Category: Digital

Build or buy? This is one of the central conundrums of becoming digital, which we will try to tackle in this third article in our four-part series. These series are outlining the approach to define and implement digital strategies, with superannuation as a case study.

The previous article covered the second element of digital strategy – defining the digital model and capability requirements. Now, that we have determined what capabilities we need to succeed, it’s time to decide how we source and manage them.

Companies in this day and age are overwhelmed with choice. When it comes to digital capability sourcing the landscape is rather mature with multiple options available in almost any area.

Historically the choices were chunkier and more binary (should we buy or build a workflow system?) Now they have become more granular and on a sliding scale, (how much of mobile UX do we do in-house?). Like shoppers in the supermarket faced with 25 different types of milk, company leadership needs to make daily decisions on which digital capabilities to develop, which to acquire and where to deploy.

The superannuation and wealth management sector we have been using as a case study is a perfect example of different approaches and a proliferation of choice.

Large retail funds and wealth arms of big banks have historically been biased towards an in-house model with large IT and digital marketing teams and variety of bespoke front and back-end systems. Most industry and public sector funds on the other hand have evolved from small trustee offices with most digital functions outsourced to an administrator.

These days as funds are consolidating and digital solutions are maturing retail and not-for-profit parts of the industry are gradually converging on what we call a digital ‘orchestration’ model. Simply put, this model seeks to develop ‘spike’ capabilities (see previous article for details) in-house and maintain good control over non-spike capabilities via strong in-house product, project and vendor management.

Previously most industry and public funds relied on their administrators to deliver a basic set of digital services. Now as superannuation has become an increasingly sophisticated digitally enabled industry, integration is king.

The funds can broaden offerings by integrating third party products such as direct equities or annuities and services such as algorithmic advice or financial information aggregation. The funds are demanding flexibility to decouple public and self-service portals from core platforms to develop their own differentiated online tools, utilising vendors of choice rather than relying solely on their administrator.

Step by step

At Strategy&, when looking to get a digital operating model right, we go through a number of steps.

First we define functional capabilities with sufficient granularity to make choices. For example, just deciding to develop business intelligence (BI) capability in-house is not particularly helpful.

A good sourcing model should provide clarity on such elements of BI as data warehouse infrastructure, data management and governance, analysis tools, data scientists, analysts and other business users that in some companies are dispersed across multiple functions.

The next step is to determine an optimal way to deliver the capabilities based on strategic priorities, market considerations and cost, service and risk trade-offs.

In making these decisions the companies must not assess each capability in isolation but rather view those as a portfolio which in the target state must form a coherent model delivering outcomes and not just executing tasks.

Finally the company needs to develop structures, processes, governance and incentive models that will ensure “all instruments” are playing in concert. This is easier said than done, particularly when it comes to managing a mix of in-house and externally sourced capabilities.

For instance, if the mobile app vendor’s pay cheque is mainly tied to churning quickly through as many ‘tickets’ as possible, one should not assume they will put best effort in advising on the best architecture to minimise change over the long term.

The success of the digital model (regardless of whether it leans in-house or externally), depends heavily on three orchestration capabilities: project (i.e. change), product (i.e. run) and vendor management. If the client cannot formulate what the “true good looks like” and hold vendors to account delivering it, they will almost certainly only get “good enough”.

For some companies which do not see digitally enabled products and services as a differentiator this ‘good enough’ may suffice. However, in a highly digitised financial services industry, gaps in these three capabilities will almost certainly undermine any digital strategy and ultimately an ability to successfully compete.

Coming back to our superannuation case study, we see that self-managing retail and industry funds are in a better starting position than those outsourcing all of their administration.

To be ‘fit for the future’ and have ability to deliver a truly differentiated customer value proposition the funds that are operating as lean trustee offices will need to rapidly catch up to the retail and self-managed peers in establishing effective future proof sourcing and governance models and building digital orchestration capabilities. The ‘wait and see’ tactic will not work as the widening digital experience gap may deem many of them obsolete from the customer perspective.

