How to Leverage Digital Technology for your Firm
Do you see digital technology as an opportunity or a threat?
Digital technology can be both a blessing and a curse. While the new possibilities are fantastic and great efficiencies can be gained, organizations often need to be restructured in order to take advantage of them.
Finding the right digital structure can be confusing. The key is to understand what role new technology is to play in your business. Sometimes we use digital technology to make us more efficient and sometimes we use it to create value. It’s very hard to do both.
To see how that affects how we should use technology, we first need to understand what organizations actually do.
What Does a Firm Do?
Why do businesses allow other companies to profit from them? Why hire people and incur overhead costs instead of using independent contractors? How should companies decide what they will do and what they won’t?
What he found was that the answer had to do with transaction costs and externalities. Hiring outside contractors incurs search and information costs that can offset the increased overhead of organizing people internally. Moreover, there is information gained by doing things internally, which has a value.
On the other hand, the costs of organizing work are substantial. So a firm needs to stay small enough to operate efficiently and the value of the trade information gained must be greater than the cost to attain it.
Successful companies need to find a balance. If a firm tries to do too much, the organizational costs will exceed the benefits of producing internally. Conversely, if everything is outsourced, there is no value created.
Digital Organization Myths
Many believed that the rise of digital technology would mean the decline of firms and the rise of virtual organizations. If everybody could work anywhere, anytime, why would companies hire people and why would people want to work in an office?
While manufacturing is increasingly outsourced around the world, hi-tech firms tend to be located close to each other. Technology seems to enable distance for everybody except those that produce it.
It seems that the value of information floating around in corporate hallways and cafes is greater than organization costs and that highly skilled people are so valuable that it’s more than worth it to keep them on salary. Moreover, the value of their collaboration makes it efficient to maintain an office with amenities.
Digital Organization in the Media Business
Nowhere is the value of information more pertinent than in the media businesses. Previously, I was running a large integrated media company that had major print and internet operations. How we used digital technology affected how each business needed to be run.
In the print business, we used digital technology to create efficiency. The real value of a print business is in the content, only human beings can do that.. Much of the production work can be outsourced with a minimum of transaction costs.
Desktop publishing has revolutionized how the publishing business is organized. Standards are well established and producing a product is not only cheaper, it takes less technical expertise.
However, digital technology was at the core of our internet business and transaction costs were substantial.
We ran two separate proprietary platforms that required specific knowledge. When we hired a new developer, or even had one switch platforms, it would take a few months for him to learn the new platform, regardless of technical expertise. Every time we tried to outsource it was a disaster.
The contrast is stark. When you use technology to innovate, the value of information tends to exceed the increased transaction costs of developing internal processes.
Standard vs. Proprietary Solutions
The crucial question is: What are you leveraging digital technology to do? Create efficiency or build value?
The answer lies in standards. If there is a usable standard, there is little value in proprietary information. However, because digital technology is so pervasive even that simple rule can be confusing.
Core Value Proposition: How will digital technology affect what you offer? Some businesses can use digital technology to do the same thing faster and cheaper. Others can create more value through new services.
If you want to create value using digital technology, its best invest in proprietary systems and processes. If not, a standard solution will be more efficient.
Expertise: Does the new technology entail a net increase or decrease in technical skill? In the media example above, desktop publishing brought a net decrease in the overall expertise required to publish and therefore created efficiencies while the web business required building new skills.
New technology makes some skills obsolete and standards are more efficient. However, if you expect to innovate with technology you will have to learn new skills and standard solutions should be adopted with caution. You could end up missing a crucial piece of the value chain.
Security: Web sites can be particularly problematic if they are connected to databases that are proprietary or will be proprietary in the future. Standard web solutions are easy to implement, but also easy to hack.
Many companies start out with a simple web site and then start building marketing and e-commerce databases on them later. 3rd party or open source components can leave security holes that put that information at risk.
Sometimes even adding mundane functionality such as a user forum can leave proprietary information exposed.
How To Leverage Digital Technology
Digital technology creates an ongoing dilemma for every firm. Many successful, even dominant companies have found their business models disrupted by faster and cheaper digital players (newspapers are a prime example).
Moreover, the questions of core value, expertise and security are not always clear cut. A good answer today can be a bad one tomorrow. In the end every firm needs to decide for themselves.
And it is not a decision to be taken lightly.