Robin Sparrefors
Principal, Head of Business Development
At a glance
- Digital innovation organizations are being set up to build new digital business, but few reach scale because they are unable to move from strategy to execution.
- This “execution gap” is created by lack of critical mass in digital skills, lack of speed, and lack of success cases to prove and communicate the value of the digital endeavor.
- The digital innovation organization needs top business and technology skills, which can be addressed e.g. by making ‘anchor hires’ and creating a ‘bridge organization’ with a partner to catalyze execution.
- The organization needs speed and must quickly prove itself, e.g. through ‘proof of value pilots’ targeting short-term value in strategically important areas and through ‘expedited governance’.
- With success cases the organization can show it is self-sustaining and thereby motivate investments to scale, and create inspiration to the workforce and for new talent.
1. Why digital innovation organizations fail
Many companies are setting up digital innovation organizations to explore, build and scale the digital business. Their mission typically includes expanding the current portfolio with digital products, creating new revenue streams using digital business models, and/or digitalizing internal operations and supply chain. However, it is well established that most will fail this mission.
To reach the scaling phase – and all the obstacles and challenges the scaling phase brings – a new digital innovation organization must overcome two critical steps; to qualify to launch and to bridge the execution gap.
The qualify to launch phase includes three essential parts:
- Strategy development: Setting a focused aim for the organization that clarifies what digital shall do for the business and makes strategic choices on what to do and what not to do.
- Operating model: Designing a fit-for-digital organization with processes and governance geared for systematic, fast and software-heavy agile innovation.
- Case for change: Building an inspiring and top-anchored change vision that motivates people to pursue the change journey, supported by a solid business case and benchmarks.
Exhibit 1
Phases in a digital innovation organization's journey to get to scale
How well the qualify to launch phase is performed will determine the probability of success of the digital innovation change journey, but it does not have to be perfect – only qualify. As long as the principles and direction are right, designing the right digital innovation strategy and operating model can – and preferably should – be an iterative process over the change journey. The most difficult phase can instead be moving from strategy to execution. Even excellent innovation strategies and operating models can fail to bridge the execution gap and many companies never make it to the scaling phase.
2. The gap
The execution gap can be described by comparing a new digital innovation organization’s ability to execute with the attractiveness of the change and benefits it promises. When the qualify to launch step is successfully completed, the attractiveness of the change to top management, business owners and to the people directly involved in the journey is high. The business potential is typically significant and outweighs the costs and risk profile of the change. The new digital innovation strategy sets a clear “north star” and people are excited to get to work in the new agile and high-paced operating model.
The organization’s readiness to execute is however often low since few companies have the capabilities and capacity to execute on a new digital innovation strategy from day one. Getting a new digital innovation operating model up and running is difficult and requires effort.
This is where the gap presents itself. If the organization’s ability to execute is not rapidly improved and success cases producing real business value are created, the attractiveness of the digital innovation organization will fade. Depending on the size and dignity of the initiative, new digital innovation organizations may not have more than 6-12 months to prove its value and be ready to scale. Otherwise the new organization will be written off as another failed digital attempt and give place to new initiatives that shall drive the company’s digitalization. Not bridging the execution gap can prove to be very costly both for the company and for the involved individuals staking their time and reputation.
Exhibit 2
The gap when moving from digital innovation strategy to execution
The gap can come in many forms. Three common ones are:
- No critical mass: High-performing digital innovation organizations require the combination of deep software development skills and business-building skills. Many underestimate the undersupply of digital talent and the effort needed to build in-house digital innovation capabilities. Companies often have a desire to transform current R&D organizations into agile teams. But, changing the methods and mindsets of existing staff will not happen overnight. When they look externally to recruit, they find themselves competing with big tech companies, rapidly growing start-ups and other new competitors that are paying top money for AI experts, data scientist and architects, UI/UX designers, DevOps engineers, and digital business hunters.
- Too slow: Speed is of the essence. In digital business environments, the longevity of opportunities is much shorter compared to traditional business. If execution on strategies to capture opportunities is not fast enough, their value will quickly be reduced. The market will have changed, or competitors will have made the move faster. In addition, if the new organization cannot prove its value rapidly enough, top management’s attention will soon be exhausted. The case for change will not hold up, scaling is no longer a top priority and the organization will lose its mandate.
- Lack of visible success: The organization must prove to be successful in order to keep and free up new resources; both in terms of money and people. New organizations typically have some investment funds to get started but soon need to cover its own costs. If realized benefits cannot be effectively communicated so that the potential of the organization is evident, further investments to reach scale will be difficult to rationalize. Change fatigue is at the same time common even in innovation organizations that understand the need to constantly evolve. If the new organization cannot tangibly visualize its success, infectious naysayers and the comfort of business as usual will soon deplete people’s willingness to change and momentum will be lost.
3. The bridge
Exhibit 3
Skills, speed and success cases are key to bridging the gap
Skills
People trump process every time. The best bet for how to cross the execution gap is to fill the new digital innovation organization with not just good, but the best people. Given that a successful digital innovation organization requires both top business and software technology talent, this is not an easy task. Two ways of overcoming this are ‘anchor hires’ and a ‘bridge organization’.
Recruiting a small number of “brightly shining stars” that can lead the way and anchor the way of working in the new model is a key to success. Externally recruited top people signals that the company is serious about digital innovation. They are also good PR as people will want to work with and learn from high-caliber people. Anchor hires can also be internal; appreciated leaders or rising stars with proven track-records and enough clout to navigate internal politics to make change happen.