Growing up in the digital age can be tough. Kids have information coming at them from all sides as they come in to a world that doesn’t seem to have an ‘off’ switch. As a parent, some of the best advice you can give a child about how to cope with the limitless stream of role models, popular trends and technologies is simply ‘be yourself’.

And that applies to companies, too.

Too often, we hear clients say they want to be like this start-up or that social network, without any regard for their own skillset, corporate character or working style. I have a deep-seated belief the most basic key success of digital strategy – in fact, any strategy – is to understand who you are – and then manifest and magnify that in your product, market and capability choices.

Going back to our superannuation example, a fund CEO’s digital agenda is defined by many choices such as what outcomes to target, how much to invest, what capabilities to spend money on, which ones to buy and which to build internally, to name a few. The variety and complexity of choices may seem daunting but there is a way to cut through the haze: first and foremost these funds must be themselves.

To help, we suggest clients select a digital model archetype or a hybrid (if none on its own fits the bill) and then tailor it to specific fund needs.

At Strategy& we distinguish five digital model archetypes that help define how companies leverage digital and which capabilities to focus on developing.

The selection of an archetype is more of an art than a science. In the superannuation example, it may require the fund leadership revisit enterprise strategy and customer value propositions. For example, if a fund is wholeheartedly dedicated to delivering lowest cost superannuation products to its customers, spending millions on a shiny new front-end design may not be the best choice. This fund may instead consider investing heavily in automation of its back-end operations, full integration of online forms for all high-volume processes and subsequent elimination of paper channel.

These digital archetypes are only good to a point – they are a useful reference in helping to set a broad direction. This direction is a basis for determining which capabilities the fund should prioritise and excel at.

The capabilities are all about defining, creating and delivering value to customers through a mix of internal and externally sourced activities. At Strategy& we find the “customer-back” perspective on capabilities the most useful in analysing and prioritising development.

For instance, a fund selecting the Distribution Optimiser play may organically choose to ‘spike’ in capabilities related to understanding customer needs such as data insights (to maximise conversion and cross-sell) and those supporting delivery of value proposition, such as channel management (to continually optimise channels for acquisition and retention efficiency) as well as communications and campaigns (to expand the share of wallet).

The spike capabilities should target an industry leading level of maturity – that is what the fund wants to be known for. The remaining ones are maintained or enhanced to the level required for the fund to effectively compete and enable the spikes.

Clearly, bringing on board best-in-class user experience and interface design expertise does not help to succeed in Experience Designer play if the fund does not have a solid (not necessarily leading) understanding of customer needs, which is in turn underpinned by data and analytics.

Clear definition of the target state capabilities is the cornerstone of a digital strategy. However, a good strategy should cover all the elements that were used in the diagnostic.

From a customer perspective it should define the target lifecycle journeys and interactions, determine customer experiences across products and channels and clarify the outcomes the fund aspires to deliver. To deliver against these experiences and outcomes the strategy should determine the target state capabilities, operating model and culture.

At this critical juncture in strategy definition it is also very important to ‘look up’ and ensure full alignment with the broader enterprise mission and vision. Any contentious issues such as whether to build an all-encompassing data collection facility despite our promise not to encroach on customer privacy should be resolved before progressing to detailed planning.

Now that we have identified all the musical instruments required for the concert (capabilities) we need to decide where to get them and how to put them together to produce beautiful music.

It’s true. This internet thing looks like it really might catch on. It’s a revolution, these meme-things tell me. Infographics cry about skyrocketing take-up rates and omni-channel proliferation. Our competitors have Chief Digital Officers, Disruptive Innovation Evangelists and UX/CX Champions.

To become “digital”, we need a few of those too – ASAP and preferably with cool call-signs preceded by hashtags and @ symbols.

Sounds easy. Except it isn’t. Most of the advice on what makes digital successful has nothing about the capabilities you need to actually make it work. Furthermore, typical digital solutions focus too quickly on one thing when, in fact, the secret to digital is recognising that, like all great business skills, it is about combining a multitude of factors.

Big data might be the violin section of this orchestra, but you are going to need the whole band to make beautiful music.

