The Shift to Digital – How to Transform Your Organization

Come up with the future by yourself or ask help from someone outside to do it? Digital transformation is currently hitting the media business, but retail, banking, logistics, insurance and even the energy industry are starting to feel the impact as well. This article gives you tools to start thinking about how to kickstart or reorient your transformation.

It's part of our series on demystifying innovation for media (and the surrounding industries that are becoming more like media companies in their own right thanks to changing distribution and customer relationships). The series also continues in the form of a free webinar Beyond the Buzzwords: Creating Value in Digital Media on the 15th of September. We still have a few seats available, so sign up for the lunch session here: https://www.infuse.work/webinar-beyond-the-buzzwords-creating-value-in-digital-media/

Last week we discussed the business models of five winners in the new media business and the importance of thinking about innovation beyond your obvious product. Most of the questions I received in private after writing it were the same: how should our corporation reorganize to be able to do this? What kind of organizational model is the key to achieving a solid digital transformation?

Let me start with disappointing news: there is no one answer you can take off the shelf and implement. Some companies swear by innovation done “at the business”, some companies organize innovation into separate units (often titled special projects or Labs) and some companies simply decide to outsource their innovation approach. Each option has it’s pros and cons, and I’m going to look to look at them through three lenses: culture, skills and business.

Culture

With culture, I mean the readiness of the company to do away with it’s existing structures. Culture is often a function of leadership – of an individual or a group of leaders getting people to believe in their vision – but it’s also a matter of trust (in organisations without trust people fear for their role if status quo is altered by the new), of flexibility (not invented here -syndrome is also often exhibited by people who fear that their jobs or promotion prospects are at risk if they don’t get the credit for innovation) and of transparency (if people don’t have an understanding of the business environment, they are not able to innovate). Without the ability to break down silos and pierce the traditional structure, a corporation is not able to transform it’s business model and it tends to get stuck into doing product innovation with inadequate structures around the product.

Skills

With skills, I’m quite practical: many organisations simply have built a base of skills that are necessary for keeping the existing “performance engine” going, but don’t apply in the new business the company finds itself in. Similarly, they haven’t really recruited or trained enough to make sure their people are up to the task of building the future. How do you turn your old school analysts into data scientists or growth hackers? Is your designer capable of lean UX; does your project manager still swear by waterfall? At the same time, skills is also a question of resourcing: how do you allocate the best people in the company – are they focused on optimising the existing business or will you put them on the front lines? Of course, this is one of the main reasons corporations look to outsource part or all of their transformation – with obvious impact on culture and business.

Business

With business, I’m looking at the overall future impact of the transformation on the business the company is doing. Many companies agonise over the question of disrupting the “performance engine” with innovation (although, to be honest, I’ve seen more executives fretting becoming too-innovative than I’ve ever seen too-innovative organizations – if you have an example of those, please share!).

The question is how do you split your investment in your innovation portfolio between the three horizons: incremental updates (exploitation of existing products), expansion to new opportunities and the exploration of options for the future. Companies that focus their attention on the first horizon often do very well until they experience a slide into a death spiral, as their portfolio becomes obsolete. At the same time, investing in the second horizon often leads to disappointments due to too-high expectations (starting by aiming for the moon, also tied to the decision-making process which expects business cases with a big hockey stick), but often also let down by weak execution or a bad choice of projects. And the third horizon requires a persistence not often witnessed in quarter-driven management.

1) Transformation at the Business Level

There is some elegance in thinking that each product should own their innovation portfolio and makes sure they improve their offering while also maintaining a roadmap that enables future growth.

In an ideal world, this model is of course how it should be. With the business owner in charge of decision-making and responsible for the budget, governance shouldn’t become a leading issue. With the team being close to the customers, they should be able to respond to what’s happening in the market. And the development people really love the product and feel ownership for it, as they’ve been nurturing it for a long time. When recruiting, new people step into a well-defined culture that feeds off it’s own energy.

Why is it then that in the feedback to my previous piece on the media business models most of the questions were centered around the problem of why didn’t the development team at the business drive innovation in the market and transform organization? There is an inherent tension in creating the new, while also maintaining and nurturing the old.

Culture Complexity

First, let’s look at the cultural challenge. With silo’d organizations, you end up making a product development team that may or may not include even the key stakeholders. One team I was appointed to lead first was only responsible for the new business models, while another team in the company looked at the content and UX of the service, and one more was in charge of the technology. That’s as silo’d as you can get – and you can imagine the squabbling and internal waste of energy, which was only solved by reorganising the teams into one development unit. Still, tensions with other silos such as marketing, strategy, legacy product leads and so on remained, and the attempt to solve them were bloated steering committees that watered down innovation by protecting their turfs or by being unable to fit tasks into their busy agendas. Cultural challenge one: lack of focus in the organization.

