You may be trading profitably, but you still have to transform

Last week I raised the subject of owners of distressed businesses looking for investors or acquirers and the value that a transformation plan can add to such a business, but what use is a transformation plan if you are still profitable and need neither an injection of cash nor an exit?

If you still aren’t trading as a digital organisation and you are honest with yourself, you must realise by now that your chances of survival are getting pretty thin. A third of businesses we know today will be lost two years from now because they failed to transform and the evidence that business leaders don’t really understand what this means to them is building.

Until comparatively recently investors have been accused of showing interest only in the short term and businesses have tended to maintain their value as long as they were still profitable, but there are growing signs that this is changing.

It’s been some years since investors realised the real value of a business lay in its customer base, but it’s not always the number of customers that count and for a while in most switched-on businesses customer retention has taken precedent over acquisition. It costs something like ten times as much to acquire a new customer as it does to sell again to an existing one, so businesses that chase new customers without securing the relationships they have with existing ones limit their profit potential.

In addition, strong relationships are self-perpetuating. If your customers know and trust you they’ll not only buy your product, but tell their friends and be more willing to purchase new products that you add to your portfolio, making range expansion, as well as customer acquisition, far easier, cheaper and quicker. So customer retention is the more efficient strategy and, as we all know by now, efficiency is the difference between success and failure.

However, in the new economy you won’t retain customers unless you are a genuinely digital business and it’s often cheaper, easier and quicker for a disrupter, who, anyway, won’t want to be burdened with the accoutrement of your old model business, to win your customers over than it would be for them to buy you out.

In the digital age, investors are increasingly aware of the importance of a being a genuinely digital business. There’s less pressure on a business that is already trading as a digital business than there is on those yet to make the move, but if you are still to embark on your digital journey, we know, even getting to the starting line will take you something like three-to-five years. The businesses I spoke of last week, hadn’t started transforming yet, but, with at least a viable plan they might retain some value.

I came across a business recently that had started its transformation, but because its leadership didn’t really understand what digital transformation is all about, had stopped short of transforming into a truly digital business. Having gone through a successful re-branding the business had seen its profile raised and its share price increase as investors, attracted by the early signs of something that looked like digital transformation happening, decided this was a business with a future.

Having increased their market value four-fold, the business owner decided this was “job done” and shelved plans for the real business of digital transformation. The organisation at this stage was talking the talk, but failing to turn that into action. They had created a digital façade, behind which life remained as it always had been – too many people, with an out-of-date mind-set, following tortuous processes and delivering the closest they could get to what customers wanted, labouring under the delusion that they had “transformed”. A sitting duck in fact, for the next disrupter that turns up in their sector.

So far their old model is still delivering a profit and the business’ leadership are happy not to have investment in transformation eat into that. However, investors, having taken the re-brand and up-dated communications as indications of transformation and a rosy future are starting to ask “so, what next?”

Within a few months of the abandonment of the transformation plan the absence of activity caused investor confidence started to wane. Share value has taken a dive, despite the fact that the trading figures look good, because astute investors know, in the digital economy, any business is only as good as its NEXT big idea and the flow has stopped. The end of the road may not be in sight yet, but you know it’s just around the corner.

So, what’s the answer? Is there a future for a business that’s in this position? The answer is “yes”. Of course, there’s always a future of some kind, although it may bear little resemblance to what was originally envisaged. After all, a lot of water will have run under the transformation bridge since the previous plan was cast. It’s the nature of the digital economy that every day the landscape changes and plans have to adapt to accommodate that.

Two things are for certain – A) you can’t just re-start the original plan and B) a lot of precious time will have been lost. However, you also have to question whether leaders who made the decision to pull the original plan have what it takes to lead the business forward again. We’re seeing something of this predicament with the Debenhams story in the UK right now and the question may equally apply to Jaguar Land-Rover and others who thought there was a way to avoid the admittedly expensive, painful and time-consuming digital transformation process. There isn’t of course.

With 70% of transformations currently failing and as many as 80% of businesses who say they recognise the need for change still not having a plan, it’s clear our approach to transformation has to change anyway, but for a business whose programme of change has stalled there are a whole bunch of additional challenges to address. For one thing, you only have to cry wolf once to damage your credibility with stakeholders these days. It’s unlikely such a business will succeed without a lot of help from external experts.

If your transformation has stalled you need to get on to it a bit sharpish. If you still haven’t started at least you have a clean slate upon which to take an approach that’s right up to date, but organisations like The John Lewis Partnership and M&S are counting on it taking them up to five years to become competitive in the digital marketplace and in that time disrupters can turn your world upside down. The starting point has to be to define your brand and build your brand community. It may seem irrelevant, but transformations fail through lack of focus and brands give you the focus you’ll need to move quickly and efficiently and avoid stalling.

Creating the brand community that will deliver your transformation plan itself can take a couple of years and you still have to know what you are doing. There’s no room for mistakes when you are trying to catch up and any business that’s not already on the transformation trail is attempting just that, but once you begin to align your brand you might maintain the interest of investors long enough to, at least, get your transformation into gear!

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