Embracing Digital is in the top 3 agendas of established companies in this decade, and many CEOs approach the topic in the same manner factory owners approached electrification a century ago. In the early days of electrification, factories retained many of the components built around the original site of the steam engine, even when they knew the future and the present is with the newer and more efficient electrical machines rather the steam driven mechanical machines. Like then, today many companies are digitizing the belts and pulleys of legacy processes when they should be thinking deeply and creatively about how to use digital to operate and organize in new ways that create new opportunities.
Powered by the exponential growth of processing power, bandwidth, and storage, digital differs fundamentally from earlier, linear business developments. It’s not enough to sprinkle digital pixie dust here and there and declare victory. Companies must clearly define the ends that they are trying to achieve by digital means.
Most legacy companies go about becoming digital by asking two initial questions:
â— Who should be in charge of digital?
â— What is the best model for organizing digital?
These are very simple but important questions to be answered but without a wholesome approach legacy processes have rarely been successful. Many companies have been sent down the wrong path in their rush to go digital. Companies often dive into a mix of projects and activities without having first developed a clear understanding of what they want to accomplish and how they plan to achieve those goals.
Companies are better off establishing a few overarching goals, selecting a digital model that is in tune with their current organization and capabilities, and then embedding digital carefully and strategically throughout the organization. To jump into the future too quickly is to risk frustration, failure, and waste.
Digital does not change the principles of organizational design and governance. But because the capabilities and cadence of digital work can differ so significantly from traditional ways of working, leaders must be thoughtful in their approach. Below, we offer a practical guide to establishing a digital organizational model and governance structure-including such issues as whether to separate digital into a standalone unit and whether to name a chief digital officer-for companies that began life in a brick-and-mortar world.
Once digital is on a CEO’s radar, the urge to act swiftly-for example, by appointing a chief digital officer with an ill-defined portfolio-is understandable. After all, accountability, responsibility, and momentum drive performance. But fast moves can backfire.
Digital covers a wide range of customer-facing, back-office, and on-ground activities, including algorithmic decision making, microtargeting of customers through artificial intelligence, use of software bots to automate clerical deskwork, and self-learning robots. Without clear goals, companies are likely to chase shiny objects that look exciting but may turn out to be subscale, redundant, or off-point.
The same need for deliberation applies to organizational and governance issues. A company that fails to establish digital roles and decision rights is likely to end up with several of its teams pursuing similar incremental goals. And if the company establishes a digital operating model in a vacuum, it will inevitably generate friction among existing teams and functions. Accountability and oversight are common casualties when a company fails to think through organizational issues.
In other words, to say that a company wants to become digital is to start a conversation about a set of choices and decisions. Answers to three key questions-one involving strategy and the others focusing on organization and leadership-will help shape and inform that evolutionary journey.
What is the Company’s expectation from its Digital Strategy?
At the beginning of this process, three quick questions are especially important:
â— What is the company’s core ambition as an enterprise? Digital should act in service of that agenda, not as an effort that is unrelated to it.
â— In what critical areas will digital be considerably better? Most companies cannot immediately go digital across the entire organization. Instead, they need to establish priorities that reflect opportunity or (conversely) anticipate danger from disruption.
â— How digitally mature is the company in those critical areas today? The company must have the right capabilities in place if digital is to work effectively. Digital skills are not replaceable. A digital marketing specialist cannot manage robots on the factory floor.
Should the Company integrate or segregate digital processes?
Once a company has defined its digital strategy, the next key question is organizational and relates to integration versus segregation of digital activities: Should digital activities reside within or outside the current organization?
Building digital capabilities internally, within an existing hierarchy, is generally the easiest way to integrate digital activities into a company’s strategy, execution, and talent development. If one goal is to embed digital in the company’s fabric as quickly as possible, the internal option is the best-and most common-approach. But committing to the internal option leads to myriad related choices about where and how best to locate digital activities.
Often, the first question about digital organization that CEOs ask is whether they should appoint a chief digital officer.
The idea of having a chief digital officer is popular these days. Giving a single executive accountability for digital activities is appealing, but the success of a CDO depends on the organizational context. If a company’s digital activities are highly centralized, having a CDO is likely to make sense; but establishing roles, responsibilities, and relationships with line businesses remains critical.
Figuring out these issues upfront will accelerate a company’s digital activities in the future.
But that question actually belongs to a broader question involving three options: Does the company want to centralize its digital activities, distribute them throughout its businesses, or split the difference and create a hybrid model?
If a company’s strategy requires significant coordination and cooperation across businesses and functions, or if the company needs a big digital push then centralization may make more sense for digital activities and other functions. Likewise, if the company’s current expertise or scale in digital is weak, centralizing probably makes sense. Finally, businesses that run on a command-and-control model tend to gravitate toward centralization.
The profile of companies that decentralize digital is the mirror opposite of those that favor centralization. A decentralized strategy does not rely on coordination across boundaries, and organizational decision making is distributed across the company. Line businesses are responsible for their digital activities, with support from one or more centers of excellence.
When digital becomes more fully embedded in the organization, businesses throughout the company will find it easier to develop a digital culture and to recruit digital team members rather than digital specialists who are unaccustomed to having front-line responsibilities.
Under a hybrid approach, line businesses continue to run digital activities, but they work closely with the center on best practices and other forms of support. Digital has support at the top, and the company can maintain a good balance between global consistency and local initiative. As in the decentralized model, however, digital in a hybrid system is at risk of competing with and losing out to other priorities.
How Should the Company Organize a Standalone Unit?
Integration is not the only option. Some companies create a standalone digital unit that operates independently of the day-to-day business. Many news organisations have taken this route. This makes sense when a company’s digital ambitions require entirely new business models and capabilities or when those ambitions are disruptive to the core business. A standalone digital unit may also make sense when the main organization resists change or when the company is unlikely to attract digital talent to its core.
The standalone option has some positive attributes. It can act as a breeding ground for new ways of thinking and working, and it can enable companies to move quickly at the start, with less risk of failure. Digital integration with a standalone unit takes longer, but that may be the price of moving forward if the core business is initially inhospitable.
Embedding Digital in an Organization’s DNA
To some degree, the digital organizational and governance issues described earlier are transitional. In the long run, companies should aim to fully embed digital in day-to-day operations. This is what digital natives such as Spotify and Zappos have done since birth and what ING, a traditional global bank headquartered in the Netherlands, has implemented with its agile approach.
If history is any guide, however, the journey to organize for digital will be an ongoing one. Companies will continue to swing between centralization, when they want state-of-the-art capabilities, and decentralization, when they want wider dispersion of expertise and capabilities. In the digital age, we anticipate that this accordion will continue to play as new trends and technologies emerge.