THE DIGITAL ATTACKER A GUIDE TO RADICALLY DIGITIZE INCUMBENTS Kai Bender, Partner Thomas Fritz, Partner Matthias Klinger, Partner Thomas Nachtwey, Partner Joerg Staeglich, Partner Thilo Grunwald Henrich, Engagement Manager
1. THE DIGITAL ATTACKER The digital age offers new opportunities for established companies, but it also poses enormous challenges. The competitive landscape is changing, with new players ranging from start ups to market spanning giants like Amazon and Google. At the same time, there is a significant shift in customer expectations, especially in rate based, direct to consumer business. Customers in the digital age want everything right away and it must be convenient, customized etc. If they find a cheaper offer online, there is little to prevent them from cancelling their current contract. Against this background, Oliver Wyman supports established companies to successfully shift into "digital attack mode". Combining strategic advice with hands on technical execution, we help setting up digital platforms and delivery models. With this "one stop shop" approach, which has already been applied successfully across industries from energy to financial services, established companies can launch a new digital platform within six to nine months. Figure 1: Digital attack mode for established companies 2. INTRODUCTION WITH YOUR BACK TO THE WALL Established companies in various industries are facing massive and constantly growing economic pressure. For many companies focused on rate based, direct to consumer business, the root causes are similar: From the customer's perspective, the products and services offered have turned into a commodity. This is especially the case for electricity and gas, telecommunications services, (car) insurance, standardized financial services, as well as mobility and travel. Being easily comparable and exchangeable, price becomes the dominating factor for such commodity offerings. Comparison portals on the web are both symptom and driver for this development, resulting in increasing price pressure, higher customer churn and declining customer lifetime value. At the same time, established companies (so called incumbents) are facing a steep increase in consumer expectations, driven by the customer experience of digital players: 24/7 availability, realtime issue handling, customized offers, customer journeys without media breaks (omni channel) or other hassles. Copyright 2018 Oliver Wyman 1
Figure 2: Customer perspective in the digital age But most incumbents business processes and systems are not set up to meet this kind of expectation. While changing that requires substantial investment, many initiatives undertaken by incumbents in recent years have not led to measurable success (despite immense costs). Examples include replacing (or even extending) existing legacy systems with new ones of similar complexity or redesigning product offerings with the intention to reduce complexity but leading to opposite results (such as an unfocused side by side of old and new products). Moreover, there are numerous examples of "silo features" being added without proper integration into the existing business model and IT systems, providing no tangible value add for customers or for the incumbent. Against this background, an even greater threat looms on the horizon: the disruption of the entire industry by digital attackers. The attack scheme, though varied, has been repeated several times in recent years: leveraging a digital platform, an attacker from outside the industry starts offering industry specific products and services to customers directly, monopolizes the data required to do business, extends or aggregates the services offered etc. The ecosystems thus created (by Amazon for example), with offerings highly customized, well integrated and convenient at the same time, defy comparison on the market. Customers are entangled in these ecosystems and incumbents lose the customer relationship. The incumbent's products and services turn into a commodity. 3. PARADIGM SHIFT INCUMBENTS AS DIGITAL ATTACKERS The downward spiral described above is by no means a foregone conclusion. Some incumbents have with the support of Oliver Wyman succeeded in becoming digital attackers themselves, claiming back the initiative. Examples from around the globe and across industries show that by shifting into digital attack mode, incumbents can reduce churn rates and costs to serve by 50 percent, while at the same time increasing customer life time value by 30 percent and speeding up time to market from months to merely days. In our first example, a German energy provider its services nowadays a commodity, easily to be replaced by cheaper offers on the market was facing increasing customer churn. Drawing valuable Copyright 2018 Oliver Wyman 2
insights from a detailed analysis of individual customer segments and their needs, the company built a digital platform that enabled it to bundle their traditional offering with additional crossindustry services. This allowed for a highly customized value proposition for each customer segment, resulting in substantial differentiation of the company from other competitors on the market. Likewise, our second example highlights the importance of customer analytics and customer experience in setting up digital business models. A telecommunications company in the Middle East built a new digital platform to create customized offerings for a customer segment severely underserved by the market. Thus, the company accelerated its digital learning curve while at the same time targeting a new customer segment based on an economically sound investment. A similar effect was achieved by an Australian bank, as there is a considerable demand among small and medium sized companies for fast, uncomplicated decision making processes for unsecured loans at best in real time. A local bank set up a digital platform that offered the world s first fully automated process for these loans, shortening the time from application to decision from several hours or days to just a few minutes. 4. THE SECRET TO SUCCESS A PRACTICAL GUIDE Repositioning an established company as a digital attacker requires rethinking and redesigning central elements of the business model. Five key elements stick out: business strategy, customer experience and delivery model as well as usage of a digital platform and a sound technical integration layer. Thus, given the sheer complexity of this endeavour, transforming existing systems, organizations and processes is typically not a viable option (at least not at reasonable costs). Therefore, the digital relaunch of an incumbent should be carried out via a separate unit or via a project approach. In either case, a direct reporting line to the C level is mandatory, allowing for existing processes and systems to be rigorously challenged and adapted for the target digital business model. 4.1. BUSINESS STRATEGY At the heart of a digital business strategy lies building a digital platform via a minimal viable product approach. However, this platform needs to meet certain requirements. Firstly, it needs to be scalable, especially regarding regulatory requirements and the technical architecture. Secondly, there must be a relentless focus on creating customized offerings for the specific needs of individual customer segments right from the start. Thirdly, the investment made needs to follow a sound economic rationale, which requires a careful selection of the first customer segment targeted and the following scaling strategy. Building on these principles, scaling the new digital platform via additional offerings etc. creates a stream of new as well as old customers. Thus, the need for complex and expensive technical migrations of old customers is reduced to a minimum. Copyright 2018 Oliver Wyman 3
