A new Digital CIO must emerge from digital economy disruption

Technology has been changing the world as we know it, and in a quite fast pace. Companies that were born with a digital DNA are now taking over the market. It’s possible to say that ten years ago the world was a completely different place: smartphones, as we know, hadn’t been invented, Facebook was still in its early steps and ExxonMobil was worth six times as much as Apple. Quite a difference a decade makes in his new digital world.

A few weeks ago, for a brief period of time, Apple, Alphabet (Google), Microsoft, Facebook and Amazon were the five most valuable publicly traded companies in the world, relegating ExxonMobil, the long-time leader in this category to a sixth place, even though the oil company has since made its way back into the Top 5, the composition of this recent list clearly illustrates how important digital economy has become over the past few years. Ten years ago, the list of most valuable companies was dominated by big oil and multinational conglomerates. Nowadays, companies such as Google, Facebook and Amazon are taking over the headlines. The chart below shows a clear comparison on the market value of the most valuable companies today and back in 2006:

Technology has certainly affected the way we do business and companies’ roles. The time is now to refocus, and turn those initiatives into a full-fledged digital transformation strategy, and that means that CIOs must reinvent themselves in order to understand how the disruptions that digital transformation will bring to the businesses as we know them can create opportunities to growth and establish themselves as the strategic digital leader companies expect and need them to be.

Before we explore what’s coming with the new digital reality, it is important to look at the present and understand how companies and CIOs are dealing with their IT departments. Reinventing the IT function to support the digital transformation requires far-reaching changes, from talent to infrastructure, and takes multiple years to complete. Fortunately, CIOs can educate companies to adopt an approach that delivers results quickly while still reshaping IT for the long term. This approach requires first building a “high-speed” IT function to work alongside the existing IT function, focusing on one or two valuable business areas such as web and customer engagement. It enables the company to address its most critical IT areas within a few months before scaling up to cover the remaining areas. Successful transformations avoid fractures between the high-speed and legacy IT functions and are driven by the CEO and business leaders who treat it as one of their top priorities, not just as an “IT effort.”

The digital transformation scenario, and the disruptions that followed it, changed the demands on IT in three principal ways. First, digitization requires increasingly sophisticated technology to improve companies’ operations and interactions with their customers and clients. To mention some examples, Netflix’s recommendation system is able to analyze terabytes of data to successfully recommend 70 percent of customer choices. Expedia’s proprietary search and caching system allowed it to become the world’s largest hotel site, searching more than 525,000 properties for consumers and other 10,000 partners. Even coffee chains are now introducing sophisticated mobile-payment and loyalty apps.

Second, greater IT-delivery performance is needed across the board. While efficiency was previously the most important performance measure for many companies, now everything matters. Time to market is critical as businesses compete on how quickly digital innovations get to consumers. Reliability is paramount in a world where downtime stops sales and where, unlike the physical world, no manual work-arounds exist. Security is essential because a broader online footprint drives new vulnerabilities and the potential for greater losses.

Third and last, but not least, digitization means that IT and CIOs must prepare for much greater business engagement and oversight from senior management, and that’s because the value at stake is much greater than before, reaching up to 40 percent of revenue, 20 percent of costs, and sometimes the business’s very survival. With that in mind, for many organizations it is no longer a question of if or when digital transformation will impact their business. It is now about how this will happen, how disruptive it will be and what they can do about it. The image below shows the evolution of IT priorities:

Companies have faced major technology disruption waves throughout time, starting with mainframe computers in the 1960s, followed by minicomputers and decentralized computing in the 70s, PCs in the 80s and client server in the 90s. More recently, the rise of the Internet has led to web browser-driven networked computing. It would be easy to dismiss the current shift to smartphones and tablets as just the next step in the evolution of technology, similar to all others before it. However, the situation is quite different this time. Up until now, these paradigm shifts have been primarily driven by relentless advances resulting from Moore’s law which states that, about every two years, computers and related technologies (e.g., memory, storage) become twice as powerful, smaller, cheaper and more connected. Digital transformation is much more than just new and innovative technology.

Then, what really makes digital transformation so different? Of course new technologies are at the heart of digital transformation, as well as technology innovation. Social technologies like Facebook, Snapchat, Twitter and LinkedIn enable businesses to better engage with customers and employees, share information, collaborate, solve problems in real-time and build lasting relationships. Smartphones and tablets are changing the way people work and behave, transforming any place with an internet access an office, retail outlet or bank branch. The information generated by all mobile and social media interactions provides a rich source of data that can be analyzed and used to create custom marketing actions and products attuned to the individual’s unique requirements. In addition, cloud technology has enabled a wide array of everything-as-a-service (XaaS) offerings that significantly reduce the cost and time required to provision everything from infrastructure to complete applications solutions.

