Digital Transformation Game Plan

Introduction

We can see the Digital Age unfolding everywhere we look. After getting out of bed, you might find yourself checking your watch for the quality of your sleep and asking Alexa for the weather; before walking out the door, you could order your favorite Starbucks coffee on their mobile app, get a ride to work with Uber, and start listening to your favorite music on Spotify. This doesn’t even include the time you might spend checking emails, Twitter, and Facebook, among all the other digital social activities.

Here is another story: on September 17, 2018, a small grocery store opened in an office building in downtown Chicago. It sells mostly prepared grab-and-go food and staples. You need to scan a QR code from your mobile phone at a turnstile when you walk into the store. When you finish your shopping, you can walk right out without seeing a cashier to pay. In fact, there is no cashier in the store at all. Your account is automatically charged for the items you take.

How does the store know which items you take from the shelf? The moment you walk into the store, a network of cameras and sensors begin to capture your shopping actions. These are not the simple security cameras we usually see in stores; they are computer vision, weight sensors, motion sensors, radio-frequency identification (RFID) tags, and more. When you take a sandwich from the shelf and put it in your bag, a variety of digital footprints related to this action will be collected and sent to a system. Artificial intelligence (AI) and deep learning crunch this data, identify the sandwich, and add it to your virtual cart. When you change your mind and put the sandwich back onto the shelf, the system is smart enough to recognize this and remove it from your virtual cart.

This store is Amazon Go, the next generation cashless grocery store. Amazon announced that it is going to open three thousand such stores by 2021. No more waiting in check-out lines.

The Digital Age is not just affecting our daily life; it is having a broad and profound impact on industries and companies. In 2007, the world’s largest companies by market capitalization were (in order) Exxon Mobil, General Electric, Microsoft, ICBC, Citigroup, AT&T, Royal Dutch Shell, Bank of America, Petro China, and China Mobile. In 2017, they were Apple, Alphabet, Microsoft, Facebook, Amazon, Berkshire Hathaway, Alibaba, Tencent, Johnson & Johnson, and Exxon Mobil. All but three are technology companies. It’s not just the largest companies. USA Information Technology’s share of MSCI Market Capitalization increased from 15% in 2007 to 25% in 2017.

According to a 2016 study, in 1965 the average tenure of companies on the S&P 500 was 33 years; by 1990, it was 20 years; by 2026, it’s forecast to be just 14 years. To put that in context, it means around half of the current S&P 500 will be replaced over the next 10 years. Empirical evidence is now also supporting the profound financial impact of digital. The Digital Strength Index “Topline Report,” published in July 2018 by Isobar and alpha-DNA, noted that companies in the top decile of the DSI have “next-year revenue of +14.5%, whereas the bottom decile has –7.8%. Companies in the top decile also beat quarterly estimates 65% of the time over the past five years; the bottom decile just 52.7% of the time.” It went on to state that “the long-term impact of being a digital laggard is devastating, with a 14.9% loss in shareholder value over a three-year period, a decline that increases with time.”

There is more pressure on leadership teams to come up with new approaches to corporate strategy now than at any time in recent memory because of this volatility in our industries and society.

This change in technology has been so fast and so disruptive that it became a main theme at the 2016 World Economic Forum (WEF) flagship annual meeting in Davos, “Mastering the Fourth Industrial Revolution.” The founder of WEF, Professor Klaus Schwab, published a book on this topic, The Fourth Industrial Revolution (Currency). He argues that there is no longer any question that the early twenty-first century is witnessing a set of economic changes of historical importance characterized by a much more ubiquitous and mobile internet, smaller and more powerful sensors that have become cheaper, and AI and machine learning.

But we have seen technological changes before. What is so special about this round of digital technology change that it is being compared with the previous industrial revolutions? A key difference, at a fundamental level, is the speed of the change.

Digital technology is driving the disruptions, and digital technology itself is progressing at an exponential speed. Moore’s Law has been proven for several decades; it famously predicted that the transistor count on an integrated circuit would double every two years. This simple exponential growth trajectory is an immensely powerful concept. As the reward for winning a chess game against the king, a legendary Indian sage asked for just a few grains of rice in the following manner: the king was to put a single grain of rice on the first chess square and double the number of grains on every subsequent square. It turns out that by the 64th square, the king would have had to put more than 18,000,000,000,000,000,000 grains of rice. That is about 210 billion tons and is enough to cover the entire land mass of India with rice to a depth of three feet.

That’s kind of what happened to the number of transistors on each chip. It grew from a few thousands per chip in the 1970s to a few billions per chip in the 2000s. Some argued that there is a limit to exponential growth (otherwise we are going to fill the universe with transistors in another 50 years) and we might now be seeing the tail end of it. They may be right, but the exponential growth curve is not just limited to transistors per chip, it can be seen in other technology improvements, too, some of which are just getting started. For example, we are observing network bandwidth improvements and cost decreases in a similar, if not exactly the same, exponential trajectory; cloud computing costs decrease, the computing power of sensors continues to increase, and manufacturing costs are decreasing in a similar manner. These are the fundamental engineering improvements driving explosive or even “magical” phenomena like big data, the Internet of Things (IoT), AI, and mixed reality (augmented reality and virtual reality). These exponential curves build on top of one another and form combinatorial growth curves.

