Barry Libert

Does your company need a Chief Digital Officer or a Digital Corporate Director? The answer is both.

This article first appeared in Observe magazine a publication of the Executive Search Firm – Odgers Berndtson.

Corporate leaders world wide, how many of you and your fellow executives are experts in today’s digital technologies – cloud, analytics (big data), social, the internet of everything (IoE) and mobile – known by the much simpler acronym CASIM? Further, how many of you have digital experts on your leadership team that can help the company set strategy, give advice to management, and monitor organisational progress through the digital pivot that most businesses require today?

Our research and analysis, based on decades of financial data and annual reports from the Standard and Poor’s (S&P) 500 companies, indicates that most executives and board members do not have these skills. In fact, despite Forrester’s recent research indicating that 93% of corporate executives believe that digital technologies will disrupt their existing business model in the next year, only 15% of executives believe their companies have the requisite digital skills to succeed. In short, most companies don’t have a tweet’s worth of digital experience and knowledge where they need it.

Since leaders globally realize that they are ill prepared for the digital age in which they find themselves, many companies are scrambling to add digital talent to their leadership ranks. The result is frequently the appointment of a Chief Digital Officer (CDO). Unfortunately, this is often a ‘Band-Aid’ solution: a quick fix arrived at without proper consideration. For example, the CDO can end up reporting to a variety of department heads including the Chief Marketing Officer, Chief Technology Officer and Chief Information officer but not always the CEO. As such, the appointment of a CDO is a only a nod to the digital revolution. It does not, however, ensure that pervasive digital capabilities are created throughout the organization, especially if the new hire doesn’t report to the CEO and have a clear transformation requirement. As such, our recommendation is to also recruit a Digital Corporate Director (DCD) to sit on the board to complement the CDO, thus ensuring that the digital mandate is endorsed and supported. In short, two heads are better than one.

Why add a digital board member to your senior ranks?

As a corporate leader, your primary objective, as you know, is to create value for your shareholders. Our in-depth research of the S&P 500 companies, which you can find at www.openmatters.com/value-metrics, put some real urgency behind the now ubiquitous exhortation to ‘go digital’ or else. We found that companies that ‘go digital’ are 2-4x more valuable to investors than those that don’t. And that differential is increasing. Put differently, companies that have or are building digital assets (social, mobile, cloud, big data and IoE) can watch their stock prices rise above the rest.  The result: the digitally rich are getting richer and the digitally poor are getting poorer.

For this reason, we believe that any company that is trying to increase shareholder value – surely every company – needs to recruit a digital leader with the power and influence to help align the company’s business and operating model more broadly, and not just launch Facebook or Twitter campaigns. For most companies, this will require the expertise of a Digital Corporate Director (DCD).

The research behind our recommendation

To prove to leaders that going digital is critical to their company’s development as well as its financial success, we investigated how investors reward companies that take these necessary steps to embrace the digital world – and deploy the right people to action it.

We are witnessing a quantum leap forward in digital technologies and the business models they support. Today’s technologies allow for rapid expansion of organizational scale and connectivity at a fraction of the previous cost. Our research indicates that there are four types of business, each associated with different waves, or levels, of technology:

• Asset Builders: These companiesuse capitaltomake, market, distribute, and sell physical things. The business model for these companies is ‘make one, market on, sell one.’ Examples include Ford, Wal-Mart, and FedEx.
• Service Providers: Thesecompanies use capital to hire employees who produce billable hours for which they charge. The business model for these types of companies is ‘offer one, service one.’ This model is similar to the Asset Builder model, but it substitutes an individual’s output for a machine’s output. Examples include United Healthcare, Accenture, and JP Morgan.
• Technology Creators: These companies use capital to develop and sell intellectual property, such as software, analytics and intellectual property. Once created, these assets can be sold multiple times. The business model for these types of companies is ‘make one, sell many.’ Examples include Microsoft, Oracle, and Pfizer.
• Network Facilitators: These companies use capital to create a network of peers in which every participant is able to interact or transact with the many other members of the network (i.e. they may sell products, build relationships, share advice, give reviews, collaborate, and more). The business model for these types of companies is ‘make many, sell many.’ Examples include eBay, TripAdvisor.com, and Visa.

The bottom line is this: new technologies enable more value creation with less capital investment. Investors reward Technology Creators and Network Facilitators with Price/Revenue ratios (P/R values) of 5x and 8x, while Asset Builders and Service Providers are penalized with lower P/R ratios of 2x and 3x. This means that over time, more and more investor capital is being funneled into Technology Creators and Network Facilitators at the expense of Asset and Service organizations. This is critical information for any board trying to increase their company’s shareholder value.

So what does that mean to your organization?

Creating a CDO position is a step in the right direction, but leaders need to be aware that a CDO normally does not have enough ownership or influence to lead a company-wide digital awakening and to reallocate sufficient organizational assets and capital to change the company’s business model. To overcome these issues:

• Have the CDO report a directly to the CEO
• Recruit a DCD to your board to create digital corporate director skills
• Recruit these two positions in tandem to insure success

One note of caution: neither of these recruits will be successful if the CEO has not recognised the digital imperative.

Change is possible

If you’re part of the 70% of companies that still haven’t crossed the digital divide with a digitally inspired business model take heart! Change is possible. Many big companies are recruiting digital talent and creating the offerings they need to succeed:

EXAMPLES OF ASSET BUILDERS and how they are moving within the digital space:

• Nike is now serving its customers with an entire Nike+ ecosystem – hardware and software to track and analyze activity, and network integration so users can tout their long Sunday morning run via Facebook.
• The Nest brought sexy, and big data, to your home thermostat. Nest Labs is taking over where classic asset builders, like Honeywell, have stopped, bringing new, networked digital technology to home controls.
• GE is creating the ‘industrial internet’ which is what they call the “convergence of machine and intelligent data” and using big data to optimize things such as jet fuel use, electrical grids, and hospital operations.

EXAMPLES OF SERVICE PROVIDERS that are adding digital to their core offering:

• McKinsey is ‘hardening’ its IP to offer software-based solutions that complement the standard people-and billable hour based offerings.
• JP Morgan Chase has created an ‘Intelligent Solutions’ business unit to turn its wealth of financial data and analytics into products.

Integrating digital into your company’s leadership ranks requires hiring the right talent and then allocating sufficient capital to their initiatives than building out new key performance indicators for the digital age (those age old manufacturing and services KPIs just wont cut it).

So how and where do you get started?

1. Assess your board’s and CEO’s commitment to going digital. The first step is to determine whether or not your board and CEO are fully aware of the digital impact of today’s technologies and are willing to commit themselves to the necessary ‘pivot’ in their business plan to adopt. To accomplish this task, you will need to look at your CEO first and see whether he or she really understands what is necessary to embrace and benefit from digital disruption and jump to digital hyperspace to avoid the pitfalls that befell Blockbuster, Kodak and Encyclopedia Britannica. If the CEO is not comfortable going digital, then it may be time to find a coach to mentor him or her or find another leader to take the organization forward into the digital realm.
2. Hire a Chief Digital Officer (CDO) as a member of your executive team. We cannot imagine how a company in today’s social, mobile, cloud and big data world couldn’t benefit from real world digital know-how. Finding the right digital talent for this position may require widening your view to consider more youthful, non-CEO candidates. Many companies are finding digital talent in young, venture-backed firms where there is a larger pool of talented professionals. But make sure you give them the power to lead change

• Starbucks promoted Adam Brotman to a CDO role, giving him reign over all “Starbucks core digital businesses, including mobile and mobile payments, web, card, loyalty, e-commerce, Wi-Fi, and the Starbucks Digital Network.”
• McDonalds recently brought on as CDO Atif Rafiq, who has worked at Amazon, Yahoo!, and AOL. Is this new role, he is “responsible for McDonald’s cohesive and holistic global digital strategy – bringing an entirely new level of convenience and fun to our customers through innovative digital experience and engagement.”

• a Digital Corporate Director (DCD) to your board. Recruiting a corporate director with digital expertise is a requirement in today’s hyper connected world if you want to help your CDO succeed and prosper (just watch what Starbucks, Nike and Wal-Mart are doing if you don’t believe us). Most of the best companies have already begun recruiting digital directors, so if you haven’t, start soon. Great DCDs are in short supply. And don’t forget that they will need full board support to successfully influence the firm’s strategy and its capital allocations.

• Disney recruited Chery Sandberg, of Facebook fame, to their board, noting “Sheryl has been at the forefront of a technological revolution that’s opened up a world of new possibilities for consumers and which has greatly affected the way we do business”
• Coca-Cola brought in Bobby Kotick, CEO of Activision Blizzard, saying “Bobby brings an entrepreneurial mindset and a high level of financial literacy and digital knowledge to our Company.”

The conclusion is simple:

If you want the 8x multiplier for your company, and the related influx of inexpensive capital and enthusiastic customers, start taking digital seriously. Recruit both a Digital Corporate Director and Chief Digital Officer to your organization and build up your digital chops to ensure your future. Time is of the essence.

Authors:

Candi Dalipe, Odgers Berndtson – USA

Steve Potter, Odgers Berndtson – USA

Barry Libert, Digital Board Advisor, OpenMatters

Megan Beck Fenley, Digital Researcher, OpenMatters

The post Building Tomorrow’s Digital Leaders: What’s Necessary appeared first on OpenMatters.

