The case for digital reinvention 03-21

Digital technology, despite its seeming ubiquity, has only begun to penetrate industries. As it continues its advance, the implications for revenues, profits, and opportunities will be dramatic.

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As new markets emerge, profit pools shift, and digital technologies pervade more of everyday life, it’s easy to assume that the economy’s digitization is already far advanced. According to our latest research, however, the forces of digital have yet to become fully mainstream. On average, industries are less than 40 percent digitized, despite the relatively deep penetration of these technologies in media, retail, and high tech.

As digitization penetrates more fully, it will dampen revenue and profit growth for some, particularly the bottom quartile of companies, according to our research, while the top quartile captures disproportionate gains. Bold, tightly integrated digital strategies will be the biggest differentiator between companies that win and companies that don’t, and the biggest payouts will go to those that initiate digital disruptions. Fast-followers with operational excellence and superior organizational health won’t be far behind.

The case for digital reinvention 

As digitization penetrates more fully, it will dampen revenue and profit growth for some, particularly the bottom quartile of companies, according to our research, while the top quartile captures disproportionate gains. Bold, tightly integrated digital strategies will be the biggest differentiator between companies that win and companies that don’t, and the biggest payouts will go to those that initiate digital disruptions. Fast-followers with operational excellence and superior organizational health won’t be far behind.

These findings emerged from a research effort to understand the nature, extent, and top-management implications of the progress of digitization. We tailored our efforts to examine its effects along multiple dimensions: products and services, marketing and distribution channels, business processes, supply chains, and new entrants at the ecosystem level (for details, see sidebar “About the research”). We sought to understand how economic performance will change as digitization continues its advance along these different dimensions. What are the best-performing companies doing in the face of rising pressure? Which approach is more important as digitization progresses: a great strategy with average execution or an average strategy with great execution?

The research-survey findings, taken together, amount to a clear mandate to act decisively, whether through the creation of new digital businesses or by reinventing the core of today’s strategic, operational, and organizational approaches.

More digitization—and performance pressure—ahead

According to our research, digitization has only begun to transform many industries (Exhibit 1). Its impact on the economic performance of companies, while already significant, is far from complete.

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Unexpected Benefits of Digital Transformation 01-22

Digital tools can be used in many different “right” — and surprising — ways to add value to an organization.

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                                                                                                                                                           Many different fields of study — such as psychology, human-computer interaction, and ecology —
have employed the concept of “affordances.” The term refers to the different possible actions that someone can take with an object in a particular environment. For example, someone can interact with a beach ball by batting it in the air, letting it float in water, sitting on it, or popping it. The importance of affordances is the shift in focus from the characteristics of the object to what one can do with an object in a particular situation.

The concept of affordances can be particularly useful when applied to digital technologies in organizations. It overcomes many of the key mistakes companies make when trying to update their organizations to compete in an increasingly digital environment.

Having the Technology Is Not Enough

Perhaps the most fundamental implication introduced by the concept of affordances is the shift from the characteristics of the technology itself to what your company can actually do with it. Digital technologies only enable possible actions for people and organizations to engage in; they do not make those actions happen on their own. Simply owning or implementing digital technologies is not enough to derive business value from it.

This insight may sound obvious, but it is stunning how often managers forget this simple fact in practice. They either believe that the mere adoption of the latest technology will improve their business prospects, or they focus all of their efforts on implementation without applying the time or resources to make the types of organizational changes needed to benefit from the possibilities the technologies offer.

For example, one company adopted Twitter in order to be more responsive to customers, but it kept existing processes in place — processes that required multiple approvals before publicly responding on behalf of the company. This negated the benefit of Twitter because it limited the way the technology could be used to respond quickly to customers. This example may be egregious, but it is common for companies to adopt digital technologies without considering how work needs to change to take advantage of the benefits they enable.

There Are Many Different ‘Right’ Ways to Use Digital Technologies

Just as a beach ball can be used in a number of different ways, so can digital technologies enable a number of different possible actions within organizations. One of Twitter’s greatest strengths (and a reason many people and companies find it confusing) is the multiple possible actions it can enable. Some companies — many of the major media outlets, for example — use Twitter as a means of broadening the reach of their content. Others, such as Delta, JetBlue, and KLM, use Twitter as an effective customer service tool, enabling them to support customers in a very fluid service environment. Still others use Twitter as a business intelligence tool. Companies such as Kaiser Permanente used data generated by companies on Twitter to identify areas of improvement in business operations, and T-Mobile used it to identify competitors’ weaknesses to inform their business strategy. The concept of affordances brings the question of how a particular technology will be used within an organization to the forefront.

The Most Valuable Applications Aren’t Always Known in Advance

The affordance literature also introduces the concept of “hidden” affordances, which describes possible actions enabled that are not necessarily known in advance, which is also true of digital technologies in organizations. For example, one company adopted an expertise identification tool to help determine who in the organization needed knowledge. The tool analyzed digital content generated by employees and automatically generated knowledge profiles for them. Although the intention of the technology was to make others in the organization aware of what knowledge employees possessed, the greater impact was in helping employees understand what knowledge they possessed that was most valuable to others. This often differed considerably from their formal roles or how the employees thought they were most valuable. In another organization, the same technology had a very different unanticipated impact, helping improve the performance of women, lower-rank, and newer employees. The technology democratized access to knowledge in the company, access that had previously been controlled through the social networks of senior male employees. Recognition of hidden affordances helps keep managers aware of unexpected or unanticipated benefits of digital technologies that may not have been considered in advance.

A Digital Organization-Affordance Cycle

The final benefit of an affordance view of digital technologies in organizations is the recognition of a mutually dependent relationship between the organization and its digital technologies. Digital technologies can change the organizational environment of which they are a part, creating the

possibility of a new set of affordances. Organizations can also implement or emphasize new features in the digital technologies, as the most valuable affordances they enable become more apparent. An affordance perspective suggests that digital transformation, rather than a linear progression, is a recursive process in which technologies and the organizational environment mutually influence one another over time. Digital technology creates new opportunities to work differently, and working differently creates new opportunities to infuse technology into the work process.

Shifting toward an affordance view requires managers to shift from thinking about digital tools themselves to a focus on what the tools help companies do differently. As managers think about whether these changes in how work happens will add value to an organization, they will be able to more easily consider what legacy technologies fulfill similar tasks, and whether these different systems will complement or compete with one another. 



Reproduced from MIT Sloan Management Review















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Google CEO Sundar Pichai unlocks digital initiative for small and medium businesses in India 01-05

Google CEO Sundar Pichai is in India to launch a new initiative for the small and medium businesses, Digital Unlocked. With this initiative Google is looking to help SMBs get digital presence.

The initiative will be in partnership with industry body FICCI and management school ISB where SMBs would get digital skill training through video tutoring, classroom training and mobile courses for offline, online and mobile presence of small businesses.

Pichai's visit to India this time is mainly focused on small and medium businesses in the country. With this initiative, Google hopes to reach thousands of businesses around the country. Since it's designed for India, SMBs can use the program grow their digital presence not just in English but nine Indian languages including Hindi, Telugu and Marathi.

Alongside Digital Unlocked, Google also launched Primer, an app to teach SMBs skills to grow. Primer works offline and is now available for download on Play Store for free. This app will help SMBs to move from a basic digital presence to an advance one.

During this visit, Pichai will also be addressing college students at IIT Kharagpur where he got his engineering degree in 1993. He will interact with students, something that's core to most of Pichai's trip to India.

