Although many see COVID-19 as a “black swan” event, the pace of disruption has been accelerating for the past few years. With the difficulties of COVID dominating the global conscience, some businesses have thrived. In fact, 24 technology and digital firms in the S&P 100 have increased their share of market capitalization from 40% to 50% during the past nine months. Every business has a unique opportunity to capture the value amplification that digital transformation offers. Yet while the opportunity is massive and straightforward, it can be complex to realize.
From an outcomes perspective, “transformation” can be across four dimensions:
- Achieving cost leadership
- Enabling customer- and user-centricity
- Creating new digital revenue, business, and operating models
- Becoming resilient
These are not mutually exclusive. In fact, contrary to conventional wisdom, there is a high positive correlation between customer/user experience and the other three imperatives. However, considering many companies’ financial focus in the current environment, achieving cost leadership is top of mind.
The American philosopher and psychologist William James said “All our life, so far as it has definite form, is but a mass of habits – practical, emotional and intellectual – systematically organized for our weal or woe, and bearing us irresistibly toward our destiny, whatever the latter maybe.”
Similarly, organizations are a mass of “processes” executed by people interacting with assets and systems (e.g. sales, marketing, finance, HR, manufacturing, customer service, procurement, onboarding, etc.). These processes have costs trapped in them, which collectively form the organization’s total indirect cost. In addition, process efficiency and effectiveness have a disproportionate bearing on direct costs. If organizations hope to achieve disruptive cost leadership, they must focus on all of these processes.
Organizations have historically taken out these costs by building applications, outsourcing to low-cost locations, applying lean and six sigma, and (more recently) leveraging AI and RPA. The results have been powerful, leading to the growth of shared-services centers, captives, and the outsourcing industry. However, there are limitations.
The Pareto principle says that 80% of transactions take 20% of the time, and vice versa. In recent years, due to hyper-automation, we have moved to a 90:10 or maybe even a 95:5 world. This means that 90% of the effort comes from only 10% or 5% of the transactions.
Unless they solve this small percentage, companies can not disrupt any further. What are these 5% transactions, and how can businesses solve for them? In procurement, these would be cases of non-compliant buying. In F&A, they would be anomalies, disputes, and unmatched invoices, and addressing them would entail multiple levels of approvals and coordination between different functions.
This 5% results from certain failures in upstream applications, policies, and processes. Hence, solving for them requires upstream interventions and a human-centered lens to identify the problems. Doing so requires the confluence of multiple capabilities, from lean, six sigma, and AI/RPA to policy changes, BPM, and Mobility.
This sounds simple, yet it’s not the way most businesses think and operate. Why? Keystone habits.
In his book “The Power of Habit,” Charles Duhigg describes keystone habits as those that have a ripple effect on the rest. For organizations, this equates to culture, mindset, and ways of working. It also explains the contradiction above, that capturing the opportunities of transformation is both straightforward and complex. The disruptive interventions above come from a product and platform mindset, agile ways of working, and a user- and customer-centric culture. Existing organizational silos must give way to fluidly formed teams based on customer journeys. Long-drawn budget cycles must give way to agile financing driven by a business case. And most important, a mindset that rewards learning from experiments and failures must be created.
Furthermore, companies must invest in small technology squads that can pick up the ideas generated at a quick pace and give them shape. They must embrace high-velocity engineering, including engineering and architectural transformation. They must assemble domain, design, AI, cloud, deep tech, and new ways of working capabilities in a boundaryless manner. If all of these steps are taken, companies can realize disruptions up to 90% in costs and, more importantly, see a significant uplift in the user and customer experience.
The mass of micro-processes that collectively enable an organization and comprise its cost is ripe for disruption. Imagine a future in which all “patterns” will be solved through robotics, “patterns of patterns” will be solved through AI, and the rest of non-conforming transactions will fall to multi-disciplinary teams who decipher them to make technology, process and policy changes while also handling change management. The prize that accompanies this transformation is huge. “What” to do is easy to answer. “How” to do it is the more difficult question. Thankfully, although alternatives are limited, the challenges are more internal than external.