When going digital fails your business

Computers are great at automating tasks. In fact, they got their name from the first task they automated — the manual steps of computing numbers. Before computers, imagine rows of people sitting in large companies with abacuses, moving wooden pieces to tally calculations. (That actually happened.)

Since then, computers have helped to improve efficiency in business, create more efficient processes and remove people from the equation (which is a topic for another post). The question I pose now is:

Is digitization good for your business?

Obviously, you would say yes. Digitizing tasks and removing humans from the equation is money saved and, therefore, better. But the question is, what kind of digitization are you striving toward?

In the early days of computing, when the first programmers were asked to digitize business processes, they digitized the things they could find and recognize — documents, calculations and rules. As they did this they ignored two very important characteristics of human behavior: 1) humans are social and 2) humans are flexible, and we can change our thinking quickly. This disregard gave rise to IT systems that were optimized for only one purpose: more efficient processes, with a lower transaction cost than it traditionally cost for a human to run the same process.

But if you stop by any back-office department and listen, you’ll hear colleagues talking with each other, and people on the phone talking with suppliers or project managers. All of this human collaboration and experience was missed in the first wave of business digitization. And that is a problem.

As more and more processes have been digitized, supplier and buyer relationships have deteriorated. Today, it’s not uncommon for a supplier to be required to use 10 to 20 different systems to interact with different customers. None of these systems are synchronized. Is this really better? More efficient? Is it creating value?

A recent study looked at the relationship between supplier happiness and profits in the automotive industry. What it revealed is that a better relationship between a buyer and seller resulted in a more profitable business and higher value contribution from the supplier’s side of the equation.

Source: http://www.ppi1.com/uploads/wri-profit/wri-profit-press-release.pdf

It’s fascinating to see that in the last 10 years, American car companies have focused on large, centralized digitization projects (often creating spectacular failures). They have pursued theoretical business cases, their relationships with suppliers have remained stagnant, and value generation has not significantly improved. Meanwhile, Japanese producers have focused on lean and agile processes, learned to adapt quickly and have involved suppliers in decision making — and they have thrived.

This is not just a theoretical problem. I’d argue that digitization is bad for your business when it is over-focused on cost savings rather than value generation. This is something I’ve seen firsthand, working with some of our largest customers. One client’s focus had for many years been to just drive cost savings in the supply chain. The suppliers were fatigued and did not want to change or adapt to new processes.

The examples I have used above are, of course, from my world, which is one of supply chains. But I believe the problem is greater. How much has the last wave of digitalization failed us in enabling companies to perform better? Just think of the fatigue among your co-workers when they use existing enterprise applications, along with how fast new applications are not sold or deployed through the traditional channels, such as IT departments. For instance, Slack is growing with more than 500,000 users in less than two years without any official sanctioning by the enterprise, in most cases. People will always choose the path of least resistance.

Furthermore, many years of tactical digitization has increasingly become a strategic risk as the world is changing. Companies who have over-invested in driving down transaction cost and centralized ERP will find that it is at the cost not being able to change quickly — a capability that will be worth more than a few cents saved on processing a business transaction.

So before you digitize any business process, first ask the question: Will it solve a strategic need for your business? If not, it might be better to wait until it can or leave it to the users to pick the tools they need to create value.