The digital operating model: How corporates can make digitalization happen (3/4)

Elements of the digital operating model: DIPOC

The digital operating model consist of five elements that logically build upon one another: Processes, decisions, capabilities, incentives and organizational structure, which we call DIPOC (for practical reasons). Processes are the overarching element of the operating model, connecting the what and the how in the strategy pyramid elements. Processes have to be transformed in line with customers, products, and people. New processes require a refinement of the decision making logic to account for other parties taking new decisions in different succession over a different time-span. To run adjusted processes and new ways of decision making, the right capabilities need to be attained and deployed – by mobilizing existing ones, building new ones and disposing of obsolete ones. Consequently, the incentive structures have to be adapted to fit the new processes, drive the decision makers to make optimal decisions and sufficiently incentivice required digital capabilities. Finally, the elements and reporting lines of the organizational structure have to be adjusted to reflect the changes made to the operating model.

Processes

As processes describe how an organization works, digital processes need to capture how an organization works in the digital world. Embedding digital capabilities and technologies into process steps (and deploying a CRM system, for example) is one (rather straightforward) way to adjust processes and had been done already before it was labelled “digitalization”. The more challenging, but also more impactful way is to adjust processes such that their ouputs deliver on the digital promise of the strategy. Primarily, these will likely be digital or hybrid products and digital business models.

 

As part of the digital operating model, the key 3-4 processes that are crucial for digital impact need to be tackled first. Typically, these are product development and creative processes, customer interaction processes, sales and marketing processes as well as data gathering and analytics processes. When laying down new processes (and, for that matter, understanding the current ones), finding the right balance between documentation and flexibility is key – we advise doing as little documentation effort as possible, as much as necessary.

 

Taking product development as an example, the process has traditionally followed a waterfall model of innovation. Starting with a scope and resource estimation, this process followed a list of tasks that the development team completes sequentially. Product development needs to be reenvisioned as it will increasingly be supported by technologies and will result in products with digital compontents. The new product development process incorporates crossfunctional input from various departments, e.g. Marketing and Sales already in the ideation process to achieve a customer-centric perspective. Agile development methodologies and direct customer feedback from the beginning allow ongoing refinement of scope in continuous learning from the customer. The overall premise of a digital and agile approach will need to come to life in this future product development process, resulting in a substantial change with more feedback loops, trial-and-error elements and more pragmatic involvement of different participants at different stages.

 

As an example, LEGO, the Danish toymaker, has successfully transformed both its business model and its operating model (MIT 2016, Transforming the LEGO Group for the Digital Economy). At first, LEGO failed when diversifying itself into the digital space. The management got distracted from its core physical products, which it realized and bridged the gap between digital media and the physical LEGO brick by adapting its operating model. Through an advanced hybrid product development process, redesigning software and hardware, LEGO launched the game “Life in George”, where users could construct physical LEGO bricks which were scanned into the game. After the success of this hybrid product, LEGO further developed its product development process by applying crowdsourced designs through communities of fans online and became the Apple of toys.  LEGO showed early on how to adapt the operating model through a step-by-step change of key business processes.

Decision making logic

Once it is clear which digitally enabled processes need to run in the company in which way, accompanying key decisions for these processes must be specified. In many cases, this calls for a much clearer specification than in the the past, when nobody could say with certainty who is actually involved in deciding, e.g. the pricing for a new product. The decision making logic is critical, as it defines which stakeholders will be involved in which decisions in which way – as a contributor, a final decision maker or as the one who needs to execute. More often than not, companies fail to make this clear enough, leaving their teams with figuring things out on the fly. This could lead to inconsistencies, yield loss and, ultimately, a perception of chaos.

 

The decision making logic changes significantly with the move towards a digital operating model, because there are new types of decisions that need to be made (e.g. which digital features to build into previously purely physical products), there are new sources of information available (e.g advanced insights based on real time customer data from product use), there are substantially shortened time horizons (e.g. software development cycles of a few days vs. hardware development cycles of months and the interlinkage thereof) and new configurations of decision makers and new roles, such as the Chief Digital Officer.

 

Looking at these impacts driven by digitalization and the increasing need for more agility, companies typically follow a few paradigms when designing the future decision making logic in a digital space, such as:

  • Leverage (more and better) data: The decision logic should follow data driven insights instead of internal politics and (just) managerial instincts, e.g. real-time data on which product functionality is used most by a certain customer group would help decide the functions to be included in the next version
  • Make decisions where they belong: Empower people close to the business (decisions as “low” in the organizations as possible, as “high” as necessary), e.g. product owners should decide on scope of product functionality, not the management board
  • Ensure speed & consistency: Leverage direct communication and decision making tools to make decisions on the spot as opposed to long-planned meetings, e.g. tools like Slack or MS Teams

 

A digital operating model should make it easier to make critical decisions quickly and effectively. There are established decision making frameworks that can also be applied for a digital operating model. We suggest, among others, the RACI model. The following example shows how part of a future product development process could be run and how we believe key stakeholders could be involved. This, of course, will always need to be specifically designed for each company.

