14 minute read 9 May 2023
A young man fixing circuit

How CIOs can embrace digital native company practices for their product development

Authors
Ken Englund

EY Americas Industry Markets Leader, TMT

Focused on helping technology, consumer electronics, internet, social commerce and software companies solve critical business issues.

Matt Bartell

EY-Parthenon Americas Deal Technology Leader

Decades of experience in technology and management consulting. Passion for helping clients with complex global transactions.

Anand Ganapathy

EY-Parthenon Americas Digital Business Building Leader

Digital business builder, digital technologist, M&A specialist, P&L architect and F1 enthusiast.

Shari Yocum

EY US People Advisory Transaction Leader

Thought leader in global M&A and HR transformations. Two decades of experience. Passionate about getting the people strategy right and creating an extraordinary employee experience.

Sumi Jagannathan

Principal, Strategy and Transactions, EY-Parthenon, Ernst & Young LLP

Experienced C-suite advisor in M&A, carve-outs, technology strategy and transformation. Passionate about all things Harry Potter, numbers, cooking, history, science fiction and Women in Technology.

Sri Prabhakaran

EY-Parthenon Principal, Strategy and Transactions, Ernst & Young LLP

Driving value through strategic growth initiatives with a focus on digital business transformations. Avid reader. Organic farming enthusiast.

14 minute read 9 May 2023
Related topics TMT Technology

Adopting these digital native company practices can help traditional organizations accelerate business growth.

In brief

  • Simply investing in digital technologies isn’t enough. Companies must rethink their operating models to implement an innovative digital mindset and culture.
  • Whether your business is starting or well along in its digital product development journey, these are four actions executives can take.

In today’s digital-first environment that is rewarding digital native companies with outsized returns, every firm needs to operate like a digital native if it wants to thrive. 

EY defines a “digital native company” as one conceived, shaped and grown online.

The imperative to invest in digital technologies is clear to executives of traditional companies. However, the inherent challenges of the digital landscape, combined with the complexity of old-school processes and legacy systems, have many traditional companies struggling to fully realize their goals.

Start with why you want to invest in digital technologies

As firms begin to pursue their digital ambitions, they take two predominant paths to move from doing digital to being digital:

  • Creating new digital products to increase revenue, by embedding digital products or software into the core business, developing a separate business focused on digital products, or white-labeling an existing third-party digital or software product into the market
  • Reimagining traditional businesses and innovating on existing processes using digital platforms to deliver frictionless user-friendly solutions

This article focuses on steps traditional companies can take to reimagine their operating model, leadership teams, talent management structure and culture with a view to adopting a digital native company mindset that breeds digital product development success.

“We are not organized in the right way to reap the benefits of digital.” – CEO of a steel manufacturer

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Reorganize the enterprise to optimize digital product development

Three insights emerged from our research that can help traditional companies establish effective digital product development functions.

1. Restructure your operating model to achieve your goals

Deploy an operating model that best reflects the company’s level of digital product maturity 

Where a traditional company sits on the product maturity scale will drive the type of operating model it should deploy and how strongly product development needs to be integrated with other functions.

Startups tend to be very product-centric. They have a lean corporate structure, with product teams that not only focus on driving product and revenue growth but that are also responsible for managing support functions.

As organizations scale, the operating model shifts to become more customer centric. Leadership becomes more centralized and independent departments manage support, allowing product teams to focus more exclusively on product development. However, this transition can yield poor results if centralized functions (marketing, finance, etc.) begin to drive product decisions rather than empowering the product teams. This can be a potential pitfall for traditional companies that already have firmly established support organizations that may be inclined to influence fledgling product teams.

Organizations with product maturity apply a federated approach that provides the right balance between autonomy and a centralized structure through shared services. Products become decoupled from one another, operating independently but with common processes, taxonomies and reporting structures. Product teams and functional support share ownership of profits and losses (P&L), while functional support ownership is shared between independent departments and resources embedded in the product teams. 

Specific functions will play different roles, with their level of integration into product development dependent on product maturity.

  • Accessibility description

    Chart demonstrating how operating model, P&L ownership, and functional support ownership shift as a company moves from a product-centric startup mindset to a federated approach with more mature products.

