Ascent Audio, a division of Recorded Books, presents Future Ready, The Four Pathways to Capturing Digital Value, by Stephanie L. Werner, Peter Weil, and Ina M. Sebastian, narrated by Christina Delane. Publishers note, This audiobook has bonus material of visual elements supporting the text. Please contact whomever you purchased this audiobook from to request the material. Chapter 1. Creating the Future-Ready Firm As the world rapidly digitizes, firms are racing to first create new value from digital, and then capture that value from digital in their financial performance. A digital economy not only creates opportunities for many firms, but also erects barriers to those firms that can't adapt fast enough.
Think of Schneider Electric helping their customers reduce energy costs by up to 30% while generating half their revenue from IoT, Internet of Things, enabled services. Developing this opportunity took vision, time, and investment that will be difficult to match. Or think of CMEX creating an entirely new and much better way of interacting with job site managers with a mobile solution that simplifies ordering and payment and includes real-time tracking of delivery.
Digitization makes real-time partnering easier. Think of WeChat in China, meeting the daily needs of customers with multiple partners offering complementary products. or the U.S. firm Fidelity Investments partnering with tax preparers, financial advice firms, and identity service providers to offer curated complementary services to their customers beyond Fidelity's core products.
Digitization also allows business processes to be made more modular, creating opportunities for faster innovation via reuse. Think of Amazon broadening their range of products from books to shopping to entertainment. And more recently, adding financial services components like loans and selling their underlying technology as a service via AWS, Amazon Web Services. We see the worth of firms like Amazon, Microsoft, and Facebook that leverage their platforms reflected in the stock market. More recently, we also see top-performing firms outside of the technology sector with digitally savvy leadership.
teams using the same approaches, like Charles Schwab, Visa, DBS, and Duncan Brands. The goal is to develop the digital capabilities that enable a traditional firm to be a top performer in the digital economy, becoming a future-ready firm. This book is designed to be a playbook for firms to succeed in the digital economy, illustrated with motivating examples and data analyses that show how top performers operate. differently.
We include self-assessments to help leaders benchmark against top performers, helping executives assess the opportunity and the progress of their transformation to becoming future-ready. What is at stake? For many traditional firms, the viability of the existing business model is at stake.
This point was hammered home to us in a workshop for a large bank. Let's call them BankCo. This bank had operated successfully for more than 100 years, making the majority of its profits through mortgages.
It was once the go-to bank for mortgages in their major markets. But over time, intermediaries came between the bank and its customers. The intermediaries came in many forms.
The most common were mortgage brokers who offered their customers a choice of mortgage providers. These mortgage brokers were often traditional face-to-face businesses, but some were online businesses like Rocket Mortgage in the United States, Domain in Australia, and Habito in the United Kingdom. Over time, the percentage of mortgages originated through brokers grew to exceed 50% of the bank's mortgage book.
Even more challenging was that the mortgage broker typically absorbed about 50% of the profit of the mortgage in upfront fees, and sometimes trailing commissions and other payments. And most confounding was the difficulty to cross-sell other products, even if the bank got the mortgage business, since the mortgage broker had an existing relationship with the customer. Banco faced a serious business model choice and identified three options.
Should they move toward the customer, offering a world-class mortgage experience and competing with their partners like the mortgage brokers? Or should they move away from the customer and become a world-class provider of mortgages as a service that is compliant with each country's regulatory environment? This option meant they were effectively selling an easy relationship with a combination of regulation-slash-compliance.
and an attractive mortgage rate to any intermediary with an end customer that wanted a mortgage. They would be the PayPal of mortgages. Instead of offering plug-and-play payment, they would provide a branded mortgage product that could seamlessly integrate into any other firm's platform.
The third option was to do both. The problem with the third option was that the capabilities and organization needed to move toward the customer were very different from those needed for providing world-class mortgages to intermediaries. Going toward the customer requires the ability to really listen and respond to the customer's voice and provide an amazing experience throughout the home purchasing journey.
In contrast, Moving away from the customer requires the creation of a world-class mortgage platform that can plug and play into any partner's systems. We will come back to Banco in future chapters and share what happened next. Does your firm face this kind of transformation choice? Probably. A playbook to capture value from digital.
