McKinsey Digital

Raising your Digital

Quotient

December 2015
 Table of contents
Making sense 8 Raising your digital 20 What ‘digital’ really
of the digital quotient means
landscape

How to succeed 26 Six building blocks 34 Changing change 38 Nine questions to help 46 Speed and scale:
in a digital for creating a high- management you get your digital Unlocking digital
transformation performing digital transformation right value in customer
enterprise journeys

Building 60 “Transformer-in- 68 How digital marketing 76 Two ways to 86 Beyond agile:

capabilities Chief”: The new Chief operations can modernize IT systems Reorganizing IT
and tech Digital Officer transform business for the digital era for faster software
delivery

Cultivating a 98 Building a design- 108 Demystifying the

digital culture driven culture hackathon

Looking ahead 116 An executive’s guide 124 An executive’s guide
to machine learning to the Internet of
Things
Introduction
“When you’re finished changing, you’re finished.”
–Benjamin Franklin

Change has become the watch word of our digital economy. Most businesses
are certainly wrestling with change and are engaged in significant transformation
efforts. Often lost in the urge to change, however, is an examination of the very
nature of change.

As we work with companies on their transformation journeys, we’ve been struck

by two emerging truths. One is that leaders in the field have a mindset that is
less about improving and more about reinventing. That might mean re-thinking
completely how they serve their customers, how they run their businesses, and
where they find value.

The other is that there is no “end state” on the change journey. Or, to put it
another way, the end state is a state of constant change. Companies that are
built to win are those that are built to change.

This selection of articles from our recent “Raising your Digital Quotient”
publishing campaign provides some insights into how companies can
approach their change efforts. We hope this collection will be useful in
sparking conversations and shaping activities that lead to successful digital
transformations. We look forward to discussing these exciting challenges with
you in the new year.

Alan Lau Marc Singer Paul Willmott

Director, Hong Kong office Director, San Francisco office Director, London office
McKinsey Digital, Asia McKinsey Digital, Americas McKinsey Digital, Europe

@alanlau999 @marcesinger @WillmottPaul

Part 1:
Making sense of the digital
landscape

8 Raising your digital quotient

20 What ‘digital’ really means

 Raising your digital quotient
Tanguy Catlin, Jay Scanlan, and Paul Willmott

Following the leader is a dangerous game. It’s better to

focus on building an organization and culture that can
realize the strategy that’s right for you.

With the pace of change in the world accelerating around us, it can be hard to remember
that the digital revolution is still in its early days. Massive changes have come about since
the packet-switch network and the microprocessor were invented, nearly 50 years ago. A
look at the rising rate of discovery in fundamental R&D and in practical engineering leaves
little doubt that more upheaval is on the way.

8 Raising your digital quotient Making sense of the digital landscape

For incumbent companies, the stakes continue to rise. From 1965 to 2012, the “topple
rate,” at which they lose their leadership positions, increased by almost 40 percent1 as
digital technology ramped up competition, disrupted industries, and forced businesses
to clarify their strategies, develop new capabilities, and transform their cultures. Yet the
opportunity is also plain. McKinsey research shows that companies have lofty ambitions:
they expect digital initiatives to deliver annual growth and cost efficiencies of 5 to 10
percent or more in the next three to five years.

To gain a more precise understanding of the digitization challenge facing business today,
McKinsey has been conducting an in-depth diagnostic survey of 150 companies around
the world. By evaluating 18 practices related to digital strategy, capabilities, and culture,
we have developed a single, simple metric for the digital maturity of a company—what
might be called its Digital Quotient, or DQ. This survey reveals a wide range of digital
performance in today’s big corporations (exhibit) and points to four lessons in which we
have increasing confidence:

• First, incumbents must think carefully about the strategy available to them. The
number of companies that can operate as pure-play disrupters at global scale—
such as Spotify, Square, and Uber—are few in number. Rarer still are the ecosystem
shapers that set de facto standards and gain command of the universal control points
created by hyperscaling digital platforms. Ninety-five to 99 percent of incumbent
companies must choose a different path, not by “doing digital” on the margin of their
established businesses but by wholeheartedly committing themselves to a clear
strategy.

• Second, success depends on the ability to invest in relevant digital capabilities that
are well aligned with strategy—and to do so at scale. The right capabilities help you
keep pace with your customers as digitization transforms the way they research
and consider products and services, interact, and make purchases on the digital
consumer decision journey.

• Third, while technical capabilities—such as big data analytics, digital content

management, and search-engine optimization—are crucial, a strong and adaptive
culture can help make up for a lack of them.

• Fourth, companies need to align their organizational structures, talent development,

funding mechanisms, and key performance indicators (KPIs) with the digital strategy
they’ve chosen.

1
Deloitte Center for the Edge, 2013 Shift Index metrics: The burdens of the past, 2013, dupress.com.

McKinsey Digital 9
Exhibit

An assessment of
the digital maturity of
big corporations
reveals a wide range
of performance

Collectively, these lessons represent a high-level road map for the executive teams of
established companies seeking to keep pace in the digital age. Much else is required, of
course.2 But in our experience, without the right road map and the management mind-set
needed to follow it, there’s a real danger of traveling in the wrong direction, traveling too
slowly in the right one, or not moving forward at all. We hope this article will help leaders
steer organizations effectively as they make the transition to becoming more fully digital
enterprises.

1. Getting the strategy right

Executives must arrive at a common vernacular for what “digital” means for them.3 Then,
the starting point for success is developing a clearly defined, coherent digital strategy
that’s fully integrated with the overall corporate one. Without this deep alignment, any
subsequent intervention is bound to fall short. Yet companies struggle to get their digital
strategy right. Among the 18 practices in our DQ diagnostic, those related to strategy
show the biggest variance between digital leaders and more average-performing
companies. One obstacle is the exposure and publicity (and, commonly, the big market
valuations) that surround the most visible players in today’s digital landscape. These
companies include pure-play disrupters, such as Nespresso and Uber, and ecosystem

2
For a more detailed look at the areas where change must occur, see Driek Desmet, Ewan Duncan, Jay Scanlan, and Marc
Singer, “Six building blocks for creating a high-performing digital enterprise,” September 2015, on mckinsey.com.
3
For more, see Karel Dörner and David Edelman, “What ‘digital’ really means,” July 2015, on mckinsey.com.

10 Raising your digital quotient Making sense of the digital landscape

shapers, such as John Deere and Schibsted. Impressive as disrupters and shapers might
be, those two strategies are feasible for only a select few.

Companies get their digital strategy right by answering three important questions. First,
where will the most interesting digital opportunities and threats open up? Second, how
quickly and on what scale is the digital disruption likely to occur? Third, what are the best
responses to embrace these opportunities proactively and to reallocate resources away
from the biggest threats? The vast majority of companies will address this third question
through more targeted strategic responses, including these:

A smaller-scale disruption of your own business model to enter a new space or redefine
an existing one. Shenzhen-based Ping An Bank, for instance, founded the digitally
centered Orange Bank to target younger consumers of financial services with simple,
high-return products and a one-minute account sign-up–all without traditional branch
networks or complex product portfolios.

Fast-following to ride the wave and capture some of the value created by an industry’s
evolution. The UK department store John Lewis deployed thoughtful, targeted “clicks
and mortar” levers to make it possible for a highly loyal and attractive customer base to
order from its website and get deliveries at stores and company-owned grocery outlets in
their local communities.

Aggressively reallocating resources from digitally threatened assets to more digitally

interesting ones. Bauer Media Group, in Germany, has systematically reallocated
resources away from potentially vulnerable analog media assets to develop a portfolio
with a digital advantage. Its overall revenue base has shrunk, but its topline growth is
materially higher, and its market capitalization has better equity multiples.

Boosting the effectiveness of existing business models through digital approaches and
tools. To help visitors at Disney resorts and theme parks, the Walt Disney Company, for
example, developed a suite of digital tools. These include the FastPass+ service, which
allows visitors to reserve access to theme-park attractions, and the MagicBand, a tech-
enabled wristband that facilitates reservations and customer routing at Disney World.
Roughly 50 percent of Disney World’s visitors elect to wear it. The more efficient routing
helped the resort’s Magic Kingdom to host about 3,000 more guests each day of the
2013–14 holiday season.4

Clearly defining the best-fitting digital strategies is important, in part, because successful
ones give rise to differentiated management practices: if you get the strategy right,

4
Michelle Baran, “Magic Kingdom gets attendance boost from RFID bracelets,” Travel Weekly, February 6, 2014,
travelweekly.com; and Dan Peltier, “Half of Walt Disney World visitors now enter wearing MyMagic+ wristbands,” Skift, May 7,
2015, skift.com.

McKinsey Digital 11
 the managerial interventions become clearer and vice versa. Consider the following
examples:

• A bold long-term orientation counteracts short-term financial-performance

imperatives and frees companies to take calibrated risks and to invest at scale in
digital initiatives and the IT architecture.

• Direct integration with the strategy puts digital at the center of the business, fostering
natural forms of internal collaboration as well as corporate governance that places
digital topics alongside other business requirements. Strategic priorities and
investment decisions are now part of the same process.

• A relentless focus on customer needs helps companies innovate constantly where it

matters most. While data from early adopters sometimes does mislead businesses
that try to serve them, more often than not their behavior soon begins permeating the
mass market. That’s especially true if multigenerational links can be made through
consumer use cases (for instance, direct consumer videoconferencing, texting, and
e-chats).

Once companies have arrived at a clearly thought-out strategy, they must commit
themselves to it wholeheartedly. The days of tinkering at the edges are gone.

2. Capabilities at scale

For digital success, certain capabilities—especially those that build foundations for other
key processes and activities—are more important than others. Foremost among them
are the modular IT platforms and agile technology-delivery skills needed to keep pace
with customers in a fast-moving, mobile world. The IT platforms of most companies we
surveyed have major gaps, reflecting (and reinforced by) a widespread failure to prioritize
digital initiatives within broader IT and capital-expenditure investments.

What further separates high performers in our survey is their ability to engage customers
digitally and to improve their cost performance in four areas.

Data-empowered decision making

High-performing digital companies distinguish themselves by keeping pace as their
customers undertake the digital consumer decision journey.5 For example, they
anticipate emerging patterns in the behavior of customers and tailor relevant interactions
with them by quickly and dynamically integrating structured data, such as demographics
and purchase history, with unstructured data, such as social media and voice analytics.

5
See Edwin van Bommel, David Edelman, and Kelly Ungerman, “Digitizing the consumer decision journey,” June 2014,
mckinsey.com.

12 Raising your digital quotient Making sense of the digital landscape

These companies skillfully assess the available resources, inside and outside the
business, and bring them to bear on issues that matter to their markets.

For example, in 2012, Reckitt Benckiser, a maker of popular cold and flu remedies, used
search data from the medical website WebMD (with almost 32 million monthly visitors
at that time) to track cold and flu symptoms across the country and anticipate where
outbreaks were likely to occur. Then the company released targeted geography- and
symptom-specific advertising and promotions (including an offer for free home delivery)
in those places. Along with a strong cold and flu season, this initiative helped Reckitt
Benckiser, during one four-week period, to increase its US sales of cough and cold
products by 22 percent, compared with the previous year.6

Connectivity
A closely related skill is connectivity. Digital leaders embrace technologies (such as apps,
personalization, and social media) that help companies establish deeper connections
between a brand and its customers—and thus give them more rewarding experiences.
Such connections can also deeply inform product development.

For example, Burberry’s Art of the Trench campaign, launched in 2009, encourages
customers to visit its online platform and upload photographs of themselves in trench
coats. Fellow shoppers and fashion experts then comment on the photos and “like” and
share them through email, as well as social-media outlets. Users can also click through
to the main Burberry site to shop and buy. These innovations are becoming ever more
deeply embedded in the company.7 Burberry may not have gotten everything right, but,
overall, this approach—combined with other innovations—helped the company to double
its annual total revenue in six years.

Process automation
Top-performing digital players focus their automation efforts on well-defined processes,
which they iterate in a series of test-and-optimize releases. Successful process-
automation efforts start by designing the future state for each process, without regard for
current constraints—say, shortening turnaround time from days to minutes. Once that
future state has been described, relevant constraints (such as legal protocols) can be
reintroduced.

Using this approach, a European bank shortened its account-opening process from two
or three days to less than ten minutes. At the same time, the bank automated elements of
its mortgage- application process by connecting an online calculator to its credit-scoring
models, which enabled it to give customers a preliminary offer in less than a minute. This
system cut costs while significantly improving customer satisfaction.8

6
Emily Steel, “Reckitt targets flu sufferers online,” Financial Times, November 5, 2012, ft.com; and Jack Neff, “Flu gives Reckitt,
Johnson & Johnson a shot in the arm,” Advertising Age, January 14, 2013, adage.com.
7
Mercedes Bunz, “Burberry checks out crowdsourcing with The Art of the Trench,” Guardian, November 9, 2009, theguardian.
com; and Harriet Walker, “Digging trenchcoats: What makes Burberry our boldest brand?” Independent, February 23, 2013,
independent.co.uk.
8
See Shahar Markovitch and Paul Willmott, “Accelerating the digitization of business processes,” McKinsey on Business
Technology, May 2014, mckinsey.com.

McKinsey Digital 13
 Two-speed IT
Today’s consumer expectations put a new set of pressures on the IT organization as
legacy IT architectures struggle with the rapid testing, failing, learning, adapting, and
iterating that digital product innovations require. Our diagnostic shows that leading
companies can operate both a specialized, high-speed IT capability designed to deliver
rapid results and a legacy capability optimized to support traditional business operations.

This IT architecture and, in certain cases, the IT organization itself essentially function at
two different speeds. The customer-facing technology is modular and flexible enough to
move quickly—for instance, to develop and deploy new microservices in days or to give
customers dynamic, personalized web pages in seconds. The core IT infrastructure, on
the other hand, is designed for the stability and resiliency required to manage transaction
and support systems. The priority here is high-quality data management and built-in
security to keep core business services reliable.

One UK financial institution used this two-speed approach to improve its online retail-
banking service. The bank opened a new development office with a start-up culture—an
agile work process tested and optimized new products rapidly. To support this capability
for the long term, the company simultaneously evolved its service architecture to
accelerate the release of new customer-facing features.9

3. A fast, agile culture

While strong skills are crucial, companies can to some degree compensate for missing
ones by infusing their traditional cultures with velocity, flexibility, an external orientation,
and the ability to learn. While there is more than one way to build such a culture, many
companies with high scores on the DQ diagnostic have succeeded by adopting
test-and-learn approaches drawn from software-development movements such as
DevOps, continuous delivery, and agile. Once, these were confined to the periphery
of the business environment. Now they bring a cooperative, collaborative disposition
to interactions between talented workers at its core. Previously siloed functions,
departments, and business units can learn a new spirit of cohesiveness.

These test-and-learn approaches incorporate automation, monitoring, community

sharing, and collaboration to unify previously isolated functions and processes into a
fast-moving, product-oriented culture. By promoting shared ownership of technology
initiatives and products, such environments democratize data, minimize complexity,
facilitate the rapid reallocation of resources, and enable reusable, modular, and
interoperable IT systems.10 To set this kind of culture in motion, executives can focus their
efforts on four key areas.

9
See Henrik Andersson and Philip Tuddenham, “Reinventing IT to support digitization,” May 2014; and Oliver Bossert, Jürgen
Laartz, and Tor Jakob Ramsøy, “Running your company at two speeds,” McKinsey Quarterly, December 2014, both available
on mckinsey.com.
10
For more about DevOps, see Satty Bhens, Ling Lau, and Shahar Markovitch, “Finding the speed to innovate,” April 2015, on
mckinsey.com. For more about agile cultures, see Paul Willmott, “Want to become agile? Learn from your IT team,” July 2015,
on mckinsey.com.

14 Raising your digital quotient Making sense of the digital landscape

External orientation
As companies develop their collaborative cultures, they position themselves to
participate more meaningfully in broader networks of collaboration, learning, and
innovation. The shaping role in these networks, or ecosystems, may be beyond the
reach of most incumbent companies. But they can play other value-creating roles by
performing specific modules of activity, such as production or logistics, within a more
broadly orchestrated ecosystem.

Collaboration beyond the boundaries of companies need not occur only in a broadly
orchestrated setting. Companies can also benefit from smaller-scale collaborations with
customers, technology providers, and suppliers. In addition, they can mobilize workers
they themselves don’t employ—the distributed talent in networks of shared interest and
purpose. SAP, for instance, mobilized the user community it developed to help launch its
NetWeaver software.

All this requires digital leaders to recognize what they’re good at themselves and what
others might do better and to improve their ability to partner collaboratively with people
and institutions. They must also be able to separate the real opportunities, threats, and
emerging collaborators and competitors from hype-laden pretenders.

Appetite for risk

Our DQ research finds that digital leaders have a high tolerance for bold initiatives but that
executives at laggards say their cultures are risk averse. Although established companies
may not be likely to shape or orchestrate broad ecosystems, they must still face up to the
implications of disruptive forces in their markets and industries— and the risks that arise
in dealing with them. In a world of more data and less certainty, companies have to make
decisions and respond to disrupters all the earlier and the more decisively.

Test and learn—at scale!

At the heart of agile cultures is the test-and-learn mind-set and product-development
method, which can usefully be applied, or translated, to nearly any project or process
that incumbents undertake. Instead of awaiting perfect conditions for a big-bang product
launch or deferring market feedback until then, digital leaders learn, track, and react by
putting something into the market quickly. Then they gauge interest, collect consumer
reactions, and pursue constant improvements. Rigorous data monitoring helps teams
quickly refine or jettison new initiatives, so that such companies fail often and succeed
early.

Nordstrom’s Innovation Lab, for example, launches customer-facing initiatives in a series

of one-week experiments. To build an app that helps customers shop for sunglasses,
the innovation team set up temporary camp in the retailer’s flagship Seattle store. There,

McKinsey Digital 15
 it mocked up paper prototypes and had shoppers tap through them as you would a live
version. Customers shared feedback on the features they found most helpful and pointed
out problematic or unintuitive elements in the prototype. Coders used that information to
make real-time adjustments and then released a new live version of the app for customers
to test-drive on the spot. After a week of continual tweaking and re-releasing, it was ready
for the store’s sales associates.11

Internal collaboration
Teamwork and collaboration are important in any context, digital or otherwise. Wharton’s
Adam Grant says the single strongest predictor of a group’s effectiveness is the amount
of help colleagues extend to each other in their reciprocal working arrangements.12

But collaborative cultures take on even greater importance as companies look to boost
their DQ, since many lack the established digital backbone needed to unify traditionally
siloed parts of the organization, from customer service to fulfillment to supply-chain
management to financial reporting.

Less than 30 percent of the 150 companies we’ve surveyed say they have a highly
collaborative culture. The good news is that there’s plenty of room for improvement.
Some of it comes from technology: by moving into cloud-based virtualized environments,
for example, companies can provide appropriate contexts where teams come together
and participate in collaborative experimentation, tinkering, and innovation. In this
way, they can learn and make decisions quickly by evaluating data from customer
experiences.

4. Organization and talent

Beyond strategy, capabilities, and culture, leading digital companies use a wide set of
coherent practices in talent, processes, and structure.

Talent connections
High-DQ companies sometimes feel the need for a digital leader on the executive team
who combines business and marketing savvy with technological expertise. But while
executive leadership is important, the most critical thing is midlevel talent: the “boots on
the ground” who can make or break digital initiatives and are ultimately responsible for
bringing products, services, and offers to market.

In today’s environment, finding that talent isn’t easy. To facilitate the search, companies
should recognize that, in many instances, digital competency matters more than sector

11
Nordstrom, “Nordstrom Innovation Lab: Sunglass iPad app case study,” YouTube video, September 28, 2011, youtube.com.
12
See Adam Grant, “Givers take all: The hidden dimension of corporate culture,” McKinsey Quarterly, April 2013, mckinsey
.com.

16 Raising your digital quotient Making sense of the digital landscape

knowledge, at least in the early stages of a digital transformation. Only 35 percent of
digital talent in the companies we analyzed had digital experience outside them.

High-DQ companies are also creative about training and nurturing talent. A number of
years ago, for example, P&G launched an employee swap with Google to shore up P&G’s
search engine– optimization skills, while the Internet giant gained a deeper knowledge
of marketing.13 Such opportunities build competency while expanding the methods and
possibilities open to companies that take advantage of them.

Companies must also nurture digital talent with the right incentives and clear career
paths. Here, some incumbents may have more advantages than they realize, since
these young people seem eager to help iconic brands in fashion apparel, luxury cars,
newsmagazines, and other categories to reach digital audiences. When that’s done well,
companies establish a virtuous cycle: the nurturing of good talent attracts more of it,
allowing organizations to build quickly on the initial foundation to secure a stable of digital
leaders. That critical mass, in turn, serves to draw in similar candidates in the future.

Real-time monitoring
Leading digital companies track and communicate digital key performance indicators
frequently—in some cases in real time. They measure those KPIs against digital priorities
and make sure senior management reviews and manages their performance.

When Starbucks rolled out a new point-of-sale system, for example, managers
videotaped transactions and interviewed employees to fine-tune the checkout process.
That feedback allowed the company to trim ten seconds off any mobile or card-based
transaction, allowing employees to process sales more quickly and saving customers
900,000 hours of time in line each year.14

Nontraditional structures
While no one answer works for all companies, high-DQ businesses carefully and
deliberately build organizational structures that reflect where they are in the digital
transformation. Some acknowledge that the core business cannot transform itself
fast enough to capture new digital growth. For example, many successful traditional
media organizations have carved out their digital businesses from more mature content
operations.

Axel Springer used its digital business model as the dominant organizing principle in its
recent reorganization—an approach that promotes the emergence of the distinct culture,
performance-management system, and governance that growing digital businesses

13
Ellen Byron, “A new odd couple: Google, P&G swap workers to spur innovation,” Wall Street Journal, November, 19, 2008,
wsj.com.
14
Adam Brotman and Curt Garner, “How Starbucks has gone digital,” interview by Michael Fitzgerald, MIT Sloan Management
Review, April 4, 2013, sloanreview.mit.edu.

McKinsey Digital 17
 require. In the meantime, Axel Springer’s strong legacy businesses can adapt and evolve
to master the new digital landscape separately.

Finally, some incumbents—such as L’Oréal and TD Bank Group— have created centers
of excellence and appointed chief digital officers. Others, like Burberry, operate governing
councils charged with thinking big and ensuring that senior leadership buys into the
digital plans. These structures often change over time as companies evolve. What might
start out as a newly incubated competency, such as social media, eventually matures and
becomes integrated into the broader business.

