By Arun Arora, Michael Becker, Markus Simon, and Florian Wunderlich
“A crisis is a terrible thing to waste.” That quote is from Paul Romer, the Stanford economist, in 2004. He was referring to the increasing competition America was facing from the rising education rates in other countries. But it’s become a “go-to” quote for leaders looking to make important changes that were impossible in the business-as-usual world.
The problem with this approach, of course, is that a crisis has already hit and has become the catalyst for action. At that stage, your scope of actions have narrowed and your probability for a successful outcome is more limited. Better in fact to use the sense of urgency that accompanies a crisis when you have some time to effectively course correct. Or put another way, better to avoid the iceberg than spring into action once the ship has already hit it.
Having a “crisis” mind-set can simultaneously force important decisions, drive activity across many fronts, and radically accelerate the pace of change. We call this a Digital Turnaround & Transformation (DTT) approach.
In working with many companies in driving an effective DTT at speed and scale, we have noticed three common misconceptions that regularly undermine and even derail digital transformations. Leaders should be alert to them, and be ready to address them quickly.
1. “It’s not going to happen to us”
While this kind of thinking is increasingly uncommon, meaningful variations of it still persist. For example, CEOs generally understand that digital change is coming and they need to react. But many believe they can contain the damage, or that the change will affect a relatively small portion of the business.
This kind of thinking tends to underestimate what a “disruption” really is. While that term is used often, it means a fundamental change to the business in terms of business model, sources of revenue, or consumer behavior that has an existential impact. The fact is that for most businesses today, the question isn’t whether a disruption will occur but when. In fact, McKinsey research shows that, on average, industries are less than 40% digitized. And the second of three waves of digitization is just hitting.
One way to address this is to develop a “disruption” dashboard highlighting changes in technology, business model, and customer behavior and mapping those to your existing business. Understanding the economics of disruption, assessing its effects on your business, and then developing thoughtful scenarios to show how they might play out can provide a clear-eyed view of the change that’s comine.
2. “We have enough time”
Embarking on a true digital transformation – not just the experiments and innovations that companies try but that fall short of the scale of change needed – is all the more important because crises tend to loom on the horizon then hit all of a sudden. Even when companies spot a potential disruption, it’s surprisingly common for them to believe they have more time to make a change than in fact they do.
A useful illustration: In 1830, William Huskisson, a popular Member of Parliament representing Liverpool, England, was at the opening of the Liverpool and Manchester Railway. In trying to cross the track, he misjudged the speed of the approaching train (called the Rocket), was run over and became the world's first railway passenger fatality.
Misjudging the speed of change is endemic to business because business leaders have are used to the pace of business they’ve mastered, not that one that’s on the horizon.
Addressing this issue requires constantly tracking the “disruption” dashboard, and tracking the pace of change (e.g. rate of investment in new technologies, rate of new customer acquisition of a new technology).
3. “We can take incremental steps to learn as we go”
Learning is an important part of any change process. The most successful companies – and digital natives in particular – test, learn, and evolve along the way. The problem is that “incrementalism” can become a crutch that stops a business from making the kind of full-scale change that’s necessary. It becomes an excuse for excessive caution and risk avoidance.
In our experience, the biggest issue is taking too little risk, not taking too much. Digital is by its nature disruptive, so the transformation needs to be as well. McKinsey research shows that boldness is one of the most important characteristics of successful digital businesses. And we’ve learned that digitization will take a significant bite out of revenues for companies that stay idle, while those that are willing to disrupt themselves through bold action can drive significant growth.
One way to address incrementalism is to look at what parts of the business are being addressed by a transformation. In a true DTT, every part of the business is on the table. Sacred cows are not protected. The other guard against incrementalism is tracking how many experiments (new business initiatives, new offers, new services) are in the field. The absolute number of them varies based on the company and sector, but it should be an uncomfortable amount – all of which need to be tracked and coordinate so that chaos doesn’t result.
Digital transformations are complicated and hard. But for companies that are willing to operate in a “crisis” mode, they can greatly accelerate their performance and drive new growth.
Arun Arora is a digital partner in McKinsey’s Chicago office; Michael Becker is an associate partner in the Munich office, where Florian Wunderlich is a senior partner; and Markus Simon is a partner in the Cologne office. They are part of the Digital McKinsey practice.
