1 April 2020
This article is a re-post of an MIT Sloan Management Review Publication, April 01, 2020
As digital disruption has become a major force across industries, organizations have responded with significant investments in digital transformation.[1] Unfortunately, recent research suggests that most of these efforts fail to meet or exceed expectations.[2]
Why?
The reality for many organizations is that digital transformation consists of an ungainly confederacy of digital initiatives revolving around “cool technologies”, a few skunkworks projects, and random acts of digital enablement. In other words, they suffer from poor governance. Indeed, research we conducted in 2019 suggests that governance-related concerns are a high priority for the people leading digital transformation efforts in companies (See “Top Digital Transformation Challenges for Organizations”). The data reflects feedback from 1,030 digital executives and shows that companies falter in many areas when it comes to providing structure and governance to digital transformation projects, from finding alignment between business processes to assigning ownership for change efforts.A well-governed digital program must satisfy different stakeholders across an organization, be flexible enough to accommodate multiple types of initiatives, while ensuring enough rigidity to achieve strategic alignment and efficiency. Unfortunately, most organizations rely on traditional governance approaches that prioritize compliance and risk mitigation. Thus, executives need to rethink their governance approach for digital transformation in a way that prioritizes active enablement over control. As Andy Weir, CIO of Bankwest, points out, in digital governance “the executive’s role is to remove ‘blockers.’ They must help teams by demonstrating rapid decision making and removing impediments to progress.”
Based on our experience working with more than 100 firms on digital challenges as well as interviews with 55 digital executives, we’ve distilled seven key governing principles that are linked to successful digital business transformation.
Digital Governance Principle 1:
Centralize information about digital initiatives rather than the initiatives themselves
Surprisingly few digital leaders have a complete or transparent picture of their organization’s portfolio of digital initiatives. Indeed, executives frequently confront a fragmented digital landscape, with varying levels of ownership and responsibility. This situation is especially common in companies with a culture of decentralization, where the locus of power resides in business units or country organizations.
Consequently, an important starting point is to take an inventory of digital initiatives.
This may sound like a straightforward task, but it is often quite challenging. People are reluctant to share information for fear that they may lose control over their initiatives. Thus, it is helpful to stress that the inventory phase is about the centralization of information about digital initiatives, not control over them.
Fred Herren, CDO of SGS, the world’s largest provider of inspection, testing, and certification services, understood that applying a top-down approach rules rarely works in decentralized cultures. He noted, “I think it’s necessary to walk the talk rather than give instructions. I’ve managed to get a lot of information because I’m not telling employees to stop [their activities]. I walk around and ask people what’s new and I always react positively.”
Adopting a collaborative approach — one that focuses on building trust and a culture of information sharing — provides a good foundation for your next key governance actions.
Digital Governance Principle 2:
Move from centralized to decentralized governance of digital initiatives as digital maturity grows
Organizations are divided on where digital initiatives should be situated. According to our research, 84 percent of organizations have established a dedicated or centralized digital group.
Centralization was the preferred structure of Energie Baden-Württemberg (EnBW), a regional Germany energy company, when they launched their digital transformation in 2016. Two years into the transformation, however, the digital team began to observe redundancies and overlap among different units. To minimize them, they created communities to manage common initiatives that didn’t require direct intervention from head office.
Although there is widespread agreement that a central unit or team should initiate a digital transformation journey, many firms recognize the need to eventually decentralize digital initiatives and empower local business units.
“I think the end goal is that everybody in the company is a CDO,” said Mark Klein, CDO of Germany’s Ergo Insurance Group. “As soon as everybody is acknowledging the value of digital transformation, embracing it, and making it happen, I’m not needed anymore.”
Digital Governance Principle 3:
Decentralize ideation but centralize idea evaluation and prioritization
Organizations use different processes to identify and evaluate innovative ideas. Companies that get it right often find that while ideation may be decentralized, the evaluation and prioritization process should be centrally driven.
For example, food giant Nestlé launched the “InGenius” program in 2014 to leverage the creativity of their 300,000+ employees worldwide[3]. Employees can pitch their ideas on a software ideation platform and get feedback and votes from other Nestlé employees. Eduard Ruess, former Head of Nestlé’s CIO office, explained that the basic goal for the program was, “to reduce the distance between the person who has an idea and the ones who can make it happen, and bring the innovation process closer to more employees.”
