Similarly, many banks are facing a fork in the road.[foot]Peter Weill and Stephanie L. Woerner, “How Digitization Is Creating a Fork in the Road for Banks,” MIT CISR Blog, January 27, 2015, accessed July 1, 2015, https://cisr-mit-edu.ezproxyberklee.flo.org/blog/blogs/2015/01/27/how-digitization-is-creating-a-fork-in-the-road-for-banks/; and P. Weill, “Digital Disruption in the Financial Services Industry,” video during the panel presentation “Remaining Competitive – Disruptive Business Models for Financial Services” at the American Bankers Association 2014 Annual Convention.[/foot] Without organizational surgery, banks are limited to being highly regulated, strongly industrialized, efficient transaction processing engines, performing the key back-office operations of financial services such as payment processing and providing credit. These are commodity services that lead to a race to the bottom in terms of margins. In this scenario, other organizations with strong customer bases—like Apple, Amazon, or IKEA—will make the sale, manage the relationship with the customer, or be their go-to partner. As a result, the banks' relationships with customers are at risk. The alternative is to reinvent how a bank goes to market and meets customer needs, in order to become the first point of call for a customer with a need that has a financial component, while it also efficiently processes back-office transactions.
Recognizing the need to reformulate its business, BBVA has over the last few years moved aggressively toward becoming a more effective omni-channel business. It has invested heavily in improving customer experience— opening branches that encourage consultative conversations with customers, redesigning ATMs, and delivering all services via digital banking—while attempting to keep costs low through automation. Meanwhile, the bank is experimenting with opening up its core banking system to customers and third parties such as software vendors, telecommunications companies, and retailers in order to create business applications that embed these services. For example, a telecommunications company might develop a peer-to-peer payment offering that uses BBVA’s core services for executing payments.
In May 2015, BBVA Chairman and CEO Francisco González performed organizational surgery by reorganizing the company into four main areas: business development, engineering, customer solutions, and risk management. The change was made to help accelerate BBVA’s business transformation and boost the development of new digital businesses. President and COO Carlos Torres Vila, formerly the head of the digital bank within BBVA, is now leading the redesigned organization.
3. Value Chains Are Becoming Irrelevant
Circa 1980, Michael Porter defined value chains as a way to help companies formulate and execute strategy. Today most companies are better defined as a set of integrated services that are far less linear. Companies provide services by developing a distinctive set of internal competencies enriched by the services of a broad set of partners.
Think of Walmart as a historically quintessential example of a value chain: purchasing inventory, taking delivery, and then selling products to customers in its stores. This is a sequential process with a beginning and an end. Amazon is the contemporary example of an ecosystem; it serves up a growing set of nonlinear business services, such as selling goods it has never ordered or received.[foot]P. Weill and S.L. Woerner, “The Next Generation Enterprise: Thriving in an Increasingly Digital Ecosystem,” MIT Sloan CISR Research Briefing Vol. XIII, No. 4, April 2013, https://cisr-mit-edu.ezproxyberklee.flo.org/publication/2013_0401_DigitalEcosystems_WeillWoerner[/foot]Meanwhile, any transaction is simply an instance in a never-ending cycle of information exchange between customer and Amazon, customer and other customers, customer and partners, and partners and Amazon. This ecosystem of service providers give consumers greater choice and more information about prices, quality, and other customers’ experiences.
Companies such as Fidelity, Aetna, Apple, and Microsoft have established ecosystems by creating relationships with providers that offer complementary (or sometimes competing) services. Fidelity’s ecosystem offers its own mutual funds but also includes funds from competitors such as Vanguard, and products and services from complementors such as personal investment advisors. Aetna’s ecosystem has expanded its range of services well beyond the healthcare insurance that formerly defined the company’s value proposition. Now Aetna views its value proposition as building a healthier world. Identifying, packaging, delivering—and to a lesser extent, building—business services is the essence of doing business in the digital economy.
4. Don’t Have a Digitized Platform? You’re Cooked!
Because the digital economy makes rapid innovation possible, it also makes it essential. Often lost in the rush to innovate, however, is the fact that an underlying digitized platform is table stakes for rapid innovation. Prior MIT CISR research has described how amidst all the changes, most companies have some elements of their business that are not changing.[foot]J.W. Ross and A. Quaadgras, “Enterprise Architecture is Not Just for Architects,” MIT Sloan CISR Research Briefing Vol. XII, No. 9, September 2012, https://cisr-mit-edu.ezproxyberklee.flo.org/publication/2012_0901_ArchitectureLearning_RossQuaadgras[/foot] For example, most commercial airlines will—probably forever—have passengers who want to book flights, check baggage, and fly safely from one planned destination to another. An effective digitized platform will automate the repetitive activities within these stable processes so that costs are low, the experience is high quality and predictable, and outcomes are easily measured. This platform dramatically cuts implementation time for an innovation. Consider the development of a new customer mobile app: if it can’t be integrated onto the platform, you end up with data that can’t easily be analyzed and transactions that take time to process (if they can be processed at all). With a digitized platform and its associated APIs, the app can plug in to the platform and immediately start delivering service, speeding roll-out and resulting in great experience.
As the platform is not sexy, companies will be tempted to funnel funds to flashy innovations rather than solid underpinnings, but they will pay dearly for such actions. The long-term success of platform-dependent companies like Procter & Gamble, Apple, and USAA speaks to the benefits of platform investments. It’s important to note that the platform is never finished. Platforms become outdated as businesses and technologies change. Companies that are sincere about the desire to foster digital innovation will invest continuously in developing and upgrading the platforms that support core processes like supply chain management, customer relationship management, and human resources development. What makes the digital economy challenging is that companies must build and sustain platforms at the same time that they introduce digital innovations intended to delight their customers.