By Barry Libert, Megan Beck, Jerry (Yoram) Wind
An organization is essentially the sum total of its physical, financial, human, intellectual, and relationship capital. Different industries and different business models have always maintained different percentages of these asset types. Manufacturers invest most of their capital into physical assets, while high-tech firms invest in R&D to create new intellectual capital. But all assets are not created equal, especially as the technological landscape changes.
In today’s market, tech platforms enable IP and relationships to scale rapidly, and at near-zero cost. This is the phenomenon that has led to exciting platform businesses like Facebook, LinkedIn, Match.com, Uber, and Airbnb. Even when these firms rely on physical assets, like cars for Uber, they own the technology, not the physical asset. Meanwhile, the laggards continue to spend their time and money on assets that do not scale so easily — physical goods (such as manufacturing plants or inventory) and human capital (such as highly trained employees that deliver services). Digital transformation requires that companies reallocate their asset portfolio to support new, digitally enabled business models.
There’s no question why legacy organizations are tackling digital transformation now. Digital native upstarts are gutting traditional industries one at a time, leveraging scalable technology and participative networks. But shifting a firm’s asset portfolio is a lengthy process and is fraught with uncertainty for leaders comfortable with older asset types.
Although the transformation will look a little different in every organization, we use a five-step process called PIVOT with our clients.
The first step is to pinpoint your starting place. That includes identifying your current mix of assets and the business model that your asset portfolio creates. For example, do you make and sell things, hire skilled employees and provide services, develop and new IP like software or pharmaceuticals, or build and manage digital networks, be they transactional, informational, or social? Taking a clear look at your starting point will enable you to understand your strengths and weakness, and identify the long-term habits that you will need to shift and eventually transform your business.
Second, make a complete inventory of all your organization’s assets. Begin with the easy things that you have always tracked — and physical assets such as plant, property, and equipment. From there, you will delve into the less-well-known intangible assets such as the talents and skills of your workforce, the IP that exists within your organization, and networks of people and organizations that exist outside the traditional boundaries of your firm. These assets are typically overlooked, undervalued, and under-managed. In particular, look at your networks with care to determine their size and affinity. Partnering with a valued and interested network is the best way to dive in.
Third, visualize a new future as a digital network where your firm partners and co-creates with one of your external networks. Customers and suppliers are common choices, but there are many networks to consider, including alumni, distributors, integrators, investors, communities, and even competitors. The goal is to identify a way that your and your network can create value together, using both your assets and theirs.
In this business model, you will also both share in the value that your network creates. This is a difficult step, but consider the four types of assets as you brainstorm how you and your network can create value together. You could offer access to physical assets like Airbnb and Uber, generate new IP or content like Yelp and Tripadvisor, provide services like TaskRabbit and Mastercard, or generate networks like Facebook and LinkedIn. Consider also the digital platform that would enable this collaboration, but to remember to start with a small investment and plan on iteration as you learn.
Fourth, begin to operate a pilot of your network business by shifting small amounts of capital (including time, talent, and money) to the new initiative. This will require building out a team, funding them, and giving them a lot of space to learn and change quickly with little bureaucratic oversight. Plan on a significant amount of outreach and communication with your target network to ensure that you are creating a platform that they will want to contribute to and a value sharing agreement that they find rewarding.
Finally, begin to track the progress of your network initiative. This will require reporting on new metrics. You will need to add key performance indicators (KPIs) specific to the digital network model, which are likely entirely new to your organization. Dashboards usually include metrics such as number of interactions on your digital platform (sales or other), number of active network partners, value created, for both the firm and its partners, and the overall sentiment of the network regarding its collaboration. Standard financial metrics like revenue and profitability are important, but as with any new initiative, it will take time for this model to prove itself and begin creating net value for the organization.
Organizational transformation must begin with a leadership transformation. So make sure your board, CEO, and the rest of the leadership team is fully supportive and ready to prioritize differently and change the asset mix. If not, your transformation is sure to stall out. We have seen many transformations, not just of the digital variety, fail due to infighting or lack of commitment. Digital transformations, however, face even more risks because they require brand new skill sets and mindsets.
Despite all these risks, digital initiatives are on the slate, and should be, for most firms. We’ve seen how dramatically digital platforms have upended long-established industries across the spectrum from hotels (Airbnb and VRBO) to music (Apple and Pandora) to recruiting (LinkedIn) to retail (Wayfair and Amazon). Legacy firms must prepare themselves, and hopefully get ahead of, the wave of digital transformation or risk being washed away like Kodak, Blockbuster, and Encyclopedia Britannica.