Natively Digital > Digitized

“Successful digital transformation is never a 1:1 conversion but a new way of using holistic digital-first thinking to achieve a better outcome.“

“Digital” and “Digitized” are two words that are used interchangeably and extremely inflationary these days. While most think that they are the same, the two words actually mean something very different.

“…izing something” is often used when applying something to something. The original thing hasn’t changed but is altered. Take “galvanizing,” for example. Galvanizing protects the underlying iron or steel from corrosion. Everyone knows the rusty parts from cars that eventually appear when the layers of paint come off.

Digitizing literally means the same thing. New technology is applied to some existing (analog) process and gives the impression that it is now digital. The problem with this approach is, that the architecture of the original process was never designed for the digital realm and so even applying digital technology to it won’t make it “natively digital”. It will hit a wall eventually and cannot compete with a competitive solution that was designed for the digital realm aka. „Natively Digital“.

If you take my gorgeous drawing above as an analogy: The invention of the combustion engine didn’t lead to just switching out the horses in front of the carriage. The result was the automobile we all know today. The combustion engine could have never reached its full potential if it had been put in front of a carriage. It took brave and hard-working inventors, entrepreneurs, and engineers to radically change transportation and infrastructure. Radical innovations take time as they often require surrounding circumstances to change before they can fully unfold (regulation, consumer trust, economic cycle, etc.).

Architecture

The architecture of a business is a key driver of its success. This phenomenon can be observed especially in times of big change. During Industrialization, business models changed radically. New business models were formed; businesses that didn't adapt vanished into oblivion. The same is happening in the information age. The majority of the currently highest-valued companies are less than two decades old, and their business models have a digital architecture without any residues from the previous epoch.

It is really interesting to look at how the composition of the S&P 500 changed during the different epochs. What is also interesting is that with the information age, the time companies are members of the S&P 500 has dropped drastically. The main reason for this is that software is easier to scale as global audiences can be reached much faster.

Companies that existed because they were the gatekeeper to some sort of information and the speed of it moving around found themselves in a bad movie with the internet coming about because suddenly everybody could create and consume data and have it move around instantly. Suddenly the game and its rules were changed.

The important observation is that with each fundamental technology shift, the validity of business models also shifts. The most successful companies during each epoch were built upon these technologies and thus incorporated them deeply into their architecture. When new radical changes appear, a new architecture is required.

Take a look at capital markets for example. The roots go back to a time when company stock was paper-based. Thus the subsequent processes were designed around the architecture of paper. It was fine back then, but in today's world, this creates barriers. Paper architecture has physical limits to what it can do. For example: Back in the days transferring ownership often meant physically transporting the paper between two locations, thus introducing clearing & settlement with some time elapsed between them. An industry of specialized players (custodians, clearing houses, etc) was formed to carry out these processes. This same value chain and its processes were brought nearly 1:1 into electronic trading. Paper was made faster. With the internet coming around the industry opted to port the same processes again and made paper even faster.

Consumers today expect the same capabilities from capital markets learned in other digital industries. Concepts such as instant, 24/7, no/low cost, sharing, and many others are missing. FinTechs have done a great job changing the front end and the interaction with the consumer, but the underlying fabric hasn't changed. Anyone who has worked on the infrastructure side of financial services knows what these systems still look like. These aged systems with their paper architecture, create limits for the business models built on top of it.

A system including its value chain can be expressed in costs and capabilities. Even Neo Brokers, who rely on these antique processes, cannot overcome these physical barriers as they are still confined within the same system. They can use smart business model innovation to shift costs within these constraints and mimic something different for the user, but in reality, it is still the old system with the same value chain and processes. The user has received a better UI/UX but has paid in a different way. The game hasn't changed, but their rules were slightly altered.

The efforts by the industry to somehow make these digital concepts work show that there is a big demand for them, but the underlying limits of the system don't allow for a good solution.

Cultural link

Around every new technology, a certain culture seems to develop. It is similar to the different cultures in music genres. Rap is different from Jazz or Pop. This is most likely linked to the fact that younger generations predominantly come up with new technologies and is therefore connected to their current Zeitgeist. The reason I'm bringing it up is that culture and technology go hand in hand. It is also the main reason why incumbents have problems getting a new technology. Their different culture makes it much harder to connect or relate to it.

