Innovation or ERP: which path will digital transformation follow?

Innovation or ERP: which path will digital transformation follow?

I’ve been thinking a lot about the concept of “digital transformation” recently.  You can’t help but encounter it on Twitter or LinkedIn, in business publications and in discussions with customers and prospects.

Everyone wants to know about digital transformation. Admittedly, teaching a class on digital transformation keeps it forefront in my mind.

From all of this interaction, I’ve been wondering which management phenomenon digital transformation will be more like – the ERP adoption of the 1990s?  Or the innovation phase from 2005-2015 or so?

Both ERP and innovation had a significant impact on businesses, both were in the press a lot, but so far I’d have to say that ERP did a lot more for businesses than innovation has, a few companies excepted.

In fairness, these two things aren’t alike, except that they were both a key focus for management and promised dramatic change.  ERP is software which required a mindset change.  Digital Transformation is a philosophy backed by data and software applications.  However, they share some common features and make some similar promises.

Digital transformation has attributes and aspects of both the switch to integrated ERP and the energy and passion (and promise) of innovation.  How it plays out, and the impact it creates, remains to be seen.

While many observers and vendors hope it will follow the ERP playbook, I think it is more likely to follow the innovation path. Here are a few ways digital transformation is like, and unlike, the two recent management eras.

Digital Transformation Consultation
Accelerating Existing Processes/Enterprise Capabilities
1.  ERP was vital and successful because it was integrating data and disparate processes, while automating existing capabilities.  All three of these ideas are important.  ERP built on an existing business process framework.  People were already processing purchase orders, running MRP and so forth.

In that instance, ERP built on and extended existing capabilities in a way that innovation did not.  As innovation became interesting to companies, it was evident (and remains evident today) that few companies have real experience or defined processes for innovation.

Digital transformation is a basket of ideas, philosophies and applications.  Some will build on existing actions or processes (RPA and Robotics).  Some will introduce new processes (blockchain).

Some may improve the use of data (Machine Learning).  Since digital transformation is not reinforcing and improving existing capabilities for the most part, it looks and its experience will probably be more like innovations to date.

Organizational Strategy and Commitment
2. Doing ERP required the full commitment of the entire organization, while innovation is rarely an enterprise commitment.  Switching all your systems and many business processes to an enterprise application is difficult and requires complete commitment, across the organization and up and down the management hierarchy.

You cannot be successful if some groups adopt your ERP and others refuse to use it or ignore it.  Innovation, on the other hand, typically thrives in some pockets and is routinely ignored in others.  Few companies have a deep, continuing commitment to innovation.  In this regard, digital transformation is again more like innovation.

There is no one digital platform, and for the short and medium-term most digital transformation will be done as pilots and proof of concept in small teams and functions, divided up into robotics, augmented reality, blockchain, machine learning for specific tasks and so forth.

Rather than integrate everything, digital transformation in the short and medium-term will create new siloes, where some teams or functions are vastly more experienced and gain more benefits from exercising digital transformation, while others lag behind.

ERP benefited from the fact that virtually everyone was impacted, and most shifted to a new application that they all shared, like it or not.  Digital transformation will not operate in the same way.

Braden Kelley Leading Digital Transformation Podcast

Clarity of Purpose
3.  ERP has a unifying purpose – integration and efficiency, while innovation focus is more diffuse – incremental changes to existing products and transformative new solutions.  In this regard, innovation is more scattershot, able to make solutions across the company in diverse ways, while ERP is focused on unifying and creating common ways of working and using data.

While digital transformation both uses and creates data, it will not necessarily create a unifying platform and may solve many discrete problems but neglect to unify the company around a clear direction.  I think many early digital transformation projects will focus on efficiency, and then eventually customer experience.

In this light again digital transformation looks and feels a bit more like the innovation experience of the last 10 years or so, rather than the unifying activity of ERP.

Single Source of the Truth
4.  ERP provided a single source of truth about data in the company, creating one aggregated way to gather data about anything in the company.  Innovation does not necessarily create data, or create ways to think about the company or customer differently.

Digital transformation does deal with data, both consuming and using data to create new insights and opportunities, and using data as inputs to fuel activities through RPA, robotics, autonomous vehicles and other means.

Until a unified digital transformation platform emerges, however, every instance of digital transformation will address a narrow need or function, not consolidating or simplifying data globally.

Digital Transformation shares with ERP the need to clean and standardize the data before its use, but gains far less enterprise value from the data generated, and often requires new data in order to generate meaningful insights.

In this digital transformation shares many of the downsides of an ERP implementation (aligning processes, cleansing and preparing data) without all of the enterprise upside.

As more AI and Machine Learning become available for your data, the risk is that there are multiple interpretations of the new data, rather than a single source of truth.

Observable and Valuable Impact
5.  Cost reduction, efficiency, revenue gains?  ERP helped gain efficiency and put businesses on a more robust footing for better operations and allowed them to grow without adding headcount.  Thus, ERP has always been focused on process efficiency and cost reduction.

Innovation promises new organic growth, and is more reasonably positioned as a revenue enhancer, but often is used to drive efficiencies as well.  In the short run, most digital transformation will follow the path of ERP, cutting costs and creating efficiencies.

It is possible as more data is gathered and interpreted that some digital transformation applications and solutions can create new revenue streams, or perhaps new business models and services that create new recurring revenue.

But one really disruptive idea converted into a new product or service from a good innovation team will drive far more growth than digital transformation is likely to for quite some time.

Thoughts and Conclusions

From this short analysis, I think digital transformation will follow the architectural, implementation and data path of ERP and will focus primarily on efficiency and cost reduction, but will in the short term look and feel more like the innovation era.

Digital Transformation will create a lot of promise, but much of that will be lost to small prototypes, capabilities and benefits that are overhyped by vendors, a lack of enterprise engagement and eventually the really different ways that disparate teams and groups implement digital transformation internally.

Rather than unifying and simplifying, digital transformation may, again may, make organizations more stovepiped and make it more difficult for adjacent teams or functions to interact effectively because they will have implemented different forms of digital transformation at different speeds and have radically different insights from their data.

There is clearly a lot of promise in digital transformation, but in many ways, much digital transformation activity remains as point solutions rather than an enterprise play.  Rather than consolidating and clarifying the data, it will create new ways to interpret the data and also may demand the acquisition of new data to operate effectively.

The disparate deployment options and ways digital transformation can be used may create wide disparities of digital capability and gaps in the same organization.  A much more thoughtful approach to digital transformation is required, more enterprise-level, more consolidated and more concerned with business processes and the interaction of disparate teams and functions.

Digital transformation is not an enterprise solution, but a set of capabilities and technologies that may enhance point solutions or data sets.  There is no one enterprise digital solution, rather a collection of digital capabilities that may support a digital strategy.

In this regard, digital transformation looks a lot like innovation – something with a lot of promise, that could create great impact, but often on a case by case basis in disparate settings, rather than fully integrating and creating a common platform.

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