Q&A: Global digital transformation
August 2018 | SPECIAL REPORT: TECHNOLOGY IN BUSINESS: STRATEGY, COMPLIANCE & RISK
Financier Worldwide Magazine
August 2018 Issue
FW moderates a discussion on global digital transformation between Claudia Milbradt at Clifford Chance Deutschland LLP, Deborah Sherry at GE Digital Europe, Russia and CIS, and Andrew Copland-Cale at Siemens AG.
FW: To what extent are you seeing more companies explore and embrace digital transformation? What factors are compelling them to do so?
Sherry: Digital transformation allows organisations to evolve continuously and adapt quickly to the changing market environment, which is vital in today’s competitive business landscape. The factors that are driving this are not new; we are seeing digital transformation take place quickest in highly competitive markets where companies are pressured to innovate in order to compete. This is driving the wider adoption of digital transformation in the industrial space where organisations are under a lot of pressure to increase efficiency and reduce costs, while enabling continuous innovation. Without digital transformation, organisations would not be able to survive the pressures of the 21st century marketplace and would not be able to evolve their products and services to respond to the changing expectations of their customers. All companies, to some degree, are going through some sort of digital transformation. But the ones which really feel the benefit are driving this process at the enterprise level and at a scale which is creating real business and bottom line benefit. We are seeing strong traction in the fast-moving consumer goods (FMCG), industrial manufacturing and automotive sectors, as well as in energy, aviation, healthcare and oil & gas.
Milbradt: More companies are getting involved in ‘industry 4.0’ topics and are embracing the effects and impacts of digital transformation. Since technology and Big Data have an extra potential innovation dynamic, companies which understand this environment and are agile enough to adapt will have a huge advantage. The key drivers for this development are, among others, Big Data and analytics, the Internet of Things (IoT), artificial intelligence (AI) and blockchain applications.
Copland-Cale: Without question there is a marked interest and increasing willingness to explore and embrace digital transformation. Digitalisation is very present in the media and nowadays there is a broad consensus that the impacts on businesses are vast. Leaders do not want to miss out on any game changer. Therefore, considerable efforts are being made in corporations, large and small. The compelling factor is increasing efficiency – increased throughput, better decision making and risks coverage – to ultimately reduce costs or leverage superior characteristics, such as quality, speed, flexibility and innovative capacity.
“The application of technologies alone without clear goals will be of no benefit. It is important to first define the problem and then choose the technology, not the other way around.”
FW: What are the main benefits companies may derive from digitalising their operations?
Milbradt: The digitalisation of businesses or, more precisely, of certain operations within these businesses, leads, in general terms, to an improvement of the following corporate business characteristics. First, improved efficiency via process improvements and automated workflows. Second, new business models. Technology allows new paths of development, commercialisation and improved decision making. By having access to a broader set of data and by having the means and tools to generate and process such data, companies are able to use this as part of the decision-making process. Finally, improved reach. Digital transformation makes businesses available to customers, basically from anywhere.
Copland-Cale: For compliance, ‘digitalisation’ has the greatest benefit when it can be applied to automate repetitive tasks for process efficiency or greater process coverage. In addition to increased efficiency, the use of the latest data analytics methods also allows enhanced risk identification. The freed capacities resulting from higher efficiency, combined with improved risk identification, enables targeted risk coverage – leaving only complex decisions for experts and the rest for machines.
Sherry: Digital transformation allows organisations to increase productivity and achieve significant efficiency gains. It can also help them to improve the quality and safety of their operations. By connecting and creating visualisations of data from across the enterprise, companies can uncover insights which will help them to make better decisions. By using AI and machine learning algorithms, those insights can be coupled with policies that either automate the operation of an industrial process or flag up potential issues for review by a technical specialist. In the industrial world, digital transformation is largely driven by the adoption of the industrial internet. In fact, the industrial internet can add billions to Europe’s economy. Conservative estimates suggest the industrial internet market is about £173bn globally, compared to the consumer internet, which is about £131bn. By embracing the industrial internet, businesses will be able to extract valuable insights from their physical assets and transform operations to enable innovation and open up new business models. For instance, the biggest steel manufacturer in the Americas, Gerdau, managed to prevent 130 hours of downtime and avoided costs of over $1.5m within a few months of adopting predictive maintenance across its plants.
FW: Based on your experience, what are the biggest challenges and risks that typically arise during a digital transformation process?
Sherry: There are two main challenges – cultural and technical. Digital transformation requires a significant cultural shift but many industrial companies are not prepared to reorganise quickly enough, either structurally or culturally, to be able to take advantage of the great opportunities digital transformation offers. This cultural ‘friction’ often takes place between digital culture where products and projects are released in fast, imperfect iterations, and industrial culture where products and projects are released slowly, methodically and are often over-engineered. This makes a lot of sense, because industrial assets, such as jet engines and wind turbines, need to be safe, and they can cost millions to fix if they go wrong. A bad book recommendation from Amazon, however, is unlikely to cause significant problems, so developers can afford to ‘fail fast’ with their product launches as long as they can react quickly. Another challenge is that the majority of the industrial organisations are at a much earlier stage in their digital transformation journey compared to most consumer organisations. This makes challenges such as upgrading old legacy systems and bridging operational silos much more complex and risky. Furthermore, technology fragmentation and the complexity of large-scale technology deployments are creating a lot of resistance to digital innovation.
