The Digital Transformation – watch the rug you are standing on!

Why Digital Transformation truly is a paradigm shift and will affect all of us.

Digital technology adoption appeared to be optional for decades in many industries, but no more. In fact, if your job does not require a substantial amount of creativity, deriving complex conclusions or physically moving things, you have every reason to check your back.

So, what is different today?

A number of factors come together to accelerate the current situation from slower evolutionary speed to faster revolutionary velocity. While in the first technical transition from analogue signal transmission to digital, the digitization, distance  or reproduction did not mean a degradation in quality any longer. Digital telephone lines, music CDs or slower data transfers allowed the dissemination of information over long distances or without a decrease in quality. Industries such as media, telecommunication or banking/finance used digitization to expand and improve their offering. 

During the digitalizationphase, technology improvements in processing power and data storage were used to penetrate a wider range of increasingly more complex applications. Web 2.0, pre-defined strings of activities enabling simple dialogs, sophisticated calculations allowing not only syntax checks but increasingly semantic analysis, the paperless office and early simple solutions of cloud storage. 

While digital technologies in the form of internet, email, social media or online purchases appeared to be optional for many businesses for well over a decade, the situation has dramatically changed over the past 3 years. So, why is this digital technology different today from previous ones?

Well, mainly because Digital Transformationis not primarily a technology change, it is a business operations and process change. What does that mean?

Most people approach Digital Transformation from a technology perspective, because it is much easier to pinpoint gadgets and geeky new applications. There is a large community repeating and amplifying technical jargon and three letter acronyms. Anyone who has ever changed industries may share my observation that the same three letters can mean very different things depending on who you are talking to. However, the technicalities are the mere preconditions. They are not at the core. After technology, there are two more steps to take to embrace the Digital Transformation. These are the process digitization enablers and the resulting impact on how business is conducted globally. 

Digital Transfomation Model: 3 core steps and 10 subsequent areas impacting business today

1.     What constitutes the Digital Transformation technically?

·     Internet Protocol (IP) everywhere – digitization at work

·     Ubiquitous hispeed access – broadband fiber and wireless changed everything

·     Cloud Technology – when owning hardware slows you down

·     Internet of Things – machines talking, bots, deeper automation

Examing each of the points a little closer will shed some light on why things happened the way they did.

Internet Protocol (IP)

A key precondition to provide superfast data highways was the ability to turn all kinds of traffic categories (voice, video, data) into one common format. The digitization of analogue signals especially for voice and data turned all traffic into a string of zeros and ones making it possible to effectively mix all types over one line, yet exactly separating them at the destination point into each group, call or connection. The Internet Protocol became the universal methodology to distinguish the traffic types in different logical groups sharing one wire or wireless connection. 

Ubiquitous hispeed access

Already in the 90′s, wavelength division multiplex (WDM) dramatically decreased the technical challenges while tremendously increasing data backbone capacity for IP traffic. For a period of 5-7 years (2000-2007), the technological advancement had outpaced the demand. While the mobile networks got faster, traffic did not increase. That changed when the iPhone was launched and suddenly a handheld device became a useful or fun tool to connect to other users, music or the broader internet and related applications. In fact, AT&T Wireless offering the iPhone initially exclusively, was overrun by wireless data demand and had to invest in data backbone increases linking all their cell phone towers. And the race was afoot. Today, we see the rapid evolution via 4G and 5G networks offering speeds competitive to landlines.

Cloud Technology

Storing centrally is not a new thing. When I attended engineering classes, we were still trained in Fortran entering code on terminals connected to a mainframe processing unit, a server in today′s speak. Cloud uses ubiquitous hispeed access to offer storage and processing in dedicated datacenters. 

The concept was adopted in two different ways: private datacenters, you own the hardware and network and operate and control. Public datacenters offering cloud as a service. This offered already opex driven business cases for software application developers to introduce use based business models instead of license or seat based models. It became very attractive for users with varying demands for storage and processing capacity. But it did not make it to mainstream. Risk management, uncertainties about data protection and security held the cloud back for many years. It is different today – why, we look at later.

