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In the last decade, an increasing number of companies have been shifting their focus to digital. But as businesses embark on this new journey, their finance teams find themselves dealing with expensive digital projects – projects characterised by uncertainty and extreme complexity. How can CFOs embrace digital transformation in their business and use agile to deliver success?
Our CFO Tim Holbrow recently spoke at Executive Leaders Network's Finance Transformation Event for CFOs and other senior executives. He talked about why (and how) agile is relevant to CFOs and what are the key strategies for budgeting, investment appraisal and risk management in an agile environment.
Here, he shares the key points covered.
When the first iPhone was released in June 2007, only one software company, Microsoft, featured in the top 10 most valuable companies in the world (FT Global 500). Today, twelve years later, only three companies in that list are not software companies. Microsoft, Apple, Amazon, Alphabet, Facebook, Alibaba and Tencent are now the most valuable companies on the planet, replacing oil and gas producers, banks, telecoms providers and car companies.
These companies rose on the wave predicted in 2011 by Marc Andreesen in his Wall Street Journal article “Software is eating the world”. At that time, six decades into the computer revolution, he saw that the technology to transform industries through software finally worked, and was deliverable at a global scale.
Since the time he wrote his article, in part driven by the software revolution, a wide range of new technologies are reaching the point that they are ready to drive a further wave of disruption. In 2016, the World Economic Forum cited this as the beginning of a Fourth Industrial Revolution, where technologies that blur the lines between the physical, digital and biological spheres, causing a fundamental change to the way that we live, work and relate to one another.
Since 2016, green shoots of this revolution have started to appear. Commercial applications of all these technologies have been launched, enabled by vast expansion in access and connectivity (over 50% of the world’s population is now online and 1 trillion IoT sensors are expected to be in use by 2025), opportunities for digital transformation are presenting themselves to companies across all their business processes.
This opportunity has a corresponding threat, an Oxford University study found that 47% of jobs are at high risk of digitisation, with only highly creative, relationship-focussed and highly unpredictable roles considered safe – at least for now. Amazon’s Chief Technologist Tye Brady says that ‘humans will always be needed’ in their warehouses, their focus has changed from what AI and robotics can do in their business, to what it cannot.
Whilst this revolution is ongoing, 12 years after the release of the first iPhone, most businesses are yet to take full advantage of web and mobile. Whilst 66% of companies say that they see rapid change in their sectors, and hence are at risk of disruption from new entrants, only 37% say that they have transformations under way and only 4% report that these have completed. More likely, organisations are doggedly sticking to legacy strategies or paying lip-service to digital transformation.
The perils of not taking this seriously are clear. Textbooks are littered with corporate failures that can be traced to a failure of business leaders to apply strategic vision as well as day-to-day management.
Most famously, Kodak invented the digital camera in 1975, and had a working DSLR in 1989. But didn’t market it for fear that it would cannibalise their main film sales business. They embraced digital too late and filed for bankruptcy in 2012. Blockbuster passed on the opportunity to buy Netflix for $50M in 2000. It’s now worth $150Bn. Blockbuster’s last store closed in 2013. Borders bookstore handed over its online business to Amazon in 2001 so that it could focus on its physical stores. The last Borders store closed in 2011.
In each of these businesses, a singular focus on legacy strategy meant management were blinkered from opportunities presented as the market evolved. Digital transformation, either as a main strategic focus or as a side bet, is essential in order to protect businesses from disruption, but more importantly as an opportunity to build future-proof value.
Approaches to digital transformation tend to fall into three categories, Digitisation, Digitalisation and Digital Innovation.
In Digitisation, the focus of the transformation is simply on using technology within current processes to make them more efficient and effective. Digitalisation takes this a step further, and looks to improve the processes themselves through the use of technology.
Digital innovation seeks to rethink the process altogether, to build on current processes and add value by addressing new customer needs.
As an example, a bank digitising its analog identity verification processes would accept scanned ID documents rather than original copies. It might also query an identity database, such as driving license, rather than make a call to a call-centre.
When Digitalising this process, they could use optical character recognition to read documents and cross-check data against multiple databases for improved verification.
A digital innovation approach could deploy digital character analysis to detect forgeries, detect additional data about the documents such as location and device data, and deploy biometrics (face or fingerprint recognition) to distribute high quality verification to devices (scanners, phones or laptops) and potentially develop new business models around trusted identity verification.
