Rewiring Organizations For A Successful Digital Transformation

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1:03Hello and welcome to another episode of the Duct Tape Marketing Podcast. This is John Jantz and my guest today is Rodney Zemel. He's a co-leader of the McKinsey Digital Practice, a senior partner based in New York and a member of McKinsey's Shareholders Council, the firm's board of directors. He serves clients across a range of industries on growth strategy, performance improvement, and value creation by harnessing the power of data and analytics, digital culture and capabilities, and modernizing core technology. We're going to talk about a book that he co-authored called Rewired, The McKinsey's Guide to Out-Competing in the Age of Digital and AI.

1:44So Rodney, welcome to the show. Thanks for having me on, John. It's a pleasure to be here. So I have to ask as an author also, but as an author who basically has only an editor to answer to, I'm wondering how writing a McKinsey guide, like a tool that's effectively going to represent the brand and be put out there as the tool that everybody uses. How much collaboration or maybe fighting goes on to structure a book like that? Your podcast is only 20 minutes, right? So it's actually, I think this is the first book that we've ever put the words McKinsey Guide on. So this was a very conscious step on our part.

2:23And the model we had in mind, there's a book called Valuation, which our firm has had and updated every year for the past 20 years or more. And that really is like the guide for corporate finance executives on how to value a company. And it's sort of become like a standard business school textbook. there's no equivalent in the world of digital. And there's a bit of a sense that digital is a bit sort of the wild west in terms of, oh, it's all about agile and people improvise the method and you can't measure things as well. And, you know, you've got to try it and see. We don't believe that, right?

2:55We believe there is a systematic method that is proven to get results. That's what we try to create. And the three of us who did this together, myself, Kate and Eric, we actually work together and different clients around the world all the time. So we had a lot of fun on it. So, you know, there was maybe, you know, debates around the best way to say something or whose data and whose examples to use, but there wasn't much sort of real, you know, real, real tension and putting it together. So is this the, you know, junior consultant at McKinsey's, you know, book to take into a client and say, this is, you know, we're going to walk, work through, you know, each of the sections here, obviously everybody's different, but I mean, is that how you see it?

3:31I actually think this is the client's book to read, right. And for them to understand how to do things themselves in their own organizations. And of course, by all means, call us if there's a need to help. But we actually do think there's a better way to do this. And we know the fact that only 30 % of digital transformations are hitting the value that they're intended to hit. And we want to see the world do better. And frankly, we're far enough down the learning curve here that I know we're putting sort of a lot of intellectual property out in the world through publishing this book and, you know, anybody that can have it.

4:06And therefore, you know, do you need to call us or not? We're confident that this is about sort of a learning journey for clients and people who are further down the learning curve are always going to want to get better and better. So I feel like we've sort of published the, you know, the 2.0 version here, and there's always going to be a 3.0 and a 4.0 that people will need help on. So why rewired? I mean, I think a lot of people would say, well, you know, for the last 20 years, I guess, since we came on the internet, we've been wired, right? Again, I'm tossing that up for you to smack it out of the park.

4:38But I think that a lot of people would think, why are we having to rewire? What's different? Is it just an evolution? No. So I'll give you an example of the answer to that using generative AI, which is the hottest conversation topic in the world right now. Generative AI is the coolest thing. And it's deceptively easy to go pilot and go try in your business, you know, in the marketing function, in customer engagement, and go do a cool pilot and get things up and running. However, it's really hard to get it working at enterprise scale and get real measurable value from it, right? So if you want to write somebody a birthday poem, or if you want to on a one-off basis, send some cool customized things to a customer, it's easy to do.

5:22If you want to build the system where you can send tens of thousands of customized things to customers every day in a way that is safe, in a way that really reflects the personalization preferences of that customer, in a way that doesn't let bias creep, in a way that has measurable economic impact, then it's not enough just to go launch a piece of technology. You actually need to rewire your commercial function around that technology. So there's this idea that it's not about like, you know, sticking a coat of paint on it. You actually do need to go and fundamentally rewire the house to take advantage of these technologies.

5:58And do you get the sense that all over, you know, companies in all over the world, that there are little pockets of people just doing this on their own? And that's that there's a real danger in what you have not sort of institutionalizing, you know, whatever methods you take? Absolutely. So, you know, when we did our interviews with companies, so what we tried to do is say, look, who's creating value from digital transformation? transformation and you know there's about a quarter of companies who we think are really hitting their economic targets between 25 and 30 depending on the kind of transformation we did interviews with them and then we did interviews with the ones who were missing and then with some who were somewhere in between and one of the most common things we heard like one of the most common failure modes was i've got more pilots than an aircraft carrier right so you know a ceo or a chief marketing officer says you know we're going big on personalization we're going big on digital customer engagement.

