13: Innovating the Organization for a Digital Edge

Royal Caribbean, Children’s Hospital of Los Angeles, The Harry Fox Agency, United Stationers and the other organizations we’ve discussed in this book capitalized on digital technologies to change the way they generate revenue and conduct their businesses. They also discovered that creating a digital edge requires a certain amount of disruption to the organization itself as much as it affects its products, services and operations. In order to achieve their various types of digital solutions, these companies relied on and/or made fundamental changes to how they managed and measured achieving the outcomes. Some relied on digital insight at the Board of Directors level, some created a new executive role and others realized new methods of measuring results. Eventually, they all faced opportunities to evolve the organization to implement and sustain a digital edge.

Digital Technology at the Board of Directors Level

The Board of Directors for a company can serve as one of the resources for companies formulating their digital edge. In particular, organizations such as FedEx, United Stationers, Proctor and Gamble, and others have established board-level committees focused specifically on technology and innovation.

Many Boards of Directors, while they are interested in technology, tend to focus on technology as an enabler and assign its oversight as a matter of risk, budget and compliance best handled as an aspect of an audit committee. But placing technology issues in the Board’s Audit Committee reflects a view that technology is more of an operational expenditure than a creator of strategic opportunity. This may have been appropriate when the majority of technology issues were IT-related, concentrating on automating and integrating back-office operations. However, digital technologies, with their potential for direct contribution to revenue and competitive edge, should generate a greater board-level focus on the strategic opportunity.

At United Stationers, the board played a critical role in helping steer the company toward its digital edge. According to CIO David Bent, “We have a technology-savvy board of directors. Several of them have direct experience working in e-commerce companies, using technology to disrupt the industry. Their experience and knowledge have been central to the big decisions we have made, like purchasing a software company. They have given us a different view of the company. Rather than seeing United Stationers as a distributor competing against other distributors, the board and executives saw the latent value of our digital resources and capabilities that led to new strategic options.”1

To assess the merits of a technology committee at a board level, look at a sample charter for an Innovation and Technology Advisory Board, found in Appendix 3, for its purpose, function, powers and responsibilities. The suggested roles and responsibilities of this standing committee communicate its importance to the enterprise.

This sample charter for an Innovation and Technology Advisory Board outlines the responsibilities and mechanisms for boards to increase their engagement on digital and technology issues. On the surface, many of these responsibilities seem similar to those already assigned to other committees, most notably the audit committee. The difference lies in the skills and focus required on an innovation and technology committee.

Traditionally, technology or IT projects represented significant expenditures and operational risk. A major ERP project, for example, represented both, with reasonable oversight offered by assessing the project’s resource requirements and risk profile. These characteristics fit within audit committee responsibilities for overseeing the company’s resources, investments and risks. Boards have translated technical issues into financial, operational and control frameworks to fit within the profile of audit committee responsibilities and membership associated with IT. The issues related to digital technology are not the same as those for IT. Consider the digital hospital at CHLA, where technology plays a fundamental role in reducing patient harm, or how FedEx created an advanced package sensor network and CDW applied technology to the core of its customer service. These are applications that influence the fundamental performance profile of a company.

Digital technologies require a different type of oversight. Audit committees, using financially based forms of oversight, can handle preplanned IT solutions that enable the business. These IT solutions have defined requirements, predictable operational results and estimated resource requirements that can be more readily translated into financial frames of reference.

Digital solutions, on the other hand, are complex, combinatorial and creative; making it difficult to predefine, assess and mitigate risk. Digital solutions emerge as digital capabilities built on each other, and therefore cannot be readily preplanned. This makes commonly used financial-based oversight techniques less appropriate.

In addition, new strategic options require new forms of Board oversight and executive leadership. While some digital leaders such as FedEx, United Stationers or Proctor and Gamble employ innovation and technology oversight committees at the board level, others have invested in a new executive role — the Chief Digital Officer (CDO).

The Chief Digital Officer

Digitalization requires a type of collaboration that spans the organization’s functions in order to create a digital edge based on an integrated customer experience. The idea of a “chief” role responsible for a specific aspect of the enterprise is not new. Organizations have created similar, specialized, and cross-functional roles before. During the late 1990’s a focus on business processes led many to create a Chief Process Officer role. E-commerce and the Internet led many others to create similar roles around those technologies, such as Chief Internet Officer or President of E-Commerce Czar.