Whilst all of these strategies are perfectly valid, the value added from Digitisation and Digitalisation tends to be restricted to improving efficiency and effectiveness, whereas Digital Innovation offers the opportunity for transformational change and revenue generation.
All three approaches require businesses to engage in software and technology development activities that are likely to be expensive and unfamiliar. These projects are minefields of cost and risk, and the approach that is taken to delivering them is critical in ensuring that they become successful value drivers rather than expensive millstones.
For 100 years, since Henry Ford and his peers developed processes to allow mass production in their factories, companies organised themselves around their ‘machine model’ and its derivatives. This model delivers efficiency and labour productivity through organisations and business processes designed like a machine, running sequentially through a set of tasks from input to output.
In software development, this is manifested as the Waterfall Model. Developed in the 1970s, the waterfall steps through requirements gathering, product design, implementation, testing and verification and finally maintenance. It is a plan-driven approach, where success is measured on whether the output matches the initial requirements.
The focus on outputs means that waterfall projects are characterised by an exhaustive search for requirements in the early stages of the programme as teams attempt to think of everything they need, want, might need and might want. Once this is complete, it becomes imperative to solidify the requirements in order to be able to build a plan for the full project, and to avoid significant rework in the design and implementation stages. Strict change control procedures are put in place to protect from change and due to the size of the overall objective, complex project management is used to try to stick to the plan, and complex risk management is put in place to try to work out what could knock it off plan.
Success for waterfall projects depends on stability of requirements. Unfortunately for teams attempting to deliver digital transformation this way, software doesn’t follow the rules of the Henry Ford era. Change is inevitable because you cannot think of everything in advance, and also because software is, by definition, soft. As an intangible product software is ultimately malleable. As you develop your product, possibilities arise for features that could not have been thought of in advance. Attempting to think about and plan everything in advance, ends up meaning you are very likely to develop huge amounts of software ‘bloat’ that adds very little value for significant cost.
As these changes take hold, budgets and timescales start to creak under the weight of additional work to be done even in the context of the inevitable budget and timescale padding that was added up-front as contingency against this kind of change. Internal and external relationships start to fray as suppliers dive for their contracts and everyone starts looking for someone to blame for the overruns. Pressure on the team rises, and at the same time motivation starts to drop as, despite everyone’s hard work, the project appears to be off track.
All this adds up to a long tradition of failure for software projects run in the waterfall model. Try googling “delayed and over-budget software project” for a feel of the scale of the problem, particularly prevalent in the public sector, where old-fashioned budgeting and procurement practices force organisations into waterfall.
Even if the project is ‘successful’, requirements delivered to spec, on time and within budget, it will be at the expense of functionality that should have been added as requirements became clearer or as the market changed. It’s very unlikely that the product developed will be the product the customer needs.
Fortunately for management teams, and particularly for CFOs, there is a simple solution to the problems of waterfall delivery. Agile.
This can sound a little frightening, and it’s easy to be put off by an impression that you need to understand software development to understand Agile. Particularly given the prevalence of acronyms, ‘methods’ and ‘frameworks’ surrounding Agile (Scrum, Kanban, Lean, LeSS, and others). However, cutting through this, Agile is fairly easy to demystify. It’s a change in focus and mindset.
Agile changes the focus from:
Project to product
. ‘What are we doing?’ to ‘What are we building?’.
Discrete to continuous
. Rather than attempt to deliver a thing as a one-off, it allows you to think in terms of continuous development and evolution of the product.
Output to outcome.
‘What have we built?’ to ‘What does this do for our customers?’.
Complementing this change in focus is a change in mindset. First and foremost is the pivot to embracing change. In Agile, you’re licensed to be flexible, to experiment and to adjust your plans. Not only because, as set out above, change is inevitable. But because change is massively beneficial to delivering value. The things you learn as you go are generally the things that are most valuable to the end-user, and embracing them allows you to ensure that the end-product delivers maximum value – making your project far more productive.
One way that this change focus manifests itself is in the way that Agile projects are planned. In Waterfall you fix the scope of the project, then attempt to estimate the budget and timeframe. In Agile you still build a high-level view of what you’re trying to achieve at the beginning of the process, but because you have embraced change you can turn the Waterfall model on its head, you fix the budget and the timeframe and allow the scope to be variable. You achieve the maximum value you can in the time and budget available. This has the added benefit that the Agile delivery team is able to maintain quality standards throughout. In waterfall projects quality is often sacrificed as milestone dates are approached, meaning that substandard products are developed causing problems further down the line.
