Digitization: New Challenges for Boards

For the original article published in KMU Magazin (in German) Click here

The digitization and transformation of an organization are not just IT issues, they are directly related to a company’s strategy, processes, business models, organizational structure and workflows. To navigate a business successfully today requires digital expertise all the way up to Board level.

We will explore what this means for the Board of Directors and the important points that they should consider when developing and implementing a digital strategy. 

With the steady progression of digitization, business is becoming more entrepreneurial and dynamic. Traditional borders are shifting, value chains are transforming into comprehensive networks and technological developments are fundamentally changing the way we interact with each other and with the economy, education systems and political organizations.

Change Mechanisms

The most recent disruptions are happening at a much faster pace than in the past. It’s impossible to attribute the cause to one specific factor because it is truly a merging of innovative forces. The interconnection between technology and new solutions is rapidly transforming systems and organizations, making it difficult to stay ahead of the curve.

We have seen mixed reactions from companies on how to address the changing landscape, from minimizing and trivializing to horror scenarios and the resulting implications. Companies really have to ask themselves if they are willing to change the strategy or risk extinction, or even if digitization on a broad scale will happen at all?

Key Points

• Boards should be composed of at least one digital expert
• Digital transformation refers to a change in the use of technologies and the resulting implementation of new business models that impact organizations.
• New technologies should be client-focused, offering cost effective products and services that help them stay ahead of the competition.
• One of the hallmarks of adaptable and resilient organizations is that they continuously question and improve their business models. They are always hunting for sustainable new business ideas, markets and ways to engage existing and new clients.

Cooperation between the Board of Directors (BOD) and management must be reciprocal. The Board of Directors represents a company’s shareholders and has legal responsibility for determining an organization’s strategy and ensuring its proper implementation. Management, on the other hand, is tasked with implementing the board’s strategy and ensuring that it be commercially viable.

The Board of Directors and Management team in practice

In practice, strategy is often decided in unison by the BOD and management, since the latter is closer to the market and well-poised to propose improvements to corporate strategy. Management should be providing the Board with a forward-looking market analysis in order to recognize trends and tendencies early on. This approach is a way to ensure that the conversation about digitization, and other important trends, widens to the board level in a timely fashion.

The Board members should avail themselves of the proper tools in order to work with management on tackling this issue. This may include seeking external support in the form of advisers or consultants with a proven digitization track record. Until recently, many SME boards had not given digitization sufficient attention. In the future, every Board will need digital know-how, whether it be directly through a board member or a third party adviser.

Strategy and business models

To maintain or increase competitiveness amid such technological upheaval, most organizations should conduct an in-depth review of their strategies, operating models, organizational structure, internal processes and culture. In most cases, a change or adaptation will be necessary.

Digital transformation typically impacts a broad cross-section of a company, impacting all relevant stakeholders. This process can make it difficult to define a company’s structure and employee functions, in terms of tasks, competencies and responsibilities. It is important to conduct this exercise with caution.

Business leaders focused on their digital transformation often ask the following questions:

• Which adjustments to our strategy are necessary?
• How is the market and business environment changing?
• What are the potential consequences?
• How will this affect operating processes and value chains?

The majority of traditional companies have centralized management, monitor themselves with financial ratios, and look to their past experience for future planning. Internal innovation comes predominantly through product improvements and process optimizations. It is important to understand that this reactive vs. proactive approach will limit an organization’s ability to answer the important questions to come in the future.

The Board of Directors must not only recognize trends before they happen but they should be prepared to respond to management with sustainable strategies to address them. In a digitally savvy organization, management will expect this from its Board. Likewise, the company’s management team must ensure that the organization’s evolution is properly organized, structured and monitored.  

In order to ensure maximum efficiency for all stakeholders, the integration of digital competencies within the Board is not only recommended, but crucial.

Competencies and skills

The standard leadership profiles are well-known: ability to engage and effect change, strategy management, financial expertise, legal advisory, and the list goes on. Less well-known are the digital skills required at the leadership level. Which competencies are we actually talking about? To name a few:

• Experience in managing multi-channel sales strategies, including e-commerce
• Social media strategy
• Technical experience (IT, cybersecurity, Automation)
• Experience in virtual organizations
• Innovation management

To stay current on these skill sets requires a willingness to learn and adapt. The same holds true for an organization. When readiness for change is lacking, even with the right tools, evolution will not occur.

Core questions about digital transformation

With the work environment becoming more dynamic and automated, employees are confronting the existential nature of their competencies as well as their organization’s chances of survival. A strong digital transformation strategy should be crafted to address the following issues:

• Dissolving organizational boundaries: how can the use of external and internal knowledge be coordinated effectively?
• Innovative pressure vs stability: how to continuously adapt individual and organizational expertise while maintaining equilibrium?
• Knowledge skills of employees will become valuable corporate assets. Which skills do employees need? In the case of automation, how can they contribute more value than a machine?
• Everything as a service: which capabilities are needed to meet and exceed client expectations?
• Work environments: which structures and tools are needed for flexible and decentralized cooperation to be effective and efficient?
• Data usage: Which advances in robotics, sensors, (IoT) and artificial intelligence are dangerous to production and service provisions?

In principle, existing board members can acquire digital competencies on their own. Otherwise, the Board can “purchase” this expertise and expand the Board to include additional members. The learning curve can be quite high, so the second approach ensures a more professional transition in a shorter time.

Digital expertise definitely needs to supplement and enhance, not replace, core competencies such as leadership skills, entrepreneurship and strategic thinking.

Technology

The Fourth Industrial Revolution is being driven by innovations at the physical, digital and biological level, and is having a noticeable impact on organizational structures.

At the digital level, we find information technology, which puts man and machine in ever-closer contact. Economic forces are leading to intelligent factories, where processes are automated by robotics, and resources are used more efficiently. Thanks to artificial intelligence and modern analytics, information has become a major production factor, with speed ??and flexibility counting more than the ownership of resources or dimensions of an enterprise.

Businesses are deciding to outsource to third parties more frequently rather than manage processes in-house. For example, IT cloud services and other support processes like accounting, human resources and logistics.

The office space and labor contract are another topic of discussion. More employees are working on the go, sitting at the client’s premises, or remotely from their homes. Often we see employees preferring to work on an interim basis, where they are focused on specific time-sensitive projects without a classic employment contract. This shift raises questions not only about IT security, but also regarding leadership succession, employee responsibilities and corresponding regulatory and contractual requirements.

In summary, today’s organization should always be designed with employer attractiveness in mind. Top talent prefers professional employers who offer contemporary employment models and attractive, tech savvy work environments.

Risk and liability

The members of the Board as well as management must be committed to the greater good of the organization, and this means focusing on digitization in order to remain viable. Shareholders will ultimately be responsible for determining to what extent a digital approach be required to drive future success. The risk associated with avoiding digital strategy is great, and it should be a key topic at every Shareholder’s meeting, if it isn’t already.

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