Assessing the Risk of Not Pursuing an Opportunity versus the Risk of Change

Digital changes everything—and having board members with experience in digital business is a new financial performance differentiator. But most boards do not have that experience. So how can executives and board chairs help their boards develop in this area?

A board needs to help oversee and guide the firm on its transformation to become future ready. A board needs to understand when the firm should commit to a course of action, experiment among alternatives, and partner to gain access to key resources and knowledge, and they should know the early indications of both success and challenges with digitally enabled initiatives operating at firm scale. These skills are critical for boards in perhaps their most important role in digital—asking the right questions of the management team as they propose and execute a transformation.

A board cannot rely on a single board member to have this understanding. We found that only firms with three or more board members with this sort of understanding of digital had superior performance.

To help boards manage discussion and agendas around digital and transformations, we developed a framework on the key areas a board must address—strategy, oversight, and defense:

• Strategy—identifying opportunities and threats to the firm’s business model from digital and how the firm will succeed in the future
• Oversight—ensuring that the major digital transformations, projects, and technology spending are sensible and on track
• Defense—protecting the firm from cyber and other risks, as well as system outages, and ensuring data privacy and compliance

To effectively address each of the areas, boards, or more typically their chairs, must design board agendas and board member engagement to provide the time and resources needed.

Motivate with a Strong Purpose

To be meaningful and resonate with stakeholders, the firm’s purpose has to be the driver of any transformation. The purpose not only guides the customization of your firm’s version of future ready, but it also helps your people make judgments and trade-offs along the way. Do the decisions being made help meet the purpose? This is a great question for leaders to ask, particularly in times of uncertainty. Here are some firms’ purposes that we admire:

• Standard Bank Group (the largest bank in Africa):   “Africa is our home and we drive her growth.”⁶ This purpose unites the bank employees from twenty countries in Africa. Those employees are often asked in workshops and other settings how the decision they were discussing helped deliver on their purpose. This purpose contributed to Standard Bank’s current vision to both “bank the ecosystem” and “be the ecosystem driver” in target areas, including health, trade, traders, home, and education.
• Cochlear (the global leader in implantable hearing solutions):   “We help people hear and be heard.”⁷ Cochlear’s drive to create new value, including enhancing the direct-to-wearer relationship and serving the ecosystem of candidates, wearers, clinicians, referrers, and players, was guided by this purpose.
• Schneider Electric (an energy and automation digital solution firm focusing on sustainability and efficiency):   “Empower all to make the most of our energy and resources,” dubbed “Life Is On.”⁸ This purpose has helped drive new business models based on electrification sustainability and digitization efficiency, helping Schneider to be ranked as the world’s most sustainable corporation in 2021.⁹
• Tetra Pak (a global food processing and packaging solutions firm):   “We commit to making food safe and available, everywhere.”¹⁰ This purpose has helped drive Tetra Pak’s transformation, first by focusing on creating value from operations, then customers, and, more recently, ecosystems.
• DBS (the Singapore-based bank operating in Asia):   “Making Banking Joyful.”¹¹ This purpose motivated DBS’s transformation to be the “world’s leading bank” and going from last to first in customer experience in a span of about ten years.
• TradeLens (a Maersk business developing a global shipping platform):   “Digitizing the global supply chain.”¹² This purpose has propelled TradeLens to improve the experience of trade for all parties by better sharing of information, increasing transparency, and simplifying and automating processes.
• Principal Financial Group (a US financial services firm providing retirement, insurance, and asset management solutions):   “To give you the financial tools, resources and information you need to live your best life.”¹³ This purpose guided Principal’s efforts in embedding digital into their strategies to help people, businesses, and institutions manage their financial assets.
• CarMax (the largest US retailer of used cars and a disruptor in the automotive industry):   “To drive integrity by being honest and transparent in every interaction.”¹⁴ This purpose underlies all of CarMax’s endeavors in transforming the experience of buying a used car.

In your firm, do you have a similarly compelling purpose that helps guide decisions?

Commit to a Pathway

To move toward future ready from silos and spaghetti, every firm has to choose its pathway(s). Not being explicit about which pathway you are following leads to very frustrating outcomes. One of the most memorable workshops we conducted was with a large, publicly listed firm. We shared the framework with the CEO and the top management team of twelve people. We asked all of the participants to identify which pathways they were on and approximately how far along they were toward completion. As soon as the polling data appeared on the screen, there was an audible groan from the participants. Among the thirteen participants, there were seven different answers! Participants named just about every combination of pathways as the approach the firm was following—with lots of variation in percent complete. What followed was a very helpful but robust conversation about how different parts of the business were pursuing different pathways that were not coordinated. In the next polling question, we asked which pathway(s) the firm should follow, and the results were much more consistent. Not everyone had the same answer, but the results were more focused. After some more discussion, there was agreement that the firm should follow pathway 3, adding a pathway 4 ecosystem play operating as a separate unit.

