Transformation Obstacles

January 28, 2022

Most enterprises are undergoing a “digital transformation.” There is a widespread realization that improving operational efficiency and new adding offerings will not be enough. Where to go from there is not so obvious.

Enterprise transformation is a strategic undertaking. There are three fundamental questions that leaders must answer convincingly. First, what will be the result of the transformation? Without a clear vision, it is difficult to enact change, and people will be filling in the blanks for themselves.

Leaders must also explain why the transformation is necessary now and provide a desirable outcome for the people in the company. Only when the what and why questions have been answered will it be possible to formulate how the transformation will occur.

Executing transformations requires overcoming a wide variety of obstacles. Transformations are customarily organized as a portfolio of projects with budgets, deadlines, quantified goals, and responsible managers. Execution without clear success criteria is a recipe for disaster, but setting quantifiable goals for projects focused on learning and exploration is tricky. Organizations must therefore learn how to set open-ended learning objectives, which are very different from execution goals.

The most fundamental obstacle to transformation success may be that the thinking behind why the transformation is needed does not go deep enough.

Before the pandemic arrived, most “transformations” were business modernization efforts rather than actual transformations. Enterprises were migrating from legacy to cloud-based IT solutions. They were deploying new technologies for lead generation, conversion, and customer support. They were also adopting new technologies and experimenting with new business models. Corporate venturing had become an increasingly popular way to access emerging technologies.

Significant changes in the operating environment were already afoot, however. Many industries saw signs of decentralization as part of our transition to a post-industrial economy. It was also clear that young people were becoming more independent in their relationships with employers. Half of Millennials in the United States had become part-time or full-time freelancers.
Decentralization also applies to firms. Technology facilitates firm registration at the click of a button, growing a worldwide customer base without a human salesforce, decentralized capital sourcing, global access to all talent and knowledge, and decentralized governance. A viable post-industrial enterprise must incorporate these developments in its operating model.

Governments’ response to the pandemic gave us the Social Distancing Economy, in which decentralization was greatly accelerated. Industries that relied on physical interaction with customers and employees were severely hampered. In contrast, those with digital services were unaffected or even boosted. Labor shortages also encouraged further investments in automation. There is little doubt that the pandemic added urgency to transformation initiatives.

A 2018 survey of 270 corporate leaders in strategy, innovation, and R&D roles cited internal conflicts as the single biggest obstacle to successful transformations [1]. A likely cause can be found in internal boundaries, reinforced by budgets. The organization’s strategy process decomposes top-level subgoals for different parts of the organization. Conflicts are sure to follow when goal-setting and execution are not collaborative across internal boundaries.

Another commonly cited obstacle is culture. The key elements of an organization’s culture are mindset, behaviors, and ideals. Mindset refers to beliefs about the past, the present, and the future. Behaviors are recurring actions that emerge from one’s mindset in response to situations and circumstances. Ideals are the professed values of the organization, e.g., what’s listed on the company website.

Observable behaviors may or may not live up to an organization’s ideals. Even when they do, however, an organization may have a great deal of difficulty with change. There are specific attributes that can help or hinder a transformation effort. These include:

  • risk tolerance
  • handling uncertainty and ambiguity
  • curiosity and openness to new ideas and opportunities
  • ambition and hunger for improvement
  • conscientiousness

A culture where people value execution discipline but are risk-averse and lack curiosity will not readily embrace significant changes. When organizations form new units such as incubators and innovation labs, they are motivated in part by a desire to escape from their own culture.

An organization’s dominant mindset influences policies and business processes. The influence relationship is bidirectional; the experience of performing a process can alter one’s mindset. Cognitive Behavioral Therapy has proven that one can change attitudes through experiencing new behaviors. One can also change behaviors with the acquisition of new knowledge or the realization that a deeply held belief is mistaken.

Individual behaviors, however, are not enough to transform an enterprise or even to keep it going. Actions must be orchestrated and coordinated. Similarly, convincing someone to adopt a new set of assumptions will not provide them with the specific guidance of what to do and how to do it. A method is required.

Enterprises have invested heavily in business improvement methodologies in the last forty years, starting with TQM, Lean, and Six Sigma on the production side, then Agile methods in IT, and more recently Design Thinking and Lean Startup for innovation. Scaling the implementation of these methodologies can be a challenge in itself. There is often a feeling that people are “going through the motions” rather than doing something that will make a real difference.

Why is it still so challenging to achieve a genuine transformation? Why can’t we just cut through “the fog of business”?  There are several reasons:

  • business complexity
  • a hesitancy to disrupt existing offerings
  • brand limitations
  • regulatory hurdles
  • investor relations
  • compensation and incentives
  • unawareness of emerging trends and technologies
  • lack of in-house technology competency
  • boards without tech-literacy
  • lack of CEO support
  • insufficient financial resources

    IT is critical to transforming the operating model of an enterprise. Mature enterprises often depend heavily on complex legacy software. These systems are slow and expensive to change. Over the last fifteen years, business-critical applications have increasingly been migrated to the cloud or replaced with cloud-based systems. Many cloud-based applications will soon have to be rearchitected as part of the decentralization of IT and the emergence of the edge computing paradigm.