The second big change between a waterfall and Agile delivery model is the use of incremental delivery. This is the structure and process by which change is prioritised and by which the team is able to deliver the highest value for the budget and timeframe available.
The overall project is broken down into small, working components or ‘stories’. The full list of these stories (the backlog) is then prioritised in close collaboration with all stakeholders (business owner, finance, IT, etc).
Each story is assigned a value (‘story points’) by the development team based on their estimate of its complexity. Work is performed in short, usually two week ‘sprints’. As the project progresses, the team builds a view of their ‘velocity’, measured as the number of story points they can deliver in each sprint.
At the beginning of each sprint, a planning session takes stories from the backlog and allocates them to the list of work to be done in the sprint, effectively filling up the sprint with stories, up to the value of the team’s velocity. Once the sprint is done, the team meets with stakeholders to demonstrate the working software that they’ve built and to get their feedback and guidance. The backlog is reviewed, augmented and reprioritised, a new sprint planned and the process starts again.
Critically, there are open channels of communication within the team and with the external stakeholders. Stakeholders are kept informed of what has been achieved, what is being done now and what is still to be done. They have frequent opportunities to see the actual working product – and to provide feedback on that. Often, once they see the product in the flesh, they will change their mind about what’s important, especially in the context of changing market needs over an extended development period. Agile allows, and expects, this change and has structures to incorporate it.
For a CFO, there are five key benefits of Agile:
1. Improved product and market fit
The focus on change and the continual feedback loop with stakeholders allows the product to be moulded to closely match real market requirements. You deliver what you need, not what you thought you needed.
2. Predictable cost, reduced waste:
Scope is the variable, so you deliver the best working software you can for the budget provided. Continuous change and the resulting close market fit means you don’t spend money developing pointless ‘bloatware’.
3. Ultimate transparency:
Agile is designed around constant, close collaboration. Stakeholders can attend demos of working software at the end of every 2 week sprint. You can see the true state of the project and understand the latest projections. The closed curtains of waterfall projects are a thing of the past.
4. Low delivery risk
Working software is demonstrated at the end of each sprint rather than at the end of the project.
5. Quality is prioritised:
The team works at their own agreed velocity which takes into account proper quality delivery. Protected quality means lower commercial risk of launching poor quality software that requires expensive rework.
As Agile becomes more widely used, it’s apparent that big benefits are available from adoption of the Agile mindset in areas of the business outside of software development.
Companies like Amazon, Apple, Google, Facebook and Microsoft have learned the lessons from years of using Agile in software development and deployed it across their businesses. They are leading a trend that will see organisations abandon the hierarchical machine model in favour of a more dynamic and organic approach.
They have removed rigid hierarchy in favour of a more organic model, where small cross-functional teams are empowered to deliver projects and processes, with an agile-like focus on change, communication, experimentation, learning and iteration (Amazon introduced the concept of ‘two pizza’ teams, limiting the size of their teams to one that can be fed by two pizzas).
These dynamic Agile elements are embedded into a stable ‘backbone’ of the business that supports and governs the organic organisation model, and ensures that it can interface with external stakeholders such as government and investors.
McKinsey have identified that companies that adopt agile across their organisations can “simultaneously achieve greater customer centricity, faster time to market, higher revenue growth, lower costs, and a more engaged workforce”.
The CFO has a critical role to play in ensuring that businesses are stepping up to the challenges presented by the emergence of disruptive technologies. As the custodian of growth and long-term financial sustainability, it’s the responsibility of the CFO to understand these trends and their impact on the business. There is nothing more cringe-inducing than a CFO who happily admits that they are useless with technology.
CFOs need to embrace and drive digital transformation in their businesses. This means building transformation strategies, either as part of the core business or as side projects, and then properly funding their development.
CFOs should demand Agile for these transformations, as waterfall projects can’t deliver the certainty they promise. They then need to engage with Agile, ensure that they are at, or at least represented at, the product demos. This way they stay informed of the progress, understand the blockers and can help smooth them out. The need to support Agile projects and teams. Agile is fragile – and it’s easily disrupted by, for example, withdrawal of budgets or lack of senior buy-in.
Finally, Agile is most powerful for the CFO as an organisational mindset. The truly Agile CFO will embrace that by influencing organisational and cultural change to unlock greater customer centricity, faster time to market, higher revenue growth, lower costs, and a more engaged workforce.