Digital Transformation and its Impact on

Energy & Utilities

Rajat J Roy
rajajroy@in.ibm.com
January 2016
Abstract
The paper comprises five sections.

Section A – ‘An Introduction to Digital’ begins with a definition of Digital, as construed by the
paper. It then investigates the four attributes that the paper believes characterizes Digital,
and rounds off by providing an industry context for digital transformation.

Section B – ‘Drivers of Digital Transformation’ investigates a number of emerging growth

vectors - Mobile revolution, Hyper-digitization, Internet of Things, Advanced Analytics, and
Digital Grid - that the paper has identified to have significant impact upon Energy & Utilities.
The perspectives from which these vectors have been analysed include - trends backed by
data, levers that unlock the vector’s value, consumer expectations, impact upon the
performing enterprise’s operating model, and future market potentials backed by industry
estimates.

Section C – ‘Impact of Digital Transformation on Energy & Utilities’ examines the effect of a
number of disruptive forces that are rapidly making the century-old traditional utility model an
anachronism. Specifically it analyses how such change agents are causing rapid digitization
of the various nodes in the industry value chain - namely generation, consumption, and the
grid. Of particular note is a preview of the Connected home of the near future, which not too
long ago would have seemed straight out of the pages of science fiction. The section also
discusses how under the influence of the emerging Distributed Energy Resources (DER) the
electricity grid is transforming to a true platform, and how utilities companies are leveraging
the Mobile revolution. It then moves on to describe how incumbents in this traditionally
regulated industry are today facing asymmetric competition from emerging entities - like
startup digital retailers, telecom giants and prosumers – that are on digital steroid, and the
opportunities and threats in this new industry framework. Finally the section investigates the
shifting regulatory framework worldwide in the industry, in the backdrop of such change agents
as rising energy prices, higher consumer awareness and increased adoption of distributed
energy resources.

Section D – ‘Staying ahead of the Digital Curve’ is a detailed assessment of enterprises’

strategic approaches for reincarnation to their digital avatar. It begins with an objective
evaluation of the state that enterprises are currently in, in their digital journey. The section then
constructs a framework through which to examine digital transformation approaches of
enterprises. The framework postulates that an enterprise can grow digitally along two
dimensions - Reshaping the customer value proposition and Reshaping the operating model.
However, to achieve their objectives on either of these dimensions, it is essential for
enterprises to develop a set of key Digital transformation capabilities. The paper discusses
how, to reshape the customer value proposition, enterprises can enhance, extend or re-define
themselves through digitization of the customer journey, and of products and services.
Similarly, from the perspective of the operating model, enterprises can create, leverage or
integrate their capabilities by digitizing their processes and systems, as well as the
organization and work performed by employees. The final component of the framework, the
essential digital transformation capabilities for enterprises, is then studied. This paper has
identified nine such capabilities - Digital strategy, Customer decision journey, Cross-channel
integration, Customer and community collaboration, Business model innovation, Data
empowered decision making, Digitally enabled supply chain, Networked workforce, and Digital
marketing. This section finally examines the transformation paths, based on the framework,
that are open to enterprises to uncork their digital genie.

Section E – ‘IT Architecture for the Digital Enterprise’ analyses the IT architecture that
enterprises need to adopt to hold their fort in the digital battlefield, especially in the face of
onslaught by newcomers like social networks and e-commerce websites – who with the
superior speed, agility, and user friendliness of their online presence have substantially
inflated consumer expectations. This section firstly discusses the capabilities – like digital
product innovation and seamless multichannel experience - that enterprises require of their IT
architecture for them to survive and thrive in the digital age. These levers pose substantial
challenges to the IT organization, and to surmount these the IT architecture must possess a
set of foundational blocks. This paper has identified nine such blocks - Instant cross-channel
deployment of functionality, Zero downtime, and Easy process configuration to name a few.
The section finally investigates the possible strategic approaches - the two-speed and the
greenfield models - that enterprises have to implement their IT architecture, and contrasts
these from the perspective of key organizational factors like functional needs, risk aversion
and integration flexibility.
 Table of Contents

A. An Introduction to Digital ..................................................................................................... 5

B. Drivers of Digital Transformation ...................................................................................... 8
I. Mobile Revolution ..................................................................................................................... 8
II. Hyper-digitization ...................................................................................................................... 9
III. Internet of Things ............................................................................................................... 10
IV. Advanced Analytics ............................................................................................................ 12
V. Digital Grid ............................................................................................................................... 13
C. Impact of Digital Transformation on Energy & Utilities ............................................. 15
I. Digital Centralized Generation ............................................................................................. 15
II. Digitization of the Electricity Grid ......................................................................................... 17
III. The Electric Grid as a Platform ........................................................................................ 18
IV. Digital Consumption ........................................................................................................... 20
V. Leveraging the Mobile revolution ......................................................................................... 23
VI. Asymmetric Competition ................................................................................................... 23
VII. Shifting Regulatory Frameworks ...................................................................................... 24
D. Staying Ahead of the Digital Curve ................................................................................. 26
I. Digital Transformation in Motion – the Current State ....................................................... 26
II. A Framework for Digital Business Transformation............................................................ 27
1. Reshaping the Customer Value Proposition .................................................................. 28
2. Reshaping the Operating Model ...................................................................................... 32
3. Essential Digital Transformation Capabilities ................................................................ 37
III. Choosing a Transformation Path ..................................................................................... 43
E. IT Architecture for the Digital Enterprise ........................................................................... 45
I. Levers and Foundational Blocks of the Digital Architecture ............................................ 45
II. Strategic Choices for IT Architecture .................................................................................. 46
F. Bibliography .............................................................................................................................. 49
 5

A. An Introduction to Digital
Enterprises today are rushing headlong to become more “Digital”. But what does “Digital”
really mean? For some executives, Digital is about technology; for others, it’s about a new
channel to engage with customers; and for others still, digital represents an entirely new way
of doing business. Such diverse perspectives often trip up leadership teams because they
reflect a lack of alignment and common vision about where the business needs to go.

Aiming to strike balance between pithiness, abstraction, and comprehensiveness, this paper
defines Digital as follows.

Digital means unlocking value from emerging growth vectors to execute, aided by data driven
decisions, a vision around customer experiences, leading to more agile, responsive, and
competitive business models.

To move a step further, let us investigate the four attributes that this paper believes
characterize Digital:
• Digital creates value at the new frontiers of the business world
• Digital executes a vision around customer experiences through a cycle of core processes
• The Digital enterprise thrives on a set of foundational capabilities that supports the entire
structure
• Digital leads to more agile, responsive, and competitive business models

Digital creates value at the new frontiers of the business world

Being digital requires being open to re-examining the entire way of doing business and
understanding where the new frontiers of value are. Characteristically, such value remains
embedded in the emerging growth vectors - the Mobile revolution, Hyper-digitization, and the
power of Analytics to name a few - and unlocking it requires a deep commitment from senior
leadership to fast paced change.

The Internet of Things, for example, is starting to open up opportunities for disruptors to use
the unprecedented levels of data precision to identify opportunities in existing value chains. In
the automotive industry, for example, connecting cars to the outside world has expanded the
frontiers for self-navigation or in-car entertainment. A few other areas where businesses are
pushing their boundaries are - Smart grid, digital utilities, and smart home; Digital logistics;
Digital patient and e-health; E-government and e-education; Digital media and entertainment.

Digital executes a vision around customer experiences

Fantastically, it is not all these awesome technologies that truly drive the digital change we
see in businesses. That honour belongs to a commitment on part of industry-leading
businesses to being customer (and user) journey driven.

Historically, the interface between business on one side and customers, partners, and even
employees on the other was driven by inside-out thinking. In other words, businesses decided
how they wanted to run their processes and designed systems and interfaces to match those
desired processes. If a bank’s preference was for the customer to be in the branch while
opening an account, that’s how the processes and systems were defined.

In Digital, those interfaces are conceptualised outside-in. The starting point is the user. What
do users want to do? How do prospective customers want to open their accounts? What are
their constraints? What would make their choices easier and their experiences better? In other
 6

words, what do customers need in each step of their omni-channel journey and how can the
enterprise use its digital capabilities to design and deliver the best possible experience along
these steps? Once enterprises start thinking outside-in, they reach a very different point in the
way systems and processes are defined.

In practice, such a paradigm, which this paper calls the Customer Experience Design,
requires an interconnected set of four core capabilities:
• Proactive decision making: This involves making decisions based on intelligence,
powered by back office Analytics, to deliver content and experiences that are personalized
and therefore relevant to the customer.
• Contextual interactivity: The rising number of customer interactions generates a stream
of intelligence that allows the brand to make better decisions about what their customers
want. The rapid rise of wearable technology and the Internet of Things represent the latest
wave of touchpoint interactions that will enable companies to blend digital and physical
experiences even more.
• Real-time automation: To support this cyclical give-and-take dynamic and help the
customer complete a task requires extensive automation. Automation can boost the
number of self-service options to help customers quickly resolve a problem, personalize
communications to be more relevant, and deliver consistent customer journeys no matter
the channel, time, or device.
• Journey-focused innovation: Serving customers well gives companies “permission” to
innovate how they interact with and sell to those customers. That innovation can include
expanding existing customer journeys into new businesses and services, ideally to the
benefit of both company and customer. These innovations in turn fuel more interactions,
create more information, and increase the value of the customer-brand relationship.

An enterprise that embraces such Design Thinking typically reaches a state where it has
integrated physical and digital experiences, bases its decisions on automated analytics and
intelligence, digitized its front end processes, is a leader in digital marketing and social media,
automated its back end processes, and outsourced its support functions.

The Digital enterprise thrives on a set of foundational capabilities

The third element of the definition of “Digital” is about the technology and organizational
processes that allow an enterprise to be agile and fast. This foundation is made up of two
elements:
• Mind-sets: A digital mind-set institutionalizes cross-functional collaboration, flattens
hierarchies, and builds out environments to encourage the generation of new ideas.
Incentives and metrics are developed to support such decision-making agility.
• System and data architecture: “Digital” in the context of IT is focused on creating a two-
part environment that decouples legacy systems that support critical functions and need
to run at a slower pace from those that can support fast-moving, often customer-facing
interactions. A key feature of digitized IT is the commitment to building networks that
connect devices, objects, and people.

Digital leads to more agile, responsive, and competitive business models

We are used to stability and to treating change as a temporary disruption between periods of
stability, not unlike moving to a new house. Increasingly though, we find ourselves in a state
of continuous change. The disruption is not a passing inclemency. It is the new normal.

The combination of technologies, design thinking, and data surfeit allow us to build
a responsive or adaptive business model that is able to keep pace with a fast-changing
 7

environment. Think evolving operating model instead of target operating model. Think of the
cost of change as a part of the cost of doing business, not as a capital expenditure.

Seen in this way, it would therefore be logical to look at an enterprise’s strategy as an agile
and evolving artefact. Many companies still look at three-year or five-year plans which are
sequential. Instead, the new normal calls for looking at rolling twelve-quarter road maps which
reflect its strategies but which can be modified on a quarterly basis, keeping a vision or end
goal in mind

The point of all this is to be competitive. And digital business models which use technology,
design thinking, and data optimally are far more competitive in the world in which we live. John
Chambers, the CEO of Cisco, once said, “Change will never be this slow again.” And 52% of
companies from the Fortune 500 list of 2000 no longer exist. Collectively, that sums up the
challenges and dangers of being a laggard in the Digital curve.

The Industry Context for Digital Transformation

Obviously, industry context is vital in Digital. Retail banks and media businesses are much
farther down the path of transformation than, for example, infrastructure providers are.

A survey by Oxford Economics asked 363 business executives around the globe the question:
In your view, which of the following business sectors will be most transformed (for the better)
by information technology over the next 5 years? The figure below represents the percentages
of the respondents stating “greatly transformed” for the various business sectors.
 8

B. Drivers of Digital Transformation

The definition of Digital in the previous section implies that Digital Transformation is powered
by a number of emerging growth vectors. This section investigates a few of these - Mobile
revolution, Hyper-digitization, Internet of Things, Advanced Analytics, and Digital Grid. It does
not purport to conduct an exhaustive analysis of all the drivers of Digital Transformation, but
only familiarizes the reader to those that this paper has identified – in the next section - to
have significant impact upon Energy & Utilities.