Once an idea passes a certain threshold, most companies create a centralized decision-making authority or “digital innovation committee” to evaluate new ideas against strategic priorities. This committee is typically led by the CDO or other senior executive and includes members from across the different business units of a firm. Bart Leurs, CDO of RaboBank elaborates:
“We set up an innovation board led by the global head of innovation. Every business line has an innovation lead that is also part of this board. Together, they manage the innovation funnel […] creating the same chance for projects to succeed, fail or to be stopped quickly.
To leverage the creative power of the whole organization, companies need a systematic approach to funnel ideas into an efficient and transparent pipeline for evaluation and prioritization.
Digital Governance Principle 4:
Make sure that KPIs measure the real impact you want to achieve with each initiative
Establishing appropriate key performance indicators (KPIs) is a critical exercise, particularly for digital initiatives that are highly dependent on strategic priorities related to the company’s future vision, success, and implementation objectives. However, when we asked leaders how they measured the performance of digital initiatives, most of them answered in one of two ways: either “we don’t” or “it depends.”
It became clear that many companies relied on generic success measures, such as adoption rates of new digital tools, but failed to assess if any real impact was generated. According to Eduard Zuber, former CDO of AXA Hong Kong, leaders can struggle to determine business impact of new initiatives, saying, “one of the drawbacks of transformation is that if you are not watching carefully enough, after a couple of years, you’ve spent a couple million dollars and you are not completely sure about the return.”
Our research shows that digital initiatives are usually undertaken to create impact in a specific dimension. Common dimensions include: revenue growth, new market creation, or increased customer satisfaction. To produce real results, we encourage digital leaders to clearly identify the desired impact of each initiative and to closely monitor appropriate KPIs (See “Impact Dimensions and KPIs” for an overview of commonly used dimensions).
Digital Governance Principle 5:
Avoid siloed solutions by ensuring data compatibility, technical consistency and continuous integration of new initiatives with existing systems
One important, but often underestimated, principle of digital governance involves ensuring new digital initiatives are integrated within the company’s existing IT rules, systems and capabilities. Digital transformation is an end-to-end process — one closely intertwined with back-end business processes and systems. The successful cases of transformation we identified were often built around a standardized approach to infrastructure, rather than by working on top of a patchwork of not well-integrated and/or siloed legacy systems.
For example, IKEA realized it could only achieve digital innovation at scale by standardizing data rules across the company. IKEA’s CDO Barbara Martin told us, “Through data standardization, we can see that if something has worked well in Italy, [and] leverage it for the good of IKEA globally. That allows for transparency, visibility and accountability.” This approach to data gives IKEA the ability to see what products and processes are working globally, and which are not.
Similarly, Nestlé engaged in a multi-year project aimed at systematically assessing and consolidating the different IT systems used across the company. Without this common infrastructure, it would have been impossible to roll out a suite of enterprise-wide digital tools.
Digital Governance Principle 6:
Implement a ‘fit-for-purpose’ mapping system that recognizes value potential and degree of feasibility for each initiative
With a list of digital initiatives and a governance structure in place, organizations need to map the initiatives onto relevant categories. Our research suggests that this mapping process can e conducted by assessing each initiative along two dimensions.
The first dimension is value potential, which refers to the value at stake, as well as the opportunity cost of failing to pursue the initiative. Executives should think through their transformation objectives and determine how much value each project contributes to that goal. The second dimension is degree of feasibility, which refers to the (perceived) ability of an organization to successfully execute an initiative based on ease of implementation, current context, capabilities and organizational structure.
Assessing initiatives along these dimensions leads to four different types of digital initiative (See “Four Types of Digital Initiatives”):
Quadrant 1 is referred to as Quick Wins. These are high feasibility initiatives that have relatively low value. For example, applying a simple digital tool to a known business challenge in a specific area of the business. These initiatives bring immediate gains, but rarely make a lasting impact.
Quadrant 2 comprises initiatives that are difficult to implement and have low value potential. They are in the Kill Zone. Despite their low attractiveness, we unfortunately see many initiatives that fit this description.
Quadrant 3 includes initiatives that have low feasibility but high value potential. These are Moonshots. Initiatives of this type seek to explore radically new, trending, and potentially disruptive innovations and technologies.
The most attractive fourth quadrant comprises initiatives that have both high feasibility and high value potential. We have divided this quadrant into two parts based on how they are implemented. The first part is referred to as Enterprise Anchors. These initiatives seek to create change to the current business at scale. An example might be a new digital platform to transform B2B customer service and sales. These initiatives typically require significant cross-enterprise collaboration. The second part of quadrant 4 is Ventures. The goal of this initiative type is to leverage digital technologies or business models outside the existing organization. Ventures often use new channels and partners, and rarely function well within the current structure of the organization.