The below article appeared in the WSJ on May 26th.

Years ago, boards and management teams could be comfortable that a company’s business model would endure for 30 years or more. Today, technology is disrupting business models every day, and business model risk is today’s biggest strategic risk. Companies without boards that are digitally savvy could find themselves starved of the investor capital and customer demand they need to innovate, thrive and grow. Boards should provide input and perspective on how management handles this strategic risk and the potential rewards available to those that keep pace.

It is clear that not just software, but the digital technologies and networks that software enables, are transforming how customers interact, employees engage and investors value businesses. In response, companies in every industry are changing how they operate, create, communicate and sell. Or at least they should be.

Research conducted by OpenMatters with input from Deloitte & Touche LLP—which included an analysis of 40 years of financial data for the S&P 500—shows that businesses at the forefront of the digital revolution are already cashing in with consumers and investors. Yet, many traditional businesses are still struggling to “cross the CASM” and have yet to embrace the disruptive power of digital technologies such as Cloud, Analytics, Social and Mobile.

The good news is that essentially every company, regardless of industry, has the potential to improve its shareholder value and long-term performance by capitalizing on digital technologies. However, achieving these benefits will require new network-driven business models, which in turn will likely require a mental shift for corporate leaders raised in a different era with different rules for business success.

Change is risky, but not as risky as standing still. One of the greatest strategic risks faced by businesses today is not adapting quickly enough to the disruptive forces of the digital revolution. These forces are affecting almost every aspect of business. However, the kinds of fundamental changes required to address them need to start at the top, including what boards can do to oversee and work with management to mitigate risk in a digital world.

For many companies, however, digital may be all talk with little action, especially in the boardroom and C-suite. According to recent research, many boards and CEOs are dangerously behind the times when it comes to capitalizing on digital. This lack of investment and preparedness on the technological front is particularly troubling given how the market is responding to and valuing technologically advanced firms.

Business Models and the Mental Models That Drive Them

Investors are rewarding companies that go digital, and leaving others behind (in terms of valuation and capital availability) according to the research conducted by OpenMatters with Deloitte’s input. In particular, the research found the most effective companies are those reallocating their capital to make and deliver the digital products that consumers and businesses want (such as social and mobile networks) and to harness the power of big data and analytics. This holds true regardless of industry. Meanwhile, companies that make, market and sell physical products and traditional services are left with lower valuations. Companies that don’t align their boards with the CASM world may be missing out on major opportunities to create value and satisfy the demands of customers and investors.

There are four distinct business models that today’s companies generally use to create value, with each model featuring a different level of technological enablement:

• Asset Builders: Companies use capital to make, market, distribute and sell physical things. Examples include automakers, big box retailers and delivery businesses.
• Service Providers: Companies use capital to hire employees who produce billable hours. This model is similar to the physical model, but it substitutes an individual’s output for a machine’s output. Examples include consulting firms and financial institutions.
• Technology Creators: Companies use capital to develop and sell intellectual property, such as software, analytics and intellectual property. Once created, these assets can be sold multiple times. Examples include software and biotech companies.
• Network Facilitators: Companies use capital to create a network of peers in which every participant makes and sells products or provides digital content to the many other members of the network. Examples include online marketplaces, social media businesses and credit card companies.

Understanding business models is crucial because business models drive shareholder value and strategic risks. According to OpenMatters’ research and Deloitte’s analysis, investors pay premiums for Technology Creators and Network Facilitators, valuing them two to three times more than physical or services firms. The average multiplier (or P/R ratio) is roughly 2x, 3x, 5x and 8x, respectively, for Asset Builders, Service Providers, Technology Creators and Network Facilitators. The bottom line is that the most effective organizations are adapting their business models to serve today’s empowered and digitally connected customers—and investors are rewarding their efforts.

But if business models drive value, then what drives business models? The answer is the “mental model” of a company’s leadership team and board of directors, or what they value, measure and invest in. For Asset Builders, leaders typically value making and selling things. For Service Providers, they care about hiring people and selling services. For Technology Creators, the focus is on creating intellectual property, such as biotech solutions and software. For Network Facilitators, the top priority is building and operating social and commercial networks.

A good way to understand where a company is headed—and how likely it is to cross the CASM—is to look at senior management’s mental model, skillsets and areas of expertise, as well as the composition of its board.

The most CASM-savvy boards are generally found at network and technology companies. Often, these companies have board members who are very skilled at operating in digital network projects, and can align strategic objectives and asset investments, including cash and talent, with digital products and services. For these companies, digital technology is at the core.

By contrast, if your company is in an Asset Builder or Service Provider business, at this point you are probably feeling like an uninvited guest. The good news is that you, too, can win the hearts and minds of investors and customers, but you will need to work with your fellow board members to reallocate your organization’s attention and capital to building its own social and commercial networks of customers, employees and partners, and mining data to unearth new business value.

Helping the Board “Cross the CASM”

How do you help your board become more digitally savvy—across Cloud, Analytics, Social and Mobile—when digital expertise is in high demand and low supply? First, assess your board’s existing capabilities and expertise by asking questions such as, “Have board members been involved in managing business in the digital realm?” and “Do they actively use today’s technologies?” This assessment may reveal a critical gap in the board’s knowledge of digital strategies. If so, following are three ways to fill the gap:

1. Educate the individual board members about digital disruption: Based on the research cited earlier winning companies fully embrace the digital world and invest significant capital in this way of doing business. Provide existing board members with continuing education classes to help them become more knowledgeable in this area, providing a foundation that enables board members to contribute to the digital dialogue.

2. Seek advice from an advisory board or outside experts: Consult with advisors who have personally acquired digital skills and experience either as investors or executives of digital organizations. These advisors can challenge your business model and show your board and senior management team the ropes, helping to avoid costly pitfalls. They can also significantly impact your strategy and operations—particularly in areas such as social media policies, mobile business strategies, big data and analytics opportunities and cloud deployments.

3. Consider recruiting a director with digital expertise: In today’s business environment, every company can benefit from real-world digital know-how. Leading companies have already added top executives from social media and internet gaming companies to their boards. However, given the short supply of qualified candidates, finding the right person might require widening your view to consider younger digital executives who are not CEOs. In fact, many companies are finding prospective board members in small, venture-backed firms where there is a larger pool of digital talent.

The stakeholders boards serve are already reallocating their attention and capital to digital. It’s time for boards to make the leap and cross the CASM. Not doing so could be perilous.

—Excerpted from “Getting on Board: Why ‘Crossing the CASM’ Is Key to Minimizing Risk,” with permission of Knowledge@Wharton.

About the authors: William J. Ribaudo is a partner at Deloitte & Touche LLP and national industry leader for Technology, Media & Telecommunications. Henry Ristuccia is a partner at Deloitte & Touche LLP and global leader, Governance, Risk and Compliance Services. Barry Libert is CEO of OpenMatters and a board member of the SEI Center at Wharton. Megan Beck Fenley is an associate at OpenMatters.

The post Embracing Digital: Why Boards That Don’t Could Put Companies at Risk appeared first on OpenMatters.

The below post appeared in the WSJ on May 2nd.  I thought it was a wonderful post and therefore have reposted it here.

MICHAEL WOLF: Over the last years, many companies appointed a “chief digital officer” (CDO) as a solution to the avalanche of new technology coming their way. The objective was to consolidate all things digital into one corporate group, charged with making all digital decisions and, in many cases, running all digital businesses. Today, however, the concept of a “centralized digital department” is quickly becoming an anachronism. Traditional organizations that need to compete with newer, digitally native companies are losing the idea of the CDO as a digital czar and instead recasting the chief digital officer as a strategic partner to senior managers and change agent across an enterprise.

Increasingly, separating digital innovation into its own department is a sign of failed cultural change. It signals to the rest of the organization that digital is something on the side, and not part of the core of their business. At the same time, it fails to address the need for everyone in an organization (not just an elite few) to prepare for the perfect storm of search, mobile technology, the cloud, big data and social media. Finally, the mere idea of a centralized power is antithetical to a company’s need to succeed in a networked economy.

Since the chief digital officer is a relatively new title, it’s not surprising that the position will evolve with the needs of traditional organizations as they transform themselves for the digital world. Today, there is a real requirement for knowledgeable technology resources to help every part of a company exploit the opportunities in digital, from user experiences to functionality to web development–and everything in between. Digital is the core and needs to be embedded within all businesses. The role of the CDO will be to coach, facilitate, organize and strategize–essentially playing a role across a company rather than managing his or her own fiefdom.

Michael J. Wolf is founder and CEO of technology and strategy consulting company Activate Inc. He formerly served on the YahooYHOO +1.56% board of directors and as president and chief operating officer of MTV Networks.

The post Leaders Need to Rethink The Chief Digital Officer appeared first on OpenMatters.

Abstract:
Business model risk is today’s biggest strategic risk, and companies without boards that are digitally savvy could find themselves starved of investor capital, according to this opinion piece written by Deloitte and Touche partners William J. Ribaudo and Henry Ristuccia; Barry Libert, CEO of OpenMatters and his associate Megan Beck Fenley.