The journey to digital maturity requires a whole-hearted commitment from a company’s

leadership and a sustained investment in people, capabilities, technology, and cultural
change. To get started, an organization must be honest about its DQ, clear about its long-
term strategic opportunity, and open to iterating and refining solutions along the way.

The authors wish to thank McKinsey’s Juliette Valains for her contributions to this article.

Tanguy Catlin is a principal in McKinsey’s Boston office; Jay Scanlan is a principal in the
London office, where Paul Willmott is a director.

18 Raising your digital quotient Making sense of the digital landscape

McKinsey Digital 19
 What ‘digital’ really means
David Edelman and Karel Dörner

Companies today are rushing headlong to become

more “digital”. But what does “digital” really mean?

Based on our experiences in many C-suites, the answers to this question vary broadly.
For some executives, digital is about technology; for others, it’s about a new channel to
engage with customers; and for others still, digital represents an entirely new way of doing
business. Such diverse perspectives often trip up leadership teams because they reflect
a lack of alignment and common vision about where the business needs to go. That often
results in piecemeal initiatives or misguided efforts that lead to missed opportunities,
sluggish performance, or false starts.

20 What ‘digital’ really means Making sense of the digital landscape

Even as CEOs push forward on digital agendas, it’s worth pressing pause to take time
to clarify vocabulary and sharpen language so that business leaders have a clear and
common understanding of what digital means in general, and what it means for their
business.

It’s tempting to look for simple definitions but to be meaningful and sustainable, we
believe that “digital” should be regarded less as a thing and more as a way of doing things.
To make this definition more concrete, we’ve broken it down into three attributes. This first
is about creating value at the new frontiers of the business world; the second focuses on
the cycle of core processes that execute a vision around customer experiences; and the
third highlights the foundational capabilities that support the entire structure.

Frontiers: New value

Being digital requires being open to re-examining the entire way of doing business and
understanding where the new frontiers of value are. For some companies, capturing
new frontiers will be about developing entirely new businesses; for others, it will be about
identifying and pursuing new value pools in existing sectors.

Unlocking that value from emerging growth vectors calls for a deep commitment
to understanding the implication of external developments in the marketplace, and
evaluating them for potential opportunities or threats. The Internet of Things, for example,
is starting to open up opportunities for disruptors to use the unprecedented levels of data
precision to identify flaws in existing value chains. In the automotive industry, for example,
connecting cars to the outside world has expanded the frontiers for self-navigation or
in-car entertainment. In the logistics industry, the use of sensors, big data, and analytics
has enabled companies to improve the efficiency of their supply-chain operations.

At the same time, being digital is about being closely attuned to how customer decision
journeys are evolving in the broadest sense. That means understanding how customer
behaviors and expectations are developing inside and outside each individual business
as well as outside each sector, which is crucial to getting ahead of trends that can deliver
or destroy value.

Core: New ways of working

The next element of “digital” is based on rethinking how to use digital capabilities to
enhance how to serve the customer. This element is grounded in an obsession with
understanding each step of a customer’s omnichannel journey and thinking about how to
use digital capabilities to design and deliver the best possible experience. This degree of
focus on the customer extends to all parts of the business. The supply chain, for example,

McKinsey Digital 21
 becomes a focus for developing the flexibility, efficiency, and speed to deliver the right
product exactly as the customer wants it. Data and metrics focus on delivering accurate
customer insights, which then drive decisions on marketing and sales.

Critically, digital isn’t about just working to deliver a one-off customer journey but about
implementing a cyclical dynamic in which processes and capabilities constantly evolve
based on inputs from the customer. In practice, this requires an interconnected set of
four core capabilities:

• Proactive decision making: Relevance is the currency of the digital age. This means
making decisions based on intelligence to deliver content and experiences that
are personalized and therefore relevant to the customer. Remembering customer
preferences is a basic example of this capability, but it also extends to personalizing
and optimizing the next step in the customer’s journey. Data providers such as
Clickfox blend data from multiple channels into one omnichannel view of what
customers are doing and what happens as a result. In the back office, analytics and
intelligence provide near-real-time insights into customer needs and behaviors that
then determine appropriate messages and offers.

• Contextual interactivity: As the consumer interacts with the brand across the
touchpoints of the journey, the company interprets the data to modify interactions to
improve the customer experience. Content and experience adapt as the customer’s
context shifts from a mobile phone to a laptop, for example, or from evaluating a
brand to making a purchase decision. The rising number of customer interactions
generates a stream of intelligence that allows the brand to make better decisions
about what their customers want. The rapid rise of wearable technology and the
Internet of Things represent the latest wave of touchpoint interactions that will enable
companies to blend digital and physical experiences even more.

• Real-time automation: To support this cyclical give-and-take dynamic and help the
customer complete a task now requires extensive automation. Automation can boost
the number of self-service options to help customers quickly resolve a problem,
personalize communications to be more relevant, and deliver consistent customer
journeys no matter the channel, time, or device. Automating supply-chain and core
business processes can drive down costs, but it is also crucial to providing the
company with more flexibility to respond to and anticipate customer demand.

• Journey-focused innovation: Serving customers well gives companies “permission”

to innovate how they interact with and sell to those customers. That innovation can
include expanding existing customer journeys into new businesses and services,
ideally to the benefit of both company and customer. These innovations in turn fuel

22 What ‘digital’ really means Making sense of the digital landscape

 more interactions, create more information, and increase the value of the customer-
brand relationship.

Foundation: New Agility

The third element of the definition of “digital” is about the technology and organizational
processes that allow an enterprise to be agile and fast. This foundation is made up of two
elements:

• Mind-sets: Being digital is about using data to make better and faster decisions,
devolving decision making to smaller teams, and developing more iterative and faster
ways of doing things. Thinking in this way shouldn’t be limited to just a handful of
functions but should incorporate a broad swath of operational approaches, including
creative partnering with external companies to extend necessary capabilities. A
digital mind-set institutionalizes cross-functional collaboration, flattens hierarchies,
and builds out environments to encourage the generation of new ideas. Incentives
and metrics are developed to support such decision-making agility.

• System and data architecture: “Digital” in the context of IT is focused on creating a

two-part environment that decouples legacy systems that support critical functions
and need to run at a slower pace from those that can support fast-moving, often
customer-facing interactions. A key feature of digitized IT is the commitment to
building networks that connect devices, objects, and people. This approach is
embodied in a continuous-delivery model in which cross-functional IT teams
(DevOps) automate systems and optimize processes to be able to release and iterate
on software quickly.

“Digital” is about unlocking growth in today’s “now” world. How companies interpret or
act on that definition will vary, but having a clear understanding of what digital means
allows business leaders to develop a shared vision of how to use it to capture value.

Karel Dörner is a principal in McKinsey’s Munich office, and David Edelman is a

principal in the Boston office.

McKinsey Digital 23
24
Part 2:
How to succeed in a digital
transformation
26 Six building blocks for creating a high-performing digital enterprise

34 Changing change management

38 Nine questions to help you get your digital transformation right

46 Speed and scale: Unlocking digital value in customer journeys

McKinsey Digital 25
 Six building blocks for creating a
high-performing digital enterprise
Driek Desmet, Ewan Duncan, Jay Scanlan, and Marc Singer

Digitization affects almost everything in today’s

organizations, which makes capturing its benefits
uniquely complex. Here are the most important aspects
that winning companies consider.

26 Six building blocks for creating a high-performing digital enterprise How to succeed in a digital transformation
Few companies need to be sold on the benefits of digitization. McKinsey research shows
that companies have lofty ambitions: they expect digital initiatives to deliver annual
growth and cost efficiencies of 5 to 10 percent or more in the next three to five years.1
Yet despite the often-substantial investments companies have made in digital initiatives,
few see that kind of growth.

That’s because getting the engine in place to digitize at scale is uniquely complex. Since
digital touches so many parts of an organization, any large digital program requires
unprecedented coordination of people, processes, and technologies. A strategy to
increase revenue from high-value customer segments, for example, requires analytics-
based insights into which purchasing journeys generate the most value, a clear vision and
plan for how to capture that value, and technologies and tools to digitize interactions with
customers. New capabilities and teams are also needed to manage and coordinate the
delivery of those journeys across the organization.2

Of course, adapting over time has always been essential to corporate success. Yet while
the average corporate life span has been falling for more than half a century—Standard
& Poor’s data show it was 61 years in 1958, 25 years in 1980, and just 18 years in 2011—
digitization is placing unprecedented pressure on organizations to evolve. At the present
rate, 75 percent of S&P 500 incumbents will be gone by 2027.3 That means managing
your transition to a digitally driven business model isn’t just critical to beating competitors;
it’s crucial to survival.

Six building blocks

In our experience, companies that have successfully transitioned to become high-

performing digital enterprises are able to orchestrate six building blocks: strategy
and innovation, the customer decision journey, process automation, organization,
technology, and data and analytics (exhibit). Now, not every digital initiative requires each
building block to be developed and used to the same degree. Some blocks will also serve
as more natural starting points, depending on a company’s circumstances—for instance,
a company whose IT constraints make it hard to deliver a cutting-edge customer
experience will naturally want to focus on the technology and process elements first.
But we’ve found that this framework provides executives with a coherent structure for
thinking through and managing large-scale digital programs.

Strategy and innovation

Digital strategy is intrinsic to business strategy today. In fact, 90 percent of digital leaders
(versus 60 percent of all leaders) have fully integrated digital into their strategic-planning
process. The best digital strategies don’t rely on past analyses, but instead start fresh
and carve out a vision based on where they believe value is likely to shift over the next

1
Tanguy Catlin, Jay Scanlan, and Paul Willmott, “Raising your Digital Quotient,” McKinsey Quarterly, June 2015, mckinsey
.com.
2
For an in-depth examination of how companies can develop meaningful digital strategies and harness technology to drive
performance, see Catlin, Scanlan, and Willmott, “Raising your Digital Quotient.”
3
Marla Capozzi, Vanessa Chan, Marc de Jong, and Erik A. Roth, “Meeting the innovation imperative: How large defenders can
go on the attack,” McKinsey on Marketing & Sales, July 2014, mckinseyonmarketingandsales.com.

McKinsey Digital 27
 Exhibit

Leading enterprises
use six building
blocks to develop
digital capabilities

three to five years (see sidebar, “Staking out your strategic position”). They assess at a
granular level where value is likely to be disrupted within their own business and market,
and they isolate where and how they will compete. Effective digital strategies prioritize
a handful of interventions where the business can exploit significant opportunities (and
divest or reduce exposure in markets where value is declining), then craft a digitally
enabled business model around them. That could mean creating a new way for
customers to purchase a product, moving into new businesses, or exploiting competitive
advantages such as proprietary data in new ways.

28 Six building blocks for creating a high-performing digital enterprise How to succeed in a digital transformation
 For example, one large retailer actively reviewed its portfolio and decided to divest its
consumer-electronics business when it saw margins eroding. It then invested in an online
retailer when it realized the strong growth trajectory of e-commerce in the sector. When
GE identified a strategic goal it needed to work toward—making deeper connections
with decision makers—it designed a company-wide social graph that tapped customer
connections and relationships across its 300,000-strong employee base. That enormous
internal network gave salespeople and account managers a significant leg up in forging
new connections and provided marketing with a return that was about 350 times its
investment.4

A digital strategy also increasingly blurs the boundaries between strategy and execution.
In fact, 60 percent of digital leaders run strategy by experimentation through limited
releases and prototyping, for example.

Sidebar While the digital maturity of a sector • Digital strivers use the advantages of
or company has a large impact on an digital to compete in existing markets
Staking out your organization’s approach, strategies tend and even disrupt their own models—
strategic position to fall into the following five categories: for example, they apply digital tools to
compete at lower prices across more
• Evolvers take actions to defend and channels and at scale.
exploit their current advantages and
effective business models. • Pure-play digital disrupters enter new
markets and redefine how to compete
• Market matchers tap existing assets through price, experience, or product.
to evolve their operating model and
consumer relationships, focusing on • Ecosystem shapers set the standards
building capabilities to move quickly that define the competitive ecosystem
into new markets when they’ve been and shape entire value chains.
identified.

Customer decision journey

Our research shows that organizations able to understand and skillfully act on complete
customer journeys can reap enormous rewards: increasing customer satisfaction by up
to 20 percent and revenue growth by 10 to 15 percent, and lowering the cost to serve by
15 to 20 percent.5 Understanding those decision journeys and the fundamentally different
ways that customers behave—from evaluating products to bonding with brands—is
becoming the cornerstone for successful businesses.6 That ability is likely to become an

4
John Dix, “How GE uses social tools to support its digital strategies,” Network World, May 21, 2014, networkworld.com.
5
Harald Fanderl and Jesko Perrey, “Best of both worlds: Customer experience for more revenues and lower costs,” McKinsey
on Marketing & Sales, April 2014, mckinseyonmarketingandsales.com.
6
To learn more about customer decision journeys, see David Court, Dave Elzinga, Susan Mulder, and Ole Jørgen Vetvik, “The
Consumer Decision Journey,” McKinsey Quarterly, June 2009, mckinsey.com; and David C. Edelman, “Branding in the digital
age,” Harvard Business Review, December 2010, Volume 88, Number 12, pp. 62–9, hbr.org.

McKinsey Digital 29
 increasingly important differentiator, since nearly 50 percent of all business-to-business
purchases will be made on digital platforms by the end of 2015,7 and $2 trillion in retail
sales will be influenced by digital by 2016.8

With so much data available, companies can become much more precise in their
outreach to customers. By combining deep data analysis and ethnographic research,
digital leaders can identify high-value microsegments, such as new mothers with full-time
jobs who primarily shop online. Understanding how these customers make decisions—
how they shop, for example, or what influences them—allows digital leaders to tailor their
approaches. One major bank unlocked more than $300 million in profitability by tapping
into underutilized customer data and delivering targeted marketing messages at various
points in the purchase-decision process. The bank used the data to inform changes in
marketing campaigns.9

Process automation
Business-process automation can result in massive competitive advantage because
initial investments, when well implemented, can scale quickly without substantial
additional costs. Over time, cost performance can improve by as much as 90 percent
as the automation effort scales across formerly siloed functions, reducing redundant
processes. New business models, in fact, are emerging as companies that create
revenue from sales of physical assets evolve into service businesses that focus on data
as an asset.

Digitizing processes has less to do with technology and more with how companies
approach development. While there is often the assumption that process automation
is a large project focused on a major platform, digital leaders in fact drive value quickly
by focusing on a series of small but important solutions that target high-value customer
journeys and expectations (for example, real-time availability and personalized treatment).
This is more than just automating an existing process. Becoming digital often requires
reinventing the entire business process to cut out steps altogether or reduce the number
of documents required.

Automating processes at speed requires small teams employing agile development

techniques to continuously build out elements of the product as prototypes, then
testing and adapting them based on feedback, often within days or weeks. When well
executed, digitizing processes can unlock significant value by compressing timelines and
eliminating duplication or inefficiencies.

Yet digitizing is as much about customer satisfaction as efficiency. A leading energy

player, for example, reduced by 40 percent churn among customers who moved houses
by making service renewal a simple two-click process accessible from the company’s

7
Oskar Lingqvist, Candace Lun Plotkin, and Jennifer Stanley, “Do you really understand how your business customers buy?,”
McKinsey Quarterly, February 2015, mckinsey.com.
8
Sucharita Mulpuru et al., US cross-channel retail forecast, 2011 to 2016, Forrester Research, July 2012, forrester.com.
9
Edwin van Bommel, David Edelman, and Kelly Ungerman, “Digitizing the consumer decision journey,” June 2014, mckinsey
.com.

30 Six building blocks for creating a high-performing digital enterprise How to succeed in a digital transformation
website. Similarly, a bank cut its cost per new mortgage by 70 percent and shortened
preapproval times from several days to just one minute by digitizing its mortgage-
application and decision processes.10

Organization
Companies know that rigid, slow-moving models no longer cut it. The challenge is to
move toward a structure that is agile, flexible, and increasingly collaborative while keeping
the rest of the business running smoothly. Successful incumbents become agile by
simplifying. They let structure follow strategy and align the organization around their
customer objectives with a focus on fast, project-based structures owned by working
groups comprising different sets of expertise, from research to marketing to finance.

While companies often obsess about the “boxes and lines” of organizational structure, it’s
more important—and significantly more difficult—to focus on processes and capabilities.
Having a clear view of what we call a company’s Digital Quotient is a critical first step to
pinpoint digital strengths and weaknesses and highlight those management practices
that can bolster financial performance.11 Some 65 percent of digital leaders have a culture
that isn’t afraid of risks, for example, and have a high tolerance for bold initiatives.

Many companies have set up incubators or centers of excellence during the early stages
of a digital transformation to cultivate capabilities. To be successful, however, these
capabilities need to be integrated into the main business. AT&T opened three AT&T
Foundry innovation centers, in Dallas, Silicon Valley, and Tel Aviv, to serve as mobile-app
and software incubators. Today, projects at these centers are completed three times
faster than elsewhere within the company. And having tested that innovation model
externally through its incubator, AT&T established a technology innovation council and
a crowdsourcing engine to infuse best practices and innovation across the rest of the
organization.12

Other companies, such as Nike, transform organically from within. The company has long
recognized the need to have focused resources for digital initiatives, and it established
a direct-to-consumer division that oversees both in-store and online activities. That
function then created a dedicated e-commerce group with its own leadership structure,
which has worked to deepen and expand its digital expertise, drive greater commerce
for Nike online, and connect across the Nike organization to create market-beating
consumer experiences, from the SNKRS app to the Nike+ community, which has tens
of millions of users. Those efforts have paid off with double-digit e-commerce revenue
growth rates and annual web sales topping $1 billion in summer 2015.

Regardless of what model a company chooses, the adage “what gets measured gets
managed” still holds true. The most successful digital companies are zealous about

10
Shahar Markovitch and Paul Willmott, “Accelerating the digitization of business processes,” McKinsey on Business
Technology, May 2014, mckinsey.com.
11
For an in-depth examination of what Digital Quotient entails and how it can help drive performance, see Catlin, Scanlan, and
Willmott, “Raising your Digital Quotient.”
12
Ben Paynter, “How ‘Toggle’ worked its way through AT&T’s innovation pipeline and into cell phones,” Fast Company, July 2,
2012, fastcompany.com.

McKinsey Digital 31
 metrics that focus on the customer journey, such as customer lifetime value, omnichannel
behavior, and share of influence across stages of the decision journey.

Technology
Most incumbents have been through waves of IT transformation in the past and
understand that overhauling legacy architecture is a multiyear process. Yet today’s
fluid marketplace requires technology that can drive innovation, automation, and
personalization much more quickly. So, the best are moving to a two-speed IT model that
enables rapid development of customer-facing programs while evolving core systems
designed for stability and high-quality data management more slowly.

This typically means that high-speed IT teams are charged with rapidly iterating software,
releasing updates in beta, fixing kinks and bugs in near-real time, then rereleasing. Their
goal is to continually fuel an accelerated development infrastructure that can support
near-instant cross-channel deployment and real-time decision making.

One European bank, for instance, created a new team that used concurrent-design
techniques (in which multiple development tasks are completed in parallel) to create a
prototype of an account-registration process, while using existing technology where it
could. By testing this process with real customers in a live environment, the team was
able to make constant refinements until it succeeded in cutting the process down to 5
steps from the original 15. In under five minutes, customers can now use a mobile device
to open an account, as opposed to waiting in a bank branch and filling out paperwork.13

New developments in DevOps (the integration of technical development and operations)

and continuous delivery (the automation of testing, deployment, and infrastructure
processes) have introduced capabilities that radically increase speed to market and lower
costs. An international travel company used these approaches to reduce time to market
by moving to the cloud, fully automating its testing, and rolling out a one-click deployment
process.

Data and analytics

Companies that make extensive use of customer analytics see a 126 percent profit
improvement over competitors.14 Companies that see that kind of return are adept at
deciding which data to use (both inside and outside the organization), focusing the
analytics on delivering on goals with clear and useful insights, and having the right
capabilities and processes in place act on them. That requires people with the right kinds
of skills—particularly “translators” who can articulate business goals and use cases with
respect to analytics requirements and turn data output into business insights.

13
Juan Garcia Avedillo, Duarte Begonha, and Andrea Peyracchia, “Two ways to modernize IT systems for the digital era,”
August 2015, mckinsey.com.
14
Alec Bokman, Lars Fiedler, Jesko Perrey, and Andrew Pickersgill, “Five facts: How customer analytics boosts corporate
performance,” July 2014, McKinsey on Marketing & Sales, mckinseyonmarketingand sales.com.

32 Six building blocks for creating a high-performing digital enterprise How to succeed in a digital transformation
With the Internet of Things and new technology developments, analytics are opening new
doors for growth. Analysts have predicted that the installed base for Internet of Things
devices will grow from around 10 billion connected devices today to as many as 30 billion
devices by 2020.15 Real-time monitoring and visualization, for example, are fundamentally
changing the relationship of insurers and the insured. Telematics are being used in auto
insurance to monitor driving habits in real time; this resulted in a 30 percent reduction in
claims at one UK insurance company, which reported that customers had developed
better driving habits.16 Similarly, data monitors on UPS trucks are used to help configure
the most efficient ways to load a truck and send alerts when a part needs a repair, before
it breaks.17

While each of these building blocks is important, the real value is in being able to integrate
them and manage the cross-business contingencies and dependencies of a large-scale
digital initiative (for best practices for all six, see our “From good to great” infographic).
The digital revolution has given birth to an interconnected world that binds customers,
employees, managers, and systems together in a network of unprecedented complexity
and opportunity. Making sense of those connections and building value requires a new
interdisciplinary model of work that is redefining how companies succeed today.

Driek Desmet is a director in McKinsey’s Singapore office, Ewan Duncan is a director

in the Seattle office, Jay Scanlan is a principal in the London office, and Marc Singer is a
director in the San Francisco office.

15
Harald Bauer, Mark Patel, and Jan Veira, “The Internet of Things: Sizing up the opportunity,” December, 2014, mckinsey.com.
16
Richard Clarke and Ari Libarikian, “Unleashing the value of advanced analytics in insurance,” August 2015, mckinsey.com.
17
Jacob Goldstein, “To increase productivity, UPS monitors drivers’ every move,” NPR, April 17, 2014, npr.org.

McKinsey Digital 33
 Changing change management
Boris Ewenstein, Wesley Smith, and Ashvin Sologar

Research tells us that most change efforts fail. Yet

change methodologies are stuck in a predigital era.
It’s high time to start catching up.

