Digital Transformation vs. Exponential Transformation

By Tristan Kromer

Everyone is launching a transformation — mostly digital transformation, but also lean or agile.

But few of them actually want it. Even fewer need it. And even fewer know what transformation actually means.

They want the growth of Uber, the brand recognition of Apple, and the profits of Google. They want their stock to be valued at 20x revenue like a tech company instead of 2x revenue like a retail outlet.

 

If you want a payoff from digital transformation, you need to invest in exponential transformation.

 

But just “going digital” isn’t going to make that happen. In fact, 70% of digital transformations fail.

In 2012, Proctor & Gamble said they would be “the most digital company on the planet,” but its broad goals failed to translate into specific wins in a difficult economy.

In 2014, Ford Motors created a whole digital division, but since it was separate from the rest of the company, it didn’t work well with the traditionally managed divisions.

In 2015, General Electric began spilling billions into GE Digital, only to watch their stock plummet because they focused on its size instead of its purpose.

You don’t want digital transformation. You don’t want lean transformation. You don’t want agile transformation.

You want exponential transformation.

Digital Transformation Isn’t Just Building an App

Right now, your business may rely on sales people calling retailers and convincing them to stock your products. It might rely on a logistics department driving store to store to deliver stock, collect payments, and take inventory on what was sold. All of this human-powered effort will naturally introduce errors into your records and the need for frequent audits. It would be great if you could just digitize the whole process.

But just dumping everything onto an app is not going to work. You still have to focus on the customer. Do they want an app? Do they need to be trained on it? Is there even internet access at their location?

A good example of a company that did it right is CBUSA, a network of homebuilders that was built on the strength of personal relationships. Their business model is all about bringing as many custom and independent builders together as possible, and pooling their purchasing power to get favorable prices from large vendors. They knew they needed to become a digital company to grow, but they recognized that just building an app wouldn’t do it.

Strong vendor and customer relationships don’t transfer to a digital medium overnight, and some of their customers had limited familiarity with digital tools. And no matter the industry, replacing personal contact with an app always comes with the sense that something important is being lost, no matter how handy the app proves to be.

You can't just throw your business onto an app and call it digital transformation.

CBUSA invested in the time required to understand the ins and outs of why people loved being a part of their network. They empathized with their customers and listened to their problems and pains. With that information, they found a way to create a digital presence to make purchasing smoother and simpler that complemented their existing business model.

It worked well for them — they were soon acquired by the software company CoConstruct (which in turn was acquired by Buildertrend).

Your ability to go digital is largely limited by the adoption curve of your customers. You may want customers to order from an app or navigate your automated customer support system. But if your customers are on a construction site far from a cell tower, an app isn’t going to help them. It might frustrate them instead.

If your customers aren’t ready to go digital, it’s very hard to force them.

Digital Transformation Isn’t Just Cost Reduction

Companies like to justify digital transformation by looking at it like a capital expenditure that will produce a Return on Investment (ROI) in the long run by driving down costs. But that’s only a small part of what going digital does.

Music is analog. The sound of Miles Davis playing Birth of the Cool is 100% pure qualitative bliss. Music used to be recorded on analog tapes. Yes, because that’s the technology we had, but also because it sounds damn good. Even today, some musicians like to push their recordings through analog machines to give them a “warmth” that analog provides.

Improving technologies usually means some form of tradeoff. Even going from a live performance to an analog recording loses something. Most people would rather see Beyonce perform live than on TV. By definition, a lot of valuable data is lost when we reduce it to pixels. Whether going from live to analog or analog to digital, we’re losing something in the process.

But we get a lot in return, including the ability to manipulate.

Entire genres of music have been built on the manipulation of digital information. The trip-hop of De la Soul, the electronica of Moby, the robot pop of Kraftwerk, the new wave of Depeche Mode, the ambient sounds of Brian Eno, the industrial chaos of Ministry, the G-funk of Dr. Dre — all made possible by the ability to reduce sound to a series of ones and zeros, giving us the ability to analyze and manipulate data.

We can do the same in business.

The Tradeoffs of Digital Transformation

When we shift sales from a person to an app, we lose a lot of qualitative data. We don’t see the customer’s body language, we don’t hear the rising pitch of their voice when they emphasize their biggest pain point, we don’t get the now that you mention it moments that come from the casual interaction in a sales call.