Rapidly building a complete in-house digital innovation capability is hard, especially with the current hyper-demand on digital talent. It is therefore natural to look externally and engage with an ecosystem of partners. A common mistake is to set up arms-long relationships with vendors and “throw things back and forth over the fence”. This approach is ineffective from a learning perspective and does not help to build the required critical mass internally.
By instead integrating a bridge organization with key people or whole teams from carefully selected partners directly into the new organization, critical mass of skills is temporarily created, and execution can quickly get up to speed. The bridge organization is gradually phased out as the in-house capability is built up. This is typically done through 1:1 hiring and on-the-job training to seamlessly transition into steady-state while accelerating the organizational learning. The bridge organization also acts as a change agent in the new organization and ensure the infusion of wanted methods, norms and behaviors from the inside.
Speed
Slow and steady does not win the race. Pace and change are characteristics of digital business environments. A new digital innovation organization must quickly prove itself and the value it can create. To do so, two things are key; ‘proof of value pilots’ and ‘expedited governance’.
Proof of value pilots target opportunities with large short-term value potential in strategically important areas and aim to prove that the new organization works. By iteratively testing and refining the new operating model in real situations that matter to the company, and quickly developing new digital products released and tested with a delimited scope of customers, the pilots create evidence of the new organization’s feasibility and business potential. Each iteration creates improved readiness to scale, and proof of value pilots gradually builds confidence in the new model, which creates a springboard for ramping up.
For pilots to be successful, they cannot be being slowed down by other parts of the company. Decision making must be fast and commitment to scale must be secured. Hence, the new digital innovation organization must break free of any existing structures and business as usual processes that might slow down execution and prolong time to business impact. An expedited governance model is needed with e.g. decision mechanisms, risk and control procedures and IT management structures that are faster than the ordinary. At the same time, governance models that challenge existing governance and control procedures too much risk creating unjustifiable friction and therefore being invalidated and shut down. One common way ahead is to create a “fast track” with clear interfaces to existing governance, that can utilize existing structures and adapts them to be fit-for-purpose – and faster.
Success cases
Success originates from having the right skills and speed, but the “power of the example” should not be underestimated. Demonstrating real impact on the company’s business is important for two reasons; to be ‘self-sustained’ and thereby motivate investments to scale, and to inspire the workforce and attract new recruits through ‘seeing is believing’.
It is rare that all pilots are successful, but they should be selected so that if at least one is a success, it generates enough cost savings or new revenue to offset the initial investment and has the potential to significantly impact the company’s profit and loss when scaled. Self-sustaining success cases do not only mean that the new organization breaks even, they also build confidence in the new model, help convince naysayers and help make the case for further investments to reach scale.
Success cases are also a great source of inspiration – both for the people in the new organization and for internal and external new recruits. Bigger success is of course better, but the wins do not have to be huge. As long as they are concrete examples with real impact that showcase what is possible to do, they will be very powerful in motivating people. Since it is much more attractive to join a winning team, success cases of are also terrific for employer branding and will help build the reputation of the new digital innovation organization.
CASE: Bridging the gap in Industrial IoT
‘Big Industry Ltd’ had been going at digitalization for years without any significant success in the market. Multiple digital innovation initiatives had come and gone. A handful of teams in different business units were innovative using digital technology, but it was mainly “innovation theatre”, scratching the surface without reaching scale and achieving any real impact for their customers or the business. Given the rapid digitalization of the industry and facing the risk of falling behind competition, the company tried a new approach to setting up a digital innovation organization.
The starting point was two external anchor hires. The duo combined the business acumen of a senior former management consultant who had spent the past years leading the digital transformation of a large industrial company, with the deep software technology skills of a self-made Silicon Valley serial entrepreneur. This gave the company two high-caliber leaders with proven track-records that could lead by example. When the duo was complemented with a senior R&D manager who had credibility within the internal innovation community and the right connections in the company, the right team to lead the new organization was in place.
They set a clear vision for what the new organization should achieve and focused on one identified cost saving opportunity in the value chain, which they expected could create a large profit pool with the right set of digital products and services. A new organizational design was created, equipped with an iterative execution model with continuous learning loops and fast decision making.
When the aim was set, they started with proof of value pilots, where one became a real success. With a small team of developers and working only for 6 weeks, they created a turnaround for a recent failed launch of a digital product. By focusing on user-centric UI/UX and creating a more intuitive collaboration platform, they tripled the market penetration rate for the product within weeks of making the new version available, and customer satisfaction rates skyrocketed.
The new organization leveraged this and additional follow on success cases to prove that it was self-sustaining and thereby freeing up enough investments to scale up the digital innovation organization from 20 to 200 people. The success cases also helped attract top talent from some of the largest tech companies in the world and top talent developers from prominent start-up communities.
The digital innovation organization eventually created so much success that it became the company’s new flagship and was transformed into a full-fledged business unit, responsible for fueling the future growth and profitability of the company.
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4. Conclusion
When the right digital innovation strategy is in place, a fit-for-digital operating model is designed and the case for change is clear, the crucial part of establishing a digital innovation capability begins; moving from strategy to execution.
To bridge the execution gap where many new digital innovation organizations fail, three factors are key:
- To achieve critical mass in digital skills by securing a small number of ‘anchor hires’ that can kick-start execution together with a temporary ‘bridge organization’ with top talent from partners;
- To ensure speed to results through ‘proof of value pilots’ and ‘expedited governance’ that legitimize the new organization and the value it can create; and
- To generate visible success cases to show that the new organization is ‘self-sustaining’ and thereby motivate investments to scale, and inspire the workforce and attract new recruits through ‘seeing is believing’.