Change management as it is traditionally applied is outdated. We know, for example,

that 70 percent of change programs fail to achieve their goals, largely due to employee
resistance and lack of management support. We also know that when people are truly
invested in change it is 30 percent more likely to stick. While companies have been
obsessing about how to use digital to improve their customer-facing business, the
application of digital tools to promote and accelerate internal change has received far less

34 Changing change management How to succeed in a digital transformation

scrutiny. However, applying new digital tools can make change more meaningful—and
durable—both for the individuals who are experiencing it as well as for those who are
implementing it.

The advent of digital change tools comes at just the right time. Organizations today must
simultaneously deliver rapid results and sustainable growth in an increasingly competitive
environment. They are being forced to adapt and change to an unprecedented degree:
Leaders have to make decisions more quickly; managers have to react more rapidly
to opportunities and threats; employees on the front line have to be more flexible and
collaborative. In this time of rapid change, mastery of the art of changing quickly is a
critical competitive advantage.

For many organizations, a five- or even a three-year strategic plan is a thing of the past.
Organizations that once enjoyed the luxury of time to test and roll out new initiatives
must now do so in a compressed timeframe while competing with tens or hundreds of
existing (and often incomplete) initiatives. In this dynamic and fast-paced environment,
competitive advantage will accrue to companies with the ability to implement new
priorities and processes quicker than their rivals.

The power of digital to drive change

Large companies are increasingly engaged in multiple, simultaneous change programs,

often involving scores of people across numerous geographies. While traditional
workshops and training courses have their place, they are not effective at scale and are
slow moving.

B2C companies have unlocked powerful digital tools to enhance the customer journey
and change consumer behavior. Wearable technology, adaptive interfaces, and
integration into social platforms are all areas where B2C companies have innovated
to make change more personal and responsive. Some of these same digital tools and
techniques can be applied with great effectiveness to change-management techniques
within an organization. Digital dashboards and personalized messages, for example,
can build faster, more effective support for new behaviors or processes in environments
where management capacity to engage deeply and frequently with every individual
employee is constrained by time and geography.

“Digitizing” five areas in particular can help make internal change efforts more effective
and enduring.

1. Provide just-in-time feedback

The best feedback processes are designed to offer the right information when the
recipient can actually act on it. Just-in-time feedback gives recipients the opportunity to

McKinsey Digital 35
 make adjustments to their behavior and to witness the effects of these adjustments on
performance.

Consider the experience of a beverages company experiencing sustained share losses

and stagnant market growth in a highly competitive market in Africa. The challenge was
to motivate 1,000-plus sales reps to sell with greater urgency and effectiveness. A simple
SMS message system was implemented to keep the widely distributed sales reps, often
on the road for weeks at a time, plugged into the organization. Each rep received two
to three daily SMS messages with personalized performance information along with
customer and market insights. For example, one message might offer feedback on which
outlets had placed orders below target; another would alert the rep to a situation that
indicated a need for increased orders, such as special events or popular brands that were
trending in the area. Within days of implementing the system, cross-sell and upsell rates
increased from 4 percent to more than 50 percent, and within the first year, the solution
delivered a US $25 million increase in gross margin, which helped to swing a 1.5 percent
share loss into a 1 percent market-share gain.

2. Personalize the experience

Personalization is about filtering information in a way that is uniquely relevant to the user
and showing each individual’s role in and contribution to a greater group goal. An easy-to-
use system can be an effective motivator and engender positive peer pressure.

This worked brilliantly for a rail yard looking to reduce the idle time of its engines and
cars by up to 10 percent. It implemented a system that presented only the most relevant
information to each worker at that moment, such as details on the status of a train under
that worker’s supervision, the precise whereabouts of each of their trains in the yard, or
alerts indicating which train to work on. Providing such specific and relevant information
helped workers clarify priorities, increase accountability, and reduce delays.

3. Sidestep hierarchy
Creating direct connections among people across the organization allows them to
sidestep cumbersome hierarchal protocols and shorten the time it takes to get things
done. It also fosters more direct and instant connections that allow employees to share
important information, find answers quickly, and get help and advice from people they
trust.

In the rail yard example, a new digital communications platform connects relevant
parties right away, bypassing any middlemen and ensuring that issues get resolved
quickly and efficiently. For example, if the person in charge of the rail yard has a question
about the status of a particular incoming train, he need only log into the system and
tap the train icon to pose the question directly to the individuals working on that train.
Previously, all calls and queries had to be routed through a central source. This ability to
bridge organizational divides is a core advantage in increasing agility, collaboration, and
effectiveness.

36 Changing change management How to succeed in a digital transformation

4. Build empathy, community, and shared purpose
In increasingly global organizations, communities involved in change efforts are often
physically distant from one another. Providing an outlet for colleagues to share and see all
the information related to a task, including progress updates and informal commentary,
can create an important team “esprit de corps.”

Specific tools are necessary to achieve this level of connectivity and commitment. Those
that we have seen work well include shared dashboards, visualizations of activity across
the team, “gamification” to bolster competition, and online forums where people can
easily speak to each other (e.g., linking a twitter-like feed to a workflow, or creating forums
linked to leaderboards so people can easily discuss how to move up rankings).

This approach worked particularly well with a leading global bank aiming to reduce critical
job vacancies. The sourcing team made the HR process a shared experience, showing all
stakeholders the end-to-end view—dashboards identifying vacancies; hiring requisitions
made and approved; candidates identified, tested, and interviewed; offers made and
accepted; hire letters issued. This transparency and openness bolstered a shared
commitment to getting results, a greater willingness to deliver on one’s own step in the
process, and a greater willingness to help each other beyond functional boundaries.

5. Demonstrate progress
Organizational change is like turning a ship: the people at the front can see the change
but the people at the back may not notice for a while. Digital change tools are helpful in
this case to communicate progress so that people can see what is happening in real time.
More sophisticated tools can also show individual contributions toward the common
goal. We have seen how this type of communication makes the change feel more urgent
and real, which in turn creates momentum that can help push an organization to a tipping
point where a “new way of doing things” becomes “the way things are done.”

Digital tools and platforms, if correctly applied, offer a powerful new way to accelerate
and amplify the ability of an organization to change. However, let’s be clear: the tool
should not drive the solution. Each company should have a clear view of the new behavior
they want to reinforce and find a digital solution to support it. The best solutions are tightly
focused on a specific task and are only rolled out after successful pilots are completed.
The chances of success increase when management actively encourages and
incorporates feedback from users to give them a sense of ownership in the process.

Boris Ewenstein is a principal in McKinsey’s Johannesburg office, where Wesley Smith

is an engagement manager and Ashvin Sologar is an associate principal.

McKinsey Digital 37
 Nine questions to help you get
your digital transformation right
Karel Dörner and Jürgen Meffert

Becoming a digital organization requires

fundamentally changing how you do business.
Answering these nine questions can help break
through the inevitable barriers.

38 Nine questions to help you get your digital transformation right How to succeed in a digital transformation
Is there a more anxiety-inducing term in today’s corporate lexicon than “digital
transformation”? Probably not, given the high stakes involved. New technologies
and business models are upending entire sectors, threatening incumbents with an
unprecedented wave of disruptive forces. Corporate leaders understand the need to
raise their Digital Quotient,1 but many are struggling with how to do it.

Digital experiments such as innovation labs and new digital products have yielded
notable successes. But how do you transform your organization from an enterprise that
engages in digital to a digital enterprise? This is no small challenge for companies with
thousands of employees, assets worth billions, and established business models.

Practices such as committed leadership, targeted communications, and appropriate

incentives are crucial to successful transformations. Yet the principles and behaviors
that drive the process are equally important. In our experience, answering the following
nine questions greatly improves a company’s chances of getting its digital transformation
right.

1. How well do you know where change is occurring?

Because digital is so ubiquitous and affects so many aspects of customer behavior
and company operations, it can be difficult to know where to begin. To demystify the
process and bring structure to it, we suggest leaders review the new frontiers where big
changes are happening, the core elements of the business affected by change, and the
foundations needed to support the change (Exhibit 1). Systematically working through
the elements and ranking each by its likely impact and feasibility provides a clearer
picture of how the landscape is changing and how to think through the implications for
your business. It’s important to look beyond your own sector: digital disruption doesn’t
respect industry boundaries.

2. Do you know which customer journeys matter?

When it comes to putting together a plan, we find it helpful to think about customer
journeys—that is, the sum of an individual’s interactions with a brand across all channels
to accomplish a task. Focusing on these helps ground the transformation in the practical
realities of change by keeping the customer front and center. Optimizing a customer
journey forces a company to identify every technology, process, capability, and transition
needed to deliver a great experience.

After mapping the customer journey from beginning to end, companies can focus
on how digital can make each touchpoint better, faster, and more efficient, as well as
integrate all of them into one coherent experience. Key performance indicators, metrics,
and performance incentives will need to be adjusted to track and reward progress on
customer journeys instead of channels or product performance.

1
See Tanguy Catlin, Jay Scanlan, and Paul Willmott, “Raising your Digital Quotient,” McKinsey Quarterly, June 2015,
mckinsey.com.

McKinsey Digital 39
 Exhibit 1

Leaders must
understand where
digital is having the
greatest impact

Opening a bank account has traditionally been a tiresome task that often takes
customers a couple of weeks, requiring them to collect, complete, and mail forms so
the institution can verify their identity. But when one bank digitized its account-opening
process using smartphone support and video verification, for example, it cut the time in
half—and saved time and effort for the bank as well.

3. Are your teams collaborating across functions?

A digital transformation can’t succeed simply by creating a separate enclave for digital
activities—even if that’s how it begins—because it touches so many functions across
a company. Our analysis has shown that digital leaders place a premium on internal
collaboration, creating processes and teams that integrate various functions across the
business and developing incentives for sharing. We’ve seen companies succeed by

40 Nine questions to help you get your digital transformation right How to succeed in a digital transformation
building a cross-functional team that brings together key people from marketing, sales,
product development, and IT for specific projects. Spotify, for example, assembles self-
managing project teams of people who bring complementary skills to a task. Similarly
skilled people in the company participate in guilds where they share their expertise and
discoveries. People move from project to project in a dynamic operating model.

To build momentum, cross-functional teams need visible CEO support, a clear mandate
to get things done, enough resources to build out a program, and profit-and-loss
responsibility and accountability. Incentives must reward the successful delivery of an
entire customer journey or complete product rather than actions that matter only for a
particular function. That could mean, for example, rewarding people who develop an
analytics model that generates actionable insights over those who simply produce a
greater number of models.

4. Do you have a disciplined ‘test and learn’ approach?

However much you plan, you can’t be sure something will work until you try it. Successful
companies work on a concept and keep testing it with customers. They iterate until
they get it right—not only delivering what customers want but also understanding why
they want it so that issues can be addressed and emerging needs factored in. With this
approach, companies avoid getting caught up in overly deterministic specifications,
market research that misses the point, and long planning cycles that end up producing
something customers don’t want.

But “test and learn” doesn’t mean just letting teams do as they like. Advanced digital
companies continuously review their actions and investments against data on all
parts of the customer journey—cohort analysis, conversion patterns, and customer-
engagement levels—as well as the broader competitive environment. For example, one
long-established publishing house set ambitious targets to earn half its revenue and profit
from digital media within ten years but managed to do so within six, thanks to relentless
tracking of digital key performance indicators and prompt course correction when
needed. A mobile- telecommunications provider adopted a similar approach, setting
clear methods and targets for in-store customer migration. It succeeded in increasing
incremental sales by 5 to 10 percent and more than halving customer onboarding time.

5. Are your budgets tied to progress?

Many transformation efforts are hampered by budgetary cycles that aren’t sufficiently
responsive to what’s happening in the company. According to our Digital Quotient
analysis, less than 15 percent of companies can quantify the return on investment
of their digital initiatives. Venture capitalists offer an alternative model. They closely
follow their projects’ development and don’t hesitate to either pull the plug if key
performance indicators fail to move in the right direction or quickly pump in more funding

McKinsey Digital 41
 if performance justifies it. Their investment decisions don’t hinge on a typical three- to
five-year “hockey stick” business plan but take into account short-term milestones: not
necessarily hard-dollar outcomes but measures such as growth in new-customer sign-
ups or customer engagement in a particular product (Exhibit 2).

Exhibit 2

Investment should
be linked to
progress, not fixed
to budget cycles

One large consumer-packaged-goods company, for example, dedicated 10 percent

of its marketing budget to experiments and innovations. The budget operated outside
normal corporate processes and was used to quickly fund new ideas that promised to
perform well. Such an approach can only succeed, though, when metrics are put in place
to track return on investment.

6. Do you have mechanisms to challenge ideas?

Despite what we may have heard during brainstorming sessions, not all ideas are good
ideas. To prevent poor or poorly thought-through ideas from squandering resources,
some companies set up a “challenger board” that includes people who know the
business inside out and digital natives hired from start-ups or tech companies. With

42 Nine questions to help you get your digital transformation right How to succeed in a digital transformation
their deep digital experience and outsider perspective, these experts can ask tough
questions, uncover problems quickly, and spot opportunities for disrupting the business.
Another option is to set up a dedicated advisory board to guide a company through its
transformation. Introducing external voices to existing governance structures is another
way to inject added critical scrutiny into decision making. IKEA took this route when it
appointed the head of Google Sweden to its board in 2014 to improve its e-commerce
and online presence.2

7. Are your people empowered to act?

In large organizations, there are always reasons not to do something new. Fear of
cannibalization—or simply fear of change—can paralyze new projects. Turf battles can
kill a digital transformation. That’s why effective teams need real business responsibility,
the authority to break through functional silos, and a willingness to lead.

Leading a digital initiative involves short-circuiting lengthy corporate processes and

moving things quickly. That calls for dedicated budgets and resources, as well as CEO-
level decision-making powers. At one company undergoing a digital transformation, for
example, project leaders were known as “dragon slayers” and had a remit from the CEO
to act fast without advance approval. They took the flak for bad choices but knew the one
mistake that wouldn’t be forgiven was avoiding tough decisions in the first place.

At another company, when the board approved the use of marketing channels for
e-commerce offerings, the relevant middle manager balked. The digital program wasn’t
stalled, though, because the effort’s leader had the authority to organize a marketing
campaign outside the usual channel and fire the middle manager. Harsh though this may
sound, it’s the sort of can-do approach that’s critical if transformations are to succeed.

8. Is your IT operating at two speeds?

It’s hard—perhaps impossible—to undergo a digital transformation with a legacy IT
architecture. While the integrity of transaction-focused systems with sensitive data must
be protected, IT needs to build out a separate system that can provide nimble customer-
facing capabilities. New apps and databases can then be added as needed without
touching the underlying systems that run the rest of the business. This second high-
speed system supports agile development and prototyping, with weekly or even daily
releases and an experimental “fail faster” mind-set.3

In developing high-speed systems, digital leaders put in place the analytics and
intelligence needed to provide near-real-time insights into customer needs and
behaviors, which then determine the personalized messages and offers delivered to
individual customers. Being digital involves establishing a cyclical dynamic in which
processes and capabilities are constantly evolving in response to inputs from the

2
Todd R. Weiss, “IKEA names former Google Sweden head to its board,” eWeek, January 3, 2014, eweek.com.
3
For more, see Juan Garcia Avedillo, Duarte Begonha, and Andrea Peyracchia, “Two ways to modernize IT systems for the
digital era,” McKinsey on Business Technology, August 2015, mckinsey.com; and Oliver Bossert, Chris Ip, and Jürgen Laartz,
“A two- speed IT architecture for the digital enterprise,” McKinsey on Business Technology, December 2014, mckinsey.com.

McKinsey Digital 43
 customer.4 Supporting this give-and-take process across multiple platforms at scale
requires extensive automation.

9. Are you coordinating a portfolio of initiatives?

A digital transformation isn’t a single effort but rather a portfolio of initiatives that combine
to scale the change. Having a “let a hundred flowers bloom” approach, where each
initiative works independently in a spirit of experimentation, can yield interesting results,
but it is not a formula for scaling a digital transformation across a business. While each
initiative is executed by a small cross-functional team and draws on broader support
for operations and implementation, success ultimately depends on how management
coordinates initiatives as they run in parallel.

Executives need to map out each initiative, ensuring it is clearly aligned with the broad
business strategy. They then must prioritize the initiatives, determine the dependencies
between them, and coordinate resourcing and budgeting. Leading digital companies
manage a portfolio of hundreds—if not thousands—of initiatives in parallel. They also
automate repetitive tasks wherever possible, freeing management to spend more time on
strategic change and growth projects.

This level of coordination was critical for a European book retailer experiencing extreme
pressure from online competition. Its digital transformation included partnering with
technology specialists and publishers to establish its own digital reader, implementing
omnichannel features such as digital kiosks in its physical outlets, and overhauling its
online shop. All the initiatives had to happen virtually simultaneously because they were
all central to the customer experience and the company couldn’t afford the delays of a
more sequential approach. Eventually, the retailer introduced a successful e-reader and
omnichannel experience that helped increase revenue by 78 percent.

Becoming a digital enterprise requires fundamentally changing the way you run your
business. Answering these nine questions can help you understand how to break
through the inevitable barriers, increasing your company’s odds of achieving a successful
digital transformation.

Karel Dörner is a principal in McKinsey’s Munich office, and Jürgen Meffert is a director
in the Düsseldorf office.

4
See Karel Dörner and David Edelman, “What ‘digital’ really means,” July 2015, mckinsey.com.

44 Nine questions to help you get your digital transformation right How to succeed in a digital transformation
McKinsey Digital 45
 Speed and scale: Unlocking digital
value in customer journeys
Driek Desmet, Shahar Markovitch, and Christopher Paquette

Even as organizations assemble digital building blocks

for the long term, they also need short-term, pragmatic
moves that meet customer expectations and protect
core businesses today.
Digitization is a profound transformation.1 When a global bank reinvented its
onboarding process for commercial clients, the results included dramatically reduced

1
Driek Desmet, Ewan Duncan, Jay Scanlan, and Marc Singer, “Six building blocks for creating a high-performing digital
enterprise,” September 2015.

46 Speed and scale: Unlocking digital value in customer journeys How to succeed in a digital transformation
costs, a market-beating customer experience—and an exhausted organization
wondering how ambitious it should be. Could it repeat what it just went through for the
rest of its business? How could it possibly do more than one of these at the same time?
Would it take years?

Companies that are achieving digitization at scale have found a better way. They
have developed a distinct structure that enables them to digitize their most important
customer experiences at scale and at speed—in a consistent way, with consistent
resources, to produce consistent results. In doing so they transform much of the rest of
their organizations, from product and process design through to technology and culture,
becoming truly digital businesses.

Crucially, these companies not only understand the digital stakes confronting them—they
also act on that knowledge. Think of how consumers behave in the digital world. Most
of us will try a new app once, or maybe twice, and if we can’t get it to work, we abandon
it. That behavior leaves companies only one or two chances for their digital offerings to
make a good impression and win adoption from their customers.

Yet today’s customers do not want digital versions of the same manual, bureaucratic
processes they faced yesterday. They search, download, pay, and listen to music all
in one go, so why should their electrical service or car insurance still make them run a
gantlet of separate steps for searching, price quotation, purchasing, invoicing, delivery,
payment, and activation?

Companies that want to win at digital adoption are therefore recognizing that they must
reimagine and digitize entire “customer journeys.” These are the beginning-to-end
processes that customers experience in getting the product or service they need, across
whichever channels they choose (see sidebar “How many journeys?”).

Streamlined, simplified journeys show impressive results quickly—usually on several

fronts at once. Faster mobile-phone sign-ups raised a telecommunications company’s
customer satisfaction by 20 percent and reduced costs by 30 percent. For a European
lender, time for account opening and loan approval fell from days to minutes, customer-
engagement opportunities rose from once a month to three or four times a week, and IT
became far more agile, delivering new releases in a month instead of a year (Exhibit 1).

A structure for scale and speed

In much the same way that the leap to digital means rethinking how an analog process
works, the leap from transforming a single journey to tackling many at once means
rethinking how digitization works. Even as the organization is building the new capabilities
that digital businesses require, it must deploy its existing capabilities very differently

McKinsey Digital 47
 Exhibit 1

Leaders must
understand where
digital is having the
greatest impact

in order to achieve scale and speed. The challenge is to balance all of the conflicting
demands.

In our experience, six critical, parallel shifts combine to make digitization more
manageable and predictable. Depending on an organization’s starting capabilities and
strategic needs, the amount of effort the elements require will naturally vary. But all six
are essential to ensure that an organization actually makes the changes, derives their full
benefit, and can keep improving once the changes are made.

Start with your story

It begins with a story. From the very earliest stages, the organization needs a consistent
way to describe what customers should experience across all of the journeys that they
may undertake with the company. This “enterprise customer experience story” will be
unique to the company and will distill its strategy, brand, and positioning into practical
guidelines that together support the rest of the transformation.

For one North American bank, customer focus groups provided direction by identifying
two qualities—accessibility and flexibility—as top priorities in their banking relationships.
These became the central theme of the bank’s story, which then informed a series of
design choices centering on the first steps customers experienced with the bank.

48 Speed and scale: Unlocking digital value in customer journeys How to succeed in a digital transformation
Sidebar Ask any reasonably complex, large products); payments; mortgages; service
organization how many journeys its requests (such as the ever-popular lost
How many customers might experience and the list PIN codes); and credit-card issuance as
journeys? will quickly grow to the dozens, if not the especially prominent. Life and retirement
hundreds. Revamping all of them would players look similar to banks, with 10
be daunting. But in our experience, it’s to 20 core journeys across account
also unnecessary. Typically, a small opening or enrollment, onboarding,
number of core customer journeys servicing, and guidance. The number is
cover about 80 percent of the customer slightly smaller for telecommunications
interaction and 50 percent of the companies, where mobile postpaid
workforce. Digitizing that subset will sales, customer-care requests (such
digitize much of the business with many as one-off data usage adjustments),
fewer resources. fixed-line provisioning, network repair
and maintenance, and prepaid top-ups
The total number of these “core journeys” rank highly in a core of 8 to 15 journeys.
will naturally vary by company, but a few For electrical utilities, the number usually
patterns hold among major industries. drops to fewer than 10, with sign-up,
For banks, the core usually consists payment, meter reading, and change of
of between 10 and 20 journeys, with address taking the lead.
account opening and onboarding (across

But the bank then had to determine which possible journeys would, with digitization,
most effectively deliver the accessibility and flexibility the story promised. Each journey
passed through a series of filters assessing its strategic and customer-experience value,
its potential for economies of scale, the regulatory and technological hurdles facing it, and
the organization’s readiness to commit adequate financial and leadership resources to it.

