What’s the right path to digital transformation? Front-end only, full rebuild, or wrap-around legacy?
Niek de Visscher
We help companies ditch IT debt, upgrade their tech, and quit throwing cash into the IT black hole. | Entrepreneur, technologist, love cooking and swimming.
Digital transformation is a strategic imperative for organizations that hope to remain relevant. But the right path to get there is a subject of much debate. Should you go all in and create a separate digital entity? Or should you slap on a digital front-end that preserves a backend legacy infrastructure? Or should you find a way to develop at two speeds - taking care of customer-oriented digital innovation while in parallel modernize your backends?
What’s the right path to digital transformation? It really depends on the depth of their pockets and their appetite for risk. We can outline three different options:
- Front-end Only: Rolling out CX improvements and cosmetic fixes without retooling any of the tech infrastructures.
- Going Digitally Native: A fully digital interface supported by a fully digital and modern backend.
- Wrap and Digitize: Setting up a digital business platform first to decouple the front-end and backend, then gradually launch CX / UX improvements, while upgrading backend components and build on them as the business develops.
Before picking one of these three directions, companies must first determine how digital fits into their overall strategy, before embarking on a me-too project that could be the wrong approach … and costs millions with low impact.
While it’s important to keep up with competitors, you must tailor your digital transformation journey to your strategy and your needs. You can’t just follow in the footsteps of another institution.
Senior leaders should ask the following three questions to figure out which approach is the right one for their institution:
- What do we want to be known for?
- Which consumer segments are we targeting?
- What are our core capabilities and points of differentiation, and how will a digital strategy strengthen them?
Many large companies already initiated a digital transformation project of some kind, but these efforts are often ad hoc and fail to yield the expected improvement in profitability. And change is never easy.
A host of challenges create significant headwinds for businesses performing an undertaking of this magnitude — a legacy infrastructure hobbled by an aged core transactional platform, an internal culture resistant to change, and an inherent aversion to risk. That means that digital transformation will be a lengthy, iterative process, and very few will become digitally native any time soon, enjoying the business benefits of digital experience and automation. Let’s zoom-in on the three different options for digital transformation.
Front-end only, take the path of least resistance
A front-end only digital strategy in which you focus your energy on improving CX and consumer-facing systems, while ignoring the backend and legacy problems, will deliver you speed and focus at the start of your digital transformation.
It is a cosmetic strategy that only addresses superficial elements of the experience. Specifically, you make the mobile app and online interface as intuitive and attractive as possible, but don’t invest in any substantive changes to the underlying legacy systems yet.
While this is definitely the quickest and least expensive way to get a digital look and feel for your business, it’s only a temporary fix — a digital “veneer” overlaid on a dated infrastructure that will still need gutting somewhere down the road. Behind the scenes, the company remains as limited as before in terms of what it can deliver.
Without the integration of back-end systems and no fundamental change to the operating model, the experience will not be significantly different from what customers had before. In other words, the front-end promises what the backend will struggle to deliver.
This approach is really just a stop-gap strategy.
Nevertheless, the front-end experience has the biggest impact on consumers and how they perceive a brand, so it makes sense for companies to get busy pouring money into an improved CX. For some organizations — those that either don’t have the stomach or the budget for full digital transformation at this time — it may be the best alternative. They can at least remain competitive (to a certain extent) by appearing to be digital.
However, without integration between the front-ends and backends, you probably won’t realize the cost and efficiency savings that ultimately make a digital-first strategy so attractive. If you’re not careful, all you may accomplish is adding costs to maintain a new front-end — trapped in a quasi-digital environment where you’re constantly struggling to retrofit workflows and adapt processes in ways for which they were never originally designed.
Bottom Line: A front-end approach may seem penny-wise but pound-foolish, yet it still may be the right strategy for some banks and credit unions.
Going digitally native: reinvent from the ground up
Some companies choose to go all in. With this strategy, the management team typically starts over by defining the “minimally viable business,” one that will offer just a handful of products. A basic retail bank, for example, might focus on deposits, payments, or loans. Many companies pursuing this approach have decided to create an entirely new digital arm — a separate arm with its own consumer-facing brand that may eventually overtake the legacy brand.
Reducing costs is a big reason companies should consider going digitally native. In banking, branch transactions cost roughly $4 each, while online and mobile transactions cost $0.09 and $0.19, respectively. But the main reason to go digital native is that it makes organizations much more agile. When you’re digitally native, you don’t have to spend months or years on IT initiatives, only to find out that consumer preferences have changed in the meantime.
It lets them adapt to rapidly changing customer tastes, and it lets them test and iterate rather than commit and hope. The digital core and open architecture also allow flexible approaches for partnering with third parties to offer a range of products and services.
It’s now possible to set up a fully functional, digital native brand using third-party architectures. If this is so attractive, why don’t we see more of it? Usually it comes down to perceptions of expense.
