Author: Peter Bendor-Samuel

Important Lesson For Companies Undertaking Digital Transformation | Sherpas in Blue Shirts

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.

Read more in my blog on Forbes

Related: Learn more about our digital transformation analyses

Big Increase in IT Services Spending in Financial Services | Sherpas in Blue Shirts

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.

How Your Company’s IT Group Must Change To Support Digital Transformation | Sherpas in Blue Shirts

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.

Read more in my blog on Forbes

Learn more about our digital transformation analyses

Why companies end up spending more on digital technologies than anticipated | Sherpas in Blue Shirts

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.

Read more in my CIO blog: https://www.cio.com/article/3294994/budget/why-companies-end-up-spending-more-on-digital-technologies-than-anticipated.html

Advice for buying or building a digital platform | Sherpas in Blue Shirts

As digital technologies mature and become applicable, they present a tremendous opportunity for companies to rethink and rearchitect their business to create better client experience, better quality results and lower costs. These opportunities are broad and extensive. At the core of all digital transformations is the assembling and perfection of a digital platform. But companies need to better understand what’s involved in digital platform. Whether the objective for the platform is as grandiose as transforming an industry or as mundane as improving a mailroom service, many companies make a big mistake when looking to build or buy a digital platform.

Let’s consider two examples of digital platforms aimed at transforming the companies’ operations and costs. A construction company built a digital platform to improve productivity and safety of several hundreds of subcontractors. The firm used geofencing technologies and implemented RFID technology and sensors into the workers’ helmets. The technology alerts supervisors if workers enter a zone they are not authorized to enter.

In another initiative, the company built a platform to improve utilization of its materials and equipment moved to different locations and even different countries. The objectives are to increase efficiencies and better monitor the life cycle of these items. RFID technology and sensors placed on the equipment and materials is, again, a key technology in the platform.

Read more in my CIO blog: https://www.cio.com/article/3293037/digital-transformation/advice-for-buying-or-building-a-digital-platform.html

CIOs Struggle with Gap in Digital Transformation Expectations and Delivery Capabilities | Sherpas in Blue Shirts

As part of our Pinnacle Model™ methodology and benchmarking, Everest Group recently conducted a study of over 200 companies on their digital transformation readiness. The study found companies’ boards of directors typically believe digital transformation is about technology, and they typically under-estimate the cost and expect results in months, not years. Those expectations are a huge gap away from the reality challenging CIOs and senior leaders leading the digital transformation. CIOs participating in our study revealed their companies were unprepared, under-funded and under-supported as to the tools, investment and commitment required to succeed. In this blog, I’ll share how to effectively communicate to your company the requirements for digital transformation to succeed.

Why Is There a Huge Gap?

The gap between expectations and delivery capabilities is because digital transformation is fundamentally different from companies’ past experiences with transformation. The technologies are disruptive and necessitate changing the organization, talent model, mind-sets, policies, processes and procedures – basically, the entire business model. Those changes are not easy. They don’t come all at once. They’re not completely known at the outset. And they unfold over a multi-year journey.

Peter Drucker advised, “If you want something new, you have to stop doing something old.” But the depth and breadth of necessary changes and the required commitment and investment for digital transformation are complicated to explain. They are hard to understand.

The digital journey requires far more resources, support, commitment and investment than anyone wants to believe. Digital technologies also take far longer to implement than people expect. For instance, in Robotic Process Automation (RPA) technology, a company can put a robot up quickly to create process improvement; but getting significant value involves more than that. Sure, a company can automate a function. But until the executives rethink the process that the robots will perform, they cannot create a meaningful improvement or breakthrough performance.

So, it’s no wonder that the boards don’t understand the extent of what is required to successfully complete a digital transformation journey. They also don’t understand that they need to fund IT transformation at the outset so that IT can successfully support the digital transformation.