But we gain quantitative data. And we get the ability to analyze and manipulate that data.

We can run algorithms against the percentage of deals that we win and see which salespeople are outperforming their peers. With more sophisticated sentiment analysis of sales-call transcripts, we can even improve our ability to predict which sales will close, and offer specific advice to salespeople based on the amount of questions they ask and what percentage of the call they are speaking instead of listening. We can identify anomalies like a sudden drop in purchasing from one client that might signal a change in market conditions or a competitor making them a better offer.

We could do this with a spreadsheet, but we can also do this with a sophisticated machine-learning algorithm. All this is possible by discarding some of the analog data to focus on the quantifiable numbers.

Of course, some companies do this to their detriment. By shifting too much of their focus to immature algorithms, they ignore the qualitative data. They may see that they have lost sales, but they don’t know why. Or they may find themselves unable to grow because of a qualitative option they haven’t considered.

A good quantitative analysis can tell us that something has happened, but it won’t always tell us why. If companies lose the qualitative connection to their customers, they often only know when something is going wrong after sales drop. An observant salesperson might have noticed the body language of the customer shift, or listened more closely to their complaints. Without that salesperson having a face to face meeting, the qualitative data is lost in a sea of ones and zeros.

 

Without qualitative data to complement your quantitative data after a digital transformation, you can get lost in a sea of ones and zeroes.

 

When we go digital, we have to understand what value we are trying to capture. We have to make sure we don’t throw away valuable analog data that we can only gain from human relationships. Click To Tweet

Exponential Drivers

The fundamental issue here is that simply digitizing our sales, marketing, and production doesn’t fundamentally alter our business model.

Imagine a perfect robot who observes every part of our business and records every bit of data. We connect the robot to biosensors to measure the heart rate of our salespeople, to cameras in our cubicles to measure productivity, and to lie detectors as part of our customer surveys.

What have we accomplished?

We now have tons of data, but nothing has changed. Our business operates just as before except now we’re paranoid about all the cameras. We have to do something with the data, and that means changing the business model.

Digital transformation enables a change in business models. But that change must be intentional and purposeful or it will not happen. Click To Tweet

In the book Exponential Organizations (highly recommended reading!), Salim Ishmael articulates eleven drivers of exponential growth:

 

The book Exponential Organizations articulates eleven drivers of exponential growth.

  • Massive Transformation Purpose
  • Interfaces
  • Dashboards
  • Experimentation
  • Autonomy
  • Social
  • Staff on Demand
  • Community & Crowd
  • Algorithms
  • Leveraged Assets
  • Engagement

Only one of these is explicitly digital (Algorithms), and two directly related to data (Interfaces & Dashboards).

A company like Upwork is valuable not simply because it is online, but because it has no assets that drag down costs. It sells other people’s services. The same with Uber and AirBnB. Digital technologies may enable these companies, but the business model driver is Leveraged Assets.

Organizations and movements such as RAICES and Black Lives Matter are exponential not because they are digital, but because they are powered by communities organized around a common cause. Again, digital technologies enable them, but the business model driver is the Community.

Perhaps no large company is as famous for embracing Experimentation as Amazon. From the Fire phone to their initial attempt at video streaming called Unbox, Amazon has had more than its share of failures. But from the lessons of Unbox came Amazon Prime Video. From a small API for self-service inventory data, Amazon experimented its way to the $45 billion dollar juggernaut of Amazon Web Services. A book store became the leading cloud computing provider, beating Microsoft, Apple, Oracle, IBM, and Google to the punch.

Instead of engaging a loosely defined plan for digital transformation, start by understanding your business model and what drives it. After you understand that, you have to determine how you can transform your business model to take advantage of some of these exponential drivers.

Only then, once you have a vision for how your business can operate by leveraging exponential growth, should you begin to digitize anything — and even then, only digitize what you need.

Lessons Learned

  • Digital is an enabler of a business model, not simply cost reduction.
  • Don’t lose the qualitative edge as you gather quantitative data.
  • Go exponential, not digital.

 

Thinking about transforming your company?

Take our Business Model Design Workshop