Nearly all companies are at some stage of digital transformation. Unfortunately, “going digital” is easier said than done. According to recent research by Genpact, companies may collectively waste some $400 billion per year on misguided efforts as they try to make this transformation.
The Genpact report notes that “digital-native” companies have an advantage. Top digital lenders, for example, run with efficiency ratios ranging from 20% to 35%, while large banks come in between 55% to 60%. The digital-native lenders also have startup costs that can be some 70% lower than their old-world counterparts.
The Nature of the Digital Transformation Threat
One example of how new companies can outmaneuver older peers is in regards to regulation. Traditional firms must dig around in legacy systems of reporting, HR, and all other functions to uncover the info they need to comply. Digital natives, on the other hand, can craft a system knowing which outputs they must deliver.
Another typical failure is the disconnect between the jazzy, front-end channels and what back-end employees actually know about them. Genpact found that nearly two-thirds (59%) of adults prefer communicating with banks through the web. But while most large financial institutions offer this service, the interactions are often glitch-prone and fraught with redundancy. Customers can’t understand, for example, why a service rep doesn’t already know their name when they pass the online chat or phone call on to another representative.
Such concerns may sound minor, but the impact is large. “Such issues are not confined to banks,” notes the Genpact report. “Insurers, healthcare, consumer products, hospitality, high tech and many others struggle to keep the overall experience aligned with expectations created by increasingly sophisticated front ends.”
Digital Transformation: Risk of Failure
The value lost when a major IT project has a big delay can run up to 170% of the investment cost, according to a May 2015 report from BCG Perspectives. Its findings, based on data from the Standish Group, show that firms face long odds of having a project that actually delivers its intended results in terms of schedule, budget, and hitting the desired tech objectives. Some 93% of mega-projects worth $10 million or more fail by some of those measures, while nearly 1 in 5 (18%) of all IT projects of any size are either stopped, left unfinished or never have their results used.
With real-world failure being the norm, it’s no wonder firms are flushing billions of dollars down the toilet each year as they try to go digital. One major reason is that companies fail to pay enough attention to risks. “Frank talk about project risks often gets squeezed out of the discussion in formal governance activities at status meetings or meetings of the project steering group,” states the BCG report. “Those intimately involved in the project get so close to the details that they cannot see the forest for the trees.”
Among the catastrophic risks the company sees bringing down even the best-laid plans are inexperienced personnel, unclear objectives, and poorly designed data-gathering systems. To combat these common pitfalls, it suggests assuring you have the project leadership in place at the outset, breaking down a mega-project into smaller components, and working with outside partners that are familiar with this type of work.
These best practices will keep everything on track — and can save millions. “In our experience, a 50% reduction in delays, cost overruns, and other problems across a portfolio of projects could easily produce economic benefits equivalent to 15 % to 20% of total portfolio spending—significant money that could be devoted to other initiatives,” states BCG’s report.
The Nearshore Role in Digital Transformation
While the process of digital transformation will never be seamless, combining best practices with outsourcing can lead to better results — and cost savings.
But there must be a balancing act throughout this transformation. Both in-house staff and external service providers are critical to cutting down on “digital transformation waste” and meeting organizational objectives. To determine how to leverage both sides, we spoke with experts in technology and outsourcing. The following is their perspectives on how to achieve an optimal outcome during any digital transformation.
SVP and CMO and head of the Genpact Research Institute
Genpact’s approach to transformation, which we call “Lean Digital,” enables large companies to re-architect their middle and back office operations. We’ve found that firms using this model of digital waste reduction achieve measurable impact — growth, cost efficiency, and business agility —while companies that only focus on technology, rather than on equal parts technology and process design, often struggle to transform.
Companies that are already well versed in outscoring are better at re-scoping jobs and transforming operations. They already have the right nexus of IT and business leaders. To harness this automation power, jobs, and processes must be redefined, as often it isn’t viable to fully automate certain roles. This is a challenge, and it has been historically. If the percentage of activity that can be automated is small, companies will absorb that as productivity and use yearly natural attrition or growth to adjust. Employees will simply take that in stride as long as the technology is easy to adopt. The automation will just translate to broader work scope. If automation’s impact, however, is very material, like it has been in the case of outsourcing, the change management must be deliberate and substantial, and require specialized skills and decision making. Otherwise, the enterprise won’t move forward or realize a positive business case.
