Digital experimentation without industrialization is fruitless

Around five years ago, large companies rushed to set up digital innovation labs in tech clusters around the world. These would typically have all the hallmarks of a tech start-up: bean bags and pool tables, “big ideas” and minimum viable products (MVPs), eco-systems and meet-ups.

Many companies did little more than experiment (often in highly controlled laboratory conditions), essentially operating on the periphery of the core business. When innovations were brought back from the digital lab and rolled out across the business, progress often stalled. Business leaders pushed back on new offerings that they feared might cannibalize existing blockbuster products. Corporate IT struggled to integrate standalone MVPs into their complex legacy environments, and CFOs and corporate counsels flagged huge potential risks relating to cyber breaches, data privacy and regulatory compliance. It was often easier to press the pause button on a digital innovation than to try and scale it.

The questions are different now
Over the last 5 years or so, I’ve discerned a shift in the types of questions clients ask me about digital transformation, especially from those outside the sectors that have been living and breathing digital disruption for the last decade (including telecommunications, media, consumer technology and retail).

Sectors that have yet to see such a radical re-writing of the value chain (such as healthcare, life sciences, insurance and automotive) are now sensing that change is coming much faster than expected. They want to know “How?” and “What?” instead of just the “Why?”

I believe the “Why?” is reasonably clear. Boards across almost every sector accept that the fourth industrial revolution will re-write the value chain of their industries, creating both opportunities and threats. Simply digitalizing the front end of yesterday’s business is not an effective response and guarantees little more than a high burn rate of resource.

Today’s questions around “How & What” are more about pace and execution:
-       How do we move faster?
-       How do we cope with the co-existence of two business models?
-       How do we stop doing digital and start being digital?
-       Should we buy, build or joint-venture to accelerate our digital transformation?
-       How do we stop killing digital innovation and start industrializing successes?

The balance between separation and integration is critical
A truly effective digital transformation program impacts almost every aspect of the organization, from the business model to the end-to-end operating model. With such a huge challenge facing them, many organizations are tempted to start from scratch, and indeed, the response of many telcos in the early days of digital re-invention was to set up new mobile virtual network operators (MVNOs) and digital-first challenger brands.

In some cases, this could be a highly effective response to try and move as fast as the market is changing, without being constrained by legacy issues. However, it does little to accelerate the transformation of the existing company.

So, how does a large corporate that’s undergoing a digital transformation make the leap from stand-alone digital innovation to industrialized scale?  For this to work, the balance between separation and integration is critical. A digital lab needs to engender a certain degree of separation in order to have the freedom to experiment; but experimentation without industrialization achieves nothing.
Today, great ideas for the future digital re-invention of the company can come from anywhere — from a lab in a tech cluster to a front line customer-facing employee. Innovation, can’t simply be outsourced to one part of the business; rather, we need to build a culture of innovation across the entire business.

Exploring digital from every angle
Similarly, it’s no longer worth building MVPs in complete isolation from the realities of integration and industrialization. Increasingly, I see lawyers and corporate IT teams getting involved earlier in a design sprint, shifting the conversation from, “We’ve built this MVP, can you approve it from a legal/IT perspective?” to “We’re starting a new design sprint, how can you help us identify and navigate the legal and technology risks that we might come up against?” The former typically leads to rejection; the latter to earlier, better conversations.

As we move into an increasingly connected world – in which combining the internet of things (IoT), artificial intelligence (AI) and robotics will drive smart automation across the whole enterprise – the challenge for most large companies will not be around experimentation; it will be focused on transitioning from successful experimentation to industrialization and scale.
 
The central battleground of a digital transformation program is focused around how to drive re-invention and infusion of digital across the whole enterprise. It’s what EY refers to as looking at digital from every angle. From the back end, through the muck-in-the middle, and to the front end – all parts of a business need to be involved in the transformation process. That’s been clear for some time among the “post-disrupted” industries. What’s encouraging today is that it’s also emerging as a key theme in the “pre-disrupted” industries.

From 26 February to 1 March, global leaders will gather at Mobile World Congress under the theme of “Creating a Better Future.” This insight is part of a series addressing how to seize the upside of disruption in the face of rapid change. To read more visit ey.com/mwc.

Key questions for boards in the fourth industrial revolution

A few months ago I read “The Fourth Industrial Revolution” by Klauss Schwabb, which seemed to frame the debate at the World Economic Forum in Davos. I was struck by the power of the language used at the WEF:

“We stand on the brink of a technological revolution that will fundamentally alter the way we live, work, and relate to one another. In its scale, scope, and complexity, the transformation will be unlike anything humankind has experienced before”

A few weeks ago I listened to George Colony, the CEO of Forrester describe the next decade as one that would create an “existential crisis for every company on the planet”.  