Transforming a firm to succeed in the digital economy requires a vision and a playbook to help firm leaders deliver on that vision, motivate employees, communicate with markets, and keep everyone focused on a common goal as they work to create new value in an increasingly digital world. The framework that we have developed starts with describing what it means to become a future-ready firm. We define a firm undergoing a digitally enabled business transformation as having two simultaneous goals.
One, using digital technologies and practices to speed up. And two, wring out costs by standardizing and automating processes, reusing data, processes, and technology, and identifying areas where productivity can be increased at the same time. These firms are using digital technologies and practices to innovate, creating new offers and services, identifying new ways to engage customers, and developing new business models and revenue streams. Some of the digital technologies and practices will provide efficiency gains and opportunities for innovation.
For instance, service enabling a core capability with application programming interfaces, APIs, standardizes and automates that capability, which can then be reused and potentially be bundled into a new product offering for customers. We name firms that have learned to both improve customer experience and be more efficient, simultaneously and consistently, as future-ready. Future-ready firms consider and use digital tools and approaches early in their decision-making to help address any challenge or opportunity, large or small.
These digital tools and approaches include building and reusing platforms, test and learn techniques, agile methods, partnering to grow through digital connections, dashboards to accumulate and measure value, and many others. These future-ready firms are top performers, reporting estimated average revenue growth of 17.3 percentage points and a net margin of 14.0 percentage points above their industry average. a rewarding premium. We developed this playbook based on more than five years of rigorous research, including more than 50 interviews with executives and several surveys with a total of over 2,000 respondents, and field tested in multiple workshops with senior management teams and boards in firms across the world in diverse industries, plus many presentations and master classes.
Figure 1-1 describes the journey we recommend for leaders as they position their firms to become future-ready and top performers in the digital economy. Motivate. Articulate your firm's purpose to your employees, managers, directors, and partners, and align it with the transformation to future-ready.
Digital business transformation is challenging for the entire firm, and a strong purpose provides meaning to everyone on the journey. Commit. Choose one of the four pathways we have identified coming up, or progress on multiple pathways if your strategy dictates it.
Communicate the pathway or pathways, and create a common language that everyone in the firm understands and uses to describe the journey. Anticipate. Look ahead to the common challenges. We call them organizational explosions that occur in all digital business transformations, and manage them.
Build. Develop the 10 capabilities future-ready firms have in common that help create value. Accumulate. Create, capture, and track three types of value from operations, customers, and ecosystems over time.
Setting the context. The future-ready firm. The two dimensions that firms improve on. Operational efficiency and customer experience create a 2x2 framework that describes four types of firms, with future-ready firms in the top-right quadrant.
Using multiple metrics for each dimension, we placed 1,311 firms on the future-ready framework relative to their competitors. The average estimated annual revenue of these firms was $4.8 billion. 1-2 Becoming future ready.
Bottom left quadrant. Silos and spaghetti. Product driven.
Complex landscape of processes, systems, and data. Perform via heroics. Bottom right quadrant.
Industrialized. Plug and play products slash services. Service enabled crown jewels.
One best way to do each key task. Single source of truth. Top left quadrant, integrated experience.
Customer gets an integrated experience, simulated, despite complex operations. Strong design and UX. Rich mobile experience, including purchasing products. Top right quadrant, future ready.
Simultaneously innovate and reduce costs. Great customer experience. Modular and agile. Dynamic partnering.
Data is a strategic asset. Silos and spaghetti. Most large firms, typically with an extensive catalog of products developed or acquired over many years, start in the bottom-left quadrant with traditional customer experience and operations. That's where 51% of firms sit. And the larger and older the firm, the more likely they are to be in this quadrant.
They have a number of silos, sets of systems in a subset of a firm that support a business unit, a product, a geography, or a customer type that are incompatible or not integrated with other systems in the firm. They added new silos when they introduced new products, new geographies, new customer types, or new service offerings to the existing legacy base, or had to meet new regulations and left them unconnected. These firms then created spaghetti when their point-to-point solutions involved making connections from many systems to many others, particularly when they needed to extract data, with the overall system resembling a plate of spaghetti.
This results in a complex set of business processes, systems, and data supporting their products. The result is a fragmented, labor-intensive, and frustrating experience for both customers and employees. often made worse by product silos. Frequently, the ability of such firms to provide an engaging customer experience depends heavily on heroics by employees. One of us was recently helping her parents with their banking, adding a family member to a checking account and checking the beneficiaries.