As a result, most digital transformation initiatives fail (70%, according to a 2013 McKinsey & Company study. Many participants in Everest Group’s Pinnacle study revealed that, even when they understood the journey, they could not communicate it to their board, could not get funding, could not build support for it, and thus could not drive the change necessary to get it done.

How to Communicate Digital Change Requirements to Your Company

From our Pinnacle Model study, we developed an assessment vehicle (a 30-minute questionnaire) from which your company can compare its digital readiness against the broader population and against the market leaders (the Pinnacle Enterprises™). Together with a four-hour workshop, you’ll have the tools that will allow you to identify gaps, create learnings, understand what things you could do differently to improve your company’s readiness and performance and well as build road maps that allow you to systematically mature your digital readiness.

Learn more about our digital transformation analyses

Executives that have gone through the assessment and workshop tell us it created a great tool for communicating with their board of directors and the rest of the business about the support, resources and investment necessary to allow for successful digital transformation.

It is also a supporting budgeting tool that allows you to demonstrate the value against the cost, build support for the investment required to mature digital readiness and communicate the value that the IT organization will be able to achieve or support by increasing its digital readiness.

There’s a startling fact in the 2013 McKinsey study I cited earlier: Of the “successful” 30% that didn’t report their initiatives as failures, “success” was described as either breaking even or finishing the program but not delivering the anticipated business results. Of course, no company wants to undergo the challenge, effort, and expense of transformation only to break even or remain in the same relative competitive position.

Harvard Professor John P. Kotter’s study of 100 companies that underwent transformation initiatives found more than 50% failed in the first phase (getting organizational commitment and cooperation for the initiative). The Pinnacle assessment, workshop and communication tools are very helpful in addressing these issues.

Accenture and Genpact Making Big Plays In Supply Chain Digital Transformation | Sherpas in Blue Shirts

The supply chain function is an area crying out for a digital platform or utility. In fact, I believe it’s ripe for digital disruption. Digital technologies such as automation, advanced analytics, AI, cloud and the IoT can make a huge contribution to rationalizing and managing the supply chain for companies in the North American market and globally, so it’s a prime candidate for transformation. Companies such as Amazon and Walmart are building logistics and supply chain digital platforms for themselves, but they seek to shape the space and disadvantage other companies. So, several vendors are pushing to provide supply chain platforms. It’s clear that especially Accenture and Genpact, also believe in the coming disruption, as they are making very big plays to compete against Amazon in the supply chain space.

Read more in my blog on Forbes

Where Most Companies Go Wrong In Digital Transformation | Sherpas in Blue Shirts

Many companies’ senior leaders and board of directors believe a company can buy digital technology, implement it and get the benefit of it in a few months. That’s an illusion. Because of the depth and breadth of change required to succeed, that belief is not realistic. The record of studies on digital transformation indicate a high failure rate, with a notable 2013 McKinsey study finding that 70% fail. That is a lot of wasted time, money and unmet expectations. In investigating why digital transformation often fail to meet expectations, I find several factors contribute to the failures. However, I believe the biggest problem is the mind-set. This is where most companies go wrong.

Read more in my blog on Forbes

How HCL Differentiates from Other Service Providers in a Digital World | Sherpas in Blue Shirts

Third-party service providers are talking a lot about digital transformation, and their strategies for rotating into digital services are well underway. HCL Technologies is quietly taking a different strategy, creating a different base of business than providers such as Cognizant, Infosys, TCS and Wipro are building. This strategy is currently rewarding HCL with higher growth and is causing HCL to be quite a different firm, standing out from its rivals.

HCL’s Strategy

I think it’s refreshing to see a service provider separating itself from the pack and taking a differentiated path. This is not the first time HCL has done this. Early on, the firm recognized the power of Remote Infrastructure Management (RIM) and was a leader in that space. It was rewarded handsomely by building a leading infrastructure practice on the back of that capability.