More recently, I had the pleasure of facilitating a roundtable debate between 20 board directors from 20 of the largest companies around the world on the topic of how boards should be responding to digital disruption. A few thoughts and themes struck me…

The last decade has arguably seen the greatest and most compressed degree of technology driven change that the world has ever seen. However, far greater change is likely to happen in the next ten years as many technologies, from diverse fields hit their critical inflection points at the same time – artificial intelligence, advanced robotics, blockchain, genomics, nano tech, drones etc.  These technologies are combining together to create Cambrian-like explosions in industry after industry, creating profound questions both for societies, companies and their boards. 

Some of the market forecasts are alarming. At the current run rate 75% of the companies in the S&P 500 in 2027, will be displaced by new entrants. By 2030, 2 billion jobs will disappear (that’s roughly 50% of all the jobs on the planet) as a result of technology advances.

Companies in every sector face a multitude of challenges, up and down their value chain:

·         Competition from both sides - new start-ups with radically different business and operating models as well as mega-vendors entering and disrupting industry after industry

·         Dramatically rising customer expectations

·         Very high levels of technical debt and digital wastage as buyers jump to new technology fads and tactics

·         A constant and relentless onslaught from cyber attackers

·         Significant risks of legal and regulatory breaches as companies operate within an ever-changing patchwork quilt of international standards and regulations

·         Huge pressure on traditional IT systems, supply chains, organisational structures, skills & cultures, ways of working etc that were simply never designed to cope with the speed of change that we see today

On the flip side, the same forces driving tech disruption also offer companies game-changing opportunities:

·         The opportunity to re-invent business models, for example moving from products to services as companies like GE have done with GE Digital

·         The potential to achieve exponential growth in new services – Pokemon Go anyone?

·         The ability to reimagine experiences, operations and supply chains – Aprecia Pharmaceuticals recently won regulatory approval to 3D print one of their drugs, giving them to potential to re-write the entire way they think about manufacturing and distribution.

·         The opportunity to capture, analyse and act on vast volumes of structured and unstructured data, providing insights into competitors, customer expectations and experiences, operations etc

Given the broad range of opportunities and threats above, it should be clear that doing nothing to consider the impact of technology-driven disruption is simply not an option. That has been clear in some industries for many years, however, it should now be clear in every industry. However, a question that I don’t believed has received enough attention is what role should the board play? One non-exec recently commented to me that good board members start by asking better questions so here are some starting questions for boards in the fourth industrial revolution to consider:

1.       Do we have the right composition in the board to be able to navigate the fourth industrial revolution?

Arguably the board’s response to the fourth industrial revolution needs to start with composition. A recent report from the CBI (Confederation of British Industry) suggested that companies should both appoint a digital native board member and also improve digital awareness of all board members. Some boards have clearly made strides to improve diversity of skill-sets. Starbucks (Clara Shih from Hearsay Social), Walmart (Kevin Systrum (instagram and Yahoo), Tim Hortons (Chris O'Neill (Google Canada) have all appointed digital board members. A Private Equity company in Hong Kong called Deep Ventures even appointed an Artificial Intelligence machine to their board. Yet, according to a recent study by Russell Reynolds Associates 80% of 300 large, global companies did not have a single director with substantial digital experience. Today, boards need diversity (in every sense of word) to make sense of the extreme pressures on the company created by technology, regulation, activist shareholders, labour unions etc.

2.       How will the company’s purpose, vision and strategy need to evolve for the digital age?

A company’s response to the fourth industrial revolution needs to begin with its purpose. Without purpose and vision there is no context to make prioritisation decisions on digital investments and almost inevitably executives will focus on digitising the business of today, rather than re-inventing the business for tomorrow. Companies will focus on creating and executing digital strategies, rather than a business strategy for a digital age. In years past, the role of the board may have been to simply provide an annual review and endorsement of the strategy created by management. Today, companies should be considering how the strategy process needs to evolve and how they can better leverage the knowledge and expertise in their boards for competitive advantage. In turn, boards need to challenge and hold the company true to its purpose.

3.       What risks and opportunities does technology create for the company up and down the value chain?

Digital leaders think broadly about the impacts of new, disruptive technologies from front, middle to back office. One board member recently told me that his company seemed obsessed with spending money on “front end sizzle”, but were not taking the easy value that could be created by driving efficiency through automation within their operations. Digital is a portfolio play (Sustaining, Adjacent, Disruptive), rather than a race to win digital marketing awards. The portfolio of one company will vary considerably to the next, but each should have a portfolio and the board should play a critical role in determining the balance of that portfolio and holding the executive team to account.

