Wednesday 20 July 2016

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!

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