Is Digital Transformation also disrupting your Board?

Many companies are facing the sweeping effects of digitalisation which, through exponentially increasing connectivity and quantities of data, has generated a “Fourth Industrial Revolution”. Technologies such as artificial intelligence, additive manufacturing, predictive data analytics and block chain are revolutionising entire industries. Meanwhile, the customer is increasingly empowered by better information and through social media. These factors have triggered a market upheaval of previously unknown dimensions, challenging existing businesses but also offering a vast range of new opportunities for innovative companies.

A research study conducted by EY focusing on digital engagement, attitudes, and behaviours in Switzerland confirms a relatively high level of consumer engagement and sophistication with digital devices, media and products. 77% of consumers typically search on the internet first when they are looking to purchase a new product or service. 69% say they feel confident purchasing, using and managing digital services. On the other hand, 83% see safe and secure transactions as very important, referring to the high importance of data security and digital trust.

Corporate leaders are searching for the best way to deal with these challenges:

• How can current levels of business be maintained and additional business be generated against the background of digital transformation?
• Is this possible within the current business structure?
• Which changes (cultural, strategic, organisational, technological) are necessary to ensure the continued success of the business?

 
It is important that the Board of Directors understands both the risks and the rewards for the organisation that result from this Fourth Industrial Revolution. This is critical for the successful monitoring of digital transformation. It is also the responsibility of the Board to ensure continued development and appropriate oversight of the corporate digital strategy: the increasingly empowered customer must take center stage here. The Board can assist in achieving a balance between the old business model and the new one. Here, timing is everything: digital transformation projects should be in place even if the business has not yet experienced market upheaval. This will help guard against risks such as loss of market share or tightening margins. 

Boards should have a planning horizon of 5+ years in their sights, and be prepared to challenge the CEO and the Executive Committee as to the strategic direction of the organisation. Technologies develop at a rapid rate and management should work with the Board to adapt business strategy, and introduce new working practices at a similarly rapid pace.

Digitalisation brings with it inherent dangers, such as cyber attacks and threats to data protection, which affected governments and companies in equal measure in the recent past. Data theft is growing, as is the threat from denial-of-service attacks, malware and ransomware (cyber blackmail that restricts access to computers). Cyber security is critical for survival. 

The 2016 EY Information Security Survey shows that organisations have become more confident in their ability to predict and detect a sophisticated cyber attack; 50% of organisations thought it was likely they would be able to do so, which is the highest level of confidence we have seen since 2013. But what about the other 50%? And what about the impact of the internet of things with an explosive number of devices interconnected? This is going to put more pressure on the cyber sense capabilities of an organisation: 73% are concerned about poor user awareness and behaviour around mobile devices. Organisations doubt that they are going to be able to continue to identify suspicious traffic over their networks (49%), to track who has access to their data (44%) or to be able to find hidden and unknown zero-day attacks (40%).

The Board must ensure management minimizes cyber risk as far as possible. Cyber risks should be an essential part of the risk map in every company these days.

Equally important is the recruitment of the right personnel for successful digital transformation . Yesterday’s management is not necessarily the best match for tomorrow’s world. Boards should consider whether more flexible compensation models would be more effective in encouraging corporate spirit and innovation, or whether acquisitions are necessary to  broaden the digital competencies within the organisation . 

Board members must have the tools necessary to oversee the implementation and success of a digital strategy. Metrics that reflect the transformation universe are often difficult to define. There are, however, useful indicators such as the number of digital transactions and their value, the costs of digital marketing and the returns, and the number of employees involved in digital projects. The more integrated the digitalisation program becomes, the more sophisticated the monitoring metrics need to be. 

The Board must also look at its own structure and consider the potential advantages of including IT-literate colleagues, e.g. on a Strategy & Technology Committee, and weigh up the costs and benefits of bringing in further expertise from both internal and external sources. 

Five key questions for Boards

1.  Do you know if and how your current business model may be affected by digitalisation (opportunities and threats)?
2.  Have you considered what business strategy is appropriate for your company in a digital world?
3.  Does your company have the right culture, organisational structure and digital capabilities to effectively implement your digital strategy?
4.  Has your company an effective cyber threat strategy in place?
5.  Does your Board have a designated digital expert who focuses on respective issues?

Markus Schweizer

About the author

Markus T. Schweizer is Managing Partner, Strategic Solutions at EY. He is developing and deploying integrated solutions that solve the biggest and most complex business issues companies are facing.