The below article was the cover story and lead article in the March 24th issue of Knowledge@Wharton.

Text:

Years ago, boards and management teams could be comfortable that a company’s business model would endure for 30 years or more. Today, that is no longer true. Technology is disrupting business models every day, and boards should provide input and perspective on how management handles this strategic risk and the potential rewards available to those that keep pace.

In 2011, Internet pioneer Mark Andreessen wrote a widely read article in the Wall Street Journal called Why Software Is Eating The World. And while he might have been biased due to his background as a software developer and venture capitalist, three years later it is clear that not just software, but the digital technologies and networks that software enables, are transforming the world and having a profound impact on how customers interact, employees engage, and investors value businesses. In response to this digital revolution, companies in every industry are changing how they operate, create, communicate and sell. Or at least they should be.

Research conducted by OpenMatters with input from Deloitte – which included an analysis of 40 years of financial data for the S&P 500 – shows that businesses at the forefront of the digital revolution are already cashing in with consumers and investors. Yet, many traditional businesses are still struggling to “cross the CASM” and have yet to embrace the disruptive power of digital technologies such as Cloud, Analytics, Social and Mobile.

The good news is that according to our research, essentially every company – regardless of industry – has the potential to improve its shareholder value and long-term performance by capitalizing on digital technologies. However, achieving these benefits will require new network-driven business models – which in turn will likely require a mental shift for corporate leaders raised in a different era with different rules for business success.

Change is risky – but not as risky as standing still. We believe one of the greatest strategic risks faced by businesses today is not adapting quickly enough to the disruptive forces of the digital revolution. These forces are affecting almost every aspect of business. However, the kinds of fundamental changes required to address them need to start at the top, which is why our focus here is on what boards can do to oversee and work with management to mitigate risk in a digital world.

The digital revolution is particularly amazing when you consider its rapidity and pervasiveness. Just 10 years ago the concept of social media was still being cooked up in a Harvard dorm room, the iPhone was just a design concept, big data wasn’t on anyone’s radar, and cloud was a meteorological term most often used to describe impending storms. Things have certainly changed since then. Today, even traditional manufacturers are viewing digital as a new frontier of opportunity. For example, Nike has developed a software/hardware ecosystem with Nike+ and FuelBand SE at its core, while GE Capital has begun to develop apps for its industrial clients, creating a digital marketplace similar to an app store for consumers.

For many companies, however, digital may be all talk with little action – especially in the boardroom and C-Suite. According to recent research, many boards and CEOs are dangerously behind the times when it comes to capitalizing on digital:

• Fewer than 10% of S&P 500 companies have integrated digital into their business model. Our research and analysis of S&P 500 data shows that companies that generate a high percentage of their revenues from software, analytics and codified IP make up only about 7% of the index. And even when we include companies that are using those technical capabilities to build social networks and commercial networks (such as credit card payment networks), the figure only grows by 2% or 3%. These numbers are particularly surprising in light of our findings on how technological adaption drives value.

• Only nine companies in the S&P 500 are ‘highly digital.’  A highly digital organization is one that “generates a high percentage of [its] revenues [and value] digitally; its leadership (both the CEO and the Board) have deep digital experience; it does business significantly enabled by digital channels; and it’s recognized as transformational in its industry,” according to a blog post on the HBR Blog Network by Jeffrey F. Rayport and Tuck Rickards.

• The United States faces a gap of 1.5 million leaders who are savvy enough to take advantage of big data. A 2011 study by the McKinsey Global Institute found that there are enormous potential gains from big data and analytics once companies and their leaders learn how to use it – gains as high as a $300 billion value increase in health care, and a 60% increase in retailer operating margins.

This lack of investment and preparedness on the technological front is particularly troubling given how the market is responding to and valuing technologically advanced firms.

According to our research, investors are rewarding companies that go digital, and leaving others behind (in terms of valuation and capital availability). In particular, we found the most effective companies are those reallocating their capital to make and deliver the digital products that consumers and businesses want (such as social and mobile networks) and to harness the power of big data and analytics. This holds true regardless of industry. Meanwhile, companies that make, market and sell physical products and traditional services are left with lower valuations. Companies that don’t align their boards with the CASM world may be missing out on major opportunities to create value and satisfy the demands of customers and investors.

Our research indicates there are four distinct business models that today’s companies use to create value, with each model featuring a different level of technological enablement.

• Physical. Companies use capital to make, market, distribute and sell physical things. Examples include automakers, big box retailers and delivery businesses.

• Services. Companies use capital to hire employees who produce billable hours. This model is similar to the physical model, but it substitutes an individual’s output for a machine’s output. Examples include consulting firms and financial institutions.

• Information. Companies use capital to develop and sell intellectual property, such as software, analytics and intellectual property. Once created, these assets can be sold multiple times. Examples include software and biotech companies.

• Network. Companies use capital to create a network of peers in which every participant makes and sells products or provides digital content to the many other members of the network. Examples include online marketplaces, social media businesses and credit card companies.

Understanding business models is crucial because business models drive shareholder value and strategic risks. According to our research and analysis, investors pay premiums for Information and Network firms, valuing them two to three times more than Physical or Services firms. The average multiplier (or P/R ratio) is roughly 2x, 3x, 5x and 8x respectively for Physical, Services, Information and Network businesses. The bottom line is that the most effective organizations are adapting their business models to serve today’s empowered and digitally connected customers — and investors are rewarding their efforts.

But if business models drive value, then what drives business models? The answer is the “mental model” of a company’s leadership team and board of directors.

In simple terms, a mental model is what an organization’s leaders and board members value, measure and invest in. For manufacturing companies, leaders typically value making and selling things. For services firms, they care about hiring people and selling services.  For information firms, the focus is on creating intellectual property, such as biotech solutions and software. For network firms, the top priority is building and operating social and commercial networks.

A good way to understand where a company is headed – and how likely it is to cross the CASM — is to look at senior management’s mental model, skillsets and areas of expertise, as well as the composition of its board.

Two primary roles of a board are (1) advising on the company’s strategic plan and related capital allocation, and (2) hiring the CEO.  As such, a boards’ preferred mode of thinking may drive the company’s focus. Board members whose primary expertise is in traditional business areas such as operational efficiency or people management might have limited insight on how CASM technology can create the most value for the business.

Predictably, the most CASM-savvy boards are generally found at network and information companies. Often, these companies have board members who are very skilled and experienced at operating and investing in information and digital network projects, and can align strategic objectives and asset investments (including cash and talent) with digital products and services that meet today’s customer and shareholder needs. For these companies, digital technology is at the core of what they do.

By contrast, if your company is in a physical or services business, at this point you are probably feeling like an uninvited guest at the digital party. The good news is that according to our research you – too – can win the hearts and minds of investors and customers. But to do so, you will need to work with your fellow board members to reallocate your organization’s attention and capital to bridging the CASM – building its own social and commercial networks of customers, employees and partners, and mining data to unearth new business value. This will require taking active steps to create and nurture the right mental models.

Whether you oversee a publicly traded company, or just want to infuse a new digital mindset into your private equity backed organization, not-for-profit organization, or private firm, we recommend making a conscious effort to help the board become more digitally savvy.

The issue of board composition and who is at the table to provide perspective, input, oversight and advice on strategy is at the heart of governance.  Investors and stakeholders alike are focused on board composition and whether a board’s combined skills and experiences align with its company’s strategy and the goal of maximizing shareholder value.

While a small percentage of companies already have boards that are “digital-ready”, so to speak, we believe others would be wise to start addressing this skill sooner rather than later.

How do you help your board become more digitally savvy at a time when digital expertise is in high demand and low supply? The first step is to assess your board’s existing capabilities and expertise.  Consider what skills and experience board members currently have by asking the following questions:

• Have existing board members been involved in building, managing and exiting business in the digital realm?
• Do they actively use today’s technologies? (e.g., leveraging big data to inform their decisions, and using social media to communicate with peers and stakeholders).
• Are they advocating the reallocation of capital from traditional uses to digital networks because they have personal experience and knowledge of the benefits?

This initial assessment may reveal a critical gap in the board’s knowledge and experience with regard to digital strategies and disruption.  If so, we believe there are three ways to fill the gap:  educate, seek advice or recruit.

1. Educate the board (or individual board members) about digital technologies and digital disruption. Our research shows that winning companies fully embrace the digital world and invest significant capital in this way of doing business. Provide existing board members with continuing education classes to help them become more knowledgeable in this area.  This kind of education can provide a foundation that enables board members to contribute to the digital dialogue.
2. Seek advice from an advisory board or outside experts. Consult with advisors who have personally acquired digital skills and experience either as investors or executives of digital organizations. These advisors can challenge your business model and show your board and senior management team the ropes — helping to avoid costly pitfalls. Although they have no formal authority over your company, digital advisors can still have a significant impact on your strategy and operations – particularly in areas such as social media policies, mobile business strategies, big data and analytics opportunities, and cloud deployments.
3. Consider recruiting a director with digital expertise. In today’s business environment of social, mobile, cloud and big data, we believe every company can benefit from real-world digital know-how. Leading companies across a wide range of traditional industries — from retail to entertainment to food & beverages – have already added top executives from social media and internet gaming companies to their boards.