The final output of the analysis was a road map for making the journeys a reality,
prioritized according to the filters. For the bank, the top priority turned out to be a new
onboarding process that would let customers open a “relationship” without naming a
specific product or account type.

Sequence your tech transformation

Of all of the changes an organization must make to support digitization, the ones that
are the most challenging, time consuming, and resource intensive are in IT. Nowadays,
designing a one-off mobile app is fairly easy. The real challenge is to link that app to all of
the other channels customers use and to integrate it into back-end systems for everything
from authentication to credit scoring and post-sale servicing.

McKinsey Digital 49
 But this is what it means to digitize at scale. Companies must resist two temptations.
The first is to try to digitize each journey separately, which only recreates the internal
silos that most organizations are trying to break apart. The second is to invest heavily
in specific Internet or mobile-channel IT, which usually is unnecessary. Instead, once
the company has identified the core journeys it will digitize, it should choose its IT
components and its sequencing so that the IT architecture changes naturally as the
journeys build on one another.

For example, one way to accelerate digitization and reduce overall costs is to identify
horizontal components, such as business-process management (BPM) layers, central
administration platforms, or externally facing channels, that can be shared across
all the journeys. Similarly, standard components such as eSignature, authentication,
or document scanning and data-extraction systems are easily reused across many
different journeys and product types.

These ideas led one organization to use its customer onboarding journey as its initial
test case. The organization reduced rework and extra expenses for later journeys by
modernizing its common BPM architecture and mobile front-end framework up front,
and by developing reusable e-archiving and authentication components. It also built
in an additional interface layer, which allowed for back-end services developed during
later journeys to be connected easily once they were ready. The lessons learned from
the test case therefore informed the entire remaining architecture transformation.

Turn, shift, accelerate, and repeat

In the predigital world, a retail chain might renovate its stores on a five- or seven-year
cycle. Once a store was done, it stayed done, at least for a while. The leading digital
platforms now release major revisions of their operating systems every year, with
substantial upgrades every few months. Some update cycles are nearing daily or even
hourly frequency, especially for data models and analytics. That rapid adaptation
represents a fundamental cultural shift for incumbents in almost every industry,
especially in heavily regulated fields in which perfectionism and caution are the default
behaviors.

First, the pressure for speed means companies must identify a new type of “MVP”—
not the “most valuable player” of sports teams, but the “minimum viable product” of
the tech industry. The critical—and, for perfectionist organizations, uncomfortable—
tension is between “minimum” and “viable.” Compromise too much on viable and
customers will think the new digital option is no option at all. Yet compromising on
minimum can be equally dangerous, and more tempting for companies accustomed
to longer timelines. Every delay to add extra features leaves openings for faster-
moving competitors.

50 Speed and scale: Unlocking digital value in customer journeys How to succeed in a digital transformation
Reconciling the two requires discipline, both to describe a customer need accurately
(without excess scope) and to fulfill it efficiently (without excess complexity). And it
requires a real change of perspective. For example, digital’s speed alone is a huge
advantage: a digital product providing only 80 percent of its analog counterpart’s
features may still succeed simply by being 10 or 20 times faster. Furthermore, by the
time a digital product could reach 100 percent replication, some of those functions
would likely be irrelevant. Accordingly, rather than view digitization as a project with
an end date, people must understand it as a continual process of finding the right 80
percent that will help customers now.

Build talent—and your digital ‘factory’

For the cultural change to last, the organization will need to change how it works.
This includes acquiring digitally oriented talent and developing their capabilities. It
also includes rethinking and streamlining governance, management, and budgeting
processes so that the organization can move quickly and innovate.

As many organizations discover, employees who combine business expertise, digital

acumen, and the leadership skills necessary to lead a digital journey transformation
are rare. Several solutions are possible. One large retailer acquired a few specialized
technology companies. A telco relied on a large digital agency to augment roles in
areas such as enterprise architecture, while in parallel it hired external talent and trained
internal employees. A bank took an even more comprehensive approach by setting up
an internal academy to teach a combination of leadership, digital, and execution skills.

But that talent will become frustrated unless enterprise-wide governance models
adapt to an environment demanding rapid iteration, learning, testing, and reacting.
The solution, as organizations from banks to telcos have found, borrows the lean-
management concept of the “work cell.” In a comparatively simple operation, a work
cell assembles representatives from the internal groups involved in the beginning-
to-end process of, say, mortgage approval—sales, underwriting, credit analysis,
document production—into a single team, so that each mortgage can be approved
much more quickly and accurately. The employees may continue to report into their
respective businesses and functions, but their day-to-day feedback comes from the
work cell, and they can move between work cells or from work cells to other parts of the
organization as needed.

This same concept works at much larger scale to cover all of the specialties that
contribute to a digitization effort: product experts, compliance managers, user-
experience designers, coders, financial analysts, and the like. A Southeast Asian telco
enabled the work-cell idea by reworking its human-resources practices to provide a
clear path for people to join work cells, build experience, and move to other positions.
What started as about a dozen specialists expanded to become a full-fledged digital

McKinsey Digital 51
 factory that quadrupled the capacity of the digitization program: everything that once
happened only on a monthly cadence is now happening within a week.

Create a ‘game plan’ to guide the factory

The digital factory operates as a combination design firm and software hothouse,
using the latest methodologies such as design thinking, zero-based process
reengineering, and agile software development. But the way the factory works
day to day is defined by a “game plan,” a set of standard operating guidelines and
methodologies that lay out the required deliverables, governance steps, and working
processes—such as which decisions can be made by factory leadership and which
require escalation. The goal is a balance between the structured predictability required
to transform a large organization and the flexibility and agility required for a rapidly
changing digital world (see sidebar “Approaches for execution”).

Ideally, a game plan emphasizes three points. First, rather than describing detailed
answers, it sets out a series of questions for each transformation stage, framed in a
way that suggests specific options but allows for a range of possibilities. Instead of
describing compliance steps that wouldn’t all apply to every product, the game plan
would ask a few probing questions: What have the compliance specialists for the
product area suggested? Did the team adequately challenge the status quo? Were
other geographies consulted for solutions to customer or regulator pain points?

The game plan’s second task is to provide a list of templates for important artifacts that
should be delivered for each journey, such as market-research summaries, customer-
experience design, economic modeling, operational implications, or interface mock-
ups. Again, the templates should not be set in stone, but they should balance creativity
and flexibility while ensuring that the key questions are answered.

The final and most important requirement for the game plan is to evolve, which
can happen only after it is tested. Accordingly, the organization should launch a
small-scale factory to start trying the concepts behind the game plan, digitizing real
products and making changes to the game plan based on actual experience. Under
the best conditions, the game plan becomes a living, breathing asset that is centrally
administered while being cocreated by the organization.

One large UK organization tested its game plan for its customer-journey
transformations in two very different business units. Even before the transformations
were launched, the game plan’s streamlined governance approach and clearly
demarked roles and responsibilities reduced stakeholder friction, speeding decisions.
Moreover, by allowing both transformations to proceed under similar methodologies
and deliverables, managers could more easily compare the journeys and refine the
transformation process—and the game plan itself. Continual revisions to the game

52 Speed and scale: Unlocking digital value in customer journeys How to succeed in a digital transformation
Sidebar Depending on factors including depth to execute are either insufficient or
and breadth of existing digital capabilities, insufficiently understood. Taking a step
Approaches for strength of executive alignment and back and spending a few weeks or
execution support, and level of technological months to build a longer-term structure
investment the company is making, for driving a digitization program—with a
we see three basic approaches in detailed prioritized road map, additional
which organizations are embarking on capabilities, and new e-talent—can
digitization at scale. minimize the risks.

A. Create one or two ‘demonstration C. Engage a third-party vendor for

events’ to build momentum. When an a build-operate-transfer approach.
institution has high clarity on the priority Finally, when moving quickly is of
journeys to digitize but is facing high utmost importance and economics
cultural resistance, this is an ideal place to prevent a quick internal ramp-up of
start. Proving that digitization is a success talent, institutions are beginning to
with a journey or two can showcase the explore “outsourcing transformation”
benefits that are achievable and the need for the highest-priority journeys. They
for a new way of working. are working with external resources to
transform, refine, operate, and when
Maintaining the momentum requires ready, transfer back to the organization.
clear communication, most importantly One large financial institution partnered
that demonstration events are not “the with a global vendor to help fill gaps in
end” but rather the means to the real end, the talent pool for the digital factory, such
which is digitizing at scale. This message as for customer-experience designers,
must come both from the top of the developers, testers, architects, and
organization and from influential leaders project managers. The contract allowed
at each level. the vendor to provide resources for
only half of each transformation. The
B. Launch a full program to build vendor was then responsible for building
foundational capabilities. Institutions the institution’s digital capabilities by
that have a proverbial burning platform, recruiting candidates on the open market
along with executives who believe in and training people from within the
digitization at scale and understand organization, who together would finish
its value, can instead start planning a the remaining half of the transformation.
complete program. But they must guard
against two dangers: first, that everything
is a priority, and second, that resources

McKinsey Digital 53
 plan’s step-by-step processes mean that the organization can now launch a new journey
transformation in a matter of weeks instead of months.

Track it all the way

Measuring the impact of a large-scale digitization effort is essential to ensure it achieves
the dramatic business results that are usually possible. Yet traditional measures of
performance will only go so far in supporting the new culture and work habits.

First, the metrics themselves typically must change. Some measures, such as short-
term return on investment, may unintentionally discourage the innovation digital requires
by discouraging employees from taking risks. Others may impede collaboration. For
example, to allocate resources optimally, an organization should abandon promotion
metrics that emphasize the number of reports a manager has and instead reward those
who reassign team members to high-growth businesses.

Next, reporting must happen faster: once the metrics are aligned with digital’s demands,
dashboards will ideally report the relevant data as they come in. Where possible, the
organization builds a version of the network-operations centers that govern utility
operations. The resulting insights ensure not only that each transformation delivers what
it should but also that leaders know where to prioritize their investments. Over time, the
organization applies the data for rapid testing and revision cycles to keep improving the
digital experience customers actually see.

As part of its digitization process, a manufacturer aggregated a wide range of indicators—

everything from batch quality and inventory availability to total full-time employees
involved in delivery—into a single, enterprise-wide, real-time dashboard. Management
could then divert resources to struggling areas. For example, when a local transformation
failed to improve batch quality, leaders could fly in experts from other facilities that had
resolved the issue. And, knowing that each facility’s transformation results were highly
visible, the new transparency created a constant tension for line managers to deliver
results.

Putting it all together

So how does it all come together? One of Europe’s largest banks is winning the adoption
game after fully digitizing an entire series of customer journeys. The initial focus of the
bank’s digitization story was on relieving retail-banking customers from their most
“irritating service requests”—the lost debit cards, forgotten PIN codes, and similar
“minor” problems that have a major impact on customer satisfaction and bank resources
(Exhibit 2).

54 Speed and scale: Unlocking digital value in customer journeys How to succeed in a digital transformation
Exhibit 2

How digitization
made bank
processes simpler
(before) . . .

Exhibit 3

. . . and more than

twice as fast (after)

McKinsey Digital 55
 Using standardized components, a small, cross-functional team redesigned the
processes underpinning these requests to assemble a mobile solution within six weeks
(Exhibit 3). Rapid adoption boosted confidence in the organization’s newfound digital
capabilities, reinforcing the leaders’ message that digitization would dramatically improve
customers’ experience. And employees reported that the changes reduced their
frustration as well.

The cross-functional team grew to take on more journeys, leading it to redesign the front
end of the bank’s digital and mobile channels and deploy analytic tools that allow for
more-precise targeting of support and live allocation of call-center specialists. Over a
period of 18 months, the team became a combination user-experience center and digital
factory, which together employ more than 100 specialists that are now tackling complex
journeys in areas such as corporate lending and export finance.

The bank as a whole has completed five of its most important journeys, with the factory
now at sufficient scale to work on two major ones simultaneously, each taking between
four and five months. The end result, across businesses as diverse as personal credit
cards and commercial financing, is that customers report dramatically better experience
and higher engagement.

The authors wish to thank Christian Schröpfer and Edwin van Bommel for their
contributions to this article.

Driek Desmet is a director in McKinsey’s Singapore office, Shahar Markovitch is a

principal in the Tel Aviv office, and Christopher Paquette is a principal in the Chicago
office.

56 Speed and scale: Unlocking digital value in customer journeys How to succeed in a digital transformation
McKinsey Digital 57
58
Part 3:
Building capabilities
and tech
60 “Transformer-in-Chief”: The new Chief Digital Officer

68 How digital marketing operations can transform business

76 Two ways to modernize IT systems for the digital era

86 Beyond agile: Reorganizing IT for faster software delivery

McKinsey Digital 59
 “Transformer-in-Chief”: The new
Chief Digital Officer
Kate Smaje, Vik Sohoni, and Tuck Rickards

The CDO role is changing dramatically. Here are the

skills today’s world demands.

In the alphabet soup that is today’s crowded C-suite, few roles attract as much
attention as that of the chief digital officer, or CDO. While the position isn’t exactly new,
what’s required of the average CDO is. Gone are the days of being responsible for
introducing basic digital capabilities and perhaps piloting a handful of initiatives. The CDO

60 “Transformer-in-Chief”: The new Chief Digital Officer Building capabilities and tech
 is now a “transformer in chief,” charged with coordinating and managing comprehensive
changes that address everything from updating how a company works to building out
entirely new businesses. And he or she must make progress quickly.

Given these demands, it’s not surprising that the number of people in CDO roles doubled
from 2013 to 2014 and is expected to double again this year.1 We find that companies
bring in a CDO for two primary reasons. The first is when they need to approach the
complex root causes that must be dissected, understood, and addressed before
any substantive progress on digitization can be made. And the second is when the
CEO realizes the organization can’t meet the primary challenge of creating integrated
transformation within its current construct (see sidebar, “Do you need a CDO?”).

In fact, the true measure of a CDO’s success is when the role becomes unnecessary:
by its very nature, a high-functioning digital company does not need a CDO (however, it
may want its former CDO to be the CEO). Of course, the vast majority of organizations are
not yet at that point. And while there are numerous actions companies can and should
take to help these executives work themselves out of a job—such as providing sufficient
resources and active CEO support—this article focuses on five areas CDOs themselves
must get right if their organizations are to successfully transition to digital.

1. Make digital integral to the strategy

Digital isn’t merely a thing—it’s a new way of doing things. Many companies are focused
on developing a digital strategy when they should instead focus on integrating digital
into all aspects of the business, from channels and processes and data to the operating
model, incentives, and culture. Our analysis of how companies with a high Digital

Sidebar Companies looking to begin or continue Is my company ready to signal its digital-
their digital transformation will benefit transformation efforts to audiences both
Do you need a from considering five questions to help internal and external?
CDO? determine whether a CDO is necessary:
Do we need a disruptive perspective
Is the marketplace where I compete from someone who can objectively and
undergoing—or vulnerable to—significant credibly challenge the status quo with a
changes that are reshaping value? “digital first” mind-set?

Is my company ready to move beyond Does the current leadership team have
basic digital experiments and embark the capacity to steward the digital
on a fundamental and integrated transformation and support this new role?
transformation of the business?

1
Karl Greenberg, “Chief digital officers grow in ranks and prominence,” MediaPost, May 7, 2015, mediapost.com.

McKinsey Digital 61
 Quotient (DQ) operate shows that 90 percent of top performers have fully integrated
digital initiatives into their strategic-planning process.2

Getting the strategy right requires the CDO to work closely with the CEO, the chief
information officer (CIO), business-unit leaders, and the chief financial officer; the
CDO also needs to be an active participant in and shaper of the strategy. An important
foundation for CDOs to establish credibility and secure a seat at the strategy table
is providing detailed analysis of market trends and developments in technology and
customer behavior, both inside and outside the sector.

Yet CDOs can’t stop there. They need to bring a bold vision: 65 percent of companies
that are “digital leaders” in our DQ analysis have a high tolerance for bold initiatives;
among average performers, 70 percent of companies don’t see support for risk taking.
This vision could include starting new businesses, acquiring technologies, or investing
in innovations—one CDO we know made it his mantra to drive agile as a new software-
development methodology for 40 percent of the company’s projects. No matter how
it’s branded, CDOs need to be known within their organization for something that is
courageous, new, and adds value.

In addition, CDOs must be specific about their goals. One international publishing house,
for example, set a target of generating 50 percent of its revenue and profit from digital
media within ten years, and it wound up doing so in almost half that time. Similarly, several
banks that set the objective of increasing digital-channel sales to more than 50 percent
are seeing that specific and measurable goal rally the organization.

2. Obsess over the customer

While most companies say they know their customers, CDOs must make it a driving
passion and core competency of the organization. With technology and customer habits
changing so quickly, developing a deep and detailed view of customer behavior across
all channels provides a common reference point in any business discussion and arms the
CDO to challenge the status quo and make changes. For example, one CDO used the
concept of customer journeys and big data mapping of these paths to show her peers
where opportunities and pain points existed—and, in doing so, destroyed several myths.

This type of analysis is critical, to be sure, but an equally important part of the CDO’s job
is communicating how essential the customer is to the organization. One CDO created
clear and visually compelling dashboards on the customer journey and made a habit
of consistently referencing them in meetings and when making decisions. Another set
up a digitally enabled “war room” with real-time reporting on several key digital metrics,
which soon will be piped to the tablets and smartphones of other C-suite executives. Yet
another CDO sends regular company-wide emails highlighting customer breakthroughs,
insights, and “voice of the customer” anecdotes. Such actions can help the business

2
See Tanguy Catlin, Jay Scanlan, and Paul Willmott, “Raising your Digital Quotient,” McKinsey Quarterly, June 2015, mckinsey
.com.

62 “Transformer-in-Chief”: The new Chief Digital Officer Building capabilities and tech
start to think more specifically about the customer so that everyone approaches all
issues with a single crucial question: How will this affect the customer?

Digital capabilities ultimately provide an important foundation for improving the

customer experience. It’s up to the CDO to identify those functions where digital is
critical: for example, investing in automation capabilities to rapidly respond to customer
interactions, developing sophisticated reporting and analytics capabilities to interpret
customer needs, building innovative interfaces to gather customer data (for example,
an alternative payment method), and creating mechanisms to deliver content and offers
across all relevant channels. While the CDO will need to work closely with marketing
and IT leadership, he or she should define the customer-experience journey and
identify the requirements for developing and then supporting a dynamic system that is
constantly learning and evolving.

3. Build agility, speed, and data

CDOs can build strong foundations for change by creating a “spirit of digital”
throughout the organization. That could include setting up coding days for the board or
holding company-wide hackathons—one company we know even had drones flying
around the atrium of its headquarters. Core to building this spirit, however, is increasing
the “metabolic rate” of the organization. That starts with changing basic habits, such as
having strategy leadership meetings weekly or even biweekly to help ingrain the idea of
moving at a faster pace.

CDOs must look at how the organization operates and find ways to inject speed
into processes. In some cases, it could be as straightforward as working with IT to
automate existing development processes. But in others, it will require radically
changing how the company works, such as setting extremely aggressive goals—as few
as six weeks—for getting a product to market. Some CDOs do this by setting up “digital
factories,” which are cross- functional groups focused on developing one product or
process using a different technology, operational, or managerial methodology from the
rest of the company. Embedding these factories in business units has the advantage of
spreading the new culture and making the digital-factory approach the norm.

Managing a portfolio of these types of initiatives requires leaders to be decisive. If the

data show a prototype doesn’t work, the CDO must be ruthless about killing the project,
incorporating anything learned from the experience, and moving on. On the other hand,
CDOs should establish flexible budgeting processes so that projects that show signs of
success can get resources to scale quickly.

4. Extend networks
In a digital world, threats often do not come from established competitors but rather
from innovative technologies that enable new businesses, start-ups that undermine
established business models, or new developments outside the way the company
defined its competitive space. For example, one of the big trends in the payments

McKinsey Digital 63
 sector is the merging of commerce and payments functionalities in the same app—
so, being able to pay for your restaurant meal using the OpenTable app you used to
reserve your table.

Successful CDOs are keenly aware of such trends. They build networks of people,
technologies, and ideas far outside of their company, constantly scanning the small-
business landscape to identify possible acquisitions or partners that can provide
complementary capabilities. Some CDOs spend as much as 50 percent of their
time working with external partners to build effective working relationships that take
advantage of every organization’s capabilities. To help bring these outside voices into
the organization, many CDOs establish advisory boards of start-up leaders or create
“challenger” boards of people with digital experience and expertise to review corporate
initiatives and strategies. At a more pedestrian level, they regularly invite technologists
or entrepreneurs to team lunches.

Building an internal network is just as important because company systems and

technologies need to be flexible enough to work with outside parties. In particular,
CDOs need to work with IT leaders to develop application programming interfaces
and cloud-based architecture that works with a broader ecosystem of providers.
Some CDOs realize too late that functions such as compliance, finance, human
resources, legal, procurement, and risk also need to change to support a more
digitally focused company. At one company, for example, an effort to accelerate time
to market is in full swing, but procurement still insists it requires six months to approve
a vendor. Changing such supporting processes isn’t easy—functions often have good
reasons for why processes are undertaken as they are. But brokering compromises
and testing new ways of operating that are necessary to make progress will be virtually
impossible if a CDO doesn’t build internal networks early and engage with leaders
across the business.

5. Get stuff done

CDOs are ultimately judged not by the quality of their ideas but by their ability to
lead different types of teams, guide projects, overcome hurdles, and deliver
integrated change.

Getting stuff done often requires hard-nosed negotiating skills. Consider the CDO
at a financial-services company who wanted to stop business units from draining IT
resources on independent projects that didn’t align with the overarching strategy. The
CDO worked closely with the CIO and agreed to use her new budget to fund some of
his projects; she also helped him retain and motivate key people by staffing them on
important digital initiatives (which also assured him visibility into what she was doing).
In return, the CIO agreed to stop supporting initiatives that the CDO didn’t explicitly
approve. Both won in the end, and they now have a close working relationship.