Copland-Cale: The application of technologies alone without clear goals will be of no benefit. It is important to first define the problem and then choose the technology, not the other way around. It is tempting to think that we have to use AI only because it is the latest trend. But it is wrong to think of a specific technology such as AI and then find applications. Considering the example of AI, the biggest challenge is getting suitable data that allows the application of this advanced technology. Before an AI can assist, or ultimately take over, a decision-making process, the knowledge has to be produced and structured in a format that is ‘digestible’ for a machine. This includes the ‘legacy data’ stored within a corporation that is not easily digitised, such as paper format, and requires high levels of manual intervention before it can be used to train an AI. To illustrate this using third-party due diligence, the machine does not know which text elements are critical in the context of corruption, and there is no way for an AI to initially work this out on its own. Humans first have to undertake large efforts to classify information as critical before it can be learned and applied by a machine.
Milbradt: The three main challenges of a digital transformation process are that people need to accept changes, the process must be in line with regulatory requirements, and the development and use of AI must be designed by diverse teams in order to ensure that systems are not biased.
“The deeper meshing of the digital world with the world of machines holds the potential to bring about profound transformation to global industries.”
FW: Do you believe boards and executives fully appreciate the impact on company culture that a digital transformation process can have? What steps can they take to manage this aspect?
Copland-Cale: It is essential to get an organisation to be ‘digitally aware’ and people to accept and adapt to increasing complexity, as well as accepting to do things differently. The increased complexity and interdependency of the business environment makes it impossible to foresee all possible impacts of a decision. Therefore, I think it is vital to also allow an incremental ‘trial and error’ mentality. The impact on culture will further depend on how disruptive the specific technology will cause change and on the speed of change. As a start, management and employees need to be trained to become ‘digital savvy’.
Milbradt: Executives do, of course, welcome the benefits of more profitable technical applications, but fear the consequences of disruption to their own business. Thus, it is of utmost importance that companies start early to elaborate threats and opportunities. This will also have a positive influence on company culture because it shows an active participation in this transformation process.
Sherry: Most senior decision makers are aware they need to make significant organisational changes to enable digital transformation. To be able to accelerate innovation and business change, leaders need to move faster. They need to create a business structure that is adaptive to change and speed – and that brings together the IT and operational technology (OT) parts of the organisation. This means moving away from the traditional command/control management style that dominates traditional working environments and adopting agile frameworks for managing IT projects and organisational change. This requires taking people out of their functional domain and incentivising them to work together across silos. By adopting an agile approach to business management, organisational change and technology innovation, businesses will be able to better respond to the challenges of their market environment and stay ahead of the competition.
FW: How important is it to ensure that the right people are tasked with overseeing digital transformation and driving the process forward? What advice can you offer on assigning roles and responsibilities?
Milbradt: The digital transformation process must be executed in a balanced way, by creative, open and trustworthy people who take the fears of employees seriously, but who are also not scared to follow new paths. The right people will also have a diverse background in order to ensure that any digital transformation process will be designed by an open-minded and diverse team.
Sherry: Executive leadership is vital, but so is strong teamwork between the chief digital officer (CDO) or chief information officer (CIO) and the chief operating officer (COO) and their respective teams. In the surge toward modernisation, some companies run the risk of overlooking the fundamentals of operational success, specifically the teams that must work with each other and the technology itself, as traditional production processes rapidly change. Maintaining optimal performance over time requires more streamlined and better-defined workflows and a top-down approach to establishing data-driven processes across the organisation. To achieve this, business leaders need to understand their business and hire the right people. This means bridging the gap between old and new technical knowledge and building teams which combine the experience of the people who built the old legacy systems and ‘new’ tech experts, such as data scientists and AI programmers. And finally, it is important to understand that digital transformation is a journey, so businesses need to think long-term and drive strategic partnerships that will allow them to deliver incremental value. Companies should look at the outcomes they want to drive and work back from them, assigning people and building partnerships that deliver on these outcomes.
Copland-Cale: I recall seeing a talk recently that cited a story of an unnamed CIO who rejected cloud computing and said “let’s wait to see how it develops”. Since 2016, cloud computing has accounted for more than 50 percent of all stored data. I think this demonstrates how important it is to have the right people in charge. It is not the knowledge of all the details, but the understanding of the implications, as well as openness to challenge a potential ‘status-quo’. For specific tasks and projects in the area of digital transformation, it is important to foster a network of ‘right people’, meaning also allowing the involvement of external parties, including crowd sourcing. In many cases, very specific knowledge is required and this will often not be available in the department or be inefficient to build up, especially just for one task. Therefore, cross-silo collaboration is key to finding the necessary skills. Ultimately, teams working on digitalisation topics should enjoy the necessary independence and freedom in order to circumvent the ‘innovator’s dilemma’ and allow even disruptive change within corporations.
