Digital transformation, the discovery-driven way

Talking about digital transformation has a way of freaking people out. They then do the exact wrong thing, which is to throw money and effort at anyone who can promise that – Poof! – digital is right around the corner! Here’s a smarter way to approach it.

There is no doubt that the advent of digital technologies has presented executives in companies with an inflection point of enormous proportions. An inflection point, as I discuss in Seeing Around Corners, is something, typically outside the boundaries of your organization, that exerts a 10X change on the way you operate. Ten times cheaper, ten times faster, ten times more valuable – you get the idea. So kudos to executives for taking the future seriously and moving to prepare. But, before leaping into an immediate solution, think through the implications of a plunge into the uncertain.

The more things change….

When I co-authored the article “Discovery Driven Planning” in 1995, the lean startup was years in the future, we didn’t have concepts like “minimum viable products” or “agile” and people planned their big projects the way they planned everything. Big budgets, big targets, big teams, and a project management process that was based on a mistaken assumption: that in an uncertain venture, you actually know what you are doing.

What we proposed, instead, was inspired by the way we saw successful serial entrepreneurs go about building businesses. Rather than a big monolithic plan with a huge up-front investment of resources, what they did was ask the question, “what would success look like for me?” and then work backward to discover what would have to be true to achieve that success.

Then, they planned around milestones, which I’m now calling checkpoints (some countries don’t use miles!), using as little money and time as possible to test assumptions at each checkpoint. As a lot of people now recognize, this is a much smarter way to go about building a new business than assuming you know what customers will want, what prices to charge, how to go to market, or any number of other potentially disastrous wrong assumptions.

Recently, my co-author, Ryan McManus, and I noticed something interesting. The exact same pattern that had created so many big, expensive flops (Quibi, anyone?) seemed to be happening to firms pursuing digital transformations. We checked it out and the results are in our HBR article “Discovery Driven Digital Transformation.” So, what have we learned since then? Not too much, it seems. McKinsey reports that 70% of transformational programs fail. In the article, we mention Veon and the BBC’s failed attempt to go digital.

But it doesn’t have to be that way. By using an updated, digitally friendly version of Discovery Driven Planning, you apply the same “experiment fast and cheaply” mindset to your digital programs as you might do with anything else.

The Five Disciplines

1 – Define what success would look like. Instead of throwing everything and the kitchen sink into an “upgrade or die” monster project plan, consider being very deliberate about how some digital effort could be helpful. Will it improve convenience for the customer? Will it eliminate frustrating and time-consuming workarounds? Does it have the potential to create an early little win to reinforce the value of the digital effort?

For instance, migraine app Cove’s founders realized that the fragmented way many patients’ suffering with what can be a debilitating illness was entirely unsatisfactory. The patients themselves were a small part of any given general practitioners’ population and digging deeply into this one malady was not something that was incentivized. As Cove’s website points out, headache specialists are rare, patients don’t know who to ask for help, and doctors themselves may not be well-trained. Through the app, Cove’s team is able to provide specialized programs for migraine sufferers, helping both them and their employers. The Migraine Research Foundation estimates that migraines are among the third most prevalent illnesses in the world, providing plenty of scope for the growth of the venture-backed app.

2 – Focus on the from/to of your digital shift. What happens now, and how will that change as you begin to bring digital capabilities on board? You can start small – as German metals distributor Kloeckner did, by using digital technologies to get rid of faxed orders. How do you know the digital effort is having impact? We like a metric we call “Return on Time Invested (ROTI).” To calculate it, you simply take the total revenue generated by a firm and divide by the number of employees needed to produce that revenue. The higher the number, the more you are getting return on time invested by people.

In the original HBR article, we analyzed the performance of Amazon (a born-digital company) versus Wal-mart (which at the time was struggling with its digital transformation) in terms of their ROTI. In 2018, Amazon had sales of $232.9 billion and 647,000 workers, bringing its sales per employee to $359,671. At the time, Walmart had $495.8 billion in sales and 2.3 million associates, giving it a ROTI of $215,548, meaning at the time, Amazon’s people were delivering 67% higher performance than Walmart’s.

My, but how things have changed. Walmart’s relentless push into digital (which included the purchase of Jet.com and the acquisition of digital legend Marc Lore) shows in its ROTI numbers. As of 2020, Amazon had sales of $386 billion, with 1.3 million people, for a ROTI of $296,923 (note the drop since 2018). Wal-Mart in contrast had sales of $519.93 billion with 2.3 million workers, for a ROTI of $226,056. While they haven’t caught Amazon yet, the investments in digital can be clearly seen in the numbers.

3 – Define your competition broadly. Digital has made both new partnerships between former allies a reality but has also lowered the barriers to entry, even in traditional markets, in ways few people foresaw.

The advent of the direct-to-consumer trend of the last decade or so makes it conceivable to have startups that can legitimately compete with long-established brands.

4 – Tend to your ecosystem. One of the qualities that makes digital so compelling is that it is essentially about connecting things and then having information flow through those connections. What that means is that even manufacturers of products need to be constantly thinking about the ecosystem implications of their decisions. Indeed, as Erich Joachimsthaler has pointed out, we are all swimming in interaction fields.

As you consider your plan, do think about who should be part of your ecosystem and what you need to do to be attractive to them. Think also about the gives and gets of various partnerships and whether your ecosystem is as competitive as that of others. Disney, for instance, has for years leveraged its ecosystem of relationships and content to create compelling entertainment experiences that others struggle to match. And don’t forget that choosing one ecosystem (Apple’s IoS) may mean you are shut out of another (Android).

5 – Test your assumptions through experiments. As Michael Schrage convincingly suggests, cheap experiments are hundreds of times more valuable than great ideas.

What’s on the horizon for digital transformation?

In recent years, digital has definitely come into its own as work-from-home and the demands of the pandemic accelerated investments. Lukewarm advocates suddenly were thrust into the role of having to become passionate promoters. And it shows no sign of slowing down.

Two of the more interesting new developments, to me, are the marching forward of low code or no code applications that are definitely going to be an inflection point for traditional programming providers. Offering lots of functionality at a fraction of the time and price, such platforms promise to do for coding what drag-and-drop editing did for web site creation.

The other thing that intrigues me is the potential for even physical products to be in perpetual beta. When you have to update the firmware in your car to keep it happy, you know that digital has crept into the physical world in a big way.

Like any transformation, digital is only startling until it gets taken for granted. That moment is on the way.