To reinforce this point about choosing and committing to a pathway, let’s review the results we discussed in chapter 2, figure 2-2. Firms that picked multiple pathways that were well-coordinated were, on average, 59 percent complete on their transformation compared to what was proposed to their boards. But firms on multiple pathways that were not coordinated were only 30 percent complete. And it’s easy to see why. Firms on uncoordinated multiple pathways are working at cross purposes, always reinventing the wheel and not learning effectively from one another or reusing the capabilities they have built. Plus, most importantly, they are often confusing their customer with multiple (unintegrated) offers and making it difficult for their employees to support all this complexity. It’s not easy to get agreement on the pathways, and choosing multiple pathways for a transformation makes managing the transformation even more challenging.

If your firm needs to commit to a transformation involving multiple pathways, think back to the case studies we describe in the book. Which appeal to you? Revisit what they did to see what you can learn from them.

Anticipate Explosions

One of the most common questions we are asked is how to change the culture so it will support the transformation to future ready. There is a lot of great (and not so great) literature on culture change, and as students of organizations, we have enjoyed reading it. But when we collaborate with firms as they think about their cultures, our advice is pragmatic. Don’t explicitly try and change the culture—that is a multilayered, political, long-term, and complicated endeavor. Getting agreement on the description of the as-is culture and then designing the to-be culture is a great activity for the TMT, but changing the culture is difficult to do as a stand-alone objective. Instead, we recommend that you focus on managing the four explosions. Changing the culture happens when people change the way they think and the way they work—changing their habits. If you manage the four explosions effectively, you will change the culture in the areas targeted for transformation. And that culture change will reinforce your transformation.

Here is a quick summary of the four explosions. As you read, start thinking about how well you are managing the explosions today. In chapter 2, we provided an assessment and benchmarks so you can see how effectively you manage the explosions.

• Decision rights:   This explosion is about getting the right people to lead key decisions. Some of the key decisions include clarifying who decides what to do and who decides how to do it, prioritizing the spending for digital investments, determining which group(s) in the firm can make new digital offers to customers, and agreeing on the decisions that can be made by teams doing the work (e.g., this involves assessing the level of risk your firm is comfortable with your teams taking on).
• New ways of working:   Digital enables new ways of working, like agile methodologies, evidence-based decision-making, and creating minimal viable products that are offered to customers in a test-and-learn way. New ways of working change collective work habits and help transform the culture.
• Platform mindset:   A firm with a platform mindset creates and reuses platforms that take their crown jewels and turn them into digital services, connect organizational silos, share data, and standardize processes.
• Organizational surgery:   There is a time in most transformations when the leaders realize that the way they are organized is not optimal for the firm’s aspirations. At this point, the firm typically does some kind of organizational surgery, often to integrate silos and increase collaboration across the firm to achieve better customer experience and more efficient operations.

We suggest you review the case studies of Tetra Pak, CEMEX, KPN, and Domain in chapters 3 through 6. You will find some great ideas on how to manage the explosions and some motivating details on what they got right.

Build Capabilities

An important and far-reaching aspiration is to build ten future-ready capabilities across the entire firm, including the board, top management team, and everyone else. These capabilities help a firm become future ready and then help sustain competitive advantage. This is not a one-and-done initiative but an ongoing effort that requires leadership, purpose, goal, metrics, budget, fresh approaches, and perseverance.

In chapter 1, we introduced the future-ready capabilities. These are the capabilities that make transformation happen and enable you to accumulate new digital value. We think of these capabilities as HOW your firm will create value. Focusing on building these ten capabilities is the best and most succinct recipe we know for moving a firm toward future ready and increasing financial performance.¹⁵ We have organized the ten capabilities by the types of digital value they are most important for, as well as the four capabilities that are foundational and common to all types of value.

Accumulate Value

We have now addressed all components of figure 7-1 except accumulating and tracking value. We think of accumulating value as the WHAT of a digital transformation. In this book, we have described three types of value that firms capture as part of their transformation:²³

• Value from operations—this value comes from increasing efficiency, reducing costs, and increasing speed and reuse.
• Value from customers—this value comes from delighting customers and is reflected in generating more revenue per customer, including more revenue from new offerings, and increasing customer stickiness.
• Value from ecosystems—your firm gets this value as it increases its revenue from ecosystems, its revenue from partners, and collects more data from the ecosystem.

As firms progress along their pathway to future ready, they capture all three types of value.

