Summary. Should all of your digital operations be located in one central location or do you need a local digital operations outpost in every country your company works in? For international firms, this is a critical decision, and each company has their own set of caveats: ownership structure, customer base, and the demands of local regulation all shape this decision. Looking at 50 firms, the authors identify five factors that companies should consider. First, economies of skill suggest that, when possible, you should try and centralize everything digital. But there are three meaningful exceptions: when your customer journeys differ significantly between operational areas, when you have a fast-faced business model that requires rapid local responses, and when your business is tied to physical assets, such as supply chain or route-to-market. Finally, many companies cite local language, or local regulations, as grounds for localizing digital activities, but this tends to be less of a factor than many assume — it’s usually not a good case for localization.
Recently, a heated argument divided the leadership at a large sporting goods retailer. The retailer had launched a digital transformation initiative, but no one could decide whether to centralize or localize their digital talent and activities. Some argued that digital activities should be put in just one central hub, pointing to examples like Booking.com, the $15B global leader in travel accommodations, which collocates over 1,700 developers in one location to optimize the tens of thousands of A/B tests that keep them in the lead. But others argued digital needs to be local, given the nature of retail, arguing that each country needed its own digital team to adapt to the local needs. They justified their arguments with examples from Amazon, which has prospered in the U.S., but struggled in countries, like the Netherlands, where they don’t have warehouses. Yet others suggested a middle ground of organizing digital operations around regions.
After a long debate, proponents of the local strategy prevailed. But they soon realized that many of the differences between countries were more imagined than real — and the fragmentation of their digital team made it hard to build the digital expertise needed to really compete. In the end they scrapped the local plan and centralized almost everything.
The dilemma at the sports retailer is a microcosm of the debate about digital transformation, all around the world, across different industries: Should leaders centralize their digital activities or leave them local? Each company has their own set of caveats: their ownership structure, their customer base, the demands of local regulation all shape how they make this decision. But how do you cut through this noise to the factors that matter most? In a cross-case comparison of 50 companies undergoing digital transformation, we identified five factors to help companies weigh the pros and cons. Understanding them can help your organization choose the right balance to get the most out of your digital transformation.
As a general rule, our evidence suggests that, when possible, you should try and centralize everything digital. Why? Digital business requires specialized technical skills, as well as short development cycles empowered by high interaction. All of that is made harder by distance. Centralizing your digital activities enables critical specialization, faster learning, scalable IT solutions and overcomes digital talent shortage.
Economies of skill explains why digital first players like Uber or Booking.com are willing to move offices a dozen times if needed to allow everyone to be as close together as possible, learning from each other. Think about it like this: If you have one person in charge of online marketing in each country, they will likely also be in charge of other things as well, like PR or regular marketing. But if you bundle those 40 people together, suddenly they can start to specialize into critical roles such as UX conversion specialist, traffic specialist, CRM campaign lead, social marketer, SEO optimizers, and other roles you didn’t even realize were important. Just as importantly, when they are close together, they can learn from each other, and coordinate more easily in morning standup meetings, speeding up cycles of experimentation that power growth.
Finally, talent is hard to attract and retain. A lone marketer will likely feel lonely and disconnected, but when they are working with other likeminded people, they are more likely to stay engaged. In the fashion industry, conglomerates like LVMH thrive on building internal communities of practice that contain likeminded experts across a range of domains. When these experts have a sense of a community, they are more likely to stay and not move to competition.
Even though it makes sense to centralize in general, there are three forces that you should consider that may temper our advice: customer journeys, business model needs and physical infrastructure.
If your customer journeys differ significantly between operational areas, you may need to localize to some degree. But be sure these differences are real, rather than perceived. For example, the retailer in the introduction initially argued that every country has a different customer journey. But in reality, these differences were only skin deep: Customers buy running shoes in the U.S. in a very similar way to Germany. This is why they initially decentralized, only then to bring all the activities centrally.
