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Adopting Digital Transformation and Avoiding Lemons

Updated: Jan 4



Digital transformation is changing job designs, processes, and even business models by adopting and adapting to that new technology. Digital transformation has brought about an increase in the number of vendors in the market offering software solutions and advice on how to manage such transformations.

 

Organizations need help leveraging the benefits of business intelligence and organizational intelligence technologies. Due to the lack of in-house capabilities for cloud services, internet-of-things, artificial intelligence, augmented reality, big data and analytics, blockchain, or cybersecurity, it becomes inevitable to partner with vendors. However, selecting a vendor comes with challenges, and reducing the risk of choosing a faulty one is crucial.

 

In a time where no “dominant design” for software or managing change exists, it is essential to conduct due diligence to avoid purchasing low-quality products or services (Utterback & Abernathy, 1975). This will ensure you make informed decisions and avoid wasting resources on subpar offerings.

 

This blog offers a 5-step process for reducing the risk of taking on a vendor.  This builds from a survey provided on LinkedIn.

 

1.     Define the Organizational Intent and Identify the Requirements.

What does the organization want to achieve with digital transformation?  Moreover, who is leading the charge on these changes?  What is the level of executive buy-in and leadership for this project?  Is this exploratory regarding organizational change, or is leadership committed to change?  Toe in the water, or jump in the deep end?  Is this an experiment, or is this a strategic choice? Defining the intent will impact defining the requirements.

 

To begin to engage with a vendor, it is critical to get clear on the following:

 

·      What is the job to be done?

·      Measures for success

·      Scope

·      Budget

·      Timeline

·      Quality standards

 

To obtain requirements for a project, it is crucial to map the process of interest. It is unclear what the job entails without exploring this internally or outsourcing this research to a consultant. For instance, does the project involve replacing a legacy system entirely or introducing a new workflow with new processes and job descriptions? Alternatively, can and should digital technology be integrated into existing workflows? Focusing on these questions will help clarify the job requirements beyond vague abstractions like "becoming more efficient" or "collecting more data for customer experience analysis."

 

To answer this question means uncovering existing processes, workarounds, hacks, and the tacit knowledge that now makes up a legacy process.  This takes time, and the best way to proceed is with visualization and mapping with a group.  This is the "canvas" approach where everyone participating in this workflow collectively articulates its current state and what is needed to change (Mueller, 2022).  The model of “forget-borrow-learn” from Govindarajan and Trimble (2009) can be helpful:  what do we forget (abandon in our process), what do we keep from the past (borrow), and what is new (to be learned)?  An analogous model is the Blue Ocean model of Kim and Mauborgne (2005), a variant of “forget-borrow-learn.”  Their approach is finer-grained with what we eliminate, reduce, increase, and create (the ERRC model) from our existing processes.

 

To fully understand this requires gathering all those involved in the process, including customers, stakeholders, investors, and whoever can inform that meaning and need to change in the process. In Kaizen, this is called "nemawashi," which means (roughly) gathering the roots so you can enable a transplant: gather all the pieces and move forward. 

 

The above requires time, management, mindfulness, and the complex process of making explicit what needs to be done.  Organizations will do this to varying degrees and bear the risk of incomplete understanding when adopting the technology.

 

2.     Research the market

Knowing the requirements provides the lens for searching in the market. However, the needs of digital transformation, which are highly technical, make researching markets very challenging. This is the classic "lemon problem" in economics—or, more formally--the problem of "adverse selection" (Akerlof, 1970). You need to learn about software products and their implementation offered by vendors. This is a condition of "information asymmetry,"--and thus, it creates risk, as the vendor can know things about the product that you do not and opportunistically not disclose information that may negatively affect the potential for a sale. You will learn much (for better and for worse) when you implement a product or service from a vendor.  Recognize that you will not be able to do an optimal search among vendors, you must "satisfice" in this way. You cannot avoid all risks. From this sober understanding, develop your list of potential vendors.

 

The challenge is, among the dozens of products, where do you start? This is where effectuation has to occur---use what is around you and who you know (Sarasvathy, 2008).  To begin, one can explore various sources, such as online platforms, industry events, referrals, testimonials, and case studies, to find and compare vendors. One criterion to consider when vetting vendors is the degree of experience in your industry, domain, and technology that you have. In addition, are customers available to evaluate their track record in delivering successful digital transformation solutions?

