In meetings with companies undertaking digital transformation or IT modernization, I often hear executives talking about advice they’ve received from their consultants and advisors on how to plan and manage these initiatives. I consistently hear different versions of three points. “We must have a detailed road map of our transformation journey.” “We will need to replace most of our existing talent.” “We’ll need mountains of money.” Sound familiar? Consultants and systems integrators (SIs) consistently preach these practices, warning companies that their transformation won’t play out the way they hope unless they follow this advice. But compare that advice with the real-life experience of CIO Toby Buckalew.
Companies are on the horns of a dilemma. They signed long-term, managed service contracts for IT or business processes, which took advantage of the savings from labor arbitrage. But now they find that there is significant potential to leverage the new suite of digital technologies that promise improved performance and lower cost. The problem is that that their incumbent service providers often actively resist implementing these technologies, using delaying and obviation tactics, refusing to pass on the savings and/or demanding additional work or other concessions in return for complying. Now that I’ve identified this major issue that many companies face today, let’s look at how they handle this non-alignment situation.
Traditional change management practices weren’t built for digital transformation. Here’s how to rethink two key aspects of your approach
IT modernization and digital transformation focus on changing a business and creating new value. But investing in new technologies and changing processes do not change a business; they just give a company the ability to change the business. Unfortunately, traditional change-management techniques are not adequate to address the level of change in IT modernization and digital transformation.
Traditional change-management techniques may help a company implement digital technologies, but they won’t enable driving the necessary change to realize the full benefits of the technologies. How can your company determine if its change management plan is effective?
The first step in determining change management effectiveness is understanding that your company is changing its business model. The traditional mindset that change-management tactics will drive success in transformation initiatives understates the immense amount of change and the nature of the change that is required. Managing business model change is far more comprehensive than typical transformation initiatives.
Most large enterprises were on a journey for the past 30 years where a higher and higher proportion of the core systems driving the enterprises was software packages or software as a service. Traditional wisdom for companies was “don’t build – buy.” Then, again, as companies undertook digital transformation journeys, the prevailing belief was that the best way to do digital transformation is to get there as fast as possible by buying (not building) many components, using third-party software and SaaS products. Now, two disruptive forces are starting to shift the balance between build vs. buy in the IT world.
Many companies find they need to undertake IT modernization to support later digital transformation to create new competitive advantage. They recognize that IT and shared service groups must modernize so they can respond more effectively and quickly to the business needs. However, it’s a mistake to approach IT modernization with the same approach as traditional transformations. The changes to people/talent, processes, policies and philosophies are cross-functional and cross-departmental and cut deeper into the organization than many companies anticipate. Despite these hurdles, Novartis achieved great success in its multi-year IT modernization journey. I spoke with Scott Mason, Head of IT Operations at Novartis, about the company’s keys to success in IT modernization.
In 2011, Novartis faced a challenge of infrastructure instability and cost explosion. It’s a global healthcare company and recognized it needed to modernize its operations to prepare the infrastructure as the backbone for the company’s agile, digital business world. “We recognized that the modern technology landscape is about building the backbone operating model and competencies that prepare your platform for digital. That’s the foundation – without it, nothing can happen,” said Mason.
The term “digital transformation” is now ubiquitous. Nearly every company’s leaders and board of directors see the potential of digital transformation to create new value and improve their competitive positioning. They are investing in building out capabilities to transform their business. Unfortunately, some companies build digital capabilities but don’t generate value that changes their competitive position. So, are businesses really making progress in these investments? Where are we in efforts to succeed at digital transformation? Here’s my view and what I believe must happen next.
By its nature, digital transformation is difficult as it’s fraught with the complexities and magnitude of change. The reason so many digital journeys don’t succeed is because the company fails to implement the operating model necessary to make the digital platform work. By operating model, I mean organizational changes, policy and process changes, talent model changes and the go-to-market changes.
