Digital Transformation Roadmap

Microsoft has given further direction to the theme “Digital Transformation” during the Ignite 2017 convention. Almost every product or solution from Microsoft is linked to Digital Transformation. Whether it’s data and machine learning or more traditional core infrastructure solutions, they are all placed in the context of Digital Transformation. Microsoft is not the only vendor that has Digital Transformation as a top priority. Every technology vendor is talking about it. A survey by Gartner shows that CEOs take Digital Transformation seriously for their organization (Gartner, 2017). Besides Gartner, other analysts like IDC and consultancy agencies such as McKinsey agree: Every organization is dealing with Digital Transformation. What is Digital Transformation and why is it important? And where should an organization start with Digital Transformation?

One of the biggest challenges companies face today is how to evolve with the digital era to stay relevant. And the CIOs biggest challenge driving digital transformation is not technology, but leading change. Digital execution requires new approaches and unprecedented collaboration between IT and business (www.mendix.com). But where to start the Digital Transformation? How to execute the roadmap and which IT strategy for People, Process and Platform should be addressed to make a successful start with Digital Transformation?

Back to the basics: strategy and competitive advantage

Before answering the above questions, some background information is needed about the strategy of an organizations. In business science, many theories have been developed over the last few years about this topic. The topic “strategy” is popular and there are different insights and sub-subjects. When it comes to generic competition strategy of an organization, the theory of Treacy & Wiersema is a widely used one. Just see how many organizations communicate their generic competitive strategy, for example, on their website: Product Leadership, Customer Intimacy or Operational Excellence. Another known theory for strategy is the theory of Porter. Porter gives a short definition of strategy: “Strategy is making trade-offs in competing. The essence of strategy is choosing what not to do.”(Porter, 1996). And: “Strategy is the creation of a unique and valuable position, involving a different set of activities”. Porter indicates that an organization can compete in two ways: by offering the lowest price (cost leadership) or by differentiation. Mintzberg defines strategy as a plan driven by a predefined decision (Ng & Wang, 2012). Mintzberg describes strategy formulation as: “Involving the interplay between a dynamic environment and some of the crucial processes in an organization, and as having distinct change-continuity cycles”.

Strategy is about distinctiveness. Competition based on the lowest price or based on differentiation. This will give an organization a sustainable competitive advantage. So, preferably as long as possible. A relevant question is: “How long is sustainable?” in a rapidly changing world. Nadella says: “Our industry does not respect tradition – it only respects innovation” (Nadella, 2014). Everyone is looking for a formula to be successful. Several studies were conducted on the success of commercial organizations in the 90’s. For example, Peters & Waterman released the book “In Search of Excellence” (1982) and Collins “Good to Great” (2001). These books describe the features of a successful organization. Success is then mainly based on superior profitability and market dominance. However, it appears that some of the outstandingly ranked organizations are no longer market leader years later. They have been caught by competitors or even no longer exist. Is there any cookbook for the success and/or strategy of an organization? This item is addressed in the book “The Flexible Firm” (Volberda, 1998).  Including the item strategy and outstanding performance. However, it is stated that there is no recipe for features for outstanding organizations. It is an organization’s ability to change and be flexible. “It is not the strongest or the most intelligent who will survive but those who can best manage change.” (Darwin, 1859). Or: “There is no formula to inventing the future” (Nadella, 2017).

Some examples of traditional market leaders who have been competed with organizations that are “Digital Companies”: Ford vs. Tesla and Walmart vs. Amazon. For a Digital company, it is about speed and innovation. In a more traditional organization, it is about stability and predictability. So here is a tension. How could this be solved?

It’s all about differentiation

The “Core and Context” model of Moore could be used in the discussion where to start with Digital Transformation.  The idea behind this model is to deconstruct the relationship between strategy and structure. “Strategy is all about investing in the next generation of innovation” (Moore, 2005). That’s the “Core”. Whatever the new thing that is going to create differentiation, that’s Core. Everything else is Context.  And the investors and the market are going to reward this part and they’re not going to give a price for all these other items that are part of the Context. If a company is doing it brilliantly they don’t succeed, if they do it badly however, they get in trouble. That’s what the mission critical row is about. Mission critical means: “You don’t know whether you get credit for this or not if you do it well, but if you screw it up you’re in deep trouble” (Moore, 2005).

