When looking at the state of digital transformation one can’t but think about the fact that history tends to repeat itself.
All too many companies remain stuck in the eternal goal of cost reductions across the board, too often without any real plan to create and reap value beyond those cost savings and the cost cutting aspects of automation.
Sure, there is increasing competition, the consumer is said to want more for less, you have those behemoths that drive costs down by paying little taxes and circumventing essential labor rights using nifty names for underpaid and overworked workers, you need to reduce costs to invest in innovation, automation and digitization are essential to transform, many traditional business models simply don’t cut it anymore and, along with legacy stuff all over the place, they bring down revenues, erode margins and simply don’t scale.
Cost reduction is not a goal but in practice it is
Cost savings are still all too often goals rather than enablers and keep organizations stuck in the initial stages of any digital transformation strategy, let alone step in whatever digital transformation maturity journey. Serving consumers with all sorts of self-service and digital tools and equipment, removing the human element as much as possible, is still often seen as the way to go (until we see that in fact consumers do want human interactions).
The focus on cost reductions is not just in organizations of course. For vendors of automation technology and services there is no easier sell than an ROI sell with a focus on those cost reductions, which in a scope of process automation is a lot about reducing headcount and lowering the overall labor cost base with less redeployment to fill in gaps or create new value propositions, let alone do ‘more valuable work’, than we like to believe.
Obviously, that’s not what you’ll read in the average ‘digital transformation xyz’ project press release: the reduction of FTEs. Keeping in mind the usual exceptions it’s even more rare to learn how organizations in transformation plan for innovation and being relevant in the longer term by going beyond the pure cost reduction, automation (which is not the same), internal optimization and so forth. How are they increasing FTEs in those areas? It’s rather rare to hear that side of the story. Where do they intend to really create value with outcomes and goals in mind rather than looking to fix the consequences of years of bad investments and decisions, fixing legacy issues, lift and shift operations and being slow to adapt, let alone pro-act by leveraging technologies in areas such as IoT, big data, advanced analytics, artificial intelligence and so forth in a way that really focuses on value creation and transformation with people in mind?
Obviously cost reductions and automation are important and have no moral meaning nor value in the broadest sense as such. It’s the context and, again, desired outcomes that matter and color the meaning of it all.
- Reducing energy costs in order to enhance comfort and save on natural resources is an example of a scenario where the cost reductions and automation that goes along with it by definition serve a goal for the better.
- Reducing costs by cutting staff with the purpose to price everyone out of the market and become a leader in an industry with minimal respect for the human element or the benefit of society and with the organization’s profit and de facto dominance in mind to serve online buyers while at the same time ‘disrupting’ industries with serious social consequences is an entirely different thing.
- Reducing costs and headcount with the sole purpose of surviving in a highly competitive market is again another thing. While survival is a natural reflex, also for organizations, here the question that arises is whether the vendors and service providers might not rather focus on helping the organization move towards where the value is and take a leap rather than selling the gear and services that enable to simply cut FTEs and in the end, encounter the same challenges as you can’t scale cost savings.
True, all this is and remains subjective and simplistic. Yet, organizations can choose which paths they want to take and wonder where the backlash against a pure focus on cost reductions might be higher. We don’t exactly see a backlash against savings on natural resources. We do in other areas.
When the pure cost reduction mindset remains the antagonist of change
Again, it is a simplified picture and somewhat black and white but we see it all too often. Change and innovation seem to be (once again) limited to those thinking ahead and more holistically.
Let’s face it: organizations still buy with cost and labor reduction in mind while pressuring vendors to lower margins in such a way that once the deal is done there isn’t too much appetite to go the extra mile for the buyer. Immediate savings and ROI, no risk taking, no hunger for innovation and little focus on value creation.
As said, at the same time a lot of vendors and service providers don’t exactly change their ways either. It’s very comfortable to sell with a focus on immediate ROI and cost reductions, including on the level of labor. Sales teams are reluctant to change as much as buyers are. And too often there isn’t a broader plan within which investments fit with a focus on protecting/enhancing core business while transforming and innovating with an eye on shifting the business to where the real value and margin opportunities are to be found. No risk, no vision, changing mandates when the next executive comes in, too much work and tasks at the same time on the short term (which of course matters too, you don’t transform by kicking everything out, killing your core business and starting from scratch) you name it.
True, all this isn’t new. That’s why we say that history tends to repeat itself. Everything comes back in the same eternal cycles from which we often don’t learn.
Organizations want to do and have as much as they can internally, then realize it’s best to work with partners, BPO service providers and ecosystems consisting of those who have the missing skills when the next challenges and changes come around (and they see that doing it internally perhaps isn’t the best way) until they see that in the end working with those partners isn’t perhaps what they expected, they acquire the needed capabilities internally and see new opportunities to do everything themselves.
The exact same thing happens on the cost reduction versus seeing new opportunities and tapping into them level. Again, this is a simplification. But still.
What has changed in give or take 25 years? Lessons from the past
Here is a bit of history to illustrate what we mean. When computer networks became popular and companies like Novell and 3Com, to name just two, were major players in the new LAN, WAN and whatever area network space, in the early days this market was mainly one of system integrators.
