Part 2 of a 2-part series. Read Part 1.
In my last blog, I discussed the ways in which corporations are responding to the increased after-tax cash flow resulting from the new tax law here in the United States. These responses run the gamut from dividend increases and share buybacks to one-time employee bonuses and debt paydown.
But have you considered long-term benefits? Digital transformation can be the right move, at least if your goal is to generate long-term value for your business.
But what, exactly, is digital transformation?
Think of digital transformation as business reinvention. The goal is to improve business performance and transform the way you serve your customers using emerging digital technologies – such as Big Data, analytics, cloud computing, Internet of Things (IoT), machine learning, blockchain, and more.
The crux of any digital transformation is data. But data has been around forever. What’s new in the digital economy is the ability to use data to connect everything – people, devices, and business networks – in real time. With powerful technologies and platforms to manage these connections, we can now develop new services, new products, and new business models that deliver better outcomes for customers.
A nondisruptive framework for disruption
But, as I asked in my last blog, how do you move forward? The problem that most companies face when it comes to change is how to keep the lights on while transforming. If your goal is to disrupt an industry or two with leading-edge innovation, how do you do it without disrupting your own company?
The first step, frankly, is to accept the fact that change is always a constant – as clichéd as it may sound. Make your peace with change. Expect it. Encourage it. No digital transformation effort is a one-and-done scenario. Rather, it’s an ongoing effort. In fact, the platforms we build as part of our transformation efforts are themselves designed to facilitate change. Change is built into the design. The best response is to embrace it.
The second step is to start thinking in terms of two-lane IT (also called “bimodal IT”), a nondisruptive framework for disruption. In one lane, you have core IT systems to support core operations. Sometimes this is referred to as your system of record, which is critical to maintain. Part of a digital transformation journey should focus on optimizing processes and operations regarding the system of record.
In the other lane, you establish a system of innovation, which gives you the flexibility to develop new digital applications – and new business models – quickly. They range from IoT-enabled devices that track customer usage and charge per usage (rather than selling the machines as products) to machine learning algorithms that tell you more about your customers. Because most new applications in this lane will need to plug into data maintained in the other lane, the two are integrated. This system of innovation uses critical core data from operations to deliver new value for your business and your customers.
Think big but start small
As we dive into digital transformation, we should all think big. But when the rubber hits the road, most of us will start small with easy wins in the slower lane and move up the value chain. One model goes like this:
- Better IT: Focus on cloud capabilities, getting right with your data, and optimizing systems.
- Better decisions: Increase transparency, improve decision support, and automate decision-making where possible.
- Better processes: Collapse cycle times, increase process flexibility, increase collaboration, build predictive capabilities.
- Better products and services: Digitalize and optimize your offerings – and create new offerings that were previously untenable.
- Better business models: Innovate with flexibility and devise outcome-based business models that help you enter new markets, attract new customers, and deliver the value that helps retain customers.
One study by the authors of “Leading Digital” (George Westerman, Didier Bonnet, and Andrew McAfee) finds that companies with stronger digital capabilities are better at driving revenue with their physical assets. Strong digital companies are 26% more profitable than their industry peers and generate nine percent more revenue from their assets. Beginners in the realm of digital transformation trail their competitors by four percent in revenue-generation efficiency and 24% in profitability.
While it might make sense for companies to use their increased after-tax cash flow for a wide range of laudable purposes, here at SAP, we’re dedicated to helping those that want to achieve long-term benefits through digital transformation. There’s a lot of opportunity out there – and companies with the capacity to change can seize it.
Gather more insight on Why Strategic Plans Need Multiple Futures.