How Top Performers Manage Total Digitization

As digitization dramatically increases within most companies and more interactions with customers move online, we see a big challenge looming: how to manage “total digitization.” Since the 2008 recession, companies have looked to innovation—particularly digital innovation—to feed growth. The result has been a spectacular increase in new products and services, most containing software and processors that are digitally connected. Some industry-leading examples include mobile apps for customers at Westpac in Australia, PepsiCo’s Touch Tower™ (a smart soda dispensing fountain), LG’s smart connected fridge, BMW’s in-car IT and robots for production, and Teck Resources’ integration of multiple systems with sensors for mine operators. The issue of how to manage company-wide digitization has started reaching boardrooms and executive committees. 

In this briefing, we share our findings that top-performing companies are managing total digitization using one of two profiles, depending on their organizational complexity and the importance of cross-product customer experience. We illustrate these top-performing profiles with example from Danske Bank and Ferrovial.

Three Approaches to Managing Total Digitization 

In the first MIT CISR research briefing on total digitization (May 2013), [foot]P. Weill and S.L. Woerner, “Managing Total Digitization: The Next Frontier,” MIT CISR Research Briefing, Vol. XIII, No. 5, May 2013, https://cisr-mit-edu.ezproxy.canberra.edu.au/publication/2013_0501_ManagingTotalDigitization_WeillWoerner[/foot] We described three approaches companies take to manage the different parts of the company that are digitized: 

• Convergence brings all digitization investments together, typically under a single executive. Convergence usually requires the introduction of new organizational structures to create efficiencies and synergies, including reuse. Companies using a convergence approach will, wherever possible, organizationally consolidate key assets like people, data, infrastructure, skills, and management processes.  
• Coordination leaves organizational structures unchanged but adds mechanisms to connect digital capabilities across IT, engineering, operations, products, labs, and other groups. Coordination avoids the disruption caused by reorganizing. Instead, coordination mechanisms such as committees or architectural reviews of project proposals help individual functional and business units work together to achieve enterprise-wide goals like improved customer experience or asset utilization. 
• Separate Digital Innovation Stacks, or Local Stacks, are organized to increase innovation through local management. Each of the local stacks, such as the different product groups, business units, or geographies, is left alone to maximize its own local responsiveness, thus forgoing both the overhead and benefits of coordination. 

Many companies simultaneously apply more than one of these three approaches, using different approaches for subsets of their islands of digitization. The combination of approaches used within a company defines its total digitization profile. 

How Do Top‐Performing Companies Manage Total Digitization? 

To better understand how top-performing companies manage the challenge of total digitization, we completed 10 case studies and a survey of 354 companies globally. Top performers clustered into two profiles[foot]Top-performing = above median on a combination of Net Margin and Revenue Growth, industry adjusted. Then cluster analysis on Total % of Governance types across four major capabilities (Technology, Software, Data, Processes) and seven separate organizational areas (i.e., customer facing, operations, engineering/automation, innovation, G&A, digital products, IT). All relationships described were statistically significant at p<0.1.[/foot] (see figure 1) that we call “Disciplined and Customer Focused” (DCF) and “Locally Responsive and Informated” (LRI). Each profile uses all three approaches, but in a very different composition. 

On average, DCF companies managed around half of their digital investments using a Convergence approach, a third with Coordination, and the rest in Local Stacks. DCF companies were typically smaller and had better customer experience, usually achieved by integrating the experience across products and business units. These companies also had the most effective company-wide business case processes, typically with multiparty approvals to ensure (a) business process improvements and (b) data and systems reuse.[foot]For example, often the CFO reviewed business cases for ROI and reuse while CIOs reviewed them for compliance with operational, process, and IT standards.[/foot]

In contrast, LRI companies managed more than two-thirds of their digital investments with Coordination, almost a quarter with Local Stacks, and the remainder as Convergence. LRI companies were larger—both in terms of the number of reporting units and revenues—and relied heavily on information sharing to achieve the desired coordination. They often invested in dashboards, benchmarks, exception reporting, and other forms of information to manage their disparate operations, identify best practices, and work with laggard to improve. As a control mechanism, more of the company-wide digitization was in the IT budget (34% more, compared to the top-performing DCF companies). Having a larger share of the total digitization spend in the IT budget increased opportunities for IT to lead consolidation, standardization, and reuse. 

Danske Bank: Disciplined and Customer Focused 

Danske Bank offers a wide range of financial services across fourteen European countries with 2013 revenues of $7.1B. Through a combination of strong Convergence with some Coordination and Local Stacks, the bank achieves economies of scale while preserving local responsiveness in different countries. Common capabilities and associated services such as payments and foreign exchange have been extracted from their products and moved into a Group Shared Services organization. 