Of the drivers analysed, only Digital Grid is specific to Energy & Utilities, and the others apply
to other industries as well.

I. Mobile Revolution

The dramatic growth in mobility adoption, particularly of smartphones, has become nearly
ubiquitous across geographies and consumer segments. A survey of digital consumer
technologies conducted by Accenture in 2014 found that, globally, 69 percent of consumers
own a smartphone, and more than half (52 percent) plan to buy a new smartphone in the next
12 months.

With such a pervasive mobility culture, consumers now consider anytime, anywhere access
as a basic expectation, and their satisfaction with digital experiences is increasingly being
defined by what they can or cannot do through their mobile devices.

As an example, a single banking app can cater to the entire gamut of consumers’ needs e.g.
viewing account balances, transferring funds to different accounts or people, snapping
pictures of checks to deposit them, setting savings targets and monitoring progress, as well
as making appointments with bank employees for more complex interactions. With other
mobile websites or apps just a swiping of the finger away, consumers increasingly expect that
same level of convenience and ease from all providers.

Consumers expect providers to seamlessly deliver the appropriate functionality in a way that
is simple, intuitive and very responsive. Further providers do not have a long rope at all in
getting the mobile app experience right the first time. A survey of energy consumers conducted
by Accenture in 2015 revealed that 28% of the respondents regularly or occasionally delete
or stop using apps after the first try, and 14% do that after trying to use them three to four
times. The reasons for not giving an app more than once chance vary, in order of priority, from
not being fir for purpose (53%) to limited functionality (42%), too many notifications (40%), too
slow (35%), too difficult to set up (28%), not intuitive (27%), dated information (21%), and data
not being personalized (20%).

Mobility, however, has a tremendous potential to create new revenue and service
opportunities with a lower cost structure, provided business can ensure that their proposition
is able to successfully address consumers’ needs. Across all industries, mobile devices will
offer ubiquitous connectivity - from connected products to wearables - to drive both
improvements in digital customer experience and digital operational excellence. Forrester
estimates that by 2020, mobile devices will account for $252 billion or approximately 49% of
US e-Commerce sales. Also in a survey of senior business and technology leaders in Europe
and the USA conducted by Forrester in 2015, 67% of the respondents indicated that
investment in mobility is crucial to their digital strategy.
 9

II. Hyper-digitization

Data have become a torrent flowing into every area of the global economy. Companies churn
out a burgeoning volume of transactional data, capturing trillions of bytes of information about
their customers, suppliers, and operations. Millions of networked sensors are being embedded
in the physical world in devices such as mobile phones, smart energy meters, automobiles,
and industrial machines that sense, create, and communicate data in the age of the Internet
of Things. Social media sites, smartphones, and other consumer devices including PCs and
laptops have allowed billions of individuals around the world to create their own enormous
trails of data as they go about their day communicating, browsing, buying, sharing, and
searching.

But is this sheer volume of data – which henceforth we will call ‘big data’1 - only white noise?
Various researches are providing evidence that big data is a major source of unique
knowledge for those users able to read through it. A recent article in Nature had reported how
online keyword search intensity data was a strong forecast in real time of the spread of
influenza. Academic research has discovered how sales are correlated with online product
search and comments, and how micro-blog sentiment analysis could be leveraged to predict
stock market index performance.

IDC predicts that the big-data technology and services market will grow at a 26.4% compound
annual rate to $41.5 billion through 2018, or about six times the growth rate of the overall
information-technology market.

Big data have swept into every industry and business function and are now an important factor
of production. Like other essential factors of production such as hard assets and human
capital, much of modern economic activity simply couldn’t take place without it. The ability to
store, aggregate, and combine data and then use the results to perform deep analyses has
become ever more accessible as trends such as Moore’s Law2 in computing, its equivalent in
digital storage, and cloud computing continue to lower costs and other technology barriers.
The means to extract insight from data are also markedly improving as software available to
apply increasingly sophisticated techniques combines with growing computing horsepower.

The global phenomenon of this big data can create significant value for the world economy,
enhancing the productivity and competitiveness of companies and the public sector and
creating substantial economic surplus for consumers. For instance, McKinsey estimates that
if US health care could use big data creatively and effectively to drive efficiency and quality,
the potential value from data in the sector could be more than $300 billion in value every year,
two-thirds of which would be in the form of reducing national health care expenditures by about
8 percent. Similarly in the private sector, a retailer using big data to the full has the potential
to increase its operating margin by more than 60 percent. And in the developed economies of
Europe, government administration could save more than €100 billion in operational efficiency
improvements alone by using big data.3

But how do big data unlock such enormous value? This paper identifies five levers behind this.

1
“Big data” is an industry term that refers to data sets whose size is beyond the ability of typical database
software tools to capture, store, manage, and analyze.
2
Moore’s Law, first described by Intel cofounder Gordon Moore, states that the number of transistors that can be
placed on an integrated circuit doubles approximately every two years. In other words, the amount of computing
power that can be purchased for the same amount of money doubles about every two years.
3
This estimate does not include big data levers that could reduce fraud, errors, and tax gaps (i.e., the gap
between potential and actual tax revenue).
 10

Firstly, the transparency introduced by simply making big data more easily accessible to
relevant stakeholders in a timely manner can create tremendous value. In the public sector,
for example, making relevant data more readily accessible across otherwise separated
departments can sharply reduce search and processing time. In manufacturing, integrating
data from R&D, engineering, and manufacturing units to enable concurrent engineering can
significantly cut time to market and improve quality.

Secondly, as they create and store more transactional data in digital form, organizations can
collect more accurate and detailed performance data (in real or near real time) on everything
from product inventories to personnel sick days. Using data to analyze variability in
performance and to understand its root causes can enable leaders to manage performance
to higher levels.

Thirdly, big data allows organizations to create highly specific segmentations and to tailor
products and services precisely to meet those needs. Even consumer goods and service
companies that have used segmentation for many years are beginning to deploy ever more
sophisticated big data techniques such as the real-time micro-segmentation of customers to
target promotions and advertising.

Fourthly, sophisticated analytics can substantially improve decision making, minimize risks,
and unearth valuable insights that would otherwise remain hidden. Such analytics have
applications for organizations from tax agencies that can use automated risk engines to flag
candidates for further examination to retailers that can use algorithms to optimize decision
processes such as the automatic fine-tuning of inventories and pricing in response to real-time
in-store and online sales. In some cases, decisions will not necessarily be automated but
augmented by analysing huge, entire data sets using big data techniques and technologies
rather than just smaller samples that individuals with spreadsheets can handle and
understand.

Lastly, big data enables companies to create new products and services, enhance existing
ones, and invent entirely new business models. Manufacturers are using data obtained from
the use of actual products to improve the development of the next generation of products and
to create innovative after-sales service offerings. The emergence of real-time location data
has created an entirely new set of location-based services from navigation to pricing property
and casualty insurance based on where, and how, people drive their cars.

III. Internet of Things

This paper defines the Internet of Things (IoT) as sensors and actuators connected by
networks to computing systems. These systems can monitor or manage the health and actions
of connected objects and machines. Connected sensors can also monitor the natural world,
people, and animals.

IoT has the potential to fundamentally shift the way we interact with our surroundings. The
ability to monitor and manage objects in the physical world electronically makes it possible to
bring data-driven decision making to new realms of human activity—to optimize the
performance of systems and processes, save time for people and businesses, and improve
quality of life.

It is estimated that there are more than nine billion connected devices around the world,
including smartphones and computers. Over the next decade, this number is expected to
increase dramatically, with estimates ranging from 25 billion to 50 billion devices in 2025.
 11

While, for example, consumer goods manufacturers and retailers have long used RFID tags
on shipping pallets to manage inventory, today we are entering a critical stage in IoT evolution.
A number of significant technology changes have come together to enable the rise of IoT. The
prices of IoT hardware are dropping, putting sensors, processing power, network bandwidth,
and cloud storage within reach of more users and making a wider range of IoT applications
practical. There is also progress toward ubiquitous wireless coverage at a low cost, an
essential enabler for widespread adoption. IoT applications also benefit from advances in big
data and advanced analytics capabilities.

McKinsey estimates that IoT has a total potential economic impact of $3.9 trillion to $11.1
trillion per year in 2025. On the top end, the value of this impact—including consumer
surplus—would be equivalent to about 11 percent of the world economy in 2025. Achieving
this level of impact will however require certain conditions to be in place and overcoming
technical, organizational, and regulatory hurdles.

The future impact of IoT can be best understood through the lens of nine settings:
a) Human - Two types of IoT technology applications fall under the human setting. The first
category is health and fitness, where using connected devices to continuously monitor
patients as they live their lives - particularly those with chronic conditions such as diabetes
can improve patient adherence to prescribed therapies, avoid hospitalizations and improve
the quality of life. The second category - human productivity - involves using IoT
technology to improve performance in the workplace. Human productivity applications
include use of augmented-reality devices such as goggles through which data can be
displayed to guide the performance of factory workers.
b) Home - A wide range of IoT devices and applications are emerging for use in the home,
including connected thermostats, smart appliances, and self-guided vacuum cleaners.
c) Retail environments – Possible applications include automated checkout, layout
optimization, smart CRM, in-store personalized promotions, inventory shrinkage
prevention
d) Offices - Key benefits of IoT use in office settings are in security and energy management.
By using digital security cameras with advanced image-processing capabilities, operators
of office buildings can monitor activity throughout their properties without requiring guards
to patrol or continuously monitor video feeds.
e) Factories including hospitals and farms - This setting is one of the largest sources of
value from the adoption of the Internet of Things. Value from IoT in this setting would arise
chiefly from productivity improvements, including energy savings and improvement in
labour efficiency, as well as improvements in equipment maintenance, inventory
optimization, and worker health and safety.
f) Worksites e.g. mines, oil and gas extraction sites, and construction sites - A typical
oil drilling platform today might use 30,000 sensors, watching over the performance of
dozens of systems. In mining, self-driving vehicles, including mine cars and ore trucks, are
helping to streamline operations and reduce costs.
g) Vehicles – In this setting, IoT has the potential to monitor and improve the performance
of planes, trains, and other vehicles while in use
h) Cities - Cities have become the locus of a great deal of innovation and experimentation
with IoT technology, through so-called smart city initiatives. Specifically, there are four
areas where cities can benefit from the IoT – transportation, public safety and health,
resource management, and service delivery. Possible applications include managing
traffic flow and autonomous vehicles, adjusting commuting schedules based on actual
tracking data of public transit systems, IoT smart meters to reduce loss of electricity in
distribution and sensors to detect water leaks.

While IoT has a number of enablers and barriers, arguably the single most important of them
is the Interoperability of IoT systems. McKinsey estimates that on an average, 40% of the total
value that can be unlocked requires different IoT systems to work together. A few common
 12

examples of such interoperability are - linking worker and machinery location data at worksites
to avoid accidents; linking payment and item detection systems in retail environments for
automatic checkout; video, cell phone data, and vehicle sensors to monitor traffic and optimize
flow in smart cities.

IV. Advanced Analytics

Leading organizations in almost all industries are enthusiastically embracing Advanced

Analytics, essentially a grouping of analytic techniques, as they start to realize the vast
opportunities and impact it can bring to solving complex business problems. Advanced
Analytics allows businesses to anticipate possible future outcomes and either capitalize on
them or adjust now to impact the future. It has found applications in areas as diverse as saving
lives, reducing customer churn and making equipment safer

Advanced Analytics goes far beyond basic analytics, which derives insights by simply
explaining what happened. By contrast, Advanced Analytics is about problem solving by
diagnosing root causes and effects, and by anticipating and optimizing outcomes, behaviours
and processes. To show this distinction, let us take customer churn, which affects most firms.
The basic analytics approach would simply seek to quantify the business problem by
answering the question, "How many customers have we lost in the past three months?" But
Advanced Analytics solves the problem by answering the question, "What must we do to
prevent our most profitable customers from going elsewhere?

In a nutshell, Advanced Analytics endows businesses with the following capabilities:

• Predict - What will happen next if our customers continue to purchase as they have in the
past? What is likely to happen to our sales if the current trends continue?
• Simulate - What if we introduce a new product into the market, how are our competitors
likely to react? What if we change our pricing strategy, how will that impact our customer
loyalty and market penetration?
• Optimize - How can we achieve the best loading plan for a truck? What are the best
drug research projects to invest in to maximize our profits, minimize our cash outflow in
the next 24 months and coincide with our expiring drug patents?

