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Stepping up to the plate of digital transformation

2017-01-03 By Karim R. Lakhani, Professor at Harvard Business School, Daniel P. Donahue, Principal at Keystone Strategy, Zhao Bo, Solution Architect at SPO Lab, Huawei

    Key takeaways:

  • The next five years will be instrumental in deciding which old companies transform and survive and which new ones have the momentum to grow.
  • Telcos have certain advantages over Internet companies. But, they need the platform capabilities to move past traditional business models.
  • The emerging drone ecosystem allows telcos to explore opportunities beyond connectivity.

Three forces are making the telecommunications sector especially volatile. First, the nature of communication services is shifting to become asynchronous and more fault tolerant. Second, a major technological change in infrastructure is happening with software defined networking (SDN) and the commoditization of hardware. Third, a new generation of network players have the incentive and means to reshape the telecom sector. 

Critically, new business models coupled with rapid revenue growth and higher profitability have given Internet players financial parity with telcos. These Internet companies are taking advantage of network advances, partnerships, and vertical integration on a global scale at an increasing pace. By substituting and commoditizing traditional communications services, they’re shrinking telcos’ margins and forcing them to innovate.  

Although the challenges are certainly real, telcos have a diverse asset pool that can help them counterpunch: They control last-mile connectivity, have existing billing relationships with customers, run retail distribution networks, and operate support networks that are difficult for Internet players to replicate. By combining these assets with the power of new digital platforms, telcos can deliver differentiated offerings in many of the emerging digital communications areas, from smart homes to connected cars to drone data platforms and industrial IoT programs.  

Our research team comprises researchers from Harvard Business School, consultants from Keystone Strategy, and members of the Huawei SPO Lab leadership team. We joined forces to study the challenges that exist in the sector and develop a plan for addressing them. Over the past few years, we’ve studied digital transformation across dozens of industries and examined opportunities and challenges in various companies, including General Electric, Facebook, Nike, and Uber.

We’ve talked to hundreds of executives and accumulated data from many industries to examine how traditional business and operating models are changing. And they’re changing fast – we believe the next five years will be instrumental in deciding which new companies will sustain their momentum and which old ones will transform and survive. We learned that there are certain basic principles to digital transformation and that the ability to adapt relies on understanding the forces that are causing business models to change.

The impact

Our research shows that digital transformation requires changes in management, organization, and technology. It also examines how competitors in traditional verticals like telecommunications view their business and operating models: business models define the direction taken by an organization and how it creates and captures value; operating models define how an organization heads in this direction and how it delivers the value promised by its business model.                 

First, digital technology changes the way an organization can create value. Digital value stems from new, network-centric ways that a business can connect with partners and customers with new business combinations. Value is captured by new data and embedded and shared in networks, increasing as the network expands. This means that business models are increasingly network-centric and data-oriented.  

Second, the opportunities for capturing the value an organization creates are rapidly expanding with pricing technology innovation, ubiquitous sensors, and increasing business instrumentation. These factors offer completely new ways to drive price differentiation, efficiency, and accuracy. An increasing portion of the value captured is also shared with partners, customers, and community participants, because the locus of any business model expands into business networks and communities.

Third, delivering these new business models is tricky and requires new operating models. This is because operating digitally can change the very foundation of an organization, including timescale and locus, the way it experiments with new concepts, and how it delivers products and services to customers. Digital transformation can provide significant opportunities for using legacy assets to create and capture value in new ways. But without adopting a new, digital operating model, the same assets will be stranded and lagging organizations will be on their way out.

Despite the different nature of digital business models, traditional telcos can still leverage significant assets and capabilities to innovate and drive sustainable differentiation for new entrants. However, delivering new digital business models requires building a digital operating model as a platform, like Amazon AWS or Salesforce’s force.com. This platform is essential because it embodies a set of technological building blocks for creating new solutions more quickly and packaging decades of capability, investments in assets, infrastructure, and a vibrant partner ecosystem.  

A platform for telcos

With a strong regional asset base and good customer relationships, telcos have a number of advantages over Internet companies. But, they need platform capabilities to innovate beyond traditional business models and direct monetization. We see a clear opportunity for a multi-sided platform approach to bring global scale, ecosystem engagement, and indirect monetization capabilities. This is necessary to compete in the ecosystem control points that are emerging across consumer and industrial IoT in areas like smart homes and drone tech. 

Both a top-down and bottom-up approach is required to build support for key horizontal platform enablers. For example, data platform, analytics, and marketplace capabilities should be explored within the context of specific pilot offerings to support a broad set of initiatives.

AT&T’s Digital Life platform is an example of combining traditional assets with a digital platform to produce a differentiated offering. AT&T developed an open API program and partnered with hundreds of device manufactures to provide its existing customer base with an array of home security and automation services. The telco’s dense network of installation capabilities and existing customer support operations let it quickly roll out the offering within its own regional network. Now AT&T has extended the digital platform and partner ecosystem that enable Digital Life to other telcos around the world. In summary, they’re using their own regional assets to deliver smart homes to customers.  

The emerging drone ecosystem allows telcos to explore opportunities beyond connectivity, because they can bundle services and capabilities that build on their unique, regional assets. We recently worked with a global telco to evaluate a digital platform for drone operators and identify the market opportunities for data processing, management, and analytics that fit telco offerings. With existing regional cloud infrastructure assets, strong enterprise sales and billing relationships, and the capabilities to address unique connectivity and edge compute requirements, telcos are uniquely positioned to consolidate this nascent, highly fragmented space.

Platform-fueled innovation

We’ve distilled the best practices observed in our research into five steps:

One: Create a roadmap for service transformation

A roadmap is necessary to set a clear, aligned long-term vision and strategy. It should define the best starting points for digital transformation to begin creating value, key milestones for service transformation, how a company will differentiate itself through service innovation, and how it will monetize these offerings at different stages of evolution.

Two: Adopt top-down ownership

Because of the complexity of transformation, senior level ownership is an absolute must. More so than for other technology disruptions, digital transformation requires multiple company functions to act in concert, so the strategic direction must be established by leaders and echoed throughout the organization. 

Three: Assemble the right capabilities   

Providing post-transformation telecom services will require new capabilities in areas like data science and software development. A successful approach must integrate these new capabilities with deep product, operations, and business knowledge. Engineering, service operations, and sales and data science teams should work together in an integrated manner. But while digital transformation initiatives should subsume multiple business functions, it’s important to insulate the teams that develop new products and services from the pressures and incentives of traditional business so as to maximize their effectiveness. Digital transformation projects can be incubated within business development or the CTO’s office, and then expanded outwards.  

Four: Engage customers in experimentation

Digital transformation is most effective when it drives collaboration and experimentation across different stakeholders in the value chain. Companies need to share their roadmaps and engage with customers in joint data-driven experiments, using their roadmap and simulation results to test and refine hypotheses. It’s important to pilot opportunities that use the scale of available data to go beyond what either the telco or customer can do alone, and focus on new, quick wins that emerge from collaboration.

Five: Run rapid iterations

Minimize the scope and time it takes to run experiments, start delivering outcomes to customers, and provide rapid feedback. We’ve observed a wide range of new and traditional organizations, and in virtually every case, the right solution can surface through rapid, low-cost, iterative experiments with customers.  

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