The following people met at the airport in Frankfurt am Main in mid-September 2015 to discuss digital transformation: Information Security Officer and SAP Technical Manager Michael Schmidt from H. B. Fuller; the analyst Stephan Kaiser from Pierre Audoin Consultants (PAC); Professor Key Pousttchi from the University of Potsdam, Director of Application Consulting Services; Armin Daubmann from Fujitsu and Professor Heiner Diefenbach, Vice President Services Central Europe, Fujitsu.
During this meeting, the impact and challenges of digital innovation and transformation processes were analyzed. The aim in reproducing this meeting here is to provide a means of orientation in a rapidly changing global economy.
The talks were moderated by the editor-in-chief of E-3, Peter Faerbinger: the digital transformation process has begun and will change the antiquated structures and organization of procedures.
At the beginning of the year, the digital association Bitkom made the following statement at CeBIT: “Digitalization will lead to fundamental changes in the market conditions of the German economy”. ln more than half of all companies, the business model will change as a result of digitalization. “
But the question that remains largely unanswered is whether digital innovation is disruptive or non-disruptive. One pragmatic answer, generally accepted by now, is „Disrupt or be disrupted”.
The Fujitsu Round Table found that tackling digital change is the most important task of management. If loT and Industry 4.0 change the market model, the company must either adapt or disappear from the market, sooner or later. According to Bitkom, 86% of the top managers interviewed see digitalization more as an opportunity than a risk, and 10% view it more as a danger.
Digitalization is a task for the whole of society. Fujitsu also represents this holistic approach in the round-table discussions. Bitkom demands a greater commitment from industry. To be able to actively shape the digital world, Germany must avoid dependencies and master key technologies. It became evident that both the SAP user Michael Schmidt, from H. B. Fuller, and Professor Pousttchi indirectly support the requirement for more digital sovereignty.
Digital sovereignty means that we have our own expertise in central areas of technology – in user-companies themselves, with lT providers like Fujitsu, and ultimately in the whole of society. Bitkom also adds that we must be capable of deciding, in a self-determined and competent manner, between the offers provided by capable and trustworthy partners. More digital sovereignty can only be attained if all areas are more intensely aligned towards digitalization.
Faerbinger: Digital transformation is the current topic of information technology. Gartner analysts are even talking about a “digital tsunami”.
Diefenbach: The digital transformation process is extremely exciting. The “digital tsunami” is an accurate description of the situation, because the effects can clearly be felt in both private and business sectors. At Fujitsu, we have been observing this process very clearly and we see that our customers are rethinking the existing business processes. However, “digital tsunami” sounds too technical. What is actually happening is that the business models are changing. We must accept this and help our customers succeed when it comes to this transformation process.
Faerbinger: Is it now essential to find the right balance between the technical and business transformation process?
Pousttchi: We are perfectly positioned at the interface. Digital transformation will change how we manufacture, how we provide our logistics, and also how we organize ourselves – and that is already a fair amount of change! But, above all, digital transformation will alter our sales behavior – i.e. how we sell and what we sell. The perspective is currently very much focused on the B2B aspect. Yet, as a counterpoint to this – a point that Mr. Diefenbach’s remark already addressed – the life of each individual person is affected. This change in B2C is dramatically underestimated. When we observe just how life is changing due to smartphones and big data, we can actually gauge the intensity of the change. This will not only affect individual companies but also entire sectors of industry and economies, because market power is being redistributed. In this case, the term “tsunami” is only partially correct. The term correctly embodies and reflects the wave that is rolling over all of us. However, this image of the wave also suggests that coincidence exerts greater influence and strategy exerts less influence. However, l see the exact opposite of this – greater influence exerted by strategy and less influence through coincidence.
Kaiser: The digitalization of processes began in the 90s, with e-commerce and the development of B2B channels. However, the speed at which these changes now take place is, of course, breathtaking. People use digital media differently today, they communicate differently, buy differently. The importance of data has increased vastly and thus allows new business models. Companies must react to this change, but are partially prevented from doing so by excessive frictional losses and a “silo mentality” of perceived self-containment.
Faerbinger: Mr. Schmidt, you come from H. B. Fuller and are a Fujitsu and SAP customer. Can you sense these challenges and the pressure of digital change?