However, given the short supply of qualified candidates, finding the right person might require widening your view to consider younger digital executives who are not CEOs. In fact, many companies are finding prospective board members in small, venture-backed firms where there is a larger pool of digital talent. You can recruit the skills needed or consider using an executive recruiter that has a Digital Board Practice with clear expertise in this area.The stakeholders you serve – including customers, employees and investors – are already reallocating their attention and capital to digital, and are excited by companies that are taking advantage of CASM technologies. Change is risky, but so is getting stuck on the wrong side of the CASM – especially in a business environment that is rapidly evolving. Business model risk is today’s biggest strategic risk (and source of rewards), and companies without boards that are digitally savvy could find themselves starved of the investor capital and customer demand they need to innovate, thrive and grow.

____________________________________________________

About the Authors: William J. Ribaudo is partner, Deloitte & Touche LLP, and national industry leader for Technology, Media & Telecommunications. Henry Ristuccia is partner, Deloitte & Touche LLP, and global leader, Governance, Risk and Compliance Services. Barry Libert is CEO, OpenMatters, and a Board Member of the SEI Center, Wharton. Megan Beck Fenley is Associate, OpenMatters.

The post Getting on Board: Why Crossing the ‘CASM’ is Key! appeared first on OpenMatters.

A Digital Advisory Board

Do you Need One?  How to Create One!

The article below was the cover story in the first quarter issue of Directors and Boards magazine.

10 rules for success in the social, mobile, cloud and big data age. 

With more than 2 billion customers connected to social networks, 5 billion people carrying mobile phones, and 2.5 quintillion new pieces of data generated every day, it is clear that being digital is critical for corporate success. Where once industrial companies ruled the list of most treasured companies, today software, big data, and social and mobile network companies like salesforce.com, Google, Workday and Apple are titans of brand identity, customer loyalty, and shareholder returns. Further, with digital companies reigning supreme over Wall Street as the place to go to start your career, the best and brightest of our youth are also lending their human capital to this trend. But if this data is not enough to sway you, then take a look at the Chinese market.

More specifically, China’s e-commerce market overtook the U.S. in 2013 as the world’s largest online retail market. According to management consulting firm Bain & Company, online sales in China are expected to reach $540 billion by 2015, compared with roughly $345 billion in the U.S. Further, e-commerce sales using mobile and social technologies in China have increased more than 70% annually since 2009, compared with 13% in the U.S. As Duncan Clark, Chairman of BDA China, says, “If you’re going to be in China, [digital] is going to be the first thing you consider, and if you’re already there, you’re scrambling to adapt.”

So whether your firm is local or global, it’s time to acknowledge the hard truth: digital rules the customer, employee, and shareholder roosts! And that means that if you don’t have at least one digital corporate director on your board, you need him or her now. But that subject — recruiting digital corporate directors — has already been covered by this publication in an earlier issue (First Quarter 2013). As such, this article addresses the importance of creating a digital advisory board to bolster your organization and the competencies of your board in this critical arena.

Getting started

The question is how to get started and where to look to build this new advisory board. Here are 10 rules to follow.

Rule 1: Understand the importance of a digital advisory board. A digital advisory board, as distinct from your company’s board of directors, should be created to offer advice to your management team and board on a regular and recurring basis given the importance of today’s technologies. It is important not to confuse your digital advisory board members with your digital corporate directors. Unlike corporate directors who sit on your board, digital advisory board members (or digital advisors) have no authority over your company. However, to insure their effectiveness, they should have significant strategic and operating impact — especially where your board probably doesn’t have all the requisite digital skills to pivot your business model to succeed in today’s social, mobile and big data world. In fact, because the advisors do not have the legally imposed fiduciary duties of corporate directors, is it imperative to give them the leeway to impact your company in this arena.

Rule 2: Recruit digital advisors who have been there and done it. Most CEOs and corporate boards know that board advisors can help with operations, including cutting costs, designing innovative new product and service offerings, introducing organizations to valuable new business opportunities, bringing new skills to the table, and helping with financings or transactions. However, in today’s connected world, digital advisory board members can also help with social media policies, mobile business strategies, big data opportunities and analytics, and cloud deployments. So recruit advisors to serve on your advisory boards with the requisite digital skills and experience that they have accumulated either as investors or operators themselves of digital organizations. That way they can show your board and senior management team the ropes and help them avoid costly pitfalls along the way.

Rule 3: In-source this critical capability. Most board members, according to the National Association of Corporate Directors (NACD), have traditional skills — finance, legal, and operations. As proof, NACD reports that less than 7% of board members are strategists and even a smaller percentage are technologists. Given how fast new companies are toppling industry stalwarts (e.g., Encyclopedia Britannica) or changing entire industries (newspapers and other print media), it is not a good idea to outsource this important new skill to a professional services firm, like you would your accounting or legal departments. As research confirms, being digital — or at least having that core competency on your board — is in short supply, so insure that you have it on your side by recruiting strong players to your digital advisory board.

Rule 4: Set clear objectives for the digital advisory board members. Most successful boards are formed with specific goals in mind, be it organic growth, succession planning, diversification through M&A, audit excellence, or regulatory compliance. These are tried and true objectives for a board that is trying to help the CEO and management team do their regular job. However, according to the newest research from Deloitte, brand reputation and business model innovation are the No. 1 and No. 2 concerns for boards and CEOs. Doesn’t it make sense, then, that it is critical to have social media and mobile experts with clear and measurable goals in this realm?  So set clear objectives for your digital advisory board members at the outset.

Rule 5: Select digital advisory board members who will challenge your business model. Getting your business model right is important in today’s customer-empowered world in which everyone is connected and chatting about your brand, products, services, and culture. (If you don’t believe me, just check out your company on Twitter, Facebook and Glassdoor.com.) Even shareholders are using information from these social networks to make investment decisions and do their due diligence about your company. Given these facts, you need to recruit digital advisory board members who understand how these technologies impact your entire business model more than just driving sales and marketing messages. To accomplish this, make sure that your advisors will not just be rubber stamps, but rather individuals who will challenge your board’s and management team’s thinking about your entire business model, including their mental model and capital allocations during your annual budget cycle.

Rule 6: Charge your advisory board with understanding big data. According to a recent joint study conducted by the Conference Board and Stanford University, 93% of companies fail to mine actionable big data that is derived from social interaction and which can help them reduce risks or seize opportunities. This reality creates significant liability for corporate directors. Given these facts, charge your advisory board with the requirement to help the corporate board, leadership team, and CEO build a big data plan for the enterprise that helps insure its future success. Once done with this task, add items such as enabling employees to: bring their own device to work (BYOD); embrace crowdsourcing for innovating ; and use social media pervasively (including the board).

Rule 7: Use experts to recruit your digital board advisors. Search your current contacts and networks, but if you come up short, it’s time to seek help from an executive search firm with expertise in recruiting digital advisors. In today’s technology world, the biggest and best recruiters are setting up digital board recruiting practices and advisory services to help you find the resources you need. Remember, digital corporate advisors and directors are in short supply, so don’t wait too long to start your search. You may be left out in the cold without the skills and experience you need to help you succeed.

Rule 8: Make sure that governance is part of your digital advisory board’s operations. Though advisory boards are more informal than boards of directors, they should still be governed by written agreements. It is vital to consult with your attorney before forming and working with an advisory board. But, generally, digital advisors should sign nondisclosure, stock compensation, and fee for services agreements. Further, it is wise to draft a charter that outlines your digital advisory board’s responsibilities and logistics, such as meeting frequency, expected time commitment, and compensation.

Rule 9: Indemnify your advisory board members just like you do your corporate board members. Each digital advisor should receive a written indemnification. Despite the fact that good advisory boards don’t have fiduciary duties, they can open themselves up to potential liabilities via the advice they give and the services they offer. It is not uncommon for an outsider to sue those listed on your website as advisors to the company. So, like corporate directors, indemnify your advisory board members if you want to attract the very best and get the very best from them.

Rule 10: Pay your advisory board members for their advice. For many digital advisors, being a member of an advisory board offers mentoring, networking, and social opportunities that make the experience worthwhile. It is still, however, a good idea to compensate your advisors if you want their time, attention and best insights. At the very least, you should offer stock compensation (like start-ups do), cover any expenses they incur, and provide meals when you get together. Many experts advise going beyond these, suggesting that you pay each member either a per-meeting fee or monthly retainer that might range from a few hundred to a few thousand dollars per day, per meeting. The bottom line: If you recruited them because you value their advice, then pay for it.

Start today

There is no getting around it. Recruiting digital board members is a must in today’s social, mobile, cloud and big data era. However, given the complexity of the issues that now confront every organization (including not-for-profits) as they pivot their business models to address today’s digital realities, it is not enough to have a single digital corporate director on your board. It is also necessary to create a digital advisory board with the members and broad expertise you need. So start today and make sure you have the right people on the digital board advisory ‘bus’ if you want to go, as Jim Collins suggests, from “Good to Great” in the digital age. ¶

The author can be contacted at barry@openmatters.com.

Barry Libert is chairman and CEO of OpenMatters, a firm that invests in social, mobile, cloud and big data companies and advises managements and boards on the value of digital technologies (www.openmatters.com). In addition to his roles as strategic advisor and angel investor he serves as a digital board member for a number of venture-backed companies and not-for-profit organizations. He is a senior fellow and board member of the SEI Center for Advanced Studies in Management at the Wharton School of the University of Pennsylvania.

