Sometimes a little technology adoption can be a dangerous thing. A recent survey by Gartner of CEOs found that 41% of those in the corner office think of their companies as “innovation pioneers,” a self-assessment that is 52% higher than it was in 2013.  

Interestingly 37% see their organizations as “fast followers” who quickly adopt new innovations.[1] Fascinatingly, the sum of those two groups leaves only 22% of CEOs who would be classified as anything other than a significant leading or fast following innovator. Are the risk averse majority now the minority?

To fully grasp this, take into account a normal technology adoption curve. Despite its purpose at looking at technology adoption, not innovation, it’s a pretty good benchmark of who should be an early innovator and the masses of companies that follow. A normal distribution of technology innovators should be small, like innovation adopters, at 2.5%. Fast followers, comparable to early adopters, is 13.5%. The rest, which include early majority, late majority, and laggards, should be the rest of the 84%.  

Are there really that many early innovative companies out there? Hardly. But with all the focus on digital business today, we seem to all think we’ve moved close to the bleeding edge. Here’s a good explanation why:

“With innovative information technology…executives sometimes lose their rational decision approaches. Certainly, it’s true that in times of radical technological change there’s a lot of figuring out to do. Executives have to understand what new technologies can do, and understand their impact on markets, products/services, and distribution channels. These decisions are inevitably influenced by hype from vendors and the media, expensive consultants offering “thought leadership” insights, many high-profile experiments, and a few exciting success stories that keep people wanting more. A charismatic CIO or chief digital officer may make it even harder to be level-headed in those heady times.”[2]

These actions we take of going through the pain of transformation and technology innovation proscribe positive feelings towards those action. Just the act of embarking on a transformation project may create a bandwagon effect, a cognitive bias that reinforces leaderships’ overall positive assessment of their organization and their actions, just because they have committed to organizational transformation, even if it ultimately fails to achieve positive transformative outcomes.

How do we overcome this cognitive bias? Here are two prescriptions.

First, take the simple VRIO test. With every innovation you are pursuing, ask yourself:
​

1. Value: Is it valuable? Does it produce a better or different outcome for our customer? Does it help our organization increase customer value or lower value loss?
2. Rare: Is it rare? Am I really the only or one of a few organizations that could do this?
3. Inimitable: Is it inimitable? Is it very difficult to copy, imitate, or substitute?
4. Organization: Is it organizational? Can our company organize itself to take advantage of it?

By these standards, few of today’s transformation efforts would pass the test for adding long-term sustainable value to an organization. Drop or deprioritize those that don’t.

Second, spend more time thinking about innovation away from the product or service and specifically around business model innovation. Think about the majority of innovations you’ve seen in the market—most have been accompanied by a business model innovation. 

A review of innovation in top performing companies by McKinsey indicated that only 27% of top quartile performers felt that they were getting their business model right—that’s of the top performing companies. The second quartile performers were significantly worse: only 10% of second quartile performers said they were good at business model innovation.[3] Business model innovation is hard, but it’s an indication that you are doing something right, valuable, and differentiable. 

Netflix, Amazon, Apple, Dollar Shave Club, Costco, and more have succeeded because they have fundamentally changed the way they provide customer outcomes and the way they make money. A little more time focused on choosing the right innovations and enhancing it with a better business model innovation will go a long way.

#innovation #transformation #digitaltransformation #netflix #Apple #Amazon #Costco #transformative #technology

[1] 2018 CEO Survey: CIOs Should Guide Business Leaders Toward Deep-Discipline Digital Business." Gartner, 6 April 2018
[2] Why So Many High-Profile Digital Transformations Fail, Thomas H. Davenport and George Westerman, Harvard Business Review, March 2018
[3] The eight essentials of innovation, McKinsey Quarterly, April 2015.

In the last blog we discussed the fact that 70% of company transformations fail and explored General Electric’s downward spiral since launching their digital transformation effort in 2014. 

GE is not alone. Notable companies that have stumbled on their path to transformation include Nike, Ford, the BBC, and many others. Why do companies like GE fail to obtain the outcomes and benefits from transformation that they anticipate? Some of the reasons certainly include the traditional behavioral, cultural, managerial and organizational issues that change management addresses. 

While most companies look to better manage their transformation journey, the issues really start at the beginning. Indeed, as we covered previously, most transformation efforts are focused on inward improvements to productivity and efficiency. These are great for improving profitability, but that shouldn’t be confused with customer value or competitiveness.  

In general, this inwardly-focused transformation efforts fail due to four major pitfalls. They include:

1. Not Making Customer Outcomes the First Priority. The intense focus companies place on maximizing operational efficiencies has made the delivery of better customer outcomes, including the customer value and experience, a third priority for most organizations. A recent IDG survey found that increasing customer experience was an objective for only 46 percent of the organizational transformation efforts, well behind employee productivity and business performance. Another survey found that improving customer experience was seen as an advantage of their transformation project in only 34 percent of the cases.

This may be a result companies’ perspective that they either adopt digital transformation or they are disrupted by it. Four out of five businesses expect to see a negative impact on revenue in the next twelve months if they fail to complete digital transformation initiatives.[1] For many organizational heads, transformation is a gun to their head, not a way to benefit their customers or derive meaningful advantage.

