While corporate transformation of some kind is on every board’s strategic agenda today, there is no lack of options on where to focus. Governance trends and issues include pandemic recovery, resiliency, talent, diversity & inclusion, and cybersecurity, just to name a few of the leading contenders. One corporate transformation that is interdependent with, and the foundation of, most of the other strategic initiatives is digital transformation, a critical governance trend.
Digital transformations in some form were well underway prior to the pandemic, but the demand has accelerated along with other trends. Digital transformation still remains uncertain in multiple aspects, e.g., technology, market acceptance, stakeholder impact, business model viability, etc. Uncertainties in all of those areas require both resources and time. Progress is more iterative with failures are often and natural, along the way. Too many times companies attempt to digitally transform without articulating the extent of uncertainty and intentionally managing those risks. The board must realize its value in governing the exploration and risk mitigations inherent in the digital transformation of a business.
What exactly is digital transformation of a business? What is entailed in the transformation? How is it different from innovation? What is the impact on a company’s stakeholders?
Most importantly for this essay, what is the board of directors’ role in digital transformation? How does the board manage all of the uncertainties inherent in digital transformation? How can the board create value for the company’s digital transformation?
The Landscape of Digital Transformations
Digital transformation arises from the confluence of elastic cloud computing, big data analytics, internet of things (IoT), and artificial intelligence (AI).For a company, these technologies offer the opportunity to be groundbreaking and revolutionary due to three qualities:
- ubiquitous data,
- unlimited connectivity, and
- massive computing power.
For example, ubiquitous data allows a company to actually gather a wide array of data on customers rather than simply estimate or survey: who they are, what they want, how often they buy, and who they recommend. Unlimited connectivity means customers have immediate access with fewer obstacles and delays at greater cost efficiencies. Computing power means a company can collect and use all of that shopping, purchasing, and servicing data to view customer relationships and observe patterns beyond those observed by humans.
One can begin to see how a successful digital transformation can provide speed, agility, and economic value. In practice, digital transformation can actually be facilitated and managed as two transformations. One transformation is internally focused on digitizing the company for operational efficiency. The other strives for digital value propositions for customers, thereby yielding new offerings1.
But digital transformation is not simply innovation. It is not simply an “automated process or product”. It is a transformation that impacts every facet of an organization. Digitizing a company means new employee roles, processes and technologies that are stakeholder focused and those processes and technologies will “cross” present day functions and departments. This requires new roles, processes, and applications.
Startups and emerging companies have less “baggage”, i.e., they have less siloed departments to recast. Their digital transformations will be relatively easier, with less obstacles. Other, more mature companies, will have a longer process of retaining present offerings and servicing while moving the people, processes, technology, and culture to a digitally designed company. It requires employee involvement and multi-functional teams to start, resolving in stakeholder teams with appropriate decision rights for adaptability.
Unlike re-structuring a company, a digital transformation is not a one-time objective. It is a dynamic process that changes as the technologies, market demands, and strategic opportunities change. The transformation is founded on identifying those items that are constant (e.g., present key offerings, customers, processes, core capabilities, master databases, etc.) and those items that will be constantly adapting (e.g., offerings, apps, skills, roles, etc.).
The transformation process itself includes collecting and sharing customer insights so that there exists alignment about the needs and goals. It also includes configuring people, resources, processes, and technologies for both a company’s stable core operations and its adaptable digital offerings. Furthermore, the process includes developing a supportive decision rights framework with relevant accountabilities. And finally, the transformation process must include all of those frameworks and plans for all stakeholder categories.
PwC’s 2020 CFO Pulse survey revealed that while 52% of companies plan to cut or defer investments because of COVID-19, only 9% of those will make those cuts in digital transformation. This year in PWC’s Digital IQ research of 2,380 executives, they discovered 5% of surveyed companies consistently invest in new ways of working and get significant value on their digital investments from growth and profits to innovation, customer experience, people and more. Of those, 84% mandate collaboration and cross- functional work, 33% invest more than others in digital initiatives, and 63% have upended their training process and seen results.
A company’s success in harnessing these technologies into a dynamic, thriving business is contingent upon CEO leadership and board governance. So, what is the board’s role in a digital transformation?
The Board’s Role in Digital Transformations
The board of directors and the C-Suite must become the engine of transformation. They must partner to set the vision and lead the transformation.
For the board, the first step is to understand what a digital transformation is, its promise, its necessity, and its process. In PwC’s 2020 Corporate Board Survey on Digital Transformation, 82% of executives say that their board is informed enough to support the company’s digital efforts, while only 58% of directors agree. Boards stay current on digital today by the following:
- Briefing from Mgt -87%
- Industry analysts, briefings, & conferences – 39%
- External Advisors – 35%
Today more than ever, a board needs an independent director who understands digital innovation and transformation to the degree that they can facilitate the board’s education, discussions, and decisions involved in digital transformations. They should act as the detailed connector between the CEO, CDO (Chief Digital Officer), and the board. So, the first step is to enhance the board composition to dynamically address digital, in addition to outside analysts and advisors.
In addition to the required board composition, the board should add the following to the strategic agenda:
- Digital strategic vision – the board must work with the C-Suite to fashion a digital strategic vision that promises to capture economic value. It is important to map the company’s industry value chain, as well as adjacent industries, noting the opportunities for business value and identifying a stream of iterative digital potentials. This would include all of those typical competitive assessments, such as potential disruptions, new entrants, etc.
- Digital roadmap – once the vision is set, identify a roadmap of initiatives and proceed iteratively, accumulating incremental success and value. Ensure that the roadmap is actively communicated to stakeholders.
- Decision rights – since digital transformation requires continual adaptation, oversee a decision rights framework that supports adaptation in the farthest nodes of the company’s network of employees/teams
- Incrementally capture business value – since digital transformation is a long game, make sure the organization is continually collecting data, building, testing, and adapting while incrementally capturing business value
- Culture of innovation – the board must attend to the culture of digital, ensuring that attention, reinforcement, and continual education are part of the corporate values and behavior
- Digital education – since adaptability rests upon iterative doing, observing, and learning, a board must ensure that leadership and the workforce are continually educated in digital.
As with other initiatives, the board executes the above agenda by probing, questioning, and advising the company on both opportunities for economic progress as well as identifying and mitigating risks.
Now more than ever, companies must take advantage of digital transformations or get left behind. The opportunities to capture value have never been greater and so are the risks. Boards can play a valuable role in steering the company towards the recognition of opportunities while guiding the mitigation of the risks, all while avoiding the largest risk of all, the failure to adapt.
Resources:
- J. Ross, C. Beath, & M. Mocker, Design for Digital: How to Architect Your Business for Sustained Success (MIT Press, 2019).
- T. Siebel, Digital Transformation: Survive and Thrive in an Era of Mass Extinction (Rosetta Books, 2019).
- PwC’s 2020 CFO Pulse Survey
- PwC’s 2020 Corporate Board Survey on Digital Transformation