Those who don’t think digital risk being left behind, says Harvard Business School professor Karim R. Lakhani. Here’s why developing a digital leadership mindset is a critical skill for finance leaders.
The case for digital transformation is strong: companies that are digital leaders perform better.
Research carried out in 2017 found that companies that had successfully embraced digital transformation reported better gross margins, earnings and net income than organisations that stuck to traditional practices.
One of the study’s authors says that leaders who fail to adopt a digital mindset risk being left behind.
Harvard Business School professor Karim R. Lakhani, who leads a virtual financial leadership program created specifically for CPA Australia members, notes that “it used to be that…technology companies needed to understand digital – nobody else needed to – but that has now changed completely.
“The shifts we saw happen in the tech industry 20 years ago are now happening across the board in all industries,” says Lakhani.
“To be a successful, effective executive,” he says, “a leader needs to think digital.”
Against this backdrop, the urgent need for businesses and leaders to adopt a digital mindset is self-evident, yet many leaders believe their companies are ill-equipped to take on the challenge of disruption and digital transformation.
A 2016 survey of 1,000 CEOs from 131 countries and 27 industries found that while “90 per cent of executives believe their businesses are being disrupted or reinvented by digital business models… 70 per cent believe they do not have the right skills, leader, or operating structure to adapt”.
Many finance leaders, recognising the importance of developing their business’s digital capabilities, are now playing catch-up. INTHEBLACK talks to Professor Lakhani about the importance of a digital mindset for finance leaders today.
Embracing a digital mindset
A digital mindset is not just about adopting new technology, it’s about rethinking entire business and operating models.
Digital technology changes how a business creates and captures value. Digital organisations tend to be platform-based, where value is created by facilitating interaction between different parties. These “business models are increasingly network-centric and data-oriented,” Professor Lakhani writes in Harvard Business Review.
“When you change the business model of the company or the operating model of the company or both, you’re going to have to change your organisational structure, and that is very difficult,” he tells INTHEBLACK.
Digital businesses often feature flat leadership structures and teams dedicated to “absorbing data from all corners” of the organisation.
“Then you have an interfaced layer of people who know how to build partnerships with everybody else – customers, communities, enterprises, small businesses,” says Lakhani.
Airbnb, for example, is a platform that builds relationships with customers and hosts – effectively microbusinesses – to create value.
The belief that an existing organisational structure can deliver value under a new business model holds many incumbent businesses back.
A decade after Airbnb entered the accommodation market, Marriott International announced in April the creation of a new division, Homes & Villas, to compete in the home-sharing market.
“If you asked seven years ago, should Marriott be in the same market as Airbnb, the answer is yes,” he says.
“Even though they have all the assets – they have 100 million members and thousands of rooms – it still took them a long time because the existing organisational structures weren’t set up to build this new platform… That causes a tonne of problems.”
The core components of a digital mindset
Leaders running digital businesses don’t need to be computer programmers or data scientists, says Lakhani, but they do need a firm grounding in digital literacy.
In the same way that accounting is a required course in MBA programs – not so MBAs can become qualified accountants, but so they can effectively work with accountants, and understand both how books come together and the strategic value of accounting as a partner in business decision-making – leaders today need strong technical skills across data, programming and statistics.
“We’re finding that the technical toolkit is now as important as accounting for leaders to learn,” he says. A leader “needs to know the capabilities and limitations of this toolkit, ask good questions, and be a critical consumer” of the available technology.
“Those tools are going to be increasingly embedded within the organisation and also driving decision-making. There’s no central human dispatcher at Uber who you call to get you a car, it’s software making decisions,” he says.
Nor does Google employ human ad auctioneers. “It’s a software-based toolkit that drives decision-making. Understanding that side is going to be critical as a skillset.”
Platform businesses require leaders to have a new understanding of strategy. It’s an area that “only in the last decade has been taught in business schools, so the existing generation of leaders hasn’t been exposed to it”, he adds.
Understanding the economics and strategy of running a business as a platform is critical, he says, offering Google as an example. The online giant, which is “basically an advertising company”, uses a platform model to subsidise one side of the business – the free services it offers users – with the value created by capturing massive volumes of fine-grained data that can be used by advertisers.
It marks a new way of thinking about strategy, he says.
In this dynamic environment, leaders must become adept at managing change. “How you will re-architect your organisation to be able to be a platform-based business is a huge challenge,” he says.
It can be done, of course. Netflix, for example, transformed from a DVD shipping company to an online streaming business – a significant shift that required the construction of a whole new set of assets. In its latest iteration, Netflix has added content production to its streaming service. However, where Netflix succeeded, many have failed, such as former photography giant Kodak.
In an era of flux, successful change management demands personal adaptability and investment in continuous learning.
“Most executives did the bulk of their schooling in their 20s, and now, 20 years later, the world has changed,” says Professor Lakhani.
“What you learned when you were a young adult…is potentially no longer relevant.”
Exclusively for CPA Australia members: Learn how to develop a digital leadership mindset in this virtual leadership program designed by CPA Australia and Harvard Business Publishing for finance leaders in busy executive roles. Learn more.