Across the companies we studied, in about 80% of cases the underlying customer journeys were the same, 15% of customer journeys were similar (meaning they can be solved through a configurable central solution), and less than 5% proved country-specific (customer driven, but also regulation-driven, such as Portugal having 5 VAT zones). Notably, B2B tends to have more “real” differences than B2C.
How do you deal with differences between customer journeys? Can you group your customer journeys around archetypes? For example, at first glance, a global beverage manufacturer selling primarily B2B faced an immense heterogeneity in customer journeys across their many markets. In the U.S. customers might order using an online platform whereas in Mexico they might demand a face-to-face representative. The difference in customer journeys required localization, but they found these many different journeys aggregated around three archetypal journeys — face-to-face, wholesale, and hybrid selling — around which they could capture some of the benefits of centralization and some of localization.
Different business models have different clock speeds, different revenue models, and different demands to win customer business, which can create pressures to localize. Specifically, some business models have long cycles of customer interaction where you work to win new customers on a monthly or annual basis, like platform-based and subscription-based business models, whereas others are much more fast-paced, requiring effort to win customer business on a weekly business, such as food retailing.
Fast-paced business models often require more localization to allow rapid response, local customization, and even deviation from the rules. Likewise, B2B relationships such as selling pet food to vets, container ships to shipping companies, or professional services, often requires some local presence, even if just a sales force. Lastly, customer demands may drive localization, such as the need for a physical presence to generate trust. Surprisingly, sometimes less physical presence is needed than expected. A study by a global consumer bank showed that in retail banking, very few branches were needed in the market to generate the needed trust for customer to do business with them. As for the sports retailer, although they initially categorized themselves a high-frequency retailer requiring a physical presence, in fact customers only purchased a few times a year and like the banks, a physical presence proved less critical with time.
The tie to physical assets, such as supply chain or route-to-market, can necessitate some level of local customization. An extreme example is producing beverages. Producers of these products tend to have a decentralized organizational structure, as the product needs to be manufactured locally. The ratio between price point and weight of product is too low to allow for shipping across countries. If your digital business is dependent on these physical infrastructures, be it product, logistics, route-to-market, decentralization of some parts of your organization might be required. But many things not dependent on physical assets can be digitized by region or even centrally.
Often local language, or local regulations, get cited as grounds for localizing digital activities. But in the cases we studied, more often than not, these were distractions from the real drivers. Often such differences — in terms of digital — can be managed from a centralized location or sourced with a partner.
Again, to be clear, we are speaking in terms of digital, not product development or regulatory and compliance. But when it comes to digital, often more can be done centrally than might be realized. For example, the global bank ING has one global overview of legal requirements and one IT backlog. This has facilitated quicker delivery and more integrated products across their geographies. Likewise, Booking.com operates across language and regulatory boundaries with fully centralized customer service and marketing teams. Sometimes, local regulations and language require a small local team, but be sure the benefits of localization outweigh the loss of economies of skill!
To apply the framework, it can help to do two things. First, think about these forces in terms of having a high, medium, or low impact. Second, think about choices not as central vs local, but as the “degree” of centralization, or the “types” of centralization (i.e., which activities are amenable to centralization? Are there regional archetypes if not country-level archetypes?).
As an example, before using this framework, the global beverage company mentioned earlier operated at a local level with each country having a nascent digital team. But using the framework they realized the potential benefits of economies of skill, both for attracting digital talent to an older incumbent and developing their capabilities. Next, they analyzed their customer journeys, which differed on each country and realized that they bore critical similarities. In some countries, sales reps sold directly to retail outlets and for these countries they developed smartphone apps for sales reps and point of sale tools for retailers that allowed them to gather and share data about customer trends. Instead of selling purely on relationships, sales reps could now go in and give retailers data-based advice about ways the retailer could increase their sales. In other countries, they sold directly to wholesalers and for these they build digital transfer tools to better manage the relationship. The remaining countries proved a hybrid of these tool kits.
