What is Digital Transformation, Anyways? (Podcast + Transcript)

December, 2019

On this episode, we hear from Jeffrey Smith, the Senior Managing Director leading digital transformation of investing at CDPQ, one of the world’s largest pension funds and institutional investors.

We discuss the most effective and challenging methods of digitalization for multi-national corporations, the ingredients and incentives that can drive transformation inside an organization and much more.

Here is the transcript:

Evan Chesir:                       Welcome to the Vintage Voices podcast. It’s a podcast that we have towards decision-makers, corporate decision-makers, startups, CEOs, so forth. In the past, we’ve discussed corporate innovation and transformation. Today, you’re our special guest. Jeffrey Smith, thanks for joining.

Jeffrey Smith:                    You’re welcome.

Evan Chesir:                       Leading the discussion today is our VP of Value-Added Services, Orly Glick, who leads relationships with hundreds of corporations. Orly, thanks for joining.

Orly Glick:                            Thank you for having me again.

Evan Chesir:                       So, Jeffrey Smith is a Senior Managing Director at CDPQ, where he leads the digital transformation of investing at a very large pension fund. Is that correct? One of the largest in Canada?

Jeffrey Smith:                    That’s correct.

Evan Chesir:                       CDPQ is an institutional investor that manages several public and para-public pension plans and insurance plans in Quebec. At the start of 2019, CDPQ managed assets of over three hundred billion Canadian dollars. Jeff joins us with particular expertise in adopting digital transformation offerings and programs for major vertical industries, from large corporations like ARGO, HB, KKR. Orly, it’s all yours.

Orly Glick:                            Thank you, Evan. Jeff, we’re so honored to speak with you. We’ve seen so many methods of digitalization processes and you have so much experience with this. Here at Vintage we’ve seen top-down approaches, bottom up approaches. Let’s start with the bottom up. The bottom up would be corporates go to Silicon Valley, to Israel, to Singapore, they see lots of startups, they get excited, and then they go back home and do their homework. We’ve seen top down approaches where corporates are looking for their pain points, understanding what they’re looking to do strategically and technically. And then, they’re looking for a startup that matches their requests.

Orly Glick:                            These are the methodologies that we’ve seen. Have you seen similar methodologies? Have you seen other methods of digitalization journeys? And what have you seen that worked, and what have you seen that did not work?

Jeffrey Smith:                    Yeah. Well, so, I think that’s actually a very good list of the conventional ways that have manifested themselves and how organizations have approached the issue of major change. I guess if there’s a common thread, and it’s not that common, is that whatever triggers the interest in changing, sometimes it’s the entrance of a new competitor. Sometimes it’s a changeover of top leadership. Sometimes it’s an economic recession or something that triggers some kind of a challenge to the existing commercial model. Sometimes it’s an activist investor, or an extreme and a corporate raider who comes in and he either pushes the board to make radical change or buys the company and then makes the radical change that sells.

Jeffrey Smith:                    Any of those can be triggering events that cause an examination of what do you change, how do you change it, and what should be the better business we have when we’re done to make it worth it. In the private equity business, we’ve often used the expression: is the juice worth the squeeze? And that’s a big question you have to answer upfront about a major change. Is the outcome going to be worth all the pain and agony that we’re going take the organization and its people through in conducting change? And that’s a pretty important question to answer upfront.

Jeffrey Smith:                    So, each of those methodologies you describe generally had some sort of rationale behind it that said, this is the least painful way generally, sometimes less expensive, sometimes less onerous to the organization or customer base or whatever that we think we can approach change with. So, sometimes they bubble it up from the bottom. Sometimes they create an innovation function which its job is to go out and research what everybody else is doing and bring back those ideas to test them for relevance with this business. And a lot of times it can be the top guy, who for one reason or another gets inspired or challenged to have to look for a way to change the organization to perform better.

Jeffrey Smith:                    The thing I would say that ought to be in common, and sometimes it isn’t, is a vision from the front of what improved performance is supposed to look like. Are we going to be closer to the customer? Are we going to have a higher return on invested capital? Are we going to have happier employees which reduces our employee turnover? I mean, if you think back a couple of years, and actually, this is still going on in India right now. A couple of the Indian large firms like Infosys were experiencing churn rates in their professional organization at a 50% level per year. And you just can’t recruit new software engineers fast enough to replace the ones who are leaving.

Jeffrey Smith:                    And so I remember one year Infosys made double digit raises to their entire workforce twice during the year for base salary to just try to stem the flow of talent that was leaving getting recruited by competitors. That sort of situation may cause you to have to change too. Because that would trigger, for a company like Infosys an interest in getting a lot more automation into the work they do so they are less dependent on that software engineering workforce over time.