Why do companies often fail to implement the operating model that’s necessary for the digital platform they build? Simply stated, they take a fractured approach to the digital journey. Although the executives say the operating model is changing, they don’t build a common vision that allows it to happen.
At the beginning of 2018, we forecasted a bump in discretionary IT services spending in Financial Services. And we predicted banks would spend heavily on technology. But we didn’t forecast as big a bump as is occurring, and the banks are spending more heavily than we anticipated. Why is it important to understand what’s happening here?
Who would be the beneficiaries of that spend? That’s why this spending trend is important.
At the beginning of the year, we said the beneficiaries would be primarily Fintech companies, in-house services, and non-incumbent service providers. However, given the amount of spending we see coming down through the pipeline, we don’t think the fintechs, in-house services and challenger service providers will be able to absorb the spend.
IT Services: Growth Trends in the Financial Services Vertical
Deep Dive Equity Research and Everest Group’s July 31 report, “IT Services: Growth Trends in the Financial Services Vertical,” reveals that the BFSI spend – particularly in banking – is poised to increase dramatically. In fact, we see a 15% increase planned for 2018 at just the top four US banks:
- JP Morgan indicates it will increase its IT spending by $1.4 billion in 2018.
- Citigroup plans to spend around $8.0 billion on IT in 2018, or about 20% of the bank’s expense budget, which is an increase over its 2017 spend.
- Wells Fargo plans a significant spending uptick in technology transformation and data management in 2018.
- Bank of America plans an incremental $500 million technology investment due to tax-reform benefits.
Initially, we believed that the incumbent technology service providers would not be the beneficiaries of the increased spend. But we now believe there will be a shortage in supply that the fintechs and new-age service providers will not be able to satisfy. We believe the only way to satisfy this shortage is if the incumbent legacy technology service providers of technology – which have been largely left on the sidelines to date – participate.
Yes, the underlying secular forces that we noted at the beginning of the year as growth obstacles for the legacy service providers (revenue compression, a strong DIY movement or insourcing and suboptimal sales model for digital projects) still hinder legacy providers’ growth. But we believe that the enormity of the spend that is coming through the pipeline will create a rising tide that the fintechs and new-age technology service providers will not be able to absorb.
Consequently, we’re upping our forecast for banking spend in 2018 and strongly believe the legacy service providers will be meaningful beneficiaries of this spend.
For the last five years, companies experimented with digital transformation. They are now convinced that the benefits are there and convinced that if they don’t take them, their competitors will. As digital technologies become more deeply embedded in the fabric of how companies compete, it forces IT departments to shift their role to become partners aligned with the business needs and digital transformation.
Think about animals that travel and hunt in packs. Digital technologies seem to work the same way. Wolves, hyenas and wild dogs, for instance, are smaller and less powerful than larger animals such as mountain lions. Hunting in packs enables them to conquer animals larger than themselves. They work together to find the right opportunity. Similarly, digital technologies don’t come in isolation. They quickly demand a level of competence across a broad set of companion technologies – and some of these additional technologies also have their own sets of companion technologies. Typically, companies that adopt digital technologies end up spending much more time and money and building much more expertise than they initially anticipated. Consider the following three examples of what typically happens.
Example: Artificial Intelligence technology
Perhaps your company is like others that believe Artificial Intelligence (AI) can contribute to their business. But you’ll find that as soon as you start to think about AI, you start to think about data and data sources. That unleashes a substantial amount of work in building data warehouses. You may encounter a hurdle that many companies often find: data sources are less reliable and less precise than you had hoped. As a result, your company will need to build new data sources or improve the existing data sources. That effort will likely move your company to implement cloud technologies, along with the analytics software and data-management software that comes with cloud.
So, what appears to be a commitment to exploring just one digital technology leads to implementing a whole pack of other new technologies. The problem is that each technology requires a learning curve of its own and often sets up a cascading effect of its own. It’s like the “dominoes effect” – one thing leads to another, leads to another and leads to another.