When a major technology shift happens, a new culture is brought along. Living and breathing this culture is key, as it is the basis for understanding and successfully applying the technology. Everybody knows how difficult pre-internet generations find it "to get the internet". The same applies to incumbent companies, who often have exactly the same problem. The right culture is also required to be authentic in order to build great brands and hire great people. Pretending something won't work for long.

This cultural phenomenon can be observed with the shift from combustion to electric engines. A lot of traditional carmakers find it difficult to understand that the consumers driving this change have a different culture than their parent's generation. Just changing the engine won't do. The new generation grew up with software and the internet, and they demand that from their vehicle as well. It's an entirely different worldview, not just a change of propulsion.

The skillset to successfully build and market an electric car is vastly different. You have to swap your mechanical engineering culture and petrol-head attitude that invigorated previous customer bases and heavily mix it up with a tech and product culture that understands that consumer priorities have massively changed and that phones, connectivity, sharing, and selfies are more important than the power of the car.

Changing the culture sounds like a fun project, but in reality, it is a really tough phase which sadly includes swapping employees who are not willing to change and replacing them with the people who fit into the desired culture and can help to drive the transformation.

That is why I believe that digital transformation is a 99% mindset and culture game, not a technology one. The better name would be “cultural transformation” rather than “digital transformation”.

The saying that “history doesn’t repeat, but rhymes” is certainly true in that way. The amount of companies that go out of business or become irrelevant is staggering, but probably just a consequence of the way humans work. We are bad at voluntary change. Forced change, such as Covid, for example, is a brutal driver but has helped to get even the laggards moving. Unfortunately, that doesn’t mean that every company will make it.

Examples

Digitized Newspapers

This is something that used to drive me crazy. Reading newspapers was relaxing and fun. Trying to read a PDF version downloaded through an app on your iPad just wasn’t. In fact, the experience was so bad that you could see people walking around with a newspaper and an iPad. The analog equivalent was simply better. It just showed that newspapers and magazines didn`t understand the technology and its changing readers. As it turns out, the consumption of journalistic content is entirely different in the digital world. Social media, podcasts, blogs, YouTube…. It is just completely different. In hindsight, everything is obvious, but it shows that 1:1 conversions between technology shifts just don’t work.

Tokenization

This is something especially dear to me, as I work in the digital asset space. There are two kinds of tokenizations. The one that makes something previously not really tradable (old cars, art, wine,…) tradable and the tokenization that creates a 1:1 wrapper around previously publicly tradable assets such as stocks and bonds. While tokenization for the first category (non-financial assets) works, it simply doesn’t work for the latter (financial assets). The reasons are the same. Shares and bonds are constructs from the paper age carrying that architecture deeply ingrained into them. The paper architecture just doesn’t work nicely together with digital properties. Changing the technical distribution (blockchain) won’t make equity, debt, or its derivatives digital. The goal of successful digital change should also be to simplify and reduce, not introduce more players into the equation. But this is what very often happens as suddenly more players are required to handle the legacy and the new system. The overall goal of removing analog dependencies is not achieved. Analog residues lead to digitized, not digital outcomes.

Achieving true digital equity and debt and building the right (digital) infrastructure around them takes time as it is dependent on external factors, mainly regulation.

“Natively Digital” is the only option

Building a digital business model rather than digitizing it is extremely difficult and requires a lot of endurance, patience, and capital to do so. The many failures of startups show that the default is not a success, but trying to just digitize an existing business model yields only medium-term success. The digitized business model is overthrown the second some digital solution arises. Digitized solutions can certainly buy time but should not be seen as the final outcome.

Fundamental rules

I have put some rules together as a kind of checklist to make sure to come up with something digital and not fall into the trap of digitizing.