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It’s the New World Of Digital Everything: Are Your Board Members and Leaders Ready?
Candi Dalipe, Barry Libert and Steve Potter

Introduction

It’s clear — the digital world is here. Recently, on the CBS how, 60 Minutes, Jeff Bezos, the infamous CEO and trailblazer of Amazon, announced that he intended to use drones as a mobile device to accelerate delivery of everything he sells to your home that same day. What’s next in the explosive world of social, mobile, cloud and big data? A lot!

Given the fast paced world of digital, how does your board and leadership team prepare for avalanche of new technologies and the requirements that they demand of your business model? What do you do, as a leader in, and corporate director of, your organization to insure its future success and growth? How do you cope in a world in which 1.5 billion users use social media to communicate and collaborate; 5 billion customers leverage their mobile phones to conduct commerce and share information; and 2.5 quintillion new pieces of data become part of the big data and cloud world each and every day?

Our answer? Put the right people on the bus, as author Jim Collins of the book Good to Great often says. And those people need to be digitally savvy executives and board directors.

So how do you get started. Read on for our insights and prescriptions.

Section 1: We Have Found the Enemy of Change and It Is Us!

Research shows some pretty disturbing facts:

• According to research from Stanford/The Conference Board, Less than 7% of boards use data from social and mobile networks. Further, only 33% of CEOs are members of the social set says Domo.com. Lastly, Berkley University has found that Twitter is an excellent source of early indicators of stock price movement for investors;
• The average tenure for CEOs is this country is around 5 years, down from over 10 years a decade ago, and it’s currently around 4 for the Fortune 200. The pace of digital and technological change is a tsunami that takes no prisoners and Moore’s Law is here for business models and CEOs with a vengeance; and
• A Sierra Ventures study of Fortune 500 execs showed that nearly a third of execs identified big data and almost another third pointed to mobile devices as critical. A smaller group, 24%, picked cloud computing. Only 12% singled out social media.

So how did we get to a place where the leaders of the capitalized world are so disconnected from the digital realities of their customers, employees and investors? Simply stated, technological changes came faster than boards and managers were ready to adapt.

To put these facts in context, over the last 30 years, as technologies changed every aspect of our customer, employee and investor communications, and corporate boards have barely morphed from their original ‘Old Boy Networks’ (rarely the early adopters of new technologies) to today’s digital enabled leaders. In fact, according to research by NACD, the average age of a board member is 62 and less than 6% of them are technologists. The result: many organizations make bad business decisions that cost them their futures. As proof, witness the demise of once great brands like Kodak, Encyclopedia Britannica and Circuit City, to name just a few that underestimated the power of the digital revolution.

Luckily, over the last 20 years, we have seen boards diversify from this homogeneous group to include more diverse leaders, but not digitally savvy or business model astute. The result of this has been a disaster for many organizations. At the time of its demise, Lehman Brothers had a very distinguished and diverse board. All of its members were successful in their respective areas and all commanded gravitas and respect. The board consisted of a female admiral, impressive in her own right, but perhaps a better choice for Bath Iron Works because she was not the most astute analyst of derivative product or mortgage-backed securities. Other members included a former actress, the former CEO of a computer manufacturer, the former CEO of an industrial company, and the former CEO of an auction house. In fact the only board member who had any finance background was a former investment banker in his 80’s who wasn’t even a capital markets or risk professional. No wonder the world was shocked by the rapid and regretful demise of a once great firm. And the same is happening again on most boards, but this time, the blind spot isn’t complex mortgage securities, but rather the intricacies of our highly technical and networked world.

Fortunately, the truly great organizations are realizing that neither the old boys nor the politically correct board directors and leadership teams are sufficient for our flattened world. Luckily, the digital pioneer companies are leading the way in this regard. Obviously Google, for instance, has a board with acute ‘digital awareness’ and others, like Coca Cola and Allstate, have added two or more digital experts to their ranks to keep on top of the competition.

Section 2: There is a Map to Success

So what do you do if you are lacking strong digital expertise? We have identified three steps to get you started.

STEP 1: Assess your board members’ and leaders’ digital skills.

First, take a look at your own board. Our experience as global executive recruiters and digital board members has led us to categorize companies and their boards and leaders into four categories to help you figure out where you stand:

• DIGITAL NATIVES: Natives are the creators, the ones who get it, who challenge or change business models and succeed in doing so. Think of Special Forces driving down the road at 80 miles an hour, sowing mines for their competitors to hit. These are companies like Apple, Google, LinkedIn, Facebook, as well as Wal-Mart and Nike.
• DIGITAL ADAPTERS: These companies didn’t start the revolution, like Google or Facebook, but they have committed to change with aggressive CEO-led initiatives, these are companies like Allstate and GE that now lead their peer groups.
• DIGITAL IMMIGRANTS: These companies know they are behind and are aware of the challenges posed by their new competitors. They want to go ‘native,’ but tend to apply Band-Aids to the problem. To return to our analogy, they are driving down the mine-sown road, following a minesweeper, and traveling at 5 miles per hour. Although they don’t hit land mines, they have significant risks of falling behind. These are companies, like BP that missed the impact of today’s technologies after the oil spill on their brand or market perception of their efforts.
• DIGITAL ILLEGALS: These companies are clueless! Unaware, they are plodding along with a business as usual POV. They are driving down the commando’s road without a minesweeper and they are the ones that will perish first. Think Encyclopedia Britannica, Blockbuster and Borders.

STEP 2: Recruit digitally competent leaders and corporate directors.

Once you have identified the category that your company falls in, the process of developing the skill sets to compete effectively in this new environment can commence. It is during this phase that companies must really dispel their traditional strategic planning methodology. Companies often make the mistake of using “old think” to develop a “new think” digital strategy.

In the new approach, hire talent and people first to develop the go-forward strategy. To begin, recruit “new blood” to your firm. Most likely, these disrupters will not come from your inside your company or industry. Think back to the music industry when it was experiencing disruption from a little company, called Napster. This threat to the industry required them to think through their new hires. At the time, a major music company needed a head of technology. Their prior CIO hailed from consumer package goods, since one of the challenges they addressed was the manufacturing/supply chain. They wanted to cut the cost of CD production and ensure delivery on time to the point of sale (POS) that were the retailers, like Best Buy and Tower Records. However, in 2001 the profile for a head of technology in the music business needed to be re-evaluated. The company needed not only a CIO, but a CTO as well – their business was about to undergo a significant shift. Their needs were CD production, but data encryption, intellectual property protection, and more. A CIO from CPG or any other media entity or even traditional retail would not do at this stage; they needed to think out of the box to recruit this executive. The hire eventually came from the financial services/banking sector. And that is our recommendation to you. Think differently when it comes to recruiting these new professionals to your organizational ranks.

For example, today, the face of the music industry has changed completely. Most of the sales are not from brick and mortar retailers. Probably, many of you purchase your music through digital downloads on iTunes or other such music service. And artists are foregoing traditional labels and at times releasing directly and electronically to technology connected and savvy consumers. And the same holds true for marketing. Take Katie Perry who, with over 40MM Twitter followers can reach her fans with less than 140 characters and without spending very much on marketing dollars.

Other industries can look to the media and entertainment sectors to learn some valuable lessons. While an insurance company may wonder, “Why would I put a guy who built a digital media business on my board?” He or she may want to think twice about his or her digital marketing and customer acquisition strategy before answering that question.

STEP 3: Educate other members of your board and leadership team in digital-everything

It is not enough to assess your board and bring in a competent digital leader, as this new member will be in danger of becoming “the token.” Beyond recruiting this type of individual, board and leadership team education is the next step to help re-order the thinking around how to foster an innovative digital culture versus tragically bringing in sustaining technology. Educating your leadership team to understand what they do not yet know will go a long way in ensuring that your company will not only realize the levers in the changing digital landscape in your sector, but also help you identify the best way to nurture innovation and develop cutting edge social and mobile technology and tools. In this way, your company will not optimize to death, but rather find the path to true innovation. Acceptance by the leadership team of how digital can help drive each of their areas will help smooth the potential political minefield that digital innovation will create.

How do you do this? Hire seasoned digital natives – the pioneers or hire the young Millenials to mentor your senior executives (aka Reverse mentoring). At the dawn of the email age (seems eons ago doesn’t it?) Jack Welch mandated that his senior execs hire a 20-something to familiarize them with the technological changes that were sweeping through corporate America. Not surprisingly GE went on to be a leader and innovator creating new online purchasing mechanisms and sales tools that were ahead of their time.

Section 3: No Need to Fall in Potholes

As you begin this journey into the digital holy land of big data, cloud, and social and mobile networks, be aware of 3 pitfalls that all organizations should avoid.

