Using a balanced portfolio to drive digital transformation

"Why do we consistently miss the emergence of new industries?"

‍This was asked in 1999 by IBM’s then-CEO, Louis V. Gerstner Jr. He was referring to the closure of a promising initiative because it was too late in capturing market value.

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That question led to the formation of the Emerging Business Opportunities (EBO) programme. It was a proactive attempt to invest in a portfolio of emerging ideas to drive IBM’s future.

The programme turned out to be a success. By 2003, two emerging businesses generated revenues of more than $1 billion, and a number of them passed the $100 million mark.

The programme also:

• Led to changes in leadership styles.
• Fostered cross-functional collaboration.
• Created an innovative culture.

These became instrumental to IBM's continued success.

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‍What is a balanced portfolio?

A balanced portfolio is a basket of digital transformation projects in the right mix and volume to help an organisation achieve its ambitions. If the mix of projects is too similar, the organisation runs the risk of partial, siloed impact. If the mix of projects is too few, the organisation runs the risk of losing momentum. Singapore’s DBS Bank, for example, had a diverse portfolio of around 200 projects to make DBS the world’s best digital bank.

You can balance your portfolio by grouping projects based on:

Risk/return: What are the uncertainties we will face and what are the potential returns if we get it right?

• Low: 2x return
• Medium: 4x return
• High: 10x or more

Time horizon: What is the timeframe for each project?

• Short-term: 1–2 years
• Mid-term: 3–5 years
• Long-term: 5–10 years

The typical allocation for a balanced portfolio is 70-20-10. This means that:

• 70% of projects are low-risk and short-term
• 20% of projects are mid-risk and mid-term
• 10% of projects are high-risk and long-term

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Why adopt the balanced portfolio approach?

A balanced portfolio approach is better than an ad-hoc, shot-in-the-dark approach because:

• It sends a strong signal to staff that the organisation is determined to work on its future.
• It raises leadership’s confidence by distributing risk and returns across many projects.
• It creates opportunities to leverage cross-functional synergies.
• It sets up a nice rhythm of expectations that increases morale and motivation.

All of these are critical in creating the drive and momentum for digital transformation.

Let's say you work in a company that grows and exports raw and processed foods. Your ambition is to increase operational efficiency 10x through digital technology.

You work with different business and operational units to identify opportunities. You then prioritise the opportunities into 70-20-10 groups in a three-horizon timeframe.

You still have one more area to fill: the transformational capabilities you need to develop through the projects. These capabilities include leadership, talent, structure, process, and culture. We call this the double-loop strategy.

Here are the key questions you would need to consider:

• If we achieve our ambition of increasing operational efficiency by 10x, what kind of organisation would we become?
• How would leadership look like?
• How would our people work?
• What kind of talent would we have?
• What types of processes would create value?
• What would the culture be like?

Having both, a balanced portfolio and a disciplined approach to target changes in your organisation, you will be ready to achieve the right success with the right capabilities to thrive in the future economy.

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Key success factors

Your portfolio must be set up for success. This is the part that most senior execs leave out. You can sow the seeds for a thousand flowers to bloom, but if the soil isn't fertile or ready, you will be left with the winds of disappointment.

To set up your portfolio for success, the following factors are mandatory:

• Shared vision: You need your stakeholders to agree on an ambitious vision—your north star. Otherwise, you risk projects veering off in different directions.
• Top-level support: You need full commitment from the C-level on the road ahead. Don't bother proceeding if you don't get this support.
• A-team leadership: You need the right leaders and team to execute your projects. Going with a B- or a C-team will increase your risk of failure.
• Ringfenced freedom: You need to protect your transformation teams from existing bureaucracy. This agility is needed for learning, improving and transforming.
• Iterative execution: You need to adopt an iterative, build-test-learn approach as you are dealing with unknowns. Using a waterfall method will increase your risk of failure.
• Continuous learning: You need to continuously learn from each experience to increase your chances of eventual success. Note that not all projects in your portfolio will succeed.

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Summary

"We didn't do anything wrong, but somehow, we lost.''

This was how Nokia’s then-CEO Stephen Elop ended his speech when he announced Microsoft's takeover. Stephen was referring to the decimation of his company by a single device: Apple's iPhone.

The same words could have easily come from IBM’s CEO in the early 2000s if Louis Gerstner hadn't identified the growing gap in 1999. IBM's early investment in cognitive computing, for example, is paying off handsomely today. It shows the impact of adopting a balanced portfolio approach to drive future business.

Many CEOs are aware of the impact of digital transformation. To paraphrase a famous proverb: Some CEOs will make things happen, some will watch things happen, and then there are those who will wonder what happened.

The balanced portfolio approach to digital transformation is a tool for those who want to make transformation happen and see their organisations thrive in the digital age.