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An incumbent’s guide to digital disruption 06-11

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Incumbents needn’t be victims of disruption if they recognize the crucial thresholds in their life cycle, and act in time.
          

A decade ago, Norwegian media group Schibsted made a courageous decision: to offer classifieds—the main revenue source of its newspaper businesses—online for free. The company had already made significant Internet investments but realized that to establish a pan-European digital stronghold it had to raise the stakes. During a presentation to a prospective French partner, Schibsted executives pointed out that existing European classifieds sites had limited traffic. “The market is up for grabs,” they said, “and we intend to get it.” 1.Raf Weverbergh, “8 lessons in how to disrupt yourself from Schibsted,” Whiteboard, whiteboardmag.com. Today, more than 80 percent of their earnings come from online classifieds.

Our framework for understanding the life cycle of industry disruption.
      

About that same time, the boards of other leading newspapers were also weighing the prospect of a digital future. No doubt, like Schibsted, they even developed and debated hypothetical scenarios in which Internet start-ups siphoned off the lucrative print classified ads the industry called its “rivers of gold.” Maybe these scenarios appeared insufficiently alarming—or maybe they were too dangerous to even entertain. But very few newspapers followed Schibsted’s path.  

From the vantage point of 2016, when print media lie shattered by a tsunami of digital disruption, it’s easy to talk about who made the “right” decision and who the “wrong.” Things are far murkier when one is actually in the midst of disruption’s uncertain, oft-hyped early stages. In the 1980s, steel giants famously underestimated the potential of mini-mills. In the 1980s and 1990s, the personal computer put a stop to Digital Equipment Corporation, Wang Laboratories, and other minicomputer makers. More recently, web retailers have disrupted physical ones, and Airbnb and Uber Technologies have disrupted lodging and car travel, respectively. The examples run the gamut from database software to boxed beef.

What they have in common is how often incumbents find themselves on the wrong side of a big trend. No matter how strong their ingoing balance sheets and market share—and sometimes because of those very factors—incumbents can’t seem to hold back the tide. The champions of disruption are far more often the attackers than the established incumbent. The good news for incumbents is that many industries are still in the early days of digital disruption. Print media, travel, and lodging provide valuable illustrations of the path increasingly more will follow. For most, it’s early enough to respond. (For a quick guide to assessing your organization's position in the digital disruption journey,
What’s the secret of those incumbents that do survive—and sometimes even thrive?

One aspect surely relates to the ability to recognize and overcome the typical pattern of response (or lack thereof) that characterizes companies in the incumbent’s position. This most often requires acuity of foresight³ 3.For McKinsey’s analysis of the economic sources of digital disruption, see Angus Dawson, Martin Hirt, and Jay Scanlan, “The economic essentials of digital strategy,” McKinsey Quarterly, March 2016. and a willingness to respond boldly before it’s too late, which usually means acting before it is obvious you have to do so. As Reed Hastings, the CEO of Netflix, pointed out (right as his company was making the leap from DVDs to streaming), most successful organizations fail to look for new things their customers want because they’re afraid to hurt their core businesses.

Clayton Christensen called this phenomenon the innovator’s dilemma. Hastings simply said, “Companies rarely die from moving too fast, and they frequently die from moving too slowly.”⁴ 4.Netflix Media Center, “An explanation and some reflections,” blog entry by Reed Hastings, September 18, 2011, media.netflix.com.
We are all great strategists in hindsight. The question is what to do when you are in the middle of it all, under the real-world constraints and pressures of running a large, modern company. This article looks at the four stages of disruption from an incumbent’s perspective, the barriers to overcome, and the choices and responses needed at each stage.

Where you are and what you need

It may help to view these stages on an S-curve (exhibit). At first, young companies struggle with uncertainty but are agile and willing to experiment. At this time, companies prize learning and optionality and work toward creating value based on the expectation of future earnings. The new model then needs to reach some critical mass to become a going concern. As they mature—that is, become incumbents—mind-sets and realities change. The established companies lock in routines and processes. They iron out and standardize variability amid growing organizational complexity. In the quest for efficiency, they weed out strategic options and reward executives for steady results. The measure of success is now delivery of consistent, growing cash flows in the here and now. The option-rich expectancy of future gain is replaced by the treadmill of continually escalating performance expectations.

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In a disruption, the company heading toward the top of the old S-curve confronts a new business model at the bottom of a new S-curve. The circle of creative destruction is renewed, but this time the shoe is on the other foot. Two primary challenges emerge. The first is to recognize the new S-curve, which starts with a small slope, and often-unimpressive profitability, and at first does not demand attention. After all, most companies have shown they are very good at dealing with obvious emergencies, rapidly corralling resources and acting decisively. But they struggle to deal with the slow, quiet rise of an uncertain threat that does not announce itself. Second, the same factors that help companies operate strongly toward the top of an S-curve often hinder them at the bottom of a new one. Because different modes of operation are required, it’s hard to do the right thing—even when you think you know what the right thing might be.

This simplified model, of a new S-curve crashing slow motion into an old one, gives us a way to look at the problem from the incumbent’s perspective, and to appreciate the actual challenges each moment presents along the way. In the first stage, the new S-curve is not yet a curve at all. In the second, the new business model gets validated, but its impact is not forceful enough to fundamentally bend the performance trajectory of the incumbent. In the third stage, however, the new model gains a critical mass and its impact is clearly felt. In the fourth, the new model becomes the new normal as it reaches its own maturity.

Let’s step through these stages in sequence and see what is going on.

Stage one: Signals amidst the noise

In the late 1990s, PolyGram was one of the world’s top record labels, with a roster boasting Bob Marley, U2, and top classical artists. But, in 1998, Cornelis Boonstra, CEO of PolyGram’s Dutch parent, Koninklijke Philips, flew to New York, met with Goldman Sachs, and arranged to sell PolyGram to Seagram for $10.6 billion. Why? Because Boonstra had come across research showing that consumers were using the new recordable CD-ROM technology (which Philips coinvented) largely for one purpose: to copy music.

In hindsight, this is a good example of how, in the early stages of disruption, demand begins to “purify” and lose the distortions imposed on it by businesses.

5.For McKinsey’s analysis of the economic sources of digital disruption, see Angus Dawson, Martin Hirt, and Jay Scanlan, “The economic essentials of digital strategy,” McKinsey Quarterly, March 2016.
The MP3 format had barely been invented, Napster was a mere gleam in Sean Parker’s eye, and PolyGram was riding at the top of its S-curve—but Boonstra detected the first signs of transformational change and decided to act swiftly and decisively. Within a decade, compact-disc and DVD sales in the United States dropped by more than 80 percent. Similarly, Telecom New Zealand foresaw the deteriorating economics of its Yellow Pages business and sold its directories business in 2007 for $2.2 billion (a nine-time revenue multiple)⁶ 6.Annual report, Telecom New Zealand, 2006, investors.sparknz.co.nz. while numerous other telecom companies held on until the businesses were nearly worthless.

7.“Telecom gets $2 billion for Yellow Pages,” New Zealand Herald, March 26, 2007, nzherald.co.nz.
The newspaper industry had no shortage of similar signals. As early as 1964, media theorist Marshall McLuhan observed that the industry’s reliance on classified ads and stock-market quotes made it vulnerable: “Should an alternative source of easy access to such diverse daily information be found, the press will fold.” The rise of the Internet created just such a source, and start-ups such as eBay opened a new way for people to list goods for sale without the use of newspaper ads. Schibsted was one of the earliest media companies to both anticipate the threat and act on the opportunity. As early as 1999, the company became convinced that “The Internet is made for classifieds, and classifieds are made for the Internet.”