2. Failing to Articulate Vision and Create Alignment. The second pitfall that companies fall into is failing to make transformation a point of company-wide alignment. Most employees simple don’t know the why and how of the transformation journey. In a recent survey of IT managers in organizations undergoing transformation, 69% said that they wouldn’t be confident explaining the concept of their company’s transformation to someone else.[2]

This lack of clear, motivating, aspirational vision is a result of the operational focus of transformation. No one but management gets behind a vision to increase earnings by 20%. Failure to create illuminating the path to get there is a significant barrier to transformation success.  As an example, former CEO Jeff Immelt said of GE’s transformation process, “One of the things I’ve said during every transformation is, ‘We’re on a forty-step journey. Today we’re on step twenty-two. I don’t know exactly what step thirty-two looks like yet. But we’re going to explore that together.’”[3] 

Step twenty two of forty? While forty-step journeys may be necessary, that journey is not going to garner the attention, understanding, and motivation of employees to support the efforts. Great leaders know they need to create a vision that is simple and outcome oriented, and then over communicate that vision by 10x to employees to turn it into a company-wide journey and effort

3. Confusing Effort for Effectiveness and Tools for Outcomes. The third pitfall of transformation efforts is that the actual effort put into transformation, especially digital transformation, tends to have an appeasing effect for organizations that they are making some effort toward change, with little regard for whether its effective. With the prospect of returns from and the effort required for transformation, it is easy to get caught up in the hype the process and potential for returns and lose sight the real outcome.  
Interestingly, the act of embarking on a transformation project may create a bandwagon effect, a cognitive bias that reinforces leaderships’ overall positive assessment of their organization and their actions because they have committed to organizational transformation, even if it ultimately fails to achieve positive transformative outcomes. This is reinforced by an already high self-perception by senior leadership that their company is technology leaders. A recent CEO survey found that 41% think of themselves as “innovation pioneers,” a self-assessment that is 52 percent higher than it was in 2013. Another 37 percent believe they are “fast followers” who quickly adopt new innovations.[4]Fascinatingly, the sum of those two groups leaves only 22 percent of CEOs who would be classified as anything other than a leading or fast following innovator. Are there really that few laggards out there?

4. Settling for Efficiency vs. Long-Term Differentiable Advantage. The fourth major pitfall for organizations is confusing the pursuit of efficiency with the concept of creating advantage for their organization. With a largely operational-efficiency focus, the outcomes most organizations create have little to do with improving an organization’s competitive position and long-term competitive advantage.  While investment in digital transformation is the theme of the day, these efforts alone often go toward strategies that can be copied, internal processes that are replicated, and new technology that can be similarly acquired or developed, providing, therefore only a transitory advantage. If every other organization has access to the same consultants, open source code, cloud computing partners, machine learning engines and algorithms, and so forth, is there a long-term advantage?

Stepping back, these pitfalls open up the question of of whether transformation efforts sustainable if transformation don't create a better and differentiated outcome for the customer and a long-term advantage for the organization. The answer is no, and the solution lies in not focusing just on transforming the organization, but in transforming customer outcomes. 

Next week we’ll discuss outcome transformation, and what steps organizations can take to improve the likelihood of transformation success.

#Transformation #digitaltransformation #transformative #strategy #changemanagement #generalelectric #GE #customeroutcome #customerexperience


[1] Connectivity Benchmark Report 2018, Mulesoft Corporation
[2] Not Everyone Understands Digital Transformation, Salesforce survey, June 2018
[3] Inside GE’s Transformation, Harvard Business Review, September-October 2017
[4] 2018 CEO Survey: CIOs Should Guide Business Leaders Toward Deep-Discipline Digital Business." Gartner, 6 April 2018

 
In the world of digital transformation, there are three key data points to know:
 

• 40% of CEOs recently acknowledged that the digital transformation of their organization was a top priority.[1] 
• They are spending $1.3 trillion to do it.[2]
• 70% of those projects will fail to reach their objective.

 
That may sound like a dire prediction, but a recent survey by McKinsey found that,
 
“After years of McKinsey research on organizational transformations, the results…confirm a long-standing trend: few executives say their companies’ transformations succeed. Today, just 26 percent of respondents say the transformations they’re most familiar with have been very or completely successful at both improving performance and equipping the organization to sustain improvements over time.”[3] 
 
Other estimates show an even higher rate of failure: seven out of eight digital transformation projects failed to reach their intended objectives.[4] 
 
This data should stand out to senior management engaging in or currently considering digital transformation in their organization.
 
