Digital transformation: How a three-phase process can fund itself

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Digital transformation is on the agenda of virtually every bank and insurance company in the world. Organizations everywhere, it seems, are trying to transform into more agile, efficient and competitive versions of themselves, end-to-end. But a project of that scope inevitably presents the question: how do we pay for it? Innovation that drives revenue growth and competitive advantage costs money—a lot of money—and moreover, the big reinvention projects have no precedent, so making the business case for them can be a shot in the dark, at best. Fortunately, digital transformation, when it’s done methodically, within an existing environment, can yield enough in cost savings that it becomes a self-funding mechanism for the entire enterprise.

Where to begin?

There’s no one-size-fits-all program for transformation and no single “right” way to do it. But in my experience, one of the best ways to approach it is through a three-phase methodology: 1) optimize business processes and IT, 2) digitize those processes, and 3) apply cognitive capabilities to drive competitive advantage.

Not surprisingly, many organizations want to jump right into the cognitive phase, because it promises competitive differentiation in a business’s products and services. Every company has digital transformation projects running, making the first two phases, optimizing and digitizing, just table steaks. Optimizing and digitizing will undoubtedly save you money, but it’s what you do with your new digitized business processes and IT that gives you competitive advantage. In the third phase, you can launch truly differentiated services to customers.

While it’s the optimize and digitize phases that deliver most of the cost savings, the three phases are best done in parallel because the systems and processes involved often overlap, as do the benefits.

  1. Optimize
    Optimizing business processes and IT begins with streamlining and consolidation, which sometimes means consolidating locations and IT environments. It entails simplification and building operational efficiency in applications, infrastructure and data to wring costs out of your current environment. It involves cutting costs with a purpose, strategically driving innovation and thus competitive capabilities. Optimization must run with the goal of getting to the third phase: change your business with cognitive.Some organizations start with what is called “vertical” transformation through the front, middle and back office in a specific line of business. Others focus on operational efficiency in the “horizontal” or foundational layers of business practices and technology, which produces a reusable process for organizations with shared services for multiple lines of business. Some begin by transforming an individual function within a line of business like a call center or an HR tool. Again, there’s no right way to do transformation. Companies select their transformation approach based on three factors:  where you are in your transformation journey, what you overall business objectives are, and how ready for change your culture and workforce are.

    The more vertical the transformation, the greater the benefit—, but greater the undertaking too. The creation of internal centers of excellence (COEs) to develop and share expertise in technology have been seen to help efficiently manage this kind of extraordinary change at scale. A recent report on digital transformation from the Hackett Group mentions COEs as useful building blocks in an optimized operating model. The Hackett report said that “finance organizations with world class [enterprise performance management] EPM capabilities spend … 36% less on the EPM process per $1 billion of revenue than [their] peers.” 1 While that’s only one example of cost savings from optimization, it’s an important one: COEs create efficiency and speed to drive creative cost savings across multiple business lines. Moreover, they also support culture and workforce evolution through transformation, promoting change agents within the organization and ensuring adoption.

  2. Digitize
    The second phase is digitization, using technologies such as robotic process automation to reduce manual labor, making internal processes and customer services available through mobile applications and more. Cloud-based solutions can accelerate digitization, providing speed and agility along with lower costs. Using the cloud also produces variable cost benefits while switching from a capital expense to an operating expense model.That shift to a cloud-based solution and change in accounting frees you to try new things, to fail quickly and cheaply, and to try something else. Working on a cloud-based environment means you no longer set up fix-cost environment to drive innovation. Cloud-based solutions give you speed and agility to build new applications, and since you are only paying for the capacity, you can run test, make changes, or ditch them completely without writing off all the capital expense that would have otherwise been holding you back.

    Further, most large organizations have data stored in different sites and in different formats, especially businesses that are now collecting data from social media to learn about customer preferences and behaviors. Once you digitize, you can open this data as well as your applications and infrastructure in order to facilitate the third phase in the process. While this more efficient data management will save money, it’s critical to digital transformation. Without control of your data, your digital transformation will fail—after all, your data is one of your greatest sources of competitive advantage.

  3. Deploy cognitive capabilities
    The third phase in digital transformation is adding cognitive capabilities to your newly optimized and digitized systems and processes. Cognitive capabilities enable you to look at your data in much greater depth and detail and perform deeper analysis to reveal new insights. You can drive more intimate knowledge of your customers and create better customer experiences using cognitive applications such as virtual agents, predictive and prescriptive analytics and artificial intelligence (AI). It truly is the cognitive phase that takes digital transformation beyond a cost-reduction exercise to produce true competitive advantage and potential revenue growth. It’s what really changes the culture of the firm.

Big organizations’ big data advantage

Now is the time of the incumbents, as IBM CEO Ginni Rometty presented at a gathering of 100 CEOs last year’s “Big Bets” meeting. The technology available to leading banks and insurers gives them the tools to be the disrupters, not the disrupted. But large, traditional organizations sometimes face a transformation process that takes longer because of the size and complexity of their legacy environment. Yet bigger organizations also have an advantage in both the quality and quantity of their data. In the digital world, decades of history represent deep repositories of valuable customer and market information that can be explored with cloud-based, cognitive solutions.

The three-phase approach outlined above can help large institutions act and react with the speed and agility of a fintech. But it’s these institutions size and data that will give them the advantage, making it critical that transformation goes beyond just cost savings.  All three phases, done in parallel, make digital transformation an undertaking well worth the effort—especially when it helps pay for itself.

See what we can do to help your digital transformation. Visit our Banking & Financial Markets or Insurance pages.

1 Nilly Essaides, Sherri Liao, Gilles Bonelli, “Transforming Enterprise Performance Management in the Digital Age,” The Hackett Group, September 1, 2017

Digital Transformation & Cloud Application Innovation Platform Leader, IBM Global Business Services

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