8.Ken Doctor, “Schibsted’s stunning classifieds and services business,” Neiman Lab, February 14, 2012, neimanlab.org.
It’s not surprising that most others publishers didn’t react. At this early stage of disruption, incumbents feel barely any impact on their core businesses except in the distant periphery. In short, they don’t “need” to act. It takes rare acuity to make a pre-emptive move, likely in the face of conflicting demands from stakeholders. What’s more, it can be difficult to work out which trends to ignore and which to react to.

Gaining sharper insight, and escaping the myopia of this first stage, requires incumbents to challenge their own “story” and to disrupt long-standing (and sometimes implicit) beliefs about how to make money in a given industry. As our colleagues put it in a recent article, “These governing beliefs reflect widely shared notions about customer preferences, the role of technology, regulation, cost drivers, and the basis of competition and differentiation. They are often considered inviolable—until someone comes along to violate them.”

9.Marc de Jong and Menno van Dijk, “Disrupting beliefs: A new approach to business-model innovation,” McKinsey Quarterly, July 2015.
The process of reframing these governing beliefs involves identifying an industry’s foremost notion about value creation and then turning it on its head to find new forms and mechanisms for creating value.

Stage two: Change takes hold

The trend is now clear. The core technological and economic drivers have been validated. At this point, it’s essential for established companies to commit to nurturing new initiatives so that they can establish footholds in the new sphere. More important, they need to ensure that new ventures have autonomy from the core business, even if the goals of the two operations conflict. The idea is to act before one has to.

But with disruption’s impact still not big enough to dampen earnings momentum, motivation is often missing. Even as online classifieds for cars and real estate began to take off and Craigslist gained momentum, most newspaper publishers lacked a sense of urgency because their own market share remained largely unaffected. And it’s not like the new players were making millions (yet). There was no performance envy.

But Schibsted did find the necessary motivation. “When the dot-com bubble burst, we continued to invest, in spite of the fact that we didn’t know how we were going to make money online,” recalls then-CEO Kjell Aamot. “We also allowed the new products to compete with the old products.”¹⁰ 10.See “CBS case competition 2009 case video. Schibsted classified media,” February 25, 2009, youtube.com. Offering free online classifieds directly cannibalized its newspaper business, but Schibsted was willing to take the risk. The company didn’t just act; it acted radically.

Now, let’s openly acknowledge how hard it is for a company’s leaders to commit to supporting experimental ventures when the business is climbing the S-curve. When Netflix disrupted itself in 2011 by shifting focus from DVDs to streaming, its share price dropped by 80 percent. Few boards and investors can handle that kind of pain when the near-term need is debatable. The vague longer-term threat just doesn’t seem as dangerous as the immediate hardship. After all, incumbents have existing revenue streams to protect—start-ups only have upside to capture. Additionally, management teams are more comfortable developing strategies for businesses they know how to operate, and are naturally reluctant to enter a new game with rules they don’t understand.

The upshot: most incumbents dabble, making small investments that won’t flatten their current S-curve and guard against cannibalization. Usually, they focus too heavily on finding synergies (always looking for efficiency) rather than fostering radical experimentation. The illusion that this dabbling is getting you into the game is all too tempting to believe. Many newspapers built online add-ons to their classified businesses, but few were willing to risk cannibalizing the traditional revenue streams, which at this point were still far bigger and more profitable. And remember, at this time, Schibsted had not yet been rewarded for its early action: its results looked pretty similar to its peers.

In time, of course, bolder action becomes necessary, and executives must commit to nurturing potentially dilutive and small next-horizon businesses in a pipeline of initiatives. Managing such a portfolio requires high tolerance for ambiguity, and it requires executives to adapt to shifting conditions, both inside and outside the company, even as the aspiration to deliver favorable outcomes for shareholders remains constant.¹¹ 11.Lowell L. Bryan, “Just-in-time strategy for a turbulent world,” McKinsey Quarterly, June 2002. The difficulty is the tendency to protect the core at the expense of the periphery. Not only are there strong, short-term financial incentives to protect the core, but it’s also often painful to shift focus from core businesses in which one has, understandably enough, an emotional as well as a financial investment.

No small part of the challenge is to accept that the previous status quo is no longer the baseline. Grocery retailer Aldi has disrupted numerous incumbents globally with its low-price model. Aldi’s future success was visible while Aldi was still nascent in the market. Yet many incumbent supermarkets chose to avoid the near-term pain of sharpening entry price points and improving their private-label brands. In hindsight, those moves would have been highly net-present-value positive with respect to avoided loss—as Aldi has continued its strong growth across three continents.

Stage three: The inevitable transformation

By now, the future is pounding on the door. The new model has proved superior to the old, at least for some critical mass of adopters, and the industry is in motion toward it. At this stage of disruption, to accelerate its own transformation, the incumbent’s challenge lies in aggressively shifting resources to the new self-competing ventures it nurtured in stage two. Think of it as treating new businesses like venture-capital investments that only pay off if they scale rapidly, while the old ones are subject to a private-equity-style workout.

Making this tough shift requires surmounting the inertia that can afflict companies even in the best of times.¹² 12.Stephen Hall, Dan Lovallo, and Reinier Musters, “How to put your money where your strategy is,” McKinsey Quarterly, March 2012. In fact, our experience suggests stage three is the hardest one for incumbents to navigate. As company performance starts to suffer, tightening up budgets, established companies naturally tend to cut back even further on peripheral activities while focusing on the core. The top decision makers, who usually come from the biggest business centers, resist having their still-profitable (though more sluggishly growing) domains starved of resources in favor of unproven upstarts. As a result, leadership often under invests in new initiatives, even as it imposes high performance hurdles on them. Legacy businesses continue to receive the lion’s share of resources instead. By this time, the very forces causing pressure in the core make the business even less willing and able to address those forces. The reflex to conserve resources kicks in just when you most need to aggressively reallocate and invest.

Boards play a significant role in this as well. Far too often, boards are unwilling (or unable) to change their view of baseline performance, further exacerbating the problem. Often a board’s (understandable) reaction to reduced performance is to push management even harder to achieve ambitious goals within the current model, ignoring the need for a more fundamental change. This only worsens problems in the future.

Further complicating matters, incumbents with initially strong positions can take false comfort at this stage, because the weaker players in the industry get hit hardest first. The narrative “it is not happening to us” is all too tempting to believe. The key is to monitor closely the underlying drivers, not just the hindsight of financial outcomes. As the tale goes, “I don’t have to outrun the bear . . . I just have to outrun you.” Except when it comes to disruption, that strategy merely buys time. If the bear keeps running, it will get to you, too.

The typical traditional newspaper operator, likewise, wasn’t blind to a shift taking place, but it rarely managed to mount a response that was sufficiently aggressive. One notable exception was former digital laggard Axel Springer. The German media company was “a mere Internet midget,” according to Financial Times Deutschland, until it leapt into action in 2005. It went on a shopping spree, acquiring 67 digital properties and launching 90 initiatives of its own by 2013.¹³ 13.Raf Weverbergh, “Strategy: How Axel Springer calculated and then bought its way to European digital dominance,” Whiteboard, whiteboardmag.com. Like Schibsted, it saw the value pools moving to online classifieds and made the leap. The lesson is that incumbents can win even with a late start, provided that they throw themselves in wholly. Today, digital media contributes 70 percent of Axel Springer’s earnings before interest, taxes, depreciation, and amortization. The core has become the periphery.