Capabilities

Capabilities ultimately bring an organization to life and are vital to have processes and decisions work out the way they are designed as per the above. Digitalization drives the need for a whole new set of capabilities, some more technology-focused such as programming and digital marketing capabilities, some more soft such as agile team management. Capabilities are also probably the hardest to change and build in a sustainable manner. Future processes and decision making logic should guide the future setup of capabilities and define which capabilities are and will be needed. Based on that, capability gaps and redundancies can be identified. Ultimaltely, building the right set of capabilities should follow a specific approach to ensure they fit with the process and decision requirements.

 

1. Craft the capability target picture

Based on the digital strategy, the processes and the decision logic, a holistic set of capabilities needs to be defined, encompassing topics like digital marketing, advanced analytics, app development, agile project management, etc. (we typically work with a set of 30-40 capabilities). Put into a capability framework, the target picture will give clear guidance on which capabilities are needed in which quality and quantity to enable the digital operating model, stringently aligned with the strategy.

 

2. Understand the capability as-is situation and spot gaps and redundancies

Often eye-opening, mapping the current state of digital capabilities (along the abovementioned framework) and comparing it with the target picture reveals substantial need for action. A heat map shows where quality and quantity are in line with the target picture vs. where biggest needs are. Often, these are – amongst others – in the areas of digital development, where neither enough, nor good enough people are on board to build the products and prototypes needed in the future. Also, the analysis may show capabilities (like outdated IT development capabilities) that are not needed in the future and may need to be reduced in capacity.

 

3. Build a realistic plan for action

In line with the staged development of the digital operating model and linked with the digital strategy, a step-by-step hiring and training plan needs to be set and acted upon. Comparing with how companies have built capabilities in the past, building a new set of digital capabilities typically requires a substantially adjusted hiring approach, using different channels (such as social media) and different messaging (e.g. designed for the generation Y). As with any outsourcing question, the criticality and availability of talent for each capability needs to be assessed and an internal/external sourcing decision needs to be made. Often, critical capabilities may not be available for hiring (e.g. agile coaches are currently sought after and many prefer to work in a freelance mode).

 

The following visual shows an example heatmap of existing and lacking digital capabilities that are necessary to transform the operating model. Red would typically be used to indicate a more urgend need for action.

Incentives

The right capabilities are of little relevance without adequate incentives to put them to action and create the right culture. Many leaders talk about innovation culture as a mythical, intangible concept. In reality, having rooms with business model canvases, bean bags and sticky notes does not yet create an innovation culture. Company culture is created by tangible and targeted (not necessarily monetary) incentives to recognize, reward, celebrate and challenge the team and their activities on a daily basis. We perceive incentives and reward mechanisms as key drivers of execution, despite the general notion of “we love to change the world”, which is often used to describe incentivation of tech founders in the Silicon Valley.

 

What to incentivice on?

Contrary to the team- and company-based incentives currently en vogue, we believe individual performance-linked bonuses to be a stronger motivator in high performing organizations.  When incentives are solely set for revenue growth of core products (on corporate or individual level) or bottom-line impact, likely few to no employees will initiate internal innovation projects or dedicate time to building digital capabilities. Thus, bonuses should be strongly connected to success with innovation efforts, innovation team performance and capability build-up. These, admittedly, are not always easy to measure and would require a thoughtful leader to assess individual contributions, e.g. How well did a leader provide freedom to innovate, to work in an agile way? How effectively did team members build up digital development capabilities (quality/quantity)?

 

How to incentivice?

With our clients, we usually work out individual incentivation schemes, composed of fixed and variable compensation elements, the latter ideally represented by equity/phantom shares. Tending towards an equity/phantom share model is very effective to foster entrepreneurial motivation and is often applied in experimental and innovative corporates. It is, however, not yet mainstream. We typically see a spectrum on which companies position their model between the classic fixed+bonus structure and a fully equity-based model. What we generally do not see work well are models in which employes only enjoy the upsides without experiencing the risks that are inherent to the startup environment.

Organization

Contrary to common corporate intuition, adapting the actual organizational structure should follow, not precede changes to the previously discussed digital operating model elements. Too often we see new organizational units being set up and staffed before a clear picture has been developed for which processes and decisions are to be run how. Once these are clarified, the roadmap for new or different roles, boards, organizational units emerges.

 

These roles will have to be represented by new or re-aligned organizational units with defined reporting lines into the current org structure.

Organizational changes can be more or less substantial, at the minimum defining new committees, e.g. a digital steering committee, composed of the heads of marketing, sales, digital factory, business units, etc., headed by the CDO. They meet regularly to take an integrated, holistic perspective on digital activities across the business, give direction and make key decisions. A digital operating committee on the other hand should translate the strategies of the digital steering committee into specific activities and, e.g. take ownership of business innovation projects. In contrast to the digital steering committee, they meet on a more frequent basis with 4-5 full-time members that report to the board and the steering committee.

 

At the maximum, we see companies establish whole new units to drive digital transformation and innovation, many following the Excubation approach: Set up an innovation company that will be tasked with building and managing the portfolio of new digital business models and smartly separated from the core business. A model, that has already been implemented by IBM many years ago with their “Emerging Business Opportunities” (EBO) unit that was successful in developing IBMs service and open source business, for example.