Digital Transformation for Regulated Industries: Ask the Right Questions
The hype surrounding Industry 4.0 technologies, and their assumed criticality for digital transformation, will surely follow the typical path determined by human psychology as it relates to technology: New technology generally piques unwavering interest. Greater investigation into said technology often leads to more promises of what it will deliver, with use cases seemingly endless. The reality of implementing the technology, however, may quickly turn downward into pessimism, especially when many promising use cases fail to come to fruition. Consequently, fear and distrust of the technology increase, and most people abandon it. Of course, some use cases become success stories, and the technology may indeed gain some traction — but only in a slow, methodical way. The real problem, however, was never with the technology itself; rather, it was likely with the human psyche’s perceptions of it.
This same human psyche may be the greatest barrier to implementing change. Yet, the ability to change at an ever-increasing pace is likely the most critical element of being a digital organization. Next comes another big barrier: regulation. Regulated industries face not only the human psyche battle of implementing change but also the necessity of doing so within the constraints and barriers imposed by regulation. If a digital transition were strictly a matter of applying new technologies to old problems, regulated industries wouldn’t lag so far behind in the transformation arena when compared to other industries.
But digital transformation requires more than the application of new technology. It requires a fluent change culture, one that regulations and regulatory bodies tend to impede by protecting against dangerous and rushed implementations. Consequently, regulated industries have become known for being change averse and slow to implement change. More than ever, we need innovation champions within regulated industries to step up and bring the regulators up to speed and on board when it comes to Industry 4.0.
Questions to Tackle
Regulated industries should not pull back in their quest toward digital transformation but should instead find a way to embrace it. To begin, regulated industries should consider these questions:
Does being in a regulated industry mean an inherently slower transition to becoming a digital organization? In almost any company within a regulated industry (e.g., healthcare, finance, transportation), there are some parts of the company to which regulations do not apply, be it recruiting, distribution, finance, or employee social groups. So, if some parts of the company are not under the regulatory oversight that could potentially slow down a digital transformation, why not apply a “two-speed digital transformation,” with one part of the organization transforming intentionally faster than another part of the organization? Theoretically, an organization could choose to adopt digital tools and methods in the parts of the organization not governed by regulatory bodies while taking a slower approach in the parts that must abide by regulations.
The challenge of a partially transformed organization is the effect on the culture of the company as a whole. Consider, for example, someone from research, accustomed to using tools in the cloud with new builds deployed daily using data from all sources in the ecosystem, who moves to a regulated manufacturing position. How will that employee impact and be affected by such a starkly different culture? Management of change, including digital change, requires a beginning-to-end vision. In a two-speed digital transformation, it should be clear that different digital adoption speeds transcend a vision toward a unified transformation, requiring patience from those at the “higher” speed and stimulating curiosity from those at the “lower” speed. But to achieve this type of unification, we need regulatory authorities that are in line with the new digital world.
Can we influence regulators to make the transition to digital? It seems self-evident that a regulatory body not fully versed in Industry 4.0 tools and techniques will not be able to properly regulate a company leveraging such tools and techniques throughout its operations. Regulatory bodies exist because the country or government they represent wants to ensure that “experts” oversee the actions of companies within a given industry to protect the public from unethical or uneducated decisions with regard to products or services that impact public well-being. If regulatory bodies don’t have expertise in newer technologies or processes, how can they possibly be expected to regulate these technologies within the companies they oversee? At the same time, do companies within the regulators’ domain really have a grasp on the level of expertise the regulatory bodies possess? Active communication between regulated companies and regulators would allow each to fully understand what the other is undertaking in regard to a digital transformation.
Regulations often blaze a path to widespread use of new technologies. If the US government were to dictate the use of blockchain for HIPAA-related data by a certain date, for example, companies would be looking at blockchain for many other ecosystems of shared data. However, many regulatory bodies lack the vision to allocate funding to properly understand the impact of a digital transformation on the industry they govern. If a regulatory body hasn’t digitally transformed itself — or educated itself on digital transformation — is there a path to help educate or drive the regulatory body toward such a change? The answer lies in the concept of transparent collaboration and communication between the regulators and the regulated. To avoid any perception of compromise, such as bribes to induce favoritism, the industry would need to create a neutral third party that would accept funding from companies within the industry and offer tools, training, and consulting to the regulators. Industry lobbyist organizations exist today and could perhaps take on this neutral third-party role, but a more direct and targeted intervention is needed to expedite transformations that are positive for both producers and consumers. The benefits of Industry 4.0 processes and technologies benefit everyone in the ecosystem, not just the companies that have implemented them. One potential path is for regulatory bodies to host incubators that make possible the creation of such a collaborative environment. Last year, US Food and Drug Administration (FDA) Commissioner Scott Gottlieb announced that the FDA was creating such an incubator environment for digital health tools.
Is becoming digital within a regulated industry worth the effort? Consumers within regulated industries receive protection in one form or another — including as safety (e.g., improved data enhances safety in air travel), transparency (e.g., clear view of all parties/charges in financial systems allow for greater transparency in mortgages), and equality (e.g., creating easier access for startups to offer Internet services provides more opportunities) — making the effects of Industry 4.0 in regulated industries potentially more impactful than in other industries. In nonregulated industries, the benefits passed on to the consumer are clear: lower cost, higher quality, closer business-customer relationships, and increased speed of innovation. While many of the applications and use cases will be industry- and even company-dependent, it is the interest in the Industry 4.0 digital tools that sparks much of the interest in the transformations around the world.
[For more from the author on this topic, see “Bring on Digital Transformation in Regulated Industries.”]