An operating model for digital innovation – transforming organisations for new value (PART TWO)

This article focuses on how to operate as a responsive, iterative, adaptive, and value-driven business. It provides business leaders with a framework of the critical capabilities required to deliver sustainable innovation—the essence of digital transformation.

In Part 1, we covered why reconfiguring an organisation's operating model is necessary to overcome the common obstacles to innovation success: slow decision-making, conflicting departmental goals and priorities, risk-averse cultures, inflexible systems, fragmented processes, and silo-based knowledge and information.

Here, we discuss five key complementary operational capabilities that, when implemented will drive innovation delivery across the organisation and create the modern digital operating model.

1. Management alignment around creating customer value and more flexible ways of working

A laser-like focus on customer value and how the organisation works, thinks, and collaborates to deliver is the cornerstone to success. Why? Because improving customer value (benefits to the user) is the key driver that will lead to improved ROI (benefits to the business). It is the glue that unites everyone and provides a clear sense of common purpose.

A change in performance measures, i.e. from monitoring what is being created (output) to the value being created (outcomes), can be a challenge for many established companies as existing strategic decision-making, budgeting processes and performance evaluation methods need realigning. For example, a company needs to shift their focus from 'How will 'X' impact our bottom line?' to 'How will 'X' impact the value we deliver to our customers?'

Successful innovative companies are rethinking their management approach to ensure everyone aligns the way they work behind producing customer value.

The best results come when functions like Finance, Marketing, Legal, Compliance and Risk find ways to avoid rigid budgeting processes and formal approval policies and start adopting agile practices. The better they became at this, the more they reduced the time and money spent on initiatives that do not deliver value.

Functional experts with different skill sets work closely together full-time, developing innovative solutions and conducting rapid test-and-learn experiments.

It minimises inefficiencies created by departmental handovers and allows people to learn about the work, priorities and motivations of others in the organisation. They understand the bigger picture and how their actions affect everyone else, and drive value.

It is critical to these teams' success that they can work autonomously, own the products/services journeys, run experiments, and be empowered to make decisions to achieve outcomes. This does not mean a 'no rules' situation. Business leaders provide the?why?(clarity on strategy and goals) but delegate the?how.

Cross-functional teaming is one of the most impactful changes an organisation can make to increase customer focus and speed-to-value. However, companies can struggle to set up and run such teams. Existing siloed structures (product, sales, IT, marketing, etc.) and functional heads have their targets, budgets and priorities, resulting in conflicting interests.

There are different ways of dealing with these constraints. For example, a company can make cross-functional teams the primary form of its organisational structure but removing all functional units is very difficult, and unnecessary. An alternative approach is to create fluid structures so people can move into various roles and teams alongside the traditional vertical structure.

Retailers frequently use data to create customer value, i.e. differential personalised experiences. Manufacturers use data to provide predictive maintenance or take preventative actions, increasing service levels and providing information as a value add to customers.

Furthermore, cross-functional product teams need data to make quick decisions on what to do, when, and when to stop doing something if it is underperforming.?This requires feedback mechanisms between the front-line, back-office operations and the product teams. The abundance of data generated by daily activity needs to be automatically collated into user-friendly dashboards and reports to inform the 'test-learn-refine' process.

Organisations typically have data scattered among disparate silos, often caused by systems that hoard data. Accessing the data can also involve considerable bureaucracy, red tape and friction. This may be appropriate for controlling protected data, but in many cases, it is because data is locked up in multiple systems and controlled by different teams.

Reporting data and its infrastructure should be considered part of the digital innovation and owned by the cross-functional product development team. Reports should be available to everyone (ideally, 'self-service' access) and provide a simple one-page summary of results for quick value-based decisions.

'Fail fast and learn quickly' depends on the speed and efficiency of data feedback loops.

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4. Platform architecture which allows for adaptability and frequent change

Flexible modular architecture is a vital component of a modern digital operating model. Platform architectures using microservices enable organisations to get products and services to market faster by allowing cross-functional teams to develop, test, problem-solve, deploy and update services independently.

Many organisations are still lumbered with monolithic applications with centralised, multi-tier architectures, making changes and additions difficult and costly. These challenges can be overcome by building modular technology for commonly shared capabilities across multiple customer journeys and running applications in the cloud rather than owning all their infrastructure. This brings cost benefits as well as speed and flexibility in provisioning, scaling, and monitoring computing resources.?