Schmidt: Yes, in some instances this is clearly evident. In our view, the individual not only brings constant challenges into the company, but also makes justified claims. The data exists, but what am I to do with it? Today, everyone wants everything and wants it everywhere. Dealing with lT and data on a private basis results in new situations and requirements. The private environment is put on a par with the work environment. The adage used to be „less is more“, but today more data is available and simultaneously less complexity is required. Of course, the aforementioned “silo mentality” should be done away with – it’s ultimately a matter of using data sensibly in order to generate a market advantage. The current problem is that there is a great deal of data – but how do I consolidate it? How do I specifically position this data where it can be sensibly used? It ultimately comes down to developing a strategy, because we are not yet quite aware of what is heading in our direction. We need to ask ourselves what it means if we do not decide in favor of this digital transformation. In my opinion, the greatest challenge is change, namely adapting the existing processes.
Färbinger: In other words, technology is not the challenge but the change and adaptation processes.
Schmidt: Yes. How do you organize these processes? How can you implement a strategy in an orderly way from top to bottom? At present, individual departments are very much the driving force. There is no uniform strategy. We are currently wasting a lot of effort and energy in order to understand or also consolidate the digital transformation processes. One question that remains unanswered is that of where the processes are being driven and controlled from, and by whom?
Faerbinger: Do business processes have to be revised and changed?
Schmidt: I don’t think that everyone has grasped this. Somewhere down the road, and as a minimum, IT departments will have to take on a leading role as regards technologies. At present, however, there are in general only very medium-term strategies, that are very budget-oriented.
Faerbinger: Mr. Daubmann, let’s do a reality check. When you visit Fujitsu customers and SAP customers and confront them with the idea of a digital transformation process, what do you experience and what role does the size of the company play?
Daubmann: It isn’t necessary to convince people. If we look at which topics are imminent in real life, it is very often the tasks of digital transformation. Of course, we call it something different, such as the “automation of a supply chain” or “investments in customer relationships” that are based on large volumes of data. We distinguish more when it comes to customer size – for example medium-sized customers, who have to react because they have consumers who want certain processes to be handled electronically. This is where the investment in digital business processes is implemented or the business relationship is lost. Another challenge is posed by the management of relations toward the end-customer – in the B2C sector it is often alarming just how little the supplier knows about his consumers. With respect to revenue – yes, more is known, but, for example, evaluation of till receipts is the exception. In future, the aggregation of all the available data will definitely provide a competitive advantage.
Faerbinger: How do you react to this operative challenge of data aggregation within the context of digital transformation?
Daubmann: In the past, we always placed emphasis on database technology. ln-memory computing is a very important topic for us and, in the case of SAP, you can add the retail sector with its countless innovative features at present.
Diefenbach: But who hit on the idea of what could be gained from the data? Can innovations also be turned into money?
Schmidt: There are as yet not many concepts for users. To some extent, there is not yet an instance that provides a clear direction – someone with vision and a strategy.
Diefenbach: That is an important point. There are no strategies. There are stand-alone ideas, but there obviously is no large-scale, overall picture.
Schmidt: Yes, there is a reaction to the digital transformation process, but the long-term objective is lacking. Where am I going? And how do I get there?
Pousttchi: We have been told that data is like a jewel, but it can also change into the opposite. Namely if we find that the scenarios that you describe here can already be managed by others. What happens if someone else knows more about our customers than we do ourselves? The owner of a smartphone operating-system could be this „someone else“.
Faerbinger: Who is then responsible for the vision of digital transformation? We are obviously all in agreement that this change exists.
Diefenbach: The initiative comes from the users and customers. The customers themselves will determine what they want and what they need – and also where they are prepared to cooperate.
Pousttchi: You mean the end-customers?
Diefenbach: Yes, I believe that the initiative originates with the end-customers and is then incorporated into the business processes.
Pousttchi: But this can also be very dangerous. There are already companies today (such as Apple, Google, Facebook or Amazon [editor‘s note]) that already know a lot of more about consumers than the suppliers. If these companies use all the end-customer data to make „big data“ – which a store like Rewe* or Edeka** cannot do – things will become exciting. Someone will then know what the customer is going to buy before the customer himself knows. And that someone then asks retailer 1: „What will you give me if the customer comes to you?“ The same question is then asked of retailer 2, and online trader 3, and then you start all over again. If we were now to say that the Amazons, Googles and Facebooks of this world want to take over the business of traditional companies, this wouldn‘t be completely correct – because they only want the margin. In other words, value-chains change and strategic customer ownership comes into play via this B2C scenario, which has the effect of monopolizing the end-customer interface.
Diefenbach: I agree, but it only works as long as the customer is willing to play along. If the customer says he will no longer hand over his details – it‘s all over.
