Digital Transformation is exploiting digital technologies and data to enhance the firm’s business model. Unfortunately, a Forbes study says that 84% of the Digital Transformation initiatives fail. There are many reasons for this and one important reason is tied to the way businesses inherently operate. Basically, businesses exist to earn profits and driving profits or margins is primarily done by increasing the revenues or by reducing costs – fixed and variable, such as COGS, SGA, Depreciation, and Taxes.
While digital technologies and data, do not help in increasing the revenue per-se, they improve the productivity and margins by reducing the cost, improving better decision making, fostering secure and repeatable processes, reducing cycle time, reducing operational risks, etc. For example, digital technologies in an Oil and Gas company will not help the company produce more crude oil per-se. But digital technologies will help reduce the cost of oil production with better insights, regulatory compliance, and understanding spend and trading patterns. All this means that to unlock the Digital transformation, focusing on the margins or productivity is the key.
Michael Wade, Professor of Digital Transformation at IMD, Switzerland, in his classic book – Digital Vortex, has identified Media, Retail, Financial Services, Airlines, and Telecom industries that will experience the most digital disruption in the coming years. Incidentally all these industries are productivity centric. These industries have huge fixed costs in running their business operations. For example, an aircraft’s fixed costs remains the same no matter how many hours or passengers you fly in the plane. To improve productivity or margins, the best strategy for an Airline company is to fly as much as possible to the full passenger capacity. This means improving the factors that are affecting the variable costs as variable costs are the sum of marginal costs over all units. So, apart from other productivity improvement strategies, the airline company has to leverage digital technologies and data to reduce the variable costs as efficiency in flight and crew scheduling, ticket booking, and flight maintenance are all tied to leveraging digital technologies and data.
Hence,to get the most out of the Digital Transformation program, one should be thinking in terms of productivity. But how can a company inculcate a productivity centric mindset in its Digital Transformation program? How can it leverage digital technologies and data to drive profit margins? It is not as simple as asking employees to think in terms of profits and money. Apart from reducing the discretionary costs, below are 5 key productivity centric strategies to unlock digital transformation.
- Position the customer in the center of Digital Transformation; every activity should have a customer – internal or external. Identify the customer’s pain points and offer a differentiating value proposition. Fundamentally, if you are not differentiating, you are commoditizing.
- Identify and invest in building a System of Record (SoR) for your core business processes – such as Procurement, HR, Accounting, etc. This will reduce the variation in the business processes and this will ultimately reduce the costs. Always, tie the investments in the digital project to KPIs such as NPV and the company’s WACC.
- Reuse your digital assets – software and data. Master Data Management (MDM) holds the key to manage your business entities like customers, vendors, and equipment.
- Train your employees on the relevant digital tools and techniques. But do not confuse new tools as relevant tools. Before implementing “shiny” tools, make sure it will actually address the pain points of the customers.
- Foster diversity and team collaboration to improve innovation and to challenge the status quo.
In closing, Digital Transformation is not about revenue generation. It is about improving productivity of the firm’s strategic resources; it is improving margins by reducing costs, improving customer service, fostering innovation and challenging the status-quo.
Prashanth H Southekal brings over 20 years of Information Management experience from companies such as SAP AG, Shell, Apple, P&G, and GE. He is the author of the most popular book – Data for Business Performance (DBP). He is regular speaker and writer on Analytics, Data Architecture, KPI based Dashboards, & Data Monetization. Southekal is also a adjunct faculty of Data Analytics at University of Alberta (UoA) and University of Calgary (UoC). You can connect with him at – https://www.linkedin.com/in/prashanthsouthekal/