It required, after several preliminary conversations, getting four of the family members into the same bank branch at the same time. followed by an hour of employee time filling out forms while the family members waited and watched. It was not until another employee in a different unit helped out that these two simple tasks were done.
By the end of the ordeal, everyone involved was frustrated. It shouldn't be surprising that the revenue growth and net profit margins of firms in this quadrant were the weakest, averaging 10.5 percentage points and 6.5 percent. percentage points below their industry average.
Industrialized. Industrialized firms, bottom right quadrant, focus their initial transformation efforts on applying best engineering practices for automation of their operations. They take the capabilities that make them great as a firm, their crown jewels, and turn them into modular and standardized digitized services. Firms in this group develop the best way of handling each key task. For example, processing an insurance claim, onboarding a customer, assessing risk, and strive to standardize it across the firm.
They configure their internal and customer-facing digitized products slash services into plug-and-play modules to meet customer needs quickly and inexpensively. They combine data collected from customer interactions and elsewhere to become a single source of truth that anyone with permission in the firm can use in decision-making. Over time, Many of these processes and decisions are automated.
Only 7% of the 1,311 firms were industrialized, and these firms reported average revenue growth of minus 1.7 percentage points below their industry average and net margins of 2.4 percentage points above the industry average. This mix of superior net margins and slightly below industry average revenue growth reflects the focus on industrialization and operational efficiency of firms in this quadrant. Integrated Experience Firms in the integrated experience, top-left quadrant, invest in providing a better-than-industry-average customer experience, which they offer despite having complex operations.
Firms that want to offer an integrated experience develop attractive websites and mobile apps. and hire designers and more relationship managers to improve the customer experience. Many attempt to improve the customer experience by investing in analytics. However, while improving the customer experience, these integrated experience firms often experience an increased cost to serve the customer as the underlying business processes, technology, and data landscape remains complex or becomes more fragile.
About 20% of firms are in the integrated experience quadrant and perform around their industry average with average revenue growth of 0.9 and a net margin of 0.5 percentage points below industry average. Much improved compared to firms in silos and spaghetti. Future ready. Future ready firms are able to innovate to engage and satisfy customers.
while at the same time reducing costs. Their goal is typically to meet customers'needs rather than push products, and customers can expect to have a good experience no matter which service delivery channel they choose. On the operations side, the firm's capabilities are modular and agile.
Data is a strategic asset that is shared and accessible to all in the firm who need it. These firms realize they can't do all of this alone. and are organized to leverage partners to add more value to customers.
We found that 22% of firms were future-ready. These future-ready firms were top performers, with estimated average revenue growth of 17.3 percentage points and a net margin of 14 percentage points above their industry average. An example of a future-ready firm is DBS, considered by many as the best bank in the world.
With both leading customer experience and strong financial performance, which has transformed to become future-ready over the last decade, we will describe DBS's journey in Chapter 5. There are interesting industry differences in the distribution of firms by quadrant. For example, the industry with the highest percentage of future-ready firms is technology companies, followed by IT services. The industries with the most firms in the silos and spaghetti quadrant are mining, oil, and gas, not-for-profit and government, health care and financial services, though financial services also have a higher-than-average percentage of firms in future ready.
Running your eye down the columns for industrialized and integrated experience gives a quick insight into the direction these industries have moved from silos and spaghetti on their journey to becoming future ready. We know that almost every firm is exploring how to leverage digital, but we wanted to see if there were differences between the average firm in the sample and small and medium enterprises, SMEs, in their transformations to future-ready. There were fewer differences than we expected, but some important differences. We looked at firms in the bottom quartile of annual revenue versus the average firm size. There were many fewer smaller firms in silos and spaghettis, 45%, than the average, 51%, and more smaller firms in integrated experience, 29% versus 20%.
Thank you. There were the same percentage of SMEs in Future Ready and the average firm, 22%. Newer, smaller firms are often designed to be future ready. The additional challenge of large firms.
Many of the firms the MIT Center for Information Systems Research, CISR, works with are very large, with more than $20 billion in annual revenue. We have noticed that moving these very large firms from silos and spaghetti to any of the other quadrants is even more difficult than for the average firm described previously. So we looked at 350 publicly traded firms with average revenue of $29.5 billion, and the results were very sobering.