By mapping different digital initiatives with corresponding governance choices, executives can avoid the common misconception that a single governance structure can cover all initiatives. In the following table we propose a “fit-for-purpose” digital governance framework that recognizes that initiative characteristics influence governance choices.
Heineken, an independent global brewer with presence in over 180 countries, illustrates how a company can manage multiple governance structures for different digital projects.
For initiatives focused on digitizing their routes to market, Heineken first developed a centralized transformation approach and roadmap. Next, they launched pilot tests in selected markets and empowered local teams to identify key customer needs. The initial pilots were scaled to additional markets only after a local minimum viable product solution had been validated. In parallel, Heineken built centralized capabilities to roll out the digital solutions globally. This is an example of how Heineken built a digital initiative into an Enterprise Anchor.
But Heineken took a very different approach for Beerwulf, their direct-to-consumer ecommerce platform for craft beers. Hans Böhm, Managing Director of Beerwulf realized that “designing a new direct-to-consumer business model would require a fundamentally different approach.” For Beerwulf, it didn’t make sense to run the initiative in a centralized, corporate way. Instead, adopting an agile mindset, Bohm noted, they used customer feedback to refine their proposition, and were willing to “test, learn, and fail” as they determined what worked and what didn’t.
Therefore, Heineken elected to launch Beerwulf as a separate “start-up” Venture, outside of the regular business structure. This approach released Beerwulf from constraints on reporting and resource allocation processes that would have applied if they were merely a “project” inside the regular business. As a result, the fledging venture was also able to set up a separate, but compatible IT architecture, which was key to achieving the flexibility and speed they required.
Digital Governance Principle 7:
Evaluate different scenarios to proactively steward digital initiatives toward full-scale impact
Digital initiative types are not static. A Moonshot designed to evaluate a radical new idea could eventually become an Enterprise Anchor. What’s critical is that these transitions are managed in a way that is consistent with organizational strategy while providing each initiative with enough resources to maximize its potential.
A disciplined approach is also required in the Kill Zone, by either stopping unsuccessful initiatives or by embedding them into existing business operations. Formulating these pathways helps the firm take control of the transformation instead of allowing ad-hoc governance processes to determine direction.
Enabling for scale
During our research, interviewees highlighted two important enablers for successful scaling of initiatives. First, digital leaders should proactively work to remove potential obstacles, i.e., make sure there are no organizational or technological barriers that could limit an initiative’s growth.
Diego de Coen, former CDO of JTI, stressed the importance of parallel work for scaling digital initiatives. He explained that at JTI, once the value of a new initiative is clear, the parallel processes for execution begin across such teams as IT, security, legal, and other key stakeholders. Relying on this parallel work avoids any bottlenecks along the critical path that may prevent the speedy scaling of initiatives.
Second, instead of trying hard to push new initiatives out into the organization, digital leaders should focus on creating a pull effect from the organization. Experts we talked to, including Chetan Tolia of Swiss bank UBS, stressed the importance for companies here — if you scale an initiative by pushing it out [into the company], you will always need to do so, preventing organic growth. To create such a pull effect, Sven Meier of EnBW describes how he worked closely with only a small number of business units, focusing on generating first results and demonstrating the value of the initiative. “Real results were generated. From that moment on, word spread quickly, and we had a hard time responding to the pull from the rest of the firm.”
Conclusion
In a constantly evolving digital landscape, executives must dynamically design and govern their portfolio of digital initiatives. There is no single governance structure that works across all situations. By following the governance principles described in this article, digital leaders can increase the likelihood of successful outcomes.
The Seven Principles for Digital Governance
- Centralize information about digital initiatives rather than the initiatives themselves.
- Move from centralized to decentralized governance of digital initiatives as digital maturity grows.
- Decentralized ideation, but centralize idea evaluation and prioritization.
- Make sure that KPIs measure the real impact you want to achieve with each initiative.
- Avoid siloed solutions by ensuring data compatibility, technical consistency and continuous integration for new initiatives with existing systems.
- Implement a “fit-for-purpose” governance system that recognizes different types of initiatives.
- Evaluate different scenarios to proactively steward digital initiatives toward full-scale impact.
[1] “Worldwide Digital Transformation Spending Guide,” IDC, November 2018.
[2] Laurent-Pierre Baculard, Laurent Colombani, Virginie Flam, Ouriel Lancry, and Elizabeth Spaulding, “Orchestrating a Successful Digital Transformation,” Bain & Company, November 22, 2017, https://www.bain.com/insights/orchestrating-a-successful-digital-transformation/
[3] https://ingenius-accelerator.nestle.com/