Internet of Things, IoT

People are not optimized for processing speed, they are optimized for creative problem solving. The myriad amount of transactions waiting for completion every day and the sheer number of devices connected to the internet have outgrown the processing power of people at the price point the very same people find acceptable. As a result, the communication between devices requires automation. 

With an almost infinite number of applications, IoT has become with everything and nothing at the same time. The hype around IoT fostered the big numbers: >25 bn devices connected by 2020, etc. True, but they all want and run different things. So, how to figure out an application that provides a decent market size and growth perspective with a limited number of partners providing connectivity, security and authentication? Putting together reliable workflows and processes with limited complexity and the real opportunity to make money on a sustained basis was limited. So, the field was left to the geeks and only slowly the adoption of specific offerings that met above criteria was achieved. Industrial IoT, IIoT was born, but it all was a lot slower and even today, many companies think there is an opportunity in IoT for them, they just don′t know how to tackle it.

2.     The process digitization enablers

·     Artificial Intelligence – how intelligent is it and how intelligent will it be?

·     Robotic Process Automation – it is the process, stupid

·     Virtual currencies – Bitcoins, who needs physical money?

·     Blockchain – inherent security in an unsafe world

Artificial intelligence

The increase in processing speed allowed the transition of simple repetitive tasks to machines. Increased computer processing power enables more complex algorithms and provides for better solutions for more complex tasks. It is increasingly possible to process sequences requiring flexible decision criteria. As a side note: once a particular task has been mastered by machines, it tends to disappear from the list of activities that qualify for being considered Artificial Intelligence. This happened to written character recognition, while automated face recognition is likely to be next and in the near future, speech recognition might be up for debate. As such, AI tends to be the thing that has not been achieved yet. 

Current applications include autonomous driving, improved cognitive capabilities in complex games such as chess or Go or the intelligent management of content delivery networks. Essentially, the development of agents, individually programmed activities, which can be combined from agent libraries to perceive its environment are a precondition to allow machines to perform more complex tasks. I would expect an exponential increase in development speed requiring individuals to redefine the meaning of life long learning.

Robotic Process Automation, RPA

Technically, RPA relies on the advancement of AI agents in combination with processing and information availability to execute longer, flexible and rules-based activities deemed simple and repetitive for most human beings. The elimination of this time-drain and the focus on higher value tasks by humans is one of the big prospects of RPA. Eventually, it is also expected to eliminate a significant amount of lower level activities and consequently jobs. 

The real benefit of RPA is however not in the mindless automation of a particular task. It resides in the opportunity to create a better, more challenging workspace where humans contribute what they are best at: creative problem solving by application of cognitive abilities. To do that, process understanding and optimization are the key factors to enable reaping the rewards, not throwing technology at it. Or in other words: you don′t have a process today and arbitrarily or worse, accidently, generate value, RPA will not help you unless it triggers a deeper understanding of your value creation. There is not machine learning or AI before human learning.

Virtual currencies

Every one dollar bill′s actual value only represents a fraction of its nominal value. We believe, we trust that this piece of paper is worth one dollar when we go into the next shop to pay with it. For decades this trust was created by the government backing the value with an equivalent in precious metals such as gold. But trust is not a law of nature. It is like human laws and evolves over time. When the gold standard was removed, trust was established that the system would continue to work. 

Yet, we still tend to trust what we know. And currently, the trust in money is mainly a thing of proximity, exposure and experience that our governments will not screw us. Having an unknown group of people issuing money requires the build-up of trust and depending on how they behave when life will get difficult for them. Will they take shortcuts at everyone else′s expense? To mitigate the lack of trust, virtual currencies increasingly cooperate with government or central banking facilities. As such, virtual currencies are fuel for the Digital Transformation, less of a precondition.

The challenge going forward is the convertibility of virtual currencies into “real” currencies. As a matter of fact, it is actually the fluctuation of such convertibility that is creating anxiety. The convertibility of currencies is mainly driven by the value creation of the area in which the currency is used versus the value creation in another area using a different currency. Same as smaller countries are using currencies they don′t issue, they could be using virtual currencies as well. As such, virtual currencies are here to stay unless the issuer breaks the link to the value creation it represents.