Four forces, as below, today drive Advanced Analytics. Of these, the first three are a fallout
of the last financial crisis
• Consumer deleveraging - Declining consumer debt levels, higher savings rates, and
lower consumption, leading to depressed revenues for businesses
• Persistent consumer frugality – The trend of consumers trading down (moving away
from premium brands), opting for lower priced alternatives, and deferring discretionary
spend cramp profitability and margins for businesses.
• Increased regulations - Depressed lending environment and increased regulatory
costs.
• Surfeit of data - Explosion of data from traditional and new sources, such as mobile
computing and social media.

Advanced Analytics can respond to the above forces by bolstering top line, bolstering bottom
line. Improving compliance, and generating better insights for decision-making respectively.
 13

Moving up the Analytics curve

The graph above shows the sophistication in the applications of Advanced Analytics with time.
In keeping with increasing sophistication in analytics capabilities, there has been a marked
surge towards predictive analytics – which anticipate tomorrow rather than explain yesterday
- of late. This is best revealed by two separate surveys, carried out in 2009 and 2012
respectively by Accenture, of analytics practitioners. While the earlier survey found that only
12% of the respondents apply analytics primarily in the predictive mode, the figure had jumped
to 33% in the later survey. In other words, businesses are getting more and more accurate in
predicting what customers will buy, where supply chains could break down, and which
employee become a top performer.

V. Digital Grid

In 2000, the National Academy of Engineering named the U.S. electric power grid as one of
the greatest inventions of the twentieth century, one that is known as the largest machine in
the world.

Yet, even large systems must evolve, and so the grid is facing a new set of challenges:
• One Way Street: Originally designed to transfer power from remote bulk generators to
consumers, the grid needs a structural overhaul as business models shift to two-way flow
and net metering.
• Performance. Increasing power outages are a disturbing trend of the industry. Many
industry leaders have called out aging of the grid as a priority focus area. The continuing
reliance on fossil fuel means that utilities spend significant effort to meet sustainability and
emission norms.
• Security. Cybersecurity of the grid is another critical aspect, especially given concerns
around national security. The grid needs more overall operational visibility as well as the
automation needed to make decisions in real time.

All of these challenges are pushing the digitization of the grid, making the world’s largest
machine connected. The benefits are not far to see:
• One-way to two-way. As Distributed Energy Resources (DERs) and micro-grids
proliferate, the grid needs to integrate numerous renewable and micro-grids to myriad
consumption points and support two way flows. Along with storage mechanisms, micro-
grids help balance and smooth variations in energy supply, provide services, such as
 14

voltage support and frequency regulation and export electricity to the larger grid to make
a profit or provide a boost during emergencies. These capabilities are enabled through
advanced automation and controllers.4
• Improving performance. The aging grid needs to be made smarter. Transmission-line
sensors help optimize power transmission by collecting power-flow data. Microprocessor-
based controllers known as intelligent electronic devices (IEDs) can be placed on
equipment such as circuit breakers, transformers, and capacitor banks to provide real-time
monitoring of power-system equipment. Advances in electricity storage and phasor
measurement units (PMUs) help to optimize the power grid’s performance across the
nation.
These sophisticated devices residing at the edge of the grid collect critical information and
transmit it back over advanced low-latency wide area measurement systems (WAMS) for
SCADA systems to process. Together these advances in technology provide grid
operators with advanced capabilities like faster than real-time simulation, improved load
modelling and forecasting tools, probabilistic vulnerability assessment, and enhanced
visualization.
• Security. As the grid ‘opens’ up more to accommodate DERs and micro-grids, more
opportunities and possibly more vulnerabilities for hackers to exploit will also appear. This
could heighten the threat of attacks on the distribution network with cascading effects. To
mitigate this ability to monitor and deter threats, security solutions that proactively identify
vulnerabilities and reduce overall system risk will need to be implemented in all aspects of
the system, down to end-use devices.

4
Advanced Automation and Controllers are a crucial part of micro-grid functionality. They convert distributed
energy resources into one actionable load that can be controlled to meet individual micro-grid needs and at the
same time maintaining grid performance. Controllers rely on data collected by various grid devices and reliable
and high-speed communication networks.
 15

C. Impact of Digital Transformation on Energy & Utilities

Disruptive forces – from rapid advancements and widespread adoption of distributed
generation and smart technologies to product innovation, game changing partnerships and
converging markets - are making the century-old traditional utility model of centralized provider
of unlimited energy on demand obsolete. At the same time consumers’ values and preferences
are evolving at a rapid pace.

Such change agents have led, or are expected in the near future to lead to profound ripple
effects through all the nodes in the industry value chain, as well as the competitive and
regulatory frameworks in the industry.

I. Digital Centralized Generation

Leveraging the digital tools at the disposal of businesses today could unlock enormous value,
both for new and existing generation units. A recent estimate by General Electric indicates
that digitizing central generation could yield value of up to $100 million for new wind farms (up
to 20% higher MW), up to $230 million for a new combined cycle gas power plant, and up to
$50 million for an existing combined cycle gas powered plant. Across the whole power
industry, this equates to up to $75 billion of impact for new combined cycle gas turbine and
wind turbine orders, with additional value for upgrades to existing assets.

The planning process for building new power plants and wind farms will utilize
comprehensive big-data analysis of the energy network.
a) Data from distribution grid assets such as advanced meters, intelligent feeder monitoring
and distributed resources can be combined with transmission data from phasor
measurement units and other monitoring devices to develop predicted sub-hourly
scenarios. These analyses will enable designers to simulate the load demand on a power
plant. They will also estimate the financial viability of the plant under different alternative
configurations, through a better understanding of the plant’s complex interactions with all
other resources in the energy system. This can also help utilities balance their generation
portfolio.
b) When building a new wind farm, the industry standard is to choose a single turbine model
for the whole farm - even though given the wind patterns, some pad mounts have greater
output potential than others. On the other hand, a Digital Wind Farm, instead of settling for
this least common denominator model, will allow to customize every turbine to its unique
location on the farm, thus maximizing the performance of each of the pads individually.
This can only be done by integrating the advances in digital infrastructure (cloud
computation, advanced load and weather simulation algorithms, satellite topology images,
etc.) and hardware technologies.
c) The location of a new centralized power generation facility will also need to take into
account the necessary Transmission and Distribution (T&D) infrastructure. Today, new
data tools such as advanced geospatial platforms and power flow modelling can evaluate
the best grid layout and determine appropriate capacity requirements. Assessing sub-
hourly interval data can help develop detailed scenarios to understand the trade-off
between installing or upgrading distribution lines and adding distributed energy resources,
or how those resources may impact power flow.

Digital tools will enhance the performance and profitability of existing power plants
and wind farms.
A typical power plant is a complex system that requires constant optimization across various
trade-offs between availability, output, efficiency, maintainability, wear and tear and
flexibility. By tackling these trade-offs through various digitization tools can significantly
increase the operating profile of an existing power plants and wind farms.
 16

a) Software Defined Operations are one such set of tools that enable:
• Deeper Insights through a single unified automation architecture, from sensor to
the boardroom.
• Better, faster decision by driving the best user experience across the workforce,
from operator to the CEO.
• Real time action by developing advanced software, algorithms and analytics that
allow various actors in a generation setting to make business optimal decision.
b) Predictive or condition-based maintenance is a defining benefit of the Industrial
internet. Digital tools will track and maintain historical performance baselines for individual
assets as well as the whole plant, comparing it to real time performance monitored on a
continuous basis. Any variance from “expected behaviour” derived from these baselines
or expected operation will trigger an alert. Advanced Analytics will then determine whether
the variance signals a potential future malfunction, its root cause and the likely timeframe
over which the malfunction will occur. Analytics will also provide a cost-benefit analysis of
how much longer the unit can perform, and at what load, before the issue must be
addressed.
c) By aggregating and analysing data, using Advanced Analytics, across assets “within the
fence”, operations can establish operating levels for individual assets that optimize the
entire plant system. Software tools can then adjust operating parameters in real time to
maximize efficiency and minimize cost.
d) Digital technologies also hold huge potential to improve fuel procurement and storage,
which can account for up to 90% of a plant’s operating cost. Digital tools can improve fuel
procurement by identifying the most cost-effective fuel suppliers, and tracking fuel
transport and storage. Online platforms can run reverse auctions to enable multiple fuel
suppliers to compete.
 17

II. Digitization of the Electricity Grid

The digital grid will underpin the future energy network: it will enable bi-directional flows of electricity, transmit information and price signals, and
ensure optimal balance of supply and demand. Together, this will enhance grid reliability, reduce losses, and integrate distributed resources
which can help decarbonize the system.

The diagram below succinctly depicts how the two way grid will drive the digitization and evolution of the electricity value chain.
 18

Utilities today manage their T&D operations through several disparate technology systems,
including outage management, customer information, maintenance management and meter
data management. However, using digital tools and intelligent monitoring devices,
T&D operators will be able to utilize an integrated digital system that will enable them to
identify reliability issues, address customer problems, and ensure optimal electricity delivery
in a more efficient manner. It is this integrated digital system that underpins the Digital Grid

The benefits and applications of the Digital Grid are elaborated below:
a) Improve outage response: Today, T&D operators often rely on manual, reactive
intervention to ensure reliable grid operation. Digital tools can detect and locate an outage,
identify the root cause, and rapidly restore power. For instance, advanced meters can
indicate an outage; geospatial data platforms can help navigate personnel to the right
geographic area, and advanced distribution systems can dynamically reroute electricity.
b) Reduce losses: T&D operators must also address both technical and non-technical
losses. To reduce technical loss due to natural power dissipation, software that processes
voltage, current, real and reactive power, and phase can make real-time adjustments. To
address non-technical loss, data from smart meters, intelligent devices, and distribution
grid sensors can identify where there may be theft or other power loss.
c) Manage distributed resources: Distributed energy resource adoption is growing, driven
by favourable economics and technical advances. Onsite generation has become
increasingly cost-efficient due to greater gas availability and rapid cost declines in solar
and storage technologies. Intelligent load devices that reduce or shift energy use are
becoming mainstream through user-friendly mobile interfaces, turning consumers into
"producers-consumers."
d) As distributed resources gain traction, they can operate as a network, and in effect
become a “virtual” power plant. For distributed resources where output can be
dispatched or controlled, software can utilize local demand projections, relevant market
pricing, and output potential to ramp distributed generation or curtail demand in a
coordinated manner. Utility systems can monitor and control distribution grid devices to
ensure stability when distributed resources are in operation.
e) Make Smarter decisions: Data from smart meters enables utilities to process information
from millions of new points across the grid to better visualize how voltage is being
distributed throughout their networks, and more importantly why. This provides them with
a rich variety of historic, real-time and even predictive data that will help them make
smarter decisions: for example, it could help distributors predict how individual
transformers may fail in different scenarios based on their type, age, and network load, so
that they can adjust their operations accordingly.

III. The Electric Grid as a Platform

As a concept, platform driven businesses are not new. They have existed in the physical realm
for centuries: a “bazaar” or “market” is a platform that brings sellers and consumers together
in some central location for a trade, enabling faster diffusion of information (through physical
co-location) and more efficient transactions. Digital-age platforms do a lot more, however.
They unlock the potential of under-utilized capacity. They enable instantaneous and universal
access to information through digital apps on mobile devices; they turn data into analytical
insights that can dramatically increase efficiency by accelerating the feedback loop between
price changes, and supply and demand responses.

The electric grid embodies many of the platform characteristics, in the sense that it connects
multiple users of a network. Traditionally however, the platform potential of the electric grid
has been limited by such factors as the exclusive role of centralized generation and the lack
of data collection and response mechanisms. These characteristics of the industry has led to
 19

a very simple hub-and-spokes model, with centralized power producers supplying electricity
and charging bulk tariffs regulated to allow them to cover investment and operational costs.