Traditional computer dealers and smaller IT companies were struggling with increasing cost pressures and eroding margins. There wasn’t any money to be made with hardware, software (cloud computing didn’t exist) and the more maintenance-oriented types of services.
So, value-added services and finding new sources of revenue was the way to go. Where did that value sit? There wasn’t a one-size-fits-all solution for all computer reseller and smaller systems and integration houses of course. For some it was specialization, for many it was in this new space of computer networks. Yet, to get there, new skills were needed, investment was required and risks needed to be taken. It’s precisely what we did when still working at Ingram Micro: have a division for those big system integrators and at the same time empower smaller players, IT firms and traditional resellers to get their place in this new market reality by focusing on the benefits. Empower your channel, you know.
It didn’t take too long before cost pressure and eroding margins started playing here as well, along with some new entrants in the computer network space such as Microsoft. The main reason was that both sellers and buyers couldn’t look beyond the cost saving, efficiency and internal goals. Those that did, however, and focused on the outcomes and of the innovative value-added possibilities went on and thrived. They sold and bought deployments with, on top of short term benefits, the future and innovation in mind and what they knew would be real value of computer networks (with a clear plan).
Moving beyond cost reductions: where is the value or can you create it?
The exact same evolutions occurred several times since then (and before), the arrival of the Internet, cloud, you name it.
Fast forward about 25 years since those early LAN days. Digital transformation. A so-called fourth industrial revolution. Ample new technologies, changes, opportunities, so much that any comparison with what computer networks brought, is impossible.
Except for the fact that we’re still stuck in those same mentalities in buying and selling and even in the reasons why we buy: cutting costs.
Whether it concerns IoT deployments, Industry 4.0, robotic process automation, artificial intelligence or whatever ‘umbrella term’ for whatever technologies the question is and remains how to get beyond that pure goal of cutting costs and increasing productivity (essentially often also cutting costs) and so forth?
Those that have the answer, as several effectively do, will win once the real ‘revolution’ is there and they keep widening the gap with their competitors, both on the buyer and seller side (and with buyers also being sellers and vice versa). The others that can’t get rid of the cost reduction mentality and keep playing in all too familiar ‘modi operandi’ should really start asking themselves “now what, what next and do we know how to remain relevant, let alone be where the value is created or perhaps create it ourselves?”.
Cost reductions, efficiencies, whatever term you like to use (with digital customer experience optimization de facto often being nothing more than cost reductions, those that looked at it this way already feel the pain): it all matters. But without more mature digital transformation goals and business outcomes in mind they are just lipstick on a pig.
An exaggerated focus on automation and cost savings hits organizations right back in the face
In fact, it’s all fairly simple:
- We’re at a point that each organization needs to digitize, automate, digitalize and transform with data, people and processes as per usual taking center stage and value generation through innovation and relevant innovative models and approaches as a goal whereby relevance is in the eye of the beholder and a dynamic given.
- True value on the longer term only is generated when the goals of people in whatever capacity are served. It’s the shift in attitudes, perceptions and desires of people that change the course of transformational challenges and leads to the next wave of ‘disruption‘, at least as much as the next big technological evolution. Value is not just a monetary and financial matter, value is a perceived measure of trust, appreciation, importance, usefulness and, most of all, human values that shifts over time with changes in perceptions and attitudes being the real disrupters.
- To, once again, quote Charlene Li from an interview we did several years ago: the thing that really causes disruption is the change in power and balance when shifts in value happen between individuals, between companies, between customers, within companies and inside ecosystems and the value chain. And it’s precisely in the context of value shifts that we urge organizations to put people at the center instead of saying they do but de facto often remain stuck in financial/monetary value and, worse, only the mentioned short-term intermediary goals of cost savings.
- Everything is cyclic and in the end people and, always, regulators start seeing the reality underneath the benefits, leading to social and macro-economical change. Each evolution has its counter-evolution. Each revolution its counter-revolution (that’s the one that will matter in Industry 4.0, the rest is continuation really) and each cycle its opposite cycle.
- There are limits to how long you can resist change but there are also limits to how much you can save costs through digitization and automation. And the latter is what we already start seeing today in a global, societal and certainly business context where too much automation and cost reductions with little positive change and value for people to show for it hits organizations right back in the face.
The question to ask is not what and how but why and for whom. It is not just where to save but also where to invest. That is what digital transformation is about: goals, risks and tangible benefits for people in a holistic perspective.
It can’t happen without inclusive ecosystems and when push comes to shovel you can’t predict the next disruption. We’re pretty sure that this next disruption is a human one though and that some of the darlings of the digital economy and of digital transformation pundits will suffer as much, if not more, from it as ‘traditional companies’ do. Because in the end people always start realizing what’s really at stake and how quite some ‘digital leaders’ mainly thrive because of their insatiable hunger to drive costs down and wipe out industries, businesses and at times human dignity.
Just watch and see. Technology should serve mankind, not just large organizations, the happy few and people in their capacities as spoiled consumers.