Also, at another business later on, we could see “not invented here” becoming a key problem. For that team, they were so convinced that their approach and ideas were right that they turned very inward-focused. Bad customer reviews were explained away by blaming anything but the product, and metrics became focused on vanity numbers (how many platforms are we on instead of what platforms should we be on). Tacking on features instead of focusing on the user became the norm, with one manager even saying “the product is soon completed after we add this or that new feature”, instead of accepting that you need to evolve following the customer.

Refreshing the Skills

From the perspective of skills, the model of doing innovation at the business is a huge challenge. Taking into account the good (excited, committed team) and bad (ivory tower) of the cultural factors, people turnover can be low and result in atrophy, and sometimes even the need for new skills and attitudes is not recognised as the development teams plods along with a conservative roadmap. 

Business-wise, a lot starts with good or bad targets. Often the development team is set targets that are incremental: this many new users, this much increase in usage time. Chasing risky things like new segments or even abandoning non-profitable activities doesn’t often fit in this model. Especially in a business that’s under pressure the targets shift into making the short-term numbers, often focusing on optimising for the bottom-line and paralysing even the most effective of development organizations. Because the roadmap gets dictated by the business owner, finding the space for exploring beyond the first horizon is unlikely at best. Things also turn into a self-fulfilling prophecy: when investment in transformation is not done, it also leads into a belief that transformation is not possible. 

Grand Design Slows Your Business

Even for businesses that see a need for transformation but try to drive it internally, they get bogged down in large-scale strategic and conceptual thinking, believing they need to have a full picture of where and how the transformation will proceed. An example here is budgeting: by having an annual budgeting cycle – or, even worse, a rolling budget where everything requires complex approval – a transformation effort becomes a slog against bureaucracy. 

However, the model of “innovation at the business” can definitely work, if attention is placed on constant improvement. Methods like open innovation, constant customer development and roadmap prioritization driven by experimentation instead of by HIPPOs (highest paid person’s opinions) can take a team a long way. Especially for second horizon innovations, having an “at the business” team that maintains high customer intimacy and uses that to launch a next generation product is by no means an impossibility. One of my favourite examples is the story of Spot&Shop, an internal venture at Sanoma, launching Swipe&Shop on the side after recognising that their core audience spends a lot of time browsing webshops with suboptimal interfaces. Although Spot&Shop itself could be considered an opportunistic spin off for Sanoma, it was already focused on one product, but was able to create a relevant extensions by understanding the evolving customer needs.

A best practice I recommend is bringing in external experts on a per project basis: by for example inserting a top-of-the-class UX person to team up with your long-established lead designer (who can be involved in the selection process to make sure he/she doesn’t feel deposed) you refresh both the talent and the methods in the organization. By having an agile/scrum coach come in weekly to spar with the team you make sure the human tendency towards process laziness doesn’t slip into the weekly rituals. If done right, it will not threaten the existing team, but makes sure that they don’t slip into an inward-focused mode of thinking and rewards them by continuous learning.

By setting aside an experimentation roadmap and budget (in addition to your regular first horizon improvement pipeline which should be focused on maintenance, not new features unless validated first), you make sure that even your “at the business” team can focus on pilot tests and prototypes. Making sure that the organization understands the difference between an experiment and a product launch, you can try out new business models without sinking too much cost into your innovation efforts.

Finally, doing innovation at the business can at best spark the overall transformation the company needs. By making sure that the whole organization feels involved in the creation of the new, you have a much bigger chance at pulling off a successful renewal than engineering it on the outside and pushing it into the organization later.

2) Transformation by a Separate Department

Right now, starting separate organizations for transformation – often called  “Labs” – seems very much en vogue. The thinking goes: innovation at the business isn’t resulting in a renewal of the portfolio, so let’s organize for a separate unit that takes care of creating new businesses for us (often also driven by the fact that acquiring digital products with proven product/market tends to be prohibitively expensive compared to the cost of setting up your own accelerator/incubator). This category for me also encompasses projects where a major strategic theme gets organized in a separate unit: think how Schibsted organized their mobile and later their TV initiatives for their Nordic media brands.

