The Challenge of Digitizing Services

Introduction

The challenges of digitization services are multiple; however, the benefits are considerable if successful. It has been called “one of the biggest opportunities and challenges facing enterprises — and their CIOs — today” (Weill & Woerner, 2013). Defined as “the practice of taking processes, content or objects that used to be primarily (or entirely) physical or analog and transforming them to be primarily (or entirely) digital” (Fichman et al. 2014),  Dilmegani, Korkmaz, & Lundqvist, (2014) suggest that capturing the full potential of govern­ment digitization could free up to $1 trillion annually in economic value worldwide, through improved cost and operational performance. It is therefore a topic worth investigating from multiple perspectives.

Macroeconomic Level

At the national (macroeconomic) level, the challenges associated with digitization include: unclear definitions and measurements of digitization, a lack of digitization impact assessment tools assessing the impact of digitization, and policy imperatives focused on taxation of information and communications technology (ICT), not digitization (Sabbagh, El-Darwiche, Friedrich, & Singh, 2012).

Unclear Definition And Measurement Of Digitization.

Policymakers must understand that the environment for ICT has changed significantly from the one for which the original policies were designed (Sabbagh, et al., 2012). Further, the concept of digitization is poorly understood; there is a misunderstanding that digitization equates to broadband access when in reality, there are significant benefits linked to growing usage of digital technologies and applications beyond access alone (Sabbagh, et al., 2012). One of the effects of digitizing processes – in addition to potential efficiency gains – is making processes more tailorable and malleable (Fichman et al. 2014).  Once the concept of digitization is understood, the question shifts to a matter of assessing assimilation of ICT within a society.  A significant challenge is the lack of established standard performance indicators to measure the extent to which ICT is being assimilated in societies (Sabbagh, et al., 2012).  There are some tentative guidelines that can be used by countries to develop a preliminary understanding of where they measure in relation to others. Therefore, the first challenge is the defining and assessment of the adoption of ICT within a society.

Lack Of Digitization Impact Assessment Tools.

The second challenge lay in the lack of tools to determine the impact that the mass adoption of connected digital technologies and applications is having on societies and economies (Sabbagh, et al., 2012). Sabbagh, et al. (2012) noted that “countries that have achieved advanced levels of digitization  (the mass adoption of connected digital technologies and applications by consumers, enterprises, and governments) have realized significant benefits in their economies, their societies, and the functioning of their public sectors.”  Indeed, countries at the most advanced stage of digitization derive 20 percent more in economic benefits than those at the initial stage (Sabbagh, et al., 2012). As such, while it is difficult to measure, there is already evidence to demonstrate that it is beneficial to implement a strong national digitization strategy.

Policy Imperatives Focused on Taxation of ICT. 

If the first two issues are resolved (defining and measuring degree of digitization, assessing the impact of digitization), it is possible to create evidence-based policy that prioritizes digitization. This will require a shift in thinking for less-digitized countries. While advanced societies view it as an enabler of socioeconomic development, developing countries still struggle to view the sector as anything more than a source of tax revenue (Sabbagh, et al., 2012). Until countries recognize the importance of the ICT sector for overall economic growth and adjust their policies accordingly, digitization will not be a priority and policymakers will not focus on adopting new policy tools to accelerate digitization and reap its accompanying benefits (Sabbagh, et al., 2012).

Microeconomic Level 

At the organizational (microeconomic) level there are other implications of digital change, including: the loss of control over the customer relationship, increased competition and threat of commoditization, and the need to engage digitally with suppliers, partners and employees in addition to customers (EY, 2011). Irrespective of whether an organization is private or public, there are several challenges associated with the digitization of services, including: fragmentation, resistant culture, and digital change management.

