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  • Writer's pictureW.B. King

The Capability Trap - Why Digitalization Fails

By W.B. King

In an effort to look outside the credit union industry and gain views from banking executives across the pond, Finopotamus virtually attended Fintech Connect’s “Global Fintech Ecosystem” event, which took place in early December.

Among sessions offered was “Digitalization Disruptor: The Capability Trap” presented by Danske Bank’s Chief Enterprise Architect Craig Hughes.

Conceding that the journey towards digitalization is an arduous one, Hughes said that for a digitalization strategy to succeed, a “buy-in of all stakeholders” must be ensured.

“Maintaining this may be harder than originally perceived, especially when the capability trap kicks in,” he said while video streaming from his home in Ireland.

Craig Hughes

Referencing a statistic from Everest Group’s CEO Peter Bendor-Samuel, Hughes noted that more than 70% of digital transformations fail. Aside from citing reasons such as a lack of commitment and taking a technology-first approach, Hughes, echoing Bendor-Samuel’s stance, said the leading cause is fatigue from continuous change.

The Consultant View

Taking a deeper dive into the issue, Hughes presented findings from McKinsey & Co., a firm that helps clients transition into a software-based world. The results featured five digitalization pitfalls: fuzzy definitions, misunderstanding the economics of digital, overlooking ecosystems, over-indexing on the “usual suspects,” and missing the duality of digital.

Speaking to the first pitfall, Hughes said organizations have to determine a definition for digitalization that is agreed upon by senior management, back office and is embraced by the marketing and sales departments.

“By lacking a clear definition, the organization struggles to connect the digital strategy to their actual business,” said Hughes. With regard to overlooking ecosystems, he said this is not only a pervasive issue in the financial services space, but other industries as well.

“Unlike startups, incumbent banks do overlook ecosystems. Large organizations tend to not focus on what is outside of them and what ecosystems are available to them,” he said, adding that Uber is an example of a company that scaled quickly by tapping into other ecosystems.

A bank digital strategy, he said, should include a move toward a balance of B2B and B2C. Many organizations, he added, miss “the duality” of digital.

“We mustn’t only focus on creating something completely new. We should also digitize our current businesses and create new business models,” he noted.

The Academic View

Citing findings from Michael Wade, professor of Innovation and Strategy at IMD Business School and a Cisco chair in Digital Business Transformation, Hughes noted issues related to digitalization failure include focusing on disruptors rather than disruption and digitizing silos.

He referenced Napster, an early 2000s disruptor that challenged incumbent music companies that became too focused on stopping Napster from offering consumers the ability to download one or two songs off an album as opposed to buying the album outright.

“The incumbents killed Napster,” said Hughes. “What they missed, however, is the disruption Napster was introducing to the market. While they were focused on the disruptor — Napster itself, Apple came in and offered a segregation of songs as a service and took the lion’s share of the market. A lot of the incumbents in the music industry suffered the consequences.”

But simply trying to build a digital strategy can be dangerous, Hughes offered. “A digital strategy places too much attention on the word ‘digital’ as an objective, which often diverts attention away from more important goals, such as reducing cost, higher revenues, increased customer satisfaction and others measures of performance.”

A common digital strategy, Wade found, is often a two-pronged effort: digital and organizational. At best, he said this can be confusing to an organization and at worst, it could be damaging.

“This inevitability leads to an overlap and conflict within an organization,” said Hughes. “We often hear organizations talk about digitizing supply chain or marketing environments. Allowing projects to digitize silos in organizations normally ends up in disappointment for a number of reasons. Firstly, if you take something analog and make it digital, it often perpetuates the existing issue. Secondly, silos are sometimes more often the problem and not necessarily the solution.”

The Capability Trap

Born out of the manufacturing industry, Hughes said the “capability trap” should be studied when determining a digitalization strategy.

The capability trap, as defined by ResearchGate, shows how self-reinforcing dynamics arise from short-run pressure for output leading to long work hours and corner-cutting in maintenance, training, and investment in process improvement and capability development, which is required for long-run success.

“You can see this in IT systems in large and small organizations. You may start with a very clean software stack and clean architecture that works really well. Requirements come along and the business changes. Instead of sticking to the principles and the architecture as it was defined, we take shortcuts,” said Hughes. “We put in quick fixes and little hacks that can get things done faster, but that starts to diminish the actual ability of the software to deliver as expected. This behavior over many, many years results in a big ball of mud—an entangled mess of software.”

As a result, an organization, he said, needs to develop a new digital strategy to replace a software system that was initially working properly. You can’t increase capacity without considering capability, he added.

Culture, Mistakes and Actions

A legacy mindset that celebrates yesterday’s heroes often is another reason why a digitalization strategy fails, said Hughes.

“We’ve done it well for the last 40 years. Why change?” This is a question usually offered when an organization is faced with the need to evolve, he noted. Many executives, he added, fall prey to the “comfort zone” mindset.

Another mistake resulting from tenure is that senior management tends to oversimply when communicating to shareholders and employees. It’s not because they are trying to hide the truth, rather Hughes said it’s due to not having adequate time to communicate the full story.

“So we summarize and simplify the actual solution and leave out some of the fundamental details,” he said, adding that there is usually an overemphasizing on the good of the strategy opposed to any related negatives.

“Middle management is responsible for delivery and we tend to put targets on middle management — delivering certain things in a certain time frame. And that time frame is a lot shorter than strategy allows,” said Hughes.

As a result, he added that the workforce “where the culture of the organization sits” is often guided in a mismatched manner mixing old guard thinking with innovation. This combination, he said, can result in failure.

In order to effect meaningful change, Hughes said C-level executives must listen to all levels of the organization — up and down the seniority chain.

“If there are questions, we should accept and appreciate them because people who asked questions are interested. It shows that they care and what to do the right thing,” he said. “We also shouldn’t filter when communicating — whether up or down the organization. We should not support filtering. This could be from the board to the shareholders right down to the developers on the ground. They should understand the bigger picture as much as possible.”

He also noted that it is imperative that the workforce and culture of the organization are apprised of the digital strategy and feels a sense of ownership.

“The people on the ground need to understand how they can add value,” said Hughes. “We need to focus on building new habits rather than trying to breakdown old ones. When it comes to a digital strategy, we need to create a collective ambition. Build trust and allow for mistakes to happen. Celebrate the small wins of today because they always add up to the bigger ones of tomorrow.”

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