I have been thinking about the terms "digital transformation” and “disruption.” I’ve used them casually in my writing and my consulting. Last week, Chris Hale, Associate Director, Global Cloud Marketing with Accenture, tagged me in a tweet about a report from McKinsey, The CEO’s New Technology Agenda.” Some glaring nuggets from report are notable:
Alignment between IT and the business. We’re seeing companies make organizational changes specifically to promote seamless collaboration between the tech function and other units and functions.
How long have we been talking about this? If you use the words "IT" and "the business" in the same sentence, you've missed the point entirely. IT is the business. On the other hand, if you interviewed a hundred IT employees, I can guarantee not a single one would say, "Oh, I'm the business." The meme "the business" is sort of a put-down created by IT to separate themselves from the rest of the organization to promote their agenda. I'm hoping for some better insights in this McKinsey article. The focus of the piece is a healthcare company:
The team reallocated IT investments toward changes to the patient-access platform and to underlying systems such as ERP. They also set up key performance indicators (KPIs) and objectives and key results (OKRs) to measure how much business value resulted from investments in patient-access technologies... They began to release additional investments only for features that showed a positive return, rather than funding them with an upfront, no-questions-asked budget allocation.
There is a logical fallacy here. You can’t set up KPIs and OKRs in advance using new technologies and processes to drive continued investment. The basis for a priori metrics is generally a poor guide going forward. This approach is just as likely to lead to distortion and dysfunction. In Measuring and Managing Performance in Organizations, Robert D. Austin contends that measurement of people always introduces distortion and often brings dysfunction, because measurement is never more than a proxy or an approximation of the real phenomena.
In McKinsey's health care use case, the new investment approach helped the company achieve a 28 percent increase in sales in less than a year, and made the software-development process more agile and patient-centric, leading to improved customer satisfaction scores and a 30 percent reduction in time to market.
There is no corroboration; we don't know what happened in subsequent years. The measurement methodology of the increase in sales is unknown, and could have been accompanied by deterioration in the margin. Employee morale, environmental violations. Not compelling. In a particularly colorful analogy from his book, Austin writes:
Kaplan and Norton’s cockpit analogy would be accurate if it included a multitude of tiny gremlins controlling wing flaps, fuel flow, and so on of a plane being buffeted by winds and generally struggling against nature, but with the gremlins always controlling information flow back to the cockpit instruments, for fear that the pilot might find gremlin replacements. It would not be surprising if airplanes guided this way occasionally flew into mountains when they seemed to be progressing smoothly toward their destinations.
The rest of the paper is a typical strategy consultant CEO hero-worship. The CEO doesn't pay dozens of managers, directors, and CXO's in IT to "strengthen the tech function’s resource model by assembling an in-house cohort of skilled technology workers.” Let’s move on, not much meat about digital transformation and disruption there.
So what really is disruption? What is digital transformation?
My friend Barry Rabkin, long-time insurance industry analyst (and Santa Fe neighbor) had this to say:
Terms like 'disruption' and 'transformation' are meaningless in the insurance industry. Nothing is being 'transformed' or 'disrupted.' Risk mitigation/management continue to be the value-add of the insurance industry regardless of what technology or technologies the insurance firm (startup or incumbent) uses to go-to-market and/or get and keep clients.
We had some back-and-forth on this because I don’t entirely agree. For example, technology allows actuaries and underwriters to evaluate risk, as well as issues of solvency to a much higher degree of precision. This may not disrupt insurance companies, but eventually, reinsurers are going to have to rejigger their business models.
Technology can, and does, change the risk landscape. Technology can, and does, improve the effectiveness and efficiency of the process.
Disruptive,or a Red Queen move? Red Queen is a concept from evolutionary biology first used in Matt Ridley's The Red Queen: Sex and the Evolution of Human Nature (New York: Macmillan Publishing Co, 1994). The allusion is to the Red Queen in Lewis Carroll's Through the Looking-Glass, who had to keep running just to stay in place. I read Clay Christensen's book, The Innovator's Dilemma, and listened to him in presentations. He defined a disruptive product as one that:
- addresses a market that previously couldn’t be served - a new-market disruption
- or it offers a simpler, cheaper, or more convenient alternative to an existing product - a low-end disruption.
When an organization moves to digitize some part of their organization, it may or may not be a digital transformation. Still, on the face of it, it doesn't qualify as a disruptive case either. If it's truly disruptive, existing competitors cannot address it. HOWEVER, there will be much disruption in the next few years, and specific industries are vulnerable: insurance, energy, consumer goods, health care, materials, telecom, and utilities.
A different point of view is found In the HBR article Digital Transformation Is Racing Ahead and No Industry Is Immune.
A 2014 study from Constellation Research quantified the accelerating rate of change in the enterprise by examining a simple benchmark - the entry and exit of U.S. corporations in the S&P 500 index. While the Constellation study is careful to say that companies rise and fall for many reasons, digital disruption is clearly responsible for a large share
In 1958, corporations listed in the S&P 500 had an average stay of 61 years. By 1980, numbers from research firm Innosight reveal that the average stay had declined sharply to 25 years. In 2011, the average tenure dropped to 18 years. At the present rate of churn, Innosight’s research estimates three-quarters of today’s S&P 500 will be replaced by 2027.
I'd add that the members of the S&P are selected by a private company with evident ties to Wall Street. As an index of disruption, it is actually a weak choice.
The HBR article concluded:
Today, disruptive technology shifts such as cloud, big data, and the Internet of Things will not only upend these industries (again), but will also introduce revolutionary change to even the most staid industries.
A rebuke of the article in Forbes, How Useful Is Christensen's Theory Of Disruptive Innovation?, pillories this idea of continuous disruption. Here are a few nuggets for a start:
Few academic management theories have had as much influence in the business world as Clayton M. Christensen’s theory of disruptive innovation,” the business school professors write. “But how well does the theory describe what actually happens in business?” The Sloan article implies that that phenomenon of disruption is some kind of myth concocted by Christensen, affecting a tiny part of the market—only 9% of the companies studied fully meet the classic pattern of disruption.
I’m going to go right to the chase of the article:
Disruption is real, whether or not it plays out exactly according to the classic pattern Christensen described. Christensen has performed a great service by pointing out how powerful and pervasive the phenomenon of disruption can be.
The Christensen-type disruption he talked about throughout his career is rare, but disruption can be something else, even if it isn't. Then why call it disruption? In my consulting career, projects were sold and funded on some sort of competitive advantage or "disruption." In fact, they were lucky to keep running with the Red Queen.