However with the rise of distributed generation and demand management set to
complement centralized power, the electric grid has for the first time an opportunity to
become a true platform. Such a platform would maximize grid reliability and minimize
delivered electricity cost by helping the parties to find the optimal resource mix and power flow
path, and thus enable a symbiotic relationship between central and distributed resources. It
would achieve this by utilizing a wide range of data such as weather and vegetation changes,
granular load projections by neighbourhoods, central generation and distributed resource
output capabilities, demand response capability, and grid asset health.

These digital platforms will enable central and distributed resource providers to determine
locational prices for energy and ancillary services, and consumers to determine how best and
when to use energy. In the event that a reliability issue such as an outage must be handled,
the digital platform will autonomously communicate with grid devices to reroute power flow,
island critical loads using micro-grids, and ensure that the proper steps are taken to restore
the grid to proper operation safely and quickly.

In much the same way that Airbnb’s platform disrupted the hospitality industry by directly
connecting hosts and travellers, platforms will enable neighbours to buy and sell power directly
from each other. As more energy solutions emerge, consumers may shop around for the best
deal on their electricity, especially if local generation offers a more compelling value
proposition.

Let us now investigate a few models that have sprung up in the industry.
• Meridian Energy, a leading developer of renewable electricity based in New Zealand,
launched Powershop, which it claims to be the world’s first retail online energy market, in
2009. Leveraging a smartphone app, analytics and a strong brand, Powershop is winning
energy consumers not only in New Zealand, but also in the highly competitive Australian
retail market. Powershop recognizes that to capitalize on commodity sales, it needs to be
responsive to the needs and values of its consumer base. From their smartphones,
customers can monitor home energy consumption, be notified when a consumption spike
occurs and choose the source of their electricity. Sources include alternative energy
projects such as wind, solar or even sugarcane processing and landfill generation.
• With the region’s growing interest in renewables, Netherlands-based Vandebron created
a (disruptive) platform that lets local consumers buy energy - including wind, solar, biofuel
and gas - directly from local producers. Its web portal even offers profiles about local
energy producers.
• Reposit Power, based in Canberra, has launched a platform that uses solar grid storage
on residential premises to monitor and trade power back to the network. The company
believes that consumers will realize the benefits of greater independence from grid pricing
and greater control over energy flow. Reposit’s platform helps consumers identify the
optimal strategy to feed power back into the grid from their solar photovoltaic or battery
storage - helping to ensure that consumers maximize the financial benefits of selling their
surplus energy.
• Simple Energy has launched Marketplace, an online e-commerce portal, which offers
consumers a fast, easy and convenient way to shop for appliances, including the ability to
receive energy-efficiency rebates instantly. Simple Energy intends for partner utilities to
white-label the platform, enabling access to consumers’ usage profiles and identification
of personalized recommendations and savings.
 20

While a range of platform types are emerging, digital innovation will continue to expose gaps
in the market and opportunities to bridge platforms. In the future, we expect the differing
platform types to blur as providers push beyond industry boundaries.

IV. Digital Consumption

The utilities industry is witnessing a number of significant changes on the consumption side
which will play an important role not just in improving consumption patterns, but in adding
generation and storage capacity. These will help consumers lower their energy spend
while enabling them to provide overall benefits to the system in the form of lower peak
demand and more economic energy and ancillary services. Indeed consumers will
assume a new and far greater role of co-suppliers.

To put the value unlocked by digital consumption in perspective, McKinsey estimates that if
selected existing technologies in energy efficiency, microgeneration and smart applications
were deployed to the fullest by 2020, a new home could consume around 90 percent less
energy, whether gas or electricity, from the grid than it does today. The opportunity for existing
homes is substantial too: cuts of 35 to 40 percent could be achieved.

These trends in digital consumption are further elaborated below.

Producer–Consumer

With solar panels on the roof and an electric vehicle in the garage, traditional consumers
can start to play a much more active and multi-dimensional role in the energy system.
When their photovoltaic (PV) energy generation falls short of their consumption needs,
they will supplement it with energy supply from the digital grid; when their generation
exceeds their needs, as on a bright sunny day, they can turn into a supplier, feeding energy
into the digital grid.5 Declining solar technology prices, and new leasing and financing
models are only fuelling the adoption of solar among consumers

Electric vehicles can provide both storage and demand response through integration with
the Smart energy system - charging when demand is low or when there is excess supply and
powering the home or supplying the network at times of peak demand.

Less important sources of micro-generation are the micro wind, which is a very small wind
turbine designed to provide electric power to the home; and a mini combined heat and power
(CHP) equipment that simultaneously generates electricity and heat.

Some refer to this trend as the “democratization of energy” and anticipate that, in the future,
the majority of energy will be generated in the home with only back-up needs and large
industrial power being produced centrally.

Dynamic response to price fluctuations

Digital energy management can interface between a consumer’s equipment and the grid,
regulating both energy consumption and the mix of supply sources utilized based on the price
signals provided by the grid itself. At times when the grid faces peak demand, its prices will
rise, and the home energy management system will respond dynamically by reducing
consumption and/or switching from grid- provided power to locally-sited generation or battery-
stored power, where those are available. For example, consumers could chose to set up smart

5
There is a new technology that can turn any window or sheet of glass into a PV solar cell – suggesting a not-
too-distant world in which new homes and office buildings, new cars, and even new smartphones and tablets
could generate their own energy. - ExtremeTech, April 20, 2015
 21

appliances (e.g. heat pumps, dishwashers and washing machines) to respond automatically
to price signals from smart meters and use energy when it is cheapest. (In any case, In-Home
Displays will display real time tariff, thus giving the consumer the flexibility to manually adapt
their usage.)

Energy usage visibility

Consumers can gain better visibility into when and how they consume electricity, thanks to the
continued rollout of smart meters and other connected devices, enabling advanced analytics
to deliver, over the air, data-driven insights about their energy consumption through intuitive
user interfaces on computers and mobile devices. Based on such insights, consumers will
adapt their strategies suitably: residential customers can benchmark themselves against
similar households and identify a menu of possible actions to reduce their spending;
commercial and industrial customers can shift some of their consumption to off-peak periods
to benefit from lower tariffs, or they can identify operational inefficiencies that can be
addressed to lower consumption.

To maximize the potential benefits of greater consumer engagement, the energy system of
the future will need to satisfy two conditions:
• Provide a system of price incentives designed to reward contributions to the system and
to nudge consumers towards a behaviour that can maximize system-level efficiency;
• Offer a monitoring and control system flexible enough to accommodate different degrees
of customer engagement according to individual preferences.
 22

The diagram below provides a model for the Connected home of the future, that incorporates the trends as described above.
 23

In this Connected home, the consumer will, through mere finger taps on apps in their smart phone,
be able to turn off lights, make coffee, set the thermostat, and power on the computer.

However, to make the Connected home a reality, a couple of risks have to be first mitigated:
• Without appropriate security protections being designed in, more Connected homes could be
vulnerable to the risk of a coordinated cyber-attack
• Smart appliances have the potential to destabilise the energy system by turning on at the
same time during low price periods.

V. Leveraging the Mobile Revolution

The impact of the Mobile revolution has been covered in bits and pieces in the above section too.
However, this section discusses this in greater details. A few key applications of the Mobile
revolution are described below:
• Prepayment customers will be able to top up their account through smart phone apps or
through text messaging.
• Remote control of smart devices through smart phones even while away from home. For
example, SSE, an energy major in the UK, has set up a project to develop a smart phone app
that will monitor the In-Home Display device.
• Real-time and more granular data available from smart metering will make it possible for
suppliers to offer services that help the prepayment customer budget and prevent
disconnection. For example, some energy companies are trialling sending low credit warnings
to customers’ mobile phones. This service is valuable particularly when customers have been
out of the house, and do not realise that their credit has expired or is low.
• It is not only consumers who will benefit from the Mobile revolution. Mobile workforce
management solution has revolutionized the Install-to-Commission business flow in the
industry. Service orders – to install/commission Smart meters, or even to read them – that are
created in the suppliers’ business systems will be transferred electronically to the mobility
devices of the assigned meter operatives. These operatives will travel, as scheduled, to the
customer premises to service the order. Through a streamlined process, they will record the
readings of the meter to be replaced on their device, and this will be transferred electronically
to the supplier’s business system. The operative will similarly use the mobility device to
electronically set up the desired tariff in the installed meter and commission – i.e. connect it
to the head end and the supplier’s business system – it. If the service order was to only read
the meter, the recorded meter reading can similarly be electronically transferred – as opposed
to the tedious batch process of today.

VI. Asymmetric Competition

Energy providers now face competition from all directions - startup digital retailers,
telecom giants and prosumers (producer-consumers). A few are highlighted below:
• In a bid to capture the behind-the-meter market, a growing list of blue-chip vendors, including
Apple, ADT, Google (after it acquired Nest), Samsung, Verizon and Walmart, are partnering
with incumbent hardware and software providers to develop home Internet-of-Things
ecosystems to usher in a new phase of home energy management solutions.
• Pure digital competitors, such as Bounce Energy in Texas and Powershop in New Zealand
use a digital platform to offer energy packages that consumers value - and their significantly
above-average customer satisfaction scores validate their innovative approaches.
 24

• Solar solution companies are offering compelling value propositions to consumers that may
require energy providers to innovate to deliver renewable products and services in a new way,
such as offering community-based solar services.
• New entrants in some competitive markets are leveraging automated comparison of retail
versus wholesale market prices to gain market share through robotic switching and collection
switching services.

The playing field for these diverse competitors is far from level, and these differences in
capabilities and constraints within the market epitomize asymmetric competition. Although utility
incumbents have the edge when it comes to economies of scale and years of experience in
refining energy delivery, digital energy startups benefit from agility and risk tolerance and may not
have responsibility for energy delivery. They are also well positioned to take advantage of new
technologies for a seamless consumer experience across digital channels.

By nature, digital startups benefit from the proverbial clean slate. Able to design internal
operations and processes around consumer needs, they can choose where, when and how to
automate transactional processes. In addition, as new energy retailers, they avoid many of the
overhead costs borne by a traditional utility. This lower cost of entry has made it easier for digital
energy retailers to enter the market. In the UK, for example, the number of retailers has been
growing, with some playing the market by buying energy in the spot market and then passing
those savings on to consumers.

In addition to threats from digital energy retailers, energy providers are now sparring with
telecommunications giants, tech innovators and other competitors that would have been
unthinkable a decade ago. In the quest for consumers, these new entrants are offering a variety
of energy and home management products and services—and leveraging consumer information
to provide valuable insights and recommendations. Apple’s HomeKit and Google’s Nest are
currently vying to become the smart thermostat of choice. They are pursuing this market not
because controlling a home’s temperature is lucrative but because each wants to become the
platform on which all of a consumer’s in-home interactions occur.

In Europe, Deutsche Telekom is testing its Qivicon product—an open platform intelligent home
automation system that can unite products from a number of companies, including electricity
suppliers and manufacturers of household appliances and consumer electronics, as well as
producers of health-oriented solutions. The Qivicon platform creates a link between the various
devices and functions that can then be accessed through an application on a smartphone, tablet
or computer.

Asymmetric competition reflects a host of new and, in some cases, unexpected threats. For
innovative energy providers, however, it also creates a market for new products and services.

VII. Shifting Regulatory Frameworks

Regulatory bodies are facing continued pressure to confirm reliability, security of supply, energy
efficiency, affordability and long-term market predictability. Among the key drivers of change:
rising energy prices and higher consumer awareness; increased adoption of distributed energy
resources and the integration of renewables; growing reliance on demand response; the needs
of the modernized grid; and infrastructure investment recovery. In response, many jurisdictions
are driving fundamental change through retail market liberalization, alternative utility revenue
models and performance-based remuneration.
 25

Competitive market structures are continuing to expand globally. In many markets, changing
policies around price regulation, affordability and consumer information transparency are driving
this change.

The figure below, as sourced from an Accenture analysis, gives a snapshot of the state of global
retail competitive electricity markets.

In the UK for example, which has a highly competitive market as per the figure above, the focus
has recently been on long-term consumer value with the introduction of new market rules to
simplify the choices offered to consumers and to increase price transparency. The goal is to
encourage higher levels of consumer choice. Each of the six large incumbent energy providers
may offer no more than four tariffs per fuel type and must inform consumers of the best deal. In
addition, consumer churn or switching has increased in 2015 over previous years, with a larger
percentage of customers who switched opting for smaller players. This appears to be the result
of the changes and the proliferation of comparison sites that are making information consistently
more transparent to consumers.

