the existing business model can be very difficult in all but the smallest of organisations.However, despite these challenges, many organisations are being forced to change because of the disruptive effects ofthe digital evolution and the increasing competition (from conventional and unconventional quarters) this introduces.

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