One very public example of this type of failure is the decline of General Electric that commenced during its attempt at digital transformation. In 2014 the venerable, 125-year-old company embarked on a company-wide effort of transformation. Focusing primarily on redeveloping itself as a technology company, the organization has invested billions to shift the company and its three hundred thousand employees into the digital future. GE Digital, the internal group that was given the mandate of making a profit and even started selling its services as transformation consultants to outside businesses. In the fall of 2017, Harvard Business Review published an article by then CEO Jeff Immelt entitled, “How I Remade GE.” Promising to take readers “inside GE’s transformation,” Immelt outlined the massive undertaking, touting how he had learned “to lead a giant organization through massive changes.”[5]
 
The results of GE’s transformation efforts, however, have been anything but spectacular. During the time of Immelt’s transformation efforts, the company fell from number nine on the Fortune 500 list in 2014 to number eighteen in 2017. Earnings per share and dividends have dropped, and the company increased its debt by almost $80 billion. With this rapid decline, the company fallout was widespread, with the CEO, the CFO, the head of the largest business unit, and half of the board exiting within ten months. In late 2017, the company announced a layoff of more than twelve thousand employees. In 2018, Fortune published an article on GE’s drop entitled, “What the Hell Happened at GE?” in which it stated, “few corporate meltdowns have been as swift and dramatic as General Electric’s over the past eighteen months”[6]
 
Atop it all, the result for GE has been a huge decline in shareholder value. At the time GE announced their initial transformation plans in 2013, GE’s share price hovered over $27 per share. Today the stock is down to $7.28 per share.  That equates to a loss of $180 billion in GE’s market capitalization in four years.
 
Unfortunately, the story of GE’s decline is not different from that of many other companies. In fact, it is reflective of the fate of many companies in positions similar to GE’s. 
 
Much of this poor performance at transformation can be chalked up to basic issues with change management and the cultural resistance to change.  Change management guru John Kotter has found similar failure rates among businesses he’s studied over the last four decades.  In other words, it’s not just about digital transformation.  We are just really bad at change.
 
Why do organizations continue to persist in their transformation efforts, despite these seemingly unbeatable odds?  The answer is because they have no choice.  The promise of digital transformation is too alluring, and the threat if they don’t is even higher. 
 
A recent survey of more than 2,000 CEOs and senior executives by global search and advisory firm Russell Reynolds, found that more than 50% of executives expected to face moderate to massive disruptions in the next year from digital technologies in the following industries: media, telecom, financial services, retail, technology, consumer products, education, non-profits, insurance, education, and professional services. 
 
So, the question is, what can companies do to improve their odds of transformation success?  To start, before even getting into the management, leadership, skills gap, and cultural issues with transformation, and they need to recognize two key problems.
 
The first problem is that, despite best branding efforts, transformation has largely become a codeword for improving operational efficiencies.  In fact, by a factor of more than two to one, organizations cite operational efficiencies as the main goal of digital transformation.  Improvement of customer experience is a distant, very distant third goal. 
 
This is largely supported by big consulting firms who often describe transformation in terms of financial performance, calling transformation any effort that produces an earnings improvement by 25% or more.  They often delineate between “Big T” “full potential” transformation and “Little t” transformation, focused on financial gains.  They advocate the former, while helping mainly with the latter.  This is ironic as a recent study by Bain found that digital transformation efforts only fully reached or exceeded their expected results five percent of the time, and in a full 75 percent of the time they actually diluted performance and achieved mediocre results.[7] 
 
Operational transformation is largely driven with shareholders, not consumers in mind.  It takes a cost accounting view of looking for improvements in company performance, not customer outcomes.  And that means that others who seek better customer outcomes will eventually win.
 
The second problem is that most transformation efforts would fail to pass the test of long-term strategic advantage.  A simple VRIO test: Is it Valuable, Is it Rare? Is it Inimitable (i.e. hard to copy), Is it Operational?, would indicate that few of today’s transformation efforts would pass the test for adding long-term sustainable value to an organization. 
 
While investment in digital transformation is the theme of the day, these efforts alone often go toward strategies that can be copied, internal processes that are replicated, and new technology that can be similarly acquired or developed, providing, at best, a transitory advantage. If every other organization in your industry has access to the same consultants, open source code, cloud computing partners, outsourcing partners, machine learning engines and algorithms, and so forth, is there a long-term advantage?
 
In fact, by the last standard of whether it creates long-term advantage, we might question how much, in the long run, the 30% success rate actually is a success. 
 
In my next post, we’ll discuss the four major pitfalls of transformation that are the cause of these two problems and how companies can avoid them to create transformative outcomes with a higher probability of success and long-term advantage.
 
William Kilmer is an executive, founder, venture investor and author of the upcoming book, The Transformative Playbook, which will be published in 2019​


[1] Digital transformation top priority for CEOs, says new BT and EIU research, 12 September 2017

[2] Worldwide Semi-annual Digital Transformation Spending Guide, International Data Corp (IDC), 15 December, 2017

[3] How to beat the transformation odds, David Jacquemont et al., McKinsey Global Survey 2015.

[4] Why 84 percent Of Companies Fail At Digital Transformation, Bruce Rogers, Forbes, 7 January 2016

[5] How I Remade GE, Harvard Business Review, Jeffrey Immelt, September-October 2017.

[6] What the Hell Happened at GE?, Geoff Colvin, Fortune Magazine, 24 May 2018

[7] Orchestrating a Successful Digital Transformation, Bain Briefing, 22 November, 2017.