Chapter 9

Digital Reorganization

Imagine attaching a World War II airplane engine to a modern commercial jet aircraft. You don’t have to be an aeronautical engineer to know that this would be an unviable design. The old engine would not have the power needed for the plane to take off and stay aloft. And yet, most enterprises undergoing digital transformation do exactly that when they rely on older versions of IT organization structures and capabilities to power the change! This can be fatal to attaining a fully synchronized Stage 4 digital transformation.

The digital enterprise needs a new design of engine (i.e., IT function) to power takeoff and staying aloft, just as modern aircraft needed a new breed of engines in the 1940s. The modern engines for digital are the new IT function capabilities. Additionally, the aircraft itself will need to be constructed of modern materials, which I use as an analogy for the need to upgrade digital literacy broadly across the enterprise.

I’ll start with the first topic, the need for a newer design of engine. Once again, the aircraft analogy helps here. Early aircraft designs were based on piston engines, like the ones that power lawn mowers today. Airplanes were light, they carried a limited number of passengers, and they flew mostly at relatively low altitudes in nonpressurized cabins. By the 1940s, the need for military-grade aircraft that demanded higher speeds drove the industry to develop more powerful piston engines. The evolution from simpler aircraft design to heavier, faster, better-performing jets necessitated a different design of engine altogether. To facilitate this transformation, aircraft designs started to move to gas-turbine engines.

As businesses evolve to a digitally transformed state in the Fourth Industrial Revolution, a similar question arises with the IT organization’s capabilities. Are you powering your digital transformation with a piston-engine IT function or a gas-turbine one?

The Evolution of Aircraft Engines from the Time of the Wright Brothers to Now

In 1903, the Wright brothers wanted to source an engine for their new airplane. They sent out requests for proposals for an engine that would produce at least 8 horsepower (HP) and would weigh no more than 200 pounds. They got no response. Having had some experience in this arena, they decided to build it themselves. And so, the first Wright engine was built; it produced all of 12 HP! It ran on gas, had four cylinders, was made of aluminum, and weighed 170 pounds. Fast-forward a century, and aircraft engines have evolved significantly. They are much more powerful, for one. In contrast to the 12 HP Wright engine, a typical engine on a Boeing 737-500 produces roughly 18,000 HP. Even the smallest Honda Civic is thirteen times more powerful than the first Wright engine!

Meanwhile, the gas-powered piston engine design, like the one used by the Wright brothers, continued to power aircraft for the next four decades, but it eventually had to confront limitations in its design for modern aircraft. It wasn’t until the late 1930s to early 1940s that production engine design ventured from pistons to gas turbines, based on a design patented by Sir Frank Whittle.

Gas-turbine engines would offer the next generation of capabilities. They inherently operate on totally different mechanical principles. Piston engines are essentially based on a reciprocating mechanism (to-and-fro motion) that converts energy from a combustion process into a mechanical motion.

In contrast, gas turbines have no reciprocating parts but only rotating parts. They have rotating blades in the front of the engine that compress air, which is then mixed with fuel and combusted. It is the expanding gas produced from the combustion that is then forced through a small outlet that produces the thrust. That design delivered the next step-change in the power-to-weight ratio. Most commercial jets use them today, although smaller aircraft still tend to use piston engines.

The analogy of using new IT capabilities and skills as “engines” to power digital transformation is not without precedent. In organization design, people have long been considered as “change engines” of enterprises. Digital technology is considered as a “growth engine” for most organizations to increase revenue. Systemically putting together people and digital capabilities as transformation engines is a simple offshoot.

Is Your IT Function a Piston Engine or a Gas-Turbine Engine?

Before I launch into my engine analogy, we need to take a brief detour into terminology. Different enterprises have different names for the organizations involved in digital capabilities, e.g., IT function, Chief Digital Officer function, Global Business Services, or Transformation Office. Currently, most enterprises also have multiple organizations doing these functions. I strongly believe that all these enabling digital functions eventually need to come together. That is a major part of the “engine upgrade” covered in this chapter. Meanwhile, these multiple organizations have left us with a dilemma on what to call this collective group. For reasons of simplicity, I refer to all of them collectively as the “IT function” in this chapter.

As we’ve learned from the experience of constantly upgrading our smartphones, technology gets old fast. That’s true of IT functions in the enterprise as well. IT technologies, IT scope of operations, and IT skills all have incredibly short life cycles. That’s been historically true and is not a surprise. What’s new is that the piston-engine version of IT has reached an inflection point. It needs a consciously different engine. We’re no longer talking evolution; we’re talking about a dramatically different redesign. The new IT function is not just about new technology platforms, a new charter of work, or newer skills; it is about leading all the other functions and business units in the company to new technology-enabled business models. The digital enterprise needs digital to be done by every function, but powered by IT. Which is why I believe that the new IT function needs a totally new charter and a new name—the digital resources function.