Schneider Electric Tracks Value Creation with Its Digital Flywheel

Schneider Electric SE is a €28.9 billion revenue company providing digital solutions for energy management and industrial automation.²⁴ Over the last decade, Schneider Electric has transformed itself from a seller of energy-related products to a digital leader in providing energy-efficiency services.

For Schneider Electric and its customers, the combination of the sustainability of electrification and the efficiency gains that digitization supports offers great new value creation potential. To implement this strategy, Schneider created EcoStruxure, an Internet-of-Things-enabled plug-and-play customer engagement system delivering energy efficiency as a service for use in buildings, factories, data centers, and so on. The EcoStruxure system translates data into actionable intelligence by collecting structured (from sensors) and unstructured (from logs completed by maintenance people) data from the set of Schneider Electric products at a customer site and analyzing the data. This produces a set of real-time instructions that the system sends back to the customer site. EcoStruxure and other capabilities have enabled Schneider Electric to move from selling products to selling more services and software. These digital solutions can make a big difference in customer sites. For example, companies using Schneider Electric’s energy efficiency solutions report a 30 percent reduction in energy consumption.

Achieving this kind of transformation in a large organization requires a way for everyone to understand the organization’s goals, metrics, and business logic and how they fit together. For Schneider Electric, the Digital Flywheel provided such guidance, becoming a tool to help drive the transformation.

Schneider Electric first represented its dashboard as a “digital barometer” that measured what value was created from digital. But soon, senior leaders realized that something additional was needed—the business logic of how value, including sales, was to be created—to help internal and external stakeholders understand why particular metrics were important. This led to the creation of the Digital Flywheel, which describes and tracks how value is created via digital. The Digital Flywheel has four key components, representing the four parts of the EcoStruxure system:

• Connectable Products:   all the energy-related systems and devices in a building, including heating and cooling systems, ventilation, and thermostats. These products supply data for analysis and receive and act on instructions.
• Edge Control:   a software and monitoring solutions layer that gives organizations the ability to coordinate and manage the connectable products.
• Digital and Software:   a layer of intelligence and software that performs analytics and generates energy efficiency dashboards in real time. Besides connectable Schneider products, the software can also manage competitor and complementary physical products. Analyses of product-generated data identify additional needs and opportunities.
• Field Services:   teams that implement Schneider products and services.

On the Digital Flywheel, Schneider Electric captures and tracks financial performance both for the four components individually and combined. But just as important is that it shows how the four components work together to produce higher value and sales for the company—and increased value for clients, often measured as energy efficiency improvement. Total firm revenues generated via EcoStruxure have grown from a very small percentage following its debut in 2016 to 50 percent in 2021²⁵—an industry-leading achievement and a tangible illustration of Schneider Electric’s shift from mostly product sales to selling both products and services.²⁶

Dashboard Effectively by Applying Five Lessons

Schneider Electric’s use of the Digital Flywheel has changed how the company is managed. We examined the company’s development and use of the Flywheel and surfaced five lessons:

1. Combine both what and how. In creating the Digital Flywheel, it took Schneider Electric many rounds of iteration to arrive at the effective version. What makes the Digital Flywheel compelling is how it combines what the company should measure with the business logic of how the value is created.
2. Persist.   It takes time to get an organization to adopt and use a dashboard. Schneider Electric, like most companies that successfully use dashboards, went through phases where people resisted using it. Eventually, company executives reached an agreement on common definitions and metrics for the drivers of business success. Once such agreement is reached, people can use a dashboard as a team tool to understand how their group operates and connects to the performance of other groups.
3. Use the dashboard to manage the company.   At Schneider Electric, CEO Jean-Pascal Tricoire uses the Digital Flywheel in his quarterly reviews with each business leader. The conversations typically start with covering what has worked well and then moves to areas that need additional focus. The Digital Flywheel provides a common language for use across the entire company—even by the board in their digital subcommittee. Recently, the Digital Flywheel was used in Schneider Electric’s investor relations presentation to demonstrate how digital and services combine to create a compelling vision proposition.
4. Communicate to the entire company how to use the dashboard.   Getting an entire large company to effectively use a dashboard requires wide-ranging, consistent communication. To reach its 135,000 employees, Schneider Electric used a variety of ways to broadcast the message. One successful approach was a monthly newsletter focused on the Digital Flywheel. A recent edition had a section titled “Behind the Data in the Flywheel,” with an interview of a senior Schneider Electric executive explaining the different types of churn and what actions can minimize churn. The goal was not only to further the use of the Flywheel but also to improve the company’s performance on the metrics.
5. Automate with drill-down capabilities.   As the dashboard moves closer to sharing real-time data with added capabilities to drill down into business and operational segments, it will become more effective and useful in company decision-making and ease course correction moving forward. At Schneider Electric, much of the data is real-time, and the dashboard filter panel displays the source of the data being examined and options to drill down on geography, business scope, and more.