Because of this, virtually all large enterprise product companies need a big partner ecosystem to finish the job. This is why a “Lean Digital” approach resonates in the market. However, too many technologists, pundits, analysts, consultants, and executives today remain focused on the shiny object du jour, and not on the necessary recombination of mostly legacy operations, processes, and technologies that must happen for new technologies to generative disruptive impact.
Partner at Information Services Group
When I think of digital, the biggest challenge is that most people can’t define what it means. You talk to lots different people and get lots of different answers. The challenge is that people are trying to equate digital to a specific technology — like we thought about e-commerce or equating it to the cloud. But when we really think about digital, it’s really about connecting with the customer better.
To do this, you need to first have a digital backbone. These are your platforms, processes, automation, the Internet of Things, and the private/public cloud. This is the first wave of what we see as the enabling technologies you will need to drive a digital transformation. Next comes customer insights, namely driving customer and product analytics. You need to determine what data is meaningful. Then the third part is customer engagement, in which you get everyone talking about mobility, social media, collaboration, and innovation. So we take all these buzzwords — the noise in the market — and put them in these three, clearly defined waves that all center on connecting an enterprise to the end customer. This keeps you grounded in what you are trying to achieve.
When it comes to doing this in-house vs. relying on the ecosystem of outsourcing providers, I’m helping a company right now to try to find that balance. They are a Global 250 company that wants to become a data company after traditionally being a chemical company with a set of products. They are now realizing now is that their product is that data and analytics they can provide the market. So we’re trying to determine how to integrate with the global ecosystem available to help in the transformation.
The first thing is how you select a set of providers that is very innovative. How do you find those that have already cultivated innovation in their culture? Are they investing in themselves, creating big labs where you can bring big ideas in and jointly develop products and offerings to bring to market? The second piece we’re doing is location analysis, looking for the five or six cities across the world that we should be have a presence in to make sure we’re connected to the best and brightest. This is really a different way of thinking and it is helping us strike that balance. Some of the transformation is going to be completely in house in terms of innovation but they also want to reach out to the market to help drive that innovation.
Senior Director of Content & C-Suite Communities at CDM Media
At the end of the day, we need to ensure that our outsourcing will provide a positive ROI for the organization. We need to fully understand which costs are variable in this new arrangement and which are fixed. We need to fully define where our savings can come from.
In addition to personnel, these may include management, real estate, and utilities costs. Conversely, start up, knowledge transfer and setting up new procedures will take time and incur costs. And there may be tax implications, staff required to handle coordination, or increased travel expenses. Are there costs associated with increased compliance and security monitoring that will need to be incurred? Finally, are there economies of scale that you will lose out on as you will no longer be using as much of a particular product or service?
Vice President at Sapient Global Markets
One thing I’m seeing that separates firms that doing well from those that are not is how willing they are to look to other industries. Especially when you look finance, energy, and telecoms, these are companies that historically have been a bit myopic. The ones that are opening their eyes are doing very well, but there is still a lot to this that is window dressing rather than an actual belief in transformation. I’ve seen different companies have different levels of enlightenment.
Leveraging external firms is an important part for companies that serious about engaging in transformation. A part of that is because the enabling technologies have changes so rapidly that most organization’s internal staffs don’t have the current technical capabilities or business understanding to maximize the strengths of what is available. So the two approaches I’ve seen be most effective are those where companies look to an outsourcing model and look to various partners to deliver a suite of capabilities that drive transformation. I wouldn’t say they’re doing this in a fully outsourced way, but largely leveraging external staffs and capabilities to get the cutting-edge talent and thinking in the industry.
The alternative is more of a 50/50 split where companies look towards a dual objective of leveraging the best in the industry and making sure you have the right in-house staff to build on that to extend and develop further resources over time. The goal is to make sure you leverage the external firm to both help you deliver but also help train your internal staff to teach them what has changed in the industry over the past few years so they can become conversant in that and pick up the pace going forward.
Both models can be very effective. Companies that I’ve seen try to go it alone, however, usually end up paying a premium to hire the staff than by leveraging firms from the outside. In some cases, they are successful. But more often than not, they are not successful. It is just much more difficult because the rate of change is so much faster than it ever has been.
