Chapter 2
The Disciplines to Move Up to Stage 5 Transformation
It was January of 2015 and Julio Nemeth, the newly minted president of Global Business Services at Procter & Gamble, mulled over an ironic problem. He was taking over an organization that was, by all external benchmarks, already best in class in the shared services industry. His predecessor, Filippo Passerini, had left behind an enviable, globally awarded Global Business Services organization, which had shaped the GBS industry itself along the way.
Nemeth’s problem was simple—how to further improve a business model that was already industry leading. The external consultant advice to him was to do “more of the same” since the current P&G model obviously worked brilliantly. Being an innovator, though, he knew that disrupting from a position of strength is always preferable to resting on your laurels.
Shared Services Industry Context
To better understand Nemeth’s dilemma, it would help to digress briefly into the shared services industry and, by extension, into Global Business Services at P&G.
Shared services is a construct that allows an enterprise to drive efficiencies of scale by sharing internal services like finance and accounting, supply chain management, HR systems, IT services, or customer relationship management across the enterprise. The shared services unit becomes an internal service provider to other business units within the enterprise and is held accountable to deliver services at significantly improved cost, quality, and timeliness. The usual strategies employed are to sweep together similar services across business units in the enterprise (e.g., payroll), then simplify, standardize, centralize, and automate those processes.
The Evolution of Shared Services
Over the past thirty years, most shared services organizations have evolved through three stages. The usual starting point is piecemeal shared services, where a limited set of services (e.g., only finance and accounting) or a limited geography is available. With maturity, this evolves to the second stage of global or full shared services, where all types of services and all geographies are optimized. The third stage of maturity is global business services, where the shared services organization becomes not just a lower-cost “service provider” to the business but also a proactive transformation agent of the enterprise. This is done by taking on stronger governance functions (e.g., defining process standards across all business units), spearheading business transformation services (e.g., helping other business units digitize), and generating top-line value (e.g., using analytics to grow sales).
P&G’s Global Business Services unit had reached the third stage of maturity more than a decade ago. It was extremely wide in its scope, possibly one of the widest in the world. It provided about 160 “services” to P&G’s business units across more than a hundred countries. For instance, a “service” could be buildings and facilities management or payroll or sales business analytics. These services were grouped into “service lines” such as IT Services, Financial Shared Services, Supply Chain Shared Services, and so on.
The Fourth Industrial Revolution Applies to Shared Services Too
Nemeth wasn’t convinced that the shared services industry’s maturity stages ought to stop at three. Knowing the disruptive power of the digital revolution, he wondered if it was possible to create a new fourth stage of evolution of GBS. This would apply not just to P&G but to the entire industry. He pulled me into the effort, and together we created the Next Generation Services (NGS) organization to find and execute this next big disruption for shared services.
At the time, I had worked for twenty-four years at Procter & Gamble. Over this period, I had been privileged to live in six countries, work in a dozen P&G roles, and manage P&G’s GBS and IT for all regions of the world. I was delighted with the opportunity to transform the GBS model itself.
Inventing the Next Generation of Shared Services
We started with a simple question: Why should the technology-driven disruptive forces that were acting upon just about every industry not disrupt the shared services industry? If anything, the shared services functions should have been disrupted faster and deeper, given that they were comprised of essentially information and data operations (e.g., accounting, payroll, IT, etc.).
Four years into the digital transformation journey, we know for a fact that there is indeed a fourth stage. Through the work my NGS team did at P&G, we created and implemented several 10X internal operations products (i.e., products that deliver ten times better top line, bottom line, or employee-centric capabilities). Along the journey, we captured a ton of learning on leading successful digital transformations. What we accomplished initially by intuition and trial and error was soon codified. All these lessons are the basis of the surprising disciplines of how to take off and stay ahead during a digital transformation.
However, back in 2015, the GBS digital transformation to the next stage was merely a hypothesis. We searched externally for evidence that this could be proved or disproved. That led us to Salim Ismail, founding executive director and “dean” of Singularity University and author of Exponential Organizations.14
Exponential Organizations as a Possible End State for GBS
Around the time that we were searching to create the next stage of evolution of shared services, P&G’s GBS leadership team had been exposed to a talk by Salim at Singularity University on the topic of exponential organizations. Founded in 2008 by Peter Diamandis and Ray Kurzweil, Singularity University (SU) is, in my opinion, the world’s foremost think tank on how disruptive technologies, from artificial intelligence to biotech, can change the world. Salim has since moved on from SU, but he and I still firmly believe that no forward-thinking leader can afford to miss the opportunity to visit SU to learn about how dramatically their business can change.