Kaiser: Of course, the end-customer simply does not have the holistic point of view and responsibility. That is why this is clearly a topic for managing directors and CIOs. And industry has good examples of strategies and visions, for example at Mercedes, where it‘s a matter of transforming a car manufacturer into a logistics provider. That entails 95% digitalization. So not everyone is asleep or waiting to be told what to do by end-customers.
Faerbinger: So do we need central coordination for this change management? Who can be responsible for the digital-transformation process? Stephan Kaiser said that there are innovative and visionary managing directors. From an IT viewpoint: do you have sufficient time and resources to reflect on this and to plan the vision? Or is a Chief Digital Officer needed?
Schmidt: My job at present is to ensure that information security is still a given. This is not really a matter of course if flexibility is required in order to simply have everything available everywhere. Our CIO is also active in operative terms, of course, because he is very aware of the interfaces to individual departments. However, he acts strategically – and in my opinion, there is no need for an additional role in the company to manage the digital transformation process. Nevertheless, an additional administrative department could also help to give greater emphasis to this task. Clearly, if IT is regarded as a cost center and the CIO reports to the CFO, then a real cost center will probably be needed.
Faerbinger: When you visit customers, how often have you ever met a CDO, Chief Digital Officer?
Daubmann: That‘s just what I was asking myself. Not once. For me, the role of Chief Digital Officer is increasingly performed by innovative heads of specialist departments, who then put internal IT under pressure but who naturally, on account of their external contacts, see where the end-customers and the market are going. IT must then create the prerequisite to implement these requirements.
Diefenbach: But the CIO has been lucky if departments merely make demands – and do not each react in a different way.
Schmidt: Yes, we also frequently experience decision-making at department level on a basis that is very independent of the role of IT.
Daubmann: That can often happen quickly. Here‘s a problem and there’s the solution – and afterwards the CIO has to put everything back in order again.
Diefenbach: In this case, the CIO is in a difficult situation. He has to bear the cost pressure, has to ensure data security and the operative processes – how much can he then still invest in strategies? Should he then drive the digital change alone?
Schmidt: This will undoubtedly not work as a part-time job. At the least, an appropriate budget also has to be available.
Diefenbach: However, to some extent there are resources in the specialist departments.
Kaiser: Yes, and then I would have to centralize things with the CIO or create the position of a CDO and give him the resources. But that means reorganization.
Diefenbach: Or you have to live the digital transformation process on a holistic basis and cooperate – i.e. look for partners within the company, with whom you can tackle the tasks together. And then, of course, the budgets must then be thrown together into the same pot.
Schmidt: Unfortunately, it’s a rarity to have this togetherness, with everyone pulling in the same direction. And then along comes the specialist department with solutions, IT believes that it‘s not possible and security has other concerns. Because if everyone is following their own goals, it’s not necessary for everything to go in one direction, namely the right direction.
Diefenbach: In other words, does the CIO have to set the pace?
Kaiser: Yes, certainly. And, from our viewpoint as analysts, for some time now we have seen that it is becoming necessary to form these interfaces – also between the user and the service-provider. This results in an interesting tandem function between the service-provider and the CIO, who can go into an organization together and actively provide solutions or sensitize this organization for the transformation process. The CIO is not close enough to the business processes, but it also cannot be left to the individual specialist departments alone – digital transformation is a strategic topic. In this situation, some large companies rely on spin-off companies, which can tackle a transformation quite differently as so-called „speedboats“ – independent of the rest of the organization. Audi is doing this with a separate team in Munich, which is consciously not located at headquarters in lngolstadt, so as to perhaps not be crushed by conflicting priorities. Detached from the day-to-day operative business, this team can experiment very freely in the field of digital transformation.
Faerbinger: In that case, that was a statement in favor of the Chief Digital Officer. Do universities train such managers? How do you become a CDO?
Pousttchi: If you‘re clever, you study business informatics. The topic of digital transformation is a topic for CIOs. The core business of more than 90% of all companies is affected by digital transformation. If the CIO does not take care of this, then he is not the right man. It goes without saying that he needs the CEO, because his IT resources are only limited. A CDO is not necessary if the CIO accepts his new role. But a CIO who still only takes care of his own IT today – well, his time is up. If he is only in charge of IT, he should then also be called head of IT and not CIO. At the same time, however, the CIO needs to be brought up to management-board level. It is wrong to have a CIO that is the head of IT. And a CIO who reports to the CFO is a nuisance.
Diefenbach: But the latter is still often the case nowadays.
