The Path To Successful Digital Transformation Starts With Pockets Of Innovation

I’ve been hearing about “Digital Transformation” for a couple of years now, and as I’ve wandered the halls of Web Summit this week in Dublin, I’ve heard lots of talk about how companies must transform and change the way they approach development and IT, while searching for innovative ways of doing business. But doing that remains daunting and scary for many organizations. Whether it’s because of a classic Innovator’s Dilemma or just fear of change, some companies remain paralyzed as the world changes around them. One approach that could help these companies get moving is creating pockets of innovation instead of trying to change the whole company at once.

The problem for large, established publicly traded companies is they are often caught between conflicting requirements. From an IT perspective, they have a generation of legacy equipment and software which they can’t just simply abandon, even though it handcuffs the organization in many ways. From a pure business angle, they see their established markets on one side and their investors on the other, and they are afraid to take risks with what has worked so well in the past. Yet they also see competition popping up all around them at a frantic pace and they know they can’t continue to do things the same way they always have, and get the same results long term. That sometimes creates a sense of panic that can result in a deer-in-the-headlights reaction as they stare transfixed at the oncoming change agent, unable to move. The good news is there are strategies to get you moving.

PICK ONE BATTLE TO START, BUT MAKE IT COUNT

One way companies can move forward is to begin to look at these issues from a different perspective. As Pivotal Labs COO Edward Hieatt says, you don’t have to boil the ocean to make this work. He says his company’s job is to coach customers through these changes. He suggests concentrating on one part of the organization that can have a big impact. That involves choosing a single, focused effort and changing your developer mindset around that initiative. He cautions that you don’t need to do this all at once, but you do need to go all out in the area you choose.

Hieatt uses health insurance company Humana as an example. They sent people to Pivotal for a year, including developers who learned modern tools and techniques and managers who learned how to build new processes. In the end, a traditional health insurance company from Kentucky built a new building specifically for this new effort, separate from the main company with a different way of working around an open layout much like you would see at a Silicon Valley startup. They made that concerted effort that Hieatt says is essential for success. One of the first results of this effort was a personal healthcare management app.

Interestingly, Hieatt’s company is a joint venture between EMC, VMware and GE (which owns 10 percent). These three companies spun out Pivotal as an independent company to provide an outlet for this very type of innovative thinking that was independent of these larger organizations because these companies recognized that they were too big and too slow to innovate in the way they needed to. In essence, they created Pivotal to be what Pivotal Labs does for its customers.

THE TWO PATHS APPROACH

Mary Mesaglio, who is a research vp at Gartner, says she recognizes that companies struggle with how to deal with these types of fundamental changes and she recommends a similar strategy to Pivotal that she calls a bimodal approach to IT. That means one part of IT remains unchanged and continues to deal with systems of record, working very deliberately to install enterprise-grade solutions with long purchase and implementation cycles, just as they have traditionally done. In addition, she recommends creating a second separate unit that thinks fast, acts quickly, and reacts to changing market conditions without the constraints of traditional IT.

As Mesaglio puts it, Mode 1 is effective with a plan and Mode 2 is effective when there is no plan and you have to create something quickly by the seat of your pants. She explained that Mode 2 operates by what she calls “enlightened trial and error.” You have to experiment, but with some purpose, not just random shots in the dark.

Much like Pivotal, Mesaglio recommends creating a separate place for the Mode 2 team to operate because if you put them side by side with Mode 1, you have a recipe for a culture war, or worse, you risk producing Mode 1.5, which is neither one nor the other –and she warns the muddled middle is as dangerous as doing nothing.

All that said, Mesaglio told me that these two approaches can’t stay on diverged paths forever. At some point Mode 2 has to be incorporated into the mainstream of the company, but that takes a measured approach. She recommends starting slowly with an island project, one that is completely separate and very likely completely different from anything your company has done before. Humana’s healthcare management app might be an example of this approach.

Over time, you need to begin to look for more integrated projects, ones that will give the company some kind of competitive advantage. She suggests looking at an existing system and providing a Mode 2 solution. For example, when your credit card system comes up for renewal, find a new solution that offers you a more modern context where you can take advantage of data you are collecting about credit card transactions to understand who your most loyal customers are and target special offers for them. This moves your credit card system from purely operational to something that could provide a competitive advantage.

