Four paths to your digital transformation

by Joao Dias and Rohit Sood

You won’t find too many arguments in C-suites about the need to transform operating models to be more digital and competitive. But the questions you do hear often are “How?” and “How much?”

We have found there are four ways to transform to a next-gen operating model. In practice, they function more as a continuum than as discrete and separate paths. As we discussed in our article, “How to start building your next-generation operating model,” which model is right for your company depends on the state of digitization in your organization and the capabilities you can call on. Remember: your digitization operating model can shift as you build experience and capabilities.

Innovation outpost. The innovation outpost is a dedicated unit separate from any functional unit or division. The primary benefit of this model is keeping the digital initiative away from the main business’s historical culture, decision-making bureaucracy, and technical infrastructure. Free from all those constraints, your most innovative talent can push the envelope and hatch new business models—your own in-house Internet start-up. With some careful monitoring, the innovation outpost can help your company leapfrog in capabilities.

One retailer, for example, chose the innovation-outpost approach to fix its ineffective online business. It focused on next-gen analytics, customer experiences rather than technology, and mobile. The unit’s work has created buzz in tech circles and attract better talent. And its innovations are being adopted across the company.

While the innovation outpost can help a company get going—even when all top executives aren’t convinced yet of the value of transformation—the innovations can have limited impact. And because it’s out of the mainstream, the innovation outpost doesn’t do much to launch the cultural changes across the organization that true transformation requires.

Fenced-off digital factory. This is the most common starting point. It concentrates digital talent and capabilities inside the business, but the factory works as a partner with business and functional units from the start. The factory cranks out needed applications and innovations, but it also serves as a model for the cultural transformation by demonstrating new ways of working and how to experiment, learn, and take risks.

One European bank has dedicated several floors at its headquarters to its digital factory. Each floor focuses on a separate digital project to create a reusable bit of technology, such as customer identification and verification or e-signatures. Each team in the factory develops products and services, then moves them quickly from prototype to deployment, before transitioning the product into the main business. After adoption, the team continues to monitor and iterate the product or service based on economic performance and customer feedback.

This path works well when you already have broad commitment to digital transformation. Slowly but steadily, as digitization spreads group by group and unit by unit, the cultural change takes hold. The downside of this approach is that, for a while, there will be digital haves and have-nots within the company.

Business-unit (BU) accelerator. This is a scaled-down version of the digital factory, embedded in a particular BU. Using this approach, the BU gets a crash course in digitization, building its own relevant skills in areas such as robotics or process redesign. The business also gains autonomy and speed—it funds the accelerator and does not need organization-wide agreement on a host of issues to start moving.

One North American bank shifted to a business-unit-accelerator model because it provided much better customer focus, outweighing the scale efficiencies of a centralized approach. The BU made a public show of investing in digital talent and tools and built a reputation as a digital business offering great customer experiences—that just happens to be in banking.

This path works well for organizations with large business units that operate independently. It is also a good starting point when one BU is already ahead in digitization or has exceptional payoff potential from digital. The downside is the risk of creating complexity across the organization and burdening the IT department with managing a separate set of vendors, licenses, etc. This model can also make it harder to build and share capabilities organization-wide, since capabilities are tailored to a specific BU.

Full-scale evolution. This is the most ambitious path, involving simultaneous transformations across the organization’s operating units and functions. This path is the default for “digital natives” whose technology, digital services, and product delivery are already inextricable. The model is highly attuned to customer needs and emphasizes rapid development, testing, and iterations of products or services.

One European bank is taking the full-scale evolution path to make agile, the core component of any next-gen operating model, the default way of working across the company. Employees now find themselves attached to cross-functional teams where results are measured by value created and profitable customer journeys. This approach is almost like shock treatment, but it offers important benefits, including shaking up management systems and forcing rapid cultural change. The organization builds agile skills broadly, identifies high and low performers, and pinpoints valuable and missing skills.

This path works well when there is a broad consensus and a top-down organizational mandate for change. There are many challenges to this model, including ensuring that best practices are used and resources focused on highest-value initiatives.

Every organization’s transformation journey will be different. But how well each company actually executes makes the difference between reinventing the business and just trying to do so.

This article is based on a longer piece: “How to start building your next-generation operating model.”

Joao Dias is a partner in McKinsey’s Cologne office, and Rohit Sood is a partner in our Toronto office.