Harnessing scale to drive

successful digital transformations

Successful digitization calls for bold moves: scale and reinvention

Most companies have embarked on digital transformations but have found it difficult to break free
of the old way of doing things. In this interview, Digital @ Scale co-author Anand Swaminathan
speaks about how businesses can use scale to get the most from their digital transformations and
reinvent their companies by focusing on the core of their businesses. An edited version of the
interview follows.

Secret sauce for digital transformation: scale

When we talk to CEOs about digital transformation, an important question keeps coming up: “How
do we drive digital transformation at scale?” That’s a big issue, because if companies don’t drive
digital transformation at scale, there is this gravitational pull of the legacy organization that brings you
back to the way you used to operate.

If we create a new way to work using the agile methodology, for example, but we’ve only
experimented with it in a discrete functional area or with a certain piece of technology, what ends

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 up happening is the legacy organization reasserts itself because it’s still driving the business
outcomes. Therefore, CEOs are trying to figure out how to transform the entire foundation of the
organization so it becomes something of a rocket that actually breaks through the gravitational
pull of the legacy organization and legacy capabilities.

Incrementalism: the enemy of digital transformations

A trap that a lot of organizations fall into when they’re thinking about digital transformations is this
concept of incrementalism: making a series of small changes. The business world moves much
too quickly for that approach. And incrementalism makes it very difficult to build the momentum
you need to break through into new businesses and value. Being successful in this new digital
era requires reinventing your business, your capabilities, and your organization. That’s much
more significant than changing pieces and parts of the company.

One telltale sign of incrementalism is when organizations look at very specific pieces that they
want to change within their organization. With Kodak, for example, the organization said in
essence, “We capture images, so let’s change just the way we can capture the image with a
digital camera.” Clearly I’m oversimplifying to make a point, but what they didn’t realize is that
their customers actually wanted access to their images in real time and to be able to share those
pictures quickly. But with Kodak digital cameras, you actually had to bring it back home, take out
the SD card, and connect it to your computer to be able to share.

When you think about the photo industry as it is today—sharing, commenting, editing on the
fly—it has fundamentally reinvented the way we think about the business, the product, and the
customer experience.

Transforming the core

What does core actually mean in the context of an organization? Harvard Medical School
talks about the core as the set of muscles that allows you to maintain the right power, the right
balance, and the right aspects of our health. That’s what the core is to an organization. It’s the
people, processes, and technology that underpin how the organization actually operates.

The reason it’s important to focus on transforming at the core is that only change at that
level enables the organization to operate with more agility and serve customers better. It also
allows the organization to operate in a way that’s exciting and new for its employees. It drives
productivity, it drives improvement in how the organization interacts with both its customers and
its employees.

Baosteel, a steel company in China, decided to transform at the core. What they did is create an
online platform to be able to sell steel in a completely new and customer-friendly way. You’ve also
got other organizations that are using online platform Alibaba as the way to sell steel products.
That’s not just another way to sell steel. It’s a fundamentally new way to engage with customers.

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To drive transformation at scale, there are three core elements that we’ve got to get right:

1. Organizations have to think about fundamentally changing their business model. How are they
going to operate in order to engage with customers in new ways? What needs to change to
drive new revenue models, new business, new markets?

2. Businesses then need to reinvent the business architecture, which is what allows a business
to deliver the best possible customer experience. So if we think about the value chain working
back from the customer experience the company wants to deliver, a transformation needs to
address all the elements of that chain. We need to think about transforming elements of the
product and value proposition that the customers are going to see.

3. The company needs to evolve and recreate the organization and its technology foundations. A
foundation typically seems static—a large, “heavy” item that supports the entire organization.
However, truly successful digital transformations build dynamic foundations. That’s because
we know more change is just around the corner. We’re going to have to evolve, because
customer expectations never stop evolving. Therefore, our foundation has to be ready to evolve
as well.

Examples of transforming business foundations

UPS decided to rethink the way it used data and analytics to improve how they operate. As an
example, UPS deployed sensors on all its trucks to get data. What they were able to then do is
rearchitect the way in which they extracted, consumed, and analyzed that data to drive several
different elements of improvements in their operations. The result is that they now consume
eight million fewer gallons of fuel, because they travel 90 million fewer miles, because they have
done route optimization based on the sensor data. It’s fundamentally changing the way they use
and consume data in order to allow them to drive significant operational improvements in their
organization at scale.

In another example, ING transformed its organizational model to operate in small collaborative
groups (called tribes and squads) in a very agile way. This new way of working is allowing them
to reinvent and experiment with new products at a very rapid pace. ING now can actually stay
ahead of the curve by testing, inventing, creating new products that they can take to customers
consistently and quickly.

Characteristics of CEOs who successfully reinvent their business

A few years ago I sat down with the CEO of a multibillion-dollar organization who wanted to
transform a 60-year-old business. He was focused on how the business could become digital at
the core.

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 When he was talking about how to scale his digital transformation, he talked about a few
characteristics. The first one was the idea of investing without fear. And the way he looked at
it was that digital was key to reinventing ourselves and that means we need to invest. We have
many examples in the industry, such as GE, which decided to create and invest in their GE Digital
business, or Allianz, which decided to invest in its global digital factory that it launched in Munich.

He also talked about how he needs to “infect” his organization with the digital mind-set. It’s not
just about, “Hey, I’ve got to figure out what digital means to my company.” For him it was about
creating something that everybody wants to be a part of. An example of what he means really
shines through in the digital factory that Allianz created. Organizations from across the business
came in to the factory. They found that there’s a new way to engage with customers, a new way to
actually work with their products, their services, and take it to market. They took these ideas and
brought them back to the rest of the organization.

There was also the element of how do you get the people equation right, which includes rethinking
what kinds of people need to be in place to make the digital transformation happen. This concept
of the chief digital officer role was born over the last few years to be that kind of leader. These are
not just technologists, they’re not just operational folks or organizational folks.

One more thing I’d highlight. I’ve noticed that CEOs today are also talking about new sets of
metrics that they want to measure. CEOs typically look at things like revenue and their balance
sheet and cost and operating model. However, what they’re now asking is, what is the customer
satisfaction and the customer engagement with our products and with our services? What is
ROAS [return on advertising spend and are my marketing dollars actually going as they need to
go? What is our clickthrough conversion rate?

Digital now unlocks new sets of customers. So as CEOs think about scale, they think about the
scale at which they’re touching and interacting with customers that they didn’t used to interact
with or serve yesterday. That is a new measure that is not traditionally tracked.

Anand Swaminathan is a senior partner in McKinsey’s San Francisco office.

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