4.       How quickly and aggressively do we want to execute?

Several companies I work with can see a future where the company’s business model looks very different to today, but they are struggling with how to get there. Consider the Automotive Company renting fleets of autonomous driving vehicles to city P2P car sharing schemes, or the Health Insurance Company who can predict and prevent health conditions based on digital data. But, many of these companies have incredibly profitable businesses today, and, in many cases technology has not yet reached the mass adoption needed for radically new business models to succeed. A key question for boards therefore is the extent to which they wish to disrupt the current business and how management will cope with the transition from old to new.

5.       How are we building the right skills and talent to manage the transition?

Talent, not technology, will arguably be the most difficult battleground for the next decade. Already we face critical skills shortages in areas like cyber and new technologies. In addition, as digital increasingly becomes interwoven into the fabric of the business, every role (from CEO, CIO and CMO to CFO, COO) needs to be up-skilled for a digital age. Many executive teams in industries that have not yet experienced significant disruption lack real experience of navigating the challenges created by disruptive technology.

6.       How will we measure management on success?

Boards need to ensure that they are holding management accountable for the right things. Unfortunately there is a significant danger with digital that companies will measure the wrong things (typically clicks & likes). Boards need to challenge their executive teams to show more tangible progress, by focussing on e.g. the success of the new business model, the extent to which the company is fulfilling its purpose, the company’s readiness for their new business model, cyber attacks, talent etc. Arguably, if digital is infused in a company then digital should enhance every dimension of the balanced scorecard, rather than create a new set of metrics.

7.       What are the legal and ethical issues arising from our investments in technology?

The Audit Committee chair in particular has responsibility to consider legal and ethical risks for the board. Unfortunately disruptive technologies will create many challenges in this space. Consider, for example, an automotive company moving towards “lights-out” operations and autonomous driving vehicles. As technology displaces jobs, the board will have to consider the social implications. As AI technology increasingly takes decisioning away from human drivers, companies will have to consider what happens when technology gets things wrong. If a car crashes, how will it minimise the damage it causes and who will ultimately be to blame when things go wrong? 

Of course there are many more questions that boards need to consider, but hopefully the above offer some suggestions to getting started. Feel free to reach out to me to suggest more!

We've barely begun

Despite 30 years of digitizing analogue information and connecting devices to networks; despite the obvious explosion of eCommerce, mobile, social media; despite the massive disruption to the music industry, newspapers, books, retail, advertising; the digital technology revolution has barely begun.

According to Cisco's former CTO, Padmasree Warrior, we've only reached 1% of the potential connectivity that we will see in the next decade. The exponential growth in connectivity will be driven in part by connecting the remaining 40-50% of the world's population who today do not have access to broadband (most of the technology giants have ambitious programs in place to make this happen via internet balloons or solar powered drones). But the real explosion in connectivity will come through the embedding of sensors, chips and SIM cards into everyday objects – things we wear, things in our home, our infrastructure, factories, machines, buildings, cities; even a bottle of beer can now be connected.

Connectivity on its own is not particularly disruptive, but the combination of the explosion of connectivity with wave upon wave of new technology, (including artificial intelligence, robotics, 3D printing, blockchain etc) will transform previously dumb products into smart, connected products and previously isolated “things” into nodes within smart, self-learning networks. A connected thermostat that previously offered only remote control access via a mobile device, may be transformed into a device that optimises energy consumption and group-buys energy on behalf of a collective. A medical device that checks blood pressure, may be transformed into a diagnostic device that combines multiple sources of data and compares health data with millions of users. Cars may be transformed from metal boxes on wheels into smart fleets of autonomous driving taxis.

Today the speed of change is uncontrollable and unfathomable to most businesses. Today a new technology can reach a critical mass of 50m users in just 35 days. However, what’s both frightening and exciting in equal measure is just how nascent some of these developments still are and how much disruption is yet to occur.