The piston-engine version of IT has reached an inflection point. It needs a consciously different engine, a totally new charter, and a new name—the digital resources function.

The Discipline of Redesigning for the Next Generation of IT Capabilities

To understand why a new IT function “engine” is needed, it might help to start with its role. The historical role of IT has been as an enabler. It provided the automation for enterprise processes and functions such as finance, sales, marketing, manufacturing, HR, and others to be efficient. That continues to be the bread-and-butter work in most IT organizations (see figure 20).

Meanwhile, over the past fifteen years, a new breed of businesses started to evolve—digitally native companies. The digitally native companies didn’t just think of IT as an enabling function; they based their entire business on data and digital technology. So, whereas Barnes & Noble started with physical stores and books, Amazon started with a website that took orders and payments and then built their physical processes later. Technology wasn’t just an enabler, it was the entire foundation of their business model.

Initially, the incumbent companies weren’t too concerned. They believed that these digital natives didn’t have the partnerships, physical presence, resources, or operational skills to be a real threat. With time, this has turned out to be a fallacy. Digitally native companies have the advantage of speed (e.g., online airline booking vs. old travel agencies) and the possibility of creating entirely new digital business models (e.g., Airbnb crowdsourcing its room space). In other words, IT technology has gone from being an enabler in the old enterprises to being the only way in which digitally native companies operate. Along with this new role of IT, there needs to be a rebirth of the IT function itself.

Figure 20 IT function maturity

Building a New Generation of IT Capabilities via the Digital Resources Function

At its heart is the change from “managing” technology to “leading” the digital ecosystem of the enterprise. The change isn’t just administrative, though; there are technologies, platforms, and people skills that will need to be redone. I have identified six vectors of change:

  More flexible technology platforms: Amazon and other digitally native companies have the capability to make hundreds of noticeable changes to their systems to test out new business models daily. They use a new generation of digital capabilities to blend scale with speed to support constantly evolving digital business models. In contrast, the current technologies in most enterprises were originally built for enterprise efficiency and scale. They are large and complex, took a long time to implement, and take even longer to modify. Think large enterprise resource planning (e.g., SAP) implementations. These monolithic systems worked extremely well in the past because the goal at the time was scale. The new digital revolution has changed that goal.

  More agility in execution: Ask any large enterprise business unit leader their opinion on IT projects in general and you will likely find their response liberally sprinkled with “millions of dollars” and “years to implement.” Meanwhile, a digitally native start-up could rent a server with order-processing software and have a business up and running in minutes. Large enterprise IT organizations have a big challenge with agile execution.

  Skills on newer technology: The top five high-paying skills of 2018 according to CIO magazine³⁵ are information security, DevOps, data science, business application development, and machine learning. The only thing you need to know as a leader in the Fourth Industrial Revolution is that perhaps only one of these five—business application development—would have been on that list five years ago. How many of your IT professionals have been in the enterprise for more than five years? How many have kept up with the latest skills?

  New capabilities to lead digital transformation: The IT professional of the future will need as many nontechnical skills—including creativity, communications, influencing, and teamwork—as technical. Further, I use the term “technical” in its broadest sense to include items such as process mapping, business model design, and lean execution, in addition to IT technology. This is to be expected as the role of the IT function evolves from “doing” technology to “leading” digital transformation. The new digital resources function requires a skill set that is of a transformational leader who also happens to be a guru on technology. The traditional approach has been to rely on consultancies that seem to have such a mix. There may be a legitimate role, especially during transition, for consultancies. However, this is problematic long-term, keeping in mind the goal of leading perpetual Stage 5 transformation as I will cover in the next stage.

  Governance of the digital ecosystem: The freelance workforce in the US is growing three times faster than the overall workforce and is projected to be the majority by 2027.³⁶ Within the freelance workforce, the growth in IT is faster than most other functions. Also, as systems across one enterprise to another become more interconnected, the predominant skill set in demand will become more governing and less managing.

  Updated vendor ecosystem: It’s very likely that the mix of IT vendors and partners who were associated with the old IT function may not be the best fit for the digital resources function. Part of this is easy to understand—the vendors who were optimal for stability and cost-efficiency goals might not be fit for digital transformation. However, that’s only half the issue. The other half is that the same digital disruptive forces are acting upon the IT industry as well. Traditional IT service partners are being squeezed as their people-centric businesses get disrupted. Being locked into multimillion-dollar, multiyear contracts with the older-generation IT providers, even for “commodity IT” services, may not be in your best interests. Current contracts may be optimized for cost efficiency over agility and innovation. The dirty little secret of IT outsourcing is that the IT providers take a given scope of work, freeze it, and promise to deliver it for 15 to 50 percent less cost partly by ruthlessly optimizing efficiencies and partly because there’s not much innovation on the old scope of work.