A C-level role tells the organization two things. First, the organization needs to change its focus and collaborate in new ways around new responsibilities. Second, creating an executive-level single point of visibility, responsibility and strategy around digital technology tells the organization that you are serious about creating a digital edge.

Do Not Limit Your Chief Digital Officer to Marketing or Social Media

There are two major forms of Chief Digital Officer. The first type to emerge grew out of the social media and digital marketing world, with goals such as improving online communications and engagement. This Chief Digital Marketing role is primarily concerned with the enterprise’s brand, image, communications and engagement. This role is important, but the CDO described here is involved in driving the use of digital technology to create and sustain the entire organization, not just its image on social media.

Digital solutions require spanning boundaries, driving to a deeper level of coordination and building integrated capabilities. Meeting these requirements in your organization may require creating a CDO role. It is similar to other C-level roles in the sense that the CDO:

• Provides a single point of coordination, action and executive oversight for digital initiatives

• Works with the other C-level positions to create a digital vision and identify opportunities for digital solutions

• Defines the strategy for how digital technology will be incorporated into the enterprise, customer experience and operations

• Sponsors digital transformation projects and investments, providing a single executive point of contact across the enterprise

• Is responsible for realizing the digital strategy, the success of digital solutions and the generation of revenue

• Drives information, analytics and performance data into the organization and its decisions

• Has ongoing responsibility for evolving and improving digital capabilities based on progress against goals

CDOs are unique because their responsibilities span those normally separated on the executive team. CDOs, like Dave Bent at United Stationers, are responsible for the performance of digital channels and operations from top-line revenue to bottom-line earnings, particularly when their organizations consider digital solutions a separate business unit or channel. Mike McDonnell at IONX has a similar role in the development and deployment of its remote monitoring capability.

Being responsible for everything from revenue to operations to profitability and earnings reflects the complex nature of digital business solutions. CDOs need a combination of skills and experience normally found in other executive roles, such as marketing, operations, information technology, supply chain and financial management. The broad demands can lead the organization to specialize the CDO role, for example, with a heavy marketing or technology background. If that is the case, then the organization should counterbalance that specialization by creating a digital executive committee involving other executive roles to produce a comprehensive set of digital capabilities.

Every organization needs an executive or executives leading and sponsoring the changes required to create a digital difference. In each of the case studies, the organization can name the executives leading in the creating their digital edge. That executive was the CIO at CDW. An executive team consisting of the head of hospitality, head of hotel operations and the CIO led in the digitalization projects at Royal Caribbean. The executive team, represented by leaders of each clinical area, formed the core at CHLA.

How to Fill the Roles and Responsibilities of a CDO

Not every organization needs a formal CDO. The role can be transformational and transitory, similar to the role of Chief Process Officer in the past. Consider creating a formal CDO in situations where:

• The organization works along formal and strict functional lines, with clear and nonoverlapping responsibilities

• The organization sees itself as a collection of individual operations, business units, channels or lines of business

• The organization has fragmented customer experience, products and channels that require greater integration to produce greater results

• The organizational culture requires a specific and identified leader to champion change and integration

If these situations apply, then consider creating a formal CDO. Your organization needs a single focal point to drive transformation. Alternatively, if the leadership team collaborates effectively, willingly makes operational adjustments in their groups to support others, and routinely achieves its shared goals and objectives, then consider the role of CDO as transformational and temporary.

Creating the CDO role gives an organization focus by concentrating responsibility into a single executive position. The role can be a powerful catalyst that brings an organization together to create new digital capabilities. Sustaining those capabilities requires maintaining collaboration and integration over time. That requires the organization to address the measurement and recognition issues created by digitalization.

Measuring and Managing Digital Performance and Contribution

“When something is everyone’s responsibility, then it’s no one’s responsibility.” That management adage drives many organizational performance reporting, recognition and contribution systems. Measuring along clear lines of responsibility makes sense, when it is possible to establish those lines. That may not be the case with digitalized solutions, particularly those where customer behavior and choice influence business outcome and result.

Measuring Digital Value Means Measuring Outcomes and Experiences

A digital edge creates new digital capabilities based on extracting and infusing information and technology. Measuring digital performance depends on measuring these new capabilities, their performance and the value that they create. This requires the organization to measure the outcomes of digital capabilities and how they change the customer experience.

