Can companies build on their digital surge?
In mid-2020, the CEO of a Fortune 500 company was looking at the spike in the business’s digital sales and the remarkable speed of its growth. He was pleasantly surprised by how well the digital side of the business had performed, and he complimented his digital leaders. Secure that the digital business was doing well, he turned his attentions quickly to the next agenda item.
What this CEO failed to appreciate was that the improvements in digital sales had almost nothing to do with what the company had done and almost everything to do with the realities of life during the pandemic, when people were flocking to digital channels. Rather than invest more in digital capabilities or rethink his business’s strategy, he took its good fortune as validation of its existing digital posture and “business as usual.”
He is not alone. While many are justifiably proud of their enormous accomplishments during the pandemic, we have found that a false sense of their digital capabilities has settled on many companies. Digital traffic and commerce made huge leaps for almost every institution, no matter how good their digital capabilities were—so much so that laggards were able to make up some lost ground on digital leaders. While market-leading pure plays have have grown fast during COVID-19, due to capacity restraints, they have been outpaced in digital growth by Best Buy, AEON, and Tesco, respectively. 1 Tellingly, according to McKinsey research, customer-satisfaction scores have grown faster at traditional retailers that have stepped up.
While many digital habits are sticking, the easing of constraints where COVID has abated has led, as expected, to a return to some nondigital habits. A recent McKinsey survey suggests that while industries across countries and regions experienced an average of 20 percent growth in “fully digital” users in the six months ending April 2021, the acceleration into digital channels now seems to be leveling off in both the United States and Europe. This development is likely to lead many beneficiaries of the digital surge to find themselves struggling to build on their digital wins because the slowing pace of digital adoption masks two more fundamental realities: digital is here to stay for many new customers, and the pace of change is continuing to accelerate.
Digital leaders, meanwhile, are keeping their foot on the accelerator pedal. While top economic performers are already significantly ahead of their peers in specific digital capabilities (automation, for example), they are also moving much more quickly than their peers in key business areas. Top tech companies, for example, share test-and-learn findings across the business, reallocate digital talent, and use multiple sources of insight about customers weekly, while average performers do those tasks monthly. 2
These developments underscore the importance of speed as the cornerstone of digital success, as we wrote in Fast Times. In our book, we covered 18 areas where businesses can build transformative speed into their organizations. For this article, we highlight four of those areas that executives have continually highlighted in our conversations as having acquired particular importance during the crisis: strategy, talent, data, and technology.
The massive migration in consumer patterns and behaviors has necessarily meant a big shift in value pools. That requires companies to take a step back to identify how their strategy should adjust to go after those value pools. Some companies instead have been caught up in the frantic need to keep pace, leading to decisions with unfortunate longer-term consequences.
One retailer, for example, implemented storefront vendor products to get an e-commerce capability in place quickly as consumers went online. The move proved successful, and the business rolled out the storefront to other geographies. But six months into the program, as its digital capabilities have matured and consumer needs have expanded, the business has hit a wall. The vendor’s offerings and services cannot be modified to roll out new features or tailor offers to specific customer segments without significant effort and complexity. The retailer is now contemplating tearing down its entire e-commerce platform and starting again.
This example highlights how important it is in the “go-now” digital world to understand not just where the value is but how to go after it. For many consumer companies, for example, a direct-to-consumer (DTC) strategy is emerging as shoppers increasingly go online or omnichannel. Taking this approach, a sports-apparel company’s digital sales grew by 82 percent in the first quarter of 2021. With aspirations to grow the share of its DTC sales from 30 percent today to 50 percent in the near future and realizing how important building relationships with its customers was to its long-term strategy, the company also severed partnerships with a number of retail outlets.
In another example, a medical-technology company saw that both patients and healthcare professionals were increasingly turning to digital for their purchase decisions. The CEO decided to build digital into the core of the company’s strategy and reallocated people and investments to build up its digital capabilities. One area that received early focus was e-commerce, where the business committed to take the time to do a complete upgrade rather than just improve one or two elements. Paid performance marketing, website optimization (including increasing page load speeds), inside sales training, customer relationship management (CRM), process automation, continuous A/B testing, analytics-driven dashboards, and full-scale implementation of agile ways of working all reinvented how the company connected with its customers and led to a sixfold increase in sales leads in six months.
This more strategic approach to digital is reflected in the importance of business building, which has become a top-three priority on business agendas across sectors and regions since the pandemic hit. According to our research, 74 percent of companies that chose business building as their main strategy grow at rates above the average for their industries. They also tend to respond to volatility with greater resilience and to see more success from the businesses they build as they gain experience. During the COVID-19 lockdowns, a European resort property company successfully built an entirely online business for its mobile vacation home sales, from virtual visits to financing to final sale.
With advances in technology, such as the growth of cloud and increasingly advanced analytics, companies can stand up whole businesses and channels in days and weeks once their strategy is in place. But this approach requires more than just “being agile”; it requires a commitment to trust and use data, test initiatives in real-world settings based on a flexible foundation, and accept that mistakes are the price for learning.
