Digital transformation is the key to success and it starts with you

An employee works on his computer at the office of CloudFactory, a Canadian startup that based itself in Kathmandu, where it hires teams of Nepalese October 5, 2012. Not far from the world of regimented cubicles and headset-toting call centre operators, a quiet revolution is stirring in its slippers. While it's early days, proponents of so-called commercial crowdsourcing contend that a swelling army of global freelancers is already disrupting traditional outsourcing - from preparing tax statements to conducting research on pediatricians. Picture taken October 5, 2012. To match story ASIA-FREELANCE/       REUTERS/Navesh Chitrakar (NEPAL) - RTR39016

“There’s a saying that leaders cast their shadow on the organization. Can you change the organization without changing the shadow that is cast by the leader?” Image: REUTERS/Navesh Chitrakar

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The Digital Economy

Every company recognizes the need for digital transformation if they wish to stay competitive in the mobile age. But what many still do not realize is that to be truly successful in the long run, business leaders must undergo a personal digital transformation themselves before they can ably guide their companies forward. Being digital on a personal level means to think and act like digital disruptors — but also knowing how to leverage this new frame of mind, knowledge and skills within an established business. Mphasis CEO Ganesh Ayyar and Wharton professor Tyler Wry recently spoke with Knowledge@Wharton to discuss this self-transformation at the “Unleashing Your Personal Next: Personal Transformation for Sustainable Success” conference.

An edited transcript of the conversation follows.

Knowledge@Wharton: Let’s start by defining digital transformation. What does that look like at the firm level?

Ganesh Ayyar: If you look at digital transformation, there are many technological elements that can be clubbed as digital, but that doesn’t make an enterprise a digital enterprise just because you’re using those technological elements. They are enablers, but you really need to embrace the culture, the mindset and how you approach the business, of a digital enterprise. When we analyzed digital enterprises, two qualities stood out: One is continuance innovation or a culture of experimentation, and second was speed. Everything was done at five times, 10 times, 50 times the speed. These two attributes — and having the right culture and those technological elements — make a digital enterprise.

Tyler Wry: I agree 100% with that. It really is the intersection between the technology, which is the foundational piece, but certainly not sufficient to be a digital enterprise, and the speed of change. Technology is changing at such a fast pace that if an organization implements a technology and calls itself digital, it’s missing the point. What you need to see into Ganesh’s point is this commitment to ongoing change, to actually develop the capabilities to guide the organization through not just one change, but ongoing changes over time, as technologies change. And then you can start to have the conversation about this being a digital enterprise, in a true sense.

Knowledge@Wharton: How important is this concept of self-transformation to the process of digital transformation, and how do you change your old mental models which have served you so well in the past?

Wry: That’s a great question. The personal piece is fundamental to any digital transformation. Obviously, in an organization, the leader is going to be the person who guides the organization through any transformation, and if the leader hasn’t transformed the way they look at the world, it’s going to be really hard to credibly lead these changes, or to even understand what these changes need to look like.

This involves being open to change, being receptive to new ways of learning, being willing to butt up against areas where you don’t know things — and then not react out of fear or feel threatened as the person in the room who knows the most. That’s hard for some CEOs to do because you don’t get to that position in an organization without having some confidence and some expertise and some willingness to make decisions. But if you aren’t engaging with the right information and you’re not open to transforming yourself, it’s going to be hard to drive these changes through the organization.

"When we analyzed digital enterprises, two qualities stood out: One is continuance innovation or a culture of experimentation, and second was speed."–Mphasis CEO Ganesh Ayyar

Ayyar: If you look at the CEOs of analog enterprises, they have done something right, they have gone through the success ladder, they have shaped themselves in a particular manner and that’s how they became a CEO. Their mindset — and ego — is shaped based on their successes, their place in society and the business enterprise. Now, suddenly there is a massive change that takes place, the digital era comes in and they are leading an analog enterprise.