Another interesting development in the UK is the evolution to principle-based regulation following

a similar approach to the financial services industry. The regulator has introduced standards of
conduct that require suppliers to treat their customers fairly. Energy providers are accountable for
implementing the principle, embedding fair treatment of customers throughout their organizations.
 26

D. Staying Ahead of the Digital Curve

I. Digital Transformation in Motion – the Current State

In May 2015, Forrester Consulting conducted an in-depth survey with senior business and
technology executives in the USA, UK, France and Germany to evaluate how enterprises define,
plan, and execute digital transformation and what are the key challenges that enterprises face
that impact their ability to transform to a digital business.

The key findings of the surveys are summarized below:

• Key drivers of digital transformation are profitability (58% of respondents), increased
speed-to-market (51%), and customer satisfaction (48%).
• Companies lack a systematic digital strategy. Forrester defines a “systematic” digital
strategy as one in which the business has a mature digital operating model that specifies who,
when and how. Only 31% of companies surveyed believe they have a systematic digital
strategy today.
• Continuing in the above vein, Digital is a patchwork of projects rather than an end-to-end
transformation program. In the survey, 80% of the responding firms were found to have an
ad hoc digital strategy - one which is sporadic due to a lack of defined process that specifies
when, how, or by whom digital should be executed. They do not have a clear digital vision or
long-term transformation strategy, and struggle to identify clear digital investment priorities
other than in operations.
• Customer behaviours change faster than traditional organizations can evolve. Only a
digital organization that flexes to address the rapid pace of change of both customers and
competitors will prosper in this new age. The survey respondents recognize that today’s
business models and operations will not suffice and indicate that they must: 1) change their
business models (61%); 2) innovate their product or service offerings (51%); 3) improve the
agility and flexibility of IT (64%); and 4) create a customer-centric (not a channel- or product-
centric) organizational structure (68%). In addition, 65% will also be looking to dedicate
resources to three core areas: digital strategy, digital governance, and digital execution
• Companies are awake to the reality that customers expect a seamless cross-channel
experience - 60% of the survey respondents included investment in omni-channel commerce
as a core component of their digital strategy.
• Mobility remains a top priority for investment. Mobile will disrupt industries by creating
new revenue and service opportunities while changing the cost structure of incumbents. 67%
of respondents believe that mobility-related investments are essential to prepare for coming
mobile disruption.
• Digital initiatives are starved for funding. The survey results indicate that firms are not
dedicating the level of investment needed to implement their digital strategy. Over 50% of
survey respondents plan to invest between 10% and 15% of revenue to IT while 79% will
allocate less than 10% of revenue to digital initiatives over the next 12 months. Just 21% will
invest between 10% and 15% of revenues in digital.
• Organizational issues are key barriers to successful execution of digital strategy. Lack
of digital expertise and skills (57%), functional disagreement on digital ownership (52%) and
overall organizational inertia (51%) remain the most important barriers to digital
transformation.
 27

• Third party vendors help plug the gaps in skills and expertise. 95% of the respondents
advised that their organization looked to third parties to support their digital strategies.
Further organizations with a clear digital strategy are more likely to seek the support of
full-service partners

However, it is noteworthy that there is a wide divergence, even among big corporations,
in the digital maturity of enterprises. This has been revealed by a survey conducted by
McKinsey in 2014-15 to assess the digital maturity of big corporations. In the figure below that
represents the results of the survey, the X-axis represents the number of corporations and the
Y-axis the enterprise’s digital quotient, on a scale of 0 to 100.

II. A Framework for Digital Business Transformation

Digital has fundamentally changed the dynamics of the markets in which an enterprise
operates and the speed needed to remain competitive. In this new world, customer
experience is now the only differentiator. However, exceptional customer experience alone
will not sustain digital transformation. Leading digital businesses recognize that digital is not
just about frontend customer experience but also operational agility - for example, increased
speed-to-market, increase productivity of employees, leaner processes and more effective
use of assets. Forrester echoes this view when it defines a Digital business as one that
“continuously exploits digital technologies to both create new sources of value for customers
and increase operational agility in service of customers.”

The strategic choices that businesses today have to stay ahead of the Digital curve are
accordingly along two dimensions – Reshaping the customer value proposition and
Reshaping the operating model. However, to achieve their objectives on either of these
dimensions, it is essential for enterprises to develop a set of key Digital transformation
capabilities. This paper considers an enterprise’s growth along both the dimensions, along
with the maturity of the enabling Digital transformation capabilities, as constituting its Digital
Business Transformation Framework. Further as explained subsequently either dimension
can be considered to comprise a set of vertical and horizontal components, that signify its
“What” and “How” elements respectively.

The components of this framework are discussed in the remainder of this section.
 28

1. Reshaping the Customer Value Proposition

The diagram below represents the structure of the dimension Reshaping the customer value
proposition.

The horizontal components for this dimension are further explained in the table below.

Horizontal Description Industry Examples

Component
Enhance – Enhance the customer • Ford augmented the customer experience
for a better experience by augmenting with digital content
customer physical products or • Lego aaugmented the customer
experience services with digital experience with digital community
content, information,
insight and engagement
Extend – for Extend physical or • Toy makers Webkinz added new revenue
new revenue traditional products and streams to traditional or mostly physical
streams services through digital offerings
content, creating new • Best Buy integrated across touch-points
revenue streams to increase sales and transactions
 29

Re-define – Re-define the value that is •
for radically delivered to customers - by
reshaped redefining the “system” •
proposition e.g. by replacing physical
with digital (where
applicable) or building fully
integrated digital/physical •
value proposition and
revenue/pricing models
Wall Street Journal added new revenue
models where digital replaces physical
Medtronic - Transformative “information
element” to recombine / reassemble and
find new ways to create new / additional
value
Amazon has truly transformed the
customer experience

Let us now investigate the vertical pillars of the framework for this dimension.

a) Digitizing the Customer Journey

Driving Seamless Customer Engagement

Customers are clearly the most important stakeholder of any organization. In order to serve
customers in the best possible way, the first pre-requisite is to know them, which until recently
has been achieved rudimentarily through internal systems - e.g. using CRM companies can
identify which products a particular customer has historically purchased. However the ample
digital footprints that consumers today leave behind in their day-to-day online
interactions has opened up opportunities for much deeper insights. In particular, based
on information filtered from social media, enterprises can correlate certain consumer
preferences to potential buying habits and even their psychologies. For instance, according to
Echo Nest, a music intelligence startup, a consumer’s music-based digital footprint can convey
much more about her than just what kind of music she likes to listen to. It can also reveal her
tastes in food, movies and literature, as well as her product preferences, political learnings
and even measures of intelligence. Justin Timberlake fans, for example, are more likely to
enjoy Pixar films; people who listen to jazz music tend to care less about sports; and people
who listen to Madonna are more likely to vote Democrat in U.S. elections.

With new channels of interaction such as mobile and social media, customers now
expect all their engagements with the company to be consistent across all available
channels. For instance, they expect to place an order when and where it is most convenient
for them, and then to receive their products through the channel of their choosing. If
enterprises do not support such omni-channel expectations, they risk and increasing customer
dissatisfaction and ultimately losing them.

Enterprises should leverage the deeper customer insights that are made possible today
through digital technology to deliver superior customer experiences. A key vehicle for
that are digital marketing tools. To understand what digital marketing is, we have to first
remember that in today’s connected world, the first action that consumers and business
customers often take when researching a purchase is exploring Web sites and their own –
increasingly online - personal networks and communities for comparisons and
recommendations. To be competitive, it is not enough for enterprises to provide up-to-date
product information online. They must engage with online communities to provide advice on
their products and further use digital marketing tools to personalize their product and service
promotions.6

However, delivering memorable experiences, which are consistent, seamless, and personal
across channels and touch points throughout the customer journey can go only so far in
satisfying business’ quest to acquire, grow and retain their customer base. To ensure long-

6
Digital Marketing has been explained in greater details, later in this section, as a foundational block of an
enterprise’s Digital Transformation capabilities
 30

term profitable relationships, businesses need to keep their customers engaged, and
empower them.

To build durable customer engagement, businesses should craft situations that encourage
customers to proactively initiate an interaction with the company - this can be a repurchase,
support request, or feedback. They need to build a trusted relationship where customers are
understood more intimately, their opinions valued highly, and their suggestions implemented
immediately. The end objective is to earn more of the customers’ attention and consequently,
their advocacy.

Progressive companies will take measures to empower their customers to drive critical
business decisions anywhere in the value chain - from product and/or service design to sales
and marketing. They will treat such customers as brand ambassadors or evangelists –firm
believers of the brands value - who can act as influencers for other customers.

While it is imperative for enterprises embark upon a customer centric engagement model, they
should be mindful that their customer engagement strategy at any time is aligned with
their existing organizational capabilities. Otherwise inflated customer expectations would
lead to unsustainable customer operations, destroying value to both the customer and the
enterprise over the long run.

Visualizing the Modern Engagement Model

The diagram below provides an overview of the customer engagement model in the digital
age.

To ensure that enterprises have at all times a holistic view of their customers - that would
translate to consistent customer interactions – they need to invest in a data management
framework, which unifies customer data from multiple sources and ensures that the
quality of data is verified periodically. Conversely, customers expect to do business with a
unified entity, a singular brand, even if they interact with different departments within the
company – without the annoyance of reiterating the same issues to multiple stakeholders.
Therefore, apart from building a unified customer view, enterprises also need to facilitate a
 31

seamless customer engagement by ensuring that the relevant data are available on
demand to stakeholders across departments and functions.

With real-time access to information, both the company’s and its competitors, and instant
connection to a vast peer network, customers in the Digital age are informed and empowered
through their journey. At each stage of this journey, they have specific requirements,
which they expect companies to understand and fulfil. This includes product discovery,
accessing product history, multi-channel shopping, purchasing through a preferred payment
method, resolving service issues, sharing with friends, and referrals.

Customers demand simple and convenient engagements that help them avoid long queues
or waiting periods. They feel entitled to rewards and recognition, personalized engagement,
transparent operations, and empowerment. They wish to be heard and made part of the
product development process. To ensure that these customer needs are fulfilled, enterprises
need to optimally design their front-office processes by offering the right combination
of cost, effort, time or emotion at the right touch point and at the right time.

Further modern businesses depend on their empowered employees to deliver profitable

engagements with the help of tightly integrated front-office and back-office operations.

In the current market environment, companies need to quantify the share of customer
attention (instead of share of wallet) as a measure of success. Customers have limited
engagement time to spare, and the challenge is to earn their qualitative attention where
maximum engagement is made possible. Companies need to ensure that, in the process of
delivering exceptional customer experiences, the results of the engagement meet their
business objectives by way of increase in repurchase, loyalty or referrals, and reduction
in costs.

To engage the modern customer, companies must look beyond transactions and craft
engagement journeys, which begin as early as a Google search and conclude long after
customers have purchased the products. Customers evaluate brands on the sum of their
experiences through various stages and touch points. To ensure that companies succeed in
this evaluation, they need to pay attention to the little details which matter to customers as
they move between channels at their convenience.

Of particular note in optimizing this customer journey is the importance of a harmonic

confluence of both digital and physical channels. For example, in-store sensors could be
sending proactive communications to customers on their mobile devices in real-time. This
blurring of channel boundaries has infinite possibilities for enterprises that can leverage both
the assurance of the physical channels, and the richness of the digital.

b) Digitizing Products and Services

Enterprises today increasingly realize they can no longer focus on just selling
products/services; they need to sell an experience. To create such experiences, organizations
need to consider how through their offerings they can stay in touch with customers all
through their journey. In particular, an increasing number of products today both consume
and generate data, and many are interconnected through the Web. Because of this increased
intelligence, their usage can be monitored, additional services can be proactively offered, or
maintenance can be provided when a problem is detected. A good example is a smart
toothbrush with sensors scanning the user’s teeth for any problems. The physical tool itself is
a commodity, but a user’s brushing habits, dental hygiene history and health needs create
information of premium value. Information can be sent to the dentist, who can provide
feedback and advice or schedule an appointment. These information, when aggregated, can
also be used by the device manufacturer to make product improvements.
 32

By analysing customer behaviour on social media, it is possible to predict their usage of a

business’s products and their level of satisfaction, enabling organizations to anticipate
customer needs before they even make them clear and before problems arise.