Looking at this model from an ideal world it makes perfect sense. By putting the strategic projects at arms-length and making sure they have autonomy, you simply bypass the corporate maze and create an environment where the experiment-driven approach can be executed without cutting through red tape. You create a culture that tolerates – or even celebrates – failure & the learnings that can be applied from it, and a culture that is much more fearless than the typical corporate landscape. Business-wise, by accepting that the Lab budget is an acceptable loss and setting a clear governance based on speed of innovation, reporting to an innovation board, you are set free to drive a transformation drive that takes the whole company on a new track of renewal.

Is Your Culture Brave?

Of course, reality is a lot more challenging and getting this right requires bravery from many parts of the organization. Basically setting up a separate team to innovate is accepting that you organize around opportunity, rather than organize by function. Interestingly, this model is what people often quote as Apple using: “it’s a company in a perpetual startup mode”. There may be the kernel of truth in that.

So, culture-wise, setting up a separate department for innovation creates a lot of tension. Obviously the business tends to feel that it should be their right to own the transformation, with the tension manifesting from top to bottom. A manager might feel threatened that the new business will not fall under her/his P&L, a development team might think that they are relegated to a maintenance role while the real “new business” is being done elsewhere, and attitudes like this aren’t always conductive for the innovation organization to getting the support they might need.

Your Skills in the Wrong Place?

For skills, this model creates a real challenge, also because of the cultural tension. The cliche about intrapreneurship is that in the best case a project organized like this has “the resources of a big corporation, and the agility of a startup” – but often ends up with “the resources of a startup, and the agility of a big corporation”. If you can’t access the expertise in the organization, you would be better off going for the third option which is fully outsourcing your innovation.

At the same time, the organization feels a tension about the top talent going off working for a transformation project with unsure results. Shouldn’t the smartest people be helping with tuning the existing “performance engine” instead of exploring new opportunities? My opinion is clear: there are more people who are adept at maintaining and systematically improving an ongoing process, than there are people who can build new businesses. If you want to build your future, you should make sure that’s what your best people are focused on.

Again creating the right mix of skills is crucial. You probably have people who have strong domain knowledge, but at the same time you want to introduce new ways of thinking. Take for example content marketing, which in the traditional media mindset threatens the Chinese Wall between editorial and advertising, but when looked on from the perspective of Buzzfeed doesn’t stall the organization into a philosophical debate. A smart combination of existing knowledge challenged and expanded by new thinking seems to be the way forward. It’s as important to appreciate the storytelling skills of trained journalists than it is to grasp the opportunities created by more informal vloggers whose videos might feel alien to the establishment.

New Silo-free Territory for Business

This can be easier when innovation is at arms length from the business, as both parties are on new territory without existing silos. 

Business-wise, my favourite article regarding separating innovation or growth into a unit of it’s own is “Two Routes to Resilience” where the authors outline an approach where major transformations need to be two different efforts happening in parallel. “Transformation A” should reposition the core business, adapting its current business model to the altered marketplace. “Transformation B” should create a separate, disruptive business to develop the innovations that will become the source of future growth.

An example quoted in the HBR article, Deseret News, built it’s digital operations in a separate company Deseret Digital, which had already grown to a third of the legacy business at the time of writing. The core rule the company applied was that for the new business to become the company’s growth engine it requires something more—a structure that allows the legacy organization and the new disruptive business to live together and share their strengths. In “Two Routes to Resilience”, the authors argue for a capabilities exchange, which coordinates the two transformation efforts so that each gets what it needs and is protected from interference by the other.

I find this an excellent method, as I’ve seen many organizations where the investment into innovation becomes a target for every business owner who is desperate to relieve pressure on their P&L and push for the innovation budget to be spent on for example user acquisition. This type of short-termism can only be tackled by a combination of clear sponsorship (by an innovation board of multiple executives, not only a single C-level sponsor), a well organized capabilities exchange and a well defined mandate for the innovation organization.

In terms of capabilities exchange, one best practice is to have the people in the innovation organization with rare skills (or externals who join the innovation organization) form “ninja teams”, who join key projects together with people from the existing business. That way they can have a broad impact across the organization, without getting dragged into the problems outlined in the “innovation at the business” part.

3) Transformation from Outside the Organization

To just say things happen outside is an interesting approach. I’ve heard many smart executives and non-executive board members voice out a belief that you can’t innovate in a corporate context and it just has to be left to market. 