Jeffrey Smith:                    And so, those sorts of things, any number of those kinds of situations may trigger at least the appetite to look at change. And then, if you think about the ambition for performance companies. Now, that combination, there’s some sort of sweet spot for an organization where they decide they’re actually going to do something. You know, I have been seen… Actually, I’ve seen this happen where sometimes a company is studying the topic academically and they bring in a guru or a luminary who is so charismatic and inspirational that, that triggers a desire to change. Or you know, Michael Hammer, rest in peace, was a very well-known thought leader in the area on re-engineering back in the late eighties, early nineties. And Michael is so energetic about re-engineering and he often talked about the three times in a company’s life cycle where they should re-engineer.

Jeffrey Smith:                    He said the first is when you’re in trouble when you’re behind and you need to catch up. The second is when your neck and neck with your competition and you want to pull ahead. And he said in the third one is when you’re out in front and you want to pull away. So, basically twice. You should always be able to reengineer. That kind of guy, that kind of message can often trigger a company to start looking at whether change might be worthwhile.

Orly Glick:                            Fascinating. So let’s say that indeed, you mentioned like when the CEO gets excited or when there are radical changes or like trigger events. So when these happen, what are the ingredients in the organization that are like must haves that have to be there in order for digitalization or digital transformation to work well?

Jeffrey Smith:                    I think first and foremost is a clear strategic intent. What are we doing this for? I mean the answering the why question is the single most important question. And it’s usually the hardest one to answer. Why are we going to do this? And in answering that you basically start designing the profile of the future state as if the why is, well why? Because we need to be closer to our customers. Then customer centricity is now a factor in whatever the future state’s going to be. We need to be much more… Much speedier in our response to the marketplace and maybe in terms of speed to launch new products and maybe in terms of speed to fulfill orders and maybe in terms of speed to source where we’re dependent on key raw material. So our ability to find them first and get them constitutes success.

Jeffrey Smith:                    So think about upstream, oil and gas exploration, whatever that speed thing is, that may be a vector that we’ve got to be looking at. Quality may be a huge issue and it’s still under underestimated I think as a factor driving cost and delays. But if you measure speed to deliver based on delivering it correctly, not just speed to deliver something, you find that oftentimes the real lead time from start to done is actually two times what you think it is. Because I’ll take an example of somebody who is pretty well documented. Procter and Gamble struggled for years with their ability to ship accurately into Walmart warehouses in the United States and they’re shipping full truck loads of disposable diapers, not the most elegant or sexy kind of item to be shipping. But if you’re ordering different sizes of diapers as Walmart wants to have some for new infants and some for three year olds who aren’t potty trained and all the guys in between and they’ve had a mixture of pampers versus love’s because there’s two different brands and the one’s a little more upscale and higher priced than the other.

Jeffrey Smith:                    Each one of those is a separate UPC code that you have to do inventory planning, replenish and then managing your inventory separately. Well if the order has a certain mix because they have a certain expectation of demand pattern in the store and so they want to have 20% of them being babies and 30% of them being… One to two year olds and the rest of them being kids who are larger and Procter is stocking the truck in order to ship it and they find that they’re short of the big ones. So they’ll send more baby ones to fill out a full truckload. That doesn’t help Walmart when they get it. To them that’s a bad order, right? The shipment doesn’t match up with what I ordered. It’s not matching my inventory plan, that’s stuff I’m getting shipped from them. If I put it in inventory it may not sell for a long time. So it’s going to cost me in terms of my costs of working capital and Walmart tends to take the stuff, stick it on a truck, ship and back, and also deduct that off the invoice.

Jeffrey Smith:                    So it creates a whole bunch of quality issues. And from Walmart’s point of view, Procter did not successfully fulfill the order when the truck showed up. It’s not fulfilled until all the things they ordered on their PO in fact got delivered like they were supposed to, which may be another week longer than what proctor thinks because they got the truck out the door on time and the truck showed up at the warehouse on time. So, these difference in measurements, difference in perspectives and the lack of a recognition if there’s a cost to quality and compensating process for it becomes a really big issue in its own right. So fixing that then creates feed and lower cost and improve customer satisfaction all at the same time if Procter was our tactic. And he eventually did but that’s an illustration of how a speed, quality and cost and all the really important performance characteristics influence return on invested capital.

Jeffrey Smith:                    And once I’ve designed those things instead of the customer-centricity is going to be the heart of it. Now I’ve got a vision for what I want to be. And if I look at how I am today, a gap analysis becomes a pretty straightforward exercise because I’m not where in some of these places and then I can start planning actions that are going to close the gap and that becomes my change plan. And then I look for ways to do it in a way, first of all that eliminates everything I can. Simplifies those things that remain and then I automate very intelligently what I’m going to do so I can integrate it.