This is the first of a four-part series looking at how to define and implement a digital strategy that recognises the capabilities required, both in-house and externally sourced, to realise the big benefits of digital: customer-centricity; data-driven decision-making; faster and cheaper processes; agility and speed-to-market.

• Part 1: Understanding your starting point, from both a customer and organisation point of view
• Part 2: Identifying the right digital model option for your business
• Part 3: Orchestrating a mix of in-house and vendor-sourced capabilities to create best outcomes for your customers
• Part 4: Putting the strategy to action: transforming digital experiences and ways of working

SUPERANNUATION AS A CASE STUDY

These articles will focus on the superannuation industry as a case study but the insights and techniques can be applied in most parts of financial services and many other industries.

Superannuation has recently attracted a lot of attention as it struggles to cope with change on regulatory, competitive and technological fronts. Digital, and the capabilities and benefits it entails, will be a key component in the strategy of the organisations that survive and thrive over the next decade.

PwC’s 2014 Superannuation survey revealed a striking swing in the CEO agenda. Up until recently superannuation players were focussed on member engagement, products and operational efficiency.

Now, digital strategy has jumped the queue to become the second most important issue for CEOs, with 42 percent of respondents (from 9 percent in 2013) calling it a strategic priority.

Seeing the growth in member activity, increasing churn driven in part by ongoing account consolidation and declining employer-led acquisition, funds’ CEOs are looking for new ways to attract and retain customers. The digital space is an obvious place to search for solutions. We are observing a perfect storm of customers willing to use and self-serve via digital channels and the industry encouraging digital take-up to drive down the cost and enhance customer experience.

We have seen two extremes in how the superannuation sector drives a digital agenda: some tend to spend time “admiring” the problem and slowly planning long-term transformations, while others jump to a multitude of tactical solutions without fully understanding what the problem is.

In the current fast paced digital environment decisiveness and agility are key to success, however understanding the issue and planning are equally important. Companies can make the right bet once or twice, but cannot base a winning strategy on the gut feel alone.

DIAGNOSTIC – THE CRITICAL FIRST STEP

The first step in effectively translating a digital aspiration into action is to clearly define the point of departure – that is, understanding the problem that we should solve. Often companies focus on one of the two perspectives of the current state.

Truly customer-centric players tend to emphasise a customer lens looking for gaps in the digital channel quality, experiences in the digital journeys or offering. The product or efficiency oriented players look inward, searching for capability gaps, operating model or cultural issues. While neither of the two is sufficient on its own, in combination they create a solid base for digital transformation.

Strategy& has developed a comprehensive diagnostic approach that looks at both sides of the digital equation. This approach has already helped companies in making the critical first step on their digital journey.

At first, companies should take the customer lens on the issue, benchmarking their customer interactions and experiences against best in class. In analysing experiences, the companies should look for inconsistencies and pain points across channels and products that are likely to impact customer acquisition, cross-selling or loyalty. It is also important to look beyond experience and evaluate the outcomes that we are creating for customers and how digital channels enable or hinder those.

Next, companies should carefully look inside – again using best in class as a benchmark. Most of the customer-facing issues can be traced back to the gaps in capabilities, operating model constraints or aspects of corporate culture.

For example, take a superannuation fund that experiences stubbornly high repeat calls related to status checks on claims. This issue will likely reflect in the customer experience dimension, e.g. poor expectation setting for the processing time at lodgement or lack of proactive email or SMS notifications on claim progress. From the fund’s perspective it may be caused by limited UX/UI design and testing capability, inefficient sourcing with IT vendor unable to deliver status notification functionality at a reasonable cost, or highly bureaucratic decision-making culture hindering innovation and continuous improvement.

In our experience, benchmarking against leaders across all segments gives the best forward looking indication as industries quickly learn from each other and gradually converge on digital experiences and capabilities. This, however, does not mean that the solution involves becoming a “Google” in your category by excelling in all-things-digital. Selecting the right digital model and setting optimal targets for uplift involves trade-offs and conscious choices.

Alignment on the current state is critical but it is only the first step on a long journey. The next item on the CEO’s digital agenda is translating the enterprise strategy into the digital target state vision and choosing the right model for harnessing digital opportunities…