Digitization – Digitalization

Historians estimate that Alan Turing and the code-breaking operation may have helped save millions of lives by shortening World War II by two to four years. Truly transformational!

I started my career as a software programmer, but it didn’t take me too long to realize that my interests lie elsewhere. That’s partly attributed to the fact that like many other software engineers at the time, my first programming assignments were ERP systems (General Ledgers, Payables, Receivables, HRMS etc.); and I was more intrigued by what business problems those systems were solving rather than coding them in C++. Jumping into the consulting bandwagon soon after, I realized how frustrating it was for a programmer-turned-business analyst to convince small businesses (SME) to stop using paper-based ledgers and replace them with a best practices-based financial system. I’d often wonder how it’s possible for someone to not comprehend the value that automation brings. Accuracy, time-saving, transparency, and best of all, insights! What kind of businessperson or leader would not want such benefits? Many years later, I’m compelled to ask the same question. This time, however, in the context of enterprises’ approach to digitization and digitalization. The underlying answers or reasons seem strikingly similar to the dilemmas years ago.

Process Automation vs. Process Re-engineering

In many cases, the answer to that question is an amalgamation of many different issues – technology literacy (or lack of), technology phobia, lack of ROI visibility, risk aversion, and so on. But two issues that clearly stand out in my view include leadership and culture. Leaders, even the less technically literate, must be willing to embrace change, to learn themselves, and to experiment. Transformational leaders also know how critical it is to inculcate a culture that is nimble enough to accept change. Over the years, by choice or compulsion, a big number of organizations worldwide have adopted automation of some sort. Broadly speaking, most companies in this enterprise automation era (which is still ongoing, by the way) took two broad approaches to automation – process automation and process re-engineering.

Almost any consulting exercise begins with an “as-is” analysis – what sort of steps are involved in the process; which actors are involved in each step; how many errors or defects usually occur at each step; how long does it take for each step or the process as whole, etc.? Process automation is usually born out of necessity – the necessity to leverage computer automation to increase the speed and reduce errors. This necessity would mostly be identified by the leader of a process or function who would have reached a conclusion that their process was becoming too labor-intensive, expensive, error-prone or all of the above. Imagine the simple yet laborious process of employees claiming their expenses. The employee retains all the physical receipts; fills out a form to claim those expenses, often with an explanation of each expense; then hands the expense claims to his managers. The managers would aggregate expenses from multiple employees; (ideally) validate each claim, and tally the amount claimed and the amount on the receipts; make a judgement on whether a claim seems valid or not; then pass the same plethora of paperwork to accounts or payables. The accounts team would re-validate each expense (ideally); making judgments on whether an expense seems too high for that category; sort and file the expense reports and receipts for audit purpose; classify expenses for manual reporting etc. etc. (even writing about it makes me sleepy). An expense reporting system would be a no-brainer for any leader, who would want to save her managers’ valuable time, and have a much better visibility of where her company is spending its money. In most cases, process automation inherently presumes that the existing process works, even with all its inherent inefficiencies. The result is having a system that does essentially the same steps…only better! That’s where the limitations of process automation kick in – where it achieves some efficiencies, it also adopts some of the inherent problems of the legacy process.

Process re-engineering exercises are geared more towards rethinking the whole process, sometimes even questioning if the process’s existence makes sense in the first place! Process re-engineering is not necessarily dependent on technology, but seems to have gained popularity due to the needs of adopting best-of-the-breed automation software for implementing best practices in enterprises’ different processes. Examples may include SAP for manufacturing or supply chain, PeopleSoft for HRMS (HR management systems), and Siebel for CRM (Customer Relationship Management), to name a few. The biggest difference between simple automation and re-engineering exercises is that the latter require rethinking each step of the process to see if it makes sense; and cut off inefficient steps or repurpose them to not just improve efficiency, but to enhance the overall business. When done right, process re-engineering brings transformational results. In the expense report example, if the organization re-engineers the process to omit manager approvals for expenses below a certain threshold, it may save line managers a lot of precious time and help focus on core business rather than administrative work. While this is a trivial example, companies have reported cost savings or top-line improvements of millions of dollars attributed to business process re-engineering projects.