To generate the acceleration needed at this stage of the game, incumbents must embark on a courageous and unremitting reallocation of resources from the old to the new model—and show a willingness to run new businesses differently (and often separately) from the old ones. Perhaps nothing underlines this point more than Axel Springer’s 2013 divestment of some of its strongest legacy print-media products, which accounted for about 15 percent of its sales, to Germany’s number-three print-media player, Funke Mediengruppe. These products, such as the Berliner Morgenpost, owned by Axel Springer since 1959, were previously a core part of the corporate DNA and emblems of its journalistic culture. But no more. They realized that the future value of the business was not just about the continuation of today’s earnings but rather relied on the creation of a new economic engine.

When incumbents lack the in-house capability to build new businesses, they must look to acquire them instead. Here the challenge is to time acquisitions somewhere between where the business model is proved but valuations have yet to become too high—all while making sure the incumbent is a “natural best owner” of the new businesses it acquires. Examples of this approach in the financial sector include BBVA’s acquisition of Simple and Capital One’s acquisition of the design firm Adaptive Path.

Stage four: Adapting to the new normal

In this late stage, the disruption has reached a point when companies have no choice but to accept reality: the industry has fundamentally changed. For incumbents, their cost base isn’t in line with the new (likely much shallower) profit pools, their earnings are caving in, and they find themselves poorly positioned to take a strong market position.

This is where print media is now. The classifieds’ “rivers of gold” have dried up, making survival the first priority, and sustainability and growth the second. In 2013, the CEO of Australia media company Fairfax Media told the International News Media Association World Congress, “We know that at some time in the future, we will be predominantly digital or digital-only in our metropolitan markets.”¹⁴ 14.Clive Mathieson, “Fairfax chief Greg Hywood sizes up the end of papers,” The Australian, May 1, 2013, theaustralian.com.au. True, some legacy mastheads have created powerful online news properties with high traffic, but display advertising and paywalls alone are for the most part not enough to generate a thriving revenue line, and social aggregation sites are continuing to drive unbundling. Typical media firms have had to undertake the multiple painful waves of restructuring and consolidation that may be needed while they seed growth and look for ways to monetize their brands.

For the incumbents who, like Axel Springer and Schibsted, have made the leap, the adaptation phase brings new challenges. Having become majority digital businesses, they’re fully exposed to the volatility and pace that comes with the territory. That is, their adaptation response is less a one-time event than a process of continual self-disruption. Think of Facebook upending its business model to go “mobile first.”¹⁵ 15.Jessica Guynn, “Facebook soars as ‘mobile first’ company,” USA Today, January 28, 2015, usatoday.com. You can’t be satisfied with the first pivot—you have to be prepared to keep doing it.

In some cases, incumbents’ capabilities are so highly tied to the old business model that rebirth through restructuring is unlikely to work, and an exit is the best way to preserve value. Eastman Kodak Company, for example, may have been better off leaving the photography business much faster, because its numerous strategies all failed to save it. When a business is built on a legacy technology that is categorically different from the new standard, even perfect foresight of the demise of film or CDs would not have solved the core problem that the digital replacement is fundamentally less profitable.

The simple fact is that new profit pools may not be as deep as prior ones (as many newspaper publishers have come to believe). The challenge is to adapt and structurally realign cost bases to the new reality of profit pools, and accept that the “new normal” likely includes far fewer “rivers of gold.”

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The reality is, most industries are still in stages one, two, and three. That’s why the early experiences of media, music, and travel companies can prove so valuable. These first industries to transition to a digital reality highlight the social and human challenges that by their nature apply to companies in most every industry and geography.

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Tech Savvy: How Blockchains Could Transform Management 05-25

What’s happening this week at the intersection of management and technology.

Re-architecting the firm with blockchain: Is Craig Wright really Satoshi Nakamoto, the mysterious creator of Bitcoin? Who knows — and really, who cares? The bigger issue is blockchains, the distributed ledgers that underpin cryptocurrencies like Bitcoin.
Blockchain technology has so many uses that trying to summarize them can make veteran tech experts sound like PR hacks. “As such, it holds the potential for unleashing countless new applications and as yet unrealized capabilities that have the potential to change everything,” write Don Tapscott and his co-author and son Alex Tapscott in their new book, Blockchain Revolution:

How the Technology Behind Bitcoin is Changing Money, Business, and the World.

That might sound like hyperbole, but it seems like everywhere you turn these days you run into blockchains. Banks are trying to harness blockchain before its blows up their business models. IBM is betting on blockchains to give its revenues a bump. Disney has a blockchain team doing … well, who knows what.

What we haven’t heard very much about is how blockchain could fundamentally change how companies are managed and operate. That’s a good reason to take a closer look at Blockchain Revolution, in which the Tapscotts devote a chapter to the topic. “Blockchain technology is enabling new forms of economic organization and new portfolios of value,” they write. “There are distributed models of the firm emerging — ownership, structure, operations, reward, and governance — that go far beyond enhancing innovation, employee motivation, and collective action.”

Intrigued? If you’d like read more about how blockchains might change the everyday operation of a business, check out the excerpt from the chapter, reprinted with permission, below.
The innovation hub — same as it ever was? The Internet has wrought significant changes in how we work, but some things — innovation hubs, for example — remain remarkably durable. “For hundreds of years,” writes freelance journalist Emily Sohn in Nature, “regions developed specialities that often arose from access to a natural resource, but then intensified as people moved to the regions to be among the expertise. The Internet was supposed to change all that. Around-the-clock connectivity that allowed researchers and entrepreneurs to collaborate from anywhere at any time meant that distance would no longer be an issue, predicted popular economic theory of the early 2000s. A decade later, it hasn’t panned out that way.”

Sohn reports that global connectivity seems to have stimulated the growth of innovation hubs, like Silicon Valley, rather than shrunk them. “Innovators and PhD students are now clumped together in fewer places, often in big cities,” she says. “And collaborations are more likely to happen between researchers who live, or have lived, close to each other.”

New and existing companies can’t afford to buck this finding. Locating in innovation hubs gives them greater access to talent. It also boosts their performance: Sohn cites studies that show start-ups located in hubs are more likely to survive, and firms in hubs are more likely to file patents than companies outside hubs.

It turns out that no matter how easy it is to collaborate at a distance, proximity remains an essential element in stimulating innovation. It sets the stage for serendipitous meetings. Face-to-face interaction also creates feel-good reactions in our brains that promote trust and more effective collaboration.

It’s not that digital connectivity inhibits innovation. Far from it, reports Sohn. Rather, it stimulates the enhanced innovation that is already taking place within innovation hubs — in effect, supercharging it. It’s a finding worth keeping in mind that next time your company is considering where to locate a new business unit or research facility.

Putting data to work with knowledge graphs: A brief story popped up in The Seattle Times last week: A data analytics company named Maana announced it had raised $26 million in Series B funding from the investment arms of Saudi Aramco and Shell. In these (waning) days of billion-dollar start-up valuations, $26 million isn’t especially jaw-dropping. But the company does have has an interesting approach to data analytics, which uses “enterprise knowledge graphs.”
There are a couple of problems with data in big companies. First, there’s lots of it, and it’s often stashed in separate silos. “A single division could have over 60 different information systems that they work with,” CTO Donald Thompson told tech reporter Rachel Lerman. Second, you need to turn the data into useful insights and recommendations. Third, you have get those into the hands of people who can use them to enhance results.

