Is creating a separate digital organization to drive digital transformation a red herring?
Virtually all firms are investing heavily in digital initiatives. One key question they grapple with is whether these digital initiatives should be housed in the current business or in a separate organization. Firms are often torn between the two extremes, and many have opted to have a separate unit to drive digital initiatives and innovation. Some have even gone back and forth on this decision, trying one approach first and then the other.
Our experience has led us to believe that the debate on creating a separate organization is a red herring. The more important issue is to create collaboration among executives who are charged with the current businesses and those who are responsible for the new digital initiatives, regardless of the organization structure chosen. Indeed, having a separate unit without explicit and upfront collaboration mechanisms with the rest of the organization is bound to cause problems later (e.g., reintegration, scaling up, culture fit).
Research shows that CEOs can deploy four levers to encourage collaboration:
1- The first lever is to create joint outcomes, but leave the means of achieving the outcomes to the judgment of the executives in charge. This encourages executives to use their creativity to achieve expected outcomes and gives them the freedom and flexibility to choose how they go about doing so. A simple example is to allow digital and traditional businesses to double count revenue, so that they are each motivated to support each other’s growth initiatives. More complex outcome metrics can be designed in specific situations.
2- The second lever is to specify desirable behaviors that the organization would like their teams to engage in. Often digital units are separate entities because of the need to foster innovation, but they may need the support of the traditional organization for commercialization. In such cases, a firm can specify the exact behaviors that will encourage such collaboration (e.g., joint planning of go-to-market activities). By requiring people to collaborate, and formally setting up the meetings and processes to do so, desired behaviors can be encouraged.
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