Only 9% of these large firms, as opposed to 22% of the average firms, had made it to future-ready relative to competitors. Around 70% of these large firms were in silos and spaghetti, compared to 51% of the average firms. The good news is that the 9% of large firms that made it into future-ready were also the top performers. These very large firms face all the challenges that the average firm encounters on a journey to become future-ready, plus huge scale and, often, global operations. Creating a clear vision, a common language, cultural change, reusable technology platforms, and all the other things needed for transformation is just harder, but even more important in these very large companies.
We measure progress toward becoming future-ready in a number of ways. For example, we ask senior executives to estimate to what extent they have completed their transformation as proposed to their boards. The answer to this question was 33% on average in our 2016 survey and 50% in our 2019 survey, with more progress observed in case studies since then, illustrating that the average firm has made slow and steady progress against its promises to the board. But since we assess future-ready firms relative to industry competitors, the bar rises as all firms improve. and the performance premiums remain strong.
Progressing to Future Ready We have identified four pathways that firms can take to become future ready. Each pathway begins in the bottom left quadrant, silos and spaghetti, and involves significant organizational disruption on the way to becoming future ready. We will describe these pathways in more detail in later chapters.
Pathway 1. Industrialize. Pathway 1 moves firms from silos and spaghetti toward industrialized. This pathway relies on building a platform mindset with API-enabled, or similar, business services that can be accessed across the enterprise and also externally. It enables a firm to eliminate many of its legacy processes and systems.
Pathway 1 also requires putting many other attractive projects on hold, at least initially. Cloud computing, APIs, microservices, and better solution architectures make this industrialization process quicker, less risky, and less disruptive. Pathway 2. Delight customers first.
Pathway 2 involves moving from silos and spaghetti toward integrated experience. Firms choose this strategy when their most pressing strategic goal is to improve the customer experience across the whole firm, but they are dealing with multiple organizational silos. Typically, they attempt to do several things at once, develop new attractive offers, build mobile apps and websites, improve customer experience in different channels, and empower relationship managers, all with the goal of delighting the customer. While typically increasing the customer experience, a disadvantage of this pathway is that it initially adds more complexity to already fragmented systems and processes, increasing the cost to serve a customer. Pathway 3 Alternate the focus, like stair steps.
Firms on Pathway 3 alternate their focus from improving customer experience to improving operations and then back again, in steady progress to future ready. Firms shift their focus back and forth in shorter efforts, say six months in duration, passing capability and lessons from one step to the next. For example… The first move might be a project to implement an omnichannel experience. After that, firms might improve operations, perhaps by replacing a few legacy processes or creating an API layer.
Then they might attempt to put together a more attractive set of customer offerings by making smarter use of internal data. With this approach, the difference between success and failure is having a roadmap that informs everyone's efforts versus taking a haphazard approach. Pathway 4. Create a new unit.
Leaders choose a Pathway 4 transformation when it is likely to be an uphill battle to transform the existing firm, or they have a compelling opportunity where success depends on the unit being future-ready from the get-go. The advantage of Pathway 4 is that it allows an enterprise to build its customer base, people, culture, processes, and systems to be born future-ready. It doesn't need to deal with legacy systems or silos or culture change.
The challenge is that once the new entity is successful, how does leadership integrate it with the existing firm? Or do they? Multiple Pathways Which pathway or Pathways your firm chooses to follow will depend on the competitive position of the firm.
We have talked to many large firms where a pathway that is well-suited to one business unit won't work well for another. For example, one business is a leader in customer experience and can focus on Pathway 1 to transform, while another business is a laggard on customer experience and needs to follow Pathway 2 to remain competitive. Or the firm has a business model innovation it wants to exploit in a new unit, on Pathway 4, and, at the same time, needs to transform the existing firm via Pathway 3 stair steps. In these cases, it makes sense for a firm to progress on multiple pathways.
There's a big caveat, though. Firms pursuing multiple pathways must coordinate across the pathways or run the risk of increasing complexity and fragmentation with progress slowing down measurably. The four explosions.
Firms have to deal with difficult organizational changes to develop new operational and customer experience capabilities. We call these changes organizational explosions because that's what it feels like when it happens. The changes are significant, disruptive, and affect most of a firm's employees and partners.