Jeffrey Smith:                    And that methodology of eliminate, simplify, integrate, automate, becomes the final kind of step in the process in designing specific detailed solutions then you can implement with your action plan. And when I think about digitization, which is just another chapter in a very long story of people trying to use technology as a way to improve the way they perform, that notion of eliminating and simplifying before you automate is still one that too many people don’t do. Instead, they automate what they have today, which Michael Hammer called it [manumating 00:12:16]. Because you’re taking a manual process and automating it as it is instead of rethinking how it ought to be given that you can automate it now.

Jeffrey Smith:                    And as he used to point out, one problem with manumating is if your current process makes mistakes. When you automate it, you make a lot more mistakes. So those things become critical factors in thinking through change. But at the heart of it, it’s starting by beginning with the end in mind, knowing what the characteristics of higher performance are you’re aiming to have in that future state. And as a result, when you designed your change plan, you know how each one of the elements in your change plan are going to contribute and moving the needle and those KPIs are going to have to measure that future state

Orly Glick:                            Now that you have the strategic intent and the initial framework. Tactically, how do you or have you seen this done on the chain plan? So how do you translate these to exact pain points in an organization? Usually your organizations are so large and oftentimes siloed. How do you do, do you take external consulting firms to help you figure out the exact pain points of each strategic issue? Do you run workshops for every business unit separately? Maybe then together, maybe involving strategy or the innovation team because there are so many silos in the organization. How do you do these work streams where also you have like a holistic view of all the pain points? Because sometimes we work with corporates that have like six or seven business units and each and every one might have different problems. But looking at all of them from like a 30000 feet view could be really helpful in digitalization process where you can help them all with some solutions that would look at the complete picture. So, how do you do it tactically?

Jeffrey Smith:                    Well, I start with what Edward Deming said, which is, “What gets measured gets done.” So, you start… One key thing to look at early on is who benefits from the change and who was hurt by it based on how they’re measured and compensated. And the silos you referenced oftentimes are unintended consequences of compensation and a performance measurement model that’s built around somebody’s idea of an organization design that when they did it seemed to make a lot of sense. But what has happened over time, as the market has moved its customers have changed. Maybe the company has entered and left different businesses may no longer make the sense it once did.

Jeffrey Smith:                    So, first thing I think about is let’s make sure everybody’s going to benefit from the change, whose going to be involved in it. And that means I’m going to create a metric and a compensation model that rewards them for moving the company in the right direction. So, that has to be a transversal, it has to be cross-silo and cross-company. And it’s where everybody benefits. Benjamin Franklin a long time ago said we should all hang together because otherwise we will all hang separately. That was something he said. And you got to create that attitude about the people who are going to be part of the change, just hang together guys because otherwise it’s not going to work.

Jeffrey Smith:                    And that creates an atmosphere of collaboration that is truly vested in self-interest versus asking everybody to be a good person and take one for the team. So that’s a really important early dimension of this in order to get motivation where you want it to be. I think the second point you raised about what kind of resources and expertise can be helpful to do this, there’s no doubt that external resources with consulting firms have their place. I mean, if I consider that most companies don’t want to do a transformation more than once every five years because it’s hard and it’s painful and once you’re done you’ll kind of want to enjoy the result for a little while before you go do it again.

Jeffrey Smith:                    So that means that your internal skillset or transformational work tends to be a muscle that doesn’t get exercised every day. While you’re doing it, it does. But in the interim, it atrophies a little bit. And the nice thing about some consultants, the good ones, is that they’re doing it all the time for multiple clients. So, they can bring an active tuned, highly professional skillset and methods and tools to augment what your own company’s going to do to get something going and get it done right. Now that in no way allows any organization to hand off the responsibility and authority to the consultant because when the consultant leaves with their last check, the company has to live with whatever’s there.

Jeffrey Smith:                    So, my experience on both sides of the table, both as a client and as a consultant has proven to me that at least 50% of any consulting project that goes wrong is the client’s fault. At least 50%. No matter how good or bad the consultant’s performance was, the client, if they were doing their job and managing the consulting privately, would have limited the downside and would have done a lot better job at getting the upside. But many clients think, okay, I’ve got… Named some names and no disparagement here, McKinsey, great firm. Bain, great firm. BCG, Accenture, Deloitte, all great firms. And yet all of them at one time or another have clients who have been unhappy with a result of a project.

Jeffrey Smith:                    And my message is client look in the mirror because odds are you didn’t help the client consultant managed successfully if there’s a project that didn’t go well. So, there has to be this explicit understanding and accountability on the client-side that somebody who is the single sponsor, the one throat to choke that the CEO can call and say “Where’s our project?” Not where’s the McKinsey project, but where’s our project? And the answer includes McKinsey, but it also includes all our own people. Because that’s the other piece of all this is done well, change programs with whatever level of automation and digital dimension they may have in them have to be driven by the people inside who are going to live in the resulting architecture. It’s not… You can’t do it to them, you have to do it with them. And that’s a big, big, big methodology choice you make.