4.2. CUSTOMER EXPERIENCE To be successful in the digital world both customer experience and satisfaction must be top notch. Everything else just being a means to achieve this goal, no concessions can be made when redesigning an incumbent's existing structures, processes, and systems. In practice, this means that by leveraging a digital platform, the customer experience of each customer segment needs to be designed in a way that its individual needs and preferences are catered for. Looking at Amazon or Netflix, we see that customization of this kind can be achieved even while retaining very basic and similar structures of the customer experience for all consumers. The key challenge lies in combining products and services including those from outside the industry to meet the specific demands of individual customer segments as much as possible. This allows for substantial differentiation from other players and lays the foundation for tying customers to the company on an emotional level. Thus, key prerequisites for a top notch customer experience are: deep expertise in customer analytics and digital marketing as well as seamless integration of products and services from other industries or players (and even cross industry offerings) via the digital platform. 4.3. DELIVERY MODEL To succeed as a digital attacker, agile structures need to be established from day one. Traditional organizational divides of incumbents such as between the business departments and IT or software development and operations must be replaced by integrated, collocated teams (DevOps). Moreover, processes and organizational structures must be constantly refined. This requires some relearning by existing teams (both on the business and the IT side), hence staff with relevant experience from prior digital projects should be leveraged in a targeted way. Where necessary, incumbents must source key capabilities from outside, for example regarding the technical platform architecture or designing the customer experience. 4.4. DIGITAL PLATFORM When setting up a digital platform, utilizing open standards is crucial. This allows for end users to use any device without hassle or impediments regarding functionality or handling (user experience). Also, it enables software development for the platform to be vendor independent. Moreover, a digital platform should be based on a modular architecture, for example by using micro services. This kind of architecture uses container technologies so that systems can be individually replaced and extended. The interaction of the individual systems is controlled and steered by an orchestration platform. A cloud based solution should be chosen to ensure the scalability of the platform. 4.5. INTEGRATION LAYER Using open interfaces (APIs) is key for linking a digital platform to an incumbent s existing systems as well as to systems of other companies. Interfaces to legacy systems are mandatory to enable golive of the platform but should be kept to a bare minimum (typically focusing on enterprise resource planning and accounting). A key challenge lies in providing quick access to data from legacy systems, which can be enabled through continuous replication. Copyright 2018 Oliver Wyman 4
In contrast, interfaces to systems of partners from other industries and providers of cross industry offerings should be as broad as possible. This allows for maximizing the value add for customers that comes with integrating these offerings in an incumbent's own product and service portfolio. Figure 3: Digital platform in the energy industry 5. ROADMAP FIRST STEPS Shifting to digital attack mode begins with identifying an economically attractive use case for building a digital platform. This includes: defining the first customer target segment, a first design of the digital offering, a draft blueprint for the digital platform based on a minimal viable product approach (including a first roadmap) and preparing a sound business case. Even in this early stage it is mandatory to ensure the scalability of the platform regarding regulatory requirements and the technical platform architecture. Based on that, executive management provides a clear mandate for building the new digital platform. Next, external specialists for building the platform need to be screened and evaluated, while at the same time, capabilities around customer analytics and digital marketing need to be ramped up. Oliver Wyman provides a "one stop shop" solution, combining strategic advice with hands on technical execution. Via this approach, the first go live of the platform can be achieved within six to nine months. Copyright 2018 Oliver Wyman 5
ABOUT OLIVER WYMAN Oliver Wyman is a global leader in management consulting. With offices in 50+ cities across nearly 30 countries, Oliver Wyman combines deep industry knowledge with specialized expertise in strategy, operations, risk management, and organization transformation. The firm has more than 4,700 professionals around the world who help clients optimize their business, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is a wholly owned subsidiary of Marsh & McLennan Companies [NYSE: MMC]. For more information, visit www.oliverwyman.com. Follow Oliver Wyman on Twitter @OliverWyman www.oliverwyman.com Copyright 2018 Oliver Wyman All rights reserved. This report may not be reproduced or redistributed, in whole or in part, without the written permission of Oliver Wyman and Oliver Wyman accepts no liability whatsoever for the actions of third parties in this respect. The information and opinions in this report were prepared by Oliver Wyman. This report is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accountants, tax, legal or financial advisors. Oliver Wyman has made every effort to use reliable, up to date and comprehensive information and analysis, but all information is provided without warranty of any kind, express or implied. Oliver Wyman disclaims any responsibility to update the information or conclusions in this report. Oliver Wyman accepts no liability for any loss arising from any action taken or refrained from as a result of information contained in this report or any reports or sources of information referred to herein, or for any consequential, special or similar damages even if advised of the possibility of such damages. The report is not an offer to buy or sell securities or a solicitation of an offer to buy or sell securities. This report may not be sold without the written consent of Oliver Wyman. Copyright 2018 Oliver Wyman 6