It has become quite a cliche by now that years of digital transformations got done in weeks. It is true of course, but the question remains -why? How come that companies that resisted digital transformation for years finally got on board? Here is what I think.
It has become quite a cliche by now that years of digital transformations got done in weeks. It is true of course, but the question remains -why? How come that companies that resisted digital transformation for years finally got on board? Here is what I think.
It has become quite a cliche by now that years of digital transformations got done in weeks. It is true of course, but the question remains -why? How come that companies that resisted digital transformation for years finally got on board? Here is what I think.
Have you ever wondered why it is that companies got so many digital projects done during the crisis when they were not approved before the crisis? Why is it that so many businesses get launched during the crisis by people who were not ready to take the leap years earlier? I believe there is a fundamental shift in our perception of risk during a crisis. Whether that is a new business or a new project.
What is considered a safe choice in normal times (like doing nothing) may become very risky in a crisis. Not making a change caused many businesses to stall, shrink or go bankrupt. On the other hand, the formerly risky proposition of a new initiative may not look that risky after all, as all things around us become uncertain. To put it another way - and this is the big aha - the perceived risk of doing nothing and the risk of doing something start looking eerily similar.
I am convinced that during the crisis overall uncertainty increases and people do not perceive more risk with a new business model than an existing one.
Microsoft CEO Satya Natella famously said that 2 years' worth of digital transformation got done in 2 months in their business. The same fact has been observed at hundreds of companies. A Twilio survey found that Covid accelerated digital transformation at some businesses by as much as 6 years.
It is way too easy to dismiss this acceleration as a simple crisis response. In fact, not all projects get accelerated in a crisis. Companies don't expand their factories or transportation fleet. They do not suddenly proliferate their product portfolio. So why is it that digital transformation got such a boost?
Let's step back first to take a look at what normally happens between the core business and innovation projects? As I've discussed many times on this channel, the core business tends to resist innovation initiatives unless they provide outsize returns. The ultimate tug of war between the status quo and innovation is not a simple change management issue.
In my experience, professional managers are pretty good at assessing the risk rewards of projects and not simply resisting change for resistance's sake. I believe the core of the issue is predictability. The business parameters of a status quo are predictable and therefore somewhat certain, whereas innovation projects are inherently unpredictable and uncertain. Managers tend to take lower returns that are certain than higher returns that are not. This is true for investment portfolios, life decisions, and for digital programs. The dilemma in normal times is between predictable core business results vs unpredictable innovation or transformation results. To put it in portfolio management terms, if the risk-free return of the status quo is more attractive than the high-risk return of the digital transformation then the business will resist the change. And because most businesses do not track realized benefits of digital programs the track record of the core business will have a lot more data and more proof than the track record of digital. In normal times, digital leaders could fix this by doing a much better job tracking value realization but for reasons we discussed before it does not happen enough.
Now, this is where things get interesting in a crisis. The risk-free return plummets in a crisis. Business operations stop, supply chains get disrupted, customers cancel orders or renege on contracts. The downside of the previously risk-free return becomes pretty bad and negative. All of a sudden, the risk-adjusted return of digital projects look much more attractive. As one CFO told me, even if we get a third of the return of the digital project it will outperform their core results 4 to 1. So a digital project that looked risky before becomes a no-brainer. This behavior happens both consciously and unconsciously. Managers instinctively assess risk levels even without the extensive ROI calculus.
Importantly the crisis invalidates all the track record and low-risk nature of the core business as well. Suddenly there is no track record of the core business always succeeding since there is proof that it had just struggled.
This is why digital projects get more traction in a crisis.
In most industries, there was a fundamental digital business model shift. And this means the new normal will also reset the expectations for risk-free returns. Many digital projects delivered staggering returns in record time and low cost so the expectation on risk-adjusted return will start including some digital programs. And that calculus will results in a higher-level digital innovations for those businesses that will thrive after the crisis.
Companies that did not launch successful digital programs in the crisis have missed this generational shift in risk expectations and due to all the dynamics we discussed, may never become the innovators in their industry.