Jeffrey Smith:                    And unfortunately, some consultants tend to do it to their clients and the result is one that’s difficult to sustain. Those that do it with them are the ones that create sustainable change that actually gets the performance you’re looking for. So, those are all elements I think about tactically in organizing and however you mix and match the skillsets, inside versus outside, technology versus business function versus change people. Those combinations are things that have to be truly somewhat sourced independently of where they come from and everybody’s got to have the same motivation.

Jeffrey Smith:                    Consultant contracts for example, I would write where they get paid based on our result that we’re looking for in the outcome. So time and materials, no thank you. Not interested, because that’s motivating you to spend more time, not motivating you to get me my results. And a lot of consultants when they’re put at risk like that are not as confident in their own abilities. And so they won’t sign up to it, which helps you then select the people you did want to work with because they are confident enough that they will sign up to it.

Jeffrey Smith:                    So, those are some of the things that I think about and some of the things I’ve seen, well things that have worked and it didn’t, I walked in on a project situation two years ago and I eventually became the client there where the consultant had happily taken two X the budget for consulting fees and the project was in a ditch. It was in a major disaster in the making. And so I stopped the project. I sent most of the people home who were on the project team from both a consultant and from our own side. And we replant the whole thing. And when we turn it back up, we gave that consultant the chance to recompete for the work alongside two other firms. And the two other firms were selected by our team. And the result was a much more successful project. And the company ended up IPO-ing a 23 Euro and got up as high as 70 Euro before some of the more recent your economic headwinds, but they’re still comfortably in the 50s so it’s been a very great value creation story for a company that’s done very well off the backs of that project work.

Jeffrey Smith:                    So I’ve seen consultants who were motivated the wrong way and the ones that are motivated the right way and they can make a great difference for good if they’re properly managed by their client.

Orly Glick:                            That’s super interesting. And so I’ll take that point that you mentioned, I mean we’re speaking now about incentives and KPIs. And you were touching upon this earlier, what is the role of HR internally in the organization supporting and encouraging people to innovate? So should innovation, you think it should be a part of every employee’s GNOs and how have you seen that or have you seen that working because I think it’s a pretty new area. I’m not sure that every company really, that is doing innovation really started doing that on the HR level.

Orly Glick:                            And the second question is how do you cope with fear? I mean, startups are agile, innovation is agility and everybody speaks about fail fast. But really in a large organization, people are afraid to lose their jobs and people are afraid to fail. So, how do you cope with that? How do you prevent that from paralyzing people?

Jeffrey Smith:                    Those are all great questions. And very important topics around this. So first of all, on the role of HR, too often even now, despite a lot of publications and a new generation of folks moving into professional HR roles which are still people hand out the balls and the bats at the picnic and they run payroll. Too much sentimentality around the function, it somewhat puts it in a box. I think where HR organizations create an organizational development or a training in professional development kind of a function within HR. They get a chance to reach into the business a bit more and influence things. Now one of the challenges with HR is they don’t necessarily have very good project management skills because that isn’t something… A project manager doesn’t think, “Oh yeah, I’m going to go do HR project management.

Jeffrey Smith:                    Just think about a project manager, is going to construction, are they going into aerospace and defense? Are they going into software and product development? Because that’s where projects are done. People don’t think about HR as a natural home for projects. Instead, it’s more process and cadence of repetitive cycle like payroll every two weeks or the W-2s and W-4s is getting printed every year in the US for tax purposes or annual performance review.

Jeffrey Smith:                    So there’s a need for HR to adopt a mindset about what its role is and the CEO really has to decide that’s what HR does here. And then get a CHRO who lines up with that vision. And a lot of companies don’t do it that way. So that’s a bit of a gating factor on how effective HR can be in the process. The performance… Whether or not they do that. HR usually owns incentives and performance and so in my mind, you have to recruit them and involve them at that point in your change program, whatever else they do or don’t do.

Jeffrey Smith:                    And bring HR on board in my mind is kind of like bringing a corporate internal audit on to do the business case for your change program. So rather than having a business plan or a program where the benefits and costs and so on are all calculated by consultants, which means that when the CFO who doesn’t like those numbers points his audit people at it, they chew it up and spit it out, 15 things that are wrong with your assumptions. And so then the business case is suspect and so is the project, if you have internal audit and put the numbers together, they’re not going to chew each other up.