Fragmentation 

Dilmegani, Korkmaz, & Lundqvist (2014) indicate that silos, fragmentation, and the absence of a central owner for IT infrastructure and common components can make it hard to create a seamless experience for the end user.  The implementation will not be successful if an analog company starts hiring new staff to implement digital solutions, but creates a digital silo for the new employees (Harshak, Schmaus, & Dimitrova, 2013). To be successful, companies need to develop a comprehensive ‘digital strategy’ that reaches far beyond the marketing department to tackle issues like ubiquitous cross-channel connectivity, social commerce, and the threat of commoditization (EY, 2011). Without innovation strategies, companies will lose their competitive advantage in an increasingly commoditised world (EY, 2011). These strategies must transcend all silos, becoming part of the overall business plan.

Resistant Culture

If an organization can avoid silos and fragmentation, they may not be able to avoid the effects of a resistant culture. Even well-designed systems can be undermined by a company’s established culture (Harshak, Schmaus, & Dimitrova, 2013), often referred to as “the way things are done here.” Cultural resistance can be embedded throughout the company; for example, through the reluctance of individuals to adopt new technology, indicating that it is “not applicable” to their domain.  Indicators of resistance to digitization can be identified through multiple means, including uncovering the attitudes held by different divisions about each other and in sales incentive structures, which are often geared to the status quo (Harshak, Schmaus, & Dimitrova, 2013). It is important to be mindful of organizational culture and work towards incremental changes, engaging the workforce in this transition to ensure it is successful.

Digital Change Management

Change can be difficult in established organizations with a strong culture, and finding someone to lead a digital change management strategy is critical to the overall success. Unfortunately, the rate of change continues to increase exponentially due to Moore’s law and increased adoption (Fichman et al. 2014) and a background in computer science or business is insufficient in meeting the demands of managing digitization and digital innovation. If IT is a driver of process innovation within firms, Fischeman et al. (2014) indicate that a better grounding on how to manage “new ways of doing things in an organizational setting, and as such, the term encompasses not just new business processes, but also the creation of new capabilities, strategies, and structures that are in some way digitally enabled” will be required.  Unfortunately, at many schools the required Information Systems (IS) core class is not very effective at teaching aspiring managers what they most need to know about digital innovation (Fichman et al. 2014). Knowing about the especially high switching costs often imposed by digital products and processes (Shapiro and Varian 1999) is important, and knowing how leveraging digitization to provide an enhanced product or service at a lower cost equally so.

 

ChallengeswithDigitization
Figure 1 – Challenges with Digitization

Discussion 

We have identified macro and micro-economic challenges related to the digitization of services, as well as challenges common to both levels. While there are many challenges associated with digitization of services, they can be mitigated. The six most important levers identified by McKinsey & Company (2014) as being applicable in both the public and private sector in relation to digitization are as follows: (1) Win organization-wide and department-deep commitment to specific digital targets. (2) Establish organization-wide coordination of IT investments(3) Redesign processes with the end user in mind(4) Hire and nurture the right talent(5) Use big data and analytics to improve decision making(6) Protect critical infrastructure and confidential data. Their report contains many stories and anecdotes that help illustrate these points. For example, an option for organizations that are looking to ‘experiment’ with digital business models is to spin off smaller businesses in order to learn how to take advantage of the new digital world (EY, 2011). This permits the primary company to maintain their focus, while testing out innovative new business models in a contained environment. In short, there are many models and potential solutions from which an organization may begin their march towards digitization of services after appropriate review of suitability within their environment–it is a matter of willingness of the organizations to face the challenges, in the expectation of great rewards.

Conclusion

There is no time to loseCountries and companies that have digitized are already reaping the rewards of this transition, technology change is accelerating exponentially and new digital platforms and devices are emerging. The failure in recent years of multiple bricks-and-mortar stores (such as Blockbuster filing for bankruptcy in 2013) simply serves to highlight this issue and its importance. At the macroeconomic level, the benefits are significant to economies, societies, and the functioning of their public sectors. At the microeconomic level, digitization can help prevent the failure of established businesses and help new businesses establish themselves over less agile incumbents. This can be done by defining and measuring digitization, assessing the impact of digitization, and developing policy imperatives (Sabbagh, et al., 2012). Without these clear steps, the potential benefits of digitization will be lost to all members and levels of society.

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