Many businesses think it’s costly and time-consuming to launch a fully digital twin, though this doesn’t have to be the case. Using cloud and next-gen technologies, it’s now possible to launch in a couple of months and at far less expense than ever before.
But going fully digital means replacing the legacy core system, which can cause a raft of cultural and HR challenges — e.g. getting employees comfortable with a more modern customer experience. The ability to go to market faster with new products can also result in cultural dissonance; many companies simply aren’t accustomed to doing anything on the fast track. The siloed departmental organizational structure served by centralized IT is another detriment.
To take advantage of the nimbleness of digital, companies need to have digital capabilities in each department rather than rely on an IT department charged with competing projects from multiple areas of the institution. Think “distributed model” rather than “centralized model.” That’s why you shouldn’t expect the CIO or CTO to automatically jump on board. Losing control of some IT functions and distributing decisions is definitely scary and potentially threatening.
Furthermore, a lot of companies now have to compete with tech startups, so getting the IT talent they need to shift to a distributed model can be a major challenge. Let’s face it, it’s difficult finding IT folks who are up on newer technologies and excited about working in a 'conservative' company.
Bottom Line: The digital native strategy will ultimately deliver the biggest cost savings as well as the ability to adapt quickly when change comes. But the internal challenges and the operational risks could prove too painful.
Wrap, decouple + digitize: gradual iteration
This path replaces the front-end with a digital experience for consumers while acknowledging that the underlying legacy systems need to go … at least eventually.
With this approach, you fix the front-end and build a decoupling capability that enables you to use your backends, while you create a roadmap outlining how and when you will retire your aging systems, and replace them with new digital solutions. You get the big bang impact from revamping your front-end while establishing a timetable for complete digital transformation.
Taking this path, one can use Business Process Automation, Service Oriented Architecture and APIs, Robotic Process Automation, and Artificial Intelligence to integrate with front-end apps and experiences.
This integration approach gives employees e.g. a 360-degree view of the customer and sets the stage for more modular, granular, “plug and play” capabilities. With data integrated and available across the organization, the organization can become more agile. Instead of multiple sites for different products and services, customers can have access to all of their accounts with a single sign-on. And employees can quickly turn data into real insights, and customer interactions are more tailored to them. Such a company has truly committed to transforming itself.
Besides that this approach will provide a powerful transition stage, it also enables a more rationalized digital architecture, where systems are separated by concern, driving agility and efficiency.
For Systems of Record (SOR) we need to go back to the core and follow the "vanilla" principle – using out-of-the-box features. Where required we adopt the processes enabled by the tool, but we don’t adapt the software.
For Systems of Differentiation (SOD) we should refactor and converge to ONE low-code / digital business platform and re-factor existing legacy tools (Productivity tools, custom-build / bespoke apps…) to at least to connect with this. Validate what’s not fitting into SOD according to the architecture principles.
Bottom Line: The wrap and digitize approach yields a consumer experience that tends to be better than the front-end only path, and the transformation process can drag out over many years. Each improvement is made one by one, so it might take some time to tackle all processes.
On the flip side, the costs are spread out, ma
king it a more affordable approach and more attractive to management teams, who are concerned that they may be disrupting too much at one time. This is a great option for companies that need to take a more gradual approach and that need to show value from digital investments, as the business case is created on two important levels: at the end-customer level, impacting customer experience and at the core of the bank, improving the ability to integrate the backends.
Business IT Leader | Digital Transformation & Culture Driver | Demand Shaping | Programme Delivery | Purpose-Value Driven | Creative Change Agent | Simplification Thought Leadership
2 年Great summary of your thought process on the pros and cons of each options. I believe this also depends on organizational appetite on risks. Having said that, I often believe its best to do it right the first time all the time, if possible to build a strong foundation, and to ensure that we look at end to end value stream, and experience. Organizations need to start considering its not just front-end, but also back-end (as One Office concept), as "customer" experience also depends on vantage point, and we should look customer at all angles (internal and external - back-to-front, front-to-back).
Senior Consultant at XPLUS.EU
3 年Increasing customer experience and most likely value at the same time, offers great advantages if you're open to identifying quick-win opportunities on the backend. Meanwhile constructing the digitalization roadmap for the next years by using the gained progressive insight on the digitalization issues doesn't seem to be rocket-science anymore. Great example using pace-layering to steer the roadmap.
Implements FM & Workplace Technology
3 年Thanks for bringing up some of the most important questions to ask. Good read!
Global ERP & IT applications management, Project-Program-Portfolio management, ERP enabled business transformations, Change enablement
3 年interesting feed on the way towards digital transformation!
A.I. & Enterprise Architecture Architect / Mentor / Docent AI, Architecture, Analysis & Modeling Languages ArchiMate BPMN DMN CMMN UML .. I can empower your organization with alignment for success
3 年I like this article, very clear