Digital Transformation

DIGITAL TRANSFORMATION ANTICIPATING, AVOIDING

UNINTENDED CONSEQUENCES

The digital disruption doesn’t have to be disruptive. Here’s how to recognize and address volatility.

BY SONIA BOT AND SHEPPARD NARKIER

Digital disruption, the transformation caused by emerging digital technologies and business models, is a reality across industries worldwide, including railroading. It is a paradigm shift that is here to stay, with bone-deep effects for all organizations.

Organizations are now challenged to think about their operating principles. They must realize that while strategy is of paramount importance, strategy must be informed by near-real-time understanding of an organization’s operating models and the stresses they undergo. Experimentation needs to be part of the new strategic spirit, where “failing” small and fast is part of the culture, so that the organization can learn quickly, and pivot as needed: guiding globally but acting regionally or locally as needed.

Often, as an immediate reaction to addressing digital disruption, organizations resort to making improvements at the surface level, because they appear to be easier to do and are more visible to stakeholders. Unintentionally, organizations end up increasing the volatility in their systems by changing “easier” user interfaces without understanding the full implications of those changes, thus spurring a domino effect of one breakdown after another and increasing the risk of failure. Making a seemingly simple change on the surface, such as a more flexible user-friendly application, can create unforeseen problems in back- and middle-office operations that can impact safety and security.

How do railroads and their partners anticipate and avoid the unintended consequences that emerge from their digitalization efforts? Based on our experiences in railroading and other industries, we found recurring patterns, three of which we’ll present here, along with approaches to address them.

RECURRING PATTERNS, UNINTENDED CONSEQUENCES At its core, digital disruption creates recurring patterns for solutions, which readily transcend across industries. They also spur unintended consequences, of which no industry is immune. These patterns include (see Figure 1):

1. Brand Loyalty through Immersive

User Experience – The current level of digital disruption has an impact on brand awareness, which in turn impacts loyalty of customers, ecosystem partners, and an organization’s employees. Attempting to create a better “user experience” on the surface, while ignoring or short-cutting the much harder to address operational logistics behind the scenes, will not help the brand.

Consequently, and unintentionally, mobile applications or user interfaces, for example, become the default brand of the organization. Aspects such as response time, reliability, range of available functionality, language, privacy, and security are all part of that experience. Expectations for more frequent functionality updates increase, to reflect seasonal needs, demographic trends, regulatory rulings, emergency responses, and so forth. In turn, these functionality updates generate more volatility across the entire operating environment, affecting the back office, middle office, and all aspects of logistics that need to support these updates. The processes, data, and application architectures will be stress tested as changes occur in response to forces. The architectures could break at a time when agility and flexibility is needed more than ever. The

amount of change and the speed needed will increase the brittleness of traditional application interactions.

2. Innovation through Platform Ecosys-

tems – Even in highly agile organizations, it is becoming nearly impossible to strategically innovate fast enough through means that are internally focused. The pursuit of finding greater value is never-ending. As such, innovation acumen and practices are moving toward open and collaborative means, such as platform ecosystems. An organization’s velocity for delivering value increases. Instead of building it all internally from scratch, each player in the ecosystem focuses on developing their strategically differentiating components and integrating them into the shared platform. To boot, platform ecosystems help protect against tech savvy disruptors (who may not be on your radar) wanting to go beyond their original industry, because the new value they bring can transcend industries, and encroach on your value system and addressable market.

After deciding to migrate to platform ecosystems, organizations often underestimate the need to re-architect processes, workflows, logistics, controls, applications, reporting, data capture and scrubbing, and deeply entrenched business and operating models to name a few. As organizations move further into their migration, they are caught by surprise on the amount of technical debt they have and must address, as this impedes progress moving forward and sustainability in the future. Internal company politics come into play, where some groups resist the migration, such as falling into the Not Invented Here Syndrome (NIHS). Ecosystem politics also come into play, which includes regulatory bodies, advocacy groups, vendors, and potentially entering contractual relationships with competitors. Creating value distribution among the ecosystem platform participants can become tricky to establish and manage.

3. Strategic Leverage through Risk Miti-

gation – Railroads since their inception have been about innovation. You must be brave to innovate and take calculated risks. If you don’t innovate, you will become obsolete. Typical approaches to risk management focus on “risk avoidance and aversion” (a cost center model) in areas such as safety, disaster recovery, and security. The increasing threats of businesses eroding, bottoming out, and becoming irrelevant, coupled with fiercer than ever competitive forces, are real. In turn, risk management practices are evolving to enable organizations to make strategic decisions regarding the identification of emerging risks and pursuing growth opportunities presented by the ecosystem (a value-added driver model). For example, decisions on solutions and interactions around branding through immersive user experiences and innovations through platform ecosystems can be guided by the strategic leverage approach for risk mitigation.