Business leaders must collaborate with technology teams to determine legacy modernisation strategies that support the broader business strategy and which systems must move faster to deliver customer value.

Modern systems combined with software development techniques (detailed below) reinforce each other, delivering massive productivity benefits.

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5. A modern approach to software development to get new products into customers' hands quicker

Based on the same principles of agile to deliver incrementally and frequently, innovative businesses have adopted Continuous Delivery and DevOps practices to streamline processes.

Unlike the traditional approach, in which dedicated teams often work on discrete technology functions, the modern Continuous Delivery method means a team, aided by the automation of repetitive manual tasks, can release solutions and changes at the push of a button without waiting for lengthy testing and release cycles.

They also embrace DevOps practices and culture. In a traditional setting, building the software and managing and maintaining it in run mode are two different activities with different skill sets. In DevOps, everyone is responsible for service provisioning and failure.

Without this and the other four foundational capabilities, innovation will likely be slower to start, harder to sustain, and less integrated with the rest of the business.

All five capabilities feed into and off one another. They should?not?be approached as separate sequential initiatives but as an integrated transformation program.

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THE IMPLEMENTATION CHALLENGE

Many organisations invest in setting up product teams, internal innovation labs, or corporate new ventures and begin building a minimum viable product (MVP). When they start engaging the rest of the organisation, which they must, problems rapidly emerge—business-as-usual ways of operating and new digital best practices struggle to mesh.?

Without a holistic approach to transitioning the organisation to a modern digital operating model, the innovation strategy will continually encounter obstacles. However, companies have finite resources, bandwidth, and funds. A broad, 'big-bang' transformation is neither feasible nor desirable.?

The alternative is to take a 'narrow-slice' approach – running vertically through the organisation from top to bottom, front line to the back office, enough to be containable but large enough to demonstrate value creation through adopting a new working method.

This approach is more manageable. It enables companies to stress-test the impact of transformational operating methods and implement and adapt them iteratively.

Innovating through a vertical narrow-slice

Start with the end-to-end customer journeys, existing or new products/services. Pick the areas that present the most significant opportunity for improvement, i.e., resolving customer problems/complaints, signing up and onboarding, cross-channel sales and servicing, radical personalisation, removing complexity, automating low-level tasks and delivering cohesive solutions.

Use customer outcome statements to define how you intend to deliver customer value, i.e.' I can do/get/see….'?and assign measurable indicators to determine if customers are achieving these outcomes.

Next, look at the value stream from front to back office supporting the customer journey - the people, processes, technology and data feeds. This is your narrow slice and focuses on a) unlocking customer value and, b) implementing the five operational capabilities discussed above.

Restricting implementation to selected functional units is not a narrow slice. It may optimise specific parts of the business but will fail to achieve the desired innovation outcomes or learnings on how to drive sustainable change.

Things will go wrong. When this happens, it is tempting to blame the new ways of working rather than seeing them as a by-product of change and coming to terms with the new operating model.

Establishing the core capabilities across the narrow slice will take time. Still, it will build lasting new confidence by convincing management, employees and stakeholders that innovation can deliver value and justify the investments.

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Making it happen

This article shows how organisations need to operate to deliver sustainable innovation. The process for transitioning to a modern digital operating model will vary depending on the culture and digital maturity of the organisations. However, here is a checklist for making it happen:

a)???? It requires dedicated funding.?71% of companies surveyed in a recent study we commissioned, conducted by Forrester, used a dedicated digital transformation budget.

b)???? CEO and senior executives must align the middle management behind customer value delivery, value success measures, rapid experimentation and iterative product/service development.

c)????? Function and business unit leaders are crucial in achieving broad buy-in and inspiring peers with the innovation vision.

d)???? Legal, Compliance, Finance and HR must be involved early to work out how to adapt existing policies and processes to new ways of working within the thin slice.

e)???? Someone needs to coordinate the process across the different functions and silos, pulling together the right people and capabilities. It's not a project to manage; it's a mission to drive. Don't assume your business-as-usual teams will simply pick this up.

f)????? Current talent, behaviour and culture analysis, and the appetite for change must start at the beginning of the engagement. This should be part of an ongoing change management program to make new working practices stick.

What are your thoughts on building digital innovation capabilities? What are your experiences and challenges? And more importantly, how are you addressing them?