64 “Transformer-in-Chief”: The new Chief Digital Officer Building capabilities and tech
A new CDO will benefit from the early establishment of near-term goals that can yield
quick wins and wow moments that help build enthusiasm and momentum. Some
CDOs find that building the marketing-commerce function is a great way to quickly
demonstrate value, while others embark on accelerated cost cutting by automating
core processes. It pays to define how success is measured, whether it’s tracking key
digital and business metrics—such as digital-media revenue as a percentage of total
revenue—or creating a full digital profit-and- loss statement (or both). To be meaningful
for the business overall and to build credibility, key performance indicators must be
aligned with those used by established business units.

Within his first month, for example, the new CDO at one financial-services company
defined clear, discrete digital initiatives; developed a long-term vision in partnership
with an anchor business-unit leader; and got his budget approved. Within six months,
he hired a handful of key employees, launched several initiatives, identified gaps in the
organization, and pulled together teams to fill them. A year and a half into the job, he
was able to claim some solid wins and moved from a “shadow” profit and loss to an
explicit one.

Of course, the projects CDOs commit to must be core to the business—such as

developing new revenue streams, cutting costs, or getting to market faster—and not
peripheral experiments, which could end up marginalizing their efforts. We’ve actually
found it works best when a CDO’s budget is funded through the efficiencies and
growth that he or she drives.

In addition, we believe that budgeting is critical to ensuring that things get done.
Successful CDOs not only time their actions to maximize budgetary flexibility but also
change how funding is allocated. One CDO shifted from annual approval of large
capital expenses for IT to a more venture capital–like monthly cycle, ensuring he could
get more projects funded and launched. This approach also served to maintain funding
momentum, with small bites over the course of the year predicated on demonstrated
effectiveness.

Defining characteristics of the new CDO

When hiring a CDO, people often agonize over finding someone with experience that is
just right. Yet we’ve found it’s the ability to lead transformation across an organization
that is the true indicator of likely success in the role, and that requires a combination of
hard and soft skills.

Hard skills include the ability to articulate a strategic vision, the means to take on
problems by identifying root causes across functions and making the tough decisions

McKinsey Digital 65
 necessary to resolve them, experience in “pure play” digital and larger company
transformations (typically in the consumer and technology sectors), and the managerial
ability to lead and see programs through to fruition.

The importance of soft skills should not be understated: some CDOs estimate they spend
80 percent of their time building relationships. In our experience, successful CDOs have
the patience to navigate the complex organizational structures of large businesses;
additionally, they collaborate to get buy-in across functions and are able to diplomatically
challenge the status quo and solidify relationships with a broad group of people. They
also demonstrate leadership and charisma that excites the organization to drive change
forward.

Of course, companies would be lucky to have executives in any function with this skill set.
But driving organization-wide change is different from the mandate for other senior roles.
A recent Russell Reynolds Associates survey found that CDOs are meaningfully different
from other senior executives across five categories: they are on average 34 percent
more likely to be innovative and 32 percent more likely to be disruptive, and also differ
with regard to determination, boldness of leadership, and social adeptness.3 Leading
an organizational transformation is messy work that requires masterful social skills to
implement digital initiatives that create disruption by their very nature. Indeed, a CDO’s
strong bias for action, bold thinking, and high tolerance for risk requires someone who
can also manage the ruffled feathers, bruised egos, and flaring tempers that are common
fallout from his or her activities.

As the digital age scrambles the traditional organizational structure, CDOs must not only
launch the organization on its digital trajectory but also help it fundamentally evolve. The
role requires a “bifocal” approach: achieving the near-term imperative of getting things
moving quickly, while setting in place the longer-term conditions of success so the
organization can compete digitally. Those CDOs that succeed will truly have earned their
place in the already-crowded C-suite.

Tuck Rickards is a managing director at Russell Reynolds Associates, where he co-leads

the executive-search company’s Digital Transformation Practice. Kate Smaje is a director
in McKinsey’s London office, and Vik Sohoni is a director in the Chicago office.

3
 or more on this survey, see “Productive disruptors: Five characteristics that differentiate transformational leaders,” Russell
F
Reynolds Associates, August 12, 2015, russellreynolds.com.

66 “Transformer-in-Chief”: The new Chief Digital Officer Building capabilities and tech
McKinsey Digital 67
 How digital marketing operations
can transform business
David Edelman and Jason Heller

Struggling to keep up with rapidly evolving consumer

behavior? Digital marketing operations can bridge the
divide between what customers expect and what they get.

Marketing operations is certainly not the sexiest part of marketing, but it is becoming the
most important one. With businesses unable to keep pace with evolving consumer behavior
and the marketing landscape, the pressure is on to put marketing operations—skilled people,

68 How digital marketing operations can transform business Building capabilities and tech
efficient processes, and supportive technology—in a position to enable brands to not
just connect with customers but to shape their interactions.

When done well, we’ve seen marketing operations provide a 15 to 25 percent

improvement in marketing effectiveness as measured by return on investment and
customer-engagement metrics. Yet achieving that level of improvement is elusive for
many. While marketers are embarking on a wide array of “digital transformations” to
reshape their operations and business models, many of these efforts are stymied by
marketing’s difficulty in delivering on its aspirations. For example, one recent survey
found an astonishing 84 percent of marketers do not have a formal content strategy or
distribution process to feed their growing bevy of marketing channels, and they lack any
kind of formally managed content supply chain.1 Despite this, content budgets continue
to increase.

This situation played out at one global consumer-products company, which saw year-
over-year content spending rise by more than 25 percent as a result of its efforts to
become more customer-centric. There was, however, no unifying strategy, governance,
or system to create cohesion, reuse assets, or measure effectiveness across the
company’s complex supply chain, which consisted of dozens of agencies, production
companies, and media partners producing material for websites, blogs, YouTube, social
media, mobile, and customer-relationship management.

Establishing a center-of-excellence function to develop and manage a consistent

content operating model across divisions resulted in transparency, new governance,
and improved processes. That cut the time to generate content, stopped the growth
in costs, and brought new discipline into managing the impact of content. As a result,
marketing return on investment has improved by more than 20 percent.

Five steps to bring marketing operations into the digital era

Digital-marketing operations involves the application of capabilities, processes,

structures, and technologies to cost-effectively exploit and scale the interactivity,
targeting, personalization, and optimization of digital channels. As the example of
the consumer-products company shows, marketing operations has a critical role in
driving bottom-line growth. That capability directly enables the speed, agility, iterative
development, experimentation, and responsiveness that successful companies need to
react to and shape the marketplace.

Marketers are aware of what needs to be done, and many are taking action. But that
often boils down to implementing new technology platforms, adding head count, or
increasing digital allocations within the marketing-spend mix. While these are important

1
 ssociation of National Advertisers (ANA) survey, “Marketing’s moment: Leading the disruption,” conducted online in August
A
and September 2014. The 374 respondents were drawn from the ANA Survey Community, ANA membership, and supporting
partners, and they self-qualified in roles of marketing director, vice president, and chief marketing officer or marketing leadership.
For more insight, see David Edelman and Jason Heller, “Marketing disruption: Five blind spots on the road to marketing’s
potential,” October 2014, mckinseyonmarketingandsales.com.

McKinsey Digital 69
 Exhibit
In the digital era, marketing operations must know how to exploit and scale the
capabilities of digital channels cost effectively

THE BIG FIVE:

CAPABILITIES TO SUPPORT DIGITAL MARKETING OPERATIONS

Designing customer
journeys based on
insights; integrating
phases and functions
to deliver great
experience.

Tracking and
CU

analyzing customer
S

ST
HT

behavior; delivering
OM
SIG

insights to decision
ER

makers quickly.
IN

GOVERNANCE
EX
ER

& PROCESS
PE
OM

RI
ST

EN

Guidelines and protocols

CU

CE

for piloting new tech, sharing

data across the business, and
managing capabilities
(internal and external).

KPIs AND MEASUREMENT

Continuously tracking
and managing
marketing program;
Flexible system adapting based on
that works with MA
RE
feedback.
large platforms RK TU
and ecosystem ET UC
IN G
of evolving point TECH STR
solutions NOLOGY INFRA

70 How digital marketing operations can transform business Building capabilities and tech
steps, they won’t solve the challenge. Fundamentally, modern marketing operations
calls for the thoughtful, deliberate development of new processes, coordination, and
governance. We’ve identified five attributes of effective marketing operations (exhibit).

1. Truly understanding customers

Like any meaningful relationship, getting to know your customers well is a commitment.
Tracking, analyzing, and interpreting customer behavior and attitudes should be an
ongoing, often moment-to-moment undertaking that is critical not only to targeting
and shaping relevant content and experiences but also to optimizing how they’re
delivered—an important capability, given that during the buying process consumers
add an average of 1.7 brands to those they are considering.2 This requires a wide
range of data and sophisticated tools to analyze specific customer segments and
their behavior to spot opportunities and predict future actions. Companies should
map detailed customer decision journeys for their most valuable segments, using
technologies such as ClickFox,3 which track customers across channels to not only
determine their cross-channel behavior but also to isolate those moments where
companies can influence the journey.

Feeding these insights into marketing operations requires processes and teams that
focus on collecting and making sense of the data and quickly delivering the analysis
in a digestible form to the right decision makers—often continuously. Scaling this
capability means organizations need to automate processes that don’t require human
intervention, for example, personalizing web pages, delivering e-mail, or generating
dashboards for managers to track customer behavior.

Most companies are only at the beginning of creating comprehensive customer-

insights programs. While establishing “war rooms” to monitor and react to social-media
conversations is a good example of how companies are moving in that direction, what’s
needed are organizations that integrate and make sense of all sources of customer
insights. One global hotel chain, for example, has combined its customer-research
group and marketing-analytics group in an effort to better understand its customers—
specifically, those who engage with their marketing, stay in their different hotels, and
spend their money once there. These two groups have been combined into one
insights team that reports directly to the chief marketing officer.

2. Delivering a superior experience

What happens when customers have a bad experience? They stop doing business
with a company. And a souring of the customer experience can take place at any
point, which is why getting the consumer journey right requires getting everything
right. Meeting customer expectations calls for mapping out each of the steps that
define the entire customer experience, highlighting not only the technologies and
processes needed to enable a smooth journey, but also the various functions across
the organization that must coordinate to deliver it.

2
 avid Edelman, “It’s all about the journey,” Financial Times Future of Marketing Summit, New York, Sept.12, 2013.
D
3
McKinsey has a relationship with ClickFox through its McKinsey-ClickFox Solution.

McKinsey Digital 71
 Marketing, sales, support, service, and operations play key roles in many customer
journeys, of course. But there are other functions that are critical as well, such as order
management and fulfillment. Those are not typically top of mind for marketers, but the
experiences enabled by these back-end systems are instrumental to the way a customer
perceives a brand’s ability to deliver on expectations.

Consider the technology and operations required for L’Oreal’s Makeup Genius app,
which uses webcams to enable customers to virtually try on different shades and styles
of makeup. To the customer, it is an easy, seamless, and enjoyable experience. But
it is enabled by complex technology that involves coding dozens of makeup shades,
matching them to a near-infinite variety of skin tones, and collecting data on which types
of customers try on which shades, then tracking their satisfaction levels after purchase—
all of which are analyzed to further refine the matching process and improve the customer
experience.

This two-way flow of information is an important aspect of modern marketing operations.

As an experience is delivered to the customer, there needs to be a system to capture how
that shopper responds and to feed that information back into the organization, which
then adjusts its offer or message accordingly. And this feedback loop is not just about
optimizing the customer experience. It also helps decision makers adjust campaign
spending based on trends and opportunities, for example, or direct salespeople to stores
where product inventory is low. We’ve found that best-in-class companies reallocate up
to 80 percent of digital-campaign budgets during a campaign.4

3. Selecting the right marketing technology

Delivering on omnichannel customer experiences requires marketing technology that
can automate processes, personalize interactions, and coordinate actions. Marketing
technologists in particular have a critical role in navigating the ecosystem of more
than 2,000 marketing-technology providers to create solutions that deliver the most
effective customer experiences.5 They effectively act as a bridge between the customer
experience and marketing operations.

An important element of managing a capable marketing-operations function is building

a system that has the flexibility to work with large platforms that are becoming more
dominant, such as Adobe or Oracle, as well as point solutions that are constantly
introducing innovations. That requires developing a thoughtful application-programming-
interface strategy to make sure your system has enough flexibility to hook into both
current and emerging technologies, which will only become more important as the
Internet of Things moves mainstream.

Yet the “best” marketing technology isn’t necessarily what’s best for an organization. For
example, an overriding consideration may be how well a particular solution integrates
with legacy systems or how well it meets specific requirements. One global technology

4
 avid Edelman, “It’s all about the journey,” Financial Times Future of Marketing Summit, New York, Sept.12, 2013.
D
5
Chief Marketing Technologist Blog, “The system dynamics of 2,000+ marketing technology vendors,” blog entry by Scott Brinker,
Jan. 29, 2015, chiefmartec.com.

72 How digital marketing operations can transform business Building capabilities and tech
original-equipment manufacturer, for instance, set out to create a personalized
content-delivery system across all touchpoints. Beginning with a clear vision of its ideal
customer-delivery needs, it defined key performance indicators, outputs, and levels of
personalization, and then it set out to assemble the technology that could do it. But it
also needed a solution that could play nicely with the company’s many legacy systems
and would also be easy for a large group of global marketers to implement and
manage day to day. The company wound up combining off-the-shelf data, content,
and analytics platforms with a personalization engine.

4. Implementing processes and governance

Technology enables the customer experience, but people, processes, and
governance are necessary to ensure technology does what it’s supposed to do. The
failure to establish guidelines for how business units might pilot new technologies,
how data will be shared across the organization, or which capabilities will be managed
in-house versus by external agencies and partners could result in a patchwork of
efforts across the enterprise that sow confusion and hamper attempts to scale.

To address this challenge, one global consumer-packaged-goods company

rethought its entire approach to bringing new products to market, beginning with
a complete overhaul of the marketing brief. The existing briefing process was not
standardized, which resulted in varying levels of input, lack of clarity around the
insights that were driving the campaign, loose definitions of the goals of the campaign,
and inconsistencies regarding the specific role of each agency and of the internal
team. As would be expected, much time was wasted as both the briefs and campaign
development underwent multiple iterations.

The new approach required every agency involved in the product launch to participate
in the creation of the briefs. Having everyone at the table formalized responsibilities,
while aligning roles and resources ahead of time helped to mitigate the “land grabs”
that can occur among competing agencies. In addition, bringing everyone together
at the beginning made for stronger briefs, as it generated healthy debate on such key
issues as which agencies would take the lead in the launch, which key performance
indicators should be measured, and how and where to incorporate feedback loops
that would allow teams to tweak and iterate after launch. The new approach paid off:
the time spent writing a marketing brief and rolling out a new product dropped from
four months to just one.

Establishing such clarity up front requires the client to be a strong orchestrator and
the agencies to stick to their defined roles. Rather than being restrictive, this level of
governance can enhance creativity, as it frees people to focus on their responsibilities
instead of wasting time and energy jockeying for position.

McKinsey Digital 73
 5. Using the best metrics to drive success
Technology is now catching up to the holy grail of marketing: the ability to monitor,
track, and manage the effectiveness of marketing investments. Measures of marketing
effectiveness need to move beyond what has often been limited to a narrow set of
metrics. As companies become more customer-centric, for example, metrics should
focus on customer activity rather than simply product or regional activity, as is often the
case. Metrics should also reinforce new behaviors and processes, such as how fast a
product is launched or how quickly lessons from the field can successfully be integrated
into the next marketing offer.

To be most effective, however, metrics need to deliver insights quickly—often in real

time—so the business can actually act. They need to be delivered in a way that is easy for
decision makers to understand, and they need to be forward looking, to identify future
opportunities, rather than focused on reporting what has already happened.

It’s sad but true: marketing operations has traditionally been overshadowed by
sexier marketing tactics. Yet as consumers become increasingly empowered and
sophisticated in the way they make purchasing decisions, it’s never been more
important to use data to map customers’ DNA, understand exactly what they want,
and then take those insights to develop and deliver a superior (and flawless) customer
experience. As outcomes go, we think that’s pretty sexy, indeed.

David Edelman is a principal in McKinsey’s Boston office, and Jason Heller is a senior
expert in the New York office and global leader of its Digital Marketing Operations
service line.

74 How digital marketing operations can transform business Building capabilities and tech
McKinsey Digital 75
 Two ways to modernize IT
systems for the digital era
Juan Garcia Avedillo, Duarte Begonha, and Andrea Peyracchia

Companies can use two-speed or greenfield

approaches to overhaul their legacy IT systems—
without weakening their enterprises. Which approach
is right for you?

Outdated IT systems are often the biggest Achilles’ heel for established companies
seeking to compete successfully against upstarts.

76 Two ways to modernize IT systems for the digital era Building capabilities and tech
Every executive knows the problem. Established companies try to get as much as they
can from their investments in legacy systems. When they come up against the systems’
limitations, they devise patches or work-arounds. While useful in the short term, over
time these remedies can create incompatibilities among discrete layers of the technology
stack and among applications within a layer. Companies may find that they are actually
increasing their operating costs in the long run and missing opportunities to embrace
more efficient and more innovative ways of working through digitization.

By contrast, newer online competitors—unburdened by legacy IT systems—benefit from

agile product-development cycles and delivery systems, digital operating models, and
lower operating costs. They can experiment and test software releases frequently with
users to respond quickly to market shifts. They can pursue hypertargeted marketing
strategies, learning as they go from the consumer data they collect. Such companies
have been able to accelerate their time to market with new products and improve
customers’ experiences.

To realize similar advantages, established companies will need to simplify their core
IT systems while still keeping the lights on. That’s what one European utility did: by
eliminating the operational drag from its legacy IT system, it was able to shave its costs
of providing customer service by 15 percent while still significantly improving customer-
satisfaction scores.

Based on our work with organizations in a range of industries, we believe two approaches
may be the most effective for successfully realizing improvements in the short term while
also transforming the IT architecture over the long term: two speed and greenfield. Each
has specific requirements that must be weighed against an organization’s appetite
for risk, its financial resources, and the maturity of its IT systems. In this article, we will
consider both approaches, the conditions under which they make the most sense, and
the essentials of governance that ensure success in either case.

Two paths to IT transformation

To obtain the same cost and performance benefits that online companies enjoy,
established companies need an IT architecture that is modular, simple, customer-centric,
and configurable—and they need it quickly. Both two-speed and greenfield approaches
give organizations the ability to rapidly transform themselves while allowing the business
to operate as usual (Exhibit 1). But they are subtly different.

McKinsey Digital 77
 Exhibit 1

Executives can
consider two IT
transformation
models

Two-speed approach
Under the two-speed approach, the IT organization produces quick iterations and
launches of front-end customer-facing applications while continuing to ensure the
stability of slower, back-end systems that handle foundational transactions and record
keeping.1

Companies prioritize two or three high-value customer experiences—say, opening an

account for a mobile phone or returning an item. Then they carve out a dedicated team of
staffers with digital skills to create a new fast-track service for that experience and bring
it to market quickly. Meanwhile, the remainder of the IT architecture team, operating at a

1
 liver Bossert, Chris Ip, and Jürgen Laartz, “A two-speed IT architecture for the digital enterprise,” December 2014, mckinsey.
O
com.

78 Two ways to modernize IT systems for the digital era Building capabilities and tech
more moderate pace, carries on with its core work: planning and designing the longer-
term enterprise architecture that will meet the organization’s strategic and operational
needs, while at the same time ensuring stability and maintenance of the current system
and overseeing day-to-day service delivery.

One European bank, for example, used this approach to improve its account-opening
process. While using existing technology where it could, it created a new team that used
concurrent-design techniques (in which multiple development tasks are completed in
parallel) to create a prototype of an account-registration process. The team tested this
process with real customers in a live environment, constantly refining it until the team
had succeeded in cutting the original 15-step process down to just 5 steps. Customers
can now open an account using a mobile device in five minutes or less instead of waiting
in a bank branch and filling out paperwork.

Takeaways

When companies come up against the inevitable limitations of their legacy IT systems,
they attempt to create patches or work-arounds.

Such remedies may prevent companies from optimizing their use of technology,
particularly in a digital era.

Two transformation approaches, two speed and greenfield, may be particularly

effective for companies seeking to modernize their IT architectures in the short term
while also ensuring the sustainability of IT systems for the long term.

Each of these approaches has specific requirements that must be weighed against an
organization’s desired time to market, its appetite for risk, its financial resources, and the
maturity of its IT systems.

The two-speed model allows management to phase in capital investments, which can
mitigate the risk of IT transformation projects and make for a smoother migration. But
the two-speed approach is no silver bullet. It can be complicated to maintain a hybrid
architecture in which transactional platforms, managed for scalability and resilience, run
alongside other systems optimized for customer experience. When one retailer adapted
its legacy systems to support multichannel delivery, for instance, fast-track software
teams bumped up against outdated IT systems built in programming languages their
young developers had never used.

The company learned the hard way that if it is not simultaneously focused on
connecting individual improvements to a new, more sustainable underlying
architecture, the whole process may grind to a halt (Exhibit 2). Indeed, many businesses

McKinsey Digital 79
 Exhibit 2

Business with
two-speed models
need to keep an
eye on how the
fast track connects
to foundational
systems

that opt for this approach become so focused on the fast part of the two-speed model
they forget to consider the changing demands of the foundational systems—and that
oversight can undermine the success of the project.

It is also critical for companies to set clear milestones for the transformation; without a
comprehensive plan and investment strategy, companies can get caught up in a change
cycle that has no end. Additionally, they must agree not to take on too much change
too fast. The two-speed path involves making implicit trade-offs. Taking on too many
fast-track initiatives leads to chaos. Finally, success requires focus and support from the
business side.

80 Two ways to modernize IT systems for the digital era Building capabilities and tech
Greenfield approach
As the name suggests, a greenfield approach is a replacement of core legacy IT systems.
This approach works best when businesses require a total transformation that the
existing legacy system simply cannot support—such as when a completely new set of
functionalities is needed. Implementing this approach successfully also requires a bit
more lead time; if there is crushing pressure to deliver results quickly, the two-speed
approach may be the better option.

To implement the approach, companies have several choices. They can build from
scratch, choose best-of-breed hardware and software products and integrate them
themselves, or go with a bundled, preintegrated suite. Whatever the choice, it is critical
for companies to understand the full capabilities of the tools and packages they are
acquiring. And rather than simply adapt to the software packages they acquire, they must
commit to redesigning their software development and delivery processes from end to
end, relying on industry best practices and common IT standards to ensure sustainable,
intuitive ways of addressing business and customer needs.