As organizations build out their strategic leverage through risk mitigation, they discover their embedded constraints and technical debt, that have been built over many decades, are not conducive to the rapid change that is needed. The underlying processes, structures, systems, and business models are rarely capable of moving at the speed and direction of change that is needed.

Figure 1. Examples of Patterns and Areas of Volatility in Digitalization.

SOME EXAMPLES

Example 1: Brand Loyalty through Immer-

sive User Experience – To quickly get their foot in the door, railroads and other industries increase their investments in User Experience (UX), plus UX usability and UX marketing tracking to see what the demographics want. Demographics are both external (railroad’s customers and partners) and internal (various groups within a railroad). Wants are numerous and include web and mobile apps for accurate and real time shipment tracking, “green” shipping options calculators, “Uberizing” the last mile, orchestrating coordinated field/yard and back-office operations, real-time warning for track authority violations, and so on. Then new features or services are provided, showcasing the modern use of technology, while strengthening their brand appeal externally and internally.

If done properly, this is a powerful mechanism. However, organizations often underestimate that many of the desired features and services do not easily integrate with existing workflows, data structures, or infrastructure.

Workarounds or re-designs of processes, which are already highly interconnected across several functional areas with parallel processing dependencies, must be reconciled as the new features and services are instituted. For example, a work-orchestration app for the maintenance or repair of signal, track, and wayside assets for field personnel must account for the following process areas: PTC subdivision creation and maintenance, Engineering and GIS master data maintenance, interworking with foreign railroads, Wayside & Signals operations, Communications operations, Back Office, Rail Traffic Control operations, Asset and Workflow Management, ITIL | Service Management, etc.

Many aspects of the regular workflows cannot be quickly altered for safety, security, regulatory, or other reasons such as the ability for the railroad to absorb the pace and volume

Figure 2. Four Zones for Organizing to Compete in an Age of Disruption.

of changes. The added exceptional processing makes it more onerous to test, make follow-on newer changes, and scale the processing. The intervening fixes become their own maintenance nightmare, increasing risks and perpetuating vicious cycles.

Example 2: Innovation through Platform

Ecosystems – Rail customers, whether freight or passenger, self-service through new technologies that enable a seamless, dynamic, and real time experience. Meanwhile the railroads are continuously responsive to meeting the service agreements as they operate in non-predictable environments. Ecosystem platforms enable this innovation. However, there are collaboration challenges in messaging, data, and image sharing, plus coordinated service workflows and security.

Often, the best that can be done, due to regulations, is portal sharing, with many digital signatures behind the scenes between the various entities involved in providing the service to share data. The device integration is often left to the customer, where they end up being the nexus of integration for data. Investments in user feedback services annoy many customers.

The investment in customer portals and data sharing is neither small nor simple. It rarely meets the needs and what is worse, there is no clear indication that outcomes are improved. Integrating service access across an ecosystem is not seamless and adds significant burden to technical debt that transportation providers incur, impeding more comprehensive approaches available through platforms that support ecosystems. This is the consequence of not taking an architectural approach.

Example 3: Strategic Leverage through

Risk Mitigation – Threat protection of user data and increased need for privacy make it more difficult for users to access their accounts due to tighter protocols, even as the need for fast mobile access becomes a necessity. The typical approach for addressing this is to build user friendly apps / web sites with multi-factor authentication, usually with backend service portals to the existing data of record often residing in mainframes. Response time suffers most of the time, “slow is the new down”, and local compliance rules become more difficult to update for multi-jurisdictional and multinational companies. The result is that the user experience suffers after all that effort, the attack surface enlarges, and the technical debt increases from the new infrastructure that the company invested in.

A more effective approach is to architect security and policy services at the “edge” where all the action is happening, rather than in the traditional back-end data center core. This approach provides for better performance (faster response time and lower latency), plus swiftly enacting locally based policies at the local level. VOLATILITY The unintended consequences of digitalization revolve around the capability of addressing volatility in the end-to-end system, whether it be with business models, processes and hand-offs, technical architectures and interfaces, products and services, skillsets, or corporate culture, plus their synergistic interactions. Volatility deals with the rate of change that is occurring, which is constantly increasing and usually more than what an organization can absorb, plus an organization’s ability to effectively address this rate of change.

High volatility leads to unstable, unpredictable, and uncapable systems and businesses. Most unintended consequences of changes to meet digital disruption forces occur at the customer and partner facing “edges”.