In dashboarding, like many other digital initiatives, seeking perfection is the enemy of progress. The data won’t be perfect or even agreed-upon in the first few rounds of creating your dashboard. Even more challenging will be changing the firm habits to use a common dashboard rather than local numbers. Plus, changing how you do management reviews with real-time dashboards will take time and reinforcement. But perhaps the most challenging and important effort will be articulating the business logic that shows how value is created and captured by the company. Including that business logic in a dashboard demonstrates that the leadership really has invested sufficient time and experience in understanding how digital will create new value for the company. Companies that have been successful with dashboarding typically started using the tool to measure and course correct a digitally enabled business transformation, but it eventually becomes the way to run the business.

Build Your Dashboard

In this section, we introduce a dashboard starter kit. Our dashboard is designed to provide a reading for everyone in the firm to see how they’re doing against their goals with benchmarks from other firms for comparison. There are three important parts to the dashboard:

• Tracking the three types of value created over time (WHAT value is created). Assessing this value could require investments and iterations to get meaningful results.
• Assessing your ten future-ready capabilities that drive value creation (HOW the value is created).
• Benchmarking your firm’s results to the average firm at the same stage of transformation. Is your firm making adequate progress compared to other firms?

Creating the dashboard has four steps. We suggest that you get multiple people to provide data and average their responses for a score for the whole firm and also look at variation across the different parts of the firm. Be prepared—completing parts of this dashboard is a challenge. Assessing value (the WHAT) requires having a deep understanding of how your firm makes money.

1. Determine how far along your firm is on its transformation (figure 7-5a). We have provided benchmarks for three stages of a transformation.
2. Complete figure 7-5b to assess your effectiveness at creating the three types of value (the WHAT). You will have three scores: value from operations, value from customers, and value from ecosystems
3. Complete figure 7-5c to assess the effectiveness of your ten future-ready capabilities (the HOW) on a percentage scale. You will have four scores: operations capabilities, customer capabilities, ecosystem capabilities, and foundational capabilities.
4. Enter your scores on figure 7-6 in the appropriate column for percent complete, and compare your answers to our benchmarks from more than a thousand firms globally. Where do you need to focus relative to the benchmarks?²⁷ And can you articulate the business logic underlying the creation and capture of value?

Let’s return to our BankCo example to work through an example of how to use the dashboard. The information for BankCo is drawn from senior executives’ assessments of value and capabilities done during a workshop, and it is consolidated onto the dashboard, using some research interpretation (see figure 7-7).

BankCo is 55 percent complete on its digital transformation using multiple pathways—pathway 1 (60 percent of investment), pathway 2 (30 percent of investment), and pathway 4 (10 percent of investment). It is below the benchmark for both value from operations and customers but well above the benchmark for value from ecosystems. The likely cause is that both investment and management attention is focused on the pathway 4 ecosystem play, which is going well. The problem is that the lag in both value from operations and value from customers will put stress on the pathway 1 and 2 transformation efforts—these are focused on the existing bank where the big impacts will be—and these efforts need immediate attention.

To better understand the issues BankCo faces, let’s now look at the future-ready capability scores. The foundational capabilities category scores are well below the benchmark. These need attention, so BankCo must examine the four capabilities that make up the foundational category to see which ones are below the benchmark.²⁸ For BankCo, the problem items were strategic use of data and firmwide rapid learning. We would make the following recommendations for action:

• Celebrate the successes of the value created from ecosystems by sharing customer stories and case studies both internally and externally to help generate momentum.
• Use the momentum from the customer stories to apply energy to the value capture efforts on pathways 1 and 2. Drill into the metrics on these paths to understand where the challenges are capturing value from operations and from customers.
• Investigate why the higher-than-benchmark levels of operations and customer future-ready capabilities are not translating into value capture. Is this an overly optimistic perception by the executives in the workshop, or does governance or reusing digital services and modules need tweaking to take more advantage of the higher-than-average capabilities?
• Address the low scores of foundational capabilities—strategic use of data and firmwide rapid learning. This is often a decision-rights and platform-mindset issue created by local decision rights and abetted by local technology solutions with no mechanism for sharing firm-wide.

We recommend that you do this assessment once every three months of your transformation and track the scores over time, holding a workshop to discuss. The individual percentages of each score are much less important than the quality of the conversation that the scores stimulate. Over time, we recommend that you replace the perceptual and actual measures we’ve provided with actual real-time data that is most relevant to your HOW and WHAT.