There’s a saying that leaders cast their shadow on the organization. Can you change the organization without changing the shadow that is cast by the leader? … It’s not possible, so leaders have to self-transform. If you want to take an analog enterprise and make it successful in the digital era, you will have to go through the challenge of duality as well because you are not going to completely flip the switch and make it a digital enterprise, and forget about your existing customers and your quarterly results. You are also not going to dump your employees. This duality would require adaptiveness — it would require change and self-transformation at the leadership level, which starts with the CEO and the CXOs are all included.

Knowledge@Wharton: Besides business leaders, who else should go through a self transformation?

Ayyar: Investors and the board, because I think the older concepts of how you measure successful organizations will have to take a backseat [to new ideas]. That means how you have measured organizational effectiveness in the past, what kind of dashboards you look at in terms of leading and lagging indicators — all of that changes.

We are in the midst of a digital revolution; the previous industrial revolution took place in the 18th century and hundreds of years have passed … and there is nobody alive today who can share with us the best practices of the industrial revolution. So in many ways, … the whole ecosystem has to have a renewed look at how success is measured, what are the ingredients of success, who are the good leaders who can take us to success, and all of the above.

“If you aren’t engaging with the right information and you’re not open to transforming yourself, it’s going to be hard to drive these changes through the organization.”–Tyler Wry, Wharton professor

Wry: In addition to transforming the leaders, if you are going to guide the organization through change there’s a really important piece to this, which is communicating the vision up and down the organization. Now especially in an analog enterprise where people have their identities and their careers tied to the old way of doing things, this can feel very threatening.

So there has to be some sort of an empathetic compassion to help foster the change in rank-and-file employees as well. And sometimes this might involve some turnover, and of course you don’t want to be [un]feeling about how this takes place, but you need to transform not just the leader, it has to be embedded in the culture and you have to get that transformation right down to the rank-and-file if you are actually going to implement the change and have it stick in the organization long-term.

Ayyar: One of the factors that I believe is the biggest obstacle to transformation is the fear of cannibalization. If you don’t embrace cannibalization — for all the good talk that we have of the CEO transformation, self-transformation, organizational transformation, a new set of strategies, new culture — you will stop in your tracks and you will not progress.

We have read so many case studies where iconic companies have fallen by the wayside, and the challenges they were confronted with was the fear of cannibalization and not embracing cannibalization. Something that has been giving you revenue and profit suddenly is vanishing, and something new is emerging. You are afraid to embrace new simply because you will cannibalize your existing revenue and profit, as a result you don’t change, you are hanging on to this hoping that this shall pass. It doesn’t pass and the company dies. So if we double up this ability to handle cannibalization, I think that will help tremendously in transforming the company.

Wry: I teach entrepreneurship, and what we teach in entrepreneurship is you need to experiment, you need to be adaptable, you need to be moving very fast. And in the context of a new venture you can do this without a lot of risk. You have some ego tied up into it but probably not a lot of resources, there’s probably not a lot of investors and customers — you don’t have all of the relationships that an established business does.

“There’s a saying that leaders cast their shadow on the organization. Can you change the organization without changing the shadow that is cast by the leader?”–Mphasis CEO Ganesh Ayyar

So when you’re talking about a digital transformation in an analog industry, and this issue of cannibalization, there is an incredible amount of risk that gets layered on to these decisions when they’re in established organizations versus small [firms] or start-ups. This is something that takes a lot of thought, and it’s a very challenging thing — how you engage cannibalization in practice because you are risking existing relationships, you are risking existing business lines, revenue streams, employees. And it’s a really tough challenge. … Ganesh is absolutely right, if you are not willing to undertake that part of the journey it’s probably game over anyway.

Ayyar: Today, automation is getting injected big into IT services, and there is still a commercial model in place where we are paid based on time and materials, which means the number of people multiplied by number of hours into their rate card is our revenue. The moment you introduce automation, which improves productivity by 40%, what it means is your revenue can go down by 40%. What do you do? Can you stand still and tell your customer that, ‘Hey, we will continue with the old model?’ Maybe you can try, but your competition is not going to sit still, they are going to come and whack the daylights out of you, so what do you do? Do you go and proactively make a proposal to your client?