Some of these explosions are not new, having challenged firms for decades. But when well-managed, these four explosions smooth the way for the journey toward becoming future-ready and also create a more agile, digitally savvy, and collaborative culture. For the explosions to create, rather than destroy, value, they need to be addressed carefully, with their impacts anticipated and managed. Explicitly deciding who will and how to manage the explosions typically reduces the time and increases the likelihood of success in becoming future ready.
We will describe these explosions in more detail in Chapter 2 and show how different firms dealt with them in Chapters 3 to 6. Future Ready Capabilities to Develop To create new types of value, Organizations cannot just rely on existing strengths. They must also innovate to leverage powerful, readily accessible technologies. They need to develop ways to adapt their resources and create new capabilities as the environment changes. For example, innovating to accomplish a step change in performance or acting in response to the moves of competitors, customers, partners, and technologies.
Future Ready firms have 10 capabilities in common that help create value, enable sustained competitive advantage, and enhance the ability to adapt to what the future brings. In Chapter 7, we will describe the capabilities, show how each pathway relies on a different set of capabilities early on, and then provide an assessment so you can evaluate how effectively your firm is building these capabilities. Value creation and capture, early indicators of future-ready performance.
In the digital era, how firms create and capture value is changing. Operational efficiency and direct customer experience are still critical, but the focus of digital business is shifting to include delivering great digital offerings and creating go-to destinations for customers with partners. This shift is driven by changing customer expectations toward integrated digital experiences that fulfill their more complete needs, coupled with digital capabilities making real-time collaboration easier and cheaper. In the world of go-to destinations, firms maximize value by collaborating with partners to increase the size of the opportunities, finding win-win approaches, and sharing the gains rather than relying on the more win-lose approaches from the past.
The key to success in transformations is creating value from digital initiatives, capturing that value in firm performance, and then accumulating that value over time. To help measure progress, we have identified three kinds of value firms create from digital initiatives on the journey to future ready. We will describe the three types here.
Discuss how some firms created and captured value in chapters 3 through 6. And in chapter 7, discuss how to set up a dashboard to measure the value accumulation along your transformation journey. To know where you are requires two types of measures. Those that indicate transformation success by showing what value is captured. And those that track effectiveness at building the future-ready capabilities to show how value is created. Value encompasses all the beneficial outcomes of digital business, like lower cost, better customer experience, more loyalty, and growth from cross-selling and innovative products.
Executives describe creating three types of digital value. Building on these three types, we hypothesize a fourth type, long-term firm value. Value from operations.
The foundation of digital business, value from operations, includes reduced cost and increased efficiency and speed. In our research, firms created this value by developing modular components, automating processes, and becoming more open and agile. Firms assess themselves, on average, as 54% effective at creating this value.
Value from customers. Value from customers encompasses increased revenue from customers via cross-selling and new offerings, plus more customer stickiness and loyalty. Aiding customers to meet their needs, providing a great customer experience, and acting consistently and with purpose helps create this value.
Firms can leverage interdependencies between value creation from customers and operations. For example… Self-service offerings help create both value from customers and from operations. Creating value from customers is an important predictor of firm success, and firms assess themselves, on average, as 40% effective at creating this value. Value from ecosystems Creating value from ecosystems is often overlooked or deferred. But as firms move to more digitally enabled and partner-based business designs, ecosystem value is becoming more important and a bigger influence on firm performance.
Firms create significant value from ecosystems when they leverage partnering to offer go-to destinations, which increase reach, getting more customers, and range, offering more products. Capturing value from ecosystems relies on developing revenues from an ecosystem the firm either leads or participates in, and realizing new value from customers and operations through partnering. Firms were, on average, 30% effective at creating value from ecosystems.
The three types of accumulated value were significant predictors of firm performance individually. Value from customers had the strongest relative impact. Next was value from ecosystems.
And finally, value from operations had the least impact. However, value from operations is the scaffolding of digital business. So even if it provides the least direct impact, it is critical to creating and capturing value from customers and ecosystems. Value from ecosystems contributes only a small part of revenue growth and profitability for the average company today.
But we think that ecosystem value in the future will be a significant contributor to company performance for the companies that create it. We hope you enjoyed this preview. To continue listening to this audiobook on Google Play Books, use the link in the video description.