Headed by the COO, Danske Bank’s Group Shared Services unit reaches far beyond the typical services of HR, Finance, and IT, also comprising product- and operations-related services. Danske Bank calls on multiple shared services to create and support branded products like credit cards and mortgages in each country. These products are then served to customers consistently across all of the bank’s channels—branches, mobile applications, call centers, online banking, ATMs, and finance centers. 

In addition to creating great customer experience, this model allowed Danske Bank to absorb six banks in five years while reducing operating costs by over 20%. After absorbing the acquisitions, the company was able to grow net income at 35% per year from 2008–2013. Initially, Danske Bank retained local brands and customer experiences from the acquired banks, converging only on a set of shared services. To increase the level of Convergence, it recently consolidated all the local brands into one Danske Bank brand. 

At Danske Bank, several mechanisms balance enterprise scale with responsiveness to local needs. Twenty-two steering groups, with people drawn from across the bank, make decisions on changes to each shared service (e.g., payments, credit) so that the services are relevant for all users. To preserve efficiency, the CIO holds the IT budget but seeks input from the steering committees and lines of business to decide on new projects. The joint striving for efficiency and focus on customer experience that is so typical of DCF companies is reflected in the goals of the IT unit; it is driven by three measures of success: time-to-market, cost reduction, and customer satisfaction (two-thirds from external customer feedback and one-third from internal customers). The bank’s digitized platform is heavily standardized, with 90% of standard and shared applications compared to a 40% industry average.[foot]Source: MIT CISR 2012 IT Investment and Total Digitization Survey, N=354. Developed countries only.[/foot] The result of Danske Bank’s Disciplined and Customer Focused profile is above industry average profits and a number one ranking in customer satisfaction in all of its geographic markets. 

Ferrovial: Locally Responsive and Informated 

Ferrovial, a Spanish multinational company with 2012 revenues of $10.2B in twenty-five countries, is the world’s largest commercial investor in transportation infrastructures. Its strength has been tackling large, complex projects faster and more successfully than competitors. Ferrovial has four business units: Airports (e.g., managing London’s Heathrow Airport), Toll Roads (e.g., operating large toll highways in North America and Europe), Services (e.g., running the Madrid metro system), and Construction (building roads, airports, plants, etc.). 

As a company relying heavily on innovation, Ferrovial’s digitization profile combines strong Coordination with some Local Stacks and Convergence to keep its innovations relevant for its business units while leveraging its group-wide capabilities. At Ferrovial, more than 53% of digital investment in operations and 75% in customer-facing areas is Coordinated. The rest of the digital investment in those areas and in all of IT and G&A is Converged. 

Ferrovial’s Coordination approach to digital innovation helps the company achieve the right balance between local innovation and group-wide reuse. The company starts its innovation process locally by defining innovation objectives within BUs. These objectives focus on either “pain points” (e.g., increase user satisfaction at airports) or cross-unit opportunities (e.g., improve energy efficiency). 

While innovation starts locally, Ferrovial employs several mechanisms that leverage the strengths of the group overall. For example, local innovation objectives are fed into a centrally coordinated “Open Innovation Ecosystem” consisting of universities, employees, and industry partners. From employees alone, Ferrovial generated more than five hundred innovation ideas in 2013. To encourage continuous innovation, Ferrovial allocates a portion of its revenue (0.4% in 2012) to a company-wide funding pool for experiments and pilots. 

Through this combination of Coordination, Local, and—to a small degree—Convergence mechanisms, Ferrovial promotes local innovation, but without the downsides that come with the complexity of Local Stacks. Recent digital innovations include free-flow toll roads that are satellite-supported, and industrial garbage containers equipped with RFID tags that signal when they need to be emptied. 

Ferrovial uses information to manage its highly decentralized businesses, spending 30% of its IT budget on data and analytics, compared to an industry average of 21%. Relying on metrics and benchmarks helps coordinate the different businesses at Ferrovial, including sharing best practices. And this approach seems to pay off: its net profit margin of 9.2% was well above the industry median of 1.2%. 

How Should You Manage Total Digitization? 

For some companies, the trigger for proactively managing total digitization is something going wrong, such as problems with compliance, safety, spiraling costs, or poor customer experience. If you haven’t clarified how you manage total digitation, it’s time, so your company can better capture the value of increasing digitization and avoid running into trouble. Which of the two top-performing profiles is a good fit to help achieve your company’s strategy? And are you ready? At Danske Bank and Ferrovial, it was the CIO who stepped up to lead the conversation around the case for action.