 

It is important to find organizations currently using a vendor’s product and to speak with the point people and strategists in those organizations.  Is the product delivering value?  Is the vendor responsive?  What are the bumps and caveats in dealing with this vendor?

 

3.     Request proposals

From the search, a set of potential vendors will be identified, and a deeper engagement with those vendors can now begin.  You can request their proposals for more details about their offerings, pricing, and terms. You want to know how they can add value to your digital transformation project and address any challenges or risks. Ideally, you provide them with clear and concise requirements to help the vendor articulate a proposal.

 

However, the vendor may know more about your opportunities than you do, so ideally, this is a conversation. Invite the vendor in and have your team meet them and ask questions. Collectively articulate the job to be done and have them indicate how they will do it...and what they cannot (or will not) do. It would be best to clarify your budget limit, the internal human resources you can commit to this project, and how this short-term alliance will be managed. Who are the point people? From that, a proposal can emerge. Be sure you can iterate on this to get what you want.

 

4.     Evaluate and Negotiate

The proposals are a start. Use an explicit scoring system to rank the vendors on cost, time frame, project management, communication model, and risk management.  More difficult to establish is their reputation, culture, and innovative capabilities; this may be discerned from their current and former customers.

 

This process is a partnership, so your team needs to appraise vendors in terms of the following:

 

(a) what is the vendor going to do

(b) what are we going to do?

 

Get the division of labor very clear, as that will impact the ultimate cost, and you will not be surprised by add-on consulting fees, etc.

 

You also need a try-and-exit clause if you find the product is not a good fit, or the vendors are not providing the support and training you need.   Given these risks, do not bury a high sunk cost at the start, or you may be victim to an "escalation of commitment to a losing course of action" cognitive bias if the project starts to fail (Staw, 1981). Clear your “gates” on what you need to know to exit the arrangement.  Thus, a kind of Stage-Gate model (Cooper, 1990) can help design the time, the deliverables, and the measures of success needed to manage risk.  These are all bargaining points and can significantly impact the cost of the project.

 

5.     Manage the relationship.

At the start (and from the negotiation), who are the point people in your organization and the vendor’s organization? How does information flow within your organization about the product and service, and how does information flow between the organizations? How are concerns, complaints, and ideas about the product handled? Get clear on expectations for service and have actions triggered if those expectations are not met. Finally, how would problems be handled so as not to escalate? Again, this is where the division of labor articulated in the negotiation bears fruit.

 

Manage the outside relationship with the vendor just like the internal staff. That is, articulate clear goals, establish monitoring logs, and show how goals are and are not met (Kaizen). Hold regular review meetings to indicate problems and develop solutions. Make sure there is a system (like a CRM) that can register concerns about the project and can be used by members and vendors.

 

Final Concerns

This is challenging.  It requires complex equipment and ample expertise, and it can disrupt workflows.  There is no "dominant design" out there, so you and the vendor will be learning together.  Can you hold up amid this kind of co-evolution? How do you share the pains and gains in this process?  This takes courage and some organizational slack to pull off.  However, these changes are coming.  Start prudently and incrementally and learn.

 

References:

Utterback, J. M. & William J. Abernathy (1975). A Dynamic Model of Product and Process Innovation, Omega 3(6) 639–656.

 

Akerlof, George A. (1970). The Market for "Lemons": Quality Uncertainty and the Market Mechanism, The Quarterly Journal of Economics, Vol. 84, No. 3 (Aug. 1970), pp. 488–500 (13 pages)

 

Cooper, Robert G. (1990). Stage-gate systems: A new tool for managing new products, Business Horizons, Volume 33, Issue 3, Pages 44–54.

 

Govindarajan, V. &  Chris Trimble (May 2009). Building Breakthrough Businesses Within Established Organizations, Harvard Business Review, https://hbr.org/2005/05/building-breakthrough-businesses-within-established-organizations

 

Kim, W. C., & Mauborgne, R. (2005). Blue Ocean Strategy: How to create uncontested market space and make the competition irrelevant. Harvard Business School Press.

 

Mueller, B. (April 27, 2022). How to Map Out Your Digital Transformation, Harvard Business Review, https://hbr.org/2022/04/how-to-map-out-your-digital-transformation

 

Sarasvathy, S. D. (2008). Effectuation: Elements of Entrepreneurial Expertise. Cheltenham: Edward Elgar Publishing.

 

Staw, B. M. (1981). The Escalation of Commitment to a Course of Action, The Academy of Management Review, Vol. 6, No. 4 (Oct), pp. 577-587

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