As enterprises implement more sophisticated ways to understand customers and their needs,
expectations will rise for product and service offerings that are tailored to individual
customer needs. Companies can accomplish this by breaking up products into smaller pieces
(modules) and then rebuilding the product with the pieces that are relevant to the needs of the
customer. Although such “mass customization” is often focused on software and service
components, as they are easiest to adjust, it is of late increasingly being adopted across
industries as a result of digital technology. Examples include customized LED lighting for
homes, animal feed mixes for farmers, individually designed sport shoes, etc.

Because they can easily access vast volumes of information and switch suppliers with the
click of a mouse or tap on a touchscreen, today’s empowered consumer wants to pay for only
what she uses. For example, publishers might let customers pay per article instead of for the
whole newspaper, like the “Blendle” initiative in the Netherlands where a combination of
subscriptions based on pay-per-use is possible, with articles from different newspapers being
combined into one overview. New pricing models, such as charging extra for upgraded
service, are also viable.

2. Reshaping the Operating Model

The diagram below represents the structure of the dimension Reshaping the operating
model.

The horizontal components for this dimension are further explained in the table below.
 33

Vertical Description Industry Examples

Component
Create – a Create the basic digital • British luxury fashion house Burberry
new set of delivery capabilities required has built a number of strategic digital
capabilities to improve operations and customer touch-points
engage customers across • British multinational publishing and
multiple touch-points education company Pearson has
added new capabilities and digital
supply chain components
Leverage – Leverage and scale by using • Media and marketing company
to scale information across channels Meredith uses information to leverage
capabilities and processes, while across channels
across the optimizing capabilities within • Global supply chain manager Li & Fung
organizations each value element Limited has optimized digital supply
chain components
Integrate – to Integrate and fully optimize all • Tesco has integrated its value chain
reshape and elements of the value delivery across digital and physical channels
fully optimize around customer touch-points • Turkey based financial services major
capabilities and efficiency / effectiveness Garanti has integrated its operations
across digital capabilities

Let us now investigate the vertical pillars of the framework for this dimension.

a) Digitizing Processes and Systems

Business process automation can result in massive competitive advantage because initial
investments, when well implemented, can scale quickly without substantial additional costs.
Over time, cost performance can improve by as much as 90% as the automation effort scales
across formerly siloed functions, reducing redundant processes. Such automation frequently
entails a renovated process model that is heavy on digitization.

Yet digitizing processes is as much about customer satisfaction as operational

efficiency. A leading energy player, for example, reduced by 40% churn among customers
who moved houses by making service renewal a simple two-click process accessible from the
company’s website. Similarly, by digitizing its mortgage application and decision processes, a
bank not only cut its cost per new mortgage by 70%, but also improved customer satisfaction
by shortening preapproval times from several days to just one minute

Rather than only automating an existing process, becoming digital often requires reinventing
the entire business process to cut out steps altogether or reduce the number of
documents required. However digital leaders do not typically implement such process re-
engineering through a big bang approach - rather they drive value quickly by focusing on a
series of small but important solutions that target high-value customer journeys and
expectations (for example, real-time availability and personalized treatment)..

Advanced digital technology, powered by the SMAC7 Stack and aided by sensors, can
improve business processes in several ways. For example, big data analytics can help in-
bound logistics run more smoothly by tracking product movements; the cloud can be used to
create uniform business processing platforms; and mobile platforms can enable employees to
perform their work anytime, anywhere and on any device. Standard cloud platforms offer
feature and functionality updates more quickly and can lower testing costs.

7
Social, Mobile, Analytics & Cloud
 34

Digitizing processes can especially add significant value to an enterprise’s sourcing

practices. By using standardized platforms, either within a large organization (as a propriety
platform) or as an open-market standard, aggressive sourcing and offshoring can cut up to
50% of operational costs.

By automating, standardizing and globally sourcing processes, organizations can become

more agile, more responsive to changes in demand, and better able to increase and sustain
profitability. Such agility is essential as competitiveness is increasingly dependent on
responding and anticipating to fast-changing market developments through human
intervention; artificial intelligence and automated machines are not yet fully able to respond.

b) Digitizing the Organization

Firms reorganize to embrace the digital economy

Businesses are acutely aware that rigid, slow-moving models for themselves are an
anachronism in today’s digital playing field, where liberalized trade barriers and real-time
market linkages require firms to be nimble. To operate in this fast-changing marketplace,
astute incumbents are moving away from strict hierarchical decision making and closer to a
network structure that is agile, flexible, collaborative and aligned with the enterprise’s
strategy – and organizing their production and people to mirror the new structure.

While one size does not fit all, there are two organizational forms emerging as successful
structures for the new digital playing field. These are as follows:
• Globally integrated enterprises: Globalization and technological progress are rendering
the old multinational structure that simply links together a collection of national businesses
under a global umbrella obsolete. In its place, large international corporations are creating
globally integrated organizations that can locate functions anywhere in the world to take
advantage of low costs, availability of skills or access to natural resources.
Advances in business analytics and information technology make it possible to monitor
performance and market developments more closely than in the past, thus further fuelling
this trend.
• Edge-based organizations: Some firms are pushing their organizations beyond global
integration to an even more flexible networked structure - an edge-based organization.
Under this organizational structure, executives and their teams are empowered at the edge
of an organization, where the firm interacts with the market. These edge-based enterprises
are characterized by their ability to self-organize, widely distribute decision-making
and quickly adapt to market changes. Such companies can be likened to a collection of
“special force” units that comprise different sets of expertise, and where all the members
of the unit possess situational awareness, skills to take action, shared values, and decision
rights to empower the edge to take action.

Social media is an important catalyst for the creation of edge-based organizations because
it is an effective medium for connecting with customers and generating demand. As an
example, Netherlands-based AVG was the first software antivirus firm to offer a free online
antivirus product, and has rapidly increased its user base to 110 million by riding the power
of viral marketing and word-of-mouth.

Firms need to inculcate an agile corporate culture

Corporate cultures also need to move toward an agile mindset. At the heart of such agile
cultures is the test-and-learn mind-set and product-development method, which can usefully
be applied to nearly any project or process. Instead of awaiting perfect conditions for a big-
bang product launch or deferring market feedback until then, digital leaders learn, track, and
 35

react by putting something into the market quickly. They continuously review their actions and
investments against data on all parts of the customer journey as well as the broader
competitive environment. Such rigorous data monitoring helps teams quickly refine or jettison
new initiatives, so that such companies fail often and succeed early. For example, one long
established publishing house set ambitious targets to earn half its revenue and profit from
digital media within ten years but managed to do so within six, thanks to relentless tracking of
digital key performance indicators and prompt course correction when needed.

Rewarding innovation is institutionalized in enterprises that are ahead of the digital curve.
Further business leaders in the digital age need to have a strong appetite for risk. That is
because in a world of more data and less certainty, enterprises have to make decisions and
respond to disrupters all the earlier and the more decisively – and that is an inherently risky
proposition.

To work effectively within an integrated ecosystem, employees of digital organizations need

to work together in a new way, breaking down silos and collaborating across different
functions. Employees need to learn from each other in order to respond more quickly and
consistently to changes in the market and within their own organization. Geographically
dispersed employees can participate in collaborative experimentation, tinkering, and
innovation through collaboration tools (for example, cloud-based virtualized environments)
that they use to share documents, ideas, contacts, experiences and knowledge – in short,.

In this context, it is noteworthy that while executive leadership is important, arguably the most
critical constituent is midlevel talent - the “boots on the ground” who can make or break digital
initiatives and are ultimately responsible for bringing products, services, and offers to market.
In today’s environment, finding that talent is not easy. To facilitate the search, companies
should recognize that, in many instances, digital competency matters more than sector
knowledge, at least in the early stages of a digital transformation.

Collaboration outside the boundaries of the organization

In the digital age, collaboration and customer value addition will not stop at the boundaries of
the organization. With value chains being increasingly integrated among businesses,
enterprises will become part of a larger ecosystem, enabling them to offer end-to-end
services to their customers. Insurance companies can, for example, offer a car replacement
when a customer’s automobile breaks down, improving the customer experience through this
added service.

Most enterprises will focus on a niche service that adds value to the customer experience and
become part of an already existing ecosystem. However, some will assume a far larger role
and shape and orchestrate an ecosystem themselves, thereby introducing their standards into
the industry value chain. Airbus and Walmart are already progressing in that direction.

As enterprises develop their collaborative cultures, they will participate more meaningfully in
broader networks - with customers, technology providers, and suppliers - of
collaboration, learning, and innovation. They will play value-creating roles - such as
providing production or logistics - to such collaborative ventures as co-creation of products or
services by communities, or customers influencing product development by providing opinions
and suggestions for product improvements through online forums. In addition, enterprises can
mobilize workers they themselves do not employ - the distributed talent in networks of shared
interest and purpose. SAP, for instance, mobilized the user community it developed to help
launch its NetWeaver software.

c) Digitizing Work
 36

Many enterprises who have automated several of their existing processes – by moving
paperwork to forms based workflow - are looking for the next wave of optimization. They are
now considering digitizing work, which essentially means getting significant cognitive work
done by leveraging the new growth vectors like IoT and smart machines.

The figure below summarizes the continuum from manual workflow to process automation to
digitizing work.

The commonest examples of digitization of work are driven by increased smartphone and
tablet use. Handheld devices are certainly changing the ways people work in interesting
ways. Mobile employees used to be a significant source of paperwork – but now they can
directly enter data into the system without bulky laptops and avoid leaving papers in their
vehicles or illegible due to grease smudges. Further the way data is entered can now be
changed from fat fingered typing to voice and text and picture taking.

Changing who does work is another key step. By enabling self-service on their websites,
many businesses are letting their customers do the work for employees. For example,
insurance companies now let motorists ‘self-adjust’ auto insurance claims, by taking pictures
and gathering evidence, thus minimizing the need for onsite adjusters.

Another opportunity for some work types is to crowdsource the workforce. For large quantity
simple work tasks like data entry from paper forms, confirming OCR data entry or identifying
pictures, Amazon Mechanical Turk and other services enable farming out the work on a
piecemeal basis for very low fees. These services often can scale rapidly – for example, to
deal with a coming regulatory deadline – and then elastically turn off, with a predictable price
and SLA.

But changing which humans – from paid to unpaid ones - do the work is not the only option.
What is next is more radical changes to work – and specifically eliminating the human
worker all together. In a hospital, for example, nurses take paper clipboards, or more recently
tablets on their rounds to review data from patient room machines like the infusion pump. But
new digital technologies like the IT mean that patient room machines can report their readings
directly to the back end electronic health record systems. In some cases, these devices can
even be controlled to speed or slow delivery or change dosages – all remotely. This frees the
nurse from significant labour that is drudgery work, so she can provide more focused patient
care. Letting machines do what they are clearly better at than humans results in more engaged
healthcare providers, better outcomes for the consumer (patients), and lowered costs – thanks
to an efficient workforce – for businesses.

With personal fitness devices and other wearable sensors, we have more data about
ourselves directly and continuously collected than ever before. Patients may not need to go to
 37

their doctors for regular check-ups – they can self-administer relevant tests without a visit, and
hear from the doctor without a visit. Conversely, this could be done in the kiosk at some local
grocery store rather than queuing up at the doctor’s office.

Beyond things, there are even smarter machines to do more cognitive computing for
analysis and decision making that leads to action as part of a process. Such capabilities go
beyond typical business rule processing capability, offering predictive analytics in real time.
Virtual personal assistants like Apple’s Siri are only the tip of the iceberg. IBM’s Watson smart
advisor, for example, can support physician decision making in cancer situations and other
cases. Other expert systems, even learning ones, can do some of the previously human
analysis and pattern matching tasks.

Other smart machines include general use robots that can be trained (and not only
programmed as before) for a variety of tasks in a variety of areas – healthcare and retail, for
example. At the University of California, San Fancisco’s Mission Bay Wing, for example, robots
are now delivering meal trays and drugs – again saving time for employees to be doing patient
care.