Salim’s pitch was simultaneously mind-blowing and terrifying. He talked about the exponential pace of change, driven by a new generation of technologies. The worrying part of the discussion was the realization of just how near these new disruptions were. It reinforced our belief that GBS had to evolve, and fast.
Salim did more than just scare the living daylights out of his audience. He also offered great insights on an end state, based on his book, Exponential Organizations, of what these future organizations might look like. This provided an important jigsaw puzzle piece. P&G’s Global Business Services had to transform into an exponential organization. We decided to hire Salim to help create Next Generation Services—the next evolution of Global Business Services.
How Exponential Organizations Can Change the World
Salim defines an exponential organization as one whose impact (or output) is disproportionally large—at least ten times larger—compared to its peers because of the use of new organizational techniques that leverage exponential technologies. Organizations with exponential characteristics and mindsets are in the best position to thrive in the coming digital era. That’s because unlike traditional command-and-control organizations, exponential organizations are digital, information-based agencies. Where traditional companies are driven by scarcity of the resources that are under their control, exponential organizations thrive on abundance by tapping the larger ecosystem. Traditional organizations move deliberately. Exponential organizations are flexible, adaptable, and agile and have few barriers to enter any industry and therefore grow explosively.
Why Exponential Organizations Are Necessary
Although we intellectually understand the transformative power of exponential technologies, it’s easy to overlook how near the threat is and just how much it can affect enterprises.
Here are a few examples:
The computing power that is available per $1,000 continues to grow exponentially. By 2023, you will be able to buy the processing capability of an entire human brain! Given the complexity of a human brain, this is a huge landmark.
A short twenty years after that, you will get the computing capacity of all the human brains on earth for $1,000. Imagine how that might change organization staffing.
In March 2018, IBM unveiled the world’s tiniest computer, which would be one millimeter big and would cost a few cents to manufacture. The University of Michigan responded in June 2018 with their version, which would be a tenth that size.
The current version of Google’s game-playing AI, named Alpha-Zero, taught itself how to play chess in four hours and defeated the world’s best chess program, Stockfish 8, by 100 to 0. It had previously beaten the world’s best Go players as AlphaGo.
This is highly relevant to enterprise operations. Imagine if manufacturers could throw in an inexpensive tiny computer into every product they sell. What would that do to their supply chain efficiency from supplier to customer? Or think of the possibilities of a self-learning AI program rapidly training itself on complex financial, customer, logistical, medical, or legal issues to make decisions that currently require human “judgment.” What would be the future of the workplace if you could buy the capacity of all the world’s human brains? Or how would the operation of any enterprise change if blockchain, the currently “unhackable” platform, could connect and enable error-free transactions across all suppliers, customers, and peers at an amazingly low cost?
Creating the Next Generation of Shared Services Products Is Possible
Within days, we had set up Next Generation Services and reached out externally to learn about 10X idea possibilities from more than a hundred organizations—consultancies, peer companies, venture capitalists, start-ups, educational institutions, and futurists. The next month was a roller-coaster ride that was both thrilling and terrifying, with periodically stomach-churning jolts of new digital reality that had us questioning whether the digital revolution wasn’t even more urgent than we had thought.
One such experience occurred in April 2015. I was trying to schedule a meeting over email with AJ Brustein, the CEO of a start-up named Wonolo. I sent AJ an email message suggesting that a P&G colleague and I would be open to a phone call. AJ responded, “Sounds great. Copying Amy as well. Thanks.” He copied Amy Ingram, who I assumed was his assistant. This was on April 10, a Friday. To clarify availability, I replied to him and Amy, “Thanks AJ, I am out next week, but perhaps we can connect the following week?” and copied my admin assistant Kim on the message. Later that day, we got a message from Amy: “Happy to get something on AJ’s calendar. Does Monday, Apr 20 at 11:00am PDT work? Alternatively, AJ is available on Monday, Apr 20 at 4:00pm PDT or Tuesday, Apr 21 at 10:00am. I’ll include the dial-in on the invite.” Kim chose a time over email, and the meeting was all set. It was just a routine day at the office. However, later that day, a P&G colleague copied on the messages asked me to check out Amy’s digital signature on her email. It said, “Amy Ingram | Personal Assistant to AJ. Brustein” and below that, “x.ai—artificial intelligence that schedules meetings.” Amy was a robot!
