Just last month, Myer’s CEO said he was confident the company was well-placed to compete with Amazon. He then announced a 36% increase in on-line sales. He’s not alone in questioning the hype around digital competition. The CEO of Super Retail Group, which owns Supercheap Auto, BCF, Amart Sports and Rebel, recently said the group’s low prices insulated it from new competition online. Even Australian Competition and Consumer Commission Chairman Rod Sims has shared his doubts, telling the AFR that digital entrants in the financial sector haven’t lived up to their promises.
The problem is that digital disruption is hard for management to foresee without clear situational awareness of market and technology dynamics – right up until it starts hollowing out incumbents’ margins. Macy’s CEO was saying that the threat posed by Amazon was overstated as recently as last year, before the company was forced to close 100 stores and cut some 10,000 jobs. Blockbuster CEO Jim Keyes said that Netflix wasn’t even on Blockbuster’s radar as a competitor, and was so confident in his judgment that he passed up the opportunity to buy out Netflix for $50 million. The company was liquidated in 2013, in large part because of overbearing pressure from digital competitors like Netflix.
It’s all too easy to make fun of the extinct fauna of the digital era. But the human consequences of digital competition can’t be overstated. We can look to the impact of online shopping on traditional retail in the US: Macy’s is shutting down 15% of its fleet of stores in 2017; Sears is closing 30 Sears and Kmart stores, and CVS [a shopping centre owner] has announced its plans to shut down 70 locations.
Rod Sims is right to say that the pace of change is slower in highly-regulated industries like financial services, but the trajectory is undeniable. Jost Stollman at Tyro has made it clear what the future might hold if the industry doesn’t transform itself: “One day we might not be talking about the Big Four but AT&T Financial Services and Alibaba owning banking services in Australia”. Australia’s existing financial institutions employ some 420,000 Australians. They may be left with the least profitable parts of their business if they move too slowly to protect themselves from digital competitors.
A new era of digital hyper-competition is coming – and many of Australia’s largest organisations will find it difficult to withstand the entry of Darwinian killing machines like Amazon onto what they thought was "their" protected territory. That means failing their shareholders, customers, suppliers, and, most significantly, their employees. The old models of outsourcing, excessive governance and de-skilled workforces will make it impossible to compete in the digital era.
Even now, too many companies don’t seem to know the business they’re in. They think of themselves as having a digital channel, and refuse to compare themselves with the best digital businesses. When users’ expectations are being set by Amazon, Google and Uber, every company doing business on the Internet needs to understand it is now a software company. As Jesse Shultis, Vice President of Cuna Mutual Group, has said, “I don’t think anybody comes to the TruStage website and says, ‘Jeez, this is a much better website than the other insurance company.’ What they’re saying is, ‘This is as good or not as good as Amazon.com.”’
And just as companies deal with the online competitors, they find new fronts opening up with competition from discounters. Today, Walmart is being attacked on two fronts- “It must simultaneously keep defending itself against Amazon, while beating back the European attack" of German discounters like Aldi and Lidl, as companies seek to use digital change to expand their consumer base to the entire global market.
The old model of outsourcing doesn’t suit the new economics of IT
Too many Australian companies think their IT team’s job is just about managing relationships with large vendors. That makes it impossible to design a great user experience, as responsibility for components of a service is split between suppliers. Worse, it makes companies subject to exorbitant fees for changes in scope, which makes it hard to use the learnings from product development to better meet user needs. Most importantly, it makes it hard for companies to take charge of their own destinies, to experiment and to apply what they have learned about their customers in real time, rather than relying on outsourcing to the six-month release cycles of large vendors.
Outsourcing to vendors made sense in the CAPEX era, when it was costly to experiment with IT. Now, competitors are iterating thousands of times a day. Users who are accustomed to the standards of Uber and Amazon won’t be willing to wait for a six-month release cycle to swing around before problems are resolved.
Apple and Google don’t outsource their product delivery to potential competitors - and neither can Australian companies. To compete and thrive in the digital economy, they need to insource their product delivery, and trust in their internal ability to deliver great digital services - just as any modern software company would.
Undoing the Triangle of Despair is essential to make great digital products
I’ve written before about how bureaucracy can constrain digital transformation. When I worked to fix government services in the UK, we called it the Triangle of Despair:
- Inappropriate procurement practices making it impossible to change course without exorbitant fees for changes in scope. Even government agencies are growing to realise that’s a recipe for incoherent services and endless delays - that’s why they’re flocking to platforms like Australia’s Digital Marketplace and the UK’s G-Cloud. If your business is behind even government in its ability to deal with start-ups and SMEs, then you’re asking to be disrupted.
- Heavy, CAPEX-era governance that slows projects down and makes experimentation impossible, as product requirements are defined at the outside of a project, rather than continuously refined in response to user needs. Worse, oversight on risk is split between multiple sub-committees, rather than having a single, clear unit of delivery like the product team in an Agile workplace.
- Ancient, proprietary IT systems which rely on costly and inefficient manual processing, and leave employees at the mercy of expired certificates and vendor contracts. Too many organisations need to unwrap layers of contracts before accessing their own systems and data. As I’ve said before: if you’re reliant on vendors to get access to your own resources, then your IT management is broken.
All three problems feed off a deskilled workforce that encourages a company to rely on vendors, rather than building in-house capability. Low digital skills create a culture of learnt helplessness, where a lack of confidence in building great digital products internally encourages a company to rely on vendors and apply heavy governance to manage risk because they can’t trust their own capability to deliver. That leads to a cultural distrust of people with specialist digital skills, which, in turn, leads to those talented employees leaving the organisation.
Organisations can only break that negative spiral if they take responsibility and insource delivery and uplift their organisation’s digital capability at every level. Facebook and Uber don’t accept months-long delays in procurement or project delivery, or inexplicable website outages. Resigning your organisation to those problems means asking your customers to put up with less convenient services at higher prices than your competitors are offering. They won’t.
We’ve never dealt with a challenge like this before
Australia has benefited immensely from twenty-six consecutive years of consistent GDP growth. Our organisations are unaccustomed to crisis or intense competition, as a generation of business leaders has avoided widespread adversity.
That adversity is rapidly approaching, in the form of hyper-competition from digital challengers. We can’t remain in denial about the dangers posed by digital competition. Australian organisations need to acknowledge the problems that they face, and transform their businesses to remain relevant in the 21st century.
Paul Shetler is an adviser to governments and organisations around the world who are transforming their business. He is a speaker on digital transformation and organisational change. Paul was the CEO of the Digital Transformation Office and the Chief Digital Officer of the Australian Government’s Digital Transformation Agency.