Good strategy and design are critical for long-term success and are judged, in part, by their ability to adapt to change. Change is inevitable in today’s global marketplace where business processes and rules need to be fluid, regulations change, new competitive forces emerge, and the key to success is refining and adding new products, services, and functionalities. Change cannot be inhibited, for example by existing processes and technology architectures, otherwise the company’s brand and viability will suffer. In our experience, changes to software interfaces and business processes have the largest cascading impact on the system if the design does not explicitly account for their frequent need to change.

The goal is to continually keep volatility low so that the ability to adapt to change is high.

ORGANIZING FOR NAVIGATING THE DIGITAL DISRUPTION How can organizations deal with the heap of issues that keep piling-up as side effects of digital disruption? First, we need to unravel the heap, by partitioning it into four zones, such as the ones proposed by Geoffrey Moore in Zone to Win. (See Figure 2.) This helps organizations understand their current context, helping them focus on mobilizing effectively.

Railroads, like most established companies, operate in both the Performance and Productivity zones. The Performance zone focuses on financial outcomes that are mission critical and rely on their sustaining innovations, the home of operating ratios. The Productivity zone deals with functions that do not have direct accountability for revenue numbers, instead the focus is on efficiency,

effectiveness, and regulatory compliance (such as, Customer Service, Marketing, Supply Chain, Human Resources).

Digital disruption first hits the Performance zone. Here, companies notice their revenue expectations are not being met; projections and actuals slip. Companies mobilize on remediating this, where the natural inclination is to address this with immediate-term and “quick-fix” solutions, after all the Performance zone deals with the current timeframe.

Often, as creating new options are explored, companies fail to realize that they are in the Incubation zone, which is a future horizon endeavor that positions the enterprise to catch the next wave. Incubation zone solutions look attractive on the surface; however, organizations fall short in comprehending the extent of underlying infrastructure work is required to bring the solutions to fruition. If companies race too fast through the Incubation zone, the risk is that the Performance and Productivity zones will not get the attention they need, until something undesirable happens, such as the unintended consequences we mentioned and not meeting top-line and bottom-line targets. Technical debt grows and volatility increases because companies don’t want to deal with refactoring and re-architecting upfront. Companies can get away with this for some time, though at some point breakdowns will occur and they will not be trivial to resolve.

The Incubation and Transformation zones must not be confused. The Incubation zone works well for getting started in creating new solutions; skunkworks, experimentation, trying something out. It is the Transformation zone that goes to the next level, where the newly devised solutions are matured for mainstream use. Here you integrate the new solution into the mainstream processes, organizations, and systems used in the Performance and Productivity zones. It’s a transformational undertaking.

Companies need to balance the ratio between running the organization (Performance and Productivity zones) with changing the organization (Incubation and Transformation zones). During periods of stability, the Performance zone funds the whole operation, while doing groundwork for the Incubation zone and building up reserves for the next transformation. The Productivity zone is the standard cost center. During periods of disruption, the Transformation zone dominates. We observe that when it comes to digitalization, companies are prone to starving the incubation and transformation fronts, by insufficiently investing finances, expertise, resources, and time.

STRATEGIES FOR ANTICIPATING THE UNINTENDED CONSEQUENCES To start, we must always bear in mind that the raison d’être of a railroad, or other traditional industries, is not technology. The evolved railroad, including its service design, is better because of the re-design of the system or railroad, where technology is an enabler.

Here are two of our strategies for anticipating the unintended consequences of digitalization, which are based on this reality.

1. Architecture as a Core Competency.

The implementation of business objectives, in an environment of digital disruption, requires a direct and comprehensive view of the endto-end business operations, organization structure and culture, and Operational and Information Technology (OT and IT). Business Architecture, Process Architecture, and Enterprise Technology Architecture are core competencies required for responding swiftly to new demands. (See Figure 3.)

Business Architecture links business objectives to strategy and execution. Business objectives are translated into initiatives considering factors both internal (such as, culture, organization, operations, processes, capabilities, technologies, projects) and external (such as partners, suppliers, vendors, regulators, trends).

Process Architecture deals with designing, building, and evolving the environment that needs to be put into place to effect the change required by Business Architecture; an environment that is process-based, with references to roles, organizations, objects or things, and the emergence of digital twins.

Enterprise Technology Architecture delivers options for data and automated support for the operational and process changes. While assessing emerging technological capabilities, factors such as how technology-based solutions affect business support and speed at which OT and IT can support business changes are considered.