There are several factors companies should weigh at the outset. They must have
substantial capital and liquidity, since initial investments can range between $50 million
and $300 million depending on the scale and scope of the IT organization. They must
have support from top leadership to sustain the strategic and financial commitments over
a period of years. They must also have enough understanding of the potential for positive
business outcomes to ensure that the effort isn’t considered simply a side project being
led by IT. Additionally, leaders must carefully think through their capabilities—for instance,
does the company have enough skilled talent and other resources on hand to pursue
digital delivery of software? If the answer is “no,” the company may want to emphasize
new training and coaching opportunities for employees or look outside the usual sources
for IT professionals with the desired digital skills.

Two companies, two different approaches

Which approach a company takes depends on a number of factors, including the market
pressures it is facing, its appetite for risk, the state of its existing IT systems, and its
financial situation. As the following examples suggest, that’s true even for businesses
competing within the same industry.

Two-speed approach
At one European telecommunications company, sales representatives often had to
navigate 15 different systems to qualify leads, access client information, and prepare
proposals. One of these, the customer-relationship-management system, could sort
data only by product. Systems issues slowed response times so that even simple
customer queries, such as a billing question, required a two- or three-minute wait on
average. The company knew it needed to dramatically improve its IT capabilities. But with

McKinsey Digital 81
 revenue stalling, it also needed some quick fixes to address urgent needs in product
life-cycle management, multichannel sales, self-service, and customer operations—
processes that in many cases had to be radically simplified.

While the larger IT systems transformation was being scoped, management pulled
together a fast-track team composed of a senior marketing director, a data scientist
specializing in customer analytics, a handful of IT developers experienced in agile
software-development techniques, and a veteran IT programmer who was deeply
familiar with the current software and hardware environment. Working in test-and-
release cycles—where prototypes were vetted, refined, and rereleased in weekly,
sometimes daily rotations—the fast-track team introduced a new software overlay. It
also developed a data-mining algorithm that aggregated customer data from the clunky
customer-relationship-management system and pooled it into an easy-to-use template
that marketers could use to sort customer information in a variety of ways.

Those changes forced the marketing end users to get used to a different working
style, one that was more unstructured and sparked resistance at first. Initial releases
lacked the elegance of traditional software programs, but as marketers field-tested the
improvements, they grew more comfortable. Those fast-track improvements allowed
the telecom company to address critical market needs in less than three months and
gave the legacy-transformation team time to develop a longer-term target IT model.

Greenfield approach
In another example, a telecommunications operator active in South America was
facing heavy regulation, rising inflation, and negative exposure to the dollar. Those cost
pressures were compounded by a bloated service portfolio in which just one-third
of the company’s products accounted for more than 90 percent of its revenues. The
company’s IT architecture was strained from years of M&A activity. Average costs for
business-support systems were nearly double those of industry peers, and average
response times in customer operations were about 40 percent higher. Management
weighed retrofitting in waves to address the most glaring problems but determined that
many core processes were so complex and broken that it would be faster and cheaper
to redesign from scratch.

The decision to embrace a greenfield design was driven in large part by the company’s
CEO, who saw the project as one piece of a larger turnaround strategy with implications
beyond the IT organization. He set aside one day each week to meet with the project
team. That team, composed of senior business and IT staffers, reviewed every major
decision—from trimming the product catalog to firming up the details of the IT stack. The
CEO and the team hashed out the customer and operational capabilities they wanted
and then, using a best-of-breed approach, shopped around for vendors that would

82 Two ways to modernize IT systems for the digital era Building capabilities and tech
partner directly with them instead of working through a system integrator. The team
wanted to have a clear line of sight into the management of the project.

Starting with its mobile-phone division, where the CEO and senior management felt
the company had the greatest exposure, the project team introduced new systems
one business domain at a time, using live tests with anywhere from 20,000 to 100,000
customers to track performance. Once the mobile business was stable and running
on a new platform, the company turned its attention to its fixed-line business units. The
company is on track to reduce IT costs by roughly 20 percent within 18 months and
shorten time to market by as much as 50 percent (Exhibit 3).

Ensuring strong governance

Regardless of which approach an organization follows, companies should adhere to

certain governance principles.

Ensure that the business plays an active leadership role. The IT transformation should
be managed as a company-wide initiative. Business leaders and senior management
must be committed to and engaged in the change process, outlining the conditions for
success and gaining agreement with the IT organization about how the transformation
will be managed.

Have a clear long-term vision and plan. The target IT architecture must be capable of
supporting the organization’s long-term strategy. If a conglomerate plans to divest itself of
a certain product line within five years or expand into Asia, for example, those decisions
will affect the underlying IT. Management must commit to articulating its strategy with
IT, and IT leaders must ensure that the resulting architecture can meet the evolving
needs of the business. Top-performing organizations predict as much as possible while
maintaining some level of flexibility to adjust.

Simplify products, processes, and IT at the same time. Business and IT should manage
all the elements related to a given customer experience (its processes, applications,
system requirements, and so on) in tandem rather than in separate, sequential work
streams. Although it is “messier,” this method forces the type of end-to-end planning that
can accelerate development and ensure improvements are more likely to meet business
and customer needs.

Maintain good housekeeping. Implement industry-leading IT standards to establish a

common language with vendors. Freeze legacy investments to free up resources and
prevent shadow IT offerings from being introduced. Such project discipline can keep the
company’s focus on the IT transformation and can help senior leadership avoid costly
changes that are not in line with the broader transformation strategy.

McKinsey Digital 83
 Exhibit 3

Simplification can
materially change
IT costs and time to
market

Make clear and frequent communication a priority. Create a reporting dashboard

that makes it easier for senior management to oversee the IT transformation and stay
engaged. Give senior managers a short list of metrics that will allow them to see, at a
glance, the impact the change is having on the organization. Hold weekly (even daily)
check-ins with the business–IT working team to maintain momentum, troubleshoot
issues, and manage work volumes so resources are deployed optimally.

Dedicate the best internal resources to the transformation project. Some organizations
fall into the trap of staffing transformation projects with people who may be available
but who may not have the required business, IT, or project-management skills. Project
teams must be staffed with experienced IT professionals with the relevant skill sets,
and they must be allowed to clear time on their schedules to devote their effort to the
transformation.

Choose vendors that prioritize your account. It’s important to select a partner that sees
your account as a high-priority contract. The provider’s commitment to your project and
understanding of your goals (and relevant experience in meeting them) can be a make-or-
break issue. While price will be an important consideration, having trust in a vendor is just
as critical when making the decision.

84 Two ways to modernize IT systems for the digital era Building capabilities and tech
Large incumbent organizations must address the barriers to digitization imposed by
their legacy IT environments. Two-speed or greenfield models can serve as effective
paths to transformation. With less hardware and software baggage and a more modern
IT architecture, established companies can simplify their processes and IT environment
and sharply improve their performance.

Juan Garcia Avedillo is an associate principal in McKinsey’s Madrid office, Duarte

Begonha is a principal in the Lisbon office, and Andrea Peyracchia is a digital VP in the
Milan office.

McKinsey Digital 85
 Beyond agile: Reorganizing IT
for faster software delivery
Oliver Bossert, Chris Ip, and Irina Starikova

The integration of software development with IT

operations can rev up companies’ delivery of new
applications. But this approach may not be right for
every part of the IT portfolio.
After more than two decades of experimentation among Silicon Valley giants,
“agile” has finally gone mainstream. Companies inside and outside the Valley are
using some form of this software-development methodology, which emphasizes,

86 Beyond agile: Reorganizing IT for faster software delivery Building capabilities and tech
 among other things, rapid building and frequent delivery of software and system updates,
with continual user involvement. Under this approach, companies are seeing increased
productivity within their software-development teams, faster release of digital products
and services, and improved customer experiences. Our experience suggests, for
instance, that companies can reduce the average number of days required to complete
code development and move it into live production from 89 days to 15 days, a mere 17
percent of the original time (Exhibit 1).

A lot of companies are now kicking the tires on DevOps, the next wave of innovation in
software development and delivery and a critical enabler of agile software development.
Under this product-development approach, companies seek to fully integrate their
software-development functions with their IT operations so teams can jointly build, test,
release, and maintain new digital applications more frequently and more efficiently.1
Software is designed with discrete business requirements and system integration in mind,
rather than in a vacuum, and developers and operations staffers are equally responsible for
the delivery and stability of code.

Exhibit 1

The value of
adopting DevOps
can be significant

1
Satty Bhens, Ling Lau, and Shahar Markovitch, “Finding the speed to innovate,” April 2015, mckinsey.com.

McKinsey Digital 87
 However, few companies, regardless of industry, have been able to reap the full value
of DevOps. The implementation of agile has typically affected interactions only among
small groups of business stakeholders and discrete application-development teams.
By contrast, the move to a DevOps model requires that companies make broader, more
systemic changes that could significantly alter interactions among all software-delivery
teams, IT-operations staffers, and business stakeholders. This is a more complex
undertaking.

Takeaways

Companies are now attempting to integrate their software-development functions

with their IT operations. Commonly referred to as DevOps, this approach brings teams
together to jointly build, test, release, and maintain new digital applications more
frequently and more efficiently.

To succeed with this approach, companies need to do two things: reorient their IT
operations around a two-speed IT architecture and identify those parts of the company
that would benefit most from DevOps.

For most established players, reorienting IT operations around a two-speed IT

architecture—which features stable, transaction-oriented systems on the back end
and fast-changing, customer-facing applications on the front end2—is a prerequisite
for implementing both agile and DevOps approaches. But not every application the
company develops or every update in a two-speed environment will require the joint
collaboration that is central to a DevOps model. Some of the mechanisms used to
support rapid development of e-commerce applications, for instance, may not be
as successful in building or maintaining applications for a core transactional system
developed in COBOL. In those instances, the traditional split of roles and responsibilities
among IT operations, software development, and business stakeholders may actually be
more acceptable.

In this article, we will discuss the considerations IT executives face when trying to
adopt a DevOps model within a two-speed IT environment (Exhibit 2). They will need to
determine how and where to introduce new technologies, such as automation and cloud
platforms, depending on which parts of the company they think would benefit most from
a DevOps approach. And they will need to explore new production processes and forms
of governance so that IT operations and software-development functions across the
company can work together effectively, despite the fact that they may be operating at
different speeds.

2
 liver Bossert, Chris Ip, and Jürgen Laartz, “A two-speed IT architecture for the digital enterprise,” December 2014, mckinsey.
O
com.

88 Beyond agile: Reorganizing IT for faster software delivery Building capabilities and tech
Exhibit 2

To deploy DevOps
in a two-speed
IT environment,
companies need to
pay attention to the
following factors

Running at two speeds

Over the past decade or so, companies that were born online have revolutionized how
technology infrastructure is built and maintained, and how software applications are
developed and deployed. They have been among the first to integrate their software-
development functions with their IT operations and focus on continuous delivery of small
upgrades, where teams rapidly design, integrate, test, deliver, and monitor software
changes.

Netflix, for instance, has created a cloud-based IT architecture that allows its developers
to launch hundreds of software changes a day. Its website comprises hundreds of
microservices hosted in the cloud, and each service is maintained by a dedicated DevOps
team. Developers don’t need to request resources from the IT operations team; instead
they can automatically build pieces of code into deployable web images. As those images
are updated with new features or services, they can be integrated with Netflix’s existing
infrastructure using a custom-built, web-based platform on which infrastructure clusters
are created. Testing is carefully done in the production environment with a subset of users.

McKinsey Digital 89
 Once the web images are live, a load-balancing technology routes part of the traffic to them
from older versions. Automated monitoring ensures that if something goes wrong with the
deployment of new images, traffic is routed back to older versions, and the new images
are rolled back. Because of this level of automation, Netflix can deploy new code into its
production environment within hours, where most companies would need months.

Of course, Internet companies such as Netflix have had the advantage of being able to
start from scratch with their IT architectures—with no complex legacy systems to either
reconfigure or maintain. And because their main products, web applications, are 100
percent customer facing, these companies have learned how to react quickly to customer
feedback and release new features and improvements on the fly.

By contrast, most non-Internet companies seeking to similarly adopt a DevOps model are
often saddled with older, transaction-based systems that they must somehow reconcile
with agile approaches to software development. What’s more, not every function within the
brick-and-mortar organization will require DevOps; this would be the case, for instance, for
systems of record that are not time sensitive, such as a general ledger. These companies
therefore must not only contend with developing a two-speed IT architecture but also
enabling a two- speed IT organization.

Managing a two-speed IT architecture

A two-speed IT architecture allows large-scale companies to accelerate the release of
innovative products and applications that could make a substantial difference to customers
while maintaining legacy IT systems that are less innovative but still necessary for the
stability of the business. This sort of architecture emphasizes tight integration between
the software applications being developed and the hardware infrastructure supporting
them. Historically the IT operations teams maintaining software and hardware have been
kept entirely separate. But with the increasing prevalence of vertical enterprise-resource-
planning systems, the advent of network virtualization, and the emergence of software-
as-a-service models, the two sides have moved closer to one another. These technology
trends have had the effect of removing complexity from hardware stacks and making them
more accessible to software developers.

A two-speed environment requires that companies introduce automation tools to support

continuous delivery of software—especially in the testing and production phases.
Automation can allow for better management of, among other things, the release of
software updates, the porting of new code, and the general processing environment.
Most important, automation tools and cloud-based technologies can serve as the bridge
between legacy IT systems on the back end and consumer-facing applications on the
front end, allowing companies to pursue seamless testing, provisioning, deployment,
governance, and security of servers and new software releases (Exhibit 3).

90 Beyond agile: Reorganizing IT for faster software delivery Building capabilities and tech
Exhibit 3

It is possible to
deploy new code on
a site within an hour

A two-speed IT architecture conveys a number of critical advantages, but it takes time,

careful consideration, and commitment to establish.

Netflix, for instance, developed most of its cloud and automation technologies in-house,
but companies have any number of products and packages (some open source) to choose
from that can allow them to achieve similar dual-speed performance.

The most critical factor in establishing a two-speed architecture is for IT leaders to adopt a
capabilities- based view of the IT architecture, rather than a system- or process-oriented
view. This means identifying and clearly defining those software applications that cut across
multiple business units. From a capabilities perspective, for instance, IT leaders could see
that certain applications developed for the company’s customer-relationship- management
(CRM) system may require a DevOps approach while others, such as core banking systems
or transaction-processing applications, would not. The CRM system would not simply be
considered a system of record, too slow to qualify for a DevOps program. Instead, IT leaders
could allocate resources toward “fast” and “slow” applications as required—gaining the
critical benefits of the DevOps approach where it is possible to do so.

Managing a two-speed IT organization

While addressing the technology architecture and infrastructure required to enable DevOps,
companies should simultaneously consider making changes to various operations,
processes, and governance structures in the IT organization and within the business overall.

McKinsey Digital 91
 The DevOps approach challenges the established product-development norms in most
IT organizations. Historically, companies have separated their infrastructure (hardware)
from their application-development (software) organizations and have kept the “build”
staff away from the “run” staff. A DevOps approach requires that companies tear down
these organizational silos, thereby marking a significant change in IT management
strategy. Additionally, IT leaders adopting DevOps organizational models may need
to reconsider how technology partners are integrated into their software-delivery
processes—a trend that is forcing some system vendors to consider ways to make their
platforms available as a service.

The biggest task for IT leaders is to identify those parts of the company where the use of
DevOps would make most sense—likely focusing on those parts of the business where
speed is at a premium, and where there is a significant opportunity for the company
to differentiate its customer experience from the competition. (Think of a retailer using
DevOps to improve its website checkout experiences, or a bank offering new fund-
tracking capabilities at its site.) For those parts of the business where DevOps might make
less sense—where reliability and resilience of software is more important than speed to
market— IT leaders will need to determine how to maintain the split between software
development and IT operations, and which roles and processes to adapt for a culture of
continuous delivery.

Redefined roles
By its very nature, integrated product development requires strong collaboration between
business and IT—and in some cases new or redefined roles. Business analysts must
communicate the requirements for new software features and functionality in terms
that employees in all departments can understand—and they must be flexible and
willing to change the business requirements slightly when doing so could speed up
implementation. Engineers and product developers must work across functions and
among different product teams—under a DevOps model, informal collaboration and
coordination among these business and IT coworkers actually becomes more important
than formal reporting and approval processes. Software testers must collaborate with
developers and business analysts—first with business analysts to clarify feature requests,
and then with developers after the code has been developed, giving them immediate
feedback on software performance. With DevOps, end users are no longer passive
recipients of “big bang” software or service releases—companies seek their input early
and often as they develop and test new software features.

Cross-functional teams of application-development, infrastructure-management, and

operations professionals should be convened to streamline the ownership of stacks
across the application-delivery pipeline. In the case of continuous delivery, for instance, a
joint team would oversee all processes (and associated tools) relating to this development
activity, such as application building, testing, and deployment; performance management
and monitoring; and virtualization and configuration management. Previously, some

92 Beyond agile: Reorganizing IT for faster software delivery Building capabilities and tech
of these components would be owned by different organizations. Also, infrastructure
teams should be given a seat at the table, with decision rights equal to those of software-
development teams.

Redefined culture and talent

Integrated development and continuous delivery can only happen within a corporate culture
that empowers its software developers and refines its IT and R&D reporting structures.
In most organizations, product development and IT operations live in separate towers,
with people of different mind-sets, skills, and experiences. IT and business executives will
need to break down these barriers. For instance, rather than have all developers report to
the head of “build” and all operations employees report to the head of “run,” some must
be purposely assigned different reporting lines. Further, employees will need training
opportunities, and their salary schemes may need to be reconsidered.

Traditionally, product developers have focused mainly on programming frameworks; in a

DevOps environment they will be held responsible for the quality of their code. They will need
to know operating-system basics and must show strong collaboration skills as they work
jointly with operations engineers to determine how best to solve application-development
or deployment problems. As a result, many companies are already modifying their recruiting
practices to hire “full stack” engineers—professionals who understand all aspects of
computing, including user interfaces, databases, and networks.

Redefined processes and governance Companies may want to look across the entire
spectrum of software-delivery processes to determine which will need to be redefined
or fully automated so that development teams can take advantage of infrastructure
as a service, as needed, and so that code can be ported into testing and production
environments in a standardized way.

There are a number of lessons companies can take from Internet pioneers on the types of
process and governance changes to deploy in support of DevOps. For instance, Internet
companies enforce “self service” for developers; teams can test, promote, and deploy
code in production environments without requiring constant hands- on involvement
from infrastructure-operations teams, although both teams share responsibility for
code performance. Internet firms also impose rigorous, automated testing of new code
at all stages of the application-development process; in some dot-com companies,
sophisticated tests are completed automatically every 10 to 15 minutes. Additionally
they take advantage of advanced analytics and other tools to preemptively scan code for
exceptions and send developers automated reports about the code segments that are
most likely to create errors.

McKinsey Digital 93
 The value of implementing DevOps can be significant with respect to both productivity and
time to market. But the implementation of DevOps is not simply about the deployment of
new IT methodologies. It must be treated as a company- wide transformation—one that
incorporates process and governance considerations as well as technology-related ones.

Oliver Bossert is a senior expert in McKinsey’s Frankfurt office, Chris Ip is a director in

McKinsey’s Hong Kong office, and Irina Starikova is an associate principal in the Silicon
Valley office.

94 Beyond agile: Reorganizing IT for faster software delivery Building capabilities and tech
McKinsey Digital 95
96
Part 4:
Cultivating a digital culture

98 Building a design-driven culture

108 Demystifying the hackathon

McKinsey Digital 97
 Building a design-driven culture
Jennifer Kilian, Hugo Sarrazin, and Hyo Yeon

It’s not enough to just sell a product or service—

companies must truly engage with their customers.
Here’s how to embed experience design in your
organization.
At one point in the movie The Best Exotic Marigold Hotel, Judi Dench, who plays a
grieving widow, is connected with a customer-service agent at a call center in India.
Despite being told Dench is in mourning, the call-center rep sticks to her script with a

98 Building a design-driven culture Cultivating a digital culture

sadly predictable result: hurt feelings and a lost customer. By the end of the movie,
Dench’s character has moved to India and reinvented herself as—wait for it—a call-
center trainer. In her initial session, she conducts a role-playing exercise in which she
demands operators go off script and respond to customers as human beings first. The
result? Instead of angry hang-ups, the call-center reps make human connections and
customers for life.

While the movie is fictitious, of course, the broader lesson lies at the core of a real-world
business need: empathy. Using empathy to put customers, clients, and end users at
the center of the problem-solving equation is the foundation of design thinking. With this
focus, design becomes a tool for change, capable of transforming the way companies
do business, hire talent, compete, and build their brand. To quote Nobel laureate
Herbert Simon, the act of design “devises courses of action aimed at changing existing
situations into preferred ones.”

From product to experience

Think about a product you recently bought. Now think about the experience you had
buying and using that product. Increasingly, it’s difficult to separate these two elements,
and we’re actually seeing many cases where customers prioritize the experience of
buying and using a product over the performance of the product itself. In fact, customer
experience is becoming a key source of competitive advantage as companies look to
transform how they do business.

This fixation on customer experience isn’t just for the cool start-up world. Consider HP
and the mundane task of replacing printer ink. Through HP Instant Ink, the company
has executed a subtle shift away from pure transactions—customers simply buying ink
when they need it—and toward establishing an ongoing service relationship, wherein
HP knows when its printers will run out of ink and preemptively ships more, saving
customers time and effort. And making their lives easier not only makes customers
more productive but also makes them happy and generates loyalty. Similarly, heavy-
industry stalwart John Deere is transforming its business by moving beyond pure
equipment to provide farmers with digital services such as crop advisories, weather
alerts, planting prescriptions, and seeding-population advice.

Few would dispute that these sorts of developments are good for the customer and
build loyalty. But there’s a larger question for businesses: Are they worth it? While a hard
metric on the return on investment of design is notoriously elusive, the value is clearly
borne out in other ways. According to the Design Management Institute’s Design Value
Index, for example, design-driven companies have maintained a significant stock-
market advantage, outperforming the S&P 500 by an extraordinary 219 percent over
the past ten years.1

1
Jeneanne Rae, “Good design drives shareholder value,” Design Management Institute, May 2015, dmi.org.

McKinsey Digital 99
 At individual companies, you don’t have to look far to see the value of design. When
Walmart revamped its e-commerce experience, unique visitors to its website increased
by 200 percent. When Bank of America undertook a user-centered redesign of its
process for account registration, online-banking traffic rose by 45 percent.2 And the
business value of design has only been underscored by the recent hiring of high-profile
designers by venture-capital firms; last year, for example, energy-focused Khosla
Ventures appointed the former head of Google’s user-experience team, Irene Au, as an
operating partner.

