What causes digital business models, products and services to fail?


# Digital Transformation, # Business Models, # Digital Failure

I wanted to share this thought provoking article https://www.linkedin.com/pulse/ignorance-regard-digitalization-frank-hilderts?trk=prof-post by Frank Hilderts with an almost Dutch straightforwardness. Not for the faint hearted.

“Digital Trans-Furcation #1 

Why are companies who have been known for many years for their innovative products and processes losing their competitive edge at an alarming speed? Large and strong corporations such as AEG, Grundig, Nixdorf Computers, Triumph, Brockhaus, Agfa, Kodak, Quelle, and Schlecker are disappearing after decades of successful operations – and what were thought to be secure jobs that formed the basis for many a life plan vanished along with them. Instead, digital companies are taking over from behind entire industry sectors AT HITHERTO UNKNOWN SPEED: Uber, AirBnB, Skype/WeChat, Alibaba, SocietyOne or Netflix have grown to become major, if not key, competitors for traditional sectors such as taxi companies, hotels, telecommunications, retailing, banks or the movie industry. Other sectors are already following close behind.

So what did proud and successful companies do wrong?

Certainly, the full picture is in each case a mix of individual causes but, as an interim CIO and IT management consultant, I have very frequently encountered one characteristic in different management boards that is surprisingly common to all of them: ignorance with regard to digitalization.

The CIO is considered more of a head technician whose IT is only of interest when something is not working or when an IT safety risk could personally affect the board members – an IT that actually only generates costs (the benefits being realized somewhere else – but this does not appear as a figure on a bill) – which is why, organization-wise, the IT function in most cases reports to Finance. On the board as such there is little IT literacy and in some cases board members are even proud of this circumstance: in their opinion, the expensive black-golden ballpoint pen doesn’t crash, long years of experience count more than big data analyses and, privately, they are very well capable of managing the electronic knick-knacks, aren’t they?

Board members look at the digital newcomers in their business segment with a lenient smile because, after all, it took them decades to reach their current position as a company. They glorify the times when people used to communicate face to face and did not permanently glance at their smartphones – while, in their own company, digital resources are to be made available as restrictively as possible (if at all) because they believe that, after all, the staff is here to work and not to play with their computers.

So should we quickly move to some digital – or what?

So when a company shifts from fax to email and replaces inefficient manual processes like recording written purchase orders or incoming invoices by inefficient digital processes operated on large, expensive and monolithic IT systems and they proudly believe to be in the first league, this is rather irritating.

When data analysts find out that men who buy diapers in a store in most cases also buy beer on the way and therefore conclude that beer should be placed on the shelf next to the diapers – this does not mean that you have found out why a customer buys something, but how you can justify activities.

If controlling the robotic vacuum cleaner via smartphone takes longer than using a hand-held vacuum cleaner, if the coffee maker absolutely needs to be able to receive dozens (?) of coffee recipes via WLAN or if the dishwasher senselessly notifies you per app that it has finished doing his job, the question must be asked whether the interests of advertising data collectors are actually more important than those of the customers who are, after all, paying for these services.

What causes digital business models, products and services to fail?

For example, departmental specialization: Purchasing is in charge of company-wide procurement activities and operates based on a large catalog of criteria which always represent a trade-off of interests but not based on the search for technically optimal components. Marketing produces advertising claims without having any detailed knowledge of the product that is based on personal experience thus creating a dangerous gap between product performance and advertising claims. R&D is looking for optimal solutions that balance technical and economic interests, but not for the maximum results. This points towards highly specialized silos with hardly any personal exchange between the departments.

Or take the decentralized division of labor: almost every department time and again inevitably has to take minor decisions affecting offers and services, but no one actually assumes full responsibility for the customer’s satisfaction with the product – thereby marginalizing the product manager for tactical reasons of power play. Every department has different objectives and they all have different managers who (hopefully) get along well. For every department, the product is just one of many, but for no one it is a true concern. Everyone in the decision-making chain believes that he is doing his job but, taken together, they only produce mediocrity – and they do so optimally.

Or the lacking cost degression: most individual products account for only a small share of overall sales, for small production volumes and, as a consequence, also for very limited degrees of freedom in terms of product development. In the App world, by contrast, you have real-time data, remote control with zero latency, live updates, HD, no waiting periods, no crashes – all devised by an international armada of developers. Conventionally operating companies are thus confronted with expectations they cannot fulfill.

Or take multitasking stakeholders: buyers are often not the end consumers, but distributors and wholesalers. In this environment, a wide product range and constantly new product variants are more important than having the one and only perfect product. As a consequence, the retail sector forces manufacturers to constantly produce new iterations of tried and tested products. Instead of striving for perfection, they end up caught with dozens of variants.

Or an inappropriate economic networking: conventional business cooperations are based on a vertical networking, characterized by a chain of command, relationships of dependency, business secrets, and full integration. One option would be to quickly merge all parties involved to one company, but it’s cheaper this way and also allows for quick divestments. No company can operate the way that would be most appropriate, this being impeded by the fact that companies are too readily following the most powerful market player. That way, long-cherished traditions turn into an obstacle for crucial changes.

