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Disruption, Trust, and starting with “why”

Innovation Executive Forum | Posted on October 16, 2017 by Erika Van Noort

Disruption from external and internal forces puts pressure on a business to adapt. An “IT leader” has become a hybrid sales role. Its mandate: Championing the IT department as a partner for transformative change. In response, many organizations are integrating technology into every facet of their operations.

At our IEF dinner in San Diego, we asked attendees to discuss disruption in their industries and the ways it helps and hinders their organizations.

Choosing self-disruption over destruction.

When we talk about disruption, we often turn to anchor examples like Netflix, Spotify, Uber and Airbnb. Many companies are reconsidering consumption economic models. But, disruption is about reducing friction both inside and outside their organizations.

For example, eyeglass retailer Warby Parker made a critical observation: Glasses wearers paid extreme mark-ups for designer-branded frames, even without lenses, with little value-added. Sales took place through brick-and-mortar stores and optometrists. Co-founder Neil Blumenthal had worked in an eyewear not-for-profit that produces glasses for people living on less than $4 per day. So, why not design frames in-house and sell online? The result was an independent, vertically-integrated eyewear brand that starts at $95 with lenses.

Organizations need to re-imagine themselves and the way they do business or risk losing their competitive edge. Sometimes this means turning disruption inward.

One IEF member described his organization’s success with self-disruption. Over the last seven years, the leadership development training company embraced digital transformation. “We used to have such complex training materials by design because we didn’t want things copied. It was hard to disassemble, but it also cost a fortune to produce and it cost a fortune to ship.” By digitizing production, they reduced headcount and shipping costs. As a result, they achieved their highest gross margins in fifteen years.

Further reading: 5 Top Technologies for Digital Disruption

Regaining control in a disrupted ecosystem.

Disruption often introduces invasive species into once balanced business ecosystems. Sometimes those species change what consumers expect from a business. Airbnb created the expectation of a simple, app-driven experience for finding a place to stay. Now, consumers expect a similar experience in their touchpoints with all service providers.

As several attendees from the restaurant industry pointed out, this has had a sizable impact on their industry. In the past, a customer would place an order by phone or online and then drive to the location to pick it up. Today, as one member explained, consumers expect to place an order with the press of a button and then wait for it to arrive. Furthermore, many restaurants that didn’t offer delivery before feel forced to work with external app-driven services. But these organizations cannot guarantee the same customer experience they would in-restaurant.

“We’re no longer in control of the experience. We’re depending on an intermediary who doesn’t work for our company.”

The result is an operating model that fails to incentivize good service. “Uber Eats has started to adopt a tipping model, which to them was previously a foreign concept as a technology company and a driving company.” This is a problem in an industry where brand and customer experience are paramount.

These new expectations also cause problems from a technology perspective. “You have restaurants with eight different tablets for eight different delivery providers.” None of these disparate systems share data and the technology hasn’t caught up to integrate them. Companies like Olo are on their way to acting as intermediaries between delivery services and restaurants. Yet, many restaurant brands are uncomfortable with these services due to the margin they take out of the product.

Nonetheless, several attendees saw technology as a positive disruptive force in food services. One member predicted lower-cost commodity devices would replace expensive, custom point-of-sale units.  Another member thought the rise of better networks would be a boon. “Today when you lose local internet in your restaurant, you lose some of your functionality. Tomorrow that will go away as 5G and other internet options become available.”

Meanwhile, Amazon’s acquisition of Whole Foods raised some concern in the restaurant sector. “Are they coming for restaurants next?” asked one member. “Whole Foods has always been a source of competition as grocery stores put out better and better ready-to-eat meals.” Incorporating a high-quality delivery experience could prompt a secondary disruption to the industry.

“Being able to control the whole experience could allow them to quickly absorb all the players in the space.” Members agreed that regaining control of the customer experience will be crucial.

Further Reading: Staying Fresh in the Restaurant Industry – Insights from KPMG’s Annual Restaurant Financial Executives Forum

Adapting to external forces.

Disruption can come from any angle. Sometimes, it’s out of an organization’s control. In the healthcare sector, governments can cause as much disruption as the competition. As one healthcare representative explained, “our biggest disruptor is the federal government and state governments and regulatory agencies that force us to keep chasing them.”

In a volatile security environment, safeguarding personal health information is growing more difficult. Unlike a lost or stolen credit card, information such as a social security number is near impossible to replace or alter to prevent misuse. For this reason, the costs of losing a personal health record are steep. At the same time, privacy and cybersecurity regulations are getting stricter.

The cost of maintaining compliance impacts technology vendors as well as care and insurance providers. In the past, providers would choose from specialized vendors in each area of operations, such as records management or operating room systems. Then, a shift from fee-per-service to value-based care drove widespread adoption of more holistic, integrated solutions. The cost of maintaining compliance forced many small, specialized vendors out of the marketplace. “Now you have six large enterprise vendors. I wouldn’t be surprised to see that kind of consolidation elsewhere.”

Another member remarked on the decline of “best-in-breed” solutions across the board. His organization considered abandoning a leading customer relationship management (CRM) solution to put in place a solution that integrated with their existing enterprise resource planning (ERP) system. “Integration is more important for us than best-of-breed. You can’t get a 360-degree view of the customer if your ERP and CRM aren’t connected.”

Further reading: Why Healthcare is Ripe for Digital Disruption

Embracing new sources of trust.