Although the company localized the tools for these customer journeys archetypes, they developed them with the central digital team, co-creating them and testing them in partnership with local units. Likewise, wherever possible they centralized activities like data warehousing, but they did empower local teams to do their own data analysis, using best-in-class, off-the-shelf tools as well as provide them reports and insights centrally.
In conclusion, ever since companies started operating outside their domestic markets they have had to deal with a question of centralizing or localizing their business activities. In the past such choices were made based on physical infrastructure and local culture. But as digital lowers barriers to create, connect, and transact, how to make these choices is shifting. Economies of skill put a premium on centralizing digital activities, yet considerable differences in customer journeys, high frequency business models and dependence on physical infrastructure will pull the company towards local solutions. When you understand these forces and evaluate the pros and cons of centralization, you can make a more informed decision for where to locate your precious digital talent.
This article is written by Nathan Furr, Andrew Shipilov, and Jur Gaarlandt. It has first been published in Harvard Business Review.
Who should you pick to lead your company’s digital transformation? Imagine you have a choice of three candidates:
William — an insider who has a proven track record but doesn’t know much about digital
Sarah — a young digital guru who’s just led a new category expansion at Amazon
Sophia — a sharp ex-McKinsey consultant with experience advising clients on digital
Which would you pick? Most of the executives we survey pick Sarah, the digital guru. But is that the right choice?
Consider the real-life experience that a global appliance manufacturer had with just such a digital guru during its digital transformation. The leadership team hired the executive from the European equivalent of Amazon. Not only did she have deep experience at a digital-first e-commerce player, but she also had led several successful category expansions there, each time carefully developing new customer journeys and rethinking the business model. She seemed like the perfect candidate, capable of adapting and leading digital transformation.
For two months she circulated throughout the company, explaining the new strategy to senior executives. She found that while they were, for the most part, talented engineers, they were frightened by the change digital presented. She decided, therefore, that she needed to create a separate business unit, far away from headquarters, where she could hire the best digital talent and execute on a strategy to reinvent the business unimpeded by nervous insiders.
At first, everything seemed to go well: The skunkworks team studied the customer journey (in this case mostly B2B customers, since the appliance manufacturer sold to retail), developed digital channel tools, and, after launch, achieved some initial sales through online channels. But still, sales weren’t as expected, which the team concluded was due to the limited online marketing budget. With pseudo-approval from the CEO, she redirected the traditional marketing budgets to the online initiative to drive sales. And online sales did creep upward.
But meanwhile, all hell was breaking loose in the rest of the organization. Confused partners were calling in to ask why the pricing through the online portal was so different from the sales team visiting in store. Angry customers started haranguing their company representatives to understand why the online channel wasn’t interfacing with the orders they had placed through their sales representative and why products had not arrived. Worse, sales through traditional channels, which still represented 99% of revenue, had started to decline. As executives around the organization reacted to these developments, cooperation ceased, and digital sales collapsed altogether. The digital guru’s sales went from zero to zero in eight months.
Why had the textbook strategy failed? Could it be pinned on the classic culprits: senior executives who just don’t get it and try to protect their old business model? Lack of resources and support? Maybe.
But fast forward a few months to when the company took a second try. With the help of one of this article’s authors, the executive team chose an unlikely insider to lead the digital initiative: the former head of the very sales organization that had most resisted digital — a leader with little experience in digital, and a notoriously feisty personality, but someone who delivered results and was willing to learn.
Although at first she refused the offer to lead the initiative, when she did accept, she retained the entire digital team and then set out, with her characteristic determination, to understand the needs of customers and the company, meeting with senior executives inside the company and with their retail partners to understand their needs, pricing strategies, and distribution channels.
She then redesigned the digital strategy, balancing their sales across the traditional and online channels. Next, she focused on training her sales force, and the executives in the company, in how the digital initiative could help them achieve their goals, instructing them on the different operational and pricing models and showing them how digital could benefit them in the long run. Then she went out to one customer at a time and worked with them to understand how to help them both succeed, for example by working together to place the appliance company’s products highest on the retailer’s online shops. With each new customer enrolled, she iterated and improved the model as needed.