• Within Healthcare - Genomics England aims to sequence 100,000 genomes, which would create 21 Petabytes of valuable data. A huge step forwards for medical science but still only 0.15% of the UK population.
• Within Automotive – we’ve already seen Tesla release a software update containing the capability for level 2 auto-pilot, but IHS Automotive estimate that it will be more like 2030, before we see self-driving only cars on our roads.
• Within energy, there are currently around 2 million smart meters already installed in UK households. Smart energy GB aims to see connect 26 million households by 2020, so today we’ve reached less than 10% penetration of smart meters.
• According to Canalys, the Global 3D printing market was $3,8bn in 2014, but is set to grow to $16.2bn by 2018. Today, the vast majority of people and businesses do not yet use a 3D printer.
• A slightly more advanced market (but one with an equally long way to go) is the industrial robotics market, where nanorobots may fuel the next wave of growth. However, the consumer robotics market is set to grow 7 times faster by 2019.
• After "60 years of false starts", the Artificial Intelligence market also looks set for exponential growth. Tractica estimate growth from a surprisingly low $202.5m in 2015 to $11.1bn by 2024

The combinations of these technology-driven developments will impact every company in every industry sector. Companies that have previously only digitized their front end web sites and apps, will see impact up and down the value chain. If every car is connected and autonomous, will motor insurance be needed? Will consumers still buy cars or will cities buy them under peer to peer schemes? If every aspect of my health and wellbeing is connected, how will my health insurance policy change? How will the healthcare system change from treatment to prevention? How will the pharma sector shift from selling pills to delivering outcomes? If robots are set to take 35% of UK jobs, what new careers will emerge? If 3D printing significantly reduces customs and excise duties, how will the tax systems around the world respond? Moreover, if we are already 20 years behind the skills needed in the market today for cyber security, what on earth will the deficit look like when we reach 50, 70, 90% connectivity?

The previous decade of technology-driven disruption has already brought  profound change, but things have barely started. Today the questions are getting more and more interesting.

Trust will make or break the equation for smart connected products

Over the last few years, previously dumb physical products have rushed to add connectivity and online services to their offerings. Product designers of everything from jet engines to tennis rackets, contact lenses to oil rigs and even beer bottles have hacked their own products, embedding chips and sensors into them.

Despite the seemingly daily release of new, smart, connected products, this trend has barely begun. Cisco's CTO, Padmasree Warrior estimates that we have reached just 1% of things that will be connected over the next decade. At the start of mega-trend it's worth thinking about a simple equation to drive success.

SCP = (CJ x C x N² x AI) x T

OR Smart connected product success = find a killer answer to Customer Jobs multiply by Connectivity, Networks, Networks of Networks, Artificial Intelligence and then by Trust.

The first step in the equation is having a killer answer to a customer job. Ultimately I suspect many connected products will fail because they simply won't deliver enough value to users to be viable – do we really need to control heating in our insoles?. Smart, connected products need to first help a customer complete the job they are trying to complete faster, cheaper, better OR by creating significant new value.

Once we've identified the job that the customer is trying to do and the way in which the smart connected product can create value, Connectivity then becomes the second element of the equation. The embedding of a SIM card, chip, beacon or sensor opens up a world of possibility for users to interact with their product, gaining information and insight or allowing a remote control function. However, many smart connected products stop here. They offer simple connectivity to allow customers to, for example, remote control their central heating but little more… At this stage of the equation a great deal of potential value is left on the table.

In order to unlock additional value, it's worth thinking about networks and the value of the data contained within them.  A connected fitness monitor, thermostat or jet engine is fine, but one that connects with a broader network is able to release far greater value, allowing users to generate insight from comparative benchmarks e.g. engine or fitness performance against peers. Most fitness monitors do this well, allowing users to compete against both their friends and other users of the network.

Connecting multiple networks can unlock exponential value. For example, connecting a network of thermostats to networks containing electrical appliances, weather forecasts, energy prices, carbon emissions, pollution levels etc gives users far more than just a remote control for their thermostat. Furthermore, by adding artificial intelligence, products can become genuinely smart. Picture the smart thermostat plugged into a network of thermostats to group buy energy based on an algorithm that predicted price rises and discounts, and worked out exactly when to power appliances around the home based on their energy consumption.

The final element of the equation, however, is arguably both the most important as well as the most overlooked. Trust is something that can take years to build up, but can be lost in an instant through a cyber attack, a data privacy breach or an ethics breach. Once it is lost a negative trust score is disastrous and renders the preceding equation entirely worthless.

Many companies currently investing in building smart, connected products fail to recognise that their trust score is already a negative one. Through years of mistreating customers and failing to build relationships, they arguably have little chance of succeeding without addressing their trust deficit. Others are sacrificing the trust equity that they have built up by launching new connected products with nothing like enough thought and attention given to cyber security and no clear policies on data usage, sharing or ethics. In the last few weeks alone we have seen cars, planes and home appliances all hacked and taken over by either friendly or unfriendly hackers.

Without question, smart, connected products offer companies the potential for radical innovation and disruption. Entire business models and propositions can be re-written. But success rests not only the attention given to innovation around customer jobs, connectivity, networks and AI, but also on Trust. Without trust, a smart, connected product is nothing but a ticking time bomb for the share price.