6:50And next thing you know, it's everywhere, but there isn't actually a top-down roadmap of how to do it with real milestones and metrics around it and a real fundamental change in the operating model. If you let me actually, sorry, there's maybe a longer answer than you're looking for, but there's a beautiful example in the banking industry. So if you use any banking app, right, the customer banking apps, the private banking apps, whatever, every bank's app is basically the same, right? Some are designed a little bit better than others, but they all have the same functionality. So we were at a roundtable with consumer banking CEOs, and a few of them said, you know, digital is table stakes.

7:28It's something we have to invest in, but it's not competitively differentiating. We said, we don't think that's true. Let's actually go look at the data. And what we did was we got the data on actually how they were doing digital. We looked outside in and did some interviews at the work practices across the different banks. And then we looked at their economics and we saw that actually, again, it was about the same ratio, about 25 percent of them were actually making money, were showing positive return on equity, were showing positive growth in value per customer through their digital initiatives.

7:57You could not tell that if you just looked at the customer apps, right? They were the same. You could tell that if you started asking questions like, how does business and technology work together in your organization, right? Do you really have a proper agile operating model, right? Do you have a single set of digital priorities across the company? Do you have a clear technology architecture with a specific set of features to it? Do you have, so when you went through and it sort of wasn't just, you know, the front of house, but that actually rewired all the way from front to back, those were the ones who were making money from it.

8:31Yeah. It's kind of like the apps were just an interface and really nothing more. Yeah. And they're necessary, right? But not sufficient. Yeah. They replaced tellers is how they looked at it. So, so the book is broken up into sections. The first one really is the transformation roadmap. So, I mean, how are you advising people? Because just what you explained was a transformation of how somebody would look at their entire business. So what, you know, how does somebody start addressing, you know, what is essentially, you know, a line by line audit of everything they're doing? Yeah, so I don't think it shouldn't feel like an audit, right?

9:07So I will, I'll use generative AI as an example again, right? So I was with a company a couple of weeks ago who said they've got 75 different pilots going across their organization on Gen AI. And their question for us was, how should they organize and govern those and prioritize them and resource them and so on? And, you know, answer to that little bit of a clip is, don't do that, right? It's just if you're doing 75 things in this new and fast moving area, you're not going to be able to do them well. What you actually need to do is to step back and say, where is the value really going to be in changing your business?

9:42And yes, there are easy things to do with Gen AI, maybe in HR around recruitment or maybe in finance with being able to pull different feeds across your finance systems and so on. But is that really going to drive differentiating value for your business? Is that something you should spend time on? Or is that something that all the various software companies you work with are going to go innovate within their own product? Instead, pick the area that's unique to you and that can really drive value. Don't pick tons of areas. Pick one area. It has to be an area that's big enough to matter. And our rule of thumb is 20 % of EBITDA.

10:16It's not going to drive a 20 % EBITDA improvement in a particular area. It's not going to be big enough to sustain people's attention. So pick an area like that and then develop the real plan around that. And it's never going to be one use case. Right. A while ago, five years ago, there was this idea of like the silver bullet use case. Right. If only we could do amazing, you know, supply chain forecasting. Right. We wouldn't get caught out in the chip shortages or whatever it is. But it's multiple use cases that need to sort of feed together. Our data actually says it's 11. Companies who had 11 use cases within a particular domain or adjacent domains were the ones who were more likely to sort of cut through into being in that quadrant that's creating value.

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11:42Sound interesting? All you have to do is license our three-step process that's going to allow you to make your competitors irrelevant, charge a premium for your services and scale, perhaps without adding overhead. And here's the best part. You can license this entire system for your agency by simply participating in an upcoming agency certification intensive. Look, why create the wheel? Use a set of tools that took us over 20 years to create, and you can have them today. Check it out at dtm.world slash certification. That's dtm.world slash certification. So let's talk about value then for a minute, because some of the AI, for example, or some of the technology, digital technology, maybe it doesn't deliver customer value.

