Working With Your Board on Digital Disruption?

The business world is rapidly digitizing, breaking down industry barriers, and creating new business opportunities while also disrupting long successful business models. We call this digital disruption. Sure, such sweeping tech-enabled changes often take longer to realize than we expect, but in time they usually have greater impact than we anticipate (think airplanes, TVs, phones, industrial robots, GPS, and publishing). And company boardrooms agree. 

In a November 2014 MIT CISR survey of eighty-one board members, respondents estimated that 32% of their companies’ revenues will be under threat from digital disruption in the next five years.[foot]MIT CISR 2014 Board Survey, N=81.[/foot] Many boards feel unprepared for this challenge, with half of board members believing their board’s ability to oversee the strategic use of IT is “less than effective.”[foot]Don Keller, Barbara Berlin, and Elizabeth Strott, Directors and IT: What Works Best™, (PricewaterhouseCoopers LLP, 2012), http://www.pwc.com/en_US/us/corporate-governance/publications/directors-and-it/assets/pwc-it-for-corporate-directors-full-report.pdf[/foot] Digital disruption is an increasingly important issue for boards, with 60% of directors saying their boards want to spend more time on the topic next year. In this briefing we share MIT CISR’s research on effective practices for boards on digital disruption, drawing insights from our survey, eight interviews of board members, and a case study of Tenet Health. We also show how CIOs and their IT units can help their boards.

The Role of the Board Around Digital Disruption 

The board has a number of legal and moral obligations and the fiduciary responsibility to protect the interests of stakeholders of the company. In the MIT CISR survey of board members, respondents identified “challenging the status quo” as the second most important board member activity after “evaluating the CEO.” Today, digital disruption is seen by many board members as one of the biggest sources of threat to their company’s status quo. However, much of the focus for boards around digital to date has been on cyber security, data privacy, compliance, and IT spending. Only 39% of board members reported discussing the impact of digitization on their company’s business model. And of perhaps greater concern, board members rated themselves an average of just 6.2 out of 10 in terms of their digital savviness. One of the symptoms of this lack of digital savviness is that 26% of boards hired consultants to evaluate major digital projects, as they did not feel comfortable making those evaluations themselves. 

In our board presentations over the last three years, we noticed an interesting pattern: If we were invited by the CEO, often the conversations were more difficult and had less tangible outcomes. For example, participants got bogged down discussing definitions or experiences with personal technology. However, if we were invited by the CIO, the board conversations were typically more productive and sophisticated. The CIOs had prepared the boards with education, effective reporting on digital issues, readings/speakers on the impacts of new technologies like Big Data or mobile, and generally sowed the seeds for fertile debate about the impacts and opportunities of digital disruption on the company. Good CIO engagement with boards is becoming more common, with 22% of CIOs presenting at every meeting and only 12% never presenting to their board.[foot]MIT CISR 2014 website poll, N=163.[/foot] And when asked to assess the effectiveness of their officer-level executives in helping board members deal with digital disruption, CIOs were ranked as the most effective (4.1 out of 5), with CEOs (3.9), fellow board members (3.6), heads of marketing (3.5), and heads of HR (3.1) ranked lower.

How Digitally Engaged is Your Board? 

In our research we found that boards seek to be involved in three areas around digitization: (1) Defense, (2) Oversight, and (3) Strategy (see figure 1).

1. Defense: Defensive involvement helps to prevent serious problems for the company, including cyber risks, data privacy breaches, service interruptions, lack of compliance, etc. Most boards’ defense-related issues are dealt with by the board’s audit committee, with some boards instead using their risk committee. Most boards are becoming increasingly mature in defense areas and have built up sophisticated reporting and monitoring systems. The numbers in figure 1 are the averaged results of three recent polls[foot]The scale of the three polls was 1 = Very ineffectively to 9 = Very effectively.[/foot] of senior IT leaders during MIT CISR forums in Boston; Melbourne, Australia; and Warsaw, Poland. The participants evaluated the capabilities of their boards in the areas of defense, oversight, and strategy, giving their boards an average score of 6.2 for defense activities—the highest scoring of the three roles.

2. Oversight: The second role is oversight of the major digitally enabled transformation projects of the company. This includes implementing large mission-critical systems like ERP’s, patient record systems, and core banking. These systems are transformational investments and significant change management efforts for large companies that require monitoring and oversight. For many firms—particularly more digital firms like banks, retailers, and media—oversight also includes reviewing spending levels on digitization across the company and comparing goals and bottom-line impact achieved. With the increasing impacts of digitization, we see all firms performing more oversight of digital investments made across multiple business units. Respondents’ boards scored on average 5.4 on oversight activities around digital. 