(Here’s a case study I picked up online if you are interested in learning more about business process reengineering projects)

Fast-forward: Digitization or Digitalization?

The automation versus re-engineering analogy is critical in understanding the modern-day discussion of digitization versus digitalization. I felt compelled to write this post because I’m convinced that many people do not see the distinction between the two. The notion that both are the same or interchangeable terms couldn’t be further from truth.

Like automation, digitization in the enterprise world is born of out of necessity. In my view, automation and digitization are synonymous terms. The term digitization is a reflection of the increase of digital technologies in our personal and corporate worlds. Automation, today, is not merely transfer of paper-based transactions to your desktops applications. Laptops, mobile phones, wearables and other IoT devices are a norm today. Such a significant number of our interactions today rely on digital technologies that it’s impossible to separate digitization and automation; whether it’s human interaction, man-to-machine interaction or machine-to-machine interaction.

Digitalization or the infamous “digital transformation” refers to a cultural shift, much similar to many business process re-engineering exercises. But unlike process re-engineering, digital transformation is more deeply-rooted in digital technologies. Organizations that have built their business on digital services (Google, Uber, Airbnb, Facebook etc.) are built ground-up with a digital culture. The same holds true for many small businesses today – whether their business plan is sound or not, most would already have plans for having a web and mobile presence, having some social media presence, utilize digital collaboration tools, considering digital modes of payment etc. Such organizations don’t have a digital culture issue, and hence “digitalization” is not even a concern for most. The problem is more evident and prevalent in older organizations. Organizations that have spent decades using manual processes do not have a culture of thinking digital inherently. Getting rid of this inertia is through a transformation or more aptly put “digital transformation” that doesn’t just look at digitizing processes, but rethinking everything ground-up! To finish the loop on the expense reporting example, imagine an employee just taking a picture of a receipt, and then having nothing to fret about for claiming that expense! Today, the advancements in OCR and AI technology can radically change the way expenses are managed; not requiring any or little involvement of managers or account departments. Imagine a mobile app that could take an image of a receipt; automatically separate the amount and date, and categorize it (hotel expense, meal, rent-a-car, etc.). The back-end of this application could automatically validate most of these transactions against company rules; file the expenses on a predefined time; and issue the reimbursement. Come to think of it, Visa or MasterCard could actually provide such an app to work with their corporate credit cards.

Why care?

The mental barriers and challenges of digitization and digitalization are very similar to the ones faced by the automation-phobic businessmen of yesteryears. In present times though, the challenges can be even more overwhelming because of the many nascent areas to explore like AI, blockchain, IoT, VR, AR etc., each having transformational potential in its own. Challenging as it is, change is imperative! And there are simpler ways to address and comprehend transformation projects.

The nuance between digitization and digitalization is very important to understand. Companies with a legacy mindset and culture are very likely to mistake digitization for digital transformation. The result is a likely set of KPIs that may bring about automation-like piecemeal benefits, but nothing truly transformational. Imagine a company that has built an amazing digital product or service that is targeted for digital customers. Now imagine if these customers have to physically walk to a shop or franchise to buy or activate this service. Kaput! The service has already fallen flat on its face! While this “digitized” service can easily be dubbed as a product development flaw, such an example highlights the lack of a digital culture that eventually cascades into internal processes or customer-facing offers that lack the digital acumen. When many such failed initiatives within an organization combine, the result is one gigantic failure that leave the stakeholders questioning if their faith in digital transformation were misplaced.

Organizations that set out on a path to digital transformation need to be cognizant about the pitfalls of not knowing the difference between digitization and digitalization. “The bombe”, Alan Turing’s machine that broke the Enigma machine’s codes, may have been instrumental in saving millions of lives but only because it had a team of linguists, scientists and mathematicians, all working as a cohesive unit; and all working towards a single goal. Digitization might be the key to unlock new benefits of automation, but if organizations truly want to achieve transformational results, the piecemeal digitization efforts must have a common cohesive goal – to digitalize the business, not just digitize it! 

DISCLAIMER: All the cool views presented in this post are my own, and do not necessarily reflect the views of my past or present employers.