Digital technology isn’t slowing down to a linear trajectory. It continues to accelerate in an exponential manner. The number of things that can now be done “at the speed of thought” continues to increase and the speed of the intellectual enterprise is becoming a critical success factor. This means that the digital disruptions we are observing across the financial services, retail, travel, and media industries are not going to slow down. Disruption will go deeper into those industries, and will continue to spread to health-care, manufacturing, automotive, and all other industries. For example, in health-care you can now describe scientific experiments using code and have a machine replicate or verify the science on the other side of the world.

The exponential growth of technology has led to three main challenges for companies:

• Heightened customer expectations

• Speed and ambiguity, which forces companies to come up with new competitive advantages more frequently

• A plethora of emergent technology that could create a competitive advantage in the future and requires investment and understanding today

Digital transformation is about dealing with these challenges. It is not just a technology revamp to do things the same way faster or sell the same product for less. It is a business transformation and should transform the entire organization to work, think, and collaborate in a different way. Instead of automating existing processes or embedding digital technology into existing offerings, we should be ready to obliterate them and start over. We should be ready to rethink our businesses: what new kinds of value can be delivered to our customers and can we deliver them with the power of digital technology? Even though the answer might not be clear at the beginning, leaders should clear the path to potentially take advantage of the power of modern digital technology to radically redesign their business to unleash dramatic improvements or innovations.

Digital transformation is not just about reaching an end state where more things are digital; it’s a shift in how you think and operate, how you learn to listen, respond, and constantly change. It is about the sum of the parts–you can’t “apply digital” in one area and expect it to survive surrounded by the current state of the organization. Indeed, there is no end state to digital transformation. Perhaps the phrase should be digital evolution, not digital transformation.

For enterprises, speed and responsiveness are the new battleground, and while everyone is trying to solve the same things, not everyone has the same constraints holding them back. Therefore there is no silver bullet or recipe that you can turn to. It will come down to your ability to learn how to listen for weaker signals and solve for your unique constraints.

This book attempts to provide an authentic look at the difficult things companies need to face in order to deal with this fourth industrial age. Based on our experience working closely with a variety of organizations going through their digital transformations, we grouped our learnings into three main areas:

• How to realign the business and operating architecture to focus more on customer value in this age of heightened customer expectations

• How to build a more responsive and Agile organization to deal with speed and ambiguity

• How to build next generation technology capability as a core differentiator

Across these three areas, we provide 34 actions to take that will help you move your company successfully along the path toward digital transformation. Each chapter has a Key Points section with two associated actions, and the full list is included in Conclusion: Getting Started.

Digital technology will transform how our companies and industries collaborate and compete, and how our entire society lives and works together in this still-young century. For leaders in the middle of this global and societal change, digital transformation is not a brisk change program. It’s a long, drawn-out campaign with many battles and stages. The journey will be full of progress and setbacks, wins and losses, momentum and inertia, and breakthroughs and detours. We hope these observations will be useful references and meaningful food for thought for any business or technology executive who is about to start or is in the middle of this difficult but important journey.

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Acknowledgments

We would like to begin by thanking our colleagues at ThoughtWorks for reading the early drafts and providing their valuable feedback: Brandon Byars, Ange Ferguson, Martin Fowler, Rachel Laycock, Jonny Leroy, Chris Murphy, Jonathan Pangrazio, Rebecca Parsons, David Robinson, Jonny Schneider, and Sue Visic. Their incredibly broad and diverse experience with real-world digital transformations gave us many more perspectives to think about than we originally had in mind. Their stories, reflections, and insights added a lot more color and depth to the book.

Special thanks to Martin Fowler for your advice on writing as a craft beyond the content itself. Thank you for helping us to get started on this journey.

We sincerely thank our peers in the industry for the careful review of the final draft, especially Rick Freedman, Jim Highsmith, Dave McKeown,and Xavier Paz. Your valuable comments, critiques, and suggestions allowed us to reflect on the flow of the content, the focus of our messages, and the relevance to different types of perspectives. Thank you, Jim, for the thorough review and the wonderful foreword.

We’d like to thank everyone at O’Reilly for green lighting the project and having confidence that our book was differentiated enough to stand out from other books about digital transformation. Many thanks to Kristen Brown, Melissa Duffield, Bob Russell, Katherine Tozer, and, in particular, our long-suffering developmental editor Alicia Young, who provided great insight and suggestions that have helped to shape the book.

From Gary O’Brien:

I’d like to thank those who helped me on this therapeutic journey of expunging thoughts from my head. Xiao, thanks for pushing me to do something I didn’t think I was capable of, and, Mike, for being the voice of reason through the process. To my wife, Nicki, and my children, Jayden, Taylor, and Emilie, for their support, patience, and enthusiasm that kept me at it. I’d also like to thank the executives I have had the pleasure of working alongside for their candor, trust, confidence, passion, and patience—friendships built and pains shared. Lastly, to my colleagues who stepped onto the transformation roller coaster with me and enjoyed the ride, especially to Sue Visic, who tolerated it more than most.

From Guo Xiao:

To my wife, Hao Dan, thank you for your indispensable patience and encouragement when I needed them most. I wouldn’t have completed the daunting project without your support. Gary and Mike, thank you for your willingness to compromise and co-create on top of your brilliance and intelligence. I couldn’t think of a more pleasant experience collaborating on such mentally challenging tasks.

From Mike Mason:

I’d like to thank my coauthors for their boundless energy and enthusiasm. Undertaking any kind of writing project is daunting—especially a book on a difficult subject such as digital transformation—but their dedication and prolific efforts created an incredible backbone for the whole work. Thank you, Gary and Xiao, for bringing me along for the ride!