Upgrading the digital resources function “engine” is only half the job. The rest is to complement it with a new “airplane design” of enterprise-wide digital capabilities, as covered in the next section.

What Does the Digital Resources Function Look Like?

It looks like an octopus: A central brain, but decentralized presence. A thin layer for a few controls (e.g., info security, data standards, and high-level open architecture), along with roles for digital capability building and disruptive innovation. This is the end-state structure, and it’s almost certain that the structure will be much larger during the digital transformation itself than at the end state.

Within the IT organization itself, the skills will include a mix of “left brain” and “right brain.” Soft skills to manage via influence and hard skills on governance. Creativity to keep generating new business models and technical skills to execute them. Disciplines such as user experience, design thinking, strategic disruptive innovation, or process-systems thinking will be as important as hard-core technology or industry vertical skills.

Is the Name Change Necessary?

The new name itself provides an important sign of intent. This is a shift from a technology focus to a resource focus. This is also an opportunity to set a clear direction of Stage 5 perpetual digital transformation. More tactically, this can also bring some sanity to the confusing array of titles that have suddenly sprung up, e.g., Chief Digital Officer, Chief Data Officer, Chief Analytics Officer, Transformation Officer, Chief Information Security Officer, Chief Information Officer, and Global Business Services Officer.

Building New Enterprise-Wide Digital Human Capabilities

In 2014, AT&T started an ambitious effort to retrain 100,000 people in its workforce to get ready for a digitally enabled future. Of the company’s 250,000-strong workforce, about half worked in science, technology, engineering, and math fields. Roughly 100,000 worked in hardware functions that would not exist in the next decade.³⁷ The choices were not easy—hire tens of thousands of people skilled in new technologies or invest significantly in retraining the existing workforce. AT&T chose the latter. Today, its Workforce2020 program plans to spend a billion dollars on a web-based multiyear effort that includes partnerships with universities and online course providers as well as new internal capabilities for career development for the future.

The strategy is a bold one that has a sound basis. New digital technology skills in fields such as AI, cloud computing, and cybersecurity are not just in short supply but are also evolving faster than you can hire new people.³⁸ Traditional hiring and training programs cannot keep up. The alternative approach is to re-skill the existing workforce to address at least part of the gap.

Enterprise-wide digital re-skilling builds the critical human resource capabilities necessary to operate the new digital backbone of enterprise.

A Stage 5 digital transformation involves embedding digital capabilities into the very fiber of the enterprise. It’s a major strategic choice that requires new human resource capabilities to operate the new digital backbone of enterprise. Retraining the mass of the current workforce is one of the major choices possible. However, the effort of developing a new digital backbone of the enterprise (i.e., where technology is not just an enabler but is the entire foundation of the business model itself) will need more than employee retraining. Here’s the total list:

  Re-skilling the entire workforce: Is there a deliberate HR transformation plan to create the digital workforce of the future?

  Re-skilling the leadership: Do we have sufficiency of skills at the top leadership level to truly leverage digital? In private enterprises, this starts at the board level.

  New human/machine interface policies: Have we created new guidelines and policies on where and how humans and machines will coexist?

  New security protocols: Do we have sufficient capabilities in personal and proprietary information security in the digital world—including both policies and technology?

  Fluid organization structures: What’s the organizing model in the post-functions world? How should the workforce organize around tasks as opposed to rigid functional boundaries? This starts with the organizing model of the digital resources function.

Together, the restructured IT function and the re-skilled digital capabilities in the enterprise provide the opportunity for the new digital capabilities and tools to take root. They provide the redesigned complete “airplane” for the Fourth Industrial Revolution.

Chapter Summary

  Stage 4 transformations fail because the digital operation does not take root. This is primarily a human capability and re-skilling challenge.

  Addressing this human re-skilling has two parts. First is building a new IT function, which I call the “digital resources function,” which plays the role of enabling, governance, and ongoing facilitation of digital innovation. The second is the digital re-skilling of the rest of the enterprise.

  The digital resources function structure must address the agility of digital systems and processes, the retraining of IT experts on newer technology and processes, and rebuilding the vendor ecosystem for the new economy.

  The enterprise-wide digital re-skilling should attack the issues of digital literacy across the board, policies for human/machine interface, digital security, and fluid organization structures.

Your Disciplines Checklist

Evaluate your digital transformation against the questions in figure 21 to follow a disciplined approach to each step in Digital Transformation 5.0.

Figure 21 Your disciplines checklist for digital reorganization