    One problem that has been treated extensively in the literature is the hesitancy to embrace an emerging trend or technology because it would disrupt one’s current offerings. Everyone knows the Kodak case story, where a world leader didn’t want to introduce a digital camera and thereby compete with its existing business model that relied on selling film. This phenomenon can be observed in virtually every industry.

    Brands represent the way an enterprise is viewed on the outside. A significant change in offerings may require a rebranding effort. Brands also embody leaders’ thinking about the identity of the company. “We have always been a furniture company,” leaders might say, and it is immediately apparent that the vision of what the enterprise can be is limited to being a better furniture company. Investor relations may also place constraints on how radical of a transformation an enterprise will embark on for fear that it will lose investor confidence. It is almost always “safer” to aim for incremental changes.

    That’s not transformation.

    Transformation requires going beyond the confines of “better” and becoming an enterprise fit for rapid, continuous evolution, quite possibly far beyond the current identity of the firm. Safety is also an illusion. There is no escape from exponential technologies and decentralization.

    Some industries exploit regulatory potholes to hold off disruptors. Homeowners are constrained by local regulations when renting out properties on Airbnb. Uber has had to fight innumerable court battles in jurisdiction after jurisdiction. In the United States, Tesla discovered that forty-eight states have laws limiting or banning manufacturers from opening up their own dealerships. The regulatory obstacles disruptive startups face will similarly hamper enterprises that want to build new innovative businesses. The more regulatory constraints and uncertainty in an industry, the less creative it will be. It is as true for an industry as it is for individual firms – if the barriers to change are too high, innovators will go elsewhere.

    Given the above obstacles, it is not surprising that executives feel they must be cautious. This caution is reflected in their compensation packages. The way to career success in a large enterprise is to set and meet conservative goals over many years, making mostly incremental changes. Meeting these goals results in bonuses. In contrast, startup founders and managers are incentivized to meet audacious goals that rapidly increase valuation. The risk of failure is higher, but successful execution can result in life-altering wealth when the company has an exit.

    Keeping track of key trends and technologies is also no easy task. The world is exploding with innovative startups. In larger organizations, managers spend most of their time focused inward rather than on the outside world. When the information becomes available to some managers, it still must be spread internally, discussed, and digested. The more people are involved, the slower the process. Thus another source of internal conflict is that some managers are much better informed than others and must wait for them to catch up.

    The competition for talent is fierce, and many enterprises struggle with attracting and retaining people with the right skills and experience. This includes tech-literate senior executives. Many corporate boards also lack directors with a deep technology background. They cannot easily hold management accountable for formulating and executing transformations, nor can they advise management. CEOs without a strong technology background are at a significant disadvantage as well. CEOs need not be engineers, but they must have the credibility necessary to act as champions for the transformation. Boards that are not tech-literate will have a more difficult time selecting CEOs who are.

    While “lack of budget” is often cited as a problem in transformation efforts, allocating more money will not by itself address the issues discussed here. Enterprise transformation is a multi-dimensional challenge. It is clear, for example, that the organization’s structure will need to change. Compartmentalization will allow some to focus on building the next version of the enterprise, while others concentrate on modernizing existing businesses.

    Over the last decade, we have seen many enterprises open up innovation outposts, incubators, and corporate venturing groups. The performance of these units has been mixed. Efforts to transfer technology and new insights into existing product lines are often met with pushback from the managers in charge of them.

    We believe enterprises may be better served by building entirely new businesses and brands from scratch. By recruiting and compensating innovators as co-founders, the organization can more easily compete for talent and provide incentives for more risk-taking. Enterprises can harness talent, technology, and capital through these higher-order organizations and create tomorrow’s revenue sources without interference from legacy businesses.

    The post-industrial enterprise will be a decentralized, self-renewing socio-technical “organism.” We will use AI to automate repetitive work, including many management tasks. AI will also be an invaluable tool for innovation. With shorter employee tenures and a much faster pace of career development, we must get used to just-in-time team formations and frequent changes in how we organize our work. The office landscape will be a hybrid one, and metaverses and distributed ledgers will be the collaborative media that tie it all together.  This is not management science fiction – these changes are in progress already. 

    Finally, the pandemic has added an extra obstacle to transformation efforts. Many people are now working remotely, and their mental well-being and work satisfaction are more difficult to gauge and manage. How can we better empathize with and motivate people at a distance, people we may never meet in person? Leaders must do much better here, or employees will not have the psychological stamina to make transformations happen. The threshold for saying goodbye to employers is lower than ever, and options abound for the very people that enterprises desperately need.