Jeffrey Smith:                    So you’ve co-opted the enemy in the sense of gaining the business can be one that will be accepted and becomes the target for the organization. And HR can be a similar thing. Bringing the incentives and comp people in early to help plan how you’re going to get that transversal set of a KPIs and transpersonal incentives then solves the problem because the people presenting it aren’t you? The people presenting it are people who are incentives guys and most of the issues that would normally be stumbling blocks or internal objections they’ve anticipated because they’re normally the ones making them.

Jeffrey Smith:                    So I think a lot of recruitment and involvement of the internal players from the relevant functions in the planning and solution architecting can really set the stage for a much faster and higher quality implementation and deployment because you kind of get all the speed bumps you don’t know about out of the way. They’re up early and they’re out in front of you so you can deal with them.

Jeffrey Smith:                    So those things are things I think HR does well. Now depending on the quality of their training and professional development capability, the user procedures, the user training, the org re-skilling, those things that may be a part of your change plan could be tasked to them or them along with some consulting help to have enough arms and legs to get it done. I’ve seen that work. But it is dependent on how capable your internal function is to begin with. If what they tend to do is do nothing but search the internet for distance learning courses that they signed licenses for and they don’t actually do the curriculum design and instructional development themselves, they’re kind of limited in what they can do for you in that case.

Jeffrey Smith:                    But if they do have those skills and they do have some org development kind of skills, then they can be very helpful and very effective as people who will call on the issue internally. So HR can play a big role. It kind of depends on how good they are. One question that this sort of project can raise is should we be better at this internally? Maybe we should be recruiting a higher caliber of player in HR in order to play the role as opposed to renting consultants that then go away. And some companies choose to upskill as a result of this because they’d like to have their capability in-house on a more regular basis. I’ve seen a number of variants of how that plays out.

Orly Glick:                            Jeff going to a different department. So we had HR. What about procurement? So I mean typically in large organizations procurement has long forms to fill out. It’s a long process. Sometimes I see startups filling out thousands of questions. So on one hand, obviously, I mean the organization has to protect themselves. On the other hand, this might be very heavy for startups. Have you seen this in the past? Have you seen this work and where have you seen the success and the failures?

Jeffrey Smith:                    Well, I’m going to I guess put a little different label on the question you’re asking. Because to me this is a symptom of something more fundamental. How do startups and early-stage companies sell into enterprises? That’s the question. And most startups are not good at it. They don’t understand enterprises, they don’t understand how the enterprise procurement acquisition and deployment cycle works. And so they struggle with their direct salespeople to be able to figure out who to talk to, let alone who has a budget, let alone who’s in the approval cycle and oh geez, now corporate procurement’s coming in and there’s all TNC thing I got to do on a master service agreement, blah blah blah. Right?

Jeffrey Smith:                    That struggle of ignorance about how enterprises buy, therefore how do you sell to them is a very common startup company problem. I sat with a guy from a very large PE firm who runs their tech portfolio a couple of years ago. And at the time I was running a large… A growing small startup, it was an artificial intelligence company. And we had built to go to market motion that was aimed at enterprise sales because I had come from that world and we were selling like hotcakes. And in the past our company has sold nothing. So, he was curious since he was on the board now just what it is we were doing. And I walked her on how we built to go into market motion and how we had our sales guys deployed and what we were doing.

Jeffrey Smith:                    And he says, “As I sit here in the valley, I think if you built a business that is based on being a broker for startups into enterprise, that might be the biggest value play in the valley.” When it comes time to commercialize it or it’s got to become a real product I can sell to a real customer and make a real revenue off of. The wheels come off the bus because they don’t know how to do that yet.

Jeffrey Smith:                    And oftentimes they recruit salespeople who know how to sell into small companies, but struggle to sell into big ones. So, there’s this fundamental issue. How do you sell to enterprise? And I think startups have a as a common challenge. Some people go through distributors, some people get acquired by a strategic, and then the strategic sales guys take over. That happens a lot and I know that happens in Israel, it’s one of the major exits that startup entrepreneurs oftentimes are forced to have to do. But if you’re going to run your own business, try to grow it yourself, and enterprise is the market as opposed to consumer, you have to confront this issue.

Jeffrey Smith:                    And both direct channel and indirect channel become relevant. Picking a big distributor who has a well-established enterprise sales organization might be a good answer for you, but recognize their strip and margin of you and you’re selling to them a wholesale and they’re getting retail. So those are things you have to keep in mind. You’re trading down on your margin in order to trade up on volume and on a channel that already has a sales organization. If you’re going to do it yourself, and maybe it’s a highly technical sale where you need to do it yourself, a distributor can’t do it for you, then you got to think hard about how you’re going to reconcile what procurement does vis-a-vis what the economic buyer is. And I always pull out the old Miller Heiman book strategic selling, which has been around for a long time because it’s still good. I mean we’re still selling to people in organizations, that has not changed despite 21st century and having mobile apps.