During the prior technology shifts, such as mainframe to minicomputers to client/server etc., an IT organization with specialists was highly required to sit between technology and the business in order to provision and support solutions. Today, people are much more tech-savvy, as the so-called “millennials” (born after 1982), who have grown up around computers and are comfortable with them. This combination of tech-savvy users and XaaS offerings now allows businesses to procure and provision technology-enabled solutions without the involvement of IT. They also have higher expectations as a result of their own experiences with their use of personal technologies, such as the ability to download an app for free or for a few dollars from an app store, and begin realizing value immediately. They are now looking for the same kind of experience at work. At the same time, a company’s external customers have similar expectations. They want to be able to perform their activities (buy books, download a song or a movie, transfer money, read the newspaper etc.) anytime of the day or night, seven days a week using their smartphone, tablet or any other mobile device. They expect to be able to get immediate help by conducting a real-time chat with a customer-support specialist, and they share their experiences – both good and bad – widely on social media. Therefore, digital enterprises can be considered the ones that put the customer first anytime, anywhere and at any place, based on customer expectations. The graphic below details that:

The economic situation also plays an important role, once hardware has truly become commoditized and so inexpensive that computes cycles and storage can be rented for pennies an hour, all on demand. Actually, it has spawned a new “everything-as-a-service” business model where just about everything from raw compute cycles through enterprise applications can be rented. It has enabled the business to bypass the capital budgeting process and procure technology-enabled solutions directly with a corporate credit card. Often, the end result is a situation where the business gains new capability faster and more cheaply than it would have done if it had followed the traditional route of using its internal IT organization. The combination of new technology, a tech-savvy population and economic factors is what makes this different from other previous technology shifts. It has led to the democratization of IT, where IT-enabled solutions are available to everyone. This is creating a number of serious challenges for CIOs when those start dealing with this new reality, especially when managing the expectations of a business that has completely changed from the traditional offline relationship to a digital engagement.

Down the other road, CIOs preside over an increasingly marginalized IT as its business customers go elsewhere for innovation, while they still manage a shrinking portfolio of legacy systems with diminishing value. However, CIOs who choose the road to digital leadership must first overcome a number of challenges.

Disintermediation of IT: Keeping IT’s relevance and driving the technology agenda have become increasingly difficult, as compelling “XaaS” solutions are now widely available, ranging from Human Resource (HR) to Enterprise Resource Planning (ERP), and those can be procured directly by line-of-business users and paid for out of their operating budgets. When they compare this with their typical IT experience, where projects are almost always over budget, consistently late, and often fail to meet expectations, they question why they need IT. Over time, these business-procured solutions consume a larger and larger portion of the technology budget. According to a recent KPMG survey, 20 percent of firms responded that more than a quarter of their IT spending was controlled or managed outside of the IT organization. In 2015, that number was 14percent , and it tends to be more and more spread around the company rather than staying centralized within the IT department in a five-year period. Also, the growing influence of the Chief Marketing Officer and the sudden rise of Chief Digital Officers (CDOs), coupled with the increasing shadow IT described above, are eroding the CIO’s influence over the technology agenda, so CIOs will be challenged to re-invent IT with new operating models and organizational structures that can respond to the business needs for agility, speed and innovation, creating and IT procurement decision model based on collaboration from different departments of a company that can produce good, yet challenging, results. The main risk for CIOs within companies that promote this kind of C-Level collaboration is making them redundant, along with information management and other classical intermediary functions.

IT and business misalignment: A significant amount of IT organizations have not kept pace with the needs of their business stakeholders. IT simply takes too long, costs too much and consistently fails to meet expectations, and main causes go far beyond poor project execution. A recent survey among more than 600 IT Leaders found that systemic issues are the main reason for a lack of IT innovation, with 66 percent of respondents citing environment or structure, processes and standards as primary causes. The current IT operating model lacks the agility, flexibility and speed to deliver high-quality solutions to support digital transformation.

Lack of qualified digital professionals: Digital transformation came requiring new roles and new skills for any IT organization who want to move ahead with it, as well as placing increased importance on some existing roles. In addition to having to master emerging technologies, IT must adopt new models of work, new methodologies and ensure a shift in emphasis from building solutions to acquiring and integrating them. Unfortunately, skills required, such as user experience design, security, mobile and cloud, are in very short supply and some of the new roles, such as solutions broker, product manager and service manager, require skills that may not be found in current IT organizations.