Emerging threats force us to wonder who to trust when it comes to protecting valuable information. Recent breaches have made clear that traditional repositories of such data are no longer impregnable. For brands like Equifax, the members agreed, the brand damage of a breach may be fatal. These kinds of incidents challenge the wisdom of keeping personal data like social security numbers fixed. If they cannot be altered after they’re stolen, they lose a great deal of their value.

The panel also discussed credit card fraud in the United States. The US adopted the Europay, Mastercard, Visa (EMV) standard into its anti-fraud technology stack. But, the drafting of the legislation prevented this from being an effective security mechanism. By preventing the adoption of chip-and-PIN for credit card transactions, as Canada and other countries have, EMV had a minimal effect.

Another member from the credit union industry believed block-chain would alter the way we “transact and trust.” Block-chain uses decentralized information that’s replicated across many nodes. It then employs a consensus mechanism to flag any foreign element that attempts to change that data.

“I see this [block-chain] on the horizon impacting the entire economy and the use of smart contracts and how we do business from a financial services perspective.”

Applying block-chain in areas like user identity management and authentication could remove the need for the old intermediaries.  As the member asserted, this could prove to be a “game changer” in the way we do business in every industry. “I feel like we’re back in the early ‘90s when the internet came out and very few knew how to deal with it. That’s where we are now with blockchain technology.”

When it comes to security, one attendee remarked, “to a degree we’re all playing Duck Hunt. If you get targeted, you’re done.” The sophistication of today’s attackers and their arsenals make complete protection an uphill battle. At the same time, the proliferation of security vendors and a young marketplace make it tough to find a solution that meets an organization’s needs.

“We’re still chasing the hackers,” lamented one IEF member. “I need something that looks forward.”

The members agreed that almost every organization has either been on the receiving end of an attack or been on the receiving end of an attack and doesn’t know it. While many security firms now offer cyber insurance, one member argued, “it doesn’t help your brand” in the event of a breach.

“Security is something you can spend tens of millions, hundreds of millions or billions of dollars on. But, are you a company that can spend that kind of money?”

Further Reading: Blockchain: trust economy (Deloitte University Press)

Starting with “why?”

In the face of external disruption, many IT leaders must champion transformation to the internal business. One attendee in the manufacturing sector explained:

“There are two things that drive us – cost and quality. California is raising the minimum wage to a rate higher than what we would pay manufacturing workers.”

As a result, he explained, companies like his are moving to robotics. But, the new challenge was in deciphering all the data gathered by these robotic systems. “Robots are great in that they don’t get hurt and they can go all the time, but they need an interface to them.”

Another member from a not-for-profit background faced reluctance to embrace change.  “The impact of viruses on our organization gives us the leverage to say, ‘this is happening because you refused to change.’ Now we have to change and it needs to happen fast.’

The panel agreed that the book Start with “Why?” by Simon Sinek laid out a strong model for driving change both in the business and in the IT department. As one member explained, “it’s one thing to give the business something they can get behind, but sometimes IT is stuck in a rut. You have to identify that.” He went on to describe the process of replacing 20% to 30% of his team as the role of IT changed within the organization.

“I don’t know anybody who has one specific job anymore. If you’re in IT and you think anything is going to be static for years, you’re in the wrong industry.” 

Technology is becoming integrated with every aspect of the business. As this happens, many IEF members saw their organizations evolving into technology brands.

The IT leader now has a significant role in driving transformation and planning for the future of the entire organization. “We’ve gone from the business coming to us and saying, ‘this is what I want you to do,’ to having IT in those meetings saying, ‘this is what I can do for you.’” Another attendee added, “the role of the IT director is changing. More C-level positions will start to come from IT.”

The changing role of the IT leader hasn’t eliminated internal resistance to change.

According to one member, budget constraints hamper his experimentation with emerging technologies. “I want to look at self-driving cars to deliver our products, voice-activated systems for ordering or robotics for back-of-house. These capabilities are beyond the investment capabilities of my brand.” Like many in this position, the company would have to wait until these technologies become commoditized. “For quick service, it would save a lot of time and money to have a customer be able to use voice recognition system. From a disruptive standpoint, it’s a capital challenge.”

Organizations are placing bigger bets on innovation and transformation. But, this creates its own set of challenges. As one attendee explained, “data is growing nine times faster than your resources. An IT budget is 1% of the CFO’s annual budget as a general rule.” In response, 25% to 30% of lines of business turn to outside cloud vendors, rather than IT, to meet their needs. When lines of business (LOBs) outsource these functions, those services still need infrastructure. “You have IT with all this traffic on the network, and no idea what’s driving it.”

The response, he explained, is to turn cloud from a destination into an operating model.

“My son is seventeen. Everything he owns is on the cloud. So, what he cares about is that cloud interface and the bandwidth to it. He’s not so different from users in your organization.”

Further Reading: Top 5 Challenges to Digital Transformation in the Enterprise

CIO Table Talk: The Cheat Sheet

In summary, IT now plays a more critical role in defining the strategic future of the organization. Here are the key takeaways from our IEF dinner in San Diego:
– Organizations must prepare to re-imagine themselves, or risk being left behind.
– Technology is altering consumer expectations. Brands must keep control of the experience.
– Legislation and regulation may be as disruptive as innovative technologies.
– Emerging security threats will need novel ways to “transact and trust.”
– Overcoming internal resistance to change is a key aspect of the modern IT leader’s role.
– In the modern security climate, an organization needs to safeguard its brand as well as its data.

Have some insights of your own to add? Join the conversation #CIOTableTalk

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