Digital Transformation

by Thomas M Siebel

  Core is what companies invest their time and resources in that their competitors do not. Core is what allows a business to make more money and/or more margin, and make people more attracted to a business than to its competitors. Core gives a business bargaining power: it is what customers want and cannot get from anyone else.26

  In his book Dealing with Darwin,27 Moore uses the example of Tiger Woods to clarify core and context. There is no debate that Tiger Woods’s core business is his golfing, and his context business is marketing. While marketing generates a large amount of money for Woods, there could not even be marketing (the context) without his golfing (the core). Context helps to support and keep the core running, while core is a company’s competitive advantage. The general rule of thumb: Context means outsourcing, while core means intellectual property.

  Overwhelmingly, today’s companies and industries have already replaced most if not all of their context competencies with digital counterparts. But their core remains to be digitalized. Core cannot simply be replaced with something that works the same but has a shinier finish or faster engine. Digitalizing core is a true transformation. This digital transformation demands a complete overhaul of core processes and capabilities. It demands a removal of corporate body parts with the promise not to replace them but to instead create something faster, stronger, and more efficient that can do the same job in a totally different way—or do entirely new things.

  Because digital transformation goes to the core of corporate capabilities, it can only happen when change is empowered to pervade the entire organization—not just at the IT, marketing, or any other business-line level. It can’t be dealt with just as a technology investment, or as a problem with a particular business process or department. It requires fundamentally transforming business models and business opportunities, and the CEO needs to drive it. The mandate must come from the top.

  I have witnessed many tech-adoption cycles over the past four decades. With the promise of performance improvements and productivity increases, such innovations were introduced to industry through the IT organization. Over months or years, and after multiple trials and evaluations, each gained the attention of the chief information officer, who was responsible for technology adoption. The CEO was periodically briefed on the cost and result.

  With 21st-century digital transformation, the adoption cycle has inverted. What I’m seeing now is that, almost invariably, corporate digital transformations are initiated and propelled by the CEO. Visionary CEOs, individually, are the engines of massive change. This is unprecedented in the history of information technology—possibly unprecedented in the history of commerce. Today, CEO-mandated digital transformation drives the company’s roadmap and goals.

  For such change to happen, the entire organization needs to be committed—from the CEO to the board to each function and line of business. This change needs to proceed in a unified, holistic manner.

  That’s why the companies that will succeed are those that not only transform a business process, or a department, but also look at wholesale digital reinvention. They take it so seriously that they create Centers of Excellence to bring together data scientists, business analysts, developers, and line managers from across the organization. These Centers of Excellence can align the organization around digital transformation efforts, unify disparate departments, and grant employees the skills necessary to be successful in this effort. For example, ENGIE CEO Isabelle Kocher has assembled a C-suite team to drive the transformation of the company. Together they have updated ENGIE’s strategy with new business targets that include specific expectations for digital value creation.

  Other CEOs I work with are thinking through scenarios to anticipate future disruption, asking questions like, “What are our customers really buying? Do they really need us, or could a digital competitor provide a better insight or product at a lower cost?” They’re using these “what if” scenarios to break out of cloistered mindsets and reallocate investments for future digital efforts.

  One health care CEO used scenarios to craft a roadmap for hundreds of next-generation application improvements across its lines of business. Where new talent is required to bolster C-level efforts, CEOs now recruit for roles such as chief digital officer with the authority and budget to make things happen.

  Get Ready, or You’ll Miss the Boat

  Digital transformation indices are cropping up everywhere to capture how prepared (or unprepared) CEOs and their companies are. The Dell Digital Transformation Index ranks 4,600 business leaders on their digital journey.28 The McKinsey Global Institute (MGI) Industry Digitization Index ranks U.S. sectors based on their degree of digitization/digital transformation.29 Germany’s Industrie 4.0 Maturity Index focuses on companies in manufacturing. The most compelling lesson from these indices confirms what we already know: The gap between the companies and sectors that have digitally transformed and those that have not is already wide and will increase exponentially.

  In an extensive 2015 report, MGI quantified the gap between the most digitized sectors and the rest of the economy over time. It found that “despite a massive rush of adoption, most sectors have barely closed that gap over the past decade”:

  The lagging sectors are less than 15 percent as digitized as the leading sectors. The companies leading the charge are winning the battle for market share and profit growth; some are reshaping entire industries to their own advantage. But many businesses are struggling to evolve quickly enough. Workers in the most digitized industries enjoy wage growth that is twice the national average, while the majority of US workers face stagnant incomes and uncertain prospects.30

  The stakes are high. Europe may either add €1.25 trillion of gross industrial value, or lose €605 billion of value by 2025, according to Roland Berger Strategy Consultants.31

  Once you miss the boat, it gets harder to catch up.

