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Digital Transformation and the Board’s Role

Digital players are threatening the traditional sectors and their business models and most of the executives from traditional sectors believe that the business model needs to be changed in the near future. Digital entrepreneur Marc Andreessen said that “Software is eating the world”. On the other hand, recent surveys show that only small number of boards focus on digital issues and sponsor digital projects. A research conducted by MIT Sloan Management Review found that 87% of respondents expect digital disruption in their industry while only 44% of respondents prepare themselves adequately1.

Boards must play a leading role in making this transformation. Boards need to be thought partners of management. However, when the boards’ understanding of the digital issues have been reviewed there seems to be an information gap. Board members should be trained and informed about technology environment, digital trends, how these trends affect the company’s business, strategy and value chain. The above research also showed that leadership skills are more important than technological skills in making digital transformation.

skills-needed-for-digital-transformationSource: “Aligning the Organization for Its Digital Future”, MIT Sloan Management Review, Summer 2016

Company’s and board’s governance structures must be reviewed and redesigned, if needed, to deal with effects of technological change. Board should be catalyst for digital transformation. Companies’ strategy and business model may need to be changed to serve in the long but the investment needs to be made in short term. Investment cost could be large and management would need the strong support of board when making such moves. Timing of right decision will determine success and failure of transformation.

Boards can also play an important role in encouraging management to utilize experimental technologies and digital business models. Board members could have important guidance since they have outside and neutral perspectives. However, boards need to consider the risks taken by the organization in such an action. Risk management and oversight must be embedded in such processes so that company should not take disruptive risks. Oversight is also critical for monitoring the results of these actions and if the desired outcomes have been achieved at the planed time interval.

Boards’ need to understand how digitalization would affect companies’ core businesses to take right decisions to transform the business.  Making right decisions can be achieved by having informed board members and having experts with wide digital and business management experiences at the same time. Recruiting directors from technology business may not be sufficient to solve problems since digital is reaching in commerce, production, transportation, logistics, communication therefore they also need to understand and combine companies’ business environment. Candidates must commit time for activities besides board meetings.

Board Nomination Committee must determine nominees with required competencies. If there is no body that fits the criteria, an expert could be hired as an outside advisor who could still help board to understand the situation and discuss the alternatives. Nomination Committees need to consider the future strategy of the business as well to determine the required competencies of future board. Then they must evaluate existing directors based on that criteria and make a transition plan for future board.

Some companies form advisory committees in digitalization issues. These committees may help to close the information gap of board members and advice on digitalization in companies’ business processes, new product development consideration, experimental technologies, innovation in internal processes like production, support functions and deeper analysis of available data. Discussion in the committee and the board would bring management and board closer to evaluate alternatives and develop new strategies. These committees may be useful to see the value created by digitalization projects. Sometimes important amount of money needs to be invested and stakeholders would like to understand feasibility of the investments. Such work could be realized with the expertise of the committee members.

Digitalization is changing business models by decreasing costs and eliminating waste. Traditional players’ boards must push management to explore company’s digital assets to understand the potential of the company. The other area of exploration is the data collected by the company. If this data could be structured and analyzed some useful hints could be gathered and used to create competitive advantage by redesigning business model. Board’s role is to make management to focus and spend time on these efforts.

Digital change business models. Board may lead to change industry dynamics at one extreme or may need to find new models to compete and survive. Blockbusters is physical video rentals and it had a revenue of 6 $ billion in 2004 while Netflix a digital video rental business which had a revenue of 0,5 $ billion in 2004. After 2004 Netflix increased its revenue with its digital business model while Blockbusters’ revenues first stayed flat and then fell very rapidly. NetFlix’s revenue reached 2.,5 $ billion in 2010 while Blockbusters’s revenue was less than 0.5 $ billion at the same year. This example shows that boards must monitor the threads coming from different sources, guide and encourage management to take action in managing these risks. The other side of the coin also shows that effective boards could support management in new business model which could lead to success like in the case of Netflix.

GE is another example. GE was mainly an industrial company. GE understands the importance of digital change and they are investing in software and analytics. The company invested more than 1 $ billion to build global software center of excellence. This new business is on developing industrial internet named Predix. Predix is an industrial internet platform where real time operational data can be turned in actionable insights with innovative applications. This software has been used by GE extensively and GE targets to help companies transform themselves since the company has the industrial know-how and experienced such a transformation before. When the revenue stream analyzed it is fast growing business with revenues in 2013 as $ 800 million and in 2014 as $ 1,4 Billion. GE’s board is supporting such an initiative since without board’s approval such a huge investment in capital and human resource terms is impossible.

The above cases show that disruption can occur instantly and company can get out of business. Therefore, boards should focus on risks and strategic issues more frequently. This means directors may need to spend more time with the senior management in addition to regular board meetings. These meeting could help to evaluate risks and developments together with top management and could improve the understanding of directors on this issue. Such actions could help to take quick actions to deal with situation and to benefit through opportunities.

Boards need to encourage discussions on risks and opportunities regarding digitalization. They need to communicate their expectations, their views on recent trends so that sense of urgency could be created on the management team to take action. Joint teams could be formed to work on the issues. Risk metrics and KPI need to be defined to guide all these efforts.

One other board responsibility is to monitor and fine tune talent management policy regarding digitalization. Human resource planning must include next generation digital talent management and planning for successful implementation of the digital strategy. Board should ensure that such policy exist and used for human resource planning. Such policy need to include rotation of digital talent between positions, and business units, outsourced positions policy and in-house talent development for open positions. Even if company has very good strategy without talent the goals could not be achieved.

Board should be part of the digital transformation. Forming future strategies based on the risks and opportunities, making large investments in digitalization, making changes in company’s business model to survive, to gain competitive advantage and to create revenue growth and profitability can not be realized without board’s involvement and guidance.

Notes
1. “Aligning the Organization for Its Digital Future”, MIT Sloan Management Review, Summer 2016

References
· Aditya Pande, Christoph Schrey, “Five Questions Boards Should Ask About IT in a Digital World”, McKinsey Quarterly, July 2016
· Annet Aris, “How to Spot a Game Changer”, INSEAD Knowledge Blog, November 26, 2015
· Annet Aris, “The Mindset Needed for Digital Change”, INSEAD Knowledge Blog, March 1, 2016
· Gerald C. Kane, Doug Palmer, Anh Nguyen Philips, David Kiran, Natasha Buckley, “Aligning the Organization for Its Digital Future”, MIT Sloan Management Review, Summer 2016
· Hugo Sarazin, Paul Willmott, “Adapting Your Board to Digital Age”, McKinsey Quarterly, July 2016
· Joerg Niessing, “Successful Digital Transformation Starts with the Customer”, INSEAD Knowledge Blog, February 3, 2016

Dr. Erkin Erimez
eerimez@arge.com


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