Leverage an operating model that enables scale, scope and learning

Digital native companies set up their operating models to support three key goals:

  1. Build the capacity to scale products and features rapidly based on the number of users through enabling technologies and partner ecosystems, allowing firms to capitalize on successes
  2. Broaden the scope of their offerings by supporting the development of multiple products and capabilities in parallel, reaping the benefits of adjacent products and enhancing customer stickiness and lifetime value
  3. Foster learning to develop internal processes so that, as the product environment grows in scale and scope, the company realizes efficiencies and cultivates an integrated landscape rather than one that begins to buckle under the weight of non-standardized tools, development methodologies and misaligned roadmaps
  • Accessibility description

    Graphic indicating that companies grow their operating models along three axes: 

    1. Scope - Increased number of products and features
    2. Scale - Increased number of users 
    3. Learning - Increased efficiencies and integration between products

Digital native companies usually start with one marquee product that initially draws a small number of users but then must scale to meet growing demand. Over time, companies develop related products and capabilities in parallel to expand their product portfolio. While they are scaling their marquee product and expanding their offerings, they need to create an environment that enables continuous learning and institutes development procedures to support an appropriate level of standardization across products and teams. Leveraging this mindset is key for traditional companies to not only find success with their first product but also to set themselves up for future wins. To realize changes, companies should follow these steps:

  1. Develop a blueprint for the vision, break down the silos and take a data-first approach to scale at speed
  2. Adopt a platform mindset, avoid process overkill and leverage enabling technologies to expand scope
  3. Cultivate an experimentation mindset to support continuous learning and leverage those insights to propel accelerated progress

2. Instill digital leaders with the right set of skills

If companies want to be successful in moving from doing digital to becoming a digital company, there needs to be a fundamental shift in leadership approach. Our research suggests that 9 in 10 executives are feeling disruption or the need for reinvention from digital business models, while 7 in 10 believe they lack the skills, leadership or structure to adapt.

Traditional leadership thinking suggests that skills are an important foundation for leadership. However, industrial-era capabilities will only enable leaders to do digital. Traditional leaders will need to augment fundamentals with digital-era capabilities that enable them to think digitally. Under a digital leadership model, competencies are designed to enable agility, resilience and transformation through people and technology. To help traditional leaders make the leap to digital leadership, 72% of companies are developing leadership programs specifically focused on digital.

As leaders learn digital competencies, they will be able to reorganize talent structures to reflect a global digital workforce, identify and adopt market-leading disruptive technologies, leverage digital capabilities as a core competency rather than as a bolt-on, and use their digital leadership mindset to drive business strategies and structures.

Matching leader to transformation

Digital leaders can come from the business, from IT or from outside the organization, depending on the needs of the business. However, traditional companies must understand the difference between traditional corporate IT and technology, which includes the product and software engineering function. The knowledge, experience and processes in back-office corporate IT functions do not necessarily translate into those skills needed for digital technology projects that are typically more software engineering-oriented. Strong chief information officers (CIOs) can likely drive operational efficiencies using digital but may not have the necessary experience to build digital products.

Whether the chief technology officer (CTO) should come from outside or within the organization depends on the organization’s level of digital product maturity and which operating model it chooses. For companies that do not have mature digital organizations, it is critical that the CTO possesses not only strong technical and sector knowledge but also the ability to drive cultural change. For companies beginning their digital journey, the CTO will not only be responsible for managing the technology organization but also for representing it to other C-suite members (and potentially the board), educating them on the role and opportunities of digital within the business.

When a company is looking to start a new digital line of business, there is a natural tendency for business leaders to drive the efforts. When companies reach a sufficient size where they possess a large portfolio of digital products, the product management organization becomes embedded into each business unit, while product engineering will become part of the technology organization.

“Our digital team needs to become an innovation engine like a digital native company.” – CIO, health insurance company

Background and experience notwithstanding, companies will want to appoint a digital product leader with the following six attributes:

  1. Fluency in digital speak
  2. Ability to connect the dots with business and define solutions for key business problems
  3. Partnership enabler with the ability to create an ecosystem model
  4. Trusted advisor with the ability to counsel the C-suite and board on digital issues and their impact on top and bottom lines
  5. Data-driven decision-makers who understand the need, sources and value of data and analytics
  6. Talent managers who can develop talent in nontraditional areas through nontraditional techniques

3. Establish digital-first, data-driven talent and culture

Digital talent management requires specific changes across many areas – from skills development to leadership – leading to an appropriately balanced team necessary to drive a thriving digital product development organization. Our research suggests that there are five key priorities for building an organization for digital talent.

  • 1. Operate horizontally

    To deliver experiences at scale, the people function of the future must work horizontally across the enterprise and consider how its people fit and work together.