Bearing in mind that I’m a layman at best, here’s how Maana approach works: Instead of placing the company’s data into a common pool, it sends out a search engine to crawl the various data silos in your company. Then, instead of simply delivering a list of results, it uses analytics and machine learning to construct knowledge graphs — kind of like the ones that Google introduced a few years back — that provide actionable recommendations based on the goals and needs of the business and delivers them to line-of-business applications. Maana has used cases on its website that show how this approach works and the results it has produced in operational settings in industrial and oil and gas companies.




Reproduced from MIT Sloan Management Review

Transforming an Analog Company into a Digital Company: The Case of BBVA 04-29

Transforming an Analog Company into a Digital Company: The Case of BBVA(Banco Bilbao Vizcaya Argentaria) 

In the past few years we have witnessed the far-reaching effects of the ongoing technological revolution on the ways we do business. Individual industries and whole sectors have been transformed; companies seemingly conjured from thin air swiftly rise to the top of their fields, joining the ranks of the world’s most valuable businesses. Conversely, long-established industry names fall into decay or disappear altogether.

This book provides a glimpse of the severe shocks that today’s companies are called on to withstand. Technology has changed, shifting the boundaries of production and distribution possibilities. Customers have changed, as have their requirements and the ways in which we reach them. Employees have changed, and their skills and motivation are now different. Change also takes place in organizational structures, decision-making models and forms of leadership, to meet the challenges of today and face those of tomorrow: technological progress and social development never stop, creating new uncertainties on the horizon of the business world.

These processes of transformation are all the more far-reaching, swift and radical in information-rich domains, such as the media, culture, and entertainment. Banking has changed, too. But despite being an information-rich activity—the “raw materials” of financial services are money and information—banking has changed a lot less than other industries. Money is readily digitized: when it takes the form of electronic book entries, it becomes information that can be processed and transferred in an instant.

Various reasons have been suggested to explain why banking has changed relatively little. First, the industry is subject to heavy regulation and government intervention. This discourages potential new entrants, so incumbent banks feel less pressure to change. Another factor often pointed to is average user age, which is higher than that seen in other industries—such as music. What’s more, most people take a conservative approach to their finances. And it may well be that the rapid growth and high earnings of the financial services industry in the years leading up to the downturn nurtured complacency and inefficiencies which in other sectors would have proved fatal.

But all this is changing. In fact, it already has changed. After the downturn, the financial services industry finds itself in an entirely new landscape. Laws and regulations are a lot tougher in the fields of consumer protection, good practice requirements, control, and capital ratios. This means thinner margins, higher costs, and lower earnings. In addition, users are now more demanding—they want improved transparency, cheaper prices and higher service quality.

Only a major effort of transformation will enable banks to return to profit figures capable of assuring medium- and long-term survival, and, by offering a wider, improved range of services at competitive prices, to restore their tarnished reputations in the eyes of customers and society at large.

This transformation is increasingly urgent for two powerful reasons. First, customers are changing swiftly; secondly, new competitors are stepping onto the stage.

A whole generation of customers have grown up with the internet—they make intensive use of social media and live in a “digital mode.” The “millennial” generation—also known as Generation Y—are now aged 25 to 40. They are approaching the peak of their professional development and making major financial decisions. By 2020, “millennials” will account for a third of the population of the United States and 75% of the workforce. 90% of them deal with their banks exclusively online, and half of them do so using their smartphones.

Over 70% of millennials say they would be happy to pay for banking products and services provided by non-banking companies—for example, telecommunications operators, technology and internet providers, online retailers. These percentages exceed 50% even among earlier generations—aged up to 55 years.1

What this means is that banks are losing their monopoly over people’s financial trust. And later generations—like “Generation Z,” born in or after the 1990s—will no doubt bring still greater developments which are yet to be discovered.

The United States is in most respects at the forefront of these changes, but the trend is global. It is not only in developed countries where we can see this shift. In developing countries, too, the more affluent customers are following the same pattern. What’s more, technology is making it possible to offer financial products and services to a poorer, more scattered population which conventional banks are unable to cater for at affordable prices. This potential market encompasses up to two billion new customers.

Change is opening up opportunities that foster the rise of a new league of competitors—mostly but not exclusively spilling over from the digital world. These new entrants can be far more efficient and agile than banks, because they are not burdened with inefficient, rigid and largely obsolete technologies or expensive brick-and-mortar distribution networks.

From Analog to Digital: Towards Knowledge-Driven Banking

Today banks must face a tough climate: tighter margins; overcapacity; tarnished reputations; and the pressure of new high-tech competitors who can move flexibly, unburdened by cost legacies.

But banks do enjoy a key competitive advantage: the huge mass of information they already have about their customers. The challenge is to turn that information into knowledge, and use the knowledge to give customers what they want.

It need hardly be said that the first thing customers want is better, quicker service on transparent terms and at an affordable price, in keeping with their own individual needs.

One of the implications is that customers should be able to interact fully with their bank, at any time and at any place, using their mobile devices. Today, there are 5 billion mobile phones in the world but only 1.2 billion bank customers. And mobile devices support an ever-increasing range of functionalities. Mobile data traffic now stands at more than 2.5 exabytes per month, and will almost treble every two years.2

This means on the one hand that the role of bank branches has radically changed; on the other, the potential scope of the banking market has widened immensely.

Facing new competitors who can move flexibly, unburdened by cost legacies, banks do enjoy a key competitive advantage: the huge mass of information they already have about their customers.

In the years to come the mobile phone will win a far greater share of interactions with banks. Technological progress—APIs, cloud computing—and increased investment in mobile banking development (now standing at about $2 billion a year in terms of venture capital alone, plus the heavy internal investment of banks themselves) will lead to a powerful rise in the operational features of mobile devices and in the range and complexity of financial transactions they will support.

Nevertheless, many people still want to deal with their bank by other means: branch offices, ATMs, computers, conventional telephones, and an increasing number of “smart” devices. So banks need to offer their customers a genuinely “omnichannel” experience. The same value proposal, the same service, must be available at any time by any channel, and you should be able to switch from one channel to another instantly and seamlessly.

And of course customers will increasingly want their bank to offer content carrying higher value-added—products and services that fit their needs more closely.

To meet these demands, banks must develop a new knowledge-based business model for the digital world.

According to Peter Weill, chair of the MIT Sloan Center for Information Systems Research (CISR), 3 the new digital model has three mainstays: first, content, the things being sold; secondly, customer experience—how the product or service is presented and used; and, thirdly, the technology platform, which shapes production and distribution.

I like to explain the construction of this new model by analogy to building a house. The technology platform is the foundation, while internal processes, organizational structures, and corporate culture are the various floors, including the installations (insulation, electricity, heating, plumbing, etc). Finally, the channels by which customers interact with the bank are the roof of the house. All these elements together make the house comfortable and safe. They let us offer the customer a good product and a satisfying experience.

For many banks, the technology platform is a limiting factor and a nearly insurmountable challenge. Most bank platforms were designed and built in the 1960s and 70s. Professor Weill calls them “spaghetti platforms,” because of the complexity of the connections resulting from several decades of add-ons, tweaks, and repairs.

This is why so many banks have tried to meet the digital challenge by building their “house” from the roof down, that is, starting with the channels. But that’s a stopgap solution. Without strong foundations, the increased volume and sophistication of online banking will overburden the obsolete platforms and the house will ultimately collapse.