I was flabbergasted! This was a “Turing test” type moment for me—the test, named after Alan Turing in 1950, being a challenge of a machine’s capability to exhibit intelligent behavior that’s indistinguishable from a human’s. We dissected Amy’s responses carefully. Her messages were in perfect business language. “She” had clearly “read” and “understood” my email on April 10 that I wouldn’t be available the next week and had therefore suggested times on April 20 and 21.
If a robot could manage the most personal type of executive service, then why couldn’t AI run so-called “judgment-based” financial decisions with suppliers and customers on accounts receivables and payables? Why could we not supplement our buyers in the purchases function with an AI “buddy” that could digest the latest information on suppliers, materials, pricing trends, and payments and trigger advice and decisions? Could we not redefine the traditional corporate systems user experience from Stone Age to Siri? Could we perhaps forecast and proactively self-heal most IT systems outages across the P&G globe? Could algorithms replan our supply chain in real time?
The game was on! However, there was one little question we had to deal with next: How exactly would we do this?
A Road Map for Digital Transformation
That question in early 2015 is not too different from the situation faced by most executives, entrepreneurs, and public sector leaders today. How do you go about achieving successful digital transformation? It is certainly a top priority for most CEOs based on a study by the Economist Intelligence Unit.15 Another study by Gartner16 says that half the CEOs expect their industry to be substantially or unrecognizably transformed by digital. The issue is no longer whether to transform but how to go about it. And frustration is building as the gap between understanding the criticality of digital transformation and actual results of successful transformations widens.
P&G and GBS had a long history of experience with disruptive innovation. We knew that the odds of true digital transformation to an ongoing perpetual stage of innovation tend to be low. We had heard about the 70 percent failure rates in digital transformation and had previously experienced some of this pain.
What we needed was a road map. Something that we could use to clearly articulate and measure successful digital transformation as well as walk us step-by-step through the journey. Over time, we created such a road map. Disciplined execution inspired by the airline checklist methodology was built into it. This was the operating model for NGS.
To date, this has been highly successful in delivering disruptive outcomes, been reapplied through more than twenty-five disruptive innovation experiments (projects) at NGS, and fine-tuned over time. (Disruptive projects were called “experiments” in NGS, as part of a new language for smart risk-taking.) Though the model has evolved significantly with experience over time, it essentially provided us the rigorous disciplines (checklist steps) to deliver success (i.e., achieve Stage 5 transformation).
The Five-Stage Digital Transformation Model
Recall that we defined digital transformation in chapter 1 as the migration of organizations from the Third Industrial Revolution to the Fourth. The chapter also demonstrated that to thrive in periods of industrial revolutions, the transformation must help the organization to both take off and stay ahead. Therefore, the only logical end point of successful digital transformations must be to reach the stage of perpetual market leadership via innovation. This is Stage 5 digital transformation.
Locking in the right definition of digital transformation also helps cut through the hype of technology vendors and consultants who tend to brand their offerings as “digital transformation.” The five-stage digital transformation model in figure 1 is an easy way to distinguish between in-process stages and the end stage.
Stage 1 is the Foundation. This is where enterprises are actively automating internal processes, such as selling, manufacturing, or finance, using SAP, Oracle, Salesforce, or similar platforms. This is more automation (also called digitalization) than transformation, but it provides the digitalized foundation necessary for future transformation. Automating processes using digital platforms is necessary to convert manual effort into data.
The next stage is called Siloed, where you might see individual functions or businesses start to use disruptive technologies to create new business models. So for instance, the manufacturing function may have made progress on using the Internet of Things to drive major changes in the way they manufacture or manage logistics, or the finance manager may have heard about blockchain and transformed the way they do intercompany accounting across countries. Alternatively, a business unit within the enterprise may have used technology to create a completely new business model, such as selling direct to consumer as opposed to via retailers. The point is that these efforts are siloed, and there is no overall company strategy driving transformation.