12:32It actually delivers convenience or efficiency inside the organization. So would you look at that as a different, would you look at that value derived in that manner differently than you would say producing customer value or revenue? so again we've seen a shift here right so when we looked at our sort of digital transformation surveys of three four years ago cost was 70 of the focus right um and that's because it was the most measurable part and because a lot of the early customer journeys were very tractable to cost like how can we you know get people out of branches right and into the app how can we get people instead of making phone calls to using the website right you can very easily look at you know sort of per employee productivity and manage that cost down.

13:19What we're seeing now, it's not that's gone away, right? That's still there, but there's been a flip. I would say there's now 70-30 growth to cost and even things that initially look like cost. So again, I'll talk Gen AI because it's the flavor of the moment, right? Gen AI is going to be a great way of saving cost in customer contact centers, but it's even better at creating unbelievably strong customer engagement, right? I mean, there's this amazing survey from the UK where people who were using a Gen AI chatbot instead of talking to a real physician, they could tell it was a chatbot. So the original test was, can you tell whether it's a robot or a human and they could tell it was a robot.

13:57However, they found it more engaging and more empathetic than the real doctor. So if you think about what that means for a customer center, yes, you'll be able to save some costs. But more importantly, you'll be able to create a level of engagement that's going to drive cross-sell, that's going to drive growth, that's going to drive new product ideas in a much better way than what you're doing today. So we're really seeing a shift to people using it for growth. Are you seeing or are you advising companies that they might actually need to get different people or new people on the bus? I'll give you a yes but.

14:33Right. So there was this giant trend, you know, five to eight years ago around go to Silicon Valley or, you know, go to London or, you know, New York and, you know, sort of hire the cool kids from digital natives to come to your company. And that turned out to be a great way to change the corporate dress code, but not a great way to change the corporate culture. And some of those people have been successful, but many of them have actually not stuck. And a little sprinkling of digital talent is not enough to change the company. So the whole sort of chapter two about talent here is as much about upskilling and reskilling as it is about hiring in the digital natives.

15:13And we've been amazed by how far companies can go, in particular companies that are in industries where there's already a high degree of sort of numeracy, like people with engineering backgrounds and so on, how far they can go with reskilling and upskilling their existing workforce to drive real digital impact. We work with a company in Baghdad, that's Baghdad, Arizona, not the other Baghdad, a copper mine. And they've built an amazing data organization. And I sort of feel like if you can do it in Baghdad, Arizona, which, you know, it's probably only a two hour flight from Silicon Valley, but it's pretty far from Silicon Valley sort of, you know, spiritually, if you can do it there, then, you know, this idea that you need to be in one of the big metro areas and you need all the young digital native talent.

15:55It's just not true. Yeah. And I've seen a lot of initial research that is suggesting, again, AI is actually allowing people with maybe less experience to do more complicated work. And so I think there is part of that, that they're using the tools to up to your term upscale some of the workers. But I think it's also allowing people, you know, call center example, you know, they have access to real time answers and you know they're even though they're less skilled so i think that's it's a combination of those things probably that's right provided you do it with the senior management layer as well right so any upskilling needs about the front line and the senior people are you finding that there are organizations that we maybe wouldn't guess this to be true that are just significantly behind in in this uh rewiring you know there's a chart i can't remember if we put the chart in the book or not, actually I think we didn't, but we have a survey that we call DQ, our digital quotient survey.

16:50And it's basically a questionnaire you can run to see how digital a company is. When we first started doing this, there were very nice patterns by industry, right? You'd see like was all the way at one end and public sector was all the way at the other end. Retail was somewhere in the middle and energy was also off to the slow end. What we see now is first, all industries have moved. But second of all, the variation within industry is actually bigger than the variation between industries. So, you know, the energy company that has really embraced digital is as digital as the average high-tech company.

17:28And the consumer goods company that's been a laggard in embracing digital is as behind as, you know, the public sector or, you know, care services company. So the spread has gone much, much wider. In addition to that, there's a learning curve, right? It takes a while to get going, but then once people are going, you see them getting better and better on the digital quotient. And are you also, is there a correlation with leadership inside of an industry by how great question? So one of the things we asked in the survey where we were passing the companies into, so the digital leaders, the digital average and the digital laggards was how many people on your executive team are digitally savvy.

18:05And when I first saw the data from that, I actually thought the team was giving me a chart with like the dummy data. Like this was like the chart to fill in once we have the real data because the correlation was sort of perfect. But it turns out that was the real data. And if you have an executive team that might have, I don't know, a dozen members on it, if you've got seven or more people who are digitally savvy, your chance of ending up in the high performing segment are really high, like 80%. And if you've got one or two people who are digitally savvy in that group, your chance of being in that high performing segment are less than 20%.

