Digital Transformation and the Reverse Hierarchy of Understanding
Digital Transformation and the Reverse Hierarchy of Understanding
By Gary Angel|
November 5, 2016
Why is it so hard for the traditional enterprise to do digital well? That’s the question that lurks at the heart of every digital transformation discussion. After all, there’s plenty of evidence that digital can be done well. No one looks at the myriad FinTech, social, and ecommerce companies that are born digital and says “Why can’t they do digital well?” When digital is in your DNA it seems perfectly manageable. Of course, mastering any complex and competitive field is going to be a challenge. But for companies born into digital, doing it well is just the age-old challenge of doing ANY business well. For most traditional enterprises, however, digital has been consistently hard.
So what is it that makes digital a particular challenge for the traditional enterprise?
That was the topic of my last conversational session at the Digital Analytics Hub this past week in Monterey (and if you didn’t go…well, sucks for you…great conference). And with a group that included analytics leaders in the traditional enterprise across almost every major industry and a couple of new tech and digital pure plays, we had the right people in the room to answer the question. What follows is, for the most part, a distillation of a discussion that was deep, probing, consistently engaging, and – believe it or not – pretty darn enlightening. Everything, in short, that a conversation is supposed to be but, like digital transformation itself, rarely succeeds in being.
There are some factors that make digital a peculiar challenge for everyone – from startup to omni-channel giant. These aren’t necessarily peculiar to the large traditional enterprise.
Digital changes fast. The speed of change in digital greatly exceeds that in most other fields. It’s not that digital is entirely unique here. Digital isn’t the only discipline where, as one participant put it, organizations have to operate in chaos. But digital is at the upper-end of the curve when it comes to pace of change and that constant chaos means that organizations will have to work hard not just to get good at digital, but to stay good at digital.
The speed of change in digital is a contributing factor to and a consequence of the frictionless nature of digital competition and the resulting tendency toward natural monopoly. I recently wrote a detailed explanation of this phenomenon, beginning with the surprising tendency of digital verticals to tend toward monopoly. Why is it that many online verticals are dominated by a single company – even in places like retail that have traditionally resisted monopolization in the physical world? The answer seems to be that in a world with little or no friction, even small advantages can become decisive. The physical world, on the other hand, provides enough inherent friction that gas stations on opposite sides of the street can charge differently for an identical product and still survive.
This absence of friction means that every single digital property is competing against a set of competitors that is at least national in scope and sometimes global. Local markets and the protection they provide for a business to start, learn and grow are much harder to find and protect in the digital world.
That’s a big problem for businesses trying to learn to do digital well.
However, it’s not quite true that it’s an equal problem for every kind of company. In that article on digital monopoly, I argued for the importance of segmentation in combating the tendency toward frictionless monopoly. If you can find a small group of customers that you can serve better by customizing your digital efforts to their particular needs and interests, you may be able to carve out that protected niche that makes it possible to learn and grow.
Big enterprise – by its very (big) nature – loses that opportunity. Most big brands have to try an appeal to broad audience segments in digital. That means they often lack the opportunity to evolve organically in the digital world.
Still, the challenges posed by a frictionless, high-chaos environment are almost as daunting to a digital startup as they are to a traditional enterprise. The third big challenge – the demand in digital for customer centricity – is a little bit different.
Digital environments put a huge premium on the ability to understand who a customer is and provide them a personalized experience across multiple touches. It’s personalization that drives competitive advantage in digital and the deeper and wider you can extend that personalization, the better. Almost every traditional enterprise is setup to silo each aspect of the customer journey. Call-Center owns one silo. Store another. Digital a third. That just doesn’t work very well.
Omni-channel enterprises not only have a harder challenge (more types of touches to handle and integrate), they are almost always setup in a fashion that makes it difficult to provide a consistent customer experience.
Customer-centricity, frictionless competition and rapidity of change are the high-level, big picture challenges that make digital hard for everyone and, in some respects, particularly hard for the large, traditional enterprise.
These top-level challenges result, inevitably, in a set of more tactical problems many of which are specific to the large traditional enterprise that wasn’t created specifically to address them. Looming large among these is the need to develop cross-functional teams (engineers, creative, analytics, etc.) that work together to drive continuous improvement over time. Rapidity of change, frictionless competition and the need for cross-silo customer-centricity make it impossible to compete using a traditional project mentality with large, one-time waterfall developments. That methodology simply doesn’t work.
Large, traditional enterprise is also plagued by IT and Marketing conflicts and Brand departments that are extremely resistant to change and unwilling to submit to measurement discipline. This is all pretty familiar territory and material that I’ve explored before.
Adapting to an environment where IT and Marketing HAVE to work together is hard. A world where traditional budgeting doesn’t work requires fundamental change in organizational process. A system where continuous improvement is essential and where you can’t silo customer data, customer experience or customer thinking is simply foreign to most large enterprises.
This stuff is hard because big organizations are hard to change. To get the change you want, a burning platform may be essential. And, in fact, in our group the teams that had most successfully navigated large enterprise transformation came from places that had been massively disrupted.
No good leader wants to accept that. If you lead a large enterprise, you don’t want to have to wait till your company’s very existence is threatened to drive digital transformation. That sucks.
So the real trick is finding ways to drive change BEFORE massive disruption makes it a question of survival.
And here, a principle I’ve been thinking about and discussed for the first time at the DA Hub enjoyed considerable interest. I call it the reverse hierarchy of understanding.
Organizations work best when an organization’s management hierarchy generally matches to its knowledge hierarchy. And believe it or not, my general experience is that that’s actually the case most of the time. We’re all used to specialized pieces of knowledge and specific expertise existing exclusively deep down in the organization. A financial planner may have deep knowledge of TM1 that the CFO lacks. But I’ve met a fair number of CFO’s and a fair number of financial planners and I can tell you there is usually a world (or perhaps two decades) of difference in their understanding of the business and its financial imperatives.
When that hierarchy doesn’t hold, it’s hard for a business to function effectively. When privates know more than sergeants, and sergeants know more than lieutenants and lieutenants know more than generals, the results aren’t pretty. Tactics and strategy get confused. The rank and file lose faith in their leaders. Leaders – and this may be even worse – tend to lose faith in themselves.
The thing about digital is that it does sometimes create a true reverse hierarchy of understanding in the large traditional enterprise. This doesn’t matter very much when digital is peripheral to the organization. Reverse hierarchies exist in all sorts of peripheral areas of the business and they don’t spell doom. But if digital become core to the organization, allowing a reverse hierarchy to persist is disastrous.
And here’s where digital transformation is incredibly tricky for the large traditional enterprise. You can’t invert the organization. Not only is it impossible, it’s stupid. Large traditional organizations can’t simply abandon what they are – which means that they have to figure out how to work with two separate knowledge hierarchies while they transform.
So the trick with digital transformation is building a digital knowledge hierarchy and finding ways to incorporate it in the existing management hierarchy of the business. It’s also where great leadership makes an enormous difference. Because most companies wait too long to begin that process – ultimately relying on a burning platform to drive the essential change. But while it’s hard to effect complete transformation without the pressure of massive disruption, it’s eminently possible to prepare for transformation by nurturing a digital knowledge hierarchy.
Think of it like FDR building out the U.S. military prior to WWII. He couldn’t fight the war, but he could prepare for it. We tend to define great leaders by what they do in crisis. But effecting change in crisis is relatively easy. The really great leaders have the vision to prepare for change before the onset of crisis.