Deciding Where to Establish Digital Initiatives

Author: Irina Postelnicu, Innovation Roundtable?

To keep ahead of market and industry changes, companies must continuously expand their core business into new value propositions, including digital initiatives which are essential for future industry success.

A poll done at the Innovation Roundtable? Summit 2018 uncovered that 58% of respondents consider that digital initiatives should be managed within the business units, while 42% answered that the initiatives should take place in a separate organization for digital transformation. The fact that the split between the two sides is almost down the middle shows that both hold positives, but what are their negatives, and what do experts say concerning them?

In the following, the Innovation Roundtable? Reasearch Team delves deeper into these issues and combines perspectives from our workshop speakers to gain insights and best practices.

Developing Initiatives Inside

Placing digital initiatives inside organizations can prove tantalizing, especially for traditional companies. It can seem both more practical and less time-consuming than developing outside divisions, as well as ensuring closer oversight by the core over what is happening within the division. However, since inside digital initiatives are closer to the core, the risk is that disruptive initiatives get stifled or stopped within the chain of command. Therefore, instead of developing true digital innovation, inside initiatives risk providing only incremental or adjacent ones.

At a 2018 workshop hosted by 3M in London, Greg Anderson, Vice President of 3M, argued against spreading digital initiatives across multiple internal divisions. Without developing a dedicated unit for digital initiatives, the different divisions will only follow their own path to achieve a competitive edge amid digital disruption. This can lead to the company developing disjointed efforts, which subsequently result in bottlenecks or overworking different divisions. In Anderson’s view, the solution is to have a single entity in charge of digitalization that works cooperatively with business divisions and brings the required governance to the transformation efforts.

Placing Initiatives Outside the Organization

The more disruptive an initiative is, the more it can make sense to place it outside the company in an environment that stimulates its exploratory potential. The key, however, is to not separate digital initiatives from the rest of the organization. When digital initiatives are separated, they risk ending up without support or resources, making re-integration harder once they mature.

Within a presentation at the Innovation Roundtable? 2018 Summit, Mohanbir Sawhney, Professor at Kellogg School of Management, stated that he considers that organizations should aim to decentralize decision-making in order to improve their agility and scalability. Digital initiatives, therefore, should be placed outside organizations within autonomous, self-governing units. This ensures teams can have a ‘startup mentality’ strengthened by speed but also the internal support necessary to grow.

Fundamentally, placing initiatives in autonomous teams outside companies, ensures that the teams work within a framework of enabling constraints – sufficient restraints to maintain organizational alignment, while allowing for plenty of space to experiment. This provides teams with a balanced amount of friction and freedom necessary for innovation, which is harder obtained when initiatives are placed within organizations.

Building on these ideas, Gina O’Connor, Professor of Innovation Management at Babson College, at a workshop hosted by W.L. Gore a few months ago, made a case for developing structural ambidexterity within the organization. This is characterized by the organization having two departments tasked with doing the exploration and exploitation, respectively. As the core and digital breakthrough divisions constantly communicate, mainly through leadership and resource sharing, feedback loops develop within them. This enables better communication between the exploration and exploitation sides of companies.

However, other connection points can be brokered as the divisions develop. This back and forth passing of information allows digital initiatives to be continuously reconfigured for optimization, pivoting, or termination. Another benefit to using structural ambidexterity is that it permits as much flexibility as needed, which means that the right metrics, team roles, and reward systems can be put in place.

Outside Initiatives in the Ecosystem

Another way of placing digital initiatives outside is by leveraging an internal venture arm, but in close collaboration with a network of external partners. At a workshop hosted by Henkel last year, Rotterdam School of Management professor of Corporate Entrepreneurship, Justin Jansen stated that this alternative ensures that internal projects benefit from the resources and skillsets in the ecosystem.

This way, the venture arm can maintain a relatively traditional way of doing things internally and then later spin out projects to accelerate the development together with external partners. This ensures that projects are not weighed down by core processes, which enables them to develop in a flexible and collaborative manner. Additionally, since the partnership requires outside considerations, the core must more closely oversee developments, which works perfectly as the venture arm is placed within the organization.

Personalized Hybrid Model

Jansen is not the only one proposing alternatives to the either/or mentality regarding placement of digital initiatives. Within an Airbus-hosted event this year, Fredrik ?stbye, VP of Digital Transformation at Grundfos, stated that developing initiatives internally required putting most of the responsibility for success on the shoulders of the chief innovation officer. If the CIO is overworked or something goes wrong, then the whole initiative folds like a house of cards. As stated above, though, developing outside the organization can also be tricky.

Instead, ?stbye advocates for organizations developing hybrid models of digital transformation, which combine the best features of outside and inside placements. Within Grundfos’ accelerator, teams of seconded resources from the core organization run experiments with real customers - just like a startup would do. Employees must spend at least 80 percent of their time in ?stbye’s team before they cycle back into the core. This setup enables them to become “change agents” and influence the core organization by spreading their newly acquired digital capabilities.

In the end there are many options for companies looking to develop their digital initiatives. Most important, as seen from the above examples, is to apply a flexible mindset when deciding what path works best for your organization: inside, outside the organization, inside the organization with ecosystem partnerships, or a hybrid model. Companies, therefore, should not be scared to develop a framework that best fits them.

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