• Pitfall 1: Thinking you are digital with only 1 or 2 leaders and corporate directors. CEOs who think they have addressed their digital strategy by hiring a single digital executive to build a digital presence are sorely mistaken. Many companies will start hiring Chief Digital Officers (CDO), but if the company is not fully committed and the CDO is not fully supported, this hire will become nothing more than a figurehead who will serve as an internal ambassador for digital. Companies must understand the strategy and the purpose of hiring the right digital talent.
• Pitfall 2: Avoiding using today’s digital technologies throughout your entire organization. With the advent of social, mobile and cloud-based platforms, existing technology infrastructures may prove to be a burden rather than an advantage to many large companies. McKinsey’s research clearly points out that companies that embrace digital technologies perform better than those that don’t and receive the benefits of faster growth, more flexibility and improved margins. And Bain’s research about Big Data shows that boards that use big data make faster, better and more competitive decisions.
• Pitfall 3: Adding digital to your biz model rather than creating a digital biz model. Our research shows that it is not sufficient to just recruit digital directors and leaders companies need to adopt their business models. More specifically, to be a leader tomorrow, organizations must ‘go digital’ and reallocate their capital accordingly. Our research shows that companies that become digital business models – e.g. those that move from making and selling things (including services) to those that codify their IP as software or big data and analytics or build social and commercial networks are worth 2-4 times more than then their brethren (manufacturers, retailers and distributors plus services firms).

Conclusion

In summary, somewhere, someplace, body parts and hamburgers are being printed using today’s newest technologies while most of Africa’s population will bank using their cell phones and never walk into a branch office (because there won’t be one). As we speak yet another serious country “overhaul” is in progress as the Ukraine begins its 4th week of major social upheaval, something that simply wouldn’t be possible without Social Media and mobile technologies. Who would have predicted the digital revolutions of Arab Spring a few years ago? What does that mean to you – a lot. Its time to reshape your board and leadership team if you don’t want to follow in the path of those regimes – be they political or business – who did not believe in the power of digital to reshape our society. The bottom line: you have a chance to either be a disrupter or be disrupted. It’s yours decision to make. We hope you make that right one. We will be there regardless to help you on your journey.

Barry Libert, CEO, OpenMatters. Digital Board Member of numerous venture backed companies as well as not-for profit organizations; Angel Investor; Strategic advisor to larger organizations seeking to go digital; and Senior Fellow at the SEI Center at Wharton.

Steve Potter, CEO, Odgers Berndtson (US); Former founder and CEO of The Highland Search Group; Former CEO of TMP Worldwide Executive Search; Board Member of Celdera Medical , and Immunnex, LLC.

Candi Dalipe, Partner, Odgers Berndtson (US); Former Executive Director, Russell Reynolds. Experienced Digital search professional who has recruited the top digital executives for some of the most innovative start-ups as well as digital leaders for progressive Fortune 1000 companies.

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Mckinsey has recently published its annual research on the impact of today’s technologies on businesses.  And the Results are startling – Every leader should be bullish on digital.

Download the newest research here.  It is a great read.

Enter your email below to download Bullish on digital: McKinsey Global Survey results.

The post Its Time to Be Bullish On Digital appeared first on OpenMatters.

The following article appeared as the cover story in the October/November issue of Corporate Secretary.

Visonary management consultant Peter Drucker once said: ‘Every organization has to prepare for the abandonment of everything it does.’ Never have his words been more relevant. What is driving today’s imperative for corporate boards to jettison old management and measurement methods and embrace new ones? The answer is literally at our fingertips: the power of today’s computers. Every age has had a signature transformative leap, from sailing ships to railroads to the telegraph. In the 21st century, it is digital technology: social, cloud, mobile and big data. It would be difficult to overstate the impact this technology is having on every aspect of business and management oversight today. What used to work doesn’t any more – it’s time for a new approach to corporate governance.

Consider this: more than 1.5 billion people – more than the populations of the largest countries – are connected via social media. These online social networks have the ability to turn an industry, company or product into an overnight success. They can also take down a business or government, as we saw in the Arab Spring and are witnessing again in the Middle East this year.

We also live in the era of big data. Google processes 1 million gigabytes of data every day; that’s thousands of times the quantity of all the printed material in the Library of Congress. The number of messages on Twitter now exceeds 400 million a day. If all the digitally stored data in the world was printed in books, it would cover the surface of the US in a layer 52 feet high. And every minute, 48 hours of video are added to YouTube and 204 million emails are sent.

These numbers are staggering, and they vividly illustrate the new world in which corporate directors live. The 2.5 quintillion bytes of information being created each day are an enormous potential resource for board members of every company and for every industry. But much of big data is lost or ignored by corporate directors. The Conference Board and the Rock Center for Corporate Governance at Stanford University found that 93 percent of firms do not mine relevant information from digital data for better decision making that mitigates risks. This is unacceptable.

Governance 2.0

Today’s corporate leaders must adopt a new, more data-centric model of decision-making if they want their organization to prosper. We call it Governance 2.0: corporate governance in the big data age, and it bears little relation to governance 1.0, the board-level concern with keeping an organization legally and ethically compliant in terms of regulations and the relationships between its stakeholders. Governance 1.0 is all well and good, but it’s time for an expanded understanding of governance, for a fundamental rethinking of existing management practices and organizational structure. At the center of Governance 2.0 is big data created by the social, mobile and cloud revolutions that surround all organizations, regardless of size or industry.

It is important to put this in context. The digital universe is creating a new set of rules for corporate directors: the free flow of information and unbridled communication between companies and virtual communities – both established and short lived – are two key characteristics.

This democratization threatens many boards and their leaders. A surprising statistic: fewer than three in 10 CEOs use social media to connect to their constituencies. This reluctance presents a real danger for the organizations they lead. Without firsthand knowledge and mastery of these technologies, how can these leaders lead effectively?

Strategy 2.0

Governance 2.0 starts at the most basic level of organizational thought: strategy, meaning decisions on where and how to invest a company’s resources. Traditionally these decisions were focused on tangible assets, such as factories, real estate and inventory. Employees and suppliers entered the ledger books as expenses, customers as income. These outdated categories ignore the new reality, which sees the value of intangibles. Ignore these intangibles and bad strategic decisions may follow.

According to the International Integrated Recording Committee, 81 percent of business assets today are intangible; physical and financial capital comprise less than a fifth. These intangible assets often go unmeasured. Governance 2.0 demands a broad strategic understanding of both investments and assets.

Let’s look to Detroit for an example. Ford Motor decided to build a global car, one that could be sold anywhere in the world with very few adjustments. The company looked for the best functions in all its vehicles available across the globe.

Ford’s European cars have had three-blink directional signals for years. When the driver presses a button, the signal blinks three times and then shuts off. The feature was popular, and Ford was considering making it a world standard. But instead of undertaking costly and time-consuming market research, it turned to data mining. Using custom software, it scoured car-lover websites in search of comments about directional signals. It culled 10,000 mentions and distilled them down to the most salient. It turns out drivers were hungry for more convenient turn signals – three-blink was rolled out on the 2010 Fiesta and is now a popular feature offered on almost all Ford vehicles worldwide.

Finance 2.0

Finance is a key component of leadership, particularly at the board level. In order to make smart financial decisions, leaders need the right information.

In the past, leaders concentrated on measuring revenue, earnings, stock price and other bottom-line data. Governance 2.0 shifts the focus from this retroactive and limiting data and places it firmly on real-time, emerging and expansive social, mobile, cloud and big data. Not measuring your organization’s digital footprint and potential is willful ignorance that will lead to uninformed financial decision making.

Finance 2.0 demands a new outlook. In the past, financial and other decisions have been internal – energy, assets, strategy, operations and capital were focused within. Today, leaders must look beyond their organization’s borders, to the technologies that connect them to all current and potential stakeholders. These are untapped sources of enormous value and opportunity and must be integrated into the overall financial picture, an integral part of decision making, starting with the chief financial officer.

Let’s consider an example of smart finance that used hitherto ignored metrics. Michael Lewis’ insightful and entertaining book Moneyball and the movie based on it tell the story of how the Oakland Athletics baseball team threw out the old recruiting handbook and used new measures to build a winning team.

For more than a century, major-league teams had relied on stolen bases, runs batted in and batting average to evaluate potential hires. Players who scored well in those areas commanded top salaries and bonuses; they were, in a word, expensive assets. The Athletics used rigorous statistical analysis to demonstrate that on-base and slugging percentages are superior indicators of offensive prowess. Using these measures, the team identified and then obtained undervalued assets (players). The result? The Athletics were able to build a winning team while spending less than a third of what the dominant New York Yankees spent on player salaries.

Operations 2.0

Two decades ago, James Champy and Michael Hammer upended the world of business with their seminal book Re-engineering the corporation. But the reforms their book inspired are not merely irrelevant to this new challenge – they are an actual hindrance to meeting it. Under Governance 2.0, we must not just re-engineer but reinvent the very concept of the corporation.

Champy and Hammer understood that most companies were poorly equipped to deal with the growing demands of sophisticated customers and the looming loss of once-safe markets. Many organizations were being strangled by their own outmoded structure. The  authors’ essential message is that work should be organized in terms of processes rather than by tasks or functions. The idea swept through the corporate world – leaders could see that their divisions were operating as individual fiefdoms, treating other divisions as rivals rather than allies. With a re-engineering perspective, leaders could see the gaps in their operations and reorganize around processes to close them.

Re-engineering was largely employed internally, to reduce costs, increase quality and boost efficiency. This is why it is irrelevant today. Internal processes cannot be ignored, of course, and under Governance 2.0 they also enjoy improved efficiency, but it doesn’t stop there. Governance 2.0 reorganizes processes across organizations and communities to deal with today’s porous world of big data, social media and the digital communities and capabilities this information empowers.

