Key Topics: Three Transformations in One
Horizon 1: Business process re-engineering re-invented
Horizon 2: Digital factory, productization of services
Horizon 3: Open innovation with start-up community
When I came to digital innovation after years of management consulting and hardcore business transformation leadership, I was struck by how strangely people in professional services - even seasoned business leaders - sometimes behave when it comes to digital and innovation. Many are either in denial and doubt that their business is at risk of anything because of the digital revolution, or on the contrary they are intoxicated by the buzz of the moment (call it blockchain, metaverse, chatGPT, etc. ) and can’t think of anything but disruption and the urge to make radical moves, right here, right now. They either see the digital transformation as an imposture, a waste of money and a distraction from the ‘real’ business, or as some sort of ‘black magic’ to which good business sense, such as healthy returns on investment, does not apply anymore. Well, as is often the case, the truth is somewhere in between. Digital transformation is a ‘real’ business opportunity, it is neither fast, easy nor cheap to realize it, and a lot of the good old business transformation and corporate development playbooks are still relevant… as boring as it sounds!
As mentioned in my previous article, digital transformation starts with a strategic analysis anchored in the wider firm’s ambition and the explicit articulation of a strategic intent bucketed in three distinct investment horizons: now, next and new. The confusion or the complication stems from the fact that it is actually three transformations in one, with very different success factors, and with contrasting, or even potentially conflicting, organizational and capability requirements, so much that the need for organizations to become ambidextrous like master piano players is often mentioned.
The music score is important but execution is everything: let us see what it takes to get a digital transformation right for each of the three time horizons. In short, the horizon 1 is process centric, the horizon 2 is client centric, and the horizon 3 is vision centric.
Horizon 1
The first horizon typically mobilizes the lion’s share of resources and management attention. It brings only incremental improvements or sometimes even barely offsets margin or volume attrition, but one should not underestimate how important the horizon 1 transformation is to establish the credibility of the whole digital transformation and earn the right to re-invest in more ambitious horizons 2 and 3, especially in early years when skeptics largely outnumber enthusiasts.
The horizon 1 transformation is process centric, in other words it focuses on the ‘job to be done’ for clients and aims at leveraging innovation and technology to reduce the cost to serve whilst increasing value delivered to clients. There isn’t much that can’t be recycled from the decades old ‘Business Process Re-engineering and Management’ methodology (BPRM): map your client delivery processes, look for standardization and simplification opportunities (quite a challenge in itself for both engineers and lawyers, believe me!), assess whether you have the best athlete at the right cost for each task along your work process and seek opportunities to automate where it makes economic sense.
This approach, is (and has always been) a ‘race to the bottom’ because it rarely creates a sustainable competitive edge but rather a temporary advantage that is bound to evaporate sooner or later when the competition also does its homework. In engineering, the implementation of digital construction (think BIM level 2 or digital project & cost management) and in legal services, the deployment of automated contract drafting and automated contract review are examples of horizon 1 digital transformations in professional services. The silver lining though is that in addition to providing a temporary competitive advantage (for the first movers only), it helps create a strong foundation for the horizon 2 transformation by increasing the digital maturity of your firm: data and knowledge become more structured (think of the need for a common data environment and a 5D object library in engineering, or the build-up of an up-to-date template library for law firms), another side benefit is the increased digital literacy that comes from horizon 1 with, for example, a better understanding of the tech scene or a more effective approach to drive technology adoption.
Horizon 2
The second horizon is client or market centric because the goal is to put yourself in the shoes of your clients and explore what else you could do to help them realize their own business outcomes: buying engineering or legal services is only a marginal (and often cumbersome) part of their business, they have deals to close, assets to deliver, products to launch, markets to conquer, etc.
The reference methodologies in horizon 2 are very different from horizon 1. Here you need to embrace ‘design thinking’, ‘lean start-up’ and ‘agile’ principles to be successful. These methodologies are often discussed a lot (contrary to BPRM which doesn’t get anyone excited anymore) but very poorly implemented because in most professional services firms these are completely new capabilities that must be built from scratch. Creating a product vision, drawing a product roadmap, conducting deep client research, building and testing a first prototype, getting an MVP (Minimal Viable Product) to market and delivering regular releases until you reach product maturity, defining the right market positioning, building a dedicated sales and technical support organization, etc. are often poorly understood and poorly executed by professional services firms that not only lack the right capabilities but also the right leadership to execute. Traditional leadership in professional services firms thinks in terms of booking, leverage, and utilization while a digital product strategy requires thinking in terms of time to market, customer acquisition costs (CAC) and consumer lifetime value (CLTV) just to name a few. In addition, for your product strategy to fly you often need your nascent data and analytics capabilities built in horizon 1 to go next level with data engineers, data scientists and domain analytics specialists, skills that are typically underdeveloped in most firms.
The horizon 2 transformation is where I notice the biggest mistakes and wasted resources, some firms spread their resources on too many products (sometimes dozens!) and fail to understand the sort of resource level that each product requires to be successful. Some firms use digital products as a loss leader to protect market share in their legacy business and by doing so fail to monetize innovation whilst adding more pressure on margins, and most firms have a weak innovation governance, if any, and no innovation accounting to dynamically manage their product portfolio.
Horizon 3
The third horizon is yet another beast; there you truly want to play the long game and give your firm a chance to lead a potential disruption in your market from the front by embracing open innovation with the start-up ecosystem. For the third horizon to avoid being a random collection of minority equity shares in promising tech companies, you need to have a powerful vision of where your market is going and make sure that you build a portfolio of participations that is paving the way to your longterm vision.
The reference methodology in horizon 3 is rather ‘corporate venturing’ which is similar to the Venture Capital playbook except that goals are not restricted to financial returns but also include the wider benefits of creating strategic options to pivot the legacy business or creating commercial and technical synergies with the core business.
The reality is that very few professional firms have both the scale and/or the risk appetite to play in the third horizon. That short list includes firms like Allen & Overy or Mishcon De Reya in legal services and AECOM or Arcadis in engineering services, and even at these firms execution often falls short of building a large enough portfolio of equity stakes to manage risks effectively. Equally, synergies between the start-up portfolio and the legacy business are not always actively realized.
Even when you have set your strategic intent and built professional capabilities for each of the three horizons of your transformation, you are not done yet! Aligning stakeholders and removing frictions in decision making and execution to make sure that the three transformations build on each other and each part of your organization contributes and benefits is where things often get stuck. I will touch on that topic in my next article: ‘co-creation is the secret sauce’.