Business, process, and enterprise technology architects work together, hand in glove. They must work across all layers and spans of the organization. Borrowing the metaphor from Gregor Hohpe’s Architect Elevator, these architects must ride the elevators between the penthouse and engine room, stopping on floors wherever it’s needed to support their efforts. The architects remove roadblocks at the right floor. They also visit upper floors to provide strategic and tactical options, to obtain support or funding, and to unblock or trigger organizational changes. In essence, these architects create the alignment from the penthouse to the engine room.

2. Couple Design Thinking with Futures

Thinking. Better decisions can be made in the face of uncertainty by evolving an organization’s thought processes to include both Design Thinking and Futures Thinking. (See

Figure 3. Relationship among business, process, and enterprise technology architectures.

Figure 4. Design Thinking and Futures Thinking as a mindset for design.

Figure 4.) After all, digitalization is a hefty and complex investment, with a huge upside, that no one wants to squander.

Design Thinking is a multidisciplinary process for creative problem solving, centered around uncovering latent human/persona needs within the immediate future. These needs are matched with what is technologically feasible and viable business strategies, which in turn deliver customer value and market opportunity. Understanding users, challenging assumptions, redefining problems, creating innovative solutions, analyzing solutions through rationality, refining, and converging are all part of Design Thinking.

Futures Thinking is a multi-disciplinary approach to thinking about the future, typically 10 to 20+ years out, in a structured and intentional manner. By identifying the possible dynamics that are creating the future, a broad range of scenarios of possible future worlds are determined. This is useful for spotting opportunities, adapting faster, and becoming better prepared for benefiting from the inevitable changes that lie ahead.

In our experience, Design Thinking forces re-thinking of the status quo and stretches designers to deliver even greater possibilities. Futures Thinking provides the context for making decisions that enable the consideration of various architecture options. In the end, coupling Design Thinking with Futures Thinking helps design products, services, and solutions that are future-proof, while being responsive in navigating the many vectors of change that organizations continuously face. It spurs an organization’s offensive and defensive effectiveness for keeping an eye on customer needs as well as the evolving market so organizations can pivot and be where their customer needs them to be.

RELENTLESS FOCUS ON OPTIONS DRIVEN BY ARCHITECTURAL EXCELLENCE The urgency for railroading to embrace agility and digitalization is on an escalating trajectory. The unexpected 2020 global disruption continues to change the pace and trends that were expected from the future of digital. Stakes are higher than ever, whether they are threats or opportunities. Railroads and their partners are under increasing pressure to operate in a hyper-accelerated digital world.

Navigating through digitalization requires a new and different way of organizing and working. Support from respected experts in digitalization and complex transformations is essential to reliably and effectively build up capability maturity. In our experience, digital disruption catapults the value of architecture, going beyond the ability to meet operational and functional requirements. By systematically understanding the impact of changes and providing options across the time horizons, organizations can intelligently and swiftly utilize offensive or defensive strategies as they maneuver through their digitalization efforts. Architectural convergence for business, process, and enterprise technology is no longer optional; this is table-stakes in digitalization.

Sonia Bot, chief executive of The BOT Consulting Group Inc. and a Railway Age Contributing Editor, has played key roles in the inception and delivery of several strategic businesses and transforma-

Sonia Bot tions in technology, media, and telecommunications companies worldwide. By utilizing methodologies in entrepreneurship, business precision, Lean Six Sigma, systems and process engineering, and organizational behavior she’s enabled organizations to deliver breakthrough results along with providing them a foundation to continue to excel. She was instrumental in PTC implementation on CN’s U.S. lines. Her approaches on the evolution of railroading and transportation are game changers that drive innovation and competitive advantage for adopters in a changing industry. She holds engineering degrees from the University of Waterloo (BMath) and the University of Toronto (MASc) and is a certified Lean Six Sigma Master Black Belt. Sonia, a 2020 Railway Age Women in Rail Awards Honorable Mention and can be reached at sdbot@botgroupinc.com. Sheppard Narkier, a CTO and Senior Enterprise Architect, is routinely tasked with complex, difficult transformation projects in a range of industries including demanding Capital Markets environments. Recruited into eleven unique roles including Chief Technical Architect at a Global Investment Bank, CTO of a global consultancy, and Chief Scientist at a startup. Has defined the architecture and rules systems for several application and infrastructure design platforms resulting in seven awarded patents. As a facilitator of change has driven the organizational transformations aligning systems development structures, processes, and data repositories with their strategic goals. A pioneer in cloud strategy, developed IP in several companies to guide enterprises towards staged migration to hybrid multicloud across a range of horizonal and vertical scenarios. Has also employed multi-disciplinary Design Thinking in recent engagements. Sheppard has two BA degrees (Mathematics and Anthropology). Sheppard can be reached at shep. narkier@candlewall-llc.com.

Sheppard Narkier