The dangerous quadrant of the Core and Context model is the “Context – Mission-Critical” quadrant. It’s going to be quite at this quadrant where a company has got a lot of resources tied up in a mission critical process because they so worried about at failing but the market won’t pay a premium for the outcomes of that process and so as a result the margins are getting hammered.

What makes a resource truly strategic – what gives it the capacity to be the basis for a sustained competitive advantage – is not ubiquity but scarcity. You only gain an edge over rivals by having or doing something that they can’t have or do. By now, the core functions of IT – data storage, data processing, and data transport – have become available and affordable to all. Their very power and presence have begun to transform them from potentially strategic resources into commodity factors of production. They are becoming costs of doing business that must be paid by all but provide distinction to none (Carr, 2003).

Start with innovation to differentiate. Innovation should start in the “Core – Non-Mission-Critical” quadrant. A company doesn’t put it in the mission critical zone, but put it in the laboratory, and incubate it. Do a pilot with customers. If the innovation is ready for the market, launch it at scale for the entire market. Build on of the success of it and it will become a cash cow. The market will start to compete with the product (solution, services, etc.) and finds a way to neutralize the differentiation the organization had. As a result, now a large part of the product line is on the other side of the Core line. It is still important for the company but it’s no longer very well differentiated and at that point Moore says: “For that part of our offer, it would be great if we could take a lot of the risk and mission critically out of it because then we could take resources out of that process and put them elsewhere. So, the flow of innovation as a whole wants to look like this; developed, deploy, stay on the left side of the line as long as you can, stay, stay, stay. Keep reinventing, reinvent, reinvent, but understand that overtime we’re going to get stuck over on the right so then we have to manage it. If we can manage out the resources and manage out the risk we can offload it.” The idea is: invest in the Core part and extract some resources from the Context part.

Don’t have an intense focus on the non-mission critical part. Manage the risk by reducing the complexity – for example get resources out of the process and centralize it – and keep the competitive advantage of the product. Invent and innovate. Make one person responsible with a very strong “just say no” approach and start to control it and standardize it. Those two things could be a shared service model. The risk goes down because there’s less to maintain. Then you should modularize it. Modularizing means take it apart, deconstruct it so it is possible to go forward with different parts at different rhythms at different paces. Some of those parts could be automated and it is possible to outsource those parts.

“A leader must see the external opportunities and the internal capability and culture – and all of the connections among them – and respond to them before they become obvious parts of the conventional wisdom” (Nadella, 2017).

Operational Excellence and Context

Furthermore, Porter states that the generic competition strategy “Operational Excellence” of Treacy & Wiersma is not a differentiation strategy (Treacy & Wiersema, 1993). Porter indicates that Operational Excellence should always be applicable but it is not sustainable. Operational efficiency, as Porter named it, could be easily copied by a competitor. Or you may also easily buy it as an organization. In addition, Porter makes a distinction in terms of cost leadership and operational excellence. Competition based on cost leadership is a generic competitive strategy: there can always be one cost leader per segment. But this is not the case for competition based on efficiency. In this respect, Operational Excellence would fit well within the Context section. But less within Core. In the Core section an organization should go for cost leadership or differentiate itself. As an example: Nadella made a statement about Microsoft and the phone business: “We should only be in the phone business when we have something that is really differentiated.” (Nadella, 2017).

ICT Strategy & roadmap: innovation & migration of legacy workloads

The Core & Context model has been described in general and this could be a start for Digital Transformation. If it is clear what the Organization’s Core is and what the Context is then there should be a translation to a tactical and operational ICT roadmap so that the Digital Transformation of the organization really starts.

Most companies that wanted to start a Digital Transformation process are likely to have invested in ICT (infrastructure) in the past. So, these companies should re-invest in their aging infrastructure – platform – and applications. When considering a technology workload migration it is important to know the multiple methods that could be used to migrate a workload to the new platform: Rehost, Refactor, Revice, Rebuild and Replace (Gartner, 2011).

Sometimes a six method is added to the above table: Remove. In today’s datacenters, there are often several workloads that are no longer used but have been kept running. For applications that are created in the current era an Agile development and maintenance process is desired. DevOps, ‘born in the cloud’ applications, etc. are items that are used in these scenario’s. So, when a new application is created, for example to support the Digital Transformation of the organization in the Core, it is desired to apply the Intelligent Cloud & Intelligent Edge vision from Microsoft. More legacy systems could be migrated with one of the methods from the table above.