Executive Director and Global Head of Digital Business Service at Dell Services
As organizations transition to the digital age, it is important for them to take a business-first approach vs. a technology-first approach. This means that we need to look at business models, customer experiences, employee engagement and operational excellence as the dimensions of digital transformation. And to take a business-first approach it is important to drive intensive collaboration between the business and the technology teams. Successful digital transformation is enabled only by business and IT alignment.
The foremost priority is to recognize the positive impact that digital can have on an organization’s business across new revenue models, customer experience and operational excellence. It is important to start with an upfront, organization-wide digital strategy. It is also important to look at the overall evolution of the industry, how competition is using digital and how non-industry players can use digital to disrupt your industry.
Only after you have defined a digital blueprint can you look at a strategy of working with external partners. With the proper overall plan, leveraging digital consultants who have been helping organizations across industries can be extremely helpful in fleshing out the right strategy for the transformation. This should include the roadmap exercise, journey mapping, change management aspects, driving collaboration between IT and business, among others.
Head of the Labor and Employment Practice at Berkeley Research Group, and Neil H. Jacoby Professor of Management, Human Resources and Organizational Behavior at UCLA Anderson School of Management
With the digital transformation, we are seeing a repeat of the history of what companies have done throughout the ages as something new develops. This has occurred many times before. It is just now happening in the digital space. For example, there was a time when computing became ubiquitous enough so that companies had to decide not whether they should buy a computer but what type. Many made missteps. They did it in fits and starts, and often followed some firm that was thought to be an industry leader only to learn that strategy didn’t work for them.
So what most companies then do after making such mistakes is to retain a consultant or two. Or they may decide to hire an expert. Companies now, for instance, tend to hire a new web-design specialist. Or they do some combination of both, and if they really want something tailored to their firm, they will end up spending some significant money so that the solution is not just off the shelf.
In terms of the outsourcing model, it sounds like a labor-cost savings model. But if you are only focused on labor-cost savings then what that tells me is that you don’t have a strategy. Cost is one side of the equation — revenue is the other side. This is why companies that try to downsize their way out of problems generally never do. Anybody can come along and cut costs — including labor costs. But can you increase the revenue you are getting from customers? Can you add customers? Can you increase your retention rates?
So, yes, you may want to outsource work. You can get it done more cheaply, but what’s critical is that you can get more of it done. And you can perhaps have greater control of it.
Managing Director at Alsbridge
One critical mistake is to underestimate the size of the task and the risk involved in moving from legacy systems to standardized, cloud-based, as-a-service digital models. Over the years, most enterprises have customized systems to the point of no return. As a result, while an “all-in” approach to digital is appropriate for many business processes, a wholesale rip-and-replace strategy is potentially catastrophic if something goes wrong.
Another mistake is to underestimate the level of resistance that will arise — the reality is that people don’t like change, and whatever the stated benefits of moving to a digital model, there will be a significant level of “but this is the way we’ve always done it” in response. Because of these risks, the transition from legacy to standardized digital should be a step-by-step process and part of a broader, long-term sourcing strategy. This strategy must include proven and solid change management, governance and transition processes, effective communication and organizational design structures and a clearly defined vendor management function.
A partnering strategy is also essential to successfully executing the level of change that will be involved. Here, the role of vendors must evolve from that of a customization and maintenance shop to more of a collaborative integrator.
AVP Global Data Center Practice at Zensar Technologies
The value of outsourcing comes through the agility and scale enabled by outsourcing to the Cloud, the economies of scale which can be gained by outsourcing operations to maintain or manage legacy equipment and the productivity realized by modernizing from systems on premise to hyper-converged solutions. Management of this hybrid IT environment can be either the mandate of the enterprise or handed to a managed services provider. The value of taking any — and all of these steps — is freeing up technical talent to focus on IT for their enterprise clients (and re-training or releasing those with legacy skills sets no longer required, i.e. for siloed server, storage, network environments).
Outsourcing the infrastructure to maintain the DevOps environment is fine, as is augmenting the development as necessary for non-core work and where demand may outpace budget. But the essence of innovation that drives the work should stay in house. More than getting this balance wrong, however, one of the most common mistakes is staying with the status quo and trying to work from a top-down approach only. The digital transformation must be viewed by the whole organization as the new normal.