Blockchain

Authenticity and transparency are prerequisites for the further expansion e-economies and the use of virtual currencies. Cybercrime, identity theft, loss of wealth or income that only exists in the digital domain are the key threats to offshoring core activities into the cyberspace that require legal authentication and verification. We are back to trust. Blockchain is intended to provide exactly that – a protection mechanism to establish trust.

Currently, blockchain transactions operate at too low a speed for widespread use, but technology will continue to evolve. The promise associated to blockchain is secure transactions that will enable a much wider use of ecommerce and other valuable transfers on the web.

3.     The impact on businesses worldwide

·     Acceleration – strategy of the day 

·     Disruptive business model - >90% of which aim at value chain drain

Acceleration

Company strategies were, for decades, designed with a 3-5 year horizon. Identify the mega drivers in your market, identify unmet customer needs, define and build a product with sustainable competitive advantages. Now, I am not going into the details here that most strategies fail due to lack of implementation and execution, which is an entire topic on its own, but there a lot of the assumptions supporting traditional strategy development, which are increasingly becoming irrelevant considering the speed of change of entire industries. 

The impact on business organizations is tremendous. Culturally, the team has to become comfortable with ambiguity triggered by fast change. It has to develop mechanisms to identify the changes and derive opportunities for innovation before others spot them. Implementation speed is of paramount importance. The increase in business speed is also the primary driver for widespread, rapid cloud adoption. You simply cannot wait for your own IT any longer to figure it out. Same as in contract manufacturing one a half decades ago, horizontalization, best of breed gear and higher volumes drove improved scalability, speed and quality. Waiting may threaten the very existence of your business.

It also creates another phenomenon. When the current strategy becomes obsolete, existing businesses, products, machinery and distribution channels become obsolete too. A new core competency needed is the ability to divest at the right time and move on. One way is to pull out the money and leave the team behind. The way I am advocating is to change the culture: curiosity, innovation, critical dialog, strong cooperation and trust are the ingredients of a culture that foster change, learning (especially from mistakes), innovation and continuous improvement. If this description does not remind you of the organization you are in today, it is time to watch your back. If you run the organization and you don′t recognize it, it is high time to take action, because you have to be ready to compete with what is up next: the disruptive business model.

Disruptive business model

A key element of any strategy is the value created it provides to the respective customer(s). This value creation is typically embedded into a value chain. How much of the value creation process you and your company owns varies, the more the better. Business disruption occurs when new technologies change what customers perceive as superior value for them. Business model disruption occurs when technology and process optimization are used to drain value from the entire value chain at the expense of incumbents. 

Most of the business model disruptions which occurred over the past 5 years where marketplace or platform driven. Amazon, Airbnb, Uber or price comparison platforms managing the change of the utility supplier for you. Additionally, these models can also offer customer experience value, plain old cost value or improve customer experience through a better platform. All three approaches essentially take out margin from the value created in the process or significantly increase the convenience factor. Most really successful disruptions combine two or even all three advantages. 

Countering a disruption can only be achieved by proactively fostering an innovative environment, monitoring your business segment with a good dose of paranoia and improving the speed of strategy development and implementation. Beating the disruptors at their own game. But it is a profound endeavour.

When Amazon started to sell datacenter capacity, it outscored smaller competitors in size, scalability, implemented governance, risk management and security. A customer experience disruption. As of today, platform disruptors are beginning the resale of datacenter capacity like mobile virtual network operators such as Virgin used to do it pressuring the Amazon margins of their most profitable offering. You can mix and match your datacenter needs using Azure, AWS or the likes all from one datacenter platform supplier. If you enjoy a cosy place today – expect unwanted company soon.

Conclusion

Digital Transformation is foremost a business transformation using digital technology. It significantly cranks up the speed of change forcing organizations to be much more nimble and fast. If you cannot create a company culture where everyone seeks innovation that may even pose a threat to their existing jobs and readily embraces the necessary changes knowing that the company will do its best to train and prepare everyone for the next role in a new business, people will neither seek innovation nor will they support change. Preparing you to become prey of the next disruptor.

Stay curious - stay relevant.

@mktginouterrim – marketing | sales | strategy