Don’t wait for the revolution — it’s here
Board leadership vital in face of disruptive tech, writes Jon Hooper
Boards ignore the digital revolution at their peril. Technological disruption is changing the way the world works and directors need to ensure their companies survive the coming onslaught.
Remaining digitally illiterate is not an option. In fact, failing to recognise and respond to the threat of a nimble newcomer in the market could be seen as a breach of good governance and the fundamental duties of a director.
Faced with relentless disruption, traditional companies worldwide are being forced to disrupt and reinvent themselves before a competitor does it for them.
But change is happening so quickly that time is not on their side.
How best to respond? What key issues do companies and boards need to consider? How do they identify and balance the opportunities and the risks? And is new blood — and a very different type of director — needed for boards to stay on top of, let alone respond to, the speed of change?
Some answers have come from a recent summit meeting of the North American and European Audit Committee Leadership Network, where digital transformation was the key discussion topic. EY’s Laurence Buchanan and McKinsey’s Paul Willmot joined the group as guests.
Focusing on the customer (an oldfashioned concept!) is still the key to a successful digital transformation of a business, the group found.
The board’s role in overseeing transformation is to ask management the right questions and to ensure directors are getting the best and most up-to-date strategic advice. But how do they do this? As one summit member put it: “You need a board member with some [digital] experience or it’s almost impossible to ask the right questions. You need someone who has been in the tech world, in the app world, on boards these days.”
As another says: “Sometimes boards need a wild card. This person might not be able to contribute to every committee but he or she is able to help with technology in a meaningful way.”
And as another member puts it: “As boards refresh themselves, they will have to break with tradition. Everybody wants a recently-retired CEO. I want the 35-year-old guy running that big project at Google.”
Bringing such people on board can be challenging.
As McKinsey’s Willmot notes: “I’ve found the right people tend to be cut from a slightly different cloth. They don’t mesh well culturally. They like to be provocative in the way they communicate. You need the right processes to integrate their talent into the board.”
Uber and Airbnb are the disrupters most frequently cited. But the change ahead of us goes much deeper than this.
As examples, the summit committee notes that the US Defence Department is developing an onboard, artificial co-pilot that can speak, listen, be “visually aware” and operate cockpit controls.
It also warns that digital transformation has the potential to reach the boardroom in another way. In a 2015 World Economic Forum survey of more than 800 executives and IT experts, 45 per cent of respondents said they expected an artificial intelligence machine would serve on a corporate board by 2025.
Similarly, EY’s Buchanan says the world is moving so fast that the process of assessing risk and opportunity is happening in real time. “A sense-and-response mechanism must be going on continuously. A new technology can hit 50 million users in 35 days.” And scale can be achieved without the capital expense that was once needed.
Another key dimension is what Willmot calls “combinatorial innovation” — where technologies interact and innovation builds on innovation.
He cites Google Maps, enabling the growth of businesses like Uber.
“New disruptors, often start-up companies, are driving new business models with very different economics,” he says. “Few disruptors are taking market share but these companies are putting huge pressure on prices.”
Legacy businesses are less able to predict where their competitors are likely to come from. New competitors could be start-ups but could also be large incumbents in other industries who can leverage their customer base, infrastructure or technology.
An example is the race to develop and market a driverless car, where software companies, hardware companies, auto manufacturers, parts suppliers and start-ups are all competing or co-operating.
This trend, coupled with the speed of innovation, puts companies in a difficult spot, the summit said. “The pace of change with digital is not linear — it is exponential. A new competitor might arrive very quickly and you might not see it coming.”
Technology is also transforming the manufacturing process. Companies are using 3-D printers to mass-produce customised and complex products. According to the summit report, more than 75 per cent of the respondents to the World Economic Forum survey expect the first transplant of a 3-D printed liver to occur by 2025.
Turning back to the need to focus on the customer, digitisation has fundamentally changed customer relationships and expectations. Says Willmot: “Intuitive interfaces, around-the-clock availability, real-time fulfilment, personalised treatment, global consistency and zero errors — this is the world to which customers have become increasingly accustomed.”
In other words, everything must be real time, fully electronic and personalised.
The big message is this: directors need to think about digital transformation in terms of customer needs rather than focusing on ways to digitise existing products or services.
Key questions might include: “Who exactly is the customer?”; “How quickly will consumers adapt?”; “Can we be a leader if the mass market isn’t ready to follow?”
As Buchanan puts it: “Place your customer at the centre of your digital strategy. Simply digitising content and blasting it out to social networks and apps is a sure-fire way to waste your investment.”
An alternative strategy might be to make careful acquisitions, buying in the expertise you need.
Along with focusing on asking the right questions (eg, “what strategy is fit for purpose in a digital world?” rather than “what is our digital strategy?”), boards also need to take a long-term view of disruption.
Put simply, directors cannot oversee decisions and have governance over processes without taking a view on what technology might mean for their business in the future — say, five to 10 years. This view needs to extend beyond the likely term of the current management team.
Another strategy might be for a board to set up technology committees, alongside its current audit and remuneration committees.
The way the world is heading, digital strategies will ultimately be woven into the fabric of successful businesses and words like “digital” and “disruption” will likely become redundant.
Boards have a critical role in getting their companies to this point.
Remaining digitally illiterate is not an option