The emergence of new technologies and geopolitical changes are disrupting industries around the world. Corporations are rethinking how to create value for their customers—whether they are serving other businesses (B2B), consumers (B2C), or both (B2B2C)—and how to rewire their business operations to focus on customer needs. Legacy automotive companies are having to find ways to compete with electric-vehicle disruptors, banks are competing with fintech companies, and consumer goods companies are reinventing themselves through direct-to-consumer models as opposed to brick-and-mortar retail.
For years, organizations have pursued digital transformation as a means for change, growth, increased efficiency, cost savings, and more. And while an increasing number of companies are able to access, implement, and benefit from digital technologies (including generative AI) and the organizational changes that support them, such efforts still commonly stall. According to McKinsey research, organizations capture less than one-third of the value expected from digitalization. However, those that have succeeded have seen revenue CAGR increase by 3.5 times. All too often, those who fail fall into the trap of reimagining business domains in isolation, with separate digital efforts and investments taking place in functional silos. This common scenario results in suboptimal business outcomes and a customer experience that remains disjointed, with limited orchestration, no synergies, fragmented sources of truth, and siloed decision making.
In our experience, companies that have successfully transformed their business model and captured the full potential of AI, have used an approach that is at once customer centered, business focused, people led, and AI enabled. In this customer-back business model (CBM), cross-cutting digital capabilities generate new ways to create customer value that are accessible to and informed by every functional area in an organization. This in turn enables organizations to pursue strategic business goals that aren’t achievable within a functional silo paradigm and to create a sustainable competitive advantage. The CBM can be applied in all sectors and is capable of generating outsize value and accelerating decision making in any business’s operations. For example, one industrial company that used the CBM approach secured a multibillion-dollar increase in profits. It also achieved greater resilience and agility in the form of an 80 percent reduction in the time needed to complete supply and demand balancing operations. The company did this while also improving employee and customer experience—and all in a span of three years.
The CBM-based approach comprises three elements:
- setting an ambitious business aspiration
- prioritizing cross-functional initiatives that produce short-term impact, which can be reinvested in additional digital efforts
- applying digital technology to reimagined processes and new business capabilities, with a focus on rapid development and scaling
The rest of this article explores these elements in detail, providing a business- and customer-centered approach to reimagining a company’s operations through digital transformation.
What is a customer-back business model?
A CBM is a reimagined end-to-end business model that refocuses processes, capabilities, and questions of where and how to apply AI to address customer needs and that transforms how corporations operate at their core (Exhibit 1). Being customer-centered, business-back, people-led, and AI-enabled offers a pragmatic approach to delivering on the promise of digital technologies for organizations. Any company—whether B2B, B2C, or B2B2C— that wants to capture the full benefits of technology must harness it to better understand customer demands. This approach puts the customer at the center of the organization and enables seamless customer experiences across traditional corporate functions.
Rethinking how a company does business and creating a distinctive experience across the entire customer life cycle is only possible when companies truly know their customers—and when one integrated perspective of all the interactions with their customers serves as the foundation of the business model. Ultimately, this approach enables the organization to meet each customer where and how they want to be met, with optimized operations across all functions.
For example, for an industrial company with a large installed base of assets, this might mean having a single view of equipment data collected directly from the assets to generate insights to accurately predict and anticipate customer needs for service or spare parts. This data view can then be matched with an integrated end-to-end planning process to fulfill those needs seamlessly. At the same time, the industrial company could use the data collected from its installed assets to inform future R&D efforts and reorient its supply chain and manufacturing capabilities to fit those needs. This would make the supply chain more resilient by giving suppliers more-accurate forecasts and would allow the company to engage with customers on the right offering to improve value. Although some companies have excelled at doing parts of the above, few have succeeded at creating a closed-loop integrated system to deliver on this without multiple handovers, disparate data sets, or a fragmented customer experience.
The impact of this approach stretches far beyond profit, improving customer experience, employee experience, and the company’s resilience (Exhibit 2).
How to build a customer-back business model
Our experience suggests three main principles need to be in place to enable a CBM and move past the common pitfalls of digital transformations.
Setting an ambitious business aspiration: Kick-starting a virtuous cycle of growth
Many digital transformation attempts fail or never get out of the pilot phase because they simply aren’t ambitious enough. Sometimes companies hold back to increase the odds of success or to derisk the initial investments. However, this can result in pilot projects failing for several reasons. For example, they may not show enough value to justify the investment, resources, and commitment from management required to scale. Or initial digital assets and minimum viable products (MVPs) may not get adopted by the business because they represent an additional widget sitting on top of an inefficient process, often requiring significant manual intervention to operate. Pilot teams may also fail to gain business buy-in and end up developing solutions that don’t address critical needs or pain points and that won’t be adopted by the target end users.
Companies that have successfully digitally transformed invest a relatively short up-front period to set a business-centered and ambitious vision. Companies don’t need to build a new business model all at once, but they do need a clear vision for where they want to be distinctive and an understanding of the sequence of steps to get there. It is also critical to have a cross-functional top team that owns the aspiration, commits to the change, and endorses the transformation. This team can identify customer pain points to address and fundamentally reimagine a critical set of end-to-end business capabilities to deliver a breakthrough in business performance and distinctive customer experiences (see sidebar “Critical business capabilities for distinctive customer experience”).