An example of this new paradigm is Warby Parker, an online retailer that sells premium eyeglasses at a fraction of the cost of designer versions. The company’s secret? Founder Neil Blumenthal found a way to cut out the traditional cast of middlemen by minimizing physical assets. Blumenthal had ‘been to the factories and knew what it costs to manufacture glasses,’ he recalls, and the process didn’t warrant a $700 price tag.

He and his partners sketched some frames and hired the same people who make the designer labels to manufacture them. Then they started advertising and selling their products directly to consumers online. When the brander, wholesaler and retailer were left out of the equation, Warby Parker could sell its glasses for just $95 a pair; governance 2.0 had rendered long-established manufacturing and selling processes obsolete.

Technology 2.0

Today, every company is a technology company, and smart organizations are embracing all things digital. Perhaps the most counterintuitive (and profitable) example of this is Starwood Hotels, which is selling many of its hotels to focus on the management and franchising components of the hospitality industry. Its key tool in this new core competence is digital technology.

Amazon is another company using digital technology in exciting ways that would have been unimaginable even two years ago, transforming its customers’ physical assets by sending their CDs and vinyl records into the cloud. The innovation, called AutoRip, was launched in January 2013, and works by automatically sending MP3 files of every CD or song a customer has bought in Amazon’s Music Store, dating back to 1998, to his or her Cloud Player library.

According to Steve Boom, Amazon’s vice president of digital music, ‘it’s a fun experience to suddenly find CDs you bought just today – or 15 years ago – added automatically and free of charge to your digital library.’

Gearing up

To become Governance 2.0-capable, boards must first incorporate big data into their decision making; it’s no longer sufficient just to rely on financial and operating data. Boards needs to request and require big data (including social) in each and every board pack. Board members who are savvy when it comes to digital technology must be recruited: financial and operating expertise was once enough, but given that less than 10 percent of corporate directors are technologists, it’s insufficient for today’s digital realities.

Next, boards should develop an overarching digital-centric strategy in order to take advantage of the opportunities provided by Governance 2.0. As noted above, every great business today realizes that it is operating in a digital environment, so creating a digitally centered business model is essential for long-term value creation.

The digital world has unleashed a modern-day gold rush for those organizations that fully appreciate the realities of its scope. Governance 2.0 enables leaders to understand the implications and possibilities today’s technologies afford – and gives corporate directors the tools and insights to lead their firms to unprecedented levels of performance.

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The Following article was the cover story in NACD’s monthly magazine.

Big data involves big numbers and bigger insights, and it’s time for boards to get on board. Despite big data’s proven importance to organizational success, corporate directors aren’t taking advantage of it. Conference Board and Stanford University research shows that only 7 percent of boards incorporate big data into their decision making.

Big data means big profits. The evidence: The Harvard Business Review put together a team comprising people from the Massachusetts Institute of Technology (MIT) Sloan School of Management, McKinsey & Co.’s business technology office, and the University of Pennsylvania’s Wharton School. Their conclusion: Companies that make the most of big data are fully 6 percent more profitable than those that don’t. How can your board embrace big data? Follow these six rules.

Understand Big Data

To put to rest a misconception among businesspeople, big data is not the same as analytics. It is true that both seek to glean intelligence from data and translate the findings into business advantage, but it is the volume, speed, and advanced technology involved that puts big data on a higher plane.

For example, in 2012, about 2.5 exabytes of data were created every day. For perspective, one exabyte is equal to one quintillion bytes. Put another way, the data that now flood the Internet every second is equivalent to the data stored on the entire Internet 20 years ago. And now companies are working with petabytes (i.e., one quadrillion bytes of data in a single data set). Wal-Mart alone collects more than 2.5 petabytes of data every hour from its customer transactions—or about 20 million, four-drawer filing cabinets’ worth of text.

But speed of data creation can trump volume in certain cases, as an MIT group discovered on Black Friday—the kick-off of the holiday shopping season in the United States. Using location data from mobile phones to deduce the number of people in a Macy’s parking lot, researchers estimated the retailer’s sales that day before the retailer itself knew its numbers. Accessing real or nearly real-time information can make it possible for a company to be more agile than its competitors.

It all adds up to an almost unfathomable amount of information. Learning to master and manipulate it is the defining managerial competence of the 21st century.

Incorporate Big Data Everywhere

Technological advances, coupled with changes in consumer behavior, now allow managers, marketers, and leaders to see every online step a customer takes. Add up the data from video recorders, retail checkouts, credit-card transactions, and countless other sources, and businesses everywhere are privy to a heretofore unimaginable trove of information about consumers.

Consider Wal-Mart’s effort to use radio frequency identification (RFID) tags for supply-chain optimization. RFID is another important link in the big-data chain of machine-speed-generated information that can be amassed and analyzed in a more instrumented and interconnected world. RFID technology tracks products at the stock-keeping unit level. It also keeps tabs on livestock, conference attendees, bridge structures, and luggage entrusted to an airline, among thousands of other uses. In a sixyear span, the number of RFID tags in use went from 1.3 billion to 30 billion.

It is difficult to find a product or piece of equipment these days that doesn’t contain coding. Airplanes are equipped with more than a billion lines of code that generate about 10 terabytes of data per engine during every 30 minutes of operation. To put those numbers in perspective, a flight from Heathrow Airport to John F. Kennedy Airport would generate about 650 terabytes of data.

Realize Big Data’s Big Returns

While big data has the potential to radically improve the way organizations function, it also has the potential to overwhelm them. The key is to develop processes that recognize, mine, and exploit the information that is relevant to an organization’s needs. Achieving this requires changes in management, processes, and culture. The choice is stark: master the data or drown in it.

When information was stored in analog form, data collection was expensive and time-consuming. Taking a customer-satisfaction survey, for example, required face-to-face, telephone, or mail contact with interviewees. Today, people can respond with a click of a mouse, and their responses are recorded and filtered instantly.

In 2011, managers at EMI Music spotted something interesting. A new artist was gaining a strong following among young people but had little recognition in other demographic groups. Eventually, company research showed that the artist had gained recognition among casual consumers who listen to and watch mainstream radio and television. At that point, EMI decided to launch a major marketing campaign and was subsequently rewarded with a number-one hit.

EMI typically uses a data-driven process to make decisions about how to market new artists, according to David Boyle, the company’s senior vice president for consumer insight. Such decisions used to be made by managers with deep knowledge of the industry but little information to draw on. Now, those managers can dive into EMI’s sizable database composed of results from more than a million online interviews, bolstered by data that flow in from Spotify, a music-streaming service with a library of 15 million tracks and three million paying users. Spotify supplies EMI with anonymous data on every track a user listens to, providing the kind of fine-grained insight into listening habits that would have been unimaginable before the Internet.

If an artist shows signs of attracting attention among an untapped group of consumers, managers may try to place him or her on radio and television shows popular with the demographic. Or they might develop a full-fledged advertising campaign. “In the last few years, EMI has gone from a business where this kind of approach was slightly feared to one where data are used to help do almost everything we do,” Boyle says.

Focus on the What Over the Why

There is another core difference with the way information was treated in the past. Traditionally, the goal was to work backward from the data to figure out the “why” of what the information showed. If, for example, data revealed that there was more employee absenteeism on Monday than on any other day of the week, the goal would be to find the reasons behind the behavior. With big data, the “what” becomes more important than the “why.” The primary goal is to allow organizations to prepare for events, to minimize any negative impact, or seize any opportunity they may present—in this case, change staffing patterns on Mondays.

The change from why to what has profound implications for all organizations. It creates a practical, proactive, forward-thinking mind-set. Not surprisingly, it is business that is leading the charge. UPS is a case in point. The delivery giant wanted to lower the number of costly breakdowns its trucks suffered. The company knew which parts were most likely to give out, so it has placed heat or vibration sensors on those parts. When the sensors detect a certain measure, the part is replaced before it fails—in the shop, not on the road. The data doesn’t tell UPS why the parts are failing, just that they are. But it does achieve the goal of minimizing delayed deliveries and idled drivers. With the immediate mission accomplished, the company can explore the reasons for the breakdowns.

Let Data Trump Instincts

As the acceptance of the big data’s efficacy spreads, traditional thinking about decision making and the value of experience must be recalibrated. Leaders have to be open to having their instincts overruled by data. This can be difficult for those people prized for their ability to make decisions that ultimately rely on gut instinct. It means letting go of some of their authority because changing an organization’s decision-making culture requires starting at the top.

Venture capital firms have embraced big data. Atlanta-based Kabbage supplies capital to online startups. It asks businesses that come to it for funding to share proprietary real-time data, such as sales, customer feedback, purchase and shipping records, and social media presence. By analyzing companies on the basis of this data it gains relevant information, learns how well organized a company is, and sees its skill at maneuvering online. Kabbage has been named a Red Herring 100 North American winner, which recognizes companies that have developed sustainable innovations and are poised for long-term growth, and as one of the Top 10 Most Innovative Companies in Finance by Fast Company.