And that’s the challenge that we are overcoming at Mphasis. What we are trying to do is we are encouraging our teams to go and make these proposals proactively. Because I have been asked this question, ‘What are you going to do when the revenue drops?’ If there was a standard answer to that question I would have found it by now. The point I am trying to make within my own company is, ‘I am better off keeping my customer than to allow my customer to go to my competition.’ Now handling cannibalization or a drop in revenue are things I will have to manage with the investors and the board, [but I believe] those are easier to manage because they will understand. … But if I lose the customer, I have lost the customer forever.

Wry: That’s something that we’ve been talking about earlier. Start-ups, when they come in, they’re not just looking to eat away at your revenue, they want to take the customer, and they are going to use data and analytics and everything at their disposal to own that relationship. So I think you’re exactly right, I mean the approach of keeping the customer, managing that relationship, and building a fortress around that — the revenue stuff you’re going to have to deal with, and there will be some discussions that will be interesting to have, but I think that’s the right approach.

Knowledge@Wharton: All of these are great points but it also assumes that there is a cultural transformation that takes place. For a business leader to have the right vision, he or she needs followers to implement that vision. What are some practical ideas in how companies can move the needle when it comes to cultural conversion or transformation?

Ayyar: Culture [as a word] is used very loosely across the globe, and it is probably the most important thing to have and the most difficult to implement. Immersing the entire organization into a particular cultural element is a long journey. It takes time and it requires tremendous commitment. It cannot be done overnight. We have actually embraced four cultural cornerstones. One is a culture of experimentation, second is empowerment, third is customer focus, and the last one is a focus on outcomes. We have been running immersion workshops. We are talking to the existing set of employees, we are doing it with the board, we are doing it with a new set of employees.

“You need to transform not just the leader, it has to be embedded in the culture and you have to get that transformation right down to the rank-and-file.”–Tyler Wry, Wharton professor

[As an example, take a] look at the social psyche of India. In India, … academic excellence [is revered], scores are compared against each other almost on an everyday basis. If you want to introduce a culture of experimentation here, it means you have to take out the fear of failure. How do you do that? So I’m just highlighting that culture is a very important thing to do, but very difficult to execute. If you want to compete effectively with pure play digital enterprises, culture is a huge area that you have to focus on.

Wry: There’s no magic bullet. Trying to change the culture is a slow moving and very challenging thing to do. Culture is not about meetings, it’s not communication, it’s not the superficial things. Culture is rooted in the cognition and the day-to-day practices of the people in your organization. And there’s a lot of momentum behind this. If people have been doing the same thing in the same way, and believe that it’s the right way, getting them to change and having that change stick is an extraordinarily difficult thing to do.

And then, if you are a multinational enterprise, you layer different sorts of national cultural expectations on top of that. So this is really tough. The easy advice is to be prepared for it to take a long time, and for change to come in small ways. But other than that, it’s just a matter of being very persistent. Also, model change at the top. You’re not going to have a cultural change unless you see that with the leadership of the organization and there’s a concerted effort to communicate that to the employees who are on the ground.

Knowledge@Wharton: At what point does firing an employee become appropriate if they are very resistant to cultural change? And also, if you want to replace your staff to get the digital skillset you need?

Ayyar: I say this with heavy responsibility: With the digital revolution sweeping the world, the number of jobs available is going to be less across the world, which means we will see a significant number of people who won’t have employment. And as a CEO, it is my utmost responsibility that I take the entire organization along, to the best of my ability, towards success. And also become culturally and socially responsible in this process.