Jeffrey Smith:                    And in the real world in 21st century, knowing who the economic buyer is, knowing who the technical buyer is, knowing who your coach is, knowing who procurement is and what they do, knowing who they gatekeepers are, who may say no but won’t say yes. Knowing who the competition is and who their coaches are and whether they’ve got a technical buyer that’s skewed towards them. All those things are things you pull out and what Miller Heiman came up with called the blue sheet, I think it’s electronic now and you document that relationship map of the complex sale you’re about to make and then you build your sales strategy to bring in the economic buyer. When the technical buyer neutralizes the gatekeeper, you leverage your coach and block your competition and that’s how you do complex selling. That is how you sell in debt or price.

Jeffrey Smith:                    And most people who haven’t done it don’t know it. And yet what you figure out once you’ve done it a few times is that machine can be something you feed additional products into over time. It’s a machine that you can carry as a commercial model from a startup to a startup to a startup. So the best serial entrepreneurs do figure this out. And then they’ve got a playbook they carry with them as they go from company to company with this kind of a commercial success pattern with it. So that’s a thing. And if I have one book I’d recommend to people to read it’d be strategic selling on this topic. That’s how you deal with procurement.

Orly Glick:                            Jeff, how much do you attribute to person to person interaction? And there’s lots of research showing that 60% to 80% of mergers and acquisitions failed depending on the research that you read due to cultural differences, for example, how much of the success of corporate-startup collaboration in your opinion is attributed to people, rather than the technology? The technology could be great, but people.

Jeffrey Smith:                    About 99.9%. Not quite six sigma, but close because reality is organizations are organizations of people and customers are people and suppliers are people and employees and colleagues are people. Our shareholders are people. And our competition are people, so if you think about all these stakeholders of various types and you use the old Michael Porter five forces model to map them out maybe. But the fact of the matter is, is that there are people’s names in all of them. And I remember years ago I worked for a large consulting firm. We were developing a new methodology or strategic information planning. And I was on the team that designed the methodology and documentation for it. And we had a big quality assurance review with a number of our senior partners before we launched it.

Jeffrey Smith:                    And somebody decided to invite a firm psychiatrist because we had a guy who was retained as a psychiatrist to do like leadership reviews and evaluations and that sort of thing. So this guy sat in and we had a four-hour presentation that morning and lots of debate back and forth about what we had and what we didn’t have in sequencing, but you could do concurrently and so on. And we kind of get all done right before lunch and David the psychiatrist had not said anything. And so the guy who was chairing the meeting said, “David you haven’t said anything yet, you usually say stuff, do you have a view on this?” David said, he says, “Well, I’ve just had a fascinating morning.” He says, “I think this demonstrates a tremendous amount of outstanding professional work and thinking it’s logical, it’s rational, it’s comprehensive.” The documentation fits the task descriptions to a T said there’s only a small problem. Then the problem is you’re doing it with people and the people are not logical. They’re not rational. They follow the rules.

Jeffrey Smith:                    We all looked at each other and said, “Damn, he’s right.” And that led to a robust afternoon conversation around all the human factor issues we needed to incorporate and anticipate in the methodology because this is something we were going to spread out at that time around 50000 professional practitioners worldwide. And they were going to use this when they went in to plan and execute information strategy practice. So by adding the people factor in with a set of tasks and a set of questions and a set of key deliverables that needed to be addressed by the organization, we explicitly brought HR into the org chart we suggested. So that became a standard proposed factor for that company. We said, don’t leave our HR out, bring them in.

Jeffrey Smith:                    Day one we went incentives in comp at the table because that’s how we’re going to motivate your people in your organization to change their behavior in fact. And this kind of gets to your point about culture, I mean Peter Drucker’s famous quote that culture eats strategy for breakfast is true. However, I think the and in add is and if you want to change the culture, you change the compensation. So, and the reason why I said it’s two-fold. One, some people say, “Well, I’m not coin operated. I’m motivated by values. I play to a higher standard.” Well good for you. You may very well do that.

Jeffrey Smith:                    Well we’re going to pay you 20% less if you don’t do it this way. And that person will have to swallow hard and decide if their values and all that other stuff they were talking about is worth the 20% pay cut. And for most people it’s not. And so either they will lead and we’ll go recruit somebody to take their place who does want to do it the way we do it, or they will change their behavior in order to get their full paycheck and then we’ll get the result we’re looking for. Either way, it’s a behavior change, right? It’s not a personality change. We’re not going to influence somebody’s fundamental views of life and what makes things important in life or the role of commercial organizations?