  • 2. Exhibit digital dexterity

    Adapting and adopting existing and emerging technologies will unlock capacity trapped in the current service delivery model and support employees in doing “tasks that matter.”

  • 3. Reinvest in the business

    Savings and efficiencies the company achieves must be reinvested back into the business to maximize the ROI and create a culture of performance.

  • 4. Enhance long-term value

    The people function must work differently and bring in environmental, social and governance (ESG)-oriented practices to maximize the human value that is essential for long-term value creation.

  • 5. Create a total experience

    Looking at experience through the lens of customers, employees and suppliers simultaneously will help to create a total experience.

In addition to these priorities, both leaders and workers need to lean into key behaviors that will help to build the right talent and culture to be a digital organization.

  • Think digital first

    Leaders and workers need to develop a customer-first mindset to both holistically understand customer needs and provide the best customer experience possible. They will also need to promote and execute on the vision of being a digital-first organization. This will include staying current on digital trends and building digital fluency relative to their roles.

  • Leverage data-driven insights

    Leaders will want to use data-driven insights and analytics to develop better opportunities and solutions for customers, shareholders and employees and improve decision-making. Employees will want to analyze data to identify patterns, root causes and other insights that add value to the work while simultaneously safeguarding the integrity of the data.

  • Demonstrate agility, innovation and decision-making

    Leaders will want to cultivate and support innovation and iterative development, as well as build a team that operates with agility. They will need to be open to new ideas and approaches that lead to better decision-making. Leaders will also want to empower everyone within the organization to make decisions. Employees will need to improve their adaptability to change and have the courage to challenge the status quo.

“You can’t just hire an innovation team and expect success. You need to embrace a user- and product-led approach.” – Senior Product Manager, innovation-as-a-service (IaaS) company

Four actions traditional company executives can take

It’s not enough to simply invest in digital technologies. Companies must fundamentally reimagine their operating models to support an innovative digital product development mindset and culture. Whether your organization is at the beginning or well along in its digital product development journey, you will want to consider taking the following four actions.

  • 1. Strategy

    Know why you want to operate like a digital company, understand what that will look like for your organization and design a strategy to help you realize those ambitions. Assess your current product development maturity level and align the current state with your desired future state. Consider inorganic strategies to accelerate your digital product development agenda.

  • 2. Operations

    Recognize the need to reimagine your operating model to support digital product development. Reconfigure the operating model to drive scope, scale and learning. Create a horizontal organization structure that supports digital dexterity, business reinvestment, long-term value and a total HR experience.

  • 3. People

    Develop leadership programs that help to foster the right skills and competencies. Appoint leaders with the digitally minded attributes.

  • 4. Culture

    Foster a digital-first, data-driven culture that promotes agility, innovation and an openness to new ideas that lead to better decision-making.

Ayleen Lau, Shashi Shrimali, Sai Avasarala, Dan McCarthy, Andy Youn, Michael Rath, Mitch Parse and Thomas Kuklenski also contributed to this article.

Summary

Traditional and non-digital native companies are investing in innovation and product development, but they must adapt their operating models, enhance leadership capabilities and implement the right talent structure to maximize their return.

About this article

Authors
Ken Englund

EY Americas Industry Markets Leader, TMT

Focused on helping technology, consumer electronics, internet, social commerce and software companies solve critical business issues.

Matt Bartell

EY-Parthenon Americas Deal Technology Leader

Decades of experience in technology and management consulting. Passion for helping clients with complex global transactions.

Anand Ganapathy

EY-Parthenon Americas Digital Business Building Leader

Digital business builder, digital technologist, M&A specialist, P&L architect and F1 enthusiast.

Shari Yocum

EY US People Advisory Transaction Leader

Thought leader in global M&A and HR transformations. Two decades of experience. Passionate about getting the people strategy right and creating an extraordinary employee experience.

Sumi Jagannathan

Principal, Strategy and Transactions, EY-Parthenon, Ernst & Young LLP

Experienced C-suite advisor in M&A, carve-outs, technology strategy and transformation. Passionate about all things Harry Potter, numbers, cooking, history, science fiction and Women in Technology.

Sri Prabhakaran

EY-Parthenon Principal, Strategy and Transactions, Ernst & Young LLP

Driving value through strategic growth initiatives with a focus on digital business transformations. Avid reader. Organic farming enthusiast.

Related topics TMT Technology