  More optimistically, and to repeat a theme of this book, these indices show the massive size of the opportunity ahead. Sectors in the earliest stages of digital transformation—like health care and construction—could be huge drivers of economic growth. As McKinsey argues, “Looking at just three big areas of potential—online talent platforms, big data analytics, and the internet of things—we estimate that digitization could add up to $2.2 trillion to annual GDP by 2025, although the possibilities are much wider.”32

  As we will cover in the following chapters, a variety of tools and resources have emerged to propel organizations on the digital transformation path. Companies can now take advantage of robust cloud computing platforms like Amazon Web Services, Microsoft Azure, IBM Watson, and Google Cloud, to enable transformation initiatives.

  Digital transformation consultancies are booming as CEOs start to understand that disruption is coming, and scramble to position themselves against the coming tsunami. The market for digital transformation consulting alone is worth an estimated $23 billion. McKinsey, BCG, and Bain have all built new digital consulting divisions, and many are acquiring digital and design firms to bolster their capabilities. New, niche consulting firms are being created entirely to focus on digital transformation.33

  Since the emergence of the internet, the digital consultancy market has evolved with the successive waves of digitalization. In the first wave, consulting firms began helping customers build their digital presence. Then with Web 2.0, consulting firms focused on interactive design and customer experience. Today, in the current wave of digital transformation, consultancies are helping clients use data to reinvent their business models. We’ll continue to see this shift in how firms engage with customers, collaborate with technology partners, and jump on this disruption wave.

  FIGURE 2.1

  Governments, too, are focused on the need to evolve and stay competitive. Nations have long competed—for skilled workers, jobs, companies, new technologies, and ultimately, economic growth. This competition will only intensify, particularly as urbanization grows as a driving force in the public sphere. As more people mo
ve to cities (68 percent of the world will live in cities by 2050), public infrastructure and resources—water and energy in particular—are being strained.34 Digital transformation will be essential to government efforts to keep up with this rapid change, through more efficient delivery of services and the eventual creation of “digital cities”—cities designed around integrated infrastructure addressing traffic, energy, maintenance, services, public safety, and education with services such as e-transport, e-health care, and e-government.35

  Governments that understand this are striving to ensure the next wave of digital transformation happens in their own countries. They are spurring investment in research and development, encouraging higher education in digital technologies, and implementing policies favorable to digitally transformed companies. Examples abound:

  • Singapore’s latest 10-year master plan relies heavily on digital technology. “AI Singapore” (AISG) is an entire national program devoted to catalyzing Singapore’s AI capabilities through research institutions, AI startups, and larger companies developing AI products.36

  • The U.A.E.’s Vision 2021 National Innovation Strategy targets core sectors including AI, software, and smart cities, and strives to encourage adoption of technologies across sectors.37

  • Amsterdam’s smart city initiative spans mobility, infrastructure, and big data, with initiatives such as using GPS data to manage traffic flows in real time, optimizing trash and recycling pickups, and replacing parking meters with pay-by-phone apps.38

  • China’s 13th Five-Year Plan calls for massive investment in next-generation artificial intelligence and the internet to establish international hegemony.39

  Just as in the corporate world, governments that adopt AI, big data, cloud computing, and IoT across all levels will prosper; countries that don’t will struggle to keep up.

  The academic world is also taking notice. As the scope of digital transformation expands and accelerates, universities are beginning to dig in. MIT launched the MIT Intelligence Quest in early 2018, “an initiative to discover the foundations of human intelligence and drive the development of technological tools that can positively influence virtually every aspect of society.” Recognizing the sweeping impact digital transformation will have across society, MIT announced that the outcomes of this initiative may yield “practical tools for use in a wide array of research endeavors, such as disease diagnosis, drug discovery, materials and manufacturing design, automated systems, synthetic biology, and finance.” In October 2018, MIT announced a $1 billion investment in its new college of computing focused on advancing the rise of artificial intelligence.

  Executive education classes, master’s degrees, and MBA programs focused on digital transformation have sprung up. Columbia Business School’s Digital Business Leadership Program, for instance, aims to “develop leadership abilities to lead digital transformation.”40 Harvard Business School has an entire executive education course on “Driving Digital Strategies.”41 And MIT Sloan’s “Initiative on the Digital Economy” offers a variety of research, executive education, and MBA-level classes examining the impact of digital technology on businesses, the economy, and society.42

  The open-ended nature of what these classes teach conveys a critical point about digital transformation: its inherent nature of constant change. “[Digital transformation] is not a process that will ever be complete, at least not in the near future,” writes Boston College professor Gerald Kane. Rather, he writes, “new classes of technologies—artificial intelligence, blockchain, autonomous vehicles, augmented and virtual reality—will likely become widely adopted over the coming decade or two, fundamentally changing expectations yet again. By the time you adapt to today’s digital environment, that environment will have likely already changed significantly.”43

  Digital transformation requires companies to continuously monitor current trends, experiment, and adapt—and academic institutions are developing curricula to teach these new capabilities to future and current business leaders.