Jeffrey Smith:                    Well, we sure as that can influence their behavior when it comes to doing the work for customers, making our products and services, fulfilling them so that customers are happy and I’m working with colleagues in a way where the colleagues feel good every day about the job they do. And if they can’t do that, then we’ll go find somebody who can. That to me is how you get at the culture change issue. And I hear a lot of it… I read a lot about hand ringing of around culture and how culture takes generations to change. I don’t think that’s true. I think it’s more takes courage to change culture, not time. And the courage involves changing how people get paid and how they get measured. Because generally speaking, people want to perform well and they want to get compensated and rewarded for performing well. And so by playing to that aspect of people who regardless of culture or geography or ethnic background or language, one will find performance improvement if you aim them at a different direction.

Orly Glick:                            Jeff, this has been wonderful. Thank you so much. You’ve enlightened us with your insights and allowed us to tap into your experience. I can’t thank you enough. Is there anything else that you wanted our listeners to learn or wanted to summarize or to say some final words?

Jeffrey Smith:                    Well, since we’re in digital and I’ve been pretty light on that word in this conversation. I want to make, can I say a couple of comments about digital and digital transformation? The first is, is that a friend of mine, Tom Davenport, occasionally writes a column for the Wall Street Journal in the US and in the technology category. And several years ago Tom wrote an article where the headline was, what the Hell is digital transformation anyway? Question mark. That was the title of the article. And his point at the time, and one that I contend is still true today in 2019 is that digital transformation is over 80%, nothing more than a marketing label for technologies that up to now have not been adopted in significance. So, when you ask somebody to tell you, well, what’s digital transformation? They start talking about AI, they talk about cybersecurity, they talk about mobile, they talk about cloud, they talk about security, they talk about virtual reality and they talk about big data analytics.

Jeffrey Smith:                    They talk about augmented reality, robotic process automation and so on. So, they have this list of things that are all products, our products and services that vendors have failed to create a business case for up to now. And that’s why they haven’t sold a lot of it. So now they’re putting a new label on it saying, well you got it, do digital transformation. And when they say, “Well, what is it, what’s all this stuff on our catalog,” so I’d say 80% of digital transformation is marketecture and tableware version 2.0 and I just caution anyone in the corporate space who has responsibility for the topic to be very careful about defining what they mean by digital transformation before they move much further along as the marketplace. The vendors wants to define it in a way where they can sell you stuff, not in a way where you’re necessarily going to really create value.

Jeffrey Smith:                    Now the 20% that is different relates basically to some thing that I first encountered when I was creating the digital strategy practice for a large tech firm. And that was framed I guess in really a simple way. If you were to put together a table where the columns were, what I would call the three truths of digital, and the rows are the four strategies that you can exercise against the three truths, the three truths are number one customers are already digital. So while we’re all wandering around if companies and organizations are trying to figure out what digital means. Customers have gone off and become digital. They’re purchasing and day-to-day behavior pattern is geared heavily towards leveraging technology. And it has changed their processes in some fundamental ways, and that bypass any decision processes which are the ones that matter.

Jeffrey Smith:                    So that’s a first truth. Second truth is asymmetric competitors. By that I mean companies that don’t fit in your SIC code, they’re not part of what you think of as your normal competition, but yet they are bringing a particular service or product into your digital customers world in a way that the digital customer finds it easy to buy it, easier than buying from you or your competition. And the result is asymmetric competitors that’s truth number two are taking your lunch money. Those asymmetric competitors are not trying to sell head to head against big enterprises. Instead, they’re slicing away the biggest part of the margin without owning assets that require them to have to have an anchor of being a physical business.

Jeffrey Smith:                    The most obvious industry that has been experiencing this is retail banking and the Fintech’s who have attacked retail banks from a variety of directions with mobile apps that don’t have a bank branch, don’t have any tellers, don’t have ATM machines because they don’t need them. Instead you do everything through your mobile phone. And as it turns out, 63 million consumers in North America called millennials only do their banking through their phone. They never go to a bank branch all 63 million. It’s a 98%. They never go to a bank branch. They never talked to a teller. And they rarely use an ATM machine.

Jeffrey Smith:                    And the consequence if you are Citibank or Chase or Bank of America as you have tens of thousands of assets physically on your balance sheet called branches and you have 100000 or more employees on your payroll called tellers. And all of that is totally irrelevant to the 63 million consumers who you want to attract and retain as customers. That’s what we call asymmetric competition. And those guys with all that physical asset and payroll are screwed. And that is an example of digital disintermediation and that’s the 20% that’s real. Where asymmetric competitors are attacking by going after the new purchase decision process that the millennials like to do where the bank wants them to behave the way the bank is built, not the way the customer wants to behave.

