It’s becoming increasingly clear that in the second phase of digital transformation, you can’t go it alone.
By second phase, I mean the creation of entirely new offerings that are possible only because of digital technology. The second phase is distinct from the familiar first phase, in which traditional offerings such as print articles are digitized and, in many cases, offered online.
The second phase is proving much more unpredictable, even in segments such as books, newspapers, music, and movies that are most easily suited to digital transformation. Most of us couldn’t have foreseen many of those segments’ second-phase products: live blogs, interactive content, streaming music, playlists, and peer-to-peer banking services such as those offered by Transferwise and Zopa.
The conundrum for incumbent companies is that they can’t very well capitalize on change if they can’t envision what change will look like.
What seems certain is that if you’re managing an incumbent company, you cannot predict, much less invent, the future on your own. Your employees are held back by a predigital worldview, and for the most part they lack the skills to develop cutting-edge digital offerings. So companies are increasingly seeking ways to tap into the creative milieu of the start-up world.
One option is to buy your way in. WPP, the world’s largest marketing-services company, has bought more than 400 digital businesses over the past decade, and it gives them sufficient autonomy that they continue to grow; around 40% of the company’s revenues now come from digital offerings.
You can also try to buy digital talent, but for that approach to work you need to give the people you hire a compelling reason to work for you. The Guardian newspaper, for example, has done a good job of integrating newly hired “techies” with journalists and commercial teams to create interactive content on its website.
The most ambitious approach is to work proactively with the start-up community — investing in new companies, working with entrepreneurs, and learning from them along the way.
Consider the Irish Times. As with other newspapers, its traditional sources of revenue were being eroded and it was on the lookout for new ways of attracting readers and advertisers to its web site. Its executives recognized that there was enormous scope to reinvent advertising online — to move beyond the traditional banner ads and pop-ups — but they didn’t know how to do it.
So in 2011, the publication launched a new model, called FUSION, for working with start-ups, welcoming a select group of new ventures into the Irish Times offices to help the company develop new digital offerings. The idea was that if you create cool user experiences online — a game, a search tool, a community-building site — then opportunities for new advertising inventory will follow. In 2012, the company selected five out of 105 applicants; in the subsequent year 20 were chosen out of 130. The start-ups were offered space inside the Irish Times buildings. A limited amount of financial and professional support was available, but there was no offer of equity investment from the company.
Johnny Ryan, the executive who created FUSION, saw it as a “validator” rather than an incubator: It forced the start-ups to face the hazards of the market, but with support from peers and mentors. For the Irish Times, it was an opportunity to get closer to the cutting edge of innovation in the advertising industry, and to act as a culture-change program for the established business. Several of the start-ups have now become viable businesses, new advertising inventory has been created for the Irish Times, and FUSION has been sold to Allied Irish Bank rebranded as the “AIB start-up academy.”
The Irish Times is not alone in working with start-ups to accelerate its own digital growth. Barclays Bank has invested in more than 20 start-ups in the last couple of years. Wells Fargo, Disney, and Microsoft have their own accelerators. In all these cases, investing in start-ups is a useful first step in making sense of a fast-changing digital world. Corporate executives are getting smarter and bolder in their approach to digital transformation.
Some industries, meanwhile, are way back on the learning curve. Business education — a field near to my heart — is one of them. B-schools and business-book publishers are creating digital offerings, such as MOOCs, but these are clearly part of the first phase of transformation, where standard products (lectures, articles) are converted to digital. I don’t think anyone knows what the future of business education looks like, and it seems highly unlikely that I or any of my academic peers will invent it. Do we have the courage to open up to outsiders to help us with the second phase of digital transformation?