  The Future of Digital Transformation

  What does the future of digital transformation hold? From where I sit, it’s clear the benefits for business and society will be enormous—on the order of the Industrial Revolution. These new technologies will boost economic growth, promote inclusiveness, improve the environment, and extend the length and quality of human life. According to a 2016 World Economic Forum study, digital transformation will have far-reaching impact across industries—not only in terms of economic and job growth, but in environmental benefits as well—that “could deliver around $100 trillion in value to business and society over the next decade.”44

  Think about the many ways digital transformation will improve human life:

  • In medicine, expect very early disease detection and diagnosis, genome-specific preventative care, extremely precise surgeries performed with the help of robots, on-demand and digital health care, AI-assisted diagnoses, and dramatically reduced costs of care.

  • In the automotive industry, expect self-driving cars, reduced crashes and casualties, fewer drunk drivers, lower insurance premiums, and decreased carbon emissions.

  • In manufacturing, 3D printing and manufacturing-as-a-service will allow for mass, inexpensive customization with low or no distribution costs.

  • In resource management and sustainability, resources will be matched with need, waste minimized, and constraints alleviated. Digital transformation even has the potential to completely decouple emissions and resource use from economic growth.

  The list goes on and on. Many of these benefits cannot even be conceived of today.45

  Consider the likely impact on productivity growth. Total U.S. economic output per worker has been stagnant since the Great Recession of 2008. Digital transformation allows companies to use machine learning, AI, IoT, and cloud computing so even smaller firms can increase employee productivity and reverse this trend.46 Digital progress adds value to the national economy in ways we don’t yet measure accurately. “At first glance, free services like Wikipedia, Skype and Google don’t seem to add anything to gross domestic product. But when you look closer, you see that they certainly do add value,” said MIT’s Brynjolfsson, who developed a method to measure the value innovative IT companies generate. Using this method, he has found that disruptive business models such as online networks and digital services create $300 billion in value each year—value that isn’t captured by the statistics or by the critics.47

  We have to acknowledge that such tremendous change will also have potentially negative effects. While Brynjolfsson emphasizes the benefits to overall productivity from digitization, he also points to a trend he calls the “great decoupling” of economic growth and job creation: Despite the last 15-20 years of economic and productivity growth, median income and job growth have stagnated. What’s to blame? Technology’s role in productivity: machines replacing humans.

  Some argue that this is a temporary shock that has been repeated throughout history, and that jobs will rebound once workers adjust their skills and learn how to work with new technologies. Harvard economist Lawrence Katz observes there is no historical precedent for the permanent reduction of jobs. While it can take decades for workers to acquire the expertise needed for new types of employment, Katz claims “we never have run out of jobs. There is no long-term trend of eliminating work for people. Over the long term, employment rates are fairly stable. People have always been able to create new jobs. People come up with new things to do.”48

  But this doesn’t mean that we can just stand by and expect jobs to come. As a society, we need to understand how to reconceptualize education and provide more flexible and agile workforce training programs that match the skills of the digital economy. Five years from now, 35 percent of the important workforce skills will have changed. We need to invest in education and basic research and admit more skilled immigrants. And we need to address the mismatch between supply and demand for digital skills. This means training people no
t only in technical skills, like coding, but also in skills that will increasingly be needed in the digital age to complement the work of machines—creativity, teamwork, and problem-solving.

  As the World Economic Forum wrote in an influential 2016 white paper on digital transformation:

  Robotics and artificial intelligence systems will not only be used to replace human tasks, but to augment their skills (for example, surgeons working with advanced robotics systems to perform operations). This, too, will provide challenges for businesses, which will need to reskill employees so they can work effectively with new technology. Reskilling will be critical to realizing the full potential of technological augmentation, both through boosting productivity and mitigating job losses from automation.49

  Regulations and public policy also need to keep up, to promote entrepreneurship and encourage the founding of new companies. Antitrust laws and tax policies need to be reconceptualized. Skilled immigration needs to be encouraged.

  We cannot predict exactly how and where the impacts of digital transformation will fall, but we can recognize the scale of change will be enormous. In some cases, it can threaten products, companies, or entire industries with outright extinction: encyclopedias, phone books, travel agencies, local newspapers, book stores. Film and photography companies were wiped out by digital cameras. Today the taxi industry is being threatened by ride-sharing services like Lyft and Uber, while malls and retail stores are being upended by e-commerce.

  In other cases, the disruption could create new, ancillary markets. Take Airbnb, for example. When it was first launched, many predicted that Airbnb would completely disrupt the hotel industry as travelers would increasingly choose to stay in private apartments and houses over hotels. But the hotel industry has not crumbled—in fact, it is still thriving. So is Airbnb. Airbnb’s actual impact has been in other areas: reducing the number of homes available in a neighborhood for people to live, potentially driving up the price of rent. Instead of competing with hotels, Airbnb is competing with renters. “Was that Airbnb’s intent? Almost certainly not,” writes journalist Derek Thompson. “But that is the outcome, anyway, and it is a meaningful—even, yes, disruptive—one. Airbnb is a transformative travel business. But most people failed to predict the thing it would transform—for good and bad.”50