Again, in an ideal world this is a great approach. By cherry-picking from the innovative startups (and maybe even nurturing a startup portfolio next door, like Axel Springer is doing with their cooperation with the Silicon Valley Plug and Play accelerator) they are able to harness the innovative power of entrepreneurs, while keeping an eye on the promising ones and pouncing on them when the time is right. Companies like Prehype have built their business model around incubating startups together with big corporations and raising funding from VCs as well. 

Hey, Let's Not Innovate in our Culture

Culture-wise this is risky, as your message to your organization is basically “don’t innovate”: let’s have someone else do it. Looking at a broad context, it is true that corporate transformation is a rare phenomenon: in 1958 the average tenure of a company on the S&P 500 was 61 years; by 1980 it had dropped to 25 years. Today it’s just 18. I believe it’s a symptom of short-term thinking and focus on efficiency innovation, where a company optimizes itself to the limits of it’s business model instead of transforming, thus leaving itself vulnerable to disruption from either the low-end or by players from adjacent sectors. It’s a death by a thousand cuts, slowly bleeding out talent, knowledge and in the end, business.

To accept a model where you outsource your innovation, you need to start looking at a corporation as a whole as a portfolio of investments, where none necessarily survive over a set lifespan. People advocating this often take it as far as proclaim the impending death of the vertically integrated company, as there are less and less benefits from shared structures and management in a construction like this.

Top Skills Only Go for Risk?

By outsourcing innovation you also solve a skills problem: you don’t need to worry about attracting top talent as long as the spin-offs can do that. Looking at execution powerhouses like Rocket Internet, you can definitely see that there is a certain top segment of the workforce who is attracted to high-pressure, high-intensity and high-risk environments where the risk is high, work-life balance is not a topic and the downsides come with a shot at a big upside. This is part of the fetishisation of the “entrepreneur” in the startup culture, where the belief is that innovation only happens without a salary – something which paradoxically does not seem to apply to top leadership compensation in corporations. I disagree with the thought that innovation is only the domain of private entrepreneurship: a reading of Mariana Mazzucato’s Entrepreneurial State should give hope both to the public sector but as much to corporate innovators. What Mazzucato argues for are large firms which reinvest their profits not in share-buybacks but in human capital and R&D that are part of a wider innovation ecosystem, together with a public sector making long-term investments and startups that then benefit from the platforms created by those players. Looking at the examples of Kodak inventing the digital camera in 1975 and numerous other examples, corporations necessarily don't have a problem with product innovation, but much more in fitting those products to their structure and giving them the needed boost.

Your Business Needs an Advantage

So from the business perspective, you simply need to ask: is there any unfair advantage your company can give an innovation project, something I wrote at length in my post “Find Your Unfair Advantage”. The further away you spin your innovation effort, the less of those advantages you can impart. Again there is no set formula: you need to take a hard look at your brands, client relationships and other assets to see if there is something to leverage.

It’s also an important consideration to consider if you will later have the firepower to acquire whatever innovation you have spun out. With corporations spinning out innovation (or doing corporate venturing) often ending up with a minority share, the question is will they be able to pull in a success, or as an extreme example, will it cause similar benefits and problems as Yahoo!’s Alibaba stake.

Although for all the models discussed here around innovation one central question is “will it be big enough”, I think it’s most pertinent when it comes to outsourcing your innovation. If your company has a turnover of one billion euros, will small spinoffs ever move the needle or contribute to a broad transformation. The further you pull innovation from the core, the less likely you are to be able to install a corporate renewal.

Should you want to pursue this course, for outsourcing innovation, it’s smart to find a partner you can build a long-term relationship with, be it an agency that handles your corporate spinoffs or corporate ventures, or an accelerator who understands your business to setup the right structures to entice the type of startup you want to have close to you. Only with a party who sees your unfair advantages does it become smart to play the game of a corporate outsourcer.

Wrapping It All Up

It's time to travel back to 1990 and take another HBR article, where Mike Hammer writes: “Instead of embedding outdated processes in silicon and software, we should obliterate them and start over.” Regardless of whether you do your innovation & transformation “at the business”, “at a separate organization” or “outsourced”, you need to be aware of the cultural impact, skills required and the business opportunities they create, and understand how you can not only drive product innovation but how to create conditions for the new products to thrive in.

Netflix didn’t invent OTT streaming, Buzzfeed wasn’t the first socially shareable content site, LinkedIn didn’t do recruitment classifieds before anyone else, but they all went far beyond product and reengineered the processes surrounding them. For corporations who are asking how to organize around innovation, my goal has been to show that there are different approaches with different opportunities and caveats, but each requires both excellence in execution and a willingness to go beyond just building new products to really have an impact on their broader business.