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How to Leverage Digital Technology for your Firm

2010 February 17

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?

Nobel Laureate Ronald Coase asked these questions in his 1937 paper The Nature of the Firm, which is still influential to this day.

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?

In fact, as Richard Florida points out, the opposite is happening.  People, especially highly skilled people, increasingly congregate in the same places.  The world is spiky (pdf) and getting more so.

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.

– Greg

10 Responses leave one →
  1. February 18, 2010

    Greg – another great post and topic – thanks. (You have indeed been busy these past few days!)
    I agree with all you said, and although it’s not precisely on topic, I would like to add something which relates to the task of business process automation.
    When our clients come to us to outsource their digital marketing efforts, they usually start off talking about all the latest buzzwords – all the latest tools and techniques and then they ask us to suggest the best tools for their needs. But we tell them we’ll get to that, but can we please begin by looking at their business processes. We defer the talk about tools or technology until we understand more of what they are trying to accomplish.

    And developing this understanding requires a knowledge of the business processes now in use, plus an insight into the biggest problems the organization is trying to fix, plus an understanding of how people change their behavior, plus a knowledge of what the technology can do. Notice the techie side is last!

    In many years of helping people to automate business processes, I have discovered that most people do not actually do this. They rush out and acquire technology, perhaps even do exhaustive comparison studies of available tools and options, or design and then build expensive digital systems, and then they install the system and switch it on and wonder why their results are so different from the promises made by the vendors, or their design aspirations.

    In these cases, it’s not usually that the software doesn’t perform, it’s more that the users don’t, or can’t, because their business processes were not changed to suit the new way of doing things. And changing the way people do their jobs is a difficult and often frustrating exercise – I wrote a post about this Process of Change. For those who want to know more here’s the link: http://www.inbound-marketing-automation.ca/blog/2009/10/04/difficulty-getting-your-sales-and-marketing-automation-project-started/

    .-= Eric Goldman´s last blog ..Holistic Websites – Does your site measure up? =-.

    [Reply]

    Greg Reply:

    Eric,

    I couldn’t agree more. Everybody always thinks it’s about the technology, it never is.

    – Greg

    [Reply]

    Stanley Kirk Reply:

    I would disagree that it is always about the technology. Technology is such a game changer that if a firm is not all about technology they can be blind sided and put out of business. Simply ask Borders Books….. Or ask any newspaper, book retailer, music store, airline reservation agent (the list can get very long).

    The days of creating a strategy and utilizing technology to support a plan no longer exist. Technology must be your business. Amazon is a tech firm that happens to sell books, electronics, food, music, shoes, soap, etc……….. Not many traditional firms can compete with Amazon.

    [Reply]

  2. February 18, 2010

    Hi Greg,
    Where do you find digital technology, if at all, in my type of business? Value or efficiency?
    What I love about your articles is their real content. Some of the others write all fluff – your is very different.
    As always, thanks for your opinion.
    Sincerely,
    Lisa

    [Reply]

    Greg Reply:

    Lisa,

    Thanks for the praise.

    In your business I guess it would be mostly about efficiency, unless you use technology to actually produce more innovative designs. I would guess you use a computer to do a lot of things that 20 years ago you would have to outsource or hire people to do.

    – Greg

    [Reply]

  3. February 18, 2010

    Greg,

    What you say about virtual organizations is true. Despite the fact that technology enables work from distance the experience so far shows that knowledge workers are more efficient when co-located. In software development for instance there is a pair-programming practice – two developers work together on the same computer. What makes co-location so good is easy exchange of knowledge and ideas, better understanding and collaboration. Face to face communication is best for that. Probably we are still to find best organizational practices for virtual teams that overcome this barrier. Virtualization also has its advantages like bringing in talent that is not available locally.

    At cross company there is also value in placing hi-tech firms close to each other in hi-tech hubs, etc.

    [Reply]

    Greg Reply:

    Stan,

    As always, thanks for some good points. I think that one thing that is often overlooked is the “information in the hallways.” You often have impromptu collaborations when you bump into people around the office or around town.

    – Greg

    [Reply]

  4. February 18, 2010

    Greg,

    That’s a great point. “Information in the hallways” is really an often overlooked factor in works on communication and collaboration. Even I overlooked it in my post above and it took two readings to get it :)

    Stan

    [Reply]

  5. February 18, 2010

    For years I worked in the book publishing industry. In the 90’s technology lowered the cost of production and allowed us to publish books that were customized by state. It was a very interesting time.

    These days, technology is taking a bite out the book industry. Many publishers are struggling with how to leverage technology to distribute their content to the market. People are looking more towards the web (new technoloty) to get information, and less towards books (old technology). But what is going to be the winning technology? The Kindle? The iPad? Smartphones? But what about school age children who are learning to read?

    This is a big problem for publishers. They have a lot of content that needs to be out in the market. But what technology is the public going to accept for the delivery of that content?

    Just some rambling thoughts on a Thursday…

    –Greg

    [Reply]

    Greg Reply:

    Greg,

    Publishing has indeed changed a lot, and the iPad is sure to change it more. It will be exciting to watch.

    – Greg

    [Reply]

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