Stage 3 is Partially Synchronized transformation. The enterprise leader, owner, or CEO has recognized the disruptive power of digital technologies and defined a digital future state. At Stage 3, the organization has started rowing in the same direction. However, the enterprise has not completed transforming to a digital backbone or new business models, nor has the agile, innovative culture become sustainable. A good example of this is GE’s digital transformation, which ultimately stalled at this stage. CEO Jeff Immelt defined his vision for a digital industrial future. The entire firm started to move toward a single digital strategy. However, the new digital business model never matured enough to develop strong roots.
Stage 4, Fully Synchronized, marks the point where an enterprise-wide digital platform or new business model has fully taken root. However, it is a one-time transformation. It is still just one technology (or business model) change away from being disrupted. The only way to survive continuous disruption threats is to make digital capabilities and an agile innovative culture an ongoing integral part of the enterprise.
Figure 1 The five-stage digital transformation model
Stage 5, or Living DNA, is the step where the transformation becomes perpetual. You maintain ongoing industry trend leadership because you are disciplined in constantly innovating and setting industry trends. You’re not just a market leader; you’re a disciplined innovator.
Doing Digital vs. Becoming Digital
How to transform an existing organization can be an exhausting challenge, especially given the immense power of digital technologies. Digital technologies can enable so many things. Should you go after a new business model? Or try a new idea extension of your current business model? Perhaps you should pursue a digitally enabled version of your existing business? The conventional wisdom here is to create a separate digital strategy to answer these questions.
My experience shows that this is a mistake. Instead, I recommend redoing your current business strategy to fully transform using digital capabilities. The distinction is more than subtle. It’s the difference between “doing” digital and “becoming” digital. This goal of “becoming” digital is key to achieving perpetual digital transformation. An organization can “do” digital as part of a one-time transformation, but to achieve ongoing market leadership it needs to “become” digital.
The organization has reached the “become” stage when digital is the “living DNA” of its operation. A new digital strategy may deliver a onetime Stage 4 transformation, but it is unlikely to get you to an ongoing Stage 5 transformation. At Stage 5, the enterprise has “become” digital.
A useful way to distinguish between the five stages of transformation is to think of what each stage is not. Table 1 illustrates this.
Table 1 Digital transformation: What you are doing and what you are not doing
Stages |
What You Are Doing |
What You Are Not |
1. Foundation |
You’re upgrading your technology to the latest digital platforms, including cloud, AI, etc. You’re “digitalizing” your operations. And seeing huge “scale” benefits. |
You’re not “transforming.” You have no digitally disruptive products, customer relations, or operations. |
2. Siloed |
Parts of your organization are experimenting with transformational business models and products. This is on top of the scaled automation of Stage 1. |
There is no enterprise-wide strategy to completely transform your business model itself. |
3. Partially Synchronized |
Your enterprise has a mix of old and new digital business models, processes, and products. All are following a corporate-wide strategy. |
You are not fully invested in a full transformation or capable of fending off nimble “digitally native” competition. |
4. Fully Synchronized |
You’re delivering industry-leading customer results, innovative digital products, and best-in-class operational efficiency. |
You’re not winning perpetually. You’re digitally optimized for the moment. But you are one technology, product, or process change away from being disrupted again. |
5. Living DNA |
Digital operation is your DNA. You are the ultimate ever-evolving market leader. You operate fully digitally. Your workforce is digitally savvy. You provide hugely personalized creative value to customers. You have the most innovative business model. And your transformation is fully synchronized and ongoing. You maintain ongoing industry trend leadership with disciplined innovation. You’re a step beyond being a market leader; you’re a disciplined market leader constantly leveraging digital. |
You’re not static. Your enterprise morphs constantly to stay ahead of competition. |
Ways to Get to Stage 5
The Digital Transformation 5.0 model provides a road map. As with any road map, there is a sequence of steps that cannot be skipped. However, the journey can certainly be expedited, and some steps can be combined for a leapfrogging effect.
Figure 2 calls out the different options to get to Stage 5. Traditional organizations desiring digital transformation will start at any stage from 1 to 4 and can either slowly evolve or rapidly leapfrog to Stage 5, which is the ongoing desirable plateau. On the other hand, successful digitally native organizations have a starting advantage in that they already have a synchronized digital platform to start with. However, they also need to move up to Stage 5.
