IT management

Are You Ready for One-Third of Your Revenue to Disappear?

Every board member and senior executive already knows the digital disruption narrative; they've certainly heard it enough times. Netflix killed Blockbuster… the biggest hotel company in the world doesn’t own any property… You hear the same noise at every conference and yet you’re somehow still in business. It’s easy to tune out and become complacent.

The actual pace of disruption in each industry varies significantly, but early research from MIT’s Center for Information Systems Research (CISR) found that organizations see on average 32% of their revenue under threat due to digital technologies over the next five years. More recent research from MIT CISR shows that for large organizations the average revenue at risk is significantly higher at 46%.

So what percentage of your revenue is at risk? Take the time to reflect on your business model and disruption exposure. You’ll likely conclude that you will need new business models to thrive (or even survive) in the future. For most organizations, the threat of complete, Blockbuster-like disruption isn’t that high. The more significant threat is of disintermediation from customers and the company’s product or service becoming a commodity that’s ranked by algorithms and bought based on price.

It’s critical to shift focus and start obsessing about your customers. Understanding your customers and where you fit into their journey may also mean that you need to revisit your purpose as an organization and give yourself a broader remit to support those customers in new and different ways. You might choose to create value in a specific part of the customer journey or to deliver an end-to-end outcome that might require you to partner with other organizations.

But when? It’s hard to make the call to cannibalize existing revenue and profitability to bet on an uncertain future success. It’s especially hard when your organization runs on quarterly reporting cycles, which see most executives more worried about moving too early than moving too late.

Research shows that early movers in digital transformations do better than their slower-moving peers. MIT CISR finds companies that have substantially completed their digital transformations have net margins that are 32% higher and revenues that are 67% higher than those that haven’t. Depending on your likelihood for disruption, there are three broad responses for you to consider:

  • When the threat is immediate, lean into it, self-disrupt and rewire the organizational DNA via new business and operating models.
  • When you understand the threats but have time, you can move at a more deliberate pace. Incubate new businesses or even a challenger brand to tackle a part of the market and flex and refine your digital capabilities. Adapt these learnings to transform your core business.
  • When the future threats are unclear, invest in getting future-fit by aggressively and systematically flexing the culture and capabilities to adapt to as-yet-undetermined realities and opportunities.

Regardless of your speed and approach to your digital transformation, you’ll likely benefit by keeping these five recommendations in mind:

  1. Get started. It sounds simple, but it isn’t. Creating alignment and consensus on driving digital transformation takes a surprisingly long time in traditional organizations. It’s too easy to get caught in a cycle of research, investigation, modeling, prioritization, more research, more prioritization etc. Instead, just dive in. Yes, it’ll be a shock, the water will be cold, and you’ll be uncomfortable. But the lessons you learn by “doing” will be far more valuable than endless planning. Early cycles of experimentation, learning and adapting while finalizing the overall transformation plan are a critical investment for success.
  2. Remember that success is all about people. Despite the enablers that create digital businesses being largely data and technology driven, it’s the people, culture and leadership that are critical ingredients for success. Starting to reset mindsets and beliefs early is important as they take the longest to change. Hire new talent who can ask questions and help to challenge your long-held beliefs. Maintain a focus on continuous learning, measurement and improvement. Invest in digitizing the employee experience to best enable your people to deliver amazing experiences for your customers.
  3. Avoid the curse of the large program. Digital transformations can take on lives of their own. The ambition of transforming the business can quickly devolve into “projects to deliver.” Lots of streams, tasks, activities and busy people running very fast—unfortunately, they’re all often disconnected from any real value. It’s part of the reason that half of change initiatives fail, according to Gartner. Keep teams small and focused and watch out for the transformation versus “business-as-usual” trap.
  4. Change business-as-usual enough that you can’t go back. Instead of standing up transformations as separate programs on the side, organizations are increasingly rotating their core businesses into new operating models and then enabling and empowering their talent to bring the new models to life with very different ways of working. The rise of enterprisewide, scaled, agile transformations comes from the growing acceptance that traditional approaches to digital transformation just haven’t worked.
  5. Just because you can, doesn’t mean you should. As business models evolve to create new and increasingly more personalized and immersive experiences for customers, employees and partners, the importance of digital ethics becomes critically important. More than just profit should dictate where and how you use the wealth of new-found data and digital capabilities.

While in the short term most organizations are unlikely to disappear due to digital disruption, losing a third or more of your revenue is going to hurt. Assess your risk, pick a path and kickstart your own digital journey before you’re forced into it by external factors.

Eugene Belilovsky is VP, advisory services at Avanade. Read more Avanade blogs here.