Enterprises need to establish new innovation systems to address the challenges and opportunities of digital transformation.
In 1951, Britain’s J Lyons & Co commissioned the LEO 1 computer to solve the problem of production scheduling and delivery of cakes to the hundreds of Lyons tea shops around England.
The LEO 1 (Lyons Electronic Office I) heralded the dawn of commercial computing, including the advent of enterprise application. Since then, companies have relied on enterprise software to run their most important back-office business operations.
Early enterprise systems, including successors to the LEO 1, quickly began handling payroll, billing and production scheduling — the forerunners of the ERP systems that sit at the core of most large companies today.
Eventually they expanded to include other functions such as logistics, HR, customer relationship management, and e-commerce. But fundamentally, they were back-office and systems of record designed to replace analogue systems and automate existing processes.
These traditional on-premise IT systems focused on stability and efficiency. Most require the attention of an in-house IT department to run and maintain, a task made more complex because many companies that have expanded through acquisition have multiple instances of the same (customized) software, or multiple incompatible systems supplied by different vendors.
Among the biggest challenges for enterprise IT departments are the need to consolidate and simplify systems, reduce costs, and ensure that the lights stay on 24/7. These considerations have been major factors in the shift to the cloud, now expanding to include ERP.
Nevertheless, business leaders often complain that they are hampered by legacy systems and that their IT departments either don’t have time or are unable to support new initiatives designed to boost revenues and serve customers better. In particular, they claim they are unable to respond to new business opportunities because their IT departments lack the agility and skill sets necessary to develop new apps and services.
In the last few years this chasm between business leaders and traditional IT has arguably become wider, hampering companies at a time when they face a new imperative — digital transformation. While the first wave of enterprise computing was about digitizing existing processes, digital transformation involves rethinking business models to deliver more value to customers.
For example, digital transformation is about selling flying hours rather than jet engines, acres ploughed rather than tractors, and healthcare outcomes rather than drugs. These new business models are built on top of technology platforms like Microsoft Azure and Amazon’s AWS, rely heavily on open standards and technologies like Hadoop and Spark, and are often the result of co-innovation and partnerships.
Most business leaders recognize the importance of digital transformation but face challenges in getting there. According to Forbes Insights, 72 percent of global CEOs believe the next three years will be more critical for their industry than the last 50 years. Nevertheless, a recent Accenture study revealed that only five percent of organizations feel that they have mastered digital to a point of differentiation from their competitors.
Reflecting this frustration, many line-of-business managers have turned to unofficial ‘shadow’ IT systems or third-party digital consultancies, bypassing their traditional in-house IT departments to help them innovate. Recently however, another alternative has emerged.
If traditional IT is focused on stability and efficiency, why not set up a separate experimental, agile IT organization focused on time to market, rapid application evolution, and tightly aligned to business units?
McKinsey calls this ‘greenfield IT’ while Gartner dubbed it ‘mode 2’ IT to distinguish it from ‘mode 1’ traditional IT in a ‘bi-modal’ IT infrastructure. Perhaps an easier way to think of it is as an innovation system for digital business that brings together hot new technologies like artificial intelligence (AI), machine learning, IoT, blockchain, and Big Data analytics.
These new innovation systems will be focused on exploiting technology for innovation, rather than productivity, and they are likely to be far smaller and more fluid/flexible than traditional IT, working with IT vendors and partners to co-innovate much of the time. Importantly, successful innovation systems will also be firmly grounded in design thinking methodology and deliver real value to customers through time-limited projects and more consumer-friendly apps.
While the emergence of these innovation systems is sometimes viewed as a threat to traditional IT departments and back-office system suppliers, the reverse is more likely to be true. Indeed, most major enterprise IT vendors, including IBM, HPE, Microsoft and SAP, have already recognized the need to address this emerging innovation IT system market while continuing to support and extend traditional enterprise IT.
In addition, if they are to succeed, these new innovation or mode 2 systems will need to be make use of industry platforms — like SAP Cloud Platform — and be connected to traditional back-office systems in order to leverage the transactional and other data those systems generate. Conversely, new products and services developed by these innovation systems are likely to be incorporated into back-office system after they have been scaled. In other words, in an ideal world, these two flavors of enterprise IT will coexist and support each other, rather than compete.
While some analysts reject this bi-modal approach, often arguing that it ‘lets traditional IT off the hook’ for making more fundamental changes, if it is combined with modernization of back-office IT systems, it could provide the best way forward for big companies as they grapple with the challenges and opportunities presented by digital transformation.
The alternative appears bleak. More than 80% of the Fortune 500 companies that made the list 20 years ago failed to navigate the transition to the Internet in the late 1990s and dropped off the list. Many of those on the list today, did not even exist 20 years ago.
Digital transformation represents a similar seismic upheaval, and it’s happening even faster than the Internet revolution. As Leon C. Megginson, Professor of Management and Marketing at Louisiana State University at Baton Rouge wrote in 1963 (paraphrasing Charles Darwin): “According to Darwin’s Origin of Species, it is not the most intellectual of the species that survives; it is not the strongest that survives; but the species that survives is the one that is able best to adapt and adjust to the changing environment in which it finds itself.”
For those interested, J Lyons & Co was eventually split up and sold off after its tea shops began losing money in the 1960s and its computer operations, which grew out of the development of the LEO 1, ended up being acquired by Japan’s Fujitsu.
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