Thinking of entering the age of AI and DLT? Here is what you must do first
In my previous series on legacy systems, I have shown how old technology makes corporations sluggish, sometimes even lethargic. This antiquated heritage effectively bars them from leveraging breakthroughs such as blockchain or artificial intelligence. And eventually they lose ground to new challengers that apply them with full force and in record time.
Latest since the pandemic, nobody doubts that digitalization is the all-encompassing trend. But minimizing legacy is not a matter of digitalization only. Sure, currently the deployment of digital tech is trending, but one day these systems will become obsolete too. Time is not standing still; on the contrary: The wheel of innovation spins faster every day. Game-changers such as quantum computing seem unthinkable today, but they are just behind the corner.
So the goal of corporations must not simply be to survive the next technological switch by investing in the latest gadgets and somehow manage to stick them to the current systems. Rather corporate stewards must strive to build a legacy-busting culture and institutionalize the fight against outdated systems, processes and mindsets. Only then will they successfully ride the next waves – note the plural – of transformation.
But changing outdated practices is much trickier than replacing a 1 terabyte hard drive with a 10 terabyte one. How do you decide which practices need to be altered? How do you calculate a return on investment on breaking silos? And most difficult: how do you change your employees’ mindset?
Sometimes changes are even rolled back. Think of the companies that reversed their open-space model. After spending years knocking down walls, managers realized that walls served more purposes than just to keep the ceiling from falling down. Many have started to back down. But slashing legacy in non-IT areas is essential to leverage the promise of new tech.
Old mindsets can halt progress just as old IT-infrastructure does. For instance, it took thirty years after the electric motor made its debut in factories before productivity rose with it. A new generation of managers was needed to understand that simply switching the steam motor with the electric one was insufficient. Instead, the entire layout of the production floor had to be altered. Eventually, the giant steam machine was replaced by many small electric motors.
Making a company fit for constant change is fought on many battlegrounds. To make it more concrete, let us go through a specific example.
Let us say you are an insurance company and want to deploy distributed ledger technology (DLT) to automatize the claims management in order to make it more transparent to the customer. It might not only include the overhaul of your hard- and software, but it can include business models, processes, employees, customers, and partner companies.
Corporate strategy is extremely hard to adapt due to the inertia forces that are at work. Successful companies eventually do change, but mostly market forces change faster.
The most crucial element of the corporate strategy is the business model. Today platformization tops all other models in terms of profitability, but for some companies ridding themselves of old ways might also mean to switch from selling items to renting them.
There are many strategic choices apart from the business model, such as on which regional and which product markets to focus, do you market your goods via price or differentiation, and so on.
What would that mean for our insurance company? Offering a completely automatic and transparent claims process might entail that it could go up with pricing, because let’s be honest: Today’s insurance products are primarily sold through the price. Companies as such are hardly perceived as different by customers. This simple shift needs to trickle down to all departments such as communications, sales, and the brokers.
Legacy in marketing may be hiding in the channels you use, the way you elicit customer feedback, the way you price your products, the way you decide about which color to use in advertisement, but also in the customers you serve.
If your marketing-approach is not up-to-date, the automatic, DLT-based insurance product might be doomed from the start. As the USP is different to a classic insurance product, you have to target a different audience, a younger, more self-service oriented clientele. They must be reached through different channels, say social media, and the message needs to be tailored.
Human resources and corporate culture
The first step in slashing legacy is disempowering people that advocate it. And newly hired people must have a different skillset. There is a virtuous circle: If you recruit changemakers or promote them to decision-making posts, the company will become attractive to new young talent.
Good software-engineers opt for companies that work with state-of-the-art coding languages, not fossils like COBOL or FORTRAN. But it is not enough to recruit fresh blood, you also need to get certain personality types that will not become resistant to change tomorrow. There are severe financial consequences to that too. Suffice it to say that in large IT-projects, people change management gobbles up to a third of the budget.
Yet the most critical task for HR-managers – and boards – in the digital age will be to bridge the divide between business and IT. That IT-departments are still siloed is a relic from a time computers filled entire buildings and whose very concept was understood only by the handful of nerdy employees who managed them.
Let us pivot back to our insurer, who wants to leverage the blockchain for a new product. It most likely will not have a legion of top Ethereum coders inhouse. But to attract – and retain – good talent in such a buzzy field is hard since you compete with Big Tech, but also startups that bait coders with shares that might take off.
It is not all in the money. The new generation of great talent is allergic to old hierarchies and slow decisions cycles. It is a tough task to build an ecosystem in which such specific talent thrives.
Finance & Supplier Management
One of the major questions is how much of your IT-capabilities to outsource. After all, the more complex your system gets, the higher your dependency on the supplier. Often legacy suppliers have a monopoly, which they are actively working on maintaining.
Also, the way financial professionals think about IT-costs needs to change. Not the number of lines or programmer hours spent matter, nor does the number of lines of code written. Instead, judge the outcome, the functionality, and the internal quality of the code.
Moreover, budget cycles must be adjusted to fit agile ways of working, not the other way around.
Whichever executive at our insurance company promotes the DLT-initiative will have to ruffle a few feathers with suppliers of the existing systems, but also their counterparts at the enterprise. Inertia plays a big role in sabotaging new projects, but so does the fear to lose one’s position. The blockchain’s very nature is to make multiple layers of existing systems obsolete.
Western companies have led the way in the 20th century and in doing so have built powerful infrastructure. But research has convincingly documented risks for successful firms in what is called the “inertia hypothesis.” Companies’ resource commitment prevents them from reaping the rewards of their ingenuity. Today’s extreme speed with which innovation spreads across the globe and with which startups grow into behemoths is unprecedented. Hence, companies and the public sector must follow a model of constant change and legacy contamination to succeed in the long term.
All the more concerning is that quantum leaps in technology are making entire technologies obsolete, while people’s mindsets remain stuck in the pre-digital era. Many boards and executives are wrapped in apathy. Some have been burned in the past trying to bring the hatchet to legacy, others feel they don’t have the support for bold action. And yet others are so overwhelmed they don’t know where to start.
What most of them simply don’t realize, however, is that stasis is the most devastating risk. Setups successful in the past must not necessarily work in the future. Hence, there is no alternative to implementing new systems. But before you start with the implementation, make sure you have created an environment in which the seed of new tech can blossom.