This is because the improvement of content and customer experience to the standards customers want will call for systematic use of a vast volume of data.

The issue is not limited to handling an increasing volume of transactions and customer interactions. It crucially hinges on the huge amount of data collected in the course of customer contact, combined with the immense and rapidly increasing volume of information available on the internet, largely supplied by people’s social media activity and devices within the “Internet of Things.” We must capture, store and accurately process all that information to generate the knowledge to offer customers the best possible experience, even anticipating their needs and supporting them throughout their decision-making process. This is what I call “knowledge-driven banking,” which is far superior to what we now refer to as “customer-focused banking”—which in its time was a very meaningful improvement on conventional “product-based banking.”

Banks must take the lead in Big Data techniques if they are to make use of the competitive edge granted by their incumbent status. This can only be done with huge data-processing capabilities and a technological structure that fully and seamlessly integrates the knowledge thus generated with every customer channel and every point of contact.

Such capabilities are still beyond the grasp of conventional banking platforms. Cloud computing, however, has created the possibility of enhancing them flexibly and efficiently. Many of the new entrants to the banking field will use cloud computing, and it can be an immensely useful tool for incumbent banks as well. But security concerns and regulatory and compliance requirements call for a very careful decision as to which data, transactions, and capabilities ought to remain on the bank’s proprietary systems. The bank, what’s more, must coordinate and integrate all cloud-based services. This highly complex task will be powerfully aided by a flexible and modern technology platform.

Having said all this, the upgrading of technology, however necessary, is not the toughest challenge to which banks must rise. To succeed in the new digital world conventional banks must completely revamp their business model. We need to reinvent operations and processes, redefine organizational structures, undertake a revolution in approaches to work, and rethink the skills and talent we need our people to display. In short, we need a transformation in corporate culture, a complete reinvention of the business itself.

Transforming a conventional “analog” bank into a new “digital” provider of knowledge-driven services can only be a protracted and complex process. We must keep up an ongoing tension of testing and reassessing what we have, trial and error, an unending search. That is to say, we can never stop innovating. Our approach to work must accordingly be far more agile and flexible, less hierarchical, rich in communication across divisions, more open and more collaborative. The new culture we are called on to develop must be compatible with keeping up, to its full extent, the operational pace of our present business, our relationship with our customers and all our stakeholders. The process might be compared to changing the tires of a truck while still in motion.

Very few banks in the world have put themselves to the task with the necessary determination and depth. But our very survival is at stake. A new competitive landscape is taking shape in the financial services industry. A new ecosystem to which we must adapt.

Any number of these projects focus on transactions—payments, transfers, financial asset sales—such as PayPal, Dwolla, Square, M-Pesa, Billtrust, Kantox, Traxpay, etc. Adjoining this field we find companies that offer alternative currencies, such as Bitcoin, Bitstamp, Xapo, BitPay, etc.

Moving beyond the field of payments, initiatives are under way in other segments formerly monopolized by conventional banks: product and service selection advice (Bankrate, MoneySuperMarket, LendingTree, Credit Karma); personal finance management (Fintonic, Moven, MINT, etc.); investment and wealth management and advice (Betterment, Wealthfront, SigFig, Personal Capital, Nutmeg); crowdfunding capital and debt financing (Lending Club, Kickstarter, Crowdfunder, AngelList, etc.). Lending to individuals—so far thought of as the segment most resistant to disintermediation—is being addressed by the preapproved loans industry (Lending Club, Prosper, Kreditech, Lenddo and many others).

Some companies are even trying to extract value from banking transaction data itself by providing customers with APIs to access their data, or directly supplying the tools for any business to manage its financial transactions on its own or for a bank to develop its digital offering (Bancbox, Open Bank Project, Plaid, etc.).

The major online players (Google, Facebook, Amazon and Apple), leading telecoms companies and big retailers are taking a real interest in offering financial products to supplement their existing goods and services. There are several reasons for this. First, it enables them to offer their customers a fully rounded experience. Secondly, a financial relationship potentially entails multiple and recurring customer interactions through which a wealth of information can be extracted.

These players can supply a broader range of financial products and services and, eventually, create a fully fledged banking offer. At the very least they can create “packages” that combine their own products and services with financial products and services. These are packages that conventional banks will be hard-pressed to replicate.

Transforming a conventional “analog” bank into a new “digital” provider of knowledge-driven services can only be a protracted and complex process. We must keep up an ongoing tension of testing and reassessing what we have, trial and error, an unending search. We can never stay nnovating

We are witnessing the emergence of start-ups that focus on single segments of the value chain. These new entrants use the latest technology and lean, flexible structures to offer highly specific products. They can do so at cheap prices and offering a great customer experience by dint of speed, agility, and intensive use of Big Data technologies.

We are witnessing the disaggregation of the financial services industry, with a multitude of highly specialized competitors operating in different segments. What’s more, major players are likely to enter the market with wider product ranges. So the banking industry—clearly burdened by overcapacity and in need of a far-reaching process of consolidation—will see an influx of competitors who will put still more pressure on incumbent banks’ growth potential and bottom line.

Those banks that let the challenge of transformation go unmet, or fail in the attempt, are doomed to disappear. This won’t happen straight away. The regulatory framework is still a formidable barrier to some areas of banking, and many customers remain attached to established practice.

But these barriers will undergo an inexorable decline. Disintermediation in an ever-widening portion of the value chain will drive out the incumbent banks, leaving them with the heavily regulated areas only. Elsewhere they will be relegated to providing back-end tasks and mere infrastructure, at a distance from the end-customer.

Yet those banks that successfully achieve transformation will leverage their knowledge of their customers to remain as the main point of contact, offering a wider and better range of services, whether sourced internally or through platforms where various specialist providers and customers themselves can interact. Only the platform owner will be able to integrate all the knowledge generated about end-customers to enhance their experience and widen and improve the available product range (whether produced by the owner itself or other suppliers which the owner admits to the platform).

None of this is “economic fiction”—this ecosystem model is already a reality in the digital world. It is yet to reach the domain of banking in anything more than embryonic form,4 but its emergence is inevitable. At some point in the course of this process there will arise a competitive face-off between “digital” banks and the leading internet-based providers. The banks, using the financial information available to them supplemented by public sources, will seek to offer a wider and better range of financial and non-financial products. Their rivals will use their information about their users to offer financial services among others.

Against a background of swift technological progress and the rise of all kinds of new competitors, it will be hard to tell who is making the right decisions and implementing them tenaciously and imaginatively. Customer behavior will ultimately cast its light on the landscape. Those perceived as leaders in digital transformation will earn better prospects of growth and profit, which in turn will win them the technical and financial capabilities to make best use of the process of consolidation: they will attract the best talent, bolster their reputation facing customers and suppliers, and capture a larger, wider and truly global market share.

The Transformation of BBVA

At BBVA we soon became aware of the depth and reach of the change faced by the banking industry when many still thought our field would be perpetually shielded by regulations and user conservatism.

Seven years ago we undertook the task of rebuilding our technology platform from scratch. We entirely transformed our technology function so that we could at one and the same time keep existing systems in full operation and develop new systems in line with the latest technological advances. We doubled our systems investment from €1.2 billion in 2006 to €2.4 billion in 2013. A substantial change took place in the proportion of funds spent to keep systems operational (“run”) to funds invested in new development (“change”), moving from the industry standard of 80%/20% to a new standard of 60%/40%.