Jeffrey Smith:                    So truth number one on digital customers already. Truth number two, asymmetric competitors are out there taking your lunch money leading to number three, which is the guys who are making this work are finding a real return on invested capital. So you don’t just do it because of the gadgets. You don’t do it because it’s cool, you don’t do it because it’s anything that you might say is a qualitative thing. Instead, it’s done because there’s a very real business value that can be calculated and delivered to a company’s P&L and balance sheet by adopting correct digital technology and digital strategies.

Jeffrey Smith:                    So those are the three truths that are the counts. Down the side, the four rows are the strategies you might be able to do something about them with the first one is to digitize your customer experience. And if you’ve been to a bank in the US you know that all three of those big banks I mentioned have very good apps now, Citibank, Chase, and Bank of America, very good apps. So they’ve kind of plug the dike where the leak was in that area from where they were getting attacked by the pure place. A second area is digitizing business processes. And that’s actually where a lot of the money’s gone so far in enterprises to do things they’re calling digital transformation. So that they’re buying UI Path or IP Soft or Blue Prism or who’s the fourth one that runs around and I don’t think of it.

Jeffrey Smith:                    Anyway, there’s like four major players in RPA and several secondaries and all of them are trying to eliminate people and take most of the normal processing for things and speed it up and error-proof it to get a much lower cost. So, that is a thing that people are actually putting some money into and seeing some results from. The third area which is kind of intriguing is for an enterprise to consider taking their technology and repurposing it into a new business model. And the example I’ll give you is actually in Europe, E.ON which is a large electric utility in Germany. They decided a couple of years ago after making a huge investment in technology refresh to separate their upstream production and transmission distribution businesses, which are very asset-intensive. Power plants and trucks that go out to fix the power lines and all that kind of thing.

Jeffrey Smith:                    Those guys are now on a separate listed stock on the London Stock Exchange called Univer and they pay a very nice dividend and the stock price is very stable. It’s a utility type of a classic stack investment. The downstream digital business, which is what they called it internally. The brand name of E.ON and it was listed separately on the stock exchange and it’s a technology play. It has none of the assets on its balance sheet, so very light on the return on net assets denominator. But it does have the technology and it’s got 28 million smart meters connected through their network to all the homes and most of the businesses in Germany, Austria, and Switzerland.

Jeffrey Smith:                    And the result is they upgraded all of the meters to be full-function computers and then they offered telephone cable television and internet service over the phone, the electric lines to the people who have those meters at half the price of what Deutsche Telekom was charging them. And Deutsche Telekom never saw it coming. Deutsche telecom’s like, “Wait a minute, the electric company is now my competition.” Here comes an asymmetric competitor, right? Had a left field or you never expected who’s suddenly blowing the doors off your core franchise because you think you own the home. If you’re in Germany and your Deutsche Telekom.

Jeffrey Smith:                    And now I can get it for 50% off by buying it from E.ON instead. And that’s disrupted Deutsche telecoms business and what they thought was their core franchise dramatically. And that’s a digital transformation, digital disruption kind of play. So repurposing your business. I was an electric company, now I’m going to be a cable TV, internet and telephony company. Very interesting play, right? In order to drive a market valuation, and that’s what I’m going to do is I’m market cap-play. I’m not paying out dividends like the old-style electric utility did. That’s what Unifor does now because that’s where all the assets are.

Jeffrey Smith:                    So that was a very thoughtful strategic move that generate a lot of value for shareholders. And that would be the third strategy is repurposing, which leads to the fourth one. They kind of the other three depend on which is you really have to make some investments in a digital platform of your own, whether you buy it or rent it or build it yourself that facilitate being able to do the other things. And it can be aimed at customers, it can be aimed at your asymmetric competitors. But what better do regardless is contribute to an improved return on invested capital. So when I talked through that with people and say that’s how you do think about digital transformation are things in the cells, in that table I just created it.

Jeffrey Smith:                    You look at each cell in the table and you identify where you think your business might have one or more opportunities. That becomes the basis for our practical digital transformation plan. The 20%. Those that are serious about it don’t look at catalog first. They look at their business first and they define either problems, you use pain points several times in your comments and that’s one way to think about it. The other is opportunities, right? Thinking instead about what could we do, what white spaces there, what adjacency might there be that could be a real opportunity for us to be a growth company and as a result, what would we be asked to invest and how would we have to do it?

Jeffrey Smith:                    And I think back to the concerns about culture and people getting laid off and their fear for their jobs and all that, you mentioned that earlier. And me the best story a company have is here’s how we’re going to grow. Because when you grow, people don’t lose their jobs. You hire, you don’t fire. And I work in companies that are growth companies and I’ve worked in companies that did nothing but do workforce reductions. And the first kind of company is a whole lot more fun than the second kind of company.

Thanks to Jeff Smith for joining us for this podcast discussion.


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