I think it is overamplified, the power of CEOs to fire employees. You have to do it with a deep sense of regret when you get to firing employees. You can’t take that as an easy option, because if I’m changing myself I have to start believing that others can change too, and you have to work hard to make them change. You can’t say, ‘Oh, tomorrow if you don’t change I’m going to fire you.’ How many months did it take for me to go through self-transformation? And still I have personal idiosyncrasies that I haven’t managed to change yet. So if I have that as a deep recognition, I would be deeply committed to my employees, and while firing is an option that I have with me, I will be very careful and responsible and do that as a last resort.

“One of the factors that I believe is the biggest obstacle to transformation is the fear of cannibalization.”–Mphasis CEO Ganesh Ayyar

Knowledge@Wharton: How do you know if you are going in the right direction when it comes to digital transformation? How do you measure it?

Ayyar: I’ll tell you two measures that we are using. The first measurement that we are undertaking is a quantitative measure, which is, ‘Are we winning business in new areas?’ Because these new areas are growth areas, these new areas are going to give the company a new brand image and there is sustainability in that area.

The second measure we are undertaking is, ‘Am I relevant to my customers?’ I am too small a company to think that I can change the market, or I can transform and the market will change accordingly. I don’t have that kind of brand image. So in our transformation, we are linking it to the transformation which our customers are undertaking.

It’s a customer-centric transformation that we are taking, and we ask this question: ‘Are you discussing with clients their transformation journey, and what is your contribution to their transformation journey?’ We are measuring the number of pitches and the number of hours we are spending in this area. So these are the two measures of how we believe that we will be successful in the future.

Wry: This is a really interesting question because there’s the old adage — what gets measured gets paid attention to. The measures that you define end up having this feedback effect and that’s what you pay attention to in the organization, so as a fundamental principle it’s important to be really considerate about what you are measuring, and how you are defining your impact.

Now you can define these outcomes at different levels, and I think it’s important, like Ganesh said, to look at it from the micro to the macro. And as you get to the macro, causality becomes much fuzzier and hard to disentangle, but you can start to get some indication. And of course, noisy indicators are better than no indicators.

The most immediate indicators are the behavioral ones. Do you see behavioral change? Do you see sales? Do you see positive customer responses? And you can track that all the way up to more macro organization performance outcomes. But this is a big thing, when you’re talking about something like a digital transformation. If you were just looking at something in terms of, what does your bottom line or your balance sheet look like, that might be giving you a really skewed perspective. Because as we’ve been talking about, there may be short-term pain for this long-term gain.

“Start-ups … want to take the customer, and they are going to use data and analytics and everything at their disposal to own that relationship.”–Tyler Wry, Wharton professor

So it’s important to define clearly what you are looking at, have a very clear understanding for why you think the causality is working the way it is, and then try to communicate that as clearly as you can to the stakeholders you need to have buy in on what you are doing. Because like I said, the metrics you define are going to define what gets paid attention to. This whole system is something that really deserves a lot of thought and attention.

Ayyar: I learned something new from you, professor. Noisy indicators. I just love the idea, and I think it is something which I will take back to my drawing board, that I would rather have some noisy indicators rather than no indicators. That’s a great one, absolutely fabulous.

Knowledge@Wharton: Let’s talk about the benefits of digital transformation. Why is it worth the effort?

Ayyar: It’s not even up for debate. Do you have a choice? It’s like, why is it good to breathe? Because you want to stay alive. It is as fundamental a question as that. Your competition, the new breed of competitors, asymmetric competitors are going to take your customers away. If your customers start migrating, you are left with nothing. So I don’t think it’s an academic pursuit as to whether we should focus on digital, this is the need of the hour, and there is no choice. Either you will do it and do it successfully, and take the company towards bigger success, or you don’t do it then it’s a matter of time and you will be referred to as a case study as to what shouldn’t have been done.

Wry: That’s absolutely right. The wave is coming, there is no getting out of the way. Either you decide to surf it and go on that terrifying but thrilling trip as the wave pushes you — or get crushed by it. There really is no other option.

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