After seven years of work, at BBVA we have achieved a state-of-the-art technology platform.5 As a result, while we processed 90 million transactions a day in 2006, we were able to process 250 million transactions a day by 2013. We estimate we will reach 1.2 to 1.4 billion transactions by 2020. At the same time, the new platform enables us to meet increasing security requirements. From 2006 to 2013, the number of attempted attacks on BBVA multiplied by a factor of 60. However, technology-driven fraud in 2013 was less than half what it was in 2010.

In short, our technology platform is able to satisfy the requirements of data capture, storage and management, which are growing exponentially in step with our progress into the digital age. We are aware that this task can never be achieved completely. There will always be new and more complex demands. But we also believe we are ahead of our peers, and able to compete successfully with new digital entrants.

Technology, though essential, is only a tool in the hands of our people to help them build a better experience for customers.

What is needed here is a revolution in operations, processes, and organizational structures; a major shift in approaches to work and in the required skills and talent. This must signify a radical transformation of our corporate culture or, following our earlier analogy, the way in which we build the “floors” of our digital “house.”

From the outset we identified a number of essential cultural traits that we had to encourage: agility, flexibility, the primacy of collaborative work, an entrepreneurial spirit, and support for innovation. Given this, it fell to us to advocate open innovation models as a way to overcome the limitations to which organizations are typically subject, and place the development of value proposals in the hands of the best talent—whether it be found in employees, customers, outside partners or any other of the company’s stakeholders.

The cultural transformation is undoubtedly even harder to achieve than the technological one, because we lack any obvious model or benchmark. We have to work with the infinite complexities of people, social relations and pre-existing cultures.

After seven years of work, at BBVA we have achieved a state-of-the-art technology platform. As a result, while we processed 90 million transactions a day in 2006, we were able to process 250 million transactions a day by 2013

Over the past few years, at BBVA we have comprehensively re-engineered our processes in step with our technological overhaul. And we have promoted a change of culture. To spread the new culture and help it gradually permeate the entire organization, three approaches proved particularly useful to us.

First, leadership and top-down role models. At every public or internal presentation, the senior management of the Group stressed the need to embrace change, encourage innovation, and engage in collaborative work. We had to lose our fear of failure—which can be a rich source of learning and a driver of creativity. This approach was coupled with a major effort of internal and external communication on the bank’s developments in the digital domain. We set up models to be followed by raising awareness of our strategies and forward steps in this field, and of the people undertaking them.

Secondly, we leveraged our selection and training policies. We have invested more than €40 million a year in this area. The bank’s training division operates physical venues that serve as a powerful point of reference for all our employees and stakeholders, and enable us to share experiences and knowledge. Our training centers teach the key subjects involved in addressing change at BBVA (strategy, marketing, finance, technology, leadership) in partnership with external institutions that are at the forefront of their respective fields: e.g., London Business School, IBM, Center for Creative Leadership, Wharton, Harvard, IESE, IE, Boston College.

Our greatest effort, however, was to build one of the most innovative e-learning platforms in the world. This system enables us to provide over 3 million hours of online education and training, involving more than 175,000 course-takers (i.e., an average of 1.7 courses were taken annually by each Group employee).

New technologies (e-learning platform, use of mobile devices) and new learning approaches (newsletters, on-the-job learning, MOOCs) are becoming an increasingly important way of providing a range of flexible training options that everyone can access.

In the field of selection our goal is to be present wherever the talent and knowledge we need is likely to emerge. We have relationships in place with the leading, cutting-edge business schools, such as those referred to earlier and others. Our key “brand” as an employer is aligned with the goal of being “the best—and first—digital bank in the world.” We are leveraging intensive use of social media (LinkedIn, Facebook, Twitter) to achieve global positioning in keeping with our requirements and expectations.

Finally, we regard the new corporate buildings now under construction as powerful instruments to accelerate change. In the countries where we have a significant presence we are bringing together BBVA employees at new headquarters. Though originally driven by financial and efficiency -related criteria, this effort is now a lever in the service of achieving our transformation.

Over the past few years, at BBVA we have comprehensively re-engineered our processes in step with our technological overhaul. And we have promoted a change of culture

In this book the article produced by the BBVA New Headquarters Team6 provides a detailed account of how this project was implemented and what it was intended to achieve. Here I shall do no more than stress the point that our aim is to create a new work experience for the digital era. The design of this experience must be both global and focused on people, meeting their functional and emotional needs. Under the new approaches to work we aim to put in place the key vector is collaborative work as a way to bring forth collective intelligence and stimulate innovation. This requires simultaneous action in three distinct but interrelated realms: physical space, technology, and culture (behaviors). Given the interrelatedness of the three settings, the new headquarters are proving to be powerful drivers of behavioral change.

Over these years BBVA’s transformation drive has already garnered meaningful results. The Group’s active digital customers in December 2011 numbered 5 million; by mid-2014, that figure had climbed to 8.4 million. Active customers using mobile technologies grew from 0.3 million to 3.6 million (i.e., they multiplied twelvefold). We have reconfigured our branch network, too. On the one hand, we created small “convenience” branches focusing on customer self-service; on the other, we operate larger branch offices where financial specialists can provide customers with personalized advice and higher value-added. These developments and the introduction of a system supporting remote personalized advice have enabled BBVA to raise the average office time spent on sales efforts from 38% to 45%, while the proportion of sales staff to total Group employees has risen from 28% to 38%, coupled with significant growth in our cross-selling success rate.

We regard the new corporate buildings now under construction as powerful instruments to accelerate change

We have also set in motion a highly ambitious Big Data project. After a period of getting things ready and attracting the right talent, the initiative is enjoying real success as to customer segmentation, improved credit risk scoring, and fraud reduction, among other areas.

We have taken steps to encourage the emergence of an open innovation platform and community. Developers come together to present, critique and improve their ideas, and help one another develop new concepts and prototypes in a process of co-creation.

BBVA is already launching new products designed and produced specially for the digital world, such as BBVA Wallet and Wizzo. The new products are a good “test bench” and have proved a powerful way of building teams and helping them learn. They are also doing very well in the market.

While building our own capabilities and talent, we also keep an eye on outside talent. BBVA Ventures is a San Francisco-based venture capital firm with a global reach that invests in start-ups that develop innovative financial services.

BBVA Ventures helps us stay on top of what is happening in the realm of digital banking. It also enables us to form alliances involving promising teams and initiatives, and may open the door to acquiring talent, technologies or business models with a disruptive potential in the industry. Specifically, this was the case with our recent acquisition of Simple, a pioneering start-up that focuses squarely on the user experience in mobile banking. Our active presence in the domain of digital start-ups and our bid to support open platforms have led to another first of its kind deal: the recent agreement between BBVA Compass with Dwolla, a payment system start-up. Bank customers can now use Dwolla’s real-time payment network to make their money transfers.

These are all meaningful forward steps that carry the organization and its people onward to a new corporate culture. In fact, at BBVA we are confident of having gained a competitive edge over competing conventional banks both technologically and in terms of revamping processes, organizational structures, and corporate culture.

But the pace of change in the digital realm and the ongoing acceleration of the innovation cycle prompted us to speed up our transformation and turn around our organizational structure in radical ways to place the digital world at the center of our vision for the future. It was for this reason that in 2014 we created the Digital Banking Area.

BBVA Digital Banking: a Radical Organizational Change to Accelerate Transformation

The main purpose of this new business Area is to speed up the Group’s transformation into a digital bank. The Area is directly responsible for developing existing distribution channels, adapting internal processes and designing a new range of digital products and services capable of delivering the best possible customer experience.