1. Transform your culture: It is the basis for understanding and applying new technology. If the organization doesn’t have the right people across the company, it won’t work. The board, the executives, and all other levels of the organization need to understand it and, more importantly, live it. Keeping the current culture will let any transformation process fail. Additional care has to be taken on the problem of people sandbagging due to the danger of losing power and position. Culture is a powerful weapon. It makes a difference in a positive or negative outcome. Depending on how long an organization is running behind and how bad change is received, it might even make sense to build an entirely new company with the right culture.
2. Obliterate, don’t just iterate: You have to start with a clean sheet. This is the key to not falling into the trap of just digitizing. Trying to extend the status quo and telling yourself it will end up 100% digital won’t work. The reason is that you have to redesign your product and service based on the digital architecture for a customer that expects digital capabilities, which will fundamentally change how things work. The normal method of iteration means doing small incremental steps and won’t let you get rid of the analog architecture. Building a skyscraper on an old roman fundament won’t work.
3. Limits: Setting limits to the transformation process is often an excuse. The need to reinvent yourself has only one limit. Namely, the fact that some competitor has figured it out for you and that the race is lost. The only limit set should be not stopping until a solution is found. Of course, the approach should be smart, but it is a time-intensive thing. It cannot be forced. Evolution doesn’t care about your budgets, it will move on with or without you. Finding solutions is difficult, so buying or investing in a company that has found one might be the better approach.
4. Let it mature: Unlike regular innovation, where only a few things are changed at a time, rethinking everything means that you will have a lot more moving parts, and that takes time until you get it right. You will know when you have something truly great, as suddenly everything just falls into place and is simple and elegant. This is described by many people who have made big discoveries or built products that changed the world.
5. No copying: Humans feel safer by gravitating toward familiar things. It is normal behavior. Remember that you are trying to do something new. If you copy something familiar, you will most likely borrow something from the status quo that won’t help you discover something new. Remembering this point while “getting inspiration” is key.
6. Your customers won’t help you: The famous saying “If I had asked people what they wanted, they would have said faster horses.” couldn’t be more to the point. You cannot ask people about something they don’t know yet. That is the problem with breakthrough inventions. This by the way, shouldn’t be an excuse not to talk to customers when you’re improving your product or service after the first big initial step. Even the most brilliant new radical things need to be polished. They can still fail if they are not polished. The initial idea just won’t come from customers.
7. Mind your business value: Even the greatest inventions didn't lead to instant economic success. Creating value out of radically new things is tricky, with many pitfalls along the way. At the end of the day, a useful product and/or service will need to be built around it. It's great that you have fallen in love with it, but unfortunately, many people will have to fall in love with it, too (and pay for it). Passing the ball to where the player will be is key. Overshooting will miss the player. Sometimes really new things can do that. We know the history of failures such as the Apple Newton. It was probably too early, even though the technology was good.
8. Analog Wrapper: In some cases, it might be necessary to bring the old market with you. When the new thing is devised, a wrapper for the analog world can be built to migrate and/or build a bridge. This way, the mistake of thinking from the analog into the digital world can be avoided.

Putting it into practice

It would be great if there were a one size fits all solutions to this. A simple guide to breakthrough innovation and guaranteed success. I’m well aware of finite resources and their allocation toward keeping a core business running. My advice on this is to actively build a culture of innovation and give people a little room to innovate. A bit at the time. Health is a good analogy. Doing a bit every day is better than just doing something when the doctor tells you too because you have some serious illness. Sadly most companies don’t do that and wake up when it is too late. Giving active space to innovate and making sure that the work is communicated to everyone often gives the necessary final step to somebody connecting the dots.

Covid was a great agent of change, but a lot of companies were so far behind they were forced under pressure to figure out basic things such as getting employees laptops to work from home. While a home office doesn’t make your company or products digital, it falls under a mindset and culture. It surely helped a lot of companies to get going and suddenly see the world from a different perspective.

Shareholders, management, and employees have to understand that innovation has an infinite return on investment called “survival”. Not changing means certain death. It most likely won’t help you to boost your next quarter's sales and increase your bonus, but it will make sure that the company still exists in 10 years.

Conclusion

The importance of a clean digital end-to-end architecture cannot be emphasized enough. This is the only way to reach the maximum potential of digital technologies as analog processes act like natural barriers to what is possible. Digitized solutions can buy some time but become invalid with a natively digital solution going to market. Thinking digital-first and working backward is paramount. Thinking from the analog side and extending the status quo will automatically lead to inheriting analog processes and thus limiting digital capabilities.

While technology is an enabler, it doesn’t create value on its own. The appropriate culture around a technology acts as a critical component to translating it into successful products and services. They go together hand in hand. Adopting the required culture is key as otherwise, it will not succeed in the market.

Technology is the king, culture the kingmaker.