Do whatever it takes on talent
Building a core of top talent in priority areas, such as open-source developers, product owners, data engineers, cloud developers, and UX/UI designers, can be one of the most effective actions a company can take to accelerate its digital aspirations. Our research shows that organizations typically have 25 to 50 roles that create a disproportionate amount of value. For example, a top engineer is more than ten times more productive than a junior engineer, and that translates immediately into speed and impact, if teams are given the room to work. We have seen a team of ten open-source engineers, for example, build out a fully functional e-commerce platform in under three months. Top companies are focused on finding and retaining those key people.
But think about this: the war for talent is about to reach a whole new level. Large tech companies are hoovering up experienced tech workers. One of the FAANG companies (Facebook, Amazon, Apple, Netflix, Google/Alphabet) announced it was hiring 10,000 people in its product and engineering areas in 2020, and the share of Silicon Valley’s workforce in tech grew from 26 percent in mid-2019 to 30 percent in mid-2020. 3
For most incumbents, much needs to change when it comes to hiring practices, such as going where the talent is (Meetups, GitHub, Stack Overflow, and so on), dramatically speeding up the interview and offer process, and designing career paths that cater to the needs and aspirations of digital workers (for example, promoting tech developers but not necessarily making them manage others). Incumbents can also find a great deal of success, in our experience, by offering talent a compelling value proposition—a higher purpose and the opportunity to work with new code, for example—and then giving them the freedom to practice their craft.
Given the extraordinary competition for talent, most companies will not be able to hire for their full needs. Instead, they will need to upskill the workers they have. Our research shows that more than 90 percent of a typical company’s tech team will need to upgrade their skills to work in cloud. 4
If digital is the heart of the modern organization, then data is its lifeblood. Most companies are swimming in it. Average broadband consumption, for example, increased 47 percent in the first quarter of 2020 over the same quarter in the previous year. 5
Used skillfully, data can generate insights that help build focused, personalized customer journeys, deepening the customer relationship. This is not news, of course. But during the pandemic, many leading companies have aggressively recalibrated their data posture to reflect the new realities of customer and worker behavior by including models for churn or attrition, workforce management, digital marketing, supply chain, and market analytics. One mining company created a global cash-flow tool that integrated and analyzed data from 20 different mines to strengthen its solvency during the crisis.
We have seen market leaders do three things in particular to get more from their data:
For those able to move quickly with the right strategy, the gains can be dramatic. A small appliance maker in Europe quickly assembled a top team of digital marketers during the pandemic. The new team, working in agile fashion, studied the data from all marketing channels to uncover opportunities for optimization. By systematically making improvements in their campaigns, creative, audience targeting, and other areas, they were able to launch six to eight tests during every two-week sprint, up from the more typical one or two per quarter. In only three months, they uncovered 10–15 percent in incremental revenue.
Focus tech on speed and scale
Unless you have a robust tech stack to enable growth, you won’t get very far with your digital aspirations. While IT leaders accomplished incredible feats to enable remote working, for example, or more flexible supply chains, cracks appeared, such as in strained virtual private networks, increased security attacks, and website uptimes. By June of 2020, there had been a near-sevenfold increase in spear-phishing attacks since the start of the pandemic.
The leaders in the next era will be those organizations able to quickly put together IT systems that enable speed and flexibility. There are several options available that will be more attractive for most organizations than a costly rebuild of the entire system from scratch. Picking the right one depends on immediate needs, long-term goals, and security considerations.
Some leading organizations are turning to open-source software (OSS) for e-commerce, which can be substantially cheaper and faster than a fully custom-built system. Rather than relying on third-party vendors, the IT team starts with an OSS solution and builds to spec from there. We know of one financial-services institution that was looking at an 18-month timeline to reconfigure its large vendor system to make urgently needed improvements to the customer experience. Frustrated with that pace, the CEO and CIO instead brought in a team of five open-source developers who got the job done in 18 weeks. The improvements helped drive a 40 percent improvement in conversion rates. In addition to substantial cost savings, an open-source solution can drive a valuable cultural shift. It requires an organization to have top engineering talent, to be flexible, and to invest in things that provide speed and flexibility—exactly the qualities needed to thrive in the new digital era.
Increasingly, companies are also turning to cloud services as an accelerant of both digital transformation and value. Recent McKinsey analysis has shown that three-quarters of the $1 billion EBITDA value in 2030 from cloud comes from innovation through new or enhanced business cases (IoT, for example), accelerated product development, and hyperscaling capabilities. That value was apparent at Goldman Sachs, which launched both its Marcus consumer-lending product and its inaugural credit card with Apple in cloud. Supporting collaboration and a seamless user experience required the integration of three different ecosystems. Within six months, the offering had scaled to meet the demands of several million customers. CEO David Solomon stated, “The only reason we were able to deliver these capabilities digitally and at scale is because of cloud technology.” 6
While it’s been said often, it still bears repeating: technology solutions cannot work without changes to talent and how people work. Those companies getting value from tech pay as much attention to upgrading their operating models as they do to getting the best tech. For example, they shift from teams working on isolated projects to teams working on complete products and platforms, create teams that work closely with the business, build security into a continuous delivery process (DevSecOps), and develop an engineering culture that emphasizes freedom to practice craft over rigid management.
Companies that pushed themselves to adapt quickly to the sudden market changes forced by COVID-19 should take pride in those accomplishments. But not for very long. To maintain growth over pure plays and a new wave of start-ups, they must commit to the digital practices highlighted in this article. Fast times mean improvised solutions should give way to new and decisive moves.
This content was originally published here.