Making the online side of an enterprise a success on par with the legacy line of business has become an imperative in many organizations this year. At long last, digital transformation initiatives are gaining budgets and traction with leadership back them. Yet for many the mystery remains on how best to organize and what to focus on seems to be as big a challenge as ever, in the face of disruption from thousands of well-funded Internet startups that are increasingly moving directly into traditional industries.
For now, many organizations are moving their digital innovation into more nimble incubators or under a new Chief Digital Officer role, the CIO will still carry the lion's share of moving a typical enterprise into the future, at least this year.
What that digital future is exactly however is a matter of considerable debate. As the broad outlines for what a modern digital business becomes clearer, it also looks very much like something traditional enterprises aren't necessarily cut out for.
If you look at the high growth digital businesses today -- by which I mean the online companies directly create tens of billions in value in very short periods of time -- they tend to have almost all of these attributes in common:
Key Priorities of Modern Digital Business
- Digital is a profit center, not a cost center. This is the opposite view of the legacy IT organization in most enterprises. In the new view, technology is at the core of the product as well as the business model(s). Ironically, given their limited assets, startups take a long term strategic look at the investment with a 5-10 year return, while enterprises tend to look at digital business as a 1-2 year investment to get their return.
- Connectedness is the most important measure of success. Registered users, active users, daily usage, k-factor, network effect, etc. are the benchmark that digital businesses use to determine how they're doing. You can always monetize if you are deeply connected to the market, but you cannot no matter how ingenious your business model is if you're not.
- Achieving and coping with high scale is a first class citizen. Enterprises used to be the largest scale users of technology, but that pole position has long been lost to contemporary digital businesses. Tens and often hundreds of millions of users is the goal. This has led to a whole new set of technologies that go well beyond what the enterprise is capable of, including the whole NoSQL/Hadoop phenomenon. The enterprise digital business team must have skills in all of these emerging areas.
- Competitive position is established by locking in and wielding hard-to-recreate digital assets. The online world is an incredibly flat market. Usually the top three companies own 80% or more of a given segment, since most customers would rather go to to the best than the second best since they're equally accessible. Every competitor is a click away and so digital businesses must use something to differentiate. All leaders in the online space have this differentiation and jealously guard this asset. Typically this a unique enterprise dataset or online community, or even an algorithm that no one else has. Large enterprise usually have many untapped assets to use for this that they've already invested in for years.
- By far the largest asset and productive force a digital business has is the people who are using it. This is where most traditional enterprises get it quite wrong. They try to be the digital business. Almost always that results in a weak and underdeveloped product. Put simply, there is no way for a centrally produced digital business can keep up with a network-centric competitor where the customers co-create and provide most of the content, service, products, etc. The rise of the $100B+ collaborative economy, after the Web 2.0 revolution, has proved this point in spades: Customers are the business. They make the product better the more that they use it. While you can certainly have limited success going the traditional route, you won't create a road to the future of your legacy enterprises, just a small-ish digital sideshow.
- The winners have the richest, most appealing, and easiest-to-onboard ecosystem. This could be via app partnerships, cultivating a participative community, or (especially strategic) building a vast developer network using open APIs, etc. Amazon won this way, so did eBay, Airbnb is winning this way, and countless others. The key is to have something that others want to integrate deeply into their own business, and therefore userbase.
- Digital businesses are designed around the network power laws. Traditional companies have a strong sense of the legacy markets they were successful in. The network is a very different place and has tremendous scalable value, if you know how to play to its intrinsic strengths. Understand what these are and design to them.
While there are certainly other attributes of digital business that are important, almost all of the above are the priorities that large companies tend to get wrong when attempting to transform their products for the digital age.
De-emphasized is the overly enterprise-centric view of digital, which includes excessively detailed business case (though you should certainly have a sense of this, it's just a starting point), elaborate business requirements, enterprise architecture, rationalization with the traditional product portfolio, with the latter especially trying to re-use far too many legacy assets (though data and customers should be exception, but enterprise technology should largely be left behind.) That's not to say these aren't still important, but are at an equal level with the priorities listed above, as these are essentially the rules for winning in today's hyper-competitive digital arena.
To win, adapt from the winning digital natives
Unfortunately, this means there's a lot of learned behavior that CIOs must unlearn as part of a new mandate when it comes to managing their next-generation digital portfolio. Yet CIOs are still uniquely positioned with the full range of resources and mandate to realize effective digital transformation.
So instead of the usual focus, digital business leaders will proactively a) foster capabilities to support high levels of external digital/social engagement, b) create desirable digital ecosystems for themselves and their business partners, c) design and then stand by new online customer/developer platforms long-term, and d) get the business essentials right while creating a customer experience that matches what the digital natives are doing in the space today.
This is the only way to succeed and make the transition. It's also a tall order, frankly. But anything much short of this will result in an outcome that will be much smaller than the legacy business you're trying to overhaul.
To help organizations understand what they need to focus on to become digital natives in their own right, I've begun defining what next-generation enterprises must aim for in 2014, including technologies and strategies. I would be delighted to hear your own contributions below in comments.