Managing Director & Partner
Our main message in this report is that TMT companies need to transform. TMT incumbents are competing against companies born in the digital and mobile era. Unless they become more like these new competitors, incumbents will be unable to ride subsequent waves of disruption, including AI, IoT, and cybersecurity.
It is important to note that digital and mobile are not just forms of technology but also mindsets. The greatest shortages at most TMT companies today do not always involve technological know-how. Instead, the short-comings are in leadership, the resolve to change, and the skills needed to reshape the organization around new approaches such as agile.
TMT companies may have been dealing with disruption for longer than most other companies, but they are not necessarily further along in their own transformative journeys. In our experience, many companies view digital transformation too narrowly. They incrementally experiment with disruptive businesses and business models, or they digitize discrete processes. For example, they may become adept at digital marketing but not at digital customer support.
At the other extreme, some companies initiate enterprise-wide digital transformations, but they lack focus and accountability. Many leaders of businesses and functions lack the technical skills and digital expertise to implement the transformation within their teams. And many of them lack an overarching vision, too.
Instead, companies need to approach digital transformation in two parallel and self-reinforcing ways:
Digital transformation is, in other words, an all-encompassing activity. Anything less ambitious is a signal to your employees, your competitors, and your customers that you are not embracing the future.
Digital attackers can swiftly build many of the traditional capabilities that took incumbents decades to acquire.
Viral and word-of-mouth marketing, for example, can create valuable brands quickly, and the cloud allows companies to acquire virtual global scale. Uber demonstrates just how rapidly these businesses can disrupt industries and generate value.
One of the most valuable exercises companies can complete is what we call a “digital disruption assessment.” It can provide the “Aha!” moment that shows how much of a company’s revenues and shareholder value is at risk.
This assessment is a business-by-business breakdown of what digital disruption could mean. It is the first of a four-step process of developing a digital strategy that comprises, in addition to the disruption assessment, an assessment of the digital potential for the company, an articulation of the company’s strategy and ambition, and a transformation plan.
Digital Disruption Assessment. This assessment is a broad five- to ten-year forecast of the industry and the company as digital disruption takes hold. The cornerstone is an estimate of revenues at risk. (See Exhibit 1.)
Other elements of the digital disruption assessment include:
Assessment of the Digital Potential. If the first step is meant to appeal to fear, the second step is aimed at greed: What is the payoff of an end-to-end digital transformation of the value chain and the pursuit of disruptive business models?
An end-to-end digital transformation of the value chain can yield margin improvements of up to 25%—and in some cases even more.1 Notes: 1 George Westerman, Didier Bonnet, and Andrew McAfee, Leading Digital: Turning Technology into Business Transformation (Boston: Harvard Business Review Press, 2014).
Any comprehensive digital transformation needs to cover not just business units, but also functions, such as IT, HR, and procurement. Cloud-based services, for example, can help manage payroll, performance reviews, and purchasing at a lower cost and with less complexity than many legacy systems. By modernizing these functions through digital innovation, companies can turn them into sources of value rather than cost centers.
Companies should estimate the size of the prize of disruptive innovation. Organic growth can be the result of the following:
More and more, companies will need to acquire digital innovation from outside their organization through corporate venturing, M&A, and partnerships. The Walt Disney Company, for example, invested in Vice Media as a way to reach younger consumers. Google, with its acquisitions of Nest and Dropcam, entered the smart-home market. Facebook moved into the next generation of virtual reality through its acquisition of Oculus, and Vodafone, with its purchase of Cobra Automotive, expanded into connected cars.
Articulation of the Strategy and Ambition. Leaders need to articulate a compelling vision and strategy for the company’s digital future. This should include priorities, metrics, and organizational initiatives that will bring the strategy to life. The good news is that companies can rely on proven methodologies to reinvent themselves. In our work on more than 500 transformations, we have developed a simple but effective way to frame transformation based on three bedrocks:
These three components form the foundation of any transformation. (See Exhibit 2.) In digital transformations, they help ground what may be unfamiliar new challenges and opportunities in proven methodologies. Funding the journey, for example, shows the organization that its leaders are committed to making progress quickly and have a plan to pay for their long-range ambitions. Winning in the medium term demonstrates a commitment to ambitious but achievable goals that will put the company on a stronger footing within three to five years. Building the right team, organization, and culture is often the missing ingredient in transformations, especially digital ones. Digital transformation is about leadership and sociology—how people work together and behave—as much as it is about technology.
At the start, the development of a digital strategy—the four steps outlined above—dominates the company’s activity. But the focus quickly switches to funding the journey and winning in the medium term—steps that have relatively quick payoffs. Over time, building the right team, organization, and culture becomes the main activity, proving again that all transformations ultimately are about people, behavior, and leaders. (See Exhibit 3.)
While the narrow purpose of this report is to analyze the TMT sector through a shareholder value creation lens, the broader aim is to encourage companies to discover ways to unlock and create future value and competitive advantage. We firmly believe that successful digital transformation must be an essential ingredient of the leadership agenda over the next few years.
Executives can ask themselves the following questions to assess and shape the digital transformation:
If the answer to any of these questions is no, it’s time to get to work.