Annual report:

Digital transformation and supervisory directors: embracing risks

03 April 2019

Original content provided by BDO Netherlands

The urgent need to adopt digital transformation is now clear: the longer you delay, the greater the likelihood that competitors or newcomers will steal a march on you. On the other hand, if you're too quick off the mark, you can fail to adequately weigh up the associated risks. Is the answer to appoint younger supervisory directors? "Supervisory directors don't have to be technology experts provided they're fully aware of the threats and risks," David Bos, partner at BDO Advisory and digital transformation specialist in this area, said in a recent interview.

What brings digital transformation into the orbit of a Supervisory Board?

David: “Over the next few years, digital transformation will become increasingly prevalent – even more visible than well-known disruptive trends such as Airbnb, Uber, Spotify or Netflix. Not just for multinationals, but also for large national enterprises, SMEs and the public sector. Each company director, including supervisory Board member, will have to take decisions relating to it. If they are to formulate an effective digital strategy that successfully harnesses the opportunities presented by technology, they will need to have a clear understanding of the underlying social trends.”

How should Supervisory Board members approach this challenge?

David: “To start, we shouldn't equate digital transformation with IT projects; digital transformation is a change that will have a decisive impact on organisations. There are two ways Supervisory Boards can approach it: first, you can ask if your organisation is sufficiently future-proof and challenge managing directors accordingly. Second, digital transformation will have a huge impact on the company's business model, and new risks will arise. You should ask what steps the organisation will be taking to adequately respond to this.”

What are the new risks that could arise?

David: “These days, organisations and consumers can go online anywhere, anytime, and can make and pay for online orders easily and securely. Ongoing improvements in data analysis and process mining can help companies to predict and respond quickly to consumer behaviour. That said, artificial intelligence, and even the use of data, brings with it responsibilities and risks. These are new risks that we barely even acknowledged a few years ago or whose impact has now become much greater. Cyber risks and privacy risks, for instance, pose a risk to business continuity. So this isn't simply another IT project; it will affect the very future of the organisation. For that reason alone, directors should be challenged when formulating a digital transformation strategy.”

What should organisations do to make a start on digital transformation?

David: “There are various ways of getting digital transformation off the ground. The ideal way is to design a digital strategy from scratch that ties in with the company and its external influences. For instance, refining a strategy and streamlining business processes to become more cost-effective, efficient and customer-friendly. Many organisations, though, are more reactive: they'll only digitalise if they see their competitors doing so. This often leads to an operational and IT-driven approach that lacks an underlying vision and isn't driven by the business. Take the implementation of an ERP system, for example. This touches upon other disciplines as well as IT: employees must learn how to operate the new system, customers notice they're being served more quickly and the finance department will look at the return on investment. In other words, an integrated approach is absolutely essential, especially where complex operating processes and business models are being digitalised. That's easy to say, of course, but in many organisations compartmentalisation is a serious obstacle to this.”

Isn't the solution to appoint younger supervisory directors with a better understanding of technology?

David: “It's certainly true that younger supervisory directors have grown up with the new economy and often appreciate the impact of digitalisation more readily and fully. And managing directors often say they need supervisory directors with more knowledge in this area. But you don't have to be an expert, provided you have a good understanding of the mix of opportunities and threats.”

A new strategy can significantly affect an organisation. How do you tackle this?

David: “In our view, the digital transformation of an organisation is defined by three dimensions: a set of key aspects of digital transformation, the digital maturity of the organisation and the level of internal execution. This requires an integrated approach: processes are never loose elements; they are always closely correlated. So if you digitalise one process, it will have direct implications for the others. All these processes therefore need to move in tandem with the digitalisation drive if a successful and balanced transformation is to be achieved. That is why an organisation's digital transformation will not succeed unless it adopts an all-encompassing and coordinated approach, one where it actively factors in the often far-reaching impact on staff and customers alike. We recently discussed this 360-degree approach to digital transformation in a white paper.”

Can you tell us more about the key aspects?

David: “BDO has identified five key aspects that we believe should guide the digital transformation of any organisation: customers, employees, IT, the finance/business model and the portfolio of products and services. These key aspects aren't self-standing; they are always closely correlated. This means that, as soon as you begin with the digital transformation of one of these aspects, it will automatically affect one or more of the other four. That's why an organisation needs to formulate a future vision and strategy for each of these key aspects. Together, they will then form the goal towards which digital transformation is headed.”

Finally, what benefits does digitalisation bring to an organisation?

David: “That depends on the phase it is in. During the initial ‘traditional’ transformation phase, the organisation operates without using digitalisation as a core competence to create added value or achieve a competitive edge. IT is used only to support the business. In the second, ‘modern’ phase, the organisation takes a more structured approach to digital initiatives and the digitalisation of processes. IT is still used in a support role but it is now closely intertwined with the business processes. Digital investments begin to pay back and the organisation is increasingly able to create value through analysing the available data. In the third, ‘future’ phase, the organisation is fully information-driven, resulting in an integrated digital operation. Everyone from top to bottom understands the added value that technology can deliver. Revenue and profit from digital investments will increase, sometimes even exponentially.”

White paper Digital transformation

For more information, please consult our white paper on an integrated approach to digital transformation, or contact David Bos, Partner at BDO Advisory and specialist in digital transformation.

Read white paper