The third stage is where she says most CIOs want to start, where they take some sort of existing back-end system and extend it into a new channel, usually mobile. The reason she councils waiting for Mode 2 to find its footing before they take this step is because this stage requires that Mode 1 and 2 work together side by side to integrate the existing back-end tools with the new tool, and without some proof points to show Mode 2 deserves to be taken seriously, this could result in a bad cultural mix and put the Mode 2 team at unnecessary risk.

The final stage is where Mode 2 reaches full maturity and creates new services that integrate with backend systems. The difference between this and the previous level is that you are creating something new as opposed to mobilizing an existing tool. In both cases, they integrate with backend systems, but in this stage the service you’re developing never existed before.

ADVICE FROM THE REAL WORLD

This is all well and good in theory, but this type of transformation takes hard work and an executive team that is willing to take some risks.  When EMC, VMware (EMC owns 80 percent of VMware) and GE launched Pivotal they were making a commitment on some level to this type of change, but GE in particular seems to be a company that is making headway in this type of business transformation by trying a number of new ways of doing things.

For instance, they are building a new Industrial Internet of Things Platform. Last spring, they signed a contract with Box for 300,000 seats and just recently, they let it be known that, in the coming years, the company plans to close 90 percent of its data centers and move most of its computing to the public cloud. These are bold moves, but they are only part of what GE is doing –and certainly not what you necessarily expect from an industrial giant that makes appliances, wind turbines and jet engines.

Andrew Markowitz, who is director of global digital strategy at GE, says a big part of this is a top-down approach to transforming the company –but he acknowledges you sometimes have to look outside the company and recognize that it’s hard for established companies to innovate. That’s why they’ve partnered with Pivotal and Quirky and launched their own venture capital firm, GE Ventures. He says they also talk to other venture capitalists and interact with startups at places like Web Summit. “We are trying to see different ways of doing things,” he told me.

Coca-Cola is another established brand looking to the outside for the type of innovation they might lack in-house. David Butler, vp of innovation at Coca-Cola says startups give his company something it lacks: agility. “Most large established companies have scale but lack agility. Startups have agility, but they’re looking for scale.” He says combining the two can create a powerful mix. Coke has been funding startups looking for different ways to reach their market or solve problems, recognizing that the world is changing and they have to as well.

What’s interesting about Coke’s approach is they are looking for experienced entrepreneurs who work lean and know how to build a solution and get it to market. And what’s more, Coke isn’t trying to control the project. They provide seed money and access to Coke’s vast resources, but Butler says there is no quid pro quo here. The solutions these companies come up with are not exclusive to Coke and the companies they fund are independent and free to talk and sell to others.

But Markowitz says you have to start to build that agility and willingness to experiment in-house too, and his department to a large extent is charged with trying different things without fear of failing. As he says, he hears about how you deal with failure at every conference, but it’s not about celebrating failure so much as celebrating a willingness to try, and not punishing people for failing. “At GE we are celebrating good ideas. Whether they are home runs is not the issue. Management supports us,” he told me.

That said, Markowitz recognizes you have to build proof points along the way. He says the purpose of his department is to create those proof points and to break down functional silos by working across departments to improve the sales cycle and give customers different ways to interact with the company.

You would think a company that sells appliances and large-scale industrial systems might not think they can deal with consumers in this fashion, but Markowitz says they have found it works. For instance, they created a game call Patient Shuffle that lets you navigate through a virtual emergency room. They created it as a way to explain how their electronic medical records (EMR) system works. When their sales people walked into hospitals to sell the EMR solution, they found people using the game and that can build important brand recognition in a creative way. As Markowitz told me, “You never know what’s going to work.”

What’s important is that companies are trying to create new systems like this. We are seeing some of the most established brands in the world recognizing the way they do business is changing in a fundamental way, and there is growing market pressure in spite of their past success. It takes a willingness to be creative and to try new things. You can’t expect the same strategies are going to work forever and you need to have mechanisms in place that let you experiment with new ways of doing business.

As Markowitz told me, “It’s a reasonable bet that companies that are faster to market and driven by data and service oriented will win. The starting point has been a runway for us to practice those things.”