Many companies are committing to improve the user experience. But making design a
core capability that drives growth and competitive advantage means companies need to
go further.

The four elements of design-driven culture

Really understanding the customer

Pretty much all companies insist they focus on the customer. Yet reality often belies
that assertion. Budgets and key performance indicators often are not aligned with
performance on customer metrics. Research may be superficial. Business decisions
made at the executive level often fail to consider the impact on customers.

The difference with design-driven companies is that they seek to go far beyond
understanding what customers want to truly uncovering why they want it. They recognize
that while data are important for understanding customer behavior, they’re woefully
short on empathy. Design- driven companies turn to ethnographers and cultural
anthropologists. These “empathy sleuths” conduct contextual one-on-one interviews,
shopper-shadowing exercises, and “follow me homes” to observe, listen, and learn how
people actually use and experience products. They plot out customer decision journeys
to understand exactly what motivates people, what bothers them, and where there are
opportunities for creating delightful experiences.

Marketing leaders at Sephora, for example, were watching millennials shopping on their
site and realized that before buying, these customers would often go to YouTube to look
for videos of people using the product. That prompted the cosmetics retailer to create its
own videos to serve this need. In another example, a user-experience scientist at GE’s
San Ramon innovation center conducted 119 interviews in the process of helping GE
redesign its marine-shipping positioning system. The result: an award-wining design that
enables mariners to focus on ship handling in dangerous and environmentally sensitive
locations instead of the distraction of managing technology.

2
Jim Ross, The business value of user experience, D3 Infragistics Services, January 2014, infragistics.com.

100 Building a design-driven culture Cultivating a digital culture

When one large North American bank tracked consumer behavior for 30 days—including
what and when bills were paid, how frequently consumers used ATMs, and how often
they got cash—it discovered, contrary to expectations, that consumers didn’t care about
the typical banking products that institutions usually try to push on them. All its customers
wanted was to sign up for an account. As a result, the bank provided services as needed
and, based on observed customer-usage patterns and behaviors, it became much more
judicious about recommending the right products to meet their needs.

Bringing empathy to the organization

One essential to running a design-driven company is making sure the right people with
the right skill set are in the right place. To start, that means ensuring a chief design lead
has a seat at the table where strategic decisions are made. That person could be a
chief design officer, a chief digital officer, or a chief marketing officer. All that matters is
that whoever has the responsibility is the primary customer advocate. He or she must
bring the customer’s point of view to business decisions, translate business goals into
customer-friendly initiatives, and build a culture in which employees think about how what
they do affects customers.

Pushing that perspective through the company requires making a designer a core part
of any product or service development and building a design-driven process around
individual customer journeys. During these initiatives, design should take an active role in
bridging multiple functions—including finance, legal, IT, marketing, and operations—so
that these groups can not only be part of the process but also start to directly understand
the value that design can deliver.

Building these bridges requires extending customer advocacy and customer-centric

empathy to more roles in the organization. In IT, for example, design should have a
role in devising the technical solutions that support customer experiences. In product
design, designers should contribute customer insights that influence prototypes as well
as the final product. And before a product is released publicly, a senior designer should
be responsible for consistency of experience across all touchpoints, from product to
packaging to social-media marketing, web design, and e-commerce.

Raising the design capabilities of a company requires moving customer empathy beyond
the skill set of a design team to permeate all areas of the business. Deutsche Bank, for
example, required all employees to use products that its customers used as a way to
understand what customers were experiencing.

Solidifying this design approach requires, among other things, metrics that focus on
the customer. Customer satisfaction and retention are standard measures, but key
performance indicators should include, for example, customer lifetime value, real-time

McKinsey Digital 101

 Exhibit 1

In a ‘braided’
design model, three
functions work
together in lockstep

102 Building a design-driven culture Cultivating a digital culture

customer satisfaction by segment, and “leaky bucket” ratios to highlight where customer
issues may be spiking. The goal is to track the depth of the relationship between
customer and brand over time.

Designing in real time

Developing any customer journey requires input from many functions. We believe in a
“braided” approach that combines design, business strategy, and technology as the
core working group (Exhibit 1). These functions should work together to make decisions,
ensure that the designed journey aligns with the business strategy and is delivering value,
and keep customer experience a top-of-mind issue.

At the same time, we recognize that because developing a customer journey requires
so many different functions and skill sets, the process can quickly become bogged
down in endless email chains and meetings. Our preferred approach for mitigating this
is what we call a “four wall” approach: setting up a war room from day one and bringing
in people from design, engineering or IT, operations, and project management who are
committed to the process (Exhibit 2). Depending on the product or service and the tactics
demanded, we include people with backgrounds in research, user experience, industrial
design, interaction and visual design, service design, and rapid prototyping.

Each group gets its own wall, which functions as a working surface dedicated to
customer journeys, technology, business operations, and planning. Every day begins
with a team meeting in which members discuss what they will do, what they hope to
achieve, and what issues they may confront. Each wall becomes an ordered mosaic of
Post-it notes capturing tasks, actions, progress steps, people, and ideas, visible for all
to see. This approach supports on-the-fly decision making. Team members can simply
walk across the room, get their questions answered, come to a decision, and move
forward.

Acting quickly
Good design is fast. That means getting a product to market quickly, which depends on
rapid prototyping, frequent iteration, and adjustments based on real customer feedback.
In a design-driven culture, companies are unafraid to release a product that is not totally
perfect. That means going to market with a minimally viable product, the better to learn
from customer feedback, incorporate it, and then build and release the next version.
Consider Instagram, which launched by rolling out a product, learning which features
were most popular (image sharing, commenting, and liking), and then relaunching a
stripped-down version. The result was 100,000 downloads in less than a week3 and
seven million registered users in the app’s first nine months.4

3
Jolie O’Dell, “iPhone photo app Instagram nabs 100K users in one week,” Mashable, October 2010, mashable.com.

McKinsey Digital 103

 Exhibit 2

Cross-functional
teams work in
the same room
simultaneiously,
using each wall
to track a specific
focus

104 Building a design-driven culture Cultivating a digital culture

To discover what the dashboard of the future might look like, Chrysler paired its
customers with designers and product engineers to develop prototypes. The project
started with a bare-bones dashboard—just a steering wheel and a blank center console.
Customers were asked to build their ideal dashboard by choosing from a kit of dozens
of digital and mechanical screens, buttons, and levers. While the results showed
pronounced country-by-country differences, everyone agreed on one element: a bigger
physical dial on the dash to control the volume of their stereo.

The bottom line? Rapid prototyping is critical for getting live feedback and avoiding costly
mistakes down the road. In our experience, advanced companies can prototype and
launch a product or service in as few as 16 weeks.

Questions for the design journey

Transforming your company into one that uses design as a driver of change takes time.
Here are some questions we’ve found helpful in successfully making that journey:

Do you have a senior design leader with real authority? Hire a chief design officer or vice
president of design strategy. Empower this person with a seat in the C-suite and the
backing of the CEO. Ensure that design factors such as customer implications are part of
any business strategy.

Are you continuously reviewing your metrics? Make metrics a “contact sport.” That
means going beyond reviewing design metrics and key performance indicators regularly
to reviewing them continuously (often in real time), testing them, and changing your
actions in a constant test-and-learn cycle.

Are designers working with the right people in the organization? Assign designers
to critical functions so that design is actively contributing to business decisions and
experience development across the entire customer journey. Identify and implement
your first four-wall experiment with design, engineering or IT, operations, and project
management.

Do you really understand what motivates your customers? Create a map of the customer
journey and use human-centered-design research techniques to interact with customers
and uncover pain points and opportunities to delight.

How can you speed up your processes? The nimble start-up mentality that defines
Silicon Valley also creates a new sense of cadence. Set challenging timelines, prioritize,
and “do the doable.” Speed is better than perfection.

4
Jennifer Van Grove, “Instagram celebrates 150 millionth photo,” Mashable, August 2011, mashable.com.

McKinsey Digital 105

 Customers increasingly expect products and services that are designed to meet their
needs, delight them with unexpectedly great experiences, and address a heightened
sense of aesthetics. Companies that meet those needs are rewarded with fierce brand
loyalty and higher spending, which translates into fatter profit margins. But that kind of
success only happens by design.

Jennifer Kilian is a digital VP in McKinsey’s New York office, Hugo Sarrazin is a director
in the Silicon Valley office, and Hyo Yeon is a digital partner in the New Jersey office.

106 Building a design-driven culture Cultivating a digital culture

McKinsey Digital 107
 Demystifying the hackathon
Ferry Grijpink, Alan Lau, and Javier Vara

Hackathons aren’t just for start-ups. They can play a

valuable role in accelerating the digital transformation of
large organizations.

The “hackathon” has become one of the latest vogue terms in business. Typically
used in reference to innovation jams like those seen at Rails Rumble or TechCrunch
Disrupt, it describes an event that pools eager entrepreneurs and software developers
into a confined space for a day or two and challenges them to create a cool killer app.

108 Demystifying the hackathon Cultivating a digital culture

Yet hackathons aren’t just for the start-up tech crowd. Businesses are employing the
same principles to break through organizational inertia and instill more innovation-driven
cultures. That’s because they offer a baptism by fire: a short, intense plunge that assaults
the senses and allows employees to experience creative disruption in a visceral way.

For large organizations in particular, hackathons can be adapted to greatly accelerate the
process of digital transformation. They are less about designing new products and more
about “hacking” away at old processes and ways of working. By giving management and
others the ability to kick the tires of collaborative design practices, 24-hour hackathons
can show that big organizations are capable of delivering breakthrough innovation at
start-up speed. And that’s never been more critical: speed and agility are today central to
driving business value,1 making hackathons a valuable tool for accelerating organizational
change and fostering a quick-march, customercentric, can-do culture.

What it takes to do a good 24-hour hackathon

A 24-hour hackathon differs from more established brainstorming sessions in that it is

all about results and jump-starting a way of working, not just idea generation. However,
done well, it can help shave 25 to 50 percent from the time it takes to bring a service or
product to market. The best 24-hour hackathons share several characteristics. They are:

ƒƒ Centered on the customer. A hackathon is focused on a single customer process or

journey and supports a clear business target—for example, speed, revenue growth,
or a breakthrough customer experience. It goes from the front to the back, starting
with the customer experience and moving through various organizational and process
steps that come into play to deliver on that interaction and the complete customer
journey.

ƒƒ Deeply cross-functional. This is not just for the IT crowd. Hackathons bring together
people from across the business to force different ways of working a problem.
In addition to IT and top management, whose involvement as participants or as
sponsors is critical, hackathon participants can include frontline personnel, brand
leaders, user-experience specialists, customer service, sales, graphic designers, and
coders. That assortment forces a range of perspectives to keep group think at bay
while intense deadlines dispense with small talk and force quick, deep collaboration.

ƒƒ Starting from scratch. Successful hackathons deliberately challenge participants to

reimagine an idealized method for addressing a given customer need, such as taking
a paper-based, offline account-opening procedure and turning it into a simple, single-
step, self-service online process. There’s an intentional irreverence in this disruption,
too. Participants go in knowing that everything can and should be challenged. That’s

1
 ee Tanguy Catlin, Jay Scanlan, and Paul Willmott, “Raising your Digital Quotient,” McKinsey Quarterly, June 2015, on mckinsey.com.
S
For more on how companies can put digital at the core of the enterprise, see our Raise your Digital Quotient series, mckinsey.com/
features/raise_your_digital_quotient.

McKinsey Digital 109

 liberating. The goal is to toss aside traditional notions of how things are done and
reimagine the richest, most efficient way to improve the customer experience.

ƒƒ Concrete and focused on output. Sessions start with ideas but end with a working
prototype that people can see and touch, such as clickable apps or a 3-D printed
product (exhibit). Output also includes a clear development path that highlights all
the steps needed, including regulatory, IT, and other considerations, to accelerate
production and implementation. After an intense design workshop, which includes
sketching a minimum viable product and overnight coding and development of the
prototype, a 24-hour hackathon typically concludes with an experiential presentation
to senior leaders. This management showcase includes a real-life demonstration of
the new prototype and a roadmap of IT and other capabilities needed to bring the final
version to market in under 12 weeks.

ƒƒ Iterative and continuous. Once teams agree on a basic experience, designers and
coders go to work creating a virtual model that the group vets, refines and re-releases
in continual cycles until the new process or app meets the desired experience criteria.
When hackathons end, there is usually a surge of enthusiasm and energy. But that
energy can dissipate unless management puts in place new processes to sustain
the momentum. That includes creating mechanisms for frontline employees to report
back on progress and rewards for adopting new behaviors.

Hacking into new ways of working

Several big organizations have started hosting 24-hour hackathons, bringing together
business and brand professionals, programmers, graphic designers, user-experience
specialists, and project managers to make the process of digital transformation feel more
concrete, open up creative thinking in a really practical way, and model how innovation
practices can be structured to ultimately serve as a mindset-change tool.

One Asian insurance company, for example, pulled 120 participants into 10 cross-
functional teams and charged them with fundamentally redesigning how customers
process healthcare claims. Within the space of 24 hours, the competing teams delivered
a new model that went far beyond the original scope, totally redesigning the way
customers could monitor their health and interact with insurance companies, effectively
eliminating the need for processing claims. The experience energized the group and
opened the eyes of top management to the power of digital to transform their business.
The hackathon helped persuade skeptical members of the management team that the
company had the goods to deliver on a bold, high-profile customer initiative, and led the
CEO to declare “the end of paper processes and the beginning of zero-based design for
our company.”

110 Demystifying the hackathon Cultivating a digital culture

Exhibit

How hackathons
can accelerate
digital
transformations

For its part, one Asian bank used a 24-hour hackathon to spur greater collaboration
among different, often siloed, business functions. The hook was to create a fully digitized
know-your-customer process to help the bank meet its regulatory requirements
concerning client identity information in a better, more customer-friendly way. Likewise,
a telecommunications company used a hackathon to show managers and staff that the
company had the design mojo to fully reinvent customer-critical processes. Participants
shredded the company’s old onboarding process and laid out a far more streamlined,
automated, and intuitive process that would allow customers of its fiber, mobile, and
television services to access service in three quick steps. It prompted the company’s
director of consumer business to report, “I cannot believe what has been achieved in the
last few hours. This is years ahead of what we currently have!”

McKinsey Digital 111

 For many organizations, envisioning, building, and releasing new customer processes
might take more than six months in a traditional development cycle and still face
additional weeks of training and internal evangelizing to get the organization on board
with the change. Digital hackathons sharply advance that process. In cases we’ve seen,
post-hackathon prototypes are often tested, built out, and scaled in an accelerated eight-
to 12-week cycle. And, since the principals—top management and brand leaders—are all
part of the initial event, they don’t need to be sold on the approach or the strategy. They
already get it. That alone can part the seas for internal adoption.

The practical, hands-on nature of hackathons allows large, established organizations to

feel what the future can be like in a way that is both exciting and reassuring. By removing
some of the perceived risk, 24-hour hackathons can be an effective way to accelerate
digital and customer transformation.

Ferry Grijpink is a principal in McKinsey’s Singapore office, where Javier Vara is an

associate principal; Alan Lau is a director in the Hong Kong office.

112 Demystifying the hackathon Cultivating a digital culture

McKinsey Digital 113
114
Part 5:
Looking ahead

116 An executive’s guide to machine learning

124 An executive’s guide to the Internet of Things

McKinsey Digital 115

 An executive’s guide to
machine learning
Dorian Pyle and Cristina San Jose

It’s no longer the preserve of artificial-intelligence

researchers and born-digital companies like Amazon,
Google, and Netflix.

Machine learning is based on algorithms that can learn from data without relying on
rules-based programming. It came into its own as a scientific discipline in the late 1990s
as steady advances in digitization and cheap computing power enabled data scientists to

116 An executive’s guide to machine learning Looking ahead

stop building finished models and instead train computers to do so. The unmanageable
volume and complexity of the big data that the world is now swimming in have increased the
potential of machine learning—and the need for it.

In 2007 Fei-Fei Li, the head of Stanford’s Artificial Intelligence Lab, gave up trying to program
computers to recognize objects and began labeling the millions of raw images that a child
might encounter by age three and feeding them to computers. By being shown thousands
and thousands of labeled data sets with instances of, say, a cat, the machine could shape
its own rules for deciding whether a particular set of digital pixels was, in fact, a cat.1 Last
November, Li’s team unveiled a program that identifies the visual elements of any picture
with a high degree of accuracy. IBM’s Watson machine relied on a similar self-generated
scoring system among hundreds of potential answers to crush the world’s best Jeopardy!
players in 2011.

Dazzling as such feats are, machine learning is nothing like learning in the human sense
(yet). But what it already does extraordinarily well—and will get better at—is relentlessly
chewing through any amount of data and every combination of variables. Because machine
learning’s emergence as a mainstream management tool is relatively recent, it often raises
questions. In this article, we’ve posed some that we often hear and answered them in a
way we hope will be useful for any executive. Now is the time to grapple with these issues,
because the competitive significance of business models turbocharged by machine
learning is poised to surge. Indeed, management author Ram Charan suggests that “any
organization that is not a math house now or is unable to become one soon is already a
legacy company.”2

1. How are traditional industries using machine learning to gather fresh business
insights?

Well, let’s start with sports. This past spring, contenders for the US National Basketball
Association championship relied on the analytics of Second Spectrum, a California
machine-learning start-up. By digitizing the past few seasons’ games, it has created
predictive models that allow a coach to distinguish between, as CEO Rajiv Maheswaran
puts it, “a bad shooter who takes good shots and a good shooter who takes bad shots”—
and to adjust his decisions accordingly.

You can’t get more venerable or traditional than General Electric, the only member of
the original Dow Jones Industrial Average still around after 119 years. GE already makes
hundreds of millions of dollars by crunching the data it collects from deep-sea oil wells or
jet engines to optimize performance, anticipate breakdowns, and streamline maintenance.
But Colin Parris, who joined GE Software from IBM late last year as vice president of
software research, believes that continued advances in data-processing power, sensors,

1
Fei-Fei Li, “How we’re teaching computers to understand pictures,” TED, March 2015, ted.com.
2
Ram Charan, The Attacker’s Advantage: Turning Uncertainty into Breakthrough Opportunities, New York: PublicAffairs, February
2015.

McKinsey Digital 117

 and predictive algorithms will soon give his company the same sharpness of insight into the
individual vagaries of a jet engine that Google has into the online behavior of a 24-year-old
netizen from West Hollywood.

2. What about outside North America?

In Europe, more than a dozen banks have replaced older statistical- modeling approaches
with machine-learning techniques and, in some cases, experienced 10 percent increases in
sales of new products, 20 percent savings in capital expenditures, 20 percent increases in
cash collections, and 20 percent declines in churn. The banks have achieved these gains by
devising new recommendation engines for clients in retailing and in small and medium-sized
companies.

They have also built microtargeted models that more accurately forecast who will cancel
service or default on their loans, and how best to intervene.

Closer to home, as a recent article in McKinsey Quarterly notes,3 our colleagues have been
applying hard analytics to the soft stuff of talent management. Last fall, they tested the ability
of three algorithms developed by external vendors and one built internally to forecast, solely
by examining scanned résumés, which of more than 10,000 potential recruits the firm would
have accepted.

The predictions strongly correlated with the real-world results. Interestingly, the machines
accepted a slightly higher percentage of female candidates, which holds promise for using
analytics to unlock a more diverse range of profiles and counter hidden human bias.

As ever more of the analog world gets digitized, our ability to learn from data by developing
and testing algorithms will only become more important for what are now seen as
traditional businesses. Google chief economist Hal Varian calls this “computer kaizen.”
For “just as mass production changed the way products were assembled and continuous
improvement changed how manufacturing was done,” he says, “so continuous [and often
automatic] experimentation will improve the way we optimize business processes in our
organizations.”4

3. What were the early foundations of machine learning?

Machine learning is based on a number of earlier building blocks, starting with classical
statistics. Statistical inference does form an important foundation for the current
implementations of artificial intelligence. But it’s important to recognize that classical
statistical techniques were developed between the 18th and early 20th centuries for
much smaller data sets than the ones we now have at our disposal. Machine learning is

3
 ee Bruce Fecheyr-Lippens, Bill Schaninger, and Karen Tanner, “Power to the new people analytics,” McKinsey Quarterly, March
S
2015, mckinsey.com.
4
Hal R. Varian, “Beyond big data,” Business Economics, 2014, Volume 49, Number 1, pp. 27–31, palgrave-journals.com.

118 An executive’s guide to machine learning Looking ahead

unconstrained by the preset assumptions of statistics. As a result, it can yield insights that
human analysts do not see on their own and make predictions with ever-higher degrees of
accuracy.

More recently, in the 1930s and 1940s, the pioneers of computing (such as Alan Turing, who
had a deep and abiding interest in artificial intelligence) began formulating and tinkering with
the basic techniques such as neural networks that make today’s machine learning possible.
But those techniques stayed in the laboratory longer than many technologies did and, for
the most part, had to await the development and infrastructure of powerful computers, in
the late 1970s and early 1980s. That’s probably the starting point for the machine-learning
adoption curve. New technologies introduced into modern economies—the steam engine,
electricity, the electric motor, and computers, for example—seem to take about 80 years to
transition from the laboratory to what you might call cultural invisibility. The computer hasn’t
faded from sight just yet, but it’s likely to by 2040. And it probably won’t take much longer for
machine learning to recede into the background.

4. What does it take to get started?

C-level executives will best exploit machine learning if they see it as a tool to craft and
implement a strategic vision. But that means putting strategy first. Without strategy as a
starting point, machine learning risks becoming a tool buried inside a company’s routine
operations: it will provide a useful service, but its long-term value will probably be limited
to an endless repetition of “cookie cutter” applications such as models for acquiring,
stimulating, and retaining customers.

We find the parallels with M&A instructive. That, after all, is a means to a well-defined end.
No sensible business rushes into a flurry of acquisitions or mergers and then just sits back
to see what happens. Companies embarking on machine learning should make the same
three commitments companies make before embracing M&A. Those commitments are,
first, to investigate all feasible alternatives; second, to pursue the strategy wholeheartedly
at the C-suite level; and, third, to use (or if necessary acquire) existing expertise and
knowledge in the C-suite to guide the application of that strategy.