This business aspiration can be informed by best practices from other companies. Leaders can visit other companies that have successfully deployed a CBM to help excite the organization, see what’s possible, and enable them to create a compelling vision that’s grounded in reality. Ultimately, the lessons learned from these companies, even when the companies are in different industries, can significantly improve the quality of the aspiration.
Having a clear, ambitious aspiration can ensure that teams that are tasked to work on initial use cases have license to reinvent and improve a critical process. Buy-in from the top management guarantees that the aspiration aligns with the strategic long-term goals of the company. This aspiration can also help companies justify allocating scarce resources (including, crucially, top internal talent) to the digital teams. And clear articulation of a customer-centric goal—with impact defined comprehensively, including for finance, operations, and people—can provide functions a vision to rally around.
For example, the same industrial company as mentioned above started with an ambitious vision to create a world-class value chain with competitive advantage. Specifically, the company sought to enhance customer experience across the order-to-purchase journey, increasing retention by 5 to 10 percent. It aimed to improve productivity by reducing non-value-add work for teams by 80 percent while improving team member experience and enhancing cross-functional collaboration and coordination toward customer-centric metrics. The company looked to increase EBIT by two to four times by improving the speed at which it could sell down inventory and achieving better cost efficiencies. And it sought to improve resilience and support future business needs through more secure, agile, and modern infrastructure. The inspiration for these ambitious goals came from best-practice visits to companies outside its industry, which leaders took to study and understand the end-to-end capabilities needed to reimagine a different way of running the business—as opposed to simply improving upon an industry standard.
Creating a road map to a self-funding journey: Prioritizing digital use cases
Once companies have established an ambitious vision, to make change stick, they must disaggregate and sequence the overall journey into a set of discrete digital products or use cases and supporting digital-transformation initiatives. Leaders can organize and sequence these initiatives with the goal of front-loading measurable impact as much as possible, thus generating additional resources to be further reinvested.
Prioritized use cases should have a direct or indirect measurable impact on operating profit, which in turn will increase cash flow generation (Exhibit 3). Higher cash flow can then fund additional investments—such as into other use cases, the modernization of legacy systems, and the recruitment of tech talent—thereby generating further impact. This approach represents a fundamental shift from tech-forward transformations that require significant up-front investment and expenses and take multiple years to break even.
With a small up-front investment, a CBM allows companies to generate positive returns in as little as six months (Exhibit 4). The initial investment would include funding for the cloud technology required to enable selected use cases. These prioritized use cases tend to fall within processes that are ripe for disruption—high-impact decision making processes that could be enhanced through AI or analytics. Examples include more-effective supply and demand matching to allow companies to optimize inventory and minimize lost sales; pricing optimization engines to more precisely set and adjust price points based on customer demand and competitive trends; and marketing effectiveness to improve the ROI of marketing campaigns.
To achieve transformative outcomes, companies must sequence use cases in a self-reinforcing way. From the get-go, leaders should have a clear understanding of how all the use cases fit and operate together in a digital ecosystem—a constellation of products that feed off each other as data flows through them to progressively learn more about the customers and enable better and faster decision making (Exhibit 5).
While not necessary to kick off the digital transformation, overhauling foundational data systems can have a significant impact. The data products can connect to existing legacy data systems. Then, as the first set of digital products starts delivering value, companies could use some of the generated cash to modernize systems, build cloud infrastructure, and implement machine learning operations (MLOps) tools and processes if the resulting value outweighs replacement and maintenance costs (see sidebar “Modernizing legacy tech systems”). Mature organizations implement robust data governance and ultimately transition to developing data products that can be used to accelerate future use case deployments.
Taking a business-focused approach to technology: Rapid development and scaling
To execute a business-focused digital transformation, business and IT must cooperate closely to develop use cases, each bringing their individual strengths to a team of eight to ten individuals dedicated to prioritizing what needs to be built and then developing these products. Businesspeople, including a product owner and business analyst, bring a deep understanding of the processes and where value resides, while technical experts—including data scientists and engineers, software developers, and designers—bring expertise about harnessing data. Subject matter experts can provide additional support to this core team as needed. Rather than forcing digital tools in a one-size-fits-all approach, business and IT can work together to deploy AI while also reimagining processes and building capabilities, tailoring the complexity and approach to the different business problems.
Rapid development and scaling are key to keeping the momentum going and fueling the self-funding journey, as is access to data and cloud infrastructure where the team can develop and deploy their solutions. Digital teams should aim to deliver an MVP, with tangible proof of impact, within three to five months of kickoff (Exhibit 6). The overall journey should take eight to ten months (or less depending on the scope of the use case) to get to an industrialized and scaled solution—meaning the new target process is in place, new digital products are in place and being used by the company, and the development team is free to develop the next capability.
To get started, companies must clarify how to reach the desired end state. Do they approach one domain at a time? Do they undertake a cross-domain effort? The answer is likely to start where value creation is happening. For many companies, particularly industrial companies, fixing the supply chain domain may be a logical first step to becoming more customer-centered and may pave the way to future use cases. With a more resilient supply chain and a more resilient operation, companies have more freedom to try new approaches.
Achieving outsize impact from digital transformations requires more than great tech. Companies need to rethink their mindset, their capabilities, and their operating model to extract the full value. However, this does not require a large up-front investment. By setting an ambitious end-state vision and a carefully prioritized road map of digital use cases, companies can embark on a self-funding journey in which they reinvest cash generated by the early digital products into further innovation, spurring change that scales across the company and ultimately leads to sustained competitive advantage.
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