Figure 2 Ways to get to Stage 5
Unless your organization happens to be a successful “digitally native” organization—i.e., a company that started with a digital platform and then built a sustained winning business model around it (e.g., Netflix)—your digital evolution will need to follow this road map.
Building the Five-Stage Model Further into Disciplines
Digital Transformation 5.0 provides a road map to help set the correct end state and assess where you are in that journey. How successfully you move along that journey is driven by discipline. Our road map will be complemented with tangible disciplines and eventually checklists to bring the right level of rigor for successful digital transformation. For that, we need lessons from the aircraft industry, and some Swiss cheese. (Yes, really!)
Learning from the Disciplines of Aircraft Takeoff
The fact that airplanes have high safety standards isn’t a surprise. The bigger surprise should be that takeoffs have become highly automated and reliable despite being highly complex endeavors. In today’s world, several coincidental failures need to occur for aircrafts to fail during takeoff. Aircraft manufacturers use the principle of layered security, also known as the Swiss cheese model (see sidebar), to understand and mitigate the risk of a failure.
Flight safety in the early days of aviation was not a given. The airplanes—which were made of fabric, glue, and wood for the most part— made flying more a game of skill than process. Takeoff and landing crashes were common. The intervening decades have seen an improvement in both design and methodology. The Swiss cheese model was one of the risk-minimization techniques employed. Once the drivers of failure were understood, it became possible to redesign technical products, processes, systems, and people capabilities to minimize or eliminate them. (The airline checklists are simply mechanisms to follow rigorous processes for items that cannot be fully automated or eliminated.)
My work at P&G’s GBS proved that understanding the drivers of digital transformation failure from one stage to the next, and then counteracting those failures with checklists, could be applied to digital transformation success as well. I have identified and confirmed very specific reliability drivers (and therefore disciplines) to improve the success rate of each of the five stages of digital transformation.
There are very specific reliability drivers (and therefore checklists) to improve the success rate of each of the five stages of digital transformation.
The Surprising Disciplines of How to Take Off and Stay Ahead
Figure 3 illustrates the two risk factors (and therefore checklist items) per stage in our five-stage model.
Figure 3 Checklist items to move up the five stages
The next part of the book will flesh out the five stages and the two respective discipline areas necessary for each of these to be successful.
After that, I will share how all these disciplines can be assembled together by describing in chapter 13 how the P&G Next Generation Services execution unfolded. Exponential organizations provided the inspiration. The NGS operating model (Digital Transformation 5.0) delivered the road map for execution. The checklist approach, which evolved over time, provided the discipline for execution.
Chapter Summary
The Fourth Industrial Revolution demands a new business strategy from the current one created in the third industrial era (i.e., the rise of PCs and the internet).
P&G’s GBS saw this challenge in 2015 and set about creating a proactive digital transformation strategy.
The shared services industry at the time had three levels of maturity. GBS was at the third level. GBS was convinced that the same digital disruption forces that acted upon other industries should also be acting upon the shared services industry.
The issue was how to go about this disruptive change with good chances of success. We realized that the reason why 70 percent of all digital transformations failed was insufficient discipline.
The five stage Digital Transformation 5.0 model provides a disciplined road map to succeed in transformation.
Stage 1 is the Foundation. This is where enterprises are actively automating internal processes.
Stage 2 is called Siloed. You might see individual functions or businesses start to use disruptive technologies to create new business models.
Stage 3 is Partially Synchronized transformation. The CEO has recognized the disruptive power of digital technologies and defined a digital future state.
Stage 4, or Fully Synchronized, marks the point where an enterprise-wide digital platform or new business model has fully taken root for the first time.
Stage 5, or Living DNA, is the step where the transformation becomes perpetual.
Airplane safety has become a byword in reliable operations by understanding and eliminating risks in a disciplined manner. Frameworks like the Swiss cheese model, combined with operational discipline using checklists, are proven models.
To move up reliably through the five stages of digital transformation, I have identified two disciplines to be checked for each.
Your Disciplines Checklist
Evaluate your digital transformation against the questions in figure 4 to follow a disciplined approach to each step in Digital Transformation 5.0.
