Most big firms attempting digital transformations today are frustrated with the results. At least a score of reasons help to explain the failure. But one particular cause stands out: qualms about letting go of the past. Effective digital transformations must recognize the need for a fresh start, re-examining every aspect of management with new eyes, and a passion for enabling real change, not change in name only.
In persuading executives to get started on a digital transformation, it can be tempting to understate the scale of the change, or the length of the transformation journey, and talk of building on the past, as if this is simply merely updating practices that are no longer right for the time. Such language removes any hint of implicitly criticizing executives for unwitting mis-steps taken in the past: it offers the solace that they were merely doing what everyone else thought at the time was right. But it risks stimulating the taste for the status quo and inhibiting the growth of the curious mindset that is needed to enable real change.
The reality is that effective digital transformation requires a re-imagination of the very concept of management. True, not every management practice has to be discarded. But instead of an assumption that existing management practices should be retained, a necessary starting assumption is that every practice must be re-examined. Here’s why.
The Foundational Assumption Of Management For The Last Half Century: MSV
The core problem for digital transformation is that it conflicts with the driving principle of big business for the last 50 years: the idea that the purpose of a firm is to maximize short-term shareholder value, and must be supported by generous stock compensation for executives to lock in that purpose (MSV). This set of ideas, launched by Milton Friedman, Michael Jensen, et al, starting in the 1970s, became the explicit practice of US big business and was endorsed by the Business RoundTable (BRT) in 1997. Even though seemingly renounced by the BRT in 2019, after being called “the dumbest idea in the world” by Jack Welch in 2009, few if any big firms sought permission from their boards to make a change. The conclusion of informed observers: the BRT’s renunciation of 2019 was mostly for show.
Everything in industrial-era management flows from MSV. Because it is a principle that the staff doesn’t naturally support or consider worthwhile, tight top-down control becomes essential, along with bureaucracy, hierarchy, individuals reporting to bosses, strategy to protect the existing business, innovation to improve current products, HR as an instrument of control, budgeting as a battle for resources among the silos, measurement focused on efficiency and outputs, accounting principles that focus on short term profits, and so on.
The Foundational Assumption Of Digital Age Management: Creating A Customer
Peter Drucker took a different view in 1954 and 1973, insisting that “there is only one valid purpose of a firm: to create a customer.” In response, many firms adopted slogans like “the customer is number one,” but rarely made it a reality.
Yet Drucker’s insight steadily strengthened into a necessity. By the end of the century, customers had more choices, and better information about those choices. The need to prioritize customers was further strengthened by the realization that software can’t be effectively managed by a bureaucracy and that software was eating the world.
Once the purpose of a firm shifted, everything else needed re-examination. Firms started to work backwards from the customer, and then see what needed to change. The list of main changes is long, as shown below in Figure 1.
In this world, seemingly durable management truths could come unstuck. The core management principle of “getting it right the first time” became impracticable in a world of fickle and unpredictable customers. The rock-solid principle of “design, then build,” evolved in software into “build as you design and test.” And even seemingly immutable rules of Generally Accepted Accounting Principles could become subject to reconsideration.
The Shift From WIIFM To WIIFT
In digital transformation, creating a cascade of change depends on making a fresh mental start. The shift to a customer-driven mindset, from “What’s in it for me” to “What’s in it for them,” becomes fundamental. The recognition that all real power comes from giving, not taking, can be shocking.
When we are dealing with a paradigm shift, every practice must be reexamined as to whether it is still valid. It is analogous to the paradigm shift in astronomy, when Copernicus concluded that the Earth revolves around the Sun, not vice versa. This meant, not only that all of the calculations and practices of pre-Copernican astronomy had to be re-thought in the light of the new fundamental assumption. It also meant that the social fabric of society was disrupted if the Earth was no longer the center of the universe. It dissolved the divine right of kings and the prerogatives of royalty.
The Case Of Apple
The Steve Jobs case is indicative. When he took over Apple in 1997, he did not build on the past.
· He dismissed the entire cadre of some four thousand middle managers.
· He got rid of the entire R&D department. He concluded that there was nothing they were doing that he couldn’t buy better and faster and cheaper on the open market.
· He looked at some fifty Apple computers they were then selling and got rid of all but five of them.
· In other words, he got rid of almost everything and everyone who knew how to run Apple the way it was.
A quarter of a century later, Apple is now a two-trillion-dollar firm—the most valuable firm in the world.
The Case of Microsoft
At Microsoft, CEO Satya Nadella was more selective, as there was more to build on.
· He kept the existing corporate relationships but made them more collaborative.
· But he changed the goal of the firm.
· He changed the areas that Microsoft would compete in.
· He got rid of core businesses that had no future.
· He empowered thousands of Agile practitioners who had been operating in the shadows and put them on center stage.
· He changed the culture from one of confrontation to empathy.
· He measured primarily customer usage, not just outputs or profits.
· In effect he changed at last half of the past.
The result? Another trillion dollars in market cap.
Each company story is different. In some firms, there is more to salvage than in others.
But the huge gains that firms such as Apple and Microsoft have made drives most other big firms to attempt digital transformations. These firms need to realize that it entails reexamining every practice of their management, not just buying digital technology.
And read also: