Podcast #81: Breaking Out of Digital Transformation Gridlock

Good day everyone, and welcome to the latest Momenta Podcast. My name is Leif Eriksen, Insights Partner here at Momenta, and our guest today is Christian Sønderstrup, Digital Transformation Consultant & Adviser. Christian has spent his career helping organizations navigate the digital transformation journey, including most recently in the renewable energy industry. His experience includes Chief Digital Officer Service at Siemens Gamesa, and VP Head of Smart Data at Vestas Global Service.

Today we’re going to discuss Christian’s perspective on how industry can overcome the roadblocks and make progress on the digital transformation journey. Welcome Christian.

Thank you. Thank you for having me Leif.

Let’s start with a little bit about your background, and how you got involved in the digital transformation arena, and maybe even talk a little bit about your optimism about the future. You know it’s a challenging time for a lot of organizations, so tell us what you found over the course of your career, and how you got to where you are today.

Throughout my career I’ve always worked on strategy, and the question of how companies become substantially more successful, independent of their starting point. More successful is not just incremental, ‘Let’s make it two percent better next year’, it’s really steep changes in performance I’ve always worked on. In the very early days, I did that as a McKinsey consultant, and subsequent to that I had roles like Head of Business Development, Corporate Strategy, VP of Transformation, and as you mentioned latest as Chief Digital Officer at a large industrial OAM.

As you work through the problem of becoming more successful, then at some point digital came, and digital is just a suitcase term for a slew of new technologies. You can now use those to answer the same question, how do we become successful? And that was sort of my transition into digital, I actually see digital and all those anthologies as tools to become more successful.

I’m super-optimistic about the future, not just for industry but for all companies, there’s the 4^th Industrial Revolution where all of these digital technologies allow for so many new opportunities, both on the individual tasks, or on value proposition changes, but also new business models, and entirely new industries, and that just an exciting space to be in where all of these changes are happening at the same time.

Yes, it’s exciting but for a lot of people it’s also kind of scary, because it means change.

Yes.

If we look at what’s happened in other industries, and here at Momenta Partners we’re primarily focused on the industrial and infrastructure sectors, but if we look at industries like retail, or where Amazon came in and disrupted the industry, and media or Netflix was and still is a tremendous disruptor. How do you see this playing out in asset intensive industries, such as energy and manufacturing? Do you envision the same kind of dynamic eventually playing out? We don’t see it today of course, but eventually playing out. And if not, why not?

I think we’ll see massive disruption also in industry, but it would not take the same blockbuster form as Netflix, Amazon, or Spotify, but it will still happen. I think the reason we’ll not see these blockbuster things has to do with the industry structure, and that each industrial subsector is very different, it has different industry structures and values created in different ways throughout those value chains. So, we’ll see disruptive companies, but they’ll be niche players. They’ll come in and take slivers of value that can be harvested with digital technologies, that will certainly happen, but they’ll not be these big blockbuster things, it will be many small things. Because digital, and the value from digital is real, and predictive analytics, which I know fairly well, you can easily harvest 3 to 10 percent of improvement, and somebody will go and do that. Hopefully incumbent companies do it themselves, but if not, they’re leaving money on the table and somebody else will come and do it. So, we will see that transformation, and money and value being moved up and down the value chain but will materialize slightly differently as we’ve seen in other industries.

What you’re saying basically is, it’s inevitable in some form of fashion. When you say ‘niche players’, will they be brand new players coming into the industry from outside, or do you think it will be a smaller player within the industry that will innovate faster than their peers, and disrupt their peers?

We’ll see both start-ups and innovative players within the industry. The start-ups often have the advantage, but they don’t have legacy, and they don’t have a core business to maintain and keep focusing on, so they can go strictly after what is disruptive, and move much-much faster than incumbents. Hence, I’m inclined to say we will see quite a lot of start-ups, very niche players developing a solution somewhere in that particular sub-industry, and most likely get acquired afterwards. Most often because they develop something and then an incumbent will say, ‘Well, this is strategic for me, I should own this piece of technology as part of my value chain, and my value proposition. I was asleep at the steering wheel’, or, ‘Our organization didn’t have the skills to develop it’, and then they get acquired. But the value is created and captured by these start-ups, and then internalized by incumbents.

Interesting.  So now that we’ve set the stage for how it may play out, what’s holding it all back today? Why aren’t we moving, again like we’re seeing in other sectors and sub-sectors? Is it the technology, is it the culture that many of these traditional companies have? Is it available resources, funds, people to develop this stuff?

I think there are many contributing factors. In my experience, one of the biggest impediments in going after these opportunities, and harvesting them fastest, is the organizational culture, the mindset, and the nurture of just large corporations. Digital requires a different mental model than we might have seen elsewhere. Digital by its nature is easy to change where industrial goods are slow to change, you make a capital good asset, and it sits there, you’re very worried that you might have health & safety risks, that it might explode etc. So, the development processes are very slow, and for very good reasons, like driver stage model, and you take your development through that, and for good reasons.

One of them, now comes digital that requires a different operating model. Few companies are able to do both at the same time. Most that I’ve seen, they sort of take the existing model, ‘Ah, let’s apply this’, because it works really well for us when we design a widget. It works really well, let’s do digital technology, digital solutions with the same approach. That certainly fails, and few companies are able to harness two operating models in the same organization, at the same time, and get those two to play together: for instance, a stage-gate model, and an agile model with two-week spreads. It’s very difficult for organizations to harness those two mental models at the same time.

Yes, I can imagine, and you’ve had some first-hand experience of some of those challenges.

I have.

It sounds like a fairly generic thing, that all industries we talk about cultural literature the way they develop products etc., but will there be any variation from sector to sector, subsector to subsector, and if so, do you have some thoughts on how that might be?

Yes, I think the organizational challenge, and the cultural challenges are going to be fairly the same across subsectors. I think however the way opportunities from digital manifest themselves will be very-very different by subsector. Let’s take for instance smartifying your product, I think many industrial companies these days are going through the IoT enablement of them, collect data, make intelligent predictions, optimize usage, foresee failures, automating, predictive analytics, remote reset, remote troubleshooting, all that stuff; those are feasible in some industries, and others not.

For instance, you can smartify a wind turbine or a machine, but let’s say you make tiles, you cannot smartify the tile, you can certainly embed intelligence into your machinery that produces the tile. As such you have two different types of transformation, the first one where you’re smartifying your product, you’re embedding intelligence and AI, machine learning, etc., into your product. The other one is doing it to your internal operations. Those differences might seem subtle, but the organisational implications are very different, if you’re trying to make an intelligent product versus making intelligent processes internally, they pan out quite differently and require very different approaches.

That makes sense, I guess the internal digital transformation perspective versus the outward facing, or customer facing one.

Correct.

I’d like to circle back to your comment about organizational culture and inertia, and what’s become clear in the last few years, and we’ve certainly seen this at Momenta Partners with our customers and clients, is that it’s very hard, it’s harder than most executives realize to make this transition. First of all, is that fair to say that this stuff is difficult? And if so, what can executives in digital industry and the industrial and infrastructure spaces do to get past these challenges, and successfully navigate the digital transformation journey?

To your first question you’re right, this is hard, this is not just incremental change, digital is transformative change, so it’s not just your next project, because we know how to do projects as companies, we know how to do that; you define your end stage, you define your project plan, enough of the team goes with the steering committee and milestones, so we know how to do that. But digital transformation is not just another project, and that’s why we struggle. So, what can companies do?

I think there’s a number of things. The first step is to really recognize that it’s not a project, the transformation is not a project, the project has a defined start and a defined end and outcome. This is a journey, and what we’re seeking to change often is the very essence of the company, or the very essence of the product. We’re going from, we are a widget manufacturer, to we are now a tech company or a digital company that happens to also make their widgets. That journey touches on identity, touches on culture, touches on the way the operating model, and the DNA in the collaboration models in tech companies work. If you’re not very aware that’s what you’re embarking on with the digital transformation, then you’re bound not to take it seriously enough, and dedicate enough senior leadership resources to think it through and lead that process.

I think the first step is recognizing that this is a digital transformation, and it really is about culture and change.

Second step is, being very clear on what is it you want to do with digital. I observe it at three different levels; what is it you want to do with digital? The one that gets most of the media buzz is what we’d call disruption, so a startup company reinvents taxis, Uber, or reinvents hotels, Airbnb, or the way music is consumed with Spotify and streaming. That type of disruptive innovation and inventing new business models, this is one way you could go about your digital transformation. That is very hard for incumbents, because often it entails that you canalize yourself. But that’s one level or one way that digital transformation of digital strategy could manifest itself.

The second one is, and I alluded to it earlier, is you smartify your value propositions, you put sensors on it, you have remote monitoring, or you have AI embedded in your devices, or you can talk to it using actual language programming etc. That’s the second type, and you don’t necessarily disrupt anything, but you do reinvent your product, and that requires a different approach. So that’s the second way you could articulate what it is you want to do.

The third way is that you take the same toolbox essentially, but you use it for internal operations. So again, you could use it in machine learning, or robotics, to manage inbound logistics manufacturing, out-out logistics pricing, finance etc., but that’s about internal operations. What I often see is companies are unaware of whether they’re doing

1) Disruption.

2) Reinventing their product and value proposition.

3) Improving internal operations.

And if you don’t know which one of them you’re doing, or maybe you want to do all three, then surely if you don’t know what you’re doing, or are intending to do, you’re bound to get it wrong, and organize yourself inadequately to achieve whatever it is that you’re experimenting with.

The second step is really becoming very clear on whether you’re doing one, two, or three different digital transformations in parallel. I think that’s a very important second step.

The third is humbleness and willingness to learn. The world hasn’t done this before, there are good case examples of companies that have done transformations, but many of those examples don’t necessarily transport very well into industry, so look at some of them. There are successful companies that have done digital transformations, most of the ones I know are actually software companies, we have Adobe that went from sort of perpetual licenses, to cloud, we have Microsoft who reinvented itself from being operating systems, to be a platform play with Asher. We have Amazon who went from just a retailer on online books, to becoming an online retailer, plus a lot of other companies, including cloud.

Those are great examples, but they don’t transport very easily to industry, or a company making widgets. Hence, you have to just say we don’t know, and there’s no-one we can copycat, we have to learn. That requires a different mental model, so willingness to learn, experiment and learn is probably my third recommendation, or the third step in that combo.

And that in some ways may be the most important step.

Going back to your example of companies in the technology industry successfully doing that, like Adobe and Microsoft, we sometimes forget there are many that didn’t or really haven’t made the transition, whether we’re talking about Xerox or HP, or something like that, even in that arena it’s not a given. I think that goes back to your comment about being agile and constantly learning, if you don’t do that then you’re not going to be successful, do you agree?

I agree.

It’s interesting times for sure. We both share admiration for the late great Clayton Christensen, Harvard Professor, and I think one of the comments he made on a regular basis was that this kind of stuff is not the stuff you learned in Business School. You’ve got to learn how to manage things differently, it’s not the traditional command and control. It’s more again as you say, you have to be in a constant learning mode, you’ve got to be willing to pivot, to acknowledge that the first strategy you chose wasn’t the right on, but let’s pivot, lets figure out what is the right one.

Correct.

Any further thoughts on that in terms of again, how specifically existing executives can pivot themselves if you will, away from a mindset where they have to set everything in stone, and then just pursue that to the bitter end, even when it becomes obvious that it’s not the right strategy.

I do have quite a lot of thoughts on that, let me try and simplify in central themes. I think we’re living through a time where the paradigm, mental model, and business is changing. So, as Clayton Christenson said, ‘Not everything you need to know today you will learn at Business School’, we still only that that theoretical foundation of what we did learn. So, we learnt balance score cards, carrot and sticks; if you incentivize people in the right way, they will do what you asked them to. We learnt about business cases and PV calculations, and how to do the trade-off between MPV and IRR. We have that toolkit very developed, and that mental model is sort of internally consistent.

However, it doesn’t serve us very well when it comes to digital, because we don’t know the answer, we can’t actually calculate an IRR, we can assume a bunch of stuff, but most of that is just wishful thinking. So, we have to let that toolkit go, and adopt a new toolkit around empowering teams, being surmount leaders working in pursuit of some greater purpose, that empowers the team to solve the problems along the way. If they know why we’re doing stuff, then they’re more likely to figure it out themselves, as oppose to delegate the question or their doubts up the chain of command. That is a very different mental model from what we’re taught in Business School.

So, my advice to other executives is, start exposing yourself to this new world. Systematically read articles on digital transformation, go visit startups, not because you can copy-paste what they’re doing, but to see the way they work, to see the way they collaborate, how they organize themselves, the environment that brilliant minds thrive in. Read newsletters on machine learning in AI; I subscribe to quite a few including one from Andrew Ng, I understand maybe fifty percent of what they write, but every single newsletter I get a new idea for. ‘Ah! If research could solve this problem, then we could also solve that problem, that is a problem I’m familiar with’.

Those are things I would recommend other executives do, expose yourself systematically, start learning, you may not get it right the first half-year, the first year, but if you’re not learning you surely won’t get there.

That’s some great advice, change is happening at a faster pace today than it ever has. So, where do we go from here? Particularly for the industrial infrastructure worlds, what can we expect, and what are some of the wild cards over the next 3, 4, 5 years as we enter this decade of the 20’s?

Where we go from here, all incumbents they need to start trying. If they’re not trying or running, or trying to win, then they will lose, because the competitive forces will make sure that somebody else goes and takes their pie. So, first, start running and start practicing, and we need to run to stand still. I think we will see many companies emerge, as we discussed earlier also in the industrial space. Finding specific solutions in your value proposition, and if you can’t develop it then go acquire them but go to it early and embed that talent into your organization and use that. Most acquire a capability or a specific solution, but also as an acquihire, you’ve just acquired a team of potentially very talented software developers, and data scientists, keep them in your organization and help yourself grow your organization further. I think that is the only way to go.

That’s all great advice. So, we typically wrap these things up Christian by asking what you’ve read recently, what books you would recommend reading; they don’t have to specifically be this, but what’s intrigued you recently in your reading list?

Clayton Christenson’s book on ‘Innovator’s Dilemma’, I think it’s a great read, it might be 20 years old…

A classic but still relevant.

Its classic, still very relevant, and if you look at your industry through his lens you will be amazed at what you could foresee.

I then would recommend reading Simon Sinek’s book, ‘The Infinite Game’, because he’s actually challenging our mental model and our core understanding of business, and how to view businesses. I think he is onto something that is right about how you lead the decision businesses in the 21^st Century, and how you lead armies of very-very talented people to solve difficult problems, and if you don’t pivot to a new mental model, but stay in the old industrial mental model, you’re bound to lose when you’re up against digital competitors. So, I think he has good input, and great insight, and we should learn from that and evolve our leadership skills from there.

I’m not as familiar with the second one, so Simon Sinek, so his focus is on leadership?

Yes, an understanding of your enterprise. So, one of his central theses is, there are two types of games, there is one called the infinite game, and one called the finite game. The finite game is about beating your competition within a defined time period and make them go away. The infinite game is you keep playing and you have to stay just a little bit ahead of your competition until he/she gives up, but you’re never actually done with your enterprise.

If you think about your business leadership in the context of there is a defined timeframe, let’s say a baseball game, nine innings, then you play the game in one form. If you thought it was a game that would go on forever and ever, and as one team left another team would come in and continue playing, you would play the game differently, and you would lead differently, you would coach differently, you’d put your players in a completely different logic than would otherwise have. His essential thesis is we all of us, the purpose of business and business by design and infinite game, that we play that infinite game, with the finite game mentality.

When is business is done, like we know when a baseball game is done after nine innings, when is business is done? It’s not done at the end of the financial year, that’s just an arbitrary yardstick that we’ve put in place. It’s actually never done, so why do we lead our companies with that finite mental model? I think he’s onto something.

Another analogy might be that it’s more like a game of cricket, which at least to those of us that aren’t familiar with cricket, it seems to go one forever!

True, very true!

Well this has been great Christian, this is a great overview of some of the challenges that organizations face, in terms of managing the digital transformation journey. Thank you very much for taking the time to speak with us today.

Thank you for having me.

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