Now, as part of its strategy to rotate into digital, HCL is aggressively acquiring other firms – so aggressively that the firm’s revenue is just $222 million short of displacing Wipro as the third-largest software provider in India. Seeking to scale its business inorganically, HCL acquired eight companies in the past two years, including 80% of US hybrid cloud and analytics company, Actian.

HCL’s strategy is leveraging its balance sheet to acquire legacy assets. It could be legacy IT assets on the infrastructure side and legacy software on the engineering side. This is different from the way the rest of the service providers are operating, and it allows HCL to garner large contracts. There is no indication that the legacy assets the firm is buying aren’t remunerative and that these deals are not well thought through and kept in focus. But there is a trap in this strategy, which other firms before HCL fell into.

Shareholder Value and Risks

Firms that leverage a balance sheet to buy legacy assets can end up overpaying for those assets. This is a trap that EDS and CSC fell into, and they spent years digging their way out of the trap. EDS was first purchased by HP and then merged with CSC, then into DXC. So, there is a trap in HCL’s strategy, but it doesn’t necessarily mean HCL is doing bad deals. Providers using this strategy must be disciplined. So far, there is no indication that HCL has not been disciplined.

HCL’s rivals in the services marketplace are buying or building digital assets that help accelerate their rotation into a digital model. In contrast, HCL (at least in its acquisition aspect) is becoming a consolidator of legacy assets. The market absolutely has a differentiated, profitable place for a consolidator of legacy assets, whether they are software or infrastructure assets. In fact, DXC perfected this strategy and created shareholder value with this strategy. The HCL path will differ from DXC in some respects but, fundamentally, could be very similar.

HCL looks to be creating itself as a consolidator of legacy assets and using its labor arbitrage position to extract value from these assets in both an innovative and clever way. I’ve been calling for providers to create differentiation, and I think HCL is doing so. But the firm runs risks that its rivals are not running. However, a legacy consolidation strategy may be less risky than creating a new business model, which is the strategy of HCL’s rivals.

Risks for Clients?

I think HCL’s clients need to understand what the firm’s strategy means to them. There is a risk for clients in believing the rhetoric around digital transformation. Clients need to see HCL for what it is truly doing, not for what it is “selling.” The firm appears to be trying to wrap itself in the flag of digital transformation. In reality HCL is playing a sophisticated legacy consolidation game. Legacy consolidation is an important and valuable role for the firm’s clients. However, clients should not fall into the trap of believing it equates to digital transformation.

Digital transformation: How to beat the funding challenges | Sherpas in Blue Shirts

Executives continue to struggle with how to fund digital transformation projects. Let’s examine three funding pitfalls and approaches that avoid them

In working with CIOs and other senior executives leading digital transformation efforts, the most frequent comment we at Everest Group hear is, “I don’t know how to get this funded.”

IT modernization and digital transformation are multiyear journeys that require enormous change to reinvent the business and create new value for customers, employees, and shareholders. Typical transformation initiatives aim to help an organization stay within the budget and complete projects on time. Although these goals help when you’re trying to achieve a return on investment (ROI) by performing a process better, these are not relevant goals when you’re aiming to do something different.

Digital Transformation Readiness

Everest Group’s study on digital transformation readiness reveals dramatic differences in value created by the most successful organizations, which we call Pinnacle Enterprises. (These 21 companies in our study achieved superior transformation results, by investing in resources  including adequate funding for digital transformation.) Consider these outcomes, for instance:

  • In 86 percent of the Pinnacle Enterprises, the IT organization enabled the enterprise to serve a new market or customer segment (versus 43 percent of the other enterprises we studied).
  • In 85 percent of the Pinnacle Enterprises, the IT organization supported significant growth of current products/services (versus 33 percent of the others).
  • The Pinnacle Enterprises invested in innovation labs (81 versus 36 percent), digital studios for new product development (71 percent versus 27 percent) and innovation funds to support start-up activities (76 percent versus 35 percent).

Read more in my blog at The Enterprisers Project

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