Simple measures can only prove simple relationships that shed little light on performance and value. Every organization is complex and dynamic in its strategy, operations and performance. This makes establishing direct and causal connections between an action and result interesting but often organizationally irrelevant. Frequently, when you provide a report that your organizational change resulted in higher revenue, lower costs or better service, a debate quickly forms about other causes of that result. Digital capabilities that incorporate new combinations of information, behavior, experience, product, service or process make the issue even more important.

It’s important to avoid the trap of false precision, debating the causality of action with result, by measuring outcomes. Digital capabilities are supposed to create new results, so measure those results to figure out if the company’s capabilities are creating value. This is done by asking what will be tangibly different when the digital capability is online. Finding evidence of that tangible difference measures the operation of that new capability.

Reducing information-based causes of patient harm is an outcome of digitalization at CHLA. That goal makes measuring straightforward, as digitalization should reduce the number of situations leading to patient harm and the role of information in those situations. Royal Caribbean Cruises measures the capacity of its restaurants as a way to assess the value of digitalization. If the restaurants are full, but not so full that they create lines, then the digital solution is helping to achieve its customer experience goals. One thing Royal Caribbean cannot know for certain is what percentage of its guests use digital channels in determining where to go for dinner. Investigating that type of causality is possible, but you have to determine if it’s practical or if it would lead to a different way of running the business.

An Approach to Measuring Digital Value

• Identify the customer behavior, business outcome or process performance metric that should change with the introduction of digital capabilities. Every action has an intended result or reaction, so name that outcome.

• Define how the organization will recognize achieving the outcome. For example, if increasing the average revenue per account manager is a goal of digitalization, then determine if that increase actually happened.

• Establish the information required to evidence the outcome being reached. Concentrate on observable differences in the business rather than participation rates or other intangible factors that are difficult to measure and may have no meaning.

• Avoid assigning results along organizational or business process lines, as divisionalizing measurement motivates complexity and hand-offs. It also absolves organizations of their end-to-end responsibility, because “my group is doing its job” is not the only definition of success. Establishing a wholly separate stand-alone digital business is a caveat to this guideline.

The nature of digital capabilities, with their value coming from applying information across product, process, customer and corporate boundaries, makes measurement difficult. The integrated nature and reliance on changing behaviors means that digital value cannot be directly ascribed to specific actions or intent. Rather, it is the outcomes of those actions that demonstrate the value of digital capability. Capturing that outcome requires bypassing traditional issues of benefit assignment, responsibilities and compensation, as United Stationers’ experience illustrates.

United Stationers Sees Measurement as a Good Problem to Have

United Stationers’ continued digitalizing of its business has involved changing process, technology and other implementation issues, along with business issues such as pricing, compensation, performance and rewards. To date, the extended digitized services have been bundled into United Stationers’ core value proposition, so the contribution of these services to the bottom line is not always clear.2

“Whenever you create something new and bundle it into an existing offer,” explains Dave Bent, “it becomes difficult to value and easy for the sales force to discount or give away. Management systems may consequently discount the contribution of digitized resources, since they are hidden in the overall margin, while the costs are clear and transparent.”

Bent and his team are addressing these issues in three ways:

By pricing the value-added digitalized services, since they generate stand-alone revenue (e.g., marketing services) and enable creation of markets and product lines

• By implementing performance management of digitalized services from the standpoint of both the operating unit and the individual working in the unit, because the services have a different cost and margin structure

• By reconsidering compensation for sales and delivery personnel working in digitized areas, since the supply chain and digitized resources are shared across the lines of business

Bent notes that these are good issues to have, being symptomatic of a successful business. “No one worries about pricing and compensation in a business that is not achieving its objectives,” he says. “But as digitization creates new revenue and business streams, these issues become even more important.”

Creating a Digital Edge Involves Organizational Evolution

It’s important to realize that creating a digital edge brings together disparate organization units, channels, products and operations. Establishing an innovation and technology advisory committee within the Board matches technology potential with the executive attention to realize results. The responsibility for leading digital transformation rests with the role of a CDO, either as a formal role or as the sponsor of digitalization initiatives that extend beyond leveraging digital channels for marketing and communications. Sustaining transformation requires more than launching a new product, service or channel — it requires establishing new measures that reflect the contribution of digital technologies.