Take a Complementary Path Toward Legacy Transformation

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Take a Complementary Path Toward Legacy Transformation

Advisor
Posted January 30, 2020 in Business Technology & Digital Transformation Strategies
Complementary Path

Digital competitors have raised the bar and are forcing incumbents from virtually every industry into huge transformation programs. To win this race for digitalization, incumbents are investing vast amounts of resources into multi-year programs that require them to change the engine with the train still rolling. This requires executive teams to manage many challenges and produce multiple results that are either different than expected or diluted. We recommend that companies explore complementary paths to avoid transformation projects becoming too large and too broad or complex, while allowing transformation teams to focus on the fundamental business issues. Complementary paths accelerate returns, are more manageable, require fewer resources to be launched, and allow the organization to try and fail without risking too much. In this Advisor, we explain how complementary strategies can help company transformations succeed in an era of fast change.

It’s the Same Everywhere

Incumbents around the world are facing the same situation, regardless of sector. Digital competitors and newborn greenfield players are raising the bar in many fields, improving customer experience, introducing new business models, and accelerating the speed of innovation. Furthermore, digital-native firms are attracting the best talent beyond the technology field. On top of that, they are more efficient, which is allowing them to redefine the term scale. This pressure pushes incumbents to undertake large and difficult transformation programs based on new technologies and ways of working. Dedication of resources to technology and innovation is growing in incumbent companies across all industries, at 16% on average – much faster than revenues.

Worldwide, incumbents’ spend on transformation programs represents approximately 10% of their annual revenues, according to our research. To compensate for transformation investments, companies seek additional efficiencies derived mainly from operations automation and removal of legacy systems. Both levers are difficult to activate and require significant efforts.

Furthermore, few incumbent companies are claiming successful transformation of core legacy operations into truly agile and efficient digital operations.

How to Move Forward?

Large transformation initiatives involve challenges that executives need to avoid and contain, as illustrated in Figure 1. Transformation programs usually take three to five years and, very often, results are different than expected because the initial scope and focus evolve.

 

Figure 1 — The challenges of tech transformation.
Figure 1 — The challenges of tech transformation. (Source: Arthur D. Little.)
 

Transformation programs usually engage the best talent available in the company, which in turn distracts those people from the day-to-day business. Furthermore, these programs require companies to take on the challenge of building new capabilities.

Companies that wish to transform must select and effectively adopt new technologies that evolve quickly, with technology cycles that become faster and faster. This forces them to undertake painful migration and rearchitecture projects to continuously upgrade the newborn legacies.

The business case for transformation requires the company to achieve relevant efficiencies in order to be approved. However, it is difficult to avoid overruns in large programs, due to their three- to five-year time scales and the many variables involved.

Transformation is never an easy journey. Transforming a complex, multinational organization in motion is very difficult. However, it is a crucial step for the company to remain competitive. To maximize the odds of acquiring new capabilities and developing new value propositions, incumbents across several sectors are launching smaller and more focused initiatives with great ambitions.

We call these initiatives complementary paths, as they will evolve in parallel with a company’s core transformation initiative without distorting it. Instead, complementary paths will derive positive externalities that will be easily transferable to the company’s core business.

Choosing a Complementary Path

Many companies have launched initiatives that rely on new technologies to explore new opportunities. Examples of these include Daimler Mobility Services, which offers application-based mobility services, and Orange, which recently launched a mobile banking service. These parallel initiatives can bring high value to the company in terms of new capabilities or data. However, in the long run, this will not result in a sustainable lever for the company’s core transformation, as these initiatives are geared toward the development of business extensions.

A true complementary path must be directly linked to the company’s core technology platform. If the complementary path develops successfully, it will support transformation of the company’s technology, processes, culture, and business model. The final goals of these initiatives may vary significantly, but they will always produce new capabilities and intellectual capital that are transferable to the core business. They may even result in a new platform to migrate specific client segments or the entire portfolio.

We foresee two types of complementary paths:

  1. A standard complementary path is considered an internal path, in which the underlying technology platform is closed and only supports the initiative.

  2. When the opportunity is developed on top of a technology platform that is made available to third parties, we consider this an external path, as the technology is open.

Some players are launching internal paths across the telecoms and banking sectors. For exmple, Santander’s SuperDigital account-less bank in Latin America, as well as its Openbank service in Spain, are based on next-generation platforms. And Orange recently launched X by Orange, a cloud-native operator focused on SMEs, also in Spain.

