Editor’s note: This story originally appeared in the Unleashing Digital Value issue of Workflow Quarterly.
In their new book, “Future Ready: The Four Pathways to Capturing Digital Value,” Stephanie L. Woerner, Peter Weill, and Ina M. Sebastian map out paths for firms to thrive in the new world of digital business. The authors, all researchers at the MIT Center for Information Systems Research, show how future-ready companies can operate more efficiently, face new challenges, and maximize digital value. Businesses that fail to become future ready will soon find themselves fighting an array of more agile competitors, digitally adept startups, and ambitious entrants from other industries. Below is an excerpt from Future Ready, available this month from Harvard Business Review Press.
Transforming a firm to succeed in the digital economy requires a playbook to help firm leaders deliver on their vision, motivate employees, communicate with markets, and keep everyone focused on a common goal as they work to create new value in an increasingly digital world. The framework that we have developed starts with describing what it means to become a future-ready firm.
We define a firm undergoing a digitally enabled business transformation as having two simultaneous goals: (1) using digital technologies and practices to speed up and (2) wring out costs by standardizing and automating processes; reusing data, processes, and technology; and identifying areas where productivity can be increased. At the same time, these firms are using digital technologies and practices to innovate, creating new offers and services, identifying new ways to engage customers, and developing new business models and revenue streams. Some of the digital technologies and practices will provide efficiency gains and opportunities for innovation—for instance, service enabling a core capability with application programming interfaces (APIs) standardizes and automates that capability, which can then be reused AND can potentially be bundled into a new product offering for customers.
RelatedInnovation delivers on promise
We name firms that have learned to both improve customer experience and be more efficient, simultaneously and consistently, as future ready. Future-ready firms consider and use digital tools and approaches early in their decision-making to help address any challenge or opportunity, large or small. These digital tools and approaches include building and reusing platforms, test-and-learn techniques, Agile methods, partnering to grow through digital connections, dashboards to accumulate and measure value, and many others. These future-ready firms are top performers, reporting estimated average revenue growth of 17.3 percentage points and a net margin of 14 percentage points above their industry average—a rewarding premium.
Setting the context
The two dimensions that firms improve on—operational efficiency and customer experience—create a 2 × 2 framework that describes four types of firms, with future-ready firms in the top right quadrant. Using multiple metrics for each dimension, we placed 1,311 firms on the future-ready framework relative to their competitors. The average estimated annual revenue of these firms was $4.8 billion.
Silos and spaghetti
Most large firms, typically with an extensive catalog of products developed or acquired over many years, start in the bottom left quadrant with traditional customer experience and operations. That’s where 51% of firms sit. They have a number of silos (sets of systems in a subset of a firm that support a business unit, a product, a geography, or a customer type) that are incompatible, or not integrated, with other systems. They added new silos when they introduced new products, new geographies, new customer types, or new service offerings (or had to meet new regulations) and left them unconnected. These firms then created spaghetti when their point-to-point solutions involved making connections from many systems to many others—particularly when they needed to extract data.
This results in a complex set of business processes, systems, and data supporting their products. The result is a fragmented, labor-intensive, and frustrating experience for both customers and employees. Frequently, the ability of such firms to provide an engaging customer experience depends heavily on heroics by employees. It shouldn’t be surprising that the revenue growth and net profit margins of firms in this quadrant were the weakest, averaging 10.5 percentage points and 6.5 percentage points below their industry average.
Industrialized firms (bottom right quadrant) focus their initial transformation efforts on applying best engineering practices for automation of their operations. They take the capabilities that made them great as a firm (their crown jewels) and turn them into modular and standardized digitized services. Firms in this group develop the best way of handling each key task (for example, processing an insurance claim, onboarding a customer, assessing risk) and strive to standardize it across the firm. They configure their internal and customer-facing digitized products/services into plug-and-play modules to meet customer needs quickly and inexpensively. They combine data collected from customer interactions and elsewhere to become a single source of truth that anyone with permission in the firm can use in decision-making.
Over time, many of these processes and decisions are automated. Only 7% of the 1,311 firms were industrialized, and these firms reported average revenue growth of −1.7 percentage points below their industry average and net margins of 2.4 percentage points above the industry average. This mix of superior net margins and slightly below industry average revenue growth reflects the focus on industrialization and operational efficiency of firms in this quadrant.
Firms in the integrated experience (top left) quadrant invest in providing a better-than-industry-average customer experience, which they offer despite having complex operations. Firms that want to offer an integrated experience develop attractive websites and mobile apps and hire designers and more relationship managers to improve the customer experience. Many attempt to improve the customer experience by investing in analytics. However, while improving the customer experience, these integrated experience firms often experience an increased cost to serve the customer as the underlying business processes, technology, and data landscape remains complex or becomes more fragile. About 20% of firms are in the integrated experience quadrant and perform around their industry average with average revenue growth of 0.9 and a net margin of 0.5 percentage points below industry average—much improved compared to firms in silos and spaghetti.
Future-ready firms engage and satisfy customers while at the same time reducing costs. Their goal is typically to meet customers’ needs rather than push products, and customers can expect to have a good experience no matter which service delivery channel they choose. On the operations side, the firm’s capabilities are modular and agile; data is a strategic asset that is shared and accessible to all in the firm who need it. These firms realize they can’t do all this alone and are organized to leverage partners to add more value to customers.
We found that 22% of firms were future ready. These future-ready firms were top performers—with estimated average revenue growth of 17.3 percentage points and a net margin of 14 percentage points above their industry average. An example of a future-ready firm is DBS, considered by many as “the best bank in the world” with both leading customer experience and strong financial performance, which has transformed to become future ready over the last decade. We describe DBS’s journey [later in the book].
Reprinted by permission of Harvard Business Review Press. Excerpted from Future Ready: The Four Pathways to Capturing Digital Value by Stephanie L. Woerner, Peter Weill, and Ina M. Sebastian.