3. Strategy: The third role is around contributing to and evaluating strategy conversations related to digital disruption. For example, in a number of banks we’ve worked with, board conversations around strategy have been focused not on other banks as in the past, but on new market entrants like eBay, Apple Pay, and retailers that are nibbling away at bank revenues and customer positioning. These new entrants threaten to relegate some banks to being more of back-end, highly regulated, low-margin, transaction-based processors of payments. With the increasing importance of disruptive technologies and the potential of the Internet of Things, most company strategies will be significantly impacted by this shift. For example, the head of strategy at Emerson, the $25 billion diversified manufacturer, described how “in the 21st century, we will differentiate our company and provide value to our customers and returns to our shareholders through trading on information.” At Emerson, board members—including the CEOs of AT&T and Harley Davidson—take a very active role in strategy conversations around digital strategy issues. Boards scored an average 4.7 on strategy activities around digital. 

Tenet Healthcare 

Tenet Healthcare Corporation, with 2014 revenues of US $16.6 billion, manages 77 acute care hospitals and 183 outpatient centers in 14 states in the USA. Tenet also provides nearly 300 hospitals and other organizations with health management services to identify individual health risks and to deliver care. Tenet is a strong performer with its Hospital Compare core measures[foot]Hospital Compare was created through the efforts of the Centers for Medicare & Medicaid Services (CMS), in collaboration with organizations representing consumers, hospitals, doctors, employers, accrediting organizations, and other Federal agencies. Hospital Compare data permits community-specific comparisons of hospitals’ self-reported standardized core measures, or accepted care standards, that reflect quality of care in adult patients.[/foot] scores consistently exceeding the national average, and both its five-year ROE and EBITD above the industry average. 

As of March 15, 2015 the board of directors of Tenet Healthcare has ten members, including the CEO, the non-executive board chairman, and six committees including Audit, Compensation, and Compliance & Ethics. The Tenet board members have a diverse set of skills, and includes among its members one former governor and three former CEOs (from Electronic Data Systems, or EDS; Allina Health; and Deloitte). The board is committed to making Tenet successful at digitization and jointly holds the CEO, COO, CFO, and CIO accountable for outcomes. The digital savviness of board members is relatively high, demonstrated by their recognition that it’s the combination of technology, business process, people, culture, and relationships that create value. 

Defense-related issues around digital such as cyber risks, data privacy breaches, and service interruptions are covered at each meeting of the audit committee. Regular reports are made to the audit committee by CIO Paul Browne and a number of his direct reports. 

In 2010, the board created an ad hoc Health IT committee for the oversight of its $620 million investment in electronic medical records. Implementation of electronic medical records has been problematic in a number of healthcare-related companies and the Tenet board felt careful oversight was important. The ad hoc committee met quarterly and received reports on project status including early wins and problems. In each meeting there was a presentation, open discussion, and finally, a closed meeting for board members. 

Upon the successful completion of the electronic medical records project in December 2013, Browne presented to the full board a vision for digitization at Tenet that included priorities and financial and operational plans. This provocative presentation led to significant discussion, and the board suggested creating a permanent Health IT committee. It was established in 2014 and is scheduled to meet four times yearly. Since formation of the committee, the percentage of its time devoted to the different key roles illustrates a transition from blue to red—or oversight to strategy, as depicted in figure 1: 

• 2010–2013: 80% of time spent on project management oversight 
• 2013–2014: 50% of time on project oversight, 50% on strategy 
• 2014 onward: shifting more to strategy 

As he reflected on what worked most effectively to help the Tenet board members on digital issues, Browne identified four activities: 

1. Reverse mentoring: Mid-career Tenet IT leaders engage informally with board members. 
2. Employing multiple presenters: Direct reports to the CIO are asked to present at board meetings. 
3. More communication between meetings: Meetings are scheduled regularly between the CIO and the chairman of Health IT committee, plus the CIO and chairman talk shortly before board meetings to review the agenda. 
4. Case study deep dives: Four times a year at board meetings, the CIO leads a deep-dive discussion with a case study. For example, one discussion was on how Tenet Healthcare used predictive analytics to predict when employees might leave. Tenet did Monte Carlo simulations to show how its HR group could make changes to reduce turnover. 

Why Boards Are Critical for Digital Disruption

Beyond its normal fiduciary and oversight responsibilities, we believe that the board plays a key role around the challenges many companies face with digital disruption. And while boards are warming to the task, their scores show there is work to do. How would you score your board on the three areas in figure 1? 

One of the biggest decisions companies face around digital disruption is how they should reorganize to be effective in a digital era. For example, it’s clear that banks can no longer manage products, channels, and divisions such as Wealth, Credit Cards, and Lending as silos when customers today want seamless multiproduct, multichannel experiences. We have found that it’s difficult for some executive committees of companies (e.g., the CEO and his/her direct reports) to perform the organizational surgery necessary to thrive in a digital era. One of the barriers is that there will be winners and losers on those committees, and some executives have a vested interest in the outcome (i.e., retaining people reporting to them) that may lead to choices that are not best for the company. CIOs and IT units should help their CEOs and boards achieve the level of digital savviness necessary to play their roles in transforming their companies. The board can then provide the necessary support—and the occasional nudge—to the CEO who is faced with the key, and sometimes hard, choices brought about by digital disruption.