3. Essential Digital Transformation Capabilities

As indicated while defining the structure of the Digital Business Transformation Framework,
reshaping an enterprise’s business or operating models in the Digital age requires a set of
new capabilities. The building blocks of these capabilities are discussed below.

a) Digital Strategy

Digital strategy is intrinsic to business strategy today. McKinsey estimates that 90% of digital
leaders (versus 60% of all leaders) have fully integrated digital into their strategic planning
process. The best digital strategies do not rely on past analyses, but instead start fresh and
carve out a vision based on where they believe value is likely to shift over the next 3-5 years.
They assess at a granular level where value is likely to be disrupted within their own
business and market, and based on that they isolate where and how they will compete.
Effective digital strategies prioritize a handful of interventions where the business can exploit
significant opportunities (and divest or reduce exposure in markets where value is declining),
then craft a digitally enabled business model around them. That could mean creating a new
way for customers to purchase a product, moving into new businesses, or exploiting
competitive advantages such as proprietary data in new ways.

For example, one large retailer actively reviewed its portfolio and decided to divest its
consumer electronics business when it saw margins eroding. It then invested in an online
retailer when it realized the strong growth trajectory of e-commerce in the sector, leading to a
surge in its profitability. Similarly when GE identified a strategic goal it needed to work toward
- making deeper connections with decision makers - it designed a company-wide social graph
that tapped customer connections and relationships across its 300,000 strong employee base.
That enormous internal network gave salespeople and account managers a significant leg up
in forging new connections and provided marketing with a return that was about 350 times its
investment.

b) Customer Decision Journey

A customer journey is the sum of an individual’s interactions with a brand across all
channels to accomplish a task. Enterprises that able to understand and skilfully act on
complete customer journeys can reap enormous rewards: increasing customer satisfaction by
 38

up to 20% and revenue growth by 10 to 15%, and lowering the cost to serve by 15 -20%, as
per McKinsey estimates.

Understanding those decision journeys and the fundamentally different ways that customers
behave - from evaluating products to bonding with brands - is becoming a key differentiator
for successful businesses. This is because a complete mapping of such journeys, aided by
deep data analysis and ethnographic research, enables enterprises to digitize their most
important customer experiences at scale and at speed - in a consistent way, with consistent
resources, to produce consistent results. In doing so they transform much of the rest of their
organizations, from product and process design through to technology and culture, becoming
truly digital businesses.

Enterprises that are achieving digitization at scale understand that today’s customers do not
want digital versions of the same manual, bureaucratic processes they faced yesterday. They
search, download, pay, and listen to music all in one go, so why should their electrical service
or car insurance still make them run a gauntlet of separate steps for searching, price quotation,
purchasing, invoicing, delivery, payment, and activation? Enterprises that want to win at digital
adoption are therefore recognizing that they must reimagine and digitize entire “customer
journeys.” These are the beginning-to-end processes that customers experience in getting
the product or service they need, across whichever channels they choose.

Streamlined, simplified journeys show impressive results pretty quickly - usually on several
fronts at once. Faster mobile-phone sign-ups raised a telecommunications company’s
customer satisfaction by 20% and reduced costs by 30%. A European lender that digitized its
account opening and loan approval process - using smartphone support and video verification,
for example – saw the time required for account opening and loan approval fall from days to
minutes, customer engagement opportunities rise from once a month to three or four times a
week, and IT become far more agile, delivering new releases in a month instead of a year.

Another critical differentiator related to customer journeys is the ability to identify high-value
microsegments, such as new mothers with full-time jobs who primarily shop online.
Understanding how these customers make decisions - how they shop, for example, or what
influences them - allows digital leaders to tailor their approaches.

Cross-channel integration and Customer and community collaboration are two key enablers
for understanding and acting upon the Customer decision journey. These are discussed below
as building blocks – of an enterprise’s digital capability – in their own rights.

c) Cross-channel Integration

Forrester defines consumers using multiple devices to interact with people and content
sources as “perpetually connected”. Perpetually connected customers expect their needs
to be met preemptively, through physical and digital touchpoints in a consistent fashion. They
now demand that any desired information or service will be available to them - in context - at
their moment of need and will gravitate toward businesses that offer a seamless experience
for their circumstances.

This paper accordingly views cross-channel integration as moving beyond multi-channel to

effectively integrate across all customer touch-points, both digital and physical
channels. This capability is further explained through the following example from the Retail
industry.
 39

d) Customer and Community Collaboration

Customer and community collaboration entails moving from a linear to a customer centric
value chain that integrates customer information and touch-points across the entire
enterprise. This transformation is best explained by the diagram below.

Such customer and community engagement requires open collaboration with customers,
external partners, and internally across silos. A few industry examples are mentioned below:
• Lego Mindstorms designs new age toys with the help of its select group of customers
• Business analytics software makers SAS generates new ideas for products & services
with the help of its customers
• Novartis collaborates with external patient groups and its employees to develop drugs
 40

• China based Loncin ccollaborates with its integrated supplier network to reinvent
motorcycle manufacturing
• Mobile phone operator NTT DoCoMo collaborates with mobile phone manufacturers to
providing credit card/loyalty card etc. facilities through mobile phones

e) Business Model Innovation

Business model innovation can be viewed as building customer value as a core competency
across industry, revenue and enterprise models. Such an innovation has three dimensions:
i. Industry Model Innovation - Changing the way the industry works or changing the
enterprise’s value chain e.g.
• Redefining existing industries e.g. Groupon, Ikea
• Moving into new industries e.g. Apple
• Creating entirely new industries e.g. Facebook, Wikipedia
ii. Revenue Model Innovation - Changing the enterprise’s value proposition or the way it
prices for products/services e.g.
• Pricing innovation e.g. Zipcar, Canal+
• Payer innovation e.g. Foursquare
• Package innovation e.g. Vodaphone
iii. Enterprise Model Innovation - Changing what the enterprise does and where it
collaborates e.g.
• Doing as much as possible within the organization e.g. Zara, eBay
• Specializing by focusing on differentiating activities e.g. Cisco, Li & Fung Ltd
• Intensively collaborating with external partners e.g. China Suppliers

f) Data empowered Decision Making

High-performing digital companies distinguish themselves by keeping pace with their

customers on their digital decision journey. In particular, they anticipate emerging patterns
in the behavior of customers and tailor relevant interactions with them by quickly and
dynamically synthesizing structured data (such as demographics and purchase history) and
unstructured data (such as social media and voice analytics) into coherent insights and action
plans.

As a case in point, in 2012, Reckitt Benckiser, a maker of popular cold and flu remedies, used
search data from the medical website WebMD (with almost 32 million monthly visitors at that
time) to track cold and flu symptoms across the country and anticipate where outbreaks were
likely to occur. Then the company released targeted geography- and symptom-specific
advertising and promotions (including an offer for free home delivery) in those places. Along
with a strong cold and flu season, this initiative helped Reckitt Benckiser to increase its US
sales of cough and cold products by 22 percent during one four-week period, compared with
the previous year.

Companies that make extensive use of customer analytics see a 126% profit improvement
over competitors8. Companies that achieve that kind of return are adept at deciding which
data to use (both inside and outside the organization), focusing the analytics on delivering on
goals with clear and useful insights. That is only possible with having the right capabilities
and processes in place, including people with the right kinds of skills - particularly
“translators” who can articulate business goals and use cases with respect to analytics
requirements and turn data output into business insights.

8 Alec Bokman, Lars Fiedler, Jesko Perrey, and Andrew Pickersgill, “Five facts: How customer analytics boosts

corporate performance,” July 2014, McKinsey on Marketing & Sales, mckinseyonmarketingand sales.com.
 41

With the Internet of Things and other new technology developments, analytics are further
opening new doors for growth. McKinsey predicts that the installed base for Internet of Things
devices will grow from around 10 billion connected devices today to as many as 30 billion
devices by 2020. Real-time monitoring and visualization, for example, are fundamentally
changing the relationship of insurers and the insured. Telematics are being used in auto
insurance to monitor driving habits in real time - this resulted in a 30 percent reduction in
claims at one UK insurance company, which reported that customers had developed better
driving habits. Similarly, data monitors on UPS trucks are used to help configure the most
efficient ways to load a truck and send alerts when a part needs a repair, before it breaks.

However, how a business applies information and takes decisions based upon that is not
something that can be achieved overnight. The diagram below shows a typical journey of an
enterprise towards its analytics insight maturity.

g) Digitally enabled Supply Chain

This capability entails building and optimizing digital capabilities and effectively integrating
them across the enterprise.

The following example of a media company shows how a digitally enabled supply chain can
drive the enterprise’s own digital maturity.
 42

h) Digital Marketing

While enterprises are embarking on a wide array of “digital transformations” to reshape their
operations and business models, many of these efforts are stymied by their marketing
function’s difficulty in delivering on its aspirations. For example, one recent survey by
McKinsey found that an astonishing 84% of marketers do not have a formal content strategy
or distribution process to feed their growing bevy of marketing channels, and they lack any
kind of formally managed content supply chain. Such an incoherent approach on part of
marketing operations ultimately leads to dissonance between what customers expect and
what they get.

This divide can be bridged through digital marketing operations, which involve the
application of capabilities, processes, structures, and technologies to cost-effectively exploit
and scale the interactivity, targeting, personalization, and optimization of digital channels.

Digital marketing essentially entails shaping the relevant content and customer
experiences, based on customer insights, and optimizing how they are delivered.
Enterprises will glean such insights - spotting opportunities and predicting future actions -
through a wide range of data and sophisticated tools, which they will use on an ongoing basis
to track, analyze and interpret customer behavior and attitudes. That requires enterprises to
map out each of the steps that define the entire customer experience, highlighting not only the
technologies and processes needed to enable a smooth journey, but also the various functions
across the organization that must coordinate to deliver it.

As an experience is delivered to the customer, there needs to be a system to capture how that
shopper responds and to feed that information back into the enterprise, which then adjusts its
offer or message accordingly. And this feedback loop is not just about optimizing the
customer experience. It also helps decision makers adjust campaign spending based on
trends and opportunities, for example, or direct salespeople to stores where product inventory
is low.

An important element of managing a capable marketing operations function is building a

system that has the flexibility to work with large platforms that are becoming more dominant,
such as Adobe or Oracle, as well as point solutions that are constantly introducing innovations.
 43

Finally, measures of marketing effectiveness need to move beyond what has often been
limited to a narrow set of metrics. As companies become more customer-centric, for example,
metrics should focus on customer activity rather than simply product or regional activity, as is
often the case now. Metrics should also reinforce new behaviors and processes, such as how
fast a product is launched or how quickly lessons from the field can successfully be integrated
into the next marketing offer. To be most effective, however, metrics need to deliver insights
quickly, often in real time, so that businesses can actually act.

i) Networked Workforce

A networked workforce is all about getting the right skills aligned around the right business
opportunities.

Digital transformation allows organizations to build an agile workplaces that are

i. Dynamic - Adjusts to rapidly changing business conditions
• Easily identifies and engages people and skills to address current needs and situations
• Creates and builds interdisciplinary skills to be able to address the dynamics of
business today
ii. Collaborative - Brings people and information together to share insights and solve
problems
• Facilitate discussions across the organization to drive insight and promote greater
productivity
• Engage people outside of your business boundaries
• Connected - Accesses data and insights regardless of time, distance and organizational
silos. This allows people to work productively regardless of location, time or device

While each of the above building blocks is important, the real value is in being able to integrate
them and manage the cross-business contingencies and dependencies of a large scale digital
initiative. The digital revolution has given birth to an interconnected world that binds
customers, employees, managers, and systems together in a network of unprecedented
complexity and opportunity. Making sense of those connections and building value requires a
new interdisciplinary model of work that is redefining how companies succeed today.

III. Choosing a Transformation Path

Enterprises will get their digital strategy right by answering three important questions. First,
where will the most interesting digital opportunities and threats open up? Second, how quickly
and on what scale is the digital disruption likely to occur? Third, what are the best responses
to embrace these opportunities proactively and to reallocate resources away from the biggest
threats?