“It is crucial that IT teams are seen as an integral part of business, with ideas from employees and customers, and digital insights from other sources included in the digital strategy.”
FW: Given the extent of the inevitable complexities, what practical strategies can businesses deploy to help deliver transformational change across their digital operations?
Sherry: As tech analyst Gartner often says, ‘think big, start small, scale fast’. ‘Think big’ because the true value of transformation happens at enterprise level. The best companies have a clear vision in mind, which helps avoid wasting resources on multiple pilots that are not scalable beyond the factory floor or production line. ‘Start small’ because demonstrating quick wins to the organisation is important, and companies should attempt to bite off more than they can chew. And finally, ‘scale fast’. Once the value has been proven at pilot level, companies should move quickly to roll out globally. Every day that these productivity gains are not being realised is a day where you are wasting money. In my experience, it can be hard to calculate precise ROI at the start of a transformation project. There are too many variables. However, I have never seen anyone lose any money, and the results can be very significant. There is always strong ROI even if it cannot be precisely predicted beforehand. Investing in technology can drive continuous improvement across the business, so the long-term benefits must be considered. The investment in digital should always be considered in the wider sense of how it helps organisations achieve their long-term business objectives.
Milbradt: It is crucial that IT teams are seen as an integral part of business, with ideas from employees and customers, and digital insights from other sources included in the digital strategy. Furthermore, developing digital skills, such as data science skills and digital product management practices, in your company is also important. Businesses need to be flexible and watch their digital growth and culture, as well as the market.
FW: Looking ahead, what are your predictions for global digital transformation and its impact on companies over the coming months and years?
Copland-Cale: Without a crystal ball this is impossible to answer. Nevertheless, data and use of data is a key success factor today and will be ever-more important going forward. Companies and functions that can harness data will have a strong competitive advantage.
Milbradt: Looking at the potential of digital transformation and the impact digitalisation has already had, the following key predictions are likely to become relevant in the future. First, digital transformation and, more precisely, the business opportunities related and linked to areas of digital transformation, will become the centre of many corporates’ strategy. Second, digital transformation will require new skills, thus a new type of workforce will be created and linked to this more IT-focused workforce. A shift to IT investments is likely. Third, Big Data analytics will serve as a foundation of the implementation of many digital transformation processes and strategies. Fourth, creation and implementation of the IoT in the daily life of people and the rise of AI gadgets and solutions will create numerous business opportunities by spreading the idea of digital transformation in all corners of the economy. We will also see a stricter regulatory environment to regulate the application of AI.
Sherry: The deeper meshing of the digital world with the world of machines holds the potential to bring about profound transformation to global industries. Through software, we will reduce energy and water consumption and manufacturing waste, and boost productivity. The most competitive companies will be the ones that adapt the fastest and others will be forced to follow. Our own estimates suggest that digital technologies will deliver $8.6 trillion in productivity gains in the industrial world over the next decade. These innovations promise to bring greater speed and efficiency to industries as diverse as aviation, rail, power generation, oil and gas development and healthcare delivery. This will have a profound impact on organisations. Business models will shift more toward ‘as a service’ models and services and operations will be completely reshaped by digital transformation.
Dr Claudia Milbradt heads the German intellectual property (IP) practice of Clifford Chance. Ms Milbradt has been a partner in the Düsseldorf office since 2005 and advised in the IP field since 1999. She is also a member of the Clifford Chance global tech group. She has significant experience in technology transfer, patent licence agreements, research and development and joint venture projects in highly complex technology fields. Ms Milbradt is also a specialist in patent and trademark litigation. She can be contacted on +49 (211) 4355 5962 or by email: claudia.milbradt@cliffordchance.com.
Deborah Sherry is the senior vice president and chief commercial officer of GE Digital in Europe. Her mission is to deliver the next industrial revolution. Her division delivers edge to cloud-based solutions that connect industries and transform industrial companies into digital industrial leaders by turning data into intelligence that drives step-change improvements in productivity. She can be contacted by email: deborah.sherry@ge.com.
Andrew Copland-Cale has worked for Siemens AG since 1997 and performed multiple roles, including accounting, planning & controlling, procurement, product management, project management, consulting, region management and corporate development. Over the past 10 years he has spent three years in a corporate audit function in the area of forensic accounting and four years in compliance investigations. Three years ago he took on his current role within legal & compliance, as head of risk management and mitigation. He can be contacted on +49 89 636 00 or by email: andrew.copland-cale@siemens.com.
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