Digital transformation: inside-out or outside-in?

We explore digital transformation in the time of coronavirus and beyond.
Written by
James Bloor
Published on
August 18, 2020
Digital transformation: inside-out or outside-in?

Since the global Covid pandemic, the luxury of time when transforming a business seems to have disappeared.

In just a few short months, over 50% of the world has been under lockdown. There’s been a five-fold increase in cyber-attacks. And even the most optimistic forecasts are predicting a 3% decline in forecasted global GDP this year.

Business models that historically made a company successful are becoming the bane of their existence. Former strengths like size, structure and culture are fast becoming liabilities as established companies struggle for agility.

Organisations that once mapped their digital strategy in one- to three-year phases have seen their plans thrown out the window. It’s been a rough awakening.

Many organisations improvised quickly – ‘pivoted’ their focus, effort and resources successfully. Many more didn’t have a Plan B.

Indeed, the DMEXCO Trend Survey undertaken in March 2020 found that over 66% of respondents believe the coronavirus pandemic will accelerate the pace of digital transformation.

Covid-19 forced organisations to rethink and reprioritise their digital transformation programmes. It made them shift their priorities.

Many of our clients were pleasantly surprised how well their teams, processes and leadership improvised. They proved they could move quickly when it really counted. Lots of organisations rapidly accelerated programmes of work that were previously low on their agenda. And, at the same time, they’ve ruthlessly deprioritised things that just weren’t that important anymore.

A recent WSJ survey of directors, CEOs, and senior executives found that digital transformation risk was their top concern in 2019. Yet 70% of all digital transformation initiatives do not reach their goals. Of the $1.3 trillion (£1.1 trillion) that was spent on digital transformation last year, it was estimated that $900 billion (£700 billion) went to waste.

By evaluating the drivers of digital transformation, perhaps we can begin to predict their likely success.

Inside-out transformation

Typically, organisations approach innovation and transformation inside-out. They evaluate their current capabilities, or lack of, alongside emerging marketplace opportunities and what their competitors are doing. Technology is then applied as the solution.

Examples of this approach include a membership organisation wishing to migrate their CRM to the cloud, a FinTech start-up using a Progressive Web App to present consumer data in a novel way, or a leading manufacturer seeking cost savings by implementing a self-serve customer portal.

They are potentially all good programmes of work that add tangible business value, despite all being inside-out transformations.

Outside-in transformation

For most companies, successful digital transformation requires a reorientation around an outside-in approach to deliver a superior and more relevant customer experience.

Customer experience (CX) leaders know that digital is not about being technology-led. They strive to be relevant to current and future customers by creating new experiences and service models to transform the business. They sense and respond to the ways that their customers, often using technology, are turning everything around them upside down.

The importance of technology is not solely a function of the technology itself. But instead what it empowers people to do and how it alters the human experience. Technology is enabling people, but disrupting business.

Well-cited examples of an outside-in transformation driven by changing consumer needs are how Monzo reinvented personal banking, Netflix redefined home cinema, and Tinder changed the dating scene.

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Why do inside-out transformations rarely succeed?

Organisations often see the inside-out approach as a natural way to innovate. Often, the obstacles to gathering deep consumer insights can appear too steep. Perhaps loss aversion is also a factor. The perceived penalty for ‘getting it wrong’ can seem too high, so the risk is avoided.

During ‘normal’ times, companies often experiment at a pace that doesn’t match the rate of change around them. They can’t learn quickly enough to keep up.

At the same time, organisations that tentatively embark on inside-out initiatives rarely embrace the bold moves needed to adopt digital technologies early and at scale which, according to research from McKinsey, correlates highly with value creation when combined with the substantial allocation of resources against digital initiatives and M&A activities.

Moving boldly doesn’t mean moving thoughtlessly, however. Bold action and the ability to learn are highly interrelated. The real-time ability to learn during a crisis is, in fact, the one ingredient that can turbocharge your ability to pivot, react and grow quickly.

Fundamentally, inside-out transformations often fail to deliver expected results because most technologies only provide the possibilities for gains, not the gains themselves. If change is not driven by consumer demand, or the organisation’s people lack the right mindset to change, or organisational practices are flawed, then digital transformation will simply magnify those flaws.

Behnam Tabrizi stated in a recent HBR article,

There is no single technology that will deliver ‘speed’ or ‘innovation’ as such. Digital transformation works when leaders in organisations focus on changing the mindset of its members as well as the organisational culture and processes before they decide what digital tools to use and how to use them. What the members envision to be the future of the organisation drove the technology, not the other way around.

How did COVID-19 impact digital transformation initiatives?

To many, the COVID-19 crisis was like a time machine – seemingly transporting us into a future world in which technology is central to every interaction. It forced organisations and consumers to adapt, almost overnight, to a world in which digital channels became the primary (and, in some cases, only) customer-engagement model.

What worked before to attract, engage and retain customers may quickly become obsolete.

Beyond this, automated processes have become a primary driver of productivity—and the basis of flexible, transparent, and stable supply chains. A world in which agile ways of working are a prerequisite to meeting seemingly daily changes to customer behaviour.

If a silver lining of the pandemic can be found, a contender may be the falling barriers to experimentation and improvisation among organisations to adapt to the circumstances. The way an organisation learns from and actively adapts to the crisis will profoundly influence their performance in whatever ‘new normal’ comes from it. Those that are able to make improvements ‘stick’ will likely be more robust and successful in future.

Acting boldly

Now is the time to reassess your digital initiatives. Now is the time to ask yourself: What are the bold digital actions we’ve hesitated to pursue in the past, even though we’ve known they would be required eventually?

Strange as it may seem, right now, in a moment of crisis, is precisely the time to boldly advance your digital agenda. Playing it safe now, even if feels like the right thing to do, is often the worst option.

If you'd like to discuss how an outside-in approach could transform your business, talk to us today, we’d love to help you.

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