Pousttchi: Yes, unfortunately. Thus the first thing a CEO who wants to tackle digital transformation has to do is make decisions regarding employees and organizational structures. I know a CEO of a medium-sized Italian company who regularly brings the leading heads of department and managing directors from Europe together for two days in a very pleasant hotel. In that way, he gets feedback and acquires know-how from every department and no-one can avoid him, thus ensuring that they can work on the digital transformation processes together.
Faerbinger: Are our CIOs so innovative and competent?
Diefenbach: The CIOs that I know and those at management-board level have these skills. On the other hand, I don‘t believe that you can acquire these skills during a course of university studies. It is a process of continuous learning and of further development – also in close contact with the university – that ultimately creates the ability to achieve digital transformation. The world is changing too quickly for us to rely on five-year old know-how from a course of university studies.
Pousttchi: l think both have to be taken into account. If universities cannot train you for the challenges of the digital transformation process, then they are superfluous. At present these topics are being used to take decisions about the welfare of German and European industry and also society – or the lack of it. Europe will get an enormous problem if universities are not involved in these innovative and visionary developments. Of course, this does not mean that we now have to train the companies’ CIOs. But we do want to train young people for future challenges. At the University of Potsdam we have a cross-subject, interdisciplinary module entitled “Implications of Digital Life and Business”. This is done by business-administration graduates, who on the one hand can distinguish between bits and bytes and on the other hand also understand the company. We need to understand that digital transformation is a cross-functional problem that has a dramatic impact on every core business. The ability to understand and manage digital transformation should be classified in a similarly cross-functional manner as the ability to speak English.
Daubmann: I also think that the ability of the CIO to work together with others will be very much in demand. In future, it will be a mistake for anyone to see IT as a fortress that no-one can enter or leave. It will not be possible to implement digital transformation in this way. But anyone who is in close contact with the colleagues in his/her department will overcome the transformation process.
Faerbinger: Mr. Schmidt, are there any such interdisciplinary work groups in your company?
Schmidt: Only to a limited extent. Our CIO, however, is also not the typical engineer – within the company, he was always a business partner for the other heads of department. Thus, our CIO is in a very good position to cope with these tasks. Nevertheless, it must be asked to what extent a certain initiative must be shown at the very top – i.e. by the CEO.
Kaiser: For decades now, IT has been used to acting in a very effective way. And that will also remain so within the context of digital transformation. From a strategic viewpoint, however, the overall responsibility for digital transformation lies with the CEO, because the challenges are so extremely interdisciplinary. In general, we are considering new modules as to how cooperation can take place in future. My proposal would be to stay away from “silos”, from a self-contained mentality.
Diefenbach: However, as long as the CIO remains stuck in the CFO environment, he is budget-driven.
Faerbinger: Is it still possible to master the balancing act between informatics’ piece of wisdom – “never change a running system” – and the agility and transformation that are required here?
Daubmann: We always try to simplify and consolidate the systems for our customers so that different objectives can be brought together. In so doing, we also make a clear distinction with regard to operative systems that have to be highly available and stable. On the other hand, we are working together with our customers to design innovative tasks and have also trained new employees for this purpose. Since last year, we have recruited data analysts who advise our customers on digital-transformation processes. The customer expects us not only to provide technical IT advice, but also to explain what he, the customer, can do with the technology. In part, the customer cannot yet imagine what can be achieved with big data.
Pousttchi: Big data is not just data-mining with more data, but the automated, algorithmic finding of similarities in large data quantities. And then someone will know what the customer is going to buy before the customer knows that himself – as I already mentioned beforehand. However, traditional retailers such as Rewe or other retail shops do not have these quantities of data. It even becomes very difficult for Payback* to consolidate sufficient data for this analysis. Compared to this, the lnternet businesses previously referred to have a lot more customer data than the aforementioned retail companies and, at the same time, they are in direct contact with the end-customer. If you now consider this from a microeconomic point of view, in retail this leads to the break-even point. The retailer thus no longer pays a costly city-center lease and does not have qualified sales employees paid according to collective wage-scales any more. This will have a devastating impact on retail in two to three years. If this digital transformation process is not recognized now, the opportunity will have gone. According to retail businesses it‘s the banks who will be affected, then the insurance companies and finally the manufacturers of consumer goods and so on. I‘m not a pessimist but a realist, and I am trying to build value-chains and systems in order to avoid this. But anyone who has not understood where this radical digital transformation is going will also probably no longer be around at the end of it.