Digital Economy Dispatch #08922nd May 2022

The 5 Digital Leadership Paradoxes Holding Back Your Organization

Over recent years, a wide variety of organizations have sprung up with operating models and working practices explicitly designed to exploit digital technologies. Competing in new ways to deliver value to their customers, this new generation has compelled management theorists and practitioners to reconsider how businesses work, and what is required for them to sustain success. They operate with distinctive characteristics that challenge existing views of what constitutes best practice.

In contrast, digitally-driven disruption and the uncertainties they bring place mature organizations at a disadvantage when faced with these “born digital” challengers. The disorientation they experience is due to the reshaping of many of the principles on which their business activities are based. One of their most challenging aspects is the need to rebalance several levers of business. Assumptions and priorities that have long been in place must now be re-examined. They need to hold on to their traditions and heritage, while adopting new ways of thinking and working.

Consequently, engaging in any digital transformation requires organizations to face a series of fundamental paradoxes. Here we highlight five that summarize the profound nature of the challenge to digital adoption in large established organizations (LEOs).

Paradox 1: Be comfortable with being uncomfortable

The primary feature of the digital economy is a lack of clarity about the nature and depth of the disruption faced by individuals, companies, and society as a whole. All we can assert with any confidence is that the VUCA nature of digital transformation requires organizations to accept this uncertainty and invest in recognizing the signals that may indicate the onset of substantial changes in their business environment. As a consequence, for many people this means that the comfortable traditional values of stability and consistency must be replaced with less certainty in day-to-day operations and new approaches aimed at opening up future opportunities. Difficult territory for those used to a calmer life!

The emphasis, therefore, is on adopting leadership and management approaches optimized for situations of massive uncertainty. Processes and techniques that have been successful in the past may not be sufficient. Where they are essential in situations that call for stability and certainty, they may be inadequate when there is a lack of relevant experience, inconclusive data, and highly unreliable trends. A move toward greater flexibility based on experimentation is necessary to encourage a culture of continual learning.

Predicting the future is difficult, sufficiently so that some believe the best approach is not to wait, but “to invent the future for yourself”. More than simply an off-hand remark, this statement is in fact an appeal to organizations not to lose hope in thinking about future possibilities. Rather, it suggests that all organizations need to have a bold vision and to engage in actions that drive toward its realization given current understanding and expectations. The goal must be to identify meaningful short-term activities that can help the organization increasingly understand the validity of that vision and the paths toward its attainment.

Paradox 2: Keep control by owning less

Many questions are being asked about the appropriate shape and form of organizations fit for a digital economy. At its most simplistic, it has been argued that the advantages of a larger organization’s scale and reach are outweighed in a digital economy by the flexibility and speed of change of smaller, more agile organizations.

Operation agility is not just a function of size. Questions can also be raised about the organization’s assets. Many organizations in the digital economy operate successfully without owning physical assets such as warehouses, trucks, stores and computing infrastructure. Acquiring these capabilities “as services” to be consumed as and when required can bring operational and fiscal elasticity without sacrificing control. If these capabilities are not considered essential to differentiating a company from its competition, then the investment and resource allocated to owning them may be better directed elsewhere.

Such thinking extends to a company’s workforce. Organizations can adopt a similarly flexible approach to building skills and capabilities. Many companies, for example, source their critical digital talent from third-party service providers, or use temporary flexible contracts to fulfil needs on an ad hoc basis. The so-called “gig economy” is one consequence of this thinking.

All of these actions clash with much existing practice where bigger is often believed to be better. For example, it is difficult to sit around boardroom tables in many organizations and not be confronted with the realization that organizational units are ranked according to size (number of people) and spending power (budget allocation).

Such thinking is now being questioned. To operate successfully in a digital economy requires that the organization acquires new skills to assemble a viable ecosystem, curate services that meet its needs, and manage their performance. The future of organizations may well be smaller core teams but with the support of much wider networks of associates and partners working together through a variety of means, coordinated dynamically around opportunities as they arise, and encouraged with novel, mutually beneficial incentive mechanisms.

Paradox 3: Strengthen the organization through exposing weaknesses

Governing complex organizations requires that it is broken up into manageable pieces, each with substantial autonomy and purpose. Typically, the siloed nature of many organizations is a response to a natural, explicit decision to cluster tasks with common aims, and to ensure that teams have local control over all aspects of their tasks. Locally made decisions are optimized for the constrained environment in which the team operates. A successful leader must set a clear set of objectives and carve out the resources needed to deliver on time and in budget. Relying on others with different objectives is frequently seen as introducing risk.

However, a key part of successful digital transformation is bringing together previously siloed groups through improved communication and transparency. To move quickly and with purpose, coordinating cross-disciplinary activity trumps isolated group actions. There are many positive consequences of individuals and teams working together more closely, cooperating more effectively, and synchronizing tasks to avoid duplication and confusion. However, many organizations recognize that the transparency provided by this open approach also exposes several shortcomings in their processes, management, and operations.

The breaking of these silos due to digital transformation will often shine a light on existing differences in structure, processes, and performance. While there is opportunity to promote best practices, greater attention is also directed at problematic areas. The organization must have a certain level of resilience to deal with such access and provide measures to contextualize the information so that it does not distract from the progress being made.