18:39So the thing it most clearly correlates with is actually the tech savviness of your leadership. Now, of course, there's correlation and causation there, and you can debate the order and so on. But it's still very clear that it's hard to be a digital leader if you're just, if in every conversation, someone's looking to the CDIO or the CMO, right? It needs to be the team. Yeah. So are you also seeing people wasting a lot of time and money on, we got to do that AI thing, because it's the sexy thing of the moment? You know, that's sort of why we wrote the book. I mean, this is being done. There's so much swirl, right?

19:18It sort of gives the field almost a bad name, right? There's so many people who are running around, you know, saying they're agile, or, you know, launching the demonstration projects or talking about things in their annual report or in investor days. that don't actually follow all the way through. It's just massive wasted effort. I mean, you know, if you'd have bought stock in the world, digital transformation in 2015, right, you'd be very wealthy now just based on word usage. This is why we're sort of arguing for this more organized, less wasteful approach. And, you know, while I'm excited about Gen AI, I think part of the worry with Gen AI is there's a little bit of a risk that it sends us like back to 2018 and digital transformation, where it's just so easy to fire up these pilots.

19:59But if you don't actually rewire the house, then you're not going to get the value from it.

20:08How crippling is any of this without access to data inside an organization? So there is no question that all these trains ride on rails of data, right? You need the data. So, but maybe just a couple of surprises to us. So maybe they're not surprises, but things that we wanted to get the research. First of all, it isn't just about your own data, right? There's almost no company who's been super successful here just relying on their own, you know, amazing trove of proprietary data. It's about how you put your own data and the world's data together in interesting and safe ways. That's thing one. Thing two is, while data is critical, having the most modern systems in the world is not critical.

20:56And I think one of the big unlocks in digital transformation has been moving away from an excessive focus on core technology modernization and into a focus on solving back from where the value is. So we've worked with companies who've had the data, I mean, literally in filing cabinets, right, not even digitized. And by being very selective with what are you trying to do, therefore, what data do you need? Now, the data you need does need to be in the cloud, right? But you can build very efficient now sort of cloud, we explain in the book, sort of cloud, like data extraction layers, just focus around what you need.

21:33And the old-fashioned approach that says, first, let's build this like giant data lake with everything in it, right? Then let's splash around in the lake for a while and see what comes out, right? Ends up being quite wasteful. Yeah. I mean, that's part of the challenge with data is there's so much of it and we can measure everything. And like you said, most of it doesn't matter, probably. Yeah. So we would say in data, start back from where you think the value is. Think as much about the world data as your own data. And then think about quality over quantity. And then don't get concerned about legacy systems.

22:05There's almost always a workaround, right? To allow you to decouple looking at the data from, you know, pinging your system every time. Yeah. So final question. do you see Rewired making any some fun summer beach reads list this year? I hope so. I'm certainly going to be sitting on the beach reading it. The only problem is it's a bit of a beast. So it was way down that bag. You know, I just flew across the country with a few copies of it in my backpack and I certainly got some exercise from it. But I think it is definitely written to be dipped into, right? It is the manual to say, okay, let's talk about technology.

22:45Let's go to chapter four in technology rather than the straight end-to-end read. But I hope if people enjoy reading it nearly as much as we enjoyed writing it, then we'll have succeeded. Awesome. Well, Rodney, I appreciate you taking a few moments to stop by the Duct Tape Marketing Podcast. Do you want to invite people where they might connect with you or obviously get a copy of the book? Sure. Oh, I mean, all the info is on McKinsey.com or you can reach me directly on Rodney underscore Zemel at McKinsey.com. And I hope you like the book. Awesome. Well, again, I appreciate you taking a few moments to stop by and hopefully we'll run into you one of these days soon out there on the road.

23:25Fantastic. And John, you can read more about the book on, I think it's McKinsey.co slash Rewired, but I'll correct that URL if I'm giving you the wrong URL back. Okay, and we'll have that in the show notes as well. All right. Okay. Thank you. Hey, and one final thing before you go. You know how I talk about marketing strategy, strategy before tactics. Well, sometimes it can be hard to understand where you stand in that. What needs to be done with regard to creating a marketing strategy? So we created a free tool for you. It's called the Marketing Strategy Assessment. You can find it at marketingassessment.co, not.com,.co.

24:02Check out our free marketing assessment and learn where you are with your strategy today. That's just marketingassessment.co. I'd love to chat with you about the results that you get.