The market has pursued external paths for decades. Airlines were pioneers in collaborating on large technology projects and opening them to third parties to join efforts and share the burden, which resulted in the creation of Sabre and Amadeus. More recently, technology companies followed a similar strategy to better leverage their IT infrastructure so they could grow to hyperscale to support their core businesses. Amazon launched AWS by leveraging its hyperscale data center infrastructure to support the largest global e-commerce platform.

Companies seeking to develop complementary strategies can follow multiple paths, as described earlier. From our benchmarking exercise across industries, we have classified the key objectives for these initiatives into the following categories:

  • Accelerate new technology and innovation adoption

  • Increase flexibility, scale, and agility

  • Attract talent and new capabilities

  • Leverage data to improve customer experience, automation, decision making, etc.

  • Diversify geographies, products, etc.

  • Develop efficient technology platforms

How to Develop a Successful Complementary Path

Developing a complementary path requires the company first to identify a sustainable and feasible opportunity directly related to its core business (see Figure 2). Second, a complementary path requires the company to do things in a different way, otherwise the ambition will not be fully achieved and execution is likely to fail.

Figure 2 — How to launch a complementary path.
Figure 2 — How to launch a complementary path. (Source: Arthur D. Little.)
 

A company must clearly identify the underlying objectives of its core transformation (e.g., reach out to new customers or drastically reduce the cost to serve existing customers). Once this goal is clear, the executive needs to identify a potential business opportunity and assess its feasibility, sustainability, and strategic fit with the core. Right after that, the project team must initiate the internal buy-in process, a difficult task that requires defending the concept and the business case to key stakeholders in the company, with the objective of obtaining the “Go!” decision.

After the “Go!” decision, a few more steps are required before the first product launch:

  1. Initial assembly. Selection of architectural components’ key partners, from technology to commercial fields. Tasks to perform include validating the concept among partners and defining the ecosystem/collaboration model.

  2. Technical pilot. Basic solutions testing for the initial product. A technical team needs to be built and the product portfolio defined.

  3. Commercial pilot. Proof of concept of the company’s product with befriended customers.

  4. Prelaunch. The complete, end-to-end solution distributed among a selected set of customers, free of charge, to expose any gaps or improvements. Service orchestration and automation will be a top priority.

  5. Launch first wave. Launch of the minimum value proposition!

Certain requirements will allow the development of the complementary paths to succeed:

  • Support from a relevant internal sponsor is paramount for the initiative to develop.

  • An autonomous supplier model must be in place to allow higher supplier flexibility and work with new partners.

  • A collective “startup mentality” must extend across the entire team; results will be different only through new and different processes.

  • Autonomy throughout the initiative will enable it to grow fast, with minimum steering to ensure the right direction.

We should emphasize the importance of the internal sponsor to the complementary project’s success. The internal sponsor should be a credible stakeholder with enough power to get things done in the organization, usually a CxO position or executive committee member. The sponsor, together with the steering committee, will define the targets and the timeline to accomplish them. Furthermore, the sponsor must regularly ensure that the project gets the required resources, and that development is aligned with the defined plan and targets.

Conclusion

Complementary paths should allow for positive externalities, and these should be easily transferable to the company’s core business. It is critical to provide complementary-path opportunities for their own development space. Otherwise, you can expect delays and lack of traction and momentum.

In addition to pursuing core transformation projects, complementary paths offer an easy way to acquire new digital capabilities and intellectual capital, which can be spread across the organization with high impact and low risks. In other words, it allows them to learn more, faster, and risk less.

About The Author

Rocio Castedo's picture

Rocío Castedo is a Principal at Arthur D. Little (ADL), based in Madrid, Spain, and a member of ADL's Technology and Innovation practice. Her main areas of expertise are IT strategy and operations, transformation projects, digitalization, and customer management. With 15 years consulting experience, Ms. Castedo has done related work for banks, insurers, and utilities, mainly in Europe and the Americas. Previously, she worked at Accenture,... Read More

Jaime Gomez's picture

Jaime Gómez is a Business Analyst at Arthur D. Little (ADL), located in Madrid. His main areas of expertise are IT strategy and operations, transformation projects, digitalization, and customer management. He has done related work for banks, insurers, security providers, and telcos, mainly in Europe and the Americas. He is a Finance and Economics double major from the University of Notre Dame.

Juan Gonzalez's picture

Juan González is a Partner at Arthur D. Little (ADL), based in Madrid, Spain. He advises clients on business transformation, new ventures launch, and reorganization to leverage the opportunities provided by technology. In the course of his career, Mr. González has supported major financial institutions, utilities, carriers, equipment makers, and media companies in Europe and Latin America on strategy, regulation, technology choices,... Read More