These internal challenges are also seen externally. Digital transformation often involves moves to connect more closely with customers, engage in co-creative tasks, and share much more information with partners and other stakeholders. Greater access for stakeholders to the day-to-day activities of the company with which they interact establishes a relationship of trust. This creates a stronger bond across the organizational ecosystem and increases the company’s core capabilities.

However, many of those in leadership may find this move to greater openness challenging. At its worst they see it as a threat to their competitive position, and an unnecessary step that exposes internal organizational detail best kept under lock and key.

Paradox 4: Ensure a future by ignoring the plan

A central element of many organizations is the planning process. A great deal of effort and attention is directed toward prioritizing a substantial backlog of requests, determining how each of them will be addressed, decomposing them into tasks that must be carried out across the organization, allocating resources, monitoring each task’s progress, and performing the interventions necessary to adjust those tasks to ensure successful completion. Hence, the focus of many people is to create and manage the plans that act as blueprints for the organization’s operation.

Varied in form and detail, these plans are an essential artifact for many organizations. They are often complex high-profile documents, produced as the centerpiece of elaborate multi-year strategy cycles. They are shared across everyone in the organization, posted on websites, and displayed on the boardroom wall. In many situations, questions about the relevance of actions receive a simple response: it’s in the plan.

However, for many organizations the plans can become straightjackets restricting an organization’s ability to adjust to changing circumstances. Deviation from the plan is considered a failure. Following the plan becomes the objective to be delivered at all costs.

In contrast, digitally disrupted domains must optimize for adapting to unpredictable operating environments. The resulting agile methods have a reputation for increasing flexibility, but often at the cost of adding significant risk into the planning process. Much of the debate around their adoption and scaling centers on how this flexibility can be maintained while meeting the needs for governance.

Digital transformation initiatives, however, recognize that the unpredictability of the environment in which plans are created deeply influences their value and utility. So much so that in highly volatile situations, some organizations believe that committing to any form of plan is likely to be misleading.

How do you plan for a future you are struggling to predict? Addressing this question is the basis for planning approaches that encourage greater experimentation within a rigorous framework for using the results obtained to determine next steps. Short time-boxed investigations allow the organization to learn quickly, adjusting frequently as the journey proceeds. Approaches such as “lean startup” emphasize that progress is determined by increasing the speed and depth of learning at the lowest possible cost.

Balancing short- and long-term success in digital transformation is essential, and it is important to recognize that plans and the planning process must not be abandoned. However, their role and significance should be reviewed. While a plan may have tremendous importance as an operational artifact, in most cases the planning process is more significant as a cultural and structural ritual that engages and informs everyone in the organization about the relevant priorities and perspectives.

Paradox 5: Maintain stability while embracing change

Organizational structures have a significant impact on the way organizations communicate, makes decisions, architect products and services, and how they are perceived by their customers. From a cultural perspective, an organization’s structure both reflects and determines many aspects of the day-to-day activities in which its workers are employed. Over the years, large bureaucratic models have become dominant in many domains aimed at top-down management in complex domains where consistency and strong governance are dominant.

In contrast, digitally disrupted domains bring significant volatility to an organization’s operating context. They introduce new challenges requiring organizational structures that can help balance the need for clear management and decision-making with the flexibility to adapt to varied and evolving contexts. Emerging theories about radical management structures are making it possible to organize business activities around customer-facing opportunities driven by achieving outcomes that optimize customer satisfaction. Similarly, approaches such as “servant-leadership” are inverting traditional hierarchical styles to democratize key aspects of the management’s role in recognizing how important collaboration and teamwork can be when an organization needs to move at speed to deliver successful solutions.

Much of the attention of management scholars is now directed toward these new management styles. Their goal is to define organizational models that balance stable governance with the adaptability required to be successful in a rapidly evolving digital world. Building such flexibility into the organizational infrastructure is essential if it is to maintain relevance the complex changing environment we face today.

Live Long and Prosper

Large Established Organizations (LEOs) faced with adopting digital ways of working must balance the need for substantial change with the demands for stability and resilience. In practice, this means they have to address 5 key paradoxes: Be comfortable being uncomfortable; Keep control by owning less; Strengthen the organization through exposing weaknesses; Ensure a future by ignoring the plan; Maintain stability while embracing change. These are big changes and the struggle to make progress is creating growing tension in many organizations.

Digital Economy Tidbits

Why We Need to Update Financial Reporting for the Digital Era. Link.

Accounting is dead. Long live accounting.

One of the most important lessons from the current era of digital innovation is that traditional was of measuring it are broken. This article does a nice job of laying out the reasons why.

The authors interviewed several chief financial officers (CFOs) of leading technology companies and senior analysts of investment banks who follow technology companies. They asked: (i) what makes the valuation of digital companies more challenging?; and (ii) how can digital firms improve their financial reports to communicate sources of value creation in their businesses? They conclude from these interviews that the time has come for investor bodies and companies to rethink the financial reporting model from scratch. For instance, standard-setters might want to encourage disclosures related to (i) value per customer; (ii) earnings or revenue outcomes or other specific metrics related to specific projects in progress; and (iii) data on how the R&D and software talent of digital firms is being deployed. Relying on firms’ voluntary initiatives is unlikely to work because executives told us time and again that they will not disclose sensitive information, unless their competition is forced to do the same.