It is important to have a tactical view of the ICT landscape prior to choose to migrate a legacy workload to a modern platform. When it comes to components of the ICT landscape that are part of the Context, the following phase model could be used: Standardize, Rationalize, Virtualize Automate and Orchestrate (Togaf). For Virtualization, it is definitely not only about server virtualization. Today, it is about technologies like containers, service fabrics, micro services, etc. Automation and orchestration includes Continuous Integration / Continuous Deployment (CI/CD) pipelines and self-service.

In addition to the above-mentioned applicable tactical strategies, it is (as described before certain at Core) about speed and innovation. Agile and DevOps are applicable here. These methods are based on fast feedback loops, fast failures and learning, etc. Continuous Integration / Continuous Deployment (CI/CD) are part of this. There is no more traditional separation in stakeholders. Everyone is actively involved in a project: end users or maybe even customers (for example with open innovation), developers, IT Pro’s, executive team, etc.

Digital Transformation, where to start?

Where should an organization start with Digital Transformation? Microsoft uses four themes for Digital Transformation that could help.

An organization could start with the theme Engage Customers. Re-engineer items with the involvement of the customer. Determine where value is and where the demands of customers are. Then Transform Products, the products that the organization markets could be better adapted to the needs of the customer. Optimize Operations then serves as efficiently as possible the (production) process, using new technology. And finally, Empower Employees. Give employees the best technology, high insight into data, etc. So, they’re more productive and ultimately more motivated to work for the company (Snover, 2017).

Digitize the Core business

Prior to Microsoft’s issues regarding Digital Transformation, it is about an organization’s competition strategy. What sustainable competitive advantage will the organization achieve and could achieved because there are new opportunities in technology and Digital Transformation now? Where does the organization differentiate itself? These questions could be answered by mapping the Core activities of an organization and differentiating it from competitors. Differentiation is particularly important for the Mission Critical items. For the other items that are part of the Context, the risks should be limited and these items should be as efficiently as possible. After all, this has no value for the market. Here is no differentiation.

This isn’t just about rolling out new IT projects; it’s about fundamentally transforming the business to make it leaner, more agile, and more cost effective. Think about where digital efforts can produce the biggest changes in performance and value for your customers—not only in marketing but also in operations and the back office. Companies that succeed tend to tackle many efforts in parallel, using standardized processes and agile techniques to accelerate execution and provide more flexibility to iterate on strategy (Boston Consulting Group, 2017).

So what should companies do? From a practical standpoint, the most important lesson to be learned from earlier infrastructural technologies may be this: When a resource becomes essential to competition but inconsequential to strategy, the risks it creates become more important than the advantages it provides (Carr, 2003).

People & Process

“People, the human element of any enterprise, are ultimately the greatest asset, and so I set about assembling the right team.” (Nadella, 2017).

For items within the Core section, innovation and speed are important. In recent years, there has been a strict separation in Development and Operations. Development involved writing code, testing and maintaining the code. Operations was responsible for the deployment of the code and user support. This is not a desirable situation when it comes to speed and innovation today. Now there is a need for DevOps method: a shared responsibility and culture. It is about fast learning loops, insights and joint tools. Leading digital companies test and refine products and strategies in close cooperation with customers and at a dizzying pace. The traditional three- to five-year strategy and planning process is no longer effective. Agile innovation methods have been successfully pioneered at companies such as Google, Amazon, Facebook, and Twitter. These companies have proven that there are real advantages in the following areas (Boston Consulting Group, 2017):

• Learning by doing;
• Rapidly and frequently delivering working products inspired by real consumer needs;
• Developing innovative delivery methods and value propositions;
• Adapting to changing requirements.

“I found that the key was agility, agility, agility. We needed to set and repeatedly meet short-term goals, shipping code at a more modern, face-paced cadence.” (Nadella, 2017).

The IT Pro and Developer today both write code and use both Microsoft Visual Studio, Team Foundation Server. Source code control is done in VSTS. CI/CD pipelines are leading. The IT Pro writes Azure Resource Manager (ARM) templates based on JSON. These are declarative. In addition, Git has enough examples of code that an IT Pro could use as starting point for a PowerShell script: “Infrastructure-as-Code”. The IT Pro should show (more) added value to the organization. For example, do not assemble hardware, but work with PowerShell DSC for compliance, automate reports, and apply orchestration. The gap between IT Pro and Developer is getting smaller. “I realized that in a successful company it is as important to unlearn some old habbits as it is to learn new skills.” (Nadella, 2017).