Industries digitalization maturity: Another major issue that most CIOs may face, depending on the industry that he or she works for, is how digitally prepared are the companies within this specific industry segment. It’s no surprise that CEOs are now creating great expectations on how much revenue Digital Transformation can bring to their companies, and that responsibility will inevitably fall over the CIO. The chart below shows an overview on how digitally mature each one of the main industry segments is globally based on several research notes and interactions with IT leaders from different countries:

In order to provide a better understanding, let’s summarize the main takeaways of this digital maturity market assessment:

• Industries which businesses are based on knowledge, information transaction and intellectual property are the ones that show a higher degree of digital maturity across all sectors;
• Industries with higher availability of capital investment (e.g. oil and gas, utilities etc.) are the ones which are more likely to further digitalize their physical assets and their customer interaction tools;
• Most service industries have a great potential to digitalize their methods of interactions with clients and costumers;
• Most labor-intense sectors (e.g. retail, construction and manufacturing) have a great potential to provide more digital tools to their employees and collaborators.

Uncertainty and security: As most of the business directly procures externally sourced solutions, and as companies are now considering their information as one of their most important assets, CIOs must struggle with a host of issues as a result. These include the need to possibly integrate these new solutions with existing applications and data, ensure that they are included in any disaster recovery and business continuity plan, determine that they comply with any internal and external policies and regulations, and that they are not duplicative with existing solutions elsewhere within the enterprise. In other words, the CIO needs to protect the overall interests of the enterprise. Additionally, the combination of Bring Your Own Device (BYOD), increased use of mobile applications, experimentation, stepped up regulation, and growing cyber threats – including state-sponsored cyber terrorism – have created an environment of increased risk. The criticality of IT to the business and the enormous potential cost of security breaches and data theft have moved the topic to the Board of Directors’ meeting agenda. CIOs will be challenged to strike a balance between risk avoidance that creates barriers to innovation, and one that manages risk to an acceptable level and encourages experimentation.

Legacy IT infrastructure: In order to fulfill the business demands for the new and innovative solutions needed for digital transformation requires an IT infrastructure that can be provisioned quickly and cheaply. In addition, it must be able to be scaled up and down rapidly as customer traffic and transaction volumes fluctuate due to product cycles, seasonality and other events. Most of the time, this will need a cloud-based infrastructure and, at the same time, these new solutions will often require some integration with existing legacy applications and databases, creating another challenge.

For CIOs to properly face the challenges of digital transformation, it’s important for them to understand that it requires a set of new IT capabilities, as well as elevating some existing capabilities to a higher level of importance. Traditional IT is concerned primarily with systems of record: transaction-oriented applications to run the business, such as ERP, EDI, CRM etc. These systems are characterized by stability and reliability with new releases measured in years. In the new digital world, the focus is on systems of engagement, customer and employee facing systems, where user experience is of major importance and new releases tend to be measured in weeks, even days, and these result from close collaboration between IT and the users, and are the product of iterative and rapid development cycles. In order to promote collaboration and experimentation throughout the companies, CIOs are creating or upgrading an R&D function or innovation lab to provide an environment where IT, business users and even external customers can explore and refine new digital solutions. Around, 34% of organizations have an R&D function within IT or within IT and business. Because of the scarcity of digital skills, using a Digital Center of Excellence (CoE) and/or Digital Acceleration Teams can leverage this talent across the company in a much easier and faster way.

A great issue that many CIOs have been facing is the fact that their agendas are currently taken by all kinds of operational issues and large projects that are rather in line with the traditional back office IT than with a digital strategy IT. For most CIOs this makes it very difficult to spend time with the business and other areas of the company discussing the implications of the Digital Transformation and the value of IT for the business. Making time available to become an “evangelist” on digital is crucial. Some CIOs even consider appointing a second-in-command to manage the operational IT issues.

The imminent impact of digital transformation presents a paradox for most companies. In one hand, it threatens the very core of their business (when was the last time you went to the store to rent a video or buy a book?). On the other hand, to those visionary companies with the ability to execute, it represents an opportunity to innovate and distance themselves from their competitors. CIOs are in a perfect position to make the difference between being a victim of disruption and the most prepared digital leader, all they have to do is to focus on the critical success factors to properly implement the digital transformation within their companies and become a digital leader in this new and exciting digital world.

The imminent and inevitable disruption caused by digital transformation calls for a new breed of CIOs, with a different mindset and new capabilities to become one of the most strategic references from every company affected by this new digital era. But there ‘s still a path to be walked.