Use Big Data for Big Decisions

In the past, the résumé and personal interview were the most important factors in a hiring decision. Big data is changing that. In the words of Dan Shapero, LinkedIn’s vice president of talent solutions and insights, “Recruiting has always been an art, but it’s becoming a science.”

Big data opens up new streams of verifiable information about potential hires that dwarfs those provided by résumés and interviews. But perhaps big data’s greatest human-resources value comes as a predictive tool. By analyzing information on established high performers, it allows organizations to determine which attributes have proven valuable in the workplace. It can then evaluate potential hires for those characteristics.

In the days before big data, recruiting was often contracted out to headhunting firms, which would seek out candidates that weren’t actively looking to change jobs. With big-data tools, many human-resources departments can turn to networking and data-aggregating sites such as LinkedIn in addition to using outside headhunters.

The Cost of Not Knowing

The risks—and missed opportunities—to boards ignoring big data are significant. The question is this: What is the cost of not knowing? Hint: It’s high. Big data is as important as financial and operating information. Jack Welch’s gut instinct may have sufficed in an age when these technologies didn’t exist, but relying on gut instinct doesn’t work anymore. It’s time for boards to join the big data revolution and use big data to make decisions in every aspect of corporate governance.

Barry Libert is the CEO of OpenMatters, an investor in social, mobile, and big-data companies. He is also an advisor to larger organizations, their boards, and leaders seeking to benefit from today’s digital technologies.

The post Why Boards Must Embrace Big Data appeared first on OpenMatters.

The following article appeared in the summer edition of New Jersey Bankers.

Responsibility for Today’s Technologies Starts in the Board Room

Four Steps to Mitigating Risks and Generating Returns

Digital technologies, including social media, smart phones, the cloud, and big data, have transformed our personal lives.  They have enabled all of us to connect and communicate with our friends and family, manage our savings, invest and share advice no matter where we are and what device we are using.  The Bottom line:  It’s time to turn those technologies into business benefits, particularly when it comes to corporate governance, organizational strategy, and capital allocation.  And the responsibility for driving that digital adoption starts (and ends) with the Board.

Let’s start with the facts. Every corporation, including commercial and investment banks, today is a digital corporation. Digital isn’t just about connecting employees and customers to improve collaboration regardless of location or device. Nor is it about making investor transactions more efficient and effective. At its core, becoming a digital corporation is about delivering real value to all stakeholders – value that adds up to some $1.3 trillion annually, according to the McKinsey Global Institute. This massive opportunity exists because of four key digital technologies.

• Social: 1.5 billion people are using social media to communicate and collaborate.

• Mobile: 5 billion people use phones and smart devices to transact and interact.

• Cloud: Hundreds of millions of people store personal and financial data there.

• Big Data: 2.5 quintillion bytes of new data are created every day.

The result: It’s time for board members and leaders of all organizations, and especially those that handle the finance of individuals, business and government, to reconsider and reinvent their business models as digital enterprises. Commercial Boards and leaders that try to avoid a digital transformation risk having their organizations fall prey to the speed and might of companies that make the most of today’s social and mobile networks and the big data they create. The graveyard is growing: Just ask the boards and leaders of Best Buy, Blockbuster, Kodak, and the presidents of the countries revolutionized in the Arab Spring.

So what are the four rules for becoming a digital corporation in the banking sector (which applies to all businesses)?

First: Become aware of today’s digital power and potential. The facts speak for themselves. Corporations that actively deploy social and mobile technologies produce 9 percent more revenues, 26 percent more profits, and a 12 percent higher market valuation than their peers, according to research by the Massachusetts Institute of Technology and Cap Gemini. Despite these facts, fewer than 30 percent of CEOs use social media, according to CEO.com. In addition, The Conference Board and the Rock Center for Corporate Governance at Stanford University report that only 7 percent of corporate directors use big data from social or mobile interactions in the course of making decisions. Finally, research from both the University of California at Berkeley and MIT reveals that social media is a leading indicator of stock-price movement, as exemplified by the recent ruling by the U.S. Securities and Exchange Commission legitimizing the use of social media for investor communications and the recent false Tweet by Associated Press which cost the financial markets $200 billion in less than six seconds.

Evidence: On January 10, 2013, Kenneth I. Chenault, the CEO of American Express, announced that the company would change its travel-service business strategy and investment in technologies, cutting 5,400 people as it reallocated its capital to emphasize online initiatives. Chenault said that the travel industry had been “fundamentally reinvented” by technology. In support of this change, he noted that more than half of its corporate customers were booking flights online or via their mobile phones rather than calling an American Express representative. “Because customers are using tools directly online, we need less customer-facing people, such as travel counselors who take reservations and bookings,” said Kim Goodman, president of AmEx’s global business travel unit.

Ask yourself: How aware are you and your board members and leaders of these fast-moving technologies and how are you using them?

Second: Understand what creates value now. Boards and leaders have always known that their objective is to create value for their stakeholders. But those sources of value are changing. In the agricultural age, the amount of land owned and tilled was what mattered. In the industrial age, value was based on an organization’s physical assets and manufacturing capabilities. In the services age, it was based on how many people an organization employed and their billable hours. In the information age, it was quantity and quality of the software code written. In the digital age, value is a function of the size and vitality of an organization’s social and mobile networks and their ability to co-create new products and services.

Evidence: Boards and leaders hold a number of historical and framing biases that make it a challenge for them to see and invest in today’s intangible and often unmeasured sources of value. This is especially critical, given that less than 25 years ago, physical and financial assets constituted some 80 percent of corporate market value. Today, that amount is less than 20 percent, according to research by Ocean Tomo. As such, leaders need to rethink their capital allocation strategies. Recent research from McKinsey shows that most companies invest in the same assets year after year.

Question: What is your organizations’ strategy to capture the value from its financial, physical, intellectual, customer, human, brand, and network assets? Do you know how much, and what the return is, for each category?

Third: Revise your attitude about the wisdom of crowds and their power in the cloud: All leaders must fully understand and appreciate that an organization’s next big idea may come from anywhere or anyone – where insider or not. To insure that an organization’s attitude about this new way of thinking is aligned with today’s realities, corporate directors need to ask their management teams how they are leveraging the collective wisdom of not just their own employees, but also the organization’s crowds, which include customers, prospects, investors, suppliers, and partners.

Evidence: Programs at Starbucks and Dell look beyond their own people for innovative ideas. In addition, Red Hat has shaken-up the software industry by partnering “with the world” (and not just its internal R&D department) to create new offerings. It even crowd-sourced its own strategy. Apple is another great example. It inspired 345,000 people to develop apps that deliver billions of dollars of revenues and market value.

Question: How do your corporate directors and leaders feel when it comes to open- and crowd-sourcing?

Fourth: Implement digital business best practices, regardless of the industry or company in which they were created. Yesterday, companies focused on internal processes to improve efficiency. That inside-out focus worked in a world in which customers had few choices. But today, consumers can buy from anyone and everyone, both online and off. And employees can work for anyone anywhere – storing their knowledge and relationships in the cloud. As such, boards need to ask management how they are shifting their focus from inside-out to outside-in and implementing digital best practices, regardless of where they originated – be it in their industry or not.

Evidence: Based on the increasing size and power of social networks, Nike reoriented its marketing processes to outside in in order to capture the capabilities and insights of its fans and followers. To do this, Nike built Nike Digital Sport to develop products that allow the company to be with and where its customers are 24/7/365. This became the focal point of transforming Nike into a social company that has dramatically increased its revenues, while significantly cutting advertising costs. Fortune magazine reports that the strategy has generated a large increase in earnings before interest, taxes, depreciation, and amortization.

Question: Where are you applying digital best practices to ensure that you will reap the benefits enjoyed by companies in other industries?

Here are the three places that every corporation seeking to become a digital enterprise needs to adopt:

Strategy: Corporate strategy in the banking sector is no longer about products and services. Digital is a strategic imperative for all industries and all job functions. Boards need to play an active role in ensuring that their leadership teams consider these issues and opportunities and present plans about how they are investing in social, mobile, cloud, and big-data technologies. Research from Cap Gemini shows that social enterprises shift market and operating risk to other less-digitally savvy companies.

Leadership: 
 The concept of management as we all know it is quickly losing its power in a world in which everyone has a voice – including customers, employees, partners, and investors. Social technologies allow people to say and publicly share whatever they want about an organization, its leaders, and culture. In the context of increasing demand for accountability, transparency and open approaches involving all stakeholders, corporate directors need to think anew about their board composition and competencies. Although many have done a good job embracing diversity, most still lack members with today’s technology and strategy skills – this according to research by Spencer Stuart.

Governance: 
The future for boards is less about traditional governance and regulatory compliance, and more about network alignment, capital reallocation to new sources of value and technology, and new strategies. Looking in the rear-view mirror of financial reporting will only go so far. Today, boards and CFOs must understand and rely on social intelligence about the future desires and needs of their stakeholders.

The bottom line: Boards and leaders of all banks (regardless of size and client base) need to join the ranks of Amazon, American Express, Google, and Nike and become winners in their industry by becoming digital corporations.

Barry Libert, CEO of OpenMatters, is a technology investor, corporate director, and strategic advisor to boards and their leaders seeking to make the most of social, mobile, and big-data technologies.

The post Today’s Technology Starts with the Board appeared first on OpenMatters.