The guiding idea is that the Area will, in addition to enhancing BBVA’s digital business and presence, work as a catalyst to transform the entire Group. In step with the digitization of the business, the Digital Banking Area will spread throughout every unit of the organization the relevant procedures, work methods, and culture. BBVA Digital Banking is the “BBVA version” of what John Kotter—in his paper collected in this book—has called the “dual model” for driving change forward.

The new Digital Banking Area’s mission has four key angles: a new, enhanced customer experience; knowledge-driven personalization using the best data analysis technologies; communication in clear, concise language; and access to products and services at any time and from any place.

This mission specification calls for a new set of behaviors. First, the customer must be the focal point of every decision. Secondly, we must be able to experiment and react quickly, launch initiatives and end them promptly if unsuccessful, and use the iteration method to improve. Thirdly, we must target what’s truly important for customers and the business—do fewer but more relevant things, and do them better. Fourthly, we must be accountable: we should set specific, quantifiable objectives, constantly measure our forward and backward steps, take any necessary corrective action promptly, and quickly take stock of any failures.

BBVA Digital Banking brings together all digital ventures and initiatives throughout the Group and, in light of the above principles, drives forward an ambitious project for change, which has two branches: transformation in project management and transformation in human resource management.

In project management we have opted for the Agile methodology. In a nutshell, this involves forming time-limited multidisciplinary teams specifically tailored to the requirements of the given project; team members make intensive use of online tools to work collaboratively. To allow them the widest flexibility in their approach teams are given full decision-making independence—although they are of course accountable for their decisions—and use iterative trial and error to test, improve, or reject the initial concept.

This new project management model entails a new human resource management model. The Digital Banking Area has been granted full authority to make its own hiring decisions. But we also want to encourage the entire Group to develop, search for, and recognize talent both within the organization and outside. We need our people to have the right know-how but also, and more importantly, we need them to have the cultural features that fit in with this new model—flexible, non-hierarchical, highly mobile, and subject to very quick project progress assessment cycles.

The Area is sub-divided into several functional units: Marketing, Customer Experience and Business Intelligence, Omni Channel, Technology, Strategy and Planning, and Talent and Culture. These units provide support for six business divisions. Four of those divisions are geographical, corresponding to the Group’s main regions: Spain and Portugal, United States, Mexico, and South America.The other two divisions are global: Forms of Payment and New Digital Businesses.

BBVA Digital Banking brings together all digital ventures and initiatives throughout the Group and drives forward an ambitious project for change, which has two branches: transformation in project management and in human resource management

This organizational structure reflects the Digital Banking Area’s goal of trans- forming BBVA’s existing activity and finding new, knowledge-driven lines of business in the digital realm.

In the business units, objectives—and, accordingly, decisions and priorities—are shaped by the features of each market, particularly the extent of its digitization and the specific opportunities available.

So in the more developed markets, such as Spain and the United States, the Digital Banking Area’s scope of action extends to digital transformation of the entire franchise and the development of a new business model. This means the Digital Banking Area is directly responsible for the entire market offering, the distribution model, and process design. As a result, the Area takes on joint responsibility with the local business unit for the income statement as a whole.

In Mexico and South America, the focus lies on developing the digital offering, whether at the request of the local unit or on the Area’s own initiative. In addition the Area manages all digital functions—product development, channels, marketing, processes, technology, etc. These efforts are aimed at the existing “digitized” population, but also seek to develop low-cost models capable of rolling out a profitable financial product range targeting low-income segments (financial inclusiveness). In these regions, the Digital Banking Area is co-responsible, in conjunction with the local business unit, for the “digital” income statement.

The Digital Banking Area is still at an early stage of development. It is attracting and integrating talent, building teams, specifying projects, and creating ties, agreements, and operational schemes with other business and support areas within the Group.

In the field of New Digital Businesses the aim is to develop new business models and value proposals beyond the scope of conventional banking. This unit—which is 100% digital in its organizational structure and culture—is entirely independent from the bank and operates as a global business line with its own income statement. It takes its projects forward internally or in partnership with others with a view to maximize the return on BBVA capabilities and assets and external talent. New Digital Businesses is accordingly in charge of the BBVA Group’s interactions with the digital ecosystem. One of the entities reporting to it is BBVA Ventures. It is also in charge of executing BBVA’s mergers and acquisitions in the digital sector.

The Digital Banking Area is still at an early stage of development. It is attracting and integrating talent, building teams, specifying projects, and creating ties, agreements, and operational schemes with other business and support areas within the Group.

But even at this incipient phase results are coming through. The Area has already launched almost fifty Agile-driven projects across all business areas involving close to 500 people. One key concern is to initiate and accelerate new projects; another highly significant consideration is to continue projects scheduled or started previously. Highly ambitious targets have been set for 2015 which involve a very significant portion of Group human and technological resources.

Leaving this aside, however, I believe that the Area’s most meaningful impact is that its principles and work approaches are permeating the organization as a whole—through its ties with other areas, its visibility in internal communications, and the backing it finds in the organization’s leadership.

This is why I think that the creation of BBVA Digital Banking was a bold and insightful decision in aid of speeding up the Group’s digital transformation. And I also believe we will shortly see the tangible results of the projects now being set in motion and of the Area’s role as a catalyst for change in the organization’s working approaches and culture.

Final Thoughts: Change Requires Leadership

It was some time ago that BBVA perceived the risks and opportunities inherent in technological change, and for several years we have worked towards reinventing ourselves and moving on from analog banking—however efficient and profitable it might have been by the standards of the twentieth century—into a knowledge-driven digital business of the twenty-first century.

This article focuses on two of the milestones in this process. First, the construction over the past seven years of an entirely new technology platform capable of supporting the data capture, storage and processing requirements of digital banking, which are far more demanding than those seen in conventional banking. Our platform now places us clearly ahead of our peers.

Secondly, in the domain of cultural transformation we have worked hard on several fronts and undertaken many significant projects. Our overarching goal has been to shape an organization that nurtures change and innovation—not as ends in themselves, but as a means to deliver the best possible customer experience. Very recently, the launch of the Digital Banking Area has marked a turning-point in the transformation of our processes, structures, approaches to work, capabilities and mindset, in alignment with the demands of the digital world.

We have come far, and are now in a position to lead the process of transformation of the banking industry and so become the first—and best—knowledge-based bank, fully in alignment with the digital ecosystem.

But we are aware that there is still a long road ahead. Our transformation, as we now envision it, is in progress and far from complete. Far more importantly, technological change continues apace, and society is changing with it. We are witnessing the dawn of Big Data technology. The Internet of Things is only just taking off, but is set to grow exponentially. In these realms, as in so many others—some of which we can as yet barely imagine—“more is different,” in the words of Kenneth Cukier in his article for this book, “Big Data and the Future of Business.”

So we are running a race which, for as long as the present stage of scientific and technological progress accelerates, has no discernible finish line. If we are not to lose our way, if we are not to become complacent or resign ourselves to being second-best, we must modify people’s attitude to change—we must not merely accept, but embrace and promote change. This calls for strong and cohesive leadership throughout the organization. Our leaders must advocate change, encourage change by example, recognize those who support change, and take steps to remove the practices and structures that stand in the way of change.

This is surely the key to BBVA’s successful transformation so far. And this is the kind of leadership we need in future if we are to achieve our goal that BBVA should become the foremost figure in transforming the best of analog banking into the best of knowledge-based banking for the twenty-first century.

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