The people charged with creating the strategic vision may well be (or have been) data
scientists. But as they define the problem and the desired outcome of the strategy, they will
need guidance from C-level colleagues overseeing other crucial strategic initiatives. More
broadly, companies must have two types of people to unleash the potential of machine
learning. “Quants” are schooled in its language and methods. “Translators” can bridge
the disciplines of data, machine learning, and decision making by reframing the quants’
complex results as actionable insights that generalist managers can execute.

McKinsey Digital 119

 Access to troves of useful and reliable data is required for effective machine learning, such
as Watson’s ability, in tests, to predict oncological outcomes better than physicians or
Facebook’s recent success teaching computers to identify specific human faces nearly
as accurately as humans do. A true data strategy starts with identifying gaps in the data,
determining the time and money required to fill those gaps, and breaking down silos.
Too often, departments hoard information and politicize access to it—one reason some
companies have created the new role of chief data officer to pull together what’s required.
Other elements include putting responsibility for generating data in the hands of frontline
managers.

Start small—look for low-hanging fruit and trumpet any early success. This will help recruit
grassroots support and reinforce the changes in individual behavior and the employee buy-
in that ultimately determine whether an organization can apply machine learning effectively.
Finally, evaluate the results in the light of clearly identified criteria for success.

5. What’s the role of top management?

Behavioral change will be critical, and one of top management’s key roles will be to influence
and encourage it. Traditional managers, for example, will have to get comfortable with
their own variations on A/B testing, the technique digital companies use to see what will
and will not appeal to online consumers. Frontline managers, armed with insights from
increasingly powerful computers, must learn to make more decisions on their own, with top
management setting the overall direction and zeroing in only when exceptions surface.

Democratizing the use of analytics—providing the front line with the necessary skills and
setting appropriate incentives to encourage data sharing—will require time.

C-level officers should think about applied machine learning in three stages: machine
learning 1.0, 2.0, and 3.0—or, as we prefer to say, description, prediction, and prescription.
They probably don’t need to worry much about the description stage, which most
companies have already been through. That was all about collecting data in databases
(which had to be invented for the purpose), a development that gave managers new
insights into the past. OLAP—online analytical processing—is now pretty routine and well
established in most large organizations.

There’s a much more urgent need to embrace the prediction stage, which is happening
right now. Today’s cutting-edge technology already allows businesses not only to look at
their historical data but also to predict behavior or outcomes in the future—for example, by
helping credit-risk officers at banks to assess which customers are most likely to default or
by enabling telcos to anticipate which customers are especially prone to “churn” in the near
term (exhibit).

120 An executive’s guide to machine learning Looking ahead

Exhibit

The contrast
between routine
statistical analysis
and data generated
by machine learning
can be quite stark

A frequent concern for the C-suite when it embarks on the prediction stage is the quality
of the data. That concern often paralyzes executives. In our experience, though, the last
decade’s IT investments have equipped most companies with sufficient information to
obtain new insights even from incomplete, messy data sets, provided of course that
those companies choose the right algorithm. Adding exotic new data sources may be of
only marginal benefit compared with what can be mined from existing data warehouses.
Confronting that challenge is the task of the “chief data scientist.”

McKinsey Digital 121

 Prescription—the third and most advanced stage of machine learning—is the opportunity
of the future and must therefore command strong C-suite attention. It is, after all, not
enough just to predict what customers are going to do; only by understanding why they are
going to do it can companies encourage or deter that behavior in the future. Technically,
today’s machine-learning algorithms, aided by human translators, can already do this. For
example, an international bank concerned about the scale of defaults in its retail business
recently identified a group of customers who had suddenly switched from using credit cards
during the day to using them in the middle of the night. That pattern was accompanied by
a steep decrease in their savings rate. After consulting branch managers, the bank further
discovered that the people behaving in this way were also coping with some recent stressful
event. As a result, all customers tagged by the algorithm as members of that microsegment
were automatically given a new limit on their credit cards and offered financial advice.

The prescription stage of machine learning, ushering in a new era of man–machine

collaboration, will require the biggest change in the way we work. While the machine
identifies patterns, the human translator’s responsibility will be to interpret them for different
microsegments and to recommend a course of action. Here the C-suite must be directly
involved in the crafting and formulation of the objectives that such algorithms attempt to
optimize.

6. This sounds awfully like automation replacing humans in the long run. Are we
any nearer to knowing whether machines will replace managers?

It’s true that change is coming (and data are generated) so quickly that human-in-
the-loop involvement in all decision making is rapidly becoming impractical. Looking
three to five years out, we expect to see far higher levels of artificial intelligence, as well
as the development of distributed autonomous corporations. These self-motivating,
self-contained agents, formed as corporations, will be able to carry out set objectives
autonomously, without any direct human supervision. Some DACs will certainly become
self-programming.

One current of opinion sees distributed autonomous corporations as threatening and

inimical to our culture. But by the time they fully evolve, machine learning will have become
culturally invisible in the same way technological inventions of the 20th century disappeared
into the background. The role of humans will be to direct and guide the algorithms as they
attempt to achieve the objectives that they are given. That is one lesson of the automatic-
trading algorithms which wreaked such damage during the financial crisis of 2008.

No matter what fresh insights computers unearth, only human managers can decide the
essential questions, such as which critical business problems a company is really trying to
solve. Just as human colleagues need regular reviews and assessments, so these “brilliant

122 An executive’s guide to machine learning Looking ahead

machines” and their works will also need to be regularly evaluated, refined—and, who
knows, perhaps even fired or told to pursue entirely different paths—by executives with
experience, judgment, and domain expertise.

The winners will be neither machines alone, nor humans alone, but the two working together
effectively.

7. So in the long term there’s no need to worry?

It’s hard to be sure, but distributed autonomous corporations and machine learning should
be high on the C-suite agenda. We anticipate a time when the philosophical discussion of
what intelligence, artificial or otherwise, might be will end because there will be no such thing
as intelligence—just processes. If distributed autonomous corporations act intelligently,
perform intelligently, and respond intelligently, we will cease to debate whether high-level
intelligence other than the human variety exists. In the meantime, we must all think about
what we want these entities to do, the way we want them to behave, and how we are going
to work with them.

Dorian Pyle is a data expert in McKinsey’s Miami office, and Cristina San Jose is a
principal in the Madrid office.

McKinsey Digital 123

 An executive’s guide to the
Internet of Things
Jacques Bughin, Michael Chui, and James Manyika

The rate of adoption is accelerating. Here are six things

you need to know.
As the Internet of Things (IoT) has gained popular attention in the five years since we first
published on the topic,1 it has also beguiled executives. When physical assets equipped
with sensors give an information system the ability to capture, communicate, and process
data—and even, in a sense, to collaborate—they create game-changing opportunities:

1
See Michael Chui, Markus Löffler, and Roger Roberts, “The Internet of Things,” McKinsey Quarterly, March 2010, mckinsey.com.

124 An executive’s guide to the Internet of Things Looking ahead

production efficiency, distribution, and innovation all stand to benefit immensely. While
the consumer’s adoption of fitness bands and connected household appliances might
generate more media buzz, the potential for business usage is much greater. Research from
the McKinsey Global Institute suggests that the operational efficiencies and greater market
reach IoT affords will create substantial value in many industries.2

There are many implications for senior leaders across this horizon of change. In what
follows, we identify three sets of opportunities: expanding pools of value in global B2B
markets, new levers of operational excellence, and possibilities for innovative business
models. In parallel, executives will need to deal with three sets of challenges: organizational
misalignment, technological interoperability and analytics hurdles, and heightened
cybersecurity risks.

Opportunities beckon . . .

IoT’s impact is already extending beyond its early, most visible applications. A much greater
potential remains to be tapped.

Creating B2B value globally

To make the Internet of Things more understandable, media coverage has often focused
on consumer applications, such as wearable health and fitness devices, as well as the
automation products that create smart homes. Our research reveals considerable value in
those areas. Yet the more visible manifestations of IoT’s power shouldn’t distract executives
from a core fact: business-to- business applications will account for nearly 70 percent of
the value that we estimate will flow from IoT in the next ten years. We believe it could create
as much as $11.1 trillion a year globally in economic value in nine different types of physical
settings. Nearly $5 trillion would be generated almost exclusively in B2B settings: factories
in the extended sense, such as those in manufacturing, agriculture, and even healthcare
environments; work sites across mining, oil and gas, and construction; and, finally, offices.

There’s also a global dimension to IoT’s B2B potential. Emerging markets, whose
manufacturing-intensive economies often supply goods to final manufacturers, will be prime
areas for IoT adoption. But over the next ten years, the total economic impact from IoT will
be greater in advanced economies, given the possibility of larger cost savings and higher
adoption rates (Exhibit 1).

However, an estimated 38 percent of IoT’s overall worldwide value will likely be generated
in developing economies, and eventually, the number of IoT deployments in such markets
could surpass those in developed ones. In fact, deployments in developing economies are
likely to exceed the global average in work-site settings (such as mining, oil and gas drilling,
and construction) and in factories. For instance, China, with its large and growing industrial

For the full McKinsey Global Institute report, see The Internet of Things: Mapping the value beyond the hype, June 2015, on
2

mckinsey.com. We analyzed more than 150 IoT use cases across the global economy, and using detailed bottom-up economic
modeling, we estimated the economic impact of these applications across a number of dimensions.

McKinsey Digital 125

 Exhibit 1

The economic
impact of the
Internet of Things
will be greater
in advanced
economies

McKinsey Global Institute analysis

and manufacturing base, stands to reap major benefits not only on the factory floor but also
in product distribution. In fact, developing economies could leapfrog the developed world in
some IoT applications because there are fewer legacy technologies to displace.

126 An executive’s guide to the Internet of Things Looking ahead

Optimizing operations
Investing in IoT hardware—from sensors embedded in manufacturing equipment and
products to electronically tagged items along the supply chain—is only the starting
point of the value equation. The biggest competitive gains come when IoT data inform
decisions. Our work shows that most of the new business value will arise from optimizing
operations. For example, in factories, sensors will make processes more efficient,
providing a constant flow of data to optimize workflows and staffing:

• Sensor data that are used to predict when equipment is wearing down or needs
repair can reduce maintenance costs by as much as 40 percent and cut unplanned
downtime in half.

• Inventory management could change radically, as well. At auto- parts supplier Wurth
USA, cameras measure the number of components in iBins along production lines,
and an inventory- management system automatically places supply orders to refill the
containers.

• In mining, self-driving vehicles promise to raise productivity by 25 percent and output

by 5 percent or more. They could also cut health and safety costs as much as 20
percent by reducing the number of workplace accidents.

IoT systems can also take the guesswork out of product development by gathering data
about how products (including capital goods) function, as well as how they are actually
used. Using data from equipment rather than information from customer focus groups or
surveys, manufacturers will be able to modify designs so that new models perform better
and to learn what features and functionality aren’t used and should therefore be eliminated
or redesigned. By analyzing usage data, for example, a carmaker found that customers
were not using the seat heater as frequently as would be expected from weather data.
That information prompted a redesign to allow easier access: the carmaker updated
the software for the dashboard touchscreen to include the seat-heater command. This
illustrates another capability of connected devices: with the ability to download new
features, these products can actually become more robust and valuable while in service,
rather than depreciate in value.

Despite this value, most data generated by existing IoT sensors are ignored. In the oil-
drilling industry, an early adopter, we found that only 1 percent of the data from the 30,000
sensors on a typical oil rig are used, and even this small fraction of data is not used for
optimization, prediction, and data-driven decision making, which can drive large amounts
of incremental value.

McKinsey Digital 127

 Creating innovative business models
IoT can also spur new business models that would shift competitive dynamics within
industries. One example is using IoT data and connectivity to transform the sale of industrial
machinery and other goods into a service. The pioneers of this trend were jet- engine
manufacturers that shifted their business model to selling thrust and ancillary services rather
than physical equipment.

Now these models are proliferating across industries and settings. Transportation as a
service, enabled by apps and geolocation devices, is encroaching on vehicle sales and
traditional distribution alike. Manufacturers of products such as laser printers with IoT
capabilities are morphing into robust service businesses.

IoT makes these business models possible in a number of ways. First, the ability to track
when and how physical assets are actually used allows providers to price and charge for
use. Second, the combined data from all these connected assets help a supplier to operate
equipment much more efficiently than its customers would, since its customers would
only have a limited view of their own equipment if they purchased and ran it themselves.
Furthermore, analysis of IoT data can enable condition-based, predictive maintenance,
which minimizes unplanned downtime.

This business-model shift will require product companies to develop and flex their service
muscles. Product development, for instance, becomes service development, where
value is cocreated with customers. It won’t be enough to focus on the product features
customers will pay the most for. Developers will need to understand the business outcomes
their customers seek and learn how to shape offerings to facilitate those outcomes most
effectively. Service providers will also have to take on capacity-planning functions—
including planning for peak usage and utilizing IoT data to forecast demand.

. . . but challenges remain

As with any major technological shift, realizing IoT’s potential will require significant
management attention not just to new technical imperatives but also to organizational
issues.

Aligning the organization

IoT will challenge traditional organizational roles as information technology becomes
widely embedded across assets, inventories, and operations. One focal point will be the
IT function, for the Internet of Things requires it to assume a transformed role that spans
beyond computers, networks, mobile devices, and data centers. Instead, IT will have to join
with line managers to oversee IoT systems that are essential to improve both the top and
bottom lines.

128 An executive’s guide to the Internet of Things Looking ahead

In retailing, for instance, one of the largest sources of value could be the sales lift that real-
time, in-store personalized offers are expected to deliver. This will require the sophisticated
integration of data across many sources: real-time location data (the shopper’s
whereabouts in a store), which would link to data from sensors in the building; customer-
relationship-management data, including the shopper’s online-browsing history; and data
from tags in the items on display, telling the customer to enter a specific aisle, where he or
she could use an instant coupon sent to a phone to buy an item previously viewed online. In
short, information technology and operations technology will converge, both technically and
in their metrics of success. As a result, companies will have to align their IT and operational
leadership tightly, though traditionally these functions tended to work separately and, more
often than not, held each other at arm’s length.

Beyond expanding IT’s role, IoT will challenge other notions of organizational
responsibilities. Chief financial, marketing, and operating officers, as well as leaders of
business units, will have to be receptive to linking up their systems. Companies may need
to train employees in new skills, so the organization can become more analytically rigorous
and data driven. Analytics experts and data scientists must be connected with executive
decision makers and (to optimize insights from the new data) with frontline managers. In
some cases, the decision makers will be algorithms. When companies need large-scale
real-time action—such as optimizing the control of equipment across an entire factory—IoT
systems will make decisions automatically. Managers will monitor metrics and set policy.

Overcoming interoperability and analytics hurdles

Strategies that use IoT data in an effective way often call for interoperability. We estimate
that nearly 40 percent of the potential value, on average, will require different IoT systems
to communicate with one another and to integrate data (Exhibit 2). Relatively little of that
is happening now. For example, on offshore oil platforms today, components such as
pumps are often installed as connected devices, but in a limited fashion: devices individually
connect back to their manufacturers, which monitor and control machines and can optimize
their maintenance and performance individually. However, data from multiple components
and systems must be combined to identify more than half of the predictable performance
issues that arise in day-to-day platform operations, including those that could impact overall
oil-production volumes.

Many large companies will have enough market power to specify that their IoT vendors
make systems interoperable. In some cases, this will lead vendors to choose common
standards that will ultimately speed up adoption. In other cases, interoperability could also
be achieved with software platforms designed to combine data from multiple systems. That
will create new market opportunities for companies capable of integrating data from diverse
sources.

McKinsey Digital 129

 Exhibit 2

IoT’s interoperability
could deliver over
$4 trillion out of
an $11.1 trillion
economic impact

However, simply bringing data together from different IoT systems won’t be enough.
Indeed, IoT may exacerbate many of the challenges we have observed when companies
use big data.3 In moving to a world where IoT is used for prediction and optimization,
companies face an analytics challenge. They’ll need to develop or purchase, to customize,
and then to deploy analytical software that extracts actionable insights from the torrent of
data IoT will generate. And in many cases, the algorithms embedded in this software will

3
 or more, see Big data: The next frontier for innovation, competition, and productivity, McKinsey Global Institute, May 2011, on
F
mckinsey.com.

130 An executive’s guide to the Internet of Things Looking ahead

have to analyze data streams in real time—a task many traditional analytical tools are not
designed to do. This offers another potential market opportunity for innovative software
developers.

Facing up to the security imperative

The prospect of implementing the Internet of Things should prompt even greater concern
about cybersecurity among executives. IoT poses not only the normal risks associated
with the increased use of data but also the vastly greater risks of systemic breaches as
organizations connect to millions of embedded sensors and communications devices.
Each is a potential entry point for malicious hackers, and the damage from a break-in can
be literally life threatening—disrupting machine-control systems on an oil rig or in a hospital,
for example. The same interoperability that creates operational efficiency and effectiveness
also exposes more of a company’s units to cyberrisks. Growing interconnections among
companies and links with consumer devices will create other challenges to the integrity of
corporate networks, too.

Companies will need to rely on the capabilities of vendors to mitigate some of these
risks. However, preparing for a revolutionary change in distributed connectedness and
computation will also require a new strategic approach, which our colleagues have
described as “digital resilience.”4 In other words, companies need to embed methods of
protecting critical information into technology architectures, business-model-innovation
processes, and interactions with customers. They can start by assessing the full set of
risks in an integrated way and by creating an extensive system of defenses that will be hard
for hackers to penetrate. Companies also need to tailor cybersecurity protections to the
processes and information assets of each of their businesses, which in an IoT world will
increasingly be linked. Given the extent of the risks and the cross-functional nature (and
significant cost) of the solutions, progress will require senior-level participation and input.

IoT will soon become a differentiating factor in competition. Senior leaders and board
members must take a systems approach to address the organizational challenges and risks
this expansion of the digital domain will create. That will allow companies to capture the full
range of benefits promised by the Internet of Things.

The authors wish to thank McKinsey’s Dan Aharon and Mark Patel for their contributions
to this article.

Jacques Bughin is a director in McKinsey’s Brussels office; Michael Chui is a partner at the
McKinsey Global Institute, where James Manyika is a director.

4
See Tucker Bailey, James M. Kaplan, and Chris Rezek , “Repelling the cyberattackers,” McKinsey Quarterly, July 2015, mckinsey
.com.

McKinsey Digital 131

1 2 3 4

5 6 7 8

9 10 11 12

13 14 15 16

17 18 19 20

132 Authors Raising your digital quotient

Authors
1. Juan Garcia Avedillo is an associate principal in 10. David Edelman, partner, is the global co-leader of
McKinsey’s Madrid office. McKinsey’s Digital and Marketing & Sales Practices.

2. Duarte Bacelar Begonha is a leader in the Business 11. Dr. Boris Ewenstein is a principal in McKinsey’s
Technology, McKinsey Digital EMEA and TMT EMEA Johannesburg office.
(telecommunications, media, and high tech) practices.
12. Ferry Grijpink, principal, co-leads McKinsey’s
3. Oliver Bossert is a senior expert in McKinsey’s research on deploying and commercializing next-
Frankfurt office. generation infrastructures such as fiber and mobile
broadband.
4. Jacques Bughin is a leader in the Strategy, Corporate
Finance and McKinsey Digital (Western Europe). He 13. Jason Heller is a senior expert in McKinsey’s New
also co-leads the Digital Economy Initiative, a recently York office and the global leader of its Digital Marketing
launched McKinsey knowledge program. Operations service line.

5. Tanguy Catlin, partner, co-leads McKinsey’s Digital 14. Chris Ip, director, co-leads McKinsey’s knowledge
Quotient™ (DQ) initiative, which helps companies build activities in business technology, including Lean IT in
out their digital capabilities to deliver rapid results and Asia.
sustained growth. He is also a leader in McKinsey’s North
American Financial Services and Marketing & Sales 15. Jennifer Kilian, digital VP, is a leader of the McKinsey
Practices. Digital Labs design team that facilitates the integration
of best business practices with forward-thinking and
6. Michael Chui, partner, leads McKinsey research on transformational design.
the impact of information technologies and innovation on
business, the economy, and society, as well as Big Data 16. Alan Lau, director, is the Asia head of McKinsey
and the Internet of Things. Digital.

7. Driek Desmet, director, co-leads McKinsey’s Digital 17. James Manyika is a director of the McKinsey Global
cross-sector effort across Asia, where he is the head of Institute (MGI), McKinsey’s business and economics
McKinsey Digital Labs Asia. research arm, and is one of its three global co-leaders.

8. Karel Doerner is a leader of the McKinsey Digital 18. Shahar Markovitch is a global co-leader of the
Practice in Germany as well as a leader of the Business McKinsey Digital EdgE (End-to-End Digitization) team.
Technology Practice in Munich.
19. Dr. Jürgen Meffert is the global leader of the TMT
9. Ewan Duncan, director, is a location leader for (telecommunications, media, and high tech) practice as
McKinsey’s Seattle office and is also a leader of well as leader of McKinsey Digital in B2B industries.
McKinsey’s North American Consumer Tech, Telecom,
and Media Practices. 20. Christopher Paquette is a principal in McKinsey’s
Chicago office.

McKinsey Digital 133

Authors
21. Andrea Peyracchia is part of McKinsey Digital 28. Vik Sohoni, director, is co-leader of McKinsey’s
Labs and has expertise in global banking and TMT Global Digital Banking Practice.
(telecommunications, media, and high tech).
29. Irina Starikova is an associate principal in
22. Dorian Pyle is a data expert in McKinsey’s Miami McKinsey’s Silicon Valley office.
office.
30. Javier Vara is an associate principal in McKinsey’s
23. Hugo Sarrazin, director, leads McKinsey’s Business Singapore office.
Technology Practice on the West Coast and is also global
leader of McKinsey Digital Labs. 31. Paul Willmott leads McKinsey Digital globally and is a
leader in the Business Technology Practice.
24. Jay Scanlan is the McKinsey Digital strategy global
leader. 32. Hyo Yeon, digital partner, oversees McKinsey’s
design capabilities, builds global design teams,
25. Marc Singer, director, is a leader of McKinsey Digital, and works with clients to build out their own design
focused on helping clients identify and translate digital organization and capabilities.
and omnichannel opportunities into sustained growth.

26. Kate Smaje leads our Consumer Digital work in

Europe, the Middle East, and Africa.

27. Wesley Smith is an engagement manager in

McKinsey’s Johannesburg office.

134 Authors Raising your digital quotient

21 22 23 24

25 26 27 28

29 30 31 32

McKinsey Digital 135

McKinsey Digital
December 2015

mckinseydigital.com

McKinsey_digital@mckinsey.com

@McKinseyDigital

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