The last of the above questions is of huge significance for an enterprise, and its response to
that – which will essentially shape the enterprise’s path to digital transformation - can either
cause it to flourish in the digital age, or be a laggard and ultimately perish to the competition.
Determining the best path to transformation requires a thorough understanding and evaluation
of several factors on part of the enterprise:
• Where products and services are on the physical-to-digital continuum in the enterprise’s
industry
• Mobility and social networking adoption levels and expectations of customers
• Strategic moves by other industry players
• The degree of integration at every stage of the transformation – between new digital
processes and legacy, physical ones
 44

This section has dwelled upon the two dimensions of digital transformation, reshaping the
customer value proposition and reshaping the operating model, and businesses would need
to be careful to not fall into the trap of focusing excessively on any one dimension,
causing the other to be neglected. Transforming operations first, for example, builds customer
alignment and efficiency. But if competitors are interacting with customers in new ways,
operationally focused organizations may lose revenue opportunities, customer loyalty and
market share. Conversely, moving too quickly to transform the value proposition may raise
cost challenges if the new offering involves too much complexity or manual intervention. Too
narrow a focus on customer value is also very likely to result in a one-time breakthrough rather
than continuous innovation for greater customer value.9

This paper envisages that most enterprises will embrace one of the following strategic
responses on their route to digital transformation, while all the time being mindful to pursue a
healthy mix of the two dimensions discussed. The chosen strategy will have a strong
dependency on the digital transformation capabilities (as discusses previously) that they would
have developed.
• A smaller scale disruption of the enterprise’s business model to enter a new space
or redefine an existing one. Shenzhen-based Ping An Bank, for instance, founded the
digitally centred Orange Bank to target younger consumers of financial services with
simple, high-return products and a one-minute account sign-up–all without traditional
branch networks or complex product portfolios.
• Fast-following to ride the wave and capture some of the value created by an
industry’s evolution. The UK department store John Lewis deployed thoughtful, targeted
“clicks and mortar” levers to make it possible for a highly loyal and attractive customer
base to order from its website and get deliveries at stores and company-owned grocery
outlets in their local communities.
• Aggressively reallocating resources from digitally threatened assets to more
digitally interesting ones. Bauer Media Group, in Germany, has systematically
reallocated resources away from potentially vulnerable analog media assets to develop a
portfolio with a digital advantage. Its overall revenue base has shrunk, but its topline growth
is materially higher, and its market capitalization has better equity multiples.
• Boosting the effectiveness of existing business models through digital approaches
and tools. To help visitors at Disney resorts and theme parks, the Walt Disney Company,
for example, developed a suite of digital tools. These include the FastPass+ service, which
allows visitors to reserve access to theme-park attractions, and the MagicBand, a tech-
enabled wristband that facilitates reservations and customer routing at Disney World.
Roughly 50 percent of Disney World’s visitors elect to wear it. The more efficient routing
helped the resort’s Magic Kingdom to host about 3,000 more guests each day of the 2013–
14 holiday season.

9 Indeed as has been revealed in the survey by Forrester Consulting (referred to earlier in this section), today’s
digital business priorities span both customer experience and operational excellence. Respondents in the study
identified five key priorities over the next 12 months which spanned both operational efficiency and customer
experience: 1) Improve products or services through digitization (47%); 2) improve operational efficiencies (47%);
3) improve the experience of our customers (42%); 4) address rising customer expectations (40%); and 5)
improve differentiation in the market (40%).
 45

E. IT Architecture for the Digital Enterprise

With social networks and e-commerce websites setting new benchmarks for speed, agility,
and user friendliness, consumers expect similar online performance from banks, retailers, and
telecommunications companies. To meet these expectations and obtain the same cost and
performance benefits that online companies enjoy, established companies need an IT
architecture that is modular, simple, customer-centric, and configurable.

I. Levers and Foundational Blocks of the Digital Architecture

To survive and thrive in the digital age, enterprises require strong capabilities of their IT
architecture in four areas - digital product innovation, seamless multichannel (digital and
physical) experience, big data and advanced analytics, automating operations and digitizing
business processes.

These levers, each of which has been dwelled upon earlier in this paper, pose substantial
challenges for IT. For example, many banking-product lines - among them credit cards,
investments, and checking and savings accounts - are managed in silos. This makes it difficult
to get a comprehensive view of customers quickly, for example, to assess their loan
applications. Further, channels are often managed and tracked independently, complicating
matters for customers who wish to use multiple channels as they pursue a transaction. For
instance, customers starting a loan application on their smartphones may find that they have
to re-enter data when they switch to desktop computers to fill in the more detailed information
required. Weak systems integration and slow database access times can prevent customers
from enjoying a real-time shopping and purchasing experience. Analytics capabilities are
especially difficult to integrate with operational process flows. Manual steps in these
processes, such as re-keying and transferring information, present major obstacles to both
analytics and automation of processes.

This paper is of the view that to address the above challenges, IT architecture of a digital
enterprise needs to accommodate the following elements:
a. Instant cross-channel deployment of functionality: New micro-services defining only a
small amount of functionality, such as lookup of the next product a consumer would most
likely purchase, should be deployable in an hour rather than in several weeks. Further
such micro-services should also be available across all the channels that the customer
can access.
b. Zero downtime: In digital global operations, days long maintenance windows are no
longer an option. Upgrades of systems affecting the consumer’s experience should be
seamless, using a concept that allows the deployment of a new software or service in
parallel with the old version. Moreover, in daily operations, there should be fallback
mechanisms in place so that issues arising in one service do not harm overall operations
more than necessary. If, for instance, a retailer’s personalized recommendation service is
unavailable, a random recommendation in a relevant category would be displayed rather
than an annoying web error page.
c. Real-time data analytics: Customers generate data with every move they make within
an app. The ability to analyze that information in real time can make analytics an integral
part of operational processes and not just a stand-alone capability. For example, one
retailer analyses customers’ purchases automatically when they pay with their credit cards;
along with the receipt, the business provides a savings coupon for a product the customer
will probably be interested in buying the next time he or she shops at the store.
 46

d. Easy process configuration: Business users themselves should be able to change

automated processes. This would allow them, for example, to eliminate unnecessary
process steps without requiring time consuming coding by an IT developer.
e. Product factory: Industries that provide digital products, such as banking and telecom-
munications, need to decouple the products from the processes. A bank, for example,
would implement one sales process and reuse it for all products, such as accounts and
cards.
f. Automated scaling of IT platforms: In a digital business, workloads expand and become
harder to predict. Ideally, this load would be balanced across private - and public - cloud
environments, with mechanisms in place to ensure that when one provider has an outage,
others can take over the workload.
g. Secure architecture: In a digital business model, cybersecurity must be an integral part
of the overall application. Not only does the company have more valuable data to protect,
making it more attractive to hackers, but the digital strategy also opens new interfaces to
customers, suppliers, and partners - interfaces that can be exploited by hackers.

II. Strategic Choices for IT Architecture

This paper considers that enterprises have the option of two strategic approaches for their IT
architecture, which will allow them to hold their fort in the digital battlefield - while at the same
time ensuring that the business operates as usual. These approaches are the two-speed and
the greenfield models. Either of these approaches has specific requirements that must be
weighed against an organization’s desired time to market, its appetite for risk, its financial
resources, and the maturity of its IT systems.

Two-speed approach

Under the two-speed approach, the IT organization produces quick iterations and launches
of front-end customer-facing applications while continuing to ensure the stability of
slower, back-end systems that handle foundational transactions and record keeping.

Companies prioritize two or three high-value customer experiences—say, opening an account

for a mobile phone or returning an item. Then they carve out a dedicated team of staffers with
digital skills to create a new fast-track service for that experience and bring it to market quickly.
Meanwhile, the remainder of the IT architecture team, operating at a more moderate pace,
carries on with its core work: planning and designing the longer-term enterprise architecture
that will meet the organization’s strategic and operational needs, while at the same time
ensuring stability and maintenance of the current system and overseeing day-to-day service
delivery.

One European bank, for example, used this approach to improve its account-opening process.
While using existing technology where it could, it created a new team that used concurrent-
design techniques (in which multiple development tasks are completed in parallel) to create a
prototype of an account-registration process. The team tested this process with real customers
in a live environment, constantly refining it until the team had succeeded in cutting the original
15-step process down to just 5 steps. Customers can now open an account using a mobile
device in five minutes or less instead of waiting in a bank branch and filling out paperwork.

The two-speed model allows management to phase in capital investments, which can mitigate
the risk of IT transformation projects and make for a smoother migration. But the two-speed
approach is no silver bullet. It can be complicated to maintain a hybrid architecture in which
transactional platforms, managed for scalability and resilience, run alongside other systems
optimized for customer experience. When one retailer adapted its legacy systems to support
multichannel delivery, for instance, fast-track software teams bumped up against outdated IT
 47

systems built in programming languages their young developers had never used. The
company learned the hard way that if it is not simultaneously focused on connecting individual
improvements to a new, more sustainable underlying architecture, the whole process may
grind to a halt Indeed, many businesses that opt for this approach become so focused on the
fast part of the two-speed model they forget to consider the changing demands of the
foundational systems—and that oversight can undermine the success of the project.

Businesses with two-speed models therefore need to keep an eye on how the fast track
connects to foundational systems. The table below summarizes this contrast.

Fast-track Architecture Foundational Architecture

Objective Allows for instant creation and Ensures the ability to upgrade
deployment of applications across applications with zero downtime;
channels; promotes auto harnesses automation so some
scalability processes can be scaled up
Guiding Experiment – succeed early and Robust and reliable services
principle fail frequently
Development Agile development and prototyping Waterfall based release management
methodology
Release Daily or weekly Quarterly
frequency

It is also critical for companies to set clear milestones for the transformation; without a
comprehensive plan and investment strategy, companies can get caught up in a change cycle
that has no end. Additionally, they must agree not to take on too much change too fast. The
two-speed path involves making implicit trade-offs. Taking on too many fast-track initiatives
leads to chaos.

Greenfield Approach

As the name suggests, a greenfield approach is a replacement of core legacy IT systems.

This approach works best when businesses require a total transformation that the existing
legacy system simply cannot support - such as when a completely new set of functionalities
is needed. Implementing this approach successfully also requires a bit more lead time; if there
is crushing pressure to deliver results quickly, the two-speed approach may be the better
option.

To implement the approach, companies have several choices. They can build from scratch,
choose best-of-breed hardware and software products and integrate them themselves, or go
with a bundled, pre-integrated suite. Whatever the choice, it is critical for companies to
understand the full capabilities of the tools and packages they are acquiring. And rather than
simply adapt to the software packages they acquire, they must commit to redesigning their
software development and delivery processes from end to end, relying on industry best
practices and common IT standards to ensure sustainable, intuitive ways of addressing
business and customer needs.

There are several factors companies should weigh at the outset. They must have substantial
capital and liquidity, since initial investments can range between $50 million and $300 million
depending on the scale and scope of the IT organization. They must have support from top
leadership to sustain the strategic and financial commitments over a period of years. They
must also have enough understanding of the potential for positive business outcomes to
ensure that the effort isn’t considered simply a side project being led by IT. Additionally,
leaders must carefully think through their capabilities - for instance, does the company have
enough skilled talent and other resources on hand to pursue digital delivery of software? If the
 48

answer is “no,” the company may want to emphasize new training and coaching opportunities
for employees or look outside the usual sources for IT professionals with the desired digital
skills.

The Two Approaches Contrasted

Which of the two approaches that a company takes depends on a number of factors, including
the market pressures it is facing, its appetite for risk, the state of its existing IT systems, and
its financial situation.

The table below contrasts the two approaches, from the perspective of key organizational
factors.

Key Two-speed model Greenfield approach

organizational
factor
Functional needs Focused changes that will affect
only a few IT domains
Business backing Support is limited to a restricted
part of the organization
Time Need to implement specific
functionalities quickly
Risk aversion Company does not want to incur
big operational risks in replacing
all legacy IT
Economics Company can afford to implement
only critical functional changes
Integration Current interfaces are fine; there is
flexibility no need for major changes in
integration logic
Tolerance for IT IT architecture is adequate;
complexity system complexity is manageable
Broad changes that will require
rework in most IT domains
Senior management is willing to
lead the entire change project.
Time to deploy specific
functionalities can be managed
Benefits of change outweigh
operational risks in replacing all
legacy IT
There are no significant budget
constraints
A new, flexible but standardized
architecture is needed to integrate
applications
Current ‘spaghetti’ IT architecture
is hindering business growth.

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