“BUILD what differentiates you, BUY what doesn’t” (Conway). “Buy” has a better fit in the Context quadrants.

For the Core/Build quadrants: invest in innovation and learn quickly. “You need to get comfortable with failure” (Snover, 2017). For the Context/Buy quadrants: Buy efficiently and reduce risks. Reduce complexity by decoupling systems, platforms, etc. and automate and orchestrate.

Why write your own application for word processing or e-mail or supplychain management when you can buy a ready-made, state-of-the-art application for a fraction of the cost? But it’s not just the software that is replicable. Because most business activities and processes have come to be embedded in software, they become replicable, too. When companies buy a generic application, they buy a generic process as well. Both the cost savings and the interoperability benefits make the sacrifice of distinctiveness unavoidable (Carr, 2003).

Platform

Choosing a platform is a strategic choice. The platform to be chosen could be used both for new innovations that are differentiate the company and to accommodating existing legacy workloads. Microsoft has different platforms available today:

• Application Platform: Azure, AzureStack;
• Operational Platform: Azure Security, Operations Management + Security (OMS);
• Development Platform: Visual Studio (VSTS) / Team Foundation Server.

For existing workloads, a migration strategy should be chosen including the associated platform:

Infrastructural technologies, in contrast, offer far more value when shared than when used in isolation. Imagine yourself in the early nineteenth century, and suppose that one manufacturing company held the rights to all the technology required to create a railroad. If it wanted to, that company could just build proprietary lines between its suppliers, its factories, and its distributors and run its own locomotives and railcars on the tracks. And it might well operate more efficiently as a result. But, for the broader economy, the value produced by such an arrangement would be trivial compared with the value that would be produced by building an open rail network connecting many companies and many buyers. The characteristics and economics of infrastructural technologies, whether railroads or telegraph lines or power generators, make it inevitable that they will be broadly shared– that they will become part of the general business infrastructure. (Carr, 2003).

Key items for a Digital Transformation Strategy

Eight keys to making the most of a company’s Digital transformation strategy (Microsoft Services, 2016):

1. The customer is the North Star for the journey ahead: create deep connections, relevance, and empathy by seeing through the eyes of the customer. Design and deliver services and solutions from their perspective, by focusing energy on the things that matter to them;
2. Design for business outcomes: when formulating your digital strategy, focus on the business outcomes. Think in terms of adding incremental business capabilities. Don’t make it a big bang thing. Instead, start small, but iterate rapidly on building business capabilities that take advantage of technologies that will help bring your business scenarios to life;
3. Commit to continuous learning: digital business transformation is a cultural shift, not a technology problem. If you want it to build to last, then it needs to be built for change. A key building block for organizational cultures that will rise and thrive in the digital age it that they are built for change and commit to being a learning organization – that is adaptive and continuously improves with time and necessity;
4. Build business agility and new customer segments: always look to take waste out where value is not being crated, whilst remaining nimble to rapidly respond to market change to deliver on your customer needs;
5. Provide anywhere and anytime access: embrace diverse buying patterns and work style by supporting devices and building apps to support new business models and needs at anytime and anywhere;
6. Connect employees, customers, partners, and suppliers: work your entire value chain optimally to build on the products and services that you deliver to customers today by creating interactive and engaging experiences, flow and feedback;
7. Gain customer insights into needs and desired outcomes: context is the key to relevancy. The way to be relevant is to show up in context, in a relevant way, to this situation at hand. As you can imagine, artificial intelligence, machine learning and analytics can play a big role in relevancy, along with all the insight gained from the exponentially growing Internet-of-Things all around you;
8. Business model innovation determines what works: businesses are connecting products in the real-world to experiences in virtual environments, coupled with the Internet-of-Things, business models get flipped on their head. Some businesses are moving from selling their things to selling their insights and information. The four dimensions of business model innovation are the customer segment (WHO), the value proposition (WHAT), the value chain (HOW), or why you profit (WHY).

As mentioned before, there is no exact cookbook to drive successful Digital Transformation and outperform the market. This blogpost is intended as inspiration to create a roadmap. A starting point, not more than that. “It was important that the transformation come from within, from the core. It’s the only way to make change sustainable.” (Nadella, 2017). Success with – the start of – your Digital Transformation!

Resources

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