All these factors get in the way of truly good business models, products and services that offer REAL solutions for IMPORTANT challenges:

  • Collect data – without breaching people’s right to privacy
  • Support customers fast and conveniently – without additionally creating suboptimal proprietary complexities
  • Offer simple implementation – without creating a gateway for criminal activities

And it works even if it is to be low-cost instead of inexpensive or if it is unfinished. To this end, companies must not only allow for changes, but welcome them, they must allow to critically question their own business model, and the omniscient boss (who cannot know everything, anyhow) must grant more scope for development – to make sure that true digitalization is no longer ignored.”

If you want the board and your business stakeholders to sign off your digital project focus on the business bottom line.

Is strategic

  • Ensure that Digital services (internal and external) can be prototyped and set up in weeks not years.

Bottom line: Focus should be on time to market

Acquire the right tool sets and focus on result culture is important but, delivery cycles should be calculated in days or a week or 2. To many companies focus on minimising software licenses only to find themselves with solutions that where initially scaled for small and mid sized companies and that requires significant effort to set up. Focus here should be on how fast can we set the service up to the needs of the business so that they can deliver customer value.

If the service does not work and does not provide value for the business it does not matter that you did not pay a software license you still invested time and resources that could have been used elsewhere.

  • Build small teams to explore external and internal business model improvement or new business models with a prototype, test, correct, put in production (agile, learn / fail fast) rather than a “do or die” mentality no one ever wanted their head to end up on a silver plate or put their career at stake.

Over investing time in tools that are not adapted to purpose only moves the cost from vendor lock in to “tools that are not adapted to purpose lock in”.

Sometimes we need to appreciate that we can not make a dead horse run any faster no matter what we do even though loading it on a truck might be tempting.

Take the sunk cost an move on! The earlier the better.

Microsoft, Google, Uber, AirBnB, Skype/WeChat, Alibaba, SocietyOne or Netflix did not propose a perfect product but a product that was good enough to be used yet 80% of IT development effort is focused on the 20% of functionality that few use anyhow.

Most of the time this is driven by business requirements where IT is unable to put a cost on the additional time it will take.

Bottom line: Allocate resources effectively and focus on the needs of the business and the needs of your customers.

A certain structure needs to be put in place such as as a transformation office, a business and IT team that leverage external providers as needed. Agile and Waterfall are popular development methods that could be leveraged but to much focus on the method might not bring the right focus. Many of the “Agile” references such as Spotify, Netflix etc work with small, smart teams that test services as they go often level times a week or day where Agile is used to formalise how they work as opposed to being implemented and rolled out. Where the business model can be more or less “disruptive” the execution of the IT backbone of the service is based on rapid improvement enabled by platforms such as AWS for micro services https://www.linkedin.com/pulse/why-microservices-should-default-architecture-pattern-brahma-acharya?trk=hp-feed-article-title-like

Sounds strategic and is capital

  • Ensure the digital customer experience for external and internal customers with dynamic BI and Digital application performance management.

Bottom line: Invest in the customer experience.

If your strategy is digital then make the necessary investment to ensure that services are up and running and the customer experience is optimised. Digital and Application Performance Management as well as Dynamic BI ensures the customer experience for your customers but also the business and your business stakeholders.

  • Build a coherent strategy where the CIO and the CDO work with best in class providers from Microsoft (Azure), IBM, AWS to rapidly deliver scale able cloud services as needed.

Bottom line: Do we build or buy the service? A public / private cloud can often be set up in a matter of days so that you can start to build services and test them on the fly to see if they gain traction. The successful service can then be brought in to a private cloud / data centre (internal cloud) as we seek to optimise cost and security.

If cloud services are not run effectively cost will run out of control and I have seen this on numerous occasions where the on off boarding of cloud services is not effectively managed.

Sounds capital and is strategic

  • Onboard the board to ensure that they understand the value of IT as a driving force and provide enough leeway to explore new digital external and internal business models.

Bottom line: Do not expect your stakeholders to “speak IT” focus on the business logics, market share, down time that is speak business.

  • Provide the ability to rapidly detect bottlenecks in the delivery of external and internal IT services.

Bottom line: The ability to deliver effective internal IT services conditions your credibility. With the right tool sets this can be done in real time.

Sounds and Is capital

  • Trust is capital in a customer relationship most executives first contact with it is with the internal IT service organisation ensure to be able to detect and address bottleneck before they become a trust issue

Bottom line: Trust is built on a step by step basis. If you can gain the trust of your board / finance department they will allocate the necessary resources.

Most of the time IT needs to answer 2 questions: 1) does it work, 2) is our spend aligned with the competition.

  • Run it as a business enabler as opposed to a cost center. That is understand how services are delivered and how cost is distributed this would include for outsourced providers.

Bottom line: Where creative accounting might sometimes be required to get the ROI right for a necessary infrastructure investment most of the time we need to understand how services are delivered and who consumes them to understand how cost is distributed.

If you have a good service request management service catalogue front end it can used to understand who consumes what and how services are billed for and notably by outsourced providers.

If you can effectively allocate cost you can run IT as a profit centre were charge back can be based on real consumption.

What causes digital business models, products and services to fail?

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