The death of long-term planning
A conclusion from previous articles, digitalization is foremost a governance and management revolution. The traditional governance principles are challenged by an increased unpredictability (the X factor) and require adjustments to corporate responsiveness and value creation. Companies failing to upgrade their governance system and leadership are more likely to be phased out of the market. They simply fail to respond in due time to opportunities and threats in the digital market. The governance revolution was particular evident when talking to a team of digital transformation professionals in a telecom company. The conclusion was that they required 18-24 months to respond to a digital trend (threat or opportunity) based on traditional governance. Considering that the period of predictability in the same market in around 12 months show us that the company will never be capable of digital competitiveness. They will always be one or two trend cycles too late!
The governance revolution implies the death of long-term planning. A prerequisite for long-term planning is high market and technology predictability (we can predict the future) – which is no longer available in IT intensive markets. The fact is that the level of predictability (see diagram above) is decreasing slowly in most industries as IT intensity increases. The trend towards higher IT intensity is a natural step for most companies and organization. The fact is that almost all business models are dependent on smart use of IT to create customer value and experience. The trend can best be described by five principles of customer expectations in the digital market enabled by IT-intensity:
- Customers have no patience for irrelevant information
- The need and demand of customers will change continuously (unpredictable)
- Customers want to be approached differently depending on situation
- Customers will require products and services that make them successful or build personal brand
- Customers wants products and services delivered at once without hesitation
Source: Peter Hinssen (“The New Normal – exploring the limits of the digital world”, 2014)
When the level of predictability decreases 12-18 months, traditional governance (long-term planning) needs to be replaced by digital governance (cyclic 3-6 months iterations) to manage the high unpredictability. Traditional governance tools such as long term (3-5 years) strategies, business cases, and sourcing agreements has little relevance in the fast-moving digital market. It is the fast devaluation of information that hinders us to predict how our business reality will look like in 12-18 months.
Many companies in digital business landscape (for example: bank & finance, media, and insurance) have given up long-term planning and focus on short-term planning processes (for example: beyond budgeting). Companies such as Handelsbanken and Statoil adapted this agile business planning early (based on the concept of Beyond Budgeting) and have a significant advantage over their peers. They de-centralized decision-making and thereby allowed business decisions to be taken closer to customers. It allowed them to be more responsive and customer oriented. The pre-requisite for the short-term and customer-oriented planning was in the trust of employees and managers. That is not always the case in traditional companies. Today, we see Handelsbanken in the top of customer ratings while traditional peers are far behind.
”The success of IT will be determined by business – and how well they create value to their customers”
- Hans Gillior
A couple of months ago, I had the opportunity to discuss digitalization with the IT department of a manufacturing company. It has invested heavily in ITIL and Service Management during the last 10 years and did not understand why business was not satisfied. The fact was that 90% of the IT employees was positioned in the IT operations domain – and hardly anyone interacted with business, and captured business ambitions and expectations. It was IT for IT. By re-balancing the resources and energy in the organization to be more business oriented (IT decisions closer to business), IT was able to manage business ambition and expectations more efficient and effective.
- Understand the characteristics of the industry and market. What is the level of unpredictability and what is driving the transformation of the industry?
- Does your company have the optimal governance structure to cope with the market’s level of unpredictability? If not, what are the consequences?
- Ask yourself how to change the governance structure of the company. It is not about technology but rather about leadership, people and culture. What is your first step?
The revolution of governance and management is not only a short-term trend of 2018, but a paradigm shift that will influence company’s digital competitive for many years to come. The probability that the current level of unpredictability will decrease is close of zero and that means that companies and organization need to accept the new governance and management principles to support digital competitiveness. History tells us the story that companies failing to adjust will be marginalized and phased out. Do you dare to take the first step on that journey?