The new effort was highly successful, and the company has become a digital leader by working with its B2B partners and exploring, where it makes sense, B2C digital initiatives (mostly in the areas where they add unique value that the retailers cannot).
With the benefit of hindsight you can see why the first effort, which followed the textbook strategy, failed and the second effort, which looked at first like a digital laggard, succeeded. As we point out in our HBR article, “Digital Isn’t Always Disruptive,” digital transformation is often less about a radical rethinking of the business than about learning how to use digital tools to better serve customers. This may require internal reorganization, including breaking down silos to serve customer needs and use data, but even in these cases it is as much about organizational change and leadership as it is about digital.
Although a digital guru may understand how to create a digital business from scratch without the constraints faced by an established business, when you put them in a real company setting, they will often fail simply because they don’t understand the business. Typically their downfall starts early, as soon as they start broadcasting their vision for the complete transformation of the company, without listening carefully to how the business operates and to the real needs of leaders and customers. This is typically followed by a period when the guru castigates the rest of the company for slowness and inertia, culminating in spinning digital off into a separate unit where the team has the freedom to create what it envisions, which in the end is too disconnected from the core organization to succeed. And that was what we saw at nearly all of the companies we’ve studied that chose a digital guru.
By contrast, insiders with little digital experience who are placed at the head of digital initiatives succeeded about 80% of the time (of the 50 cases we studied). Why? Because ultimately digital transformation is as much about organization change as it is about technology. Insiders who are willing to learn have an advantage because they understand how the business works, they have the relationships to get things done, and, most important, they understand what they don’t know. They also understand when they need help: Smart insiders hire digital expertise into their team and then lead them to success based on their understanding of how to use digital to serve the business.
As a closing example, consider the woes of a major retailer trying to launch an e-commerce channel. It started by hiring a digital guru from one of the top online retailing companies. Although the guru understood online, he struggled to understand how the company worked and quickly offended the insiders he needed to make the business work. Two years later the initiative was a complete failure. As the executive team wrestled with the question of who to pick next, we told them, “Forget about digital for a moment: If you were to enter China, who would you pick to lead that challenging initiative?” Right away, the answer came back: Tim, one of the best operators in the company, with a track record for succeeding in challenging circumstances. “That’s your leader,” we told them. But when we approached Tim, he laughed. “I don’t know anything about digital…but I’m willing to learn.”
Right away Tim set about doing what he did best: building a great team. Tim believed that happy, productive teams are more effective generating revenue than sales. But rather than starting from scratch, Tim kept the digital experts hired earlier, and set about finding out how to make them work well together. Next, Tim worked to understand how to make the digital transformation work for the business, meeting with the product category heads and sales teams about what he could do to help them succeed. Soon, the online venture went from a total failure, unable to stock inventory due to the internal conflict with category heads, to a synergistic, joint effort in the company that grew quickly.
This didn’t mean that Tim wouldn’t challenge the status quo. As an example, the company had strong beliefs about certain products that “must be included” in the online retail initiative because they were part of the company’s core identity. But when Tim did a SKU-by-SKU analysis, he found that he was losing money on these products. Because Tim understood organizational change and politics, rather than violating the company norms by just cutting these categories, as his predecessor had done, he went to the product leads and shared his dilemma: “I’m losing money on these products. How can we fix it together, so I can sell more product for you?” Together, they came up with some creative solutions.
And when retail stores started to complain about returns from the online venture, Tim went in person to the store leads and told them, “This is my problem. How can I fix it?” Tim’s attitude transformed the retail leaders from enemies to friends, and together they came up with solutions, for example changing how they described certain commonly returned products. In the end, Tim, the company insider, succeeded where the digital guru failed — not because he understood technology, but because he understood the business and focused on the people. In the end, digital transformation is about organizational change as much as it is about digital.
This article is a re-post of a Harvard Business Review publication. Written by Nathan Furr, Jur Gaarlandt and Andrew Shiplov.