Digital Design: It’s a Journey

One of the great challenges of the digital economy is the pressure to rapidly respond to constantly changing technologies, customer demands, and competitive opportunities. To respond effectively, companies must be able to quickly test, integrate, and scale digital innovations. 

How do companies design themselves for responsiveness? Recent research performed by MIT CISR and The Boston Consulting Group[foot]The MIT CISR research on Designing Digital Organizations was performed in collaboration with the Technology Advantage Practice of The Boston Consulting Group, which also participated in the production of this research briefing. The research involved interviews with three senior executives—at least one each within IT and in a business function—in twenty-seven companies. Results are available in: J.W. Ross, I.M. Sebastian, C.M. Beath, S. Scantlebury, M. Mocker, N.O. Fonstad, M. Kagan, K. Moloney, S.G. Krusell, and the Technology Advantage Practice of The Boston Consulting Group, “Designing Digital Organizations,” MIT Sloan CISR Working Paper No.406, March 2016, https://cisr.mit.edu/publication/MIT_CISRwp406_DesigningDigitalOrganzations_RossSebastianBeathScantleburyMockerFonstadKaganMoloneyKrusellBCG[/foot] found that companies successfully transforming to meet the demands of the digital economy need two sets of capabilities: (1) an operational backbone that automates much of the company’s transaction processing and back-office services, and (2) a digital services platform that supports rapid innovation. 

Having two distinct sets of capabilities—an operational backbone and a digital services platform—might seem like a bad idea, but we found that it is the fastest way to introduce digital innovations without jeopardizing enterprise capabilities.

In this briefing, we describe the two sets of capabilities and discuss how companies use them to create business success. 

An Operational Backbone Supports Operational Excellence 

We define an operational backbone as the set of enterprise systems, processes, and data that ensure the efficiency, scalability, reliability, quality, and predictability of core operations. Companies have been building operational backbones since the late 1990s, when the emergence of ERPs and CRMs heralded the benefits of standardized and integrated systems and processes. 

Today, an operational backbone is table stakes for any digital strategy. Some large companies have managed to survive without wiring in operational excellence—but they now lack seamless operations, and so they do not have basic competencies essential to digital business. Although every company’s operational backbone must address the business’s unique strategic requirements, the most common elements are: 

• A single source of truth for critical data (e.g., customer data, order data, product data) 
• Seamless and transparent transaction processing 
• Standardized back-office shared services

Successful companies define digital strategies that leverage the capabilities embodied in their operational backbone: 

• A key element of Nordstrom’s operational backbone is the transparency of its supply chain. This transparency allows both employees and customers to see and easily acquire any item the company has available at any warehouse or store. It also facilitates easy returns across all channels. Nordstrom’s backbone provides a fast, personalized, seamless customer experience.[foot]J.W. Ross, I.M. Sebastian, and N.O. Fonstad, “Define your Digital Strategy—Now,” MIT Sloan CISR Research Briefing, Vol. XV, No. 6, June 2015, https://cisr.mit.edu/publication/2015_0601_DigitalStrategy_RossSebastianFonstad[/foot]
• At the heart of USAA’s operational backbone is a customer file that provides employees with full information on each member’s accounts, transactions, and interactions across channels. This knowledge is important in supporting individuals’ “life events” and USAA’s commitment to the financial security of its members.[foot]C.M. Beath and J.W. Ross, “USAA: Defining a Digital Experience,” MIT Sloan CISR Working Paper No. 410, April 2016, https://cisr.mit.edu/publication/MIT_CISRwp410_USAA_BeathRoss[/foot]
• Ferrovial built an operational backbone of standardized purchasing and other back-office processes. This backbone imposes few limitations on the other business processes of each of Ferrovial’s four diversified businesses, while allowing the company to manage solutions across multiple lines of business.[foot]N.O. Fonstad and J.W. Ross, “Building Business Agility: Cloud-Based Services and Digitized Platform Maturity,” MIT Sloan CISR Research Briefing, Vol. XV, No. 2, February 2015, https://cisr.mit.edu/publication/2015_0201_BuildingBusinessAgility_FonstadRoss[/foot]

At complex organizations, developing an operational backbone is a long, expensive, and transformative journey. Even the best companies find they must continuously improve and extend their operational backbones. 

For example, the LEGO Group implemented its ERP to streamline supply chain processes. But that was just the first component of a backbone that has standardized systems and processes related to human resources management, manufacturing, and product lifecycle management. This backbone, which the LEGO Group refers to as the LEGO Enterprise Platform, ensures effective operations and customer satisfaction. Moreover, the enterprise platform has allowed management to turn its attention to building digital services.[foot]P. Andersen and J.W. Ross, “Transforming the LEGO Group for the Digital Economy,” MIT Sloan CISR Working Paper No. 407, March 2016, https://cisr.mit.edu/publication/MIT_CISRwp407_TheLEGOGroup_AndersenRoss.[/foot]

As a company enters new markets, acquires other companies, or adds products, its operational backbone facilitates reuse of existing capabilities. Thus, building and using an operational backbone is step one in facilitating responsiveness to new market opportunities. But an operational backbone is not enough.

A Digital Services Platform Enables Rapid Innovation 

Precisely because the operational backbone is designed for reliability and efficiency, it does not offer the speed and flexibility companies need for constant, rapid digital innovations. As a result, a growing number of companies are defining a second set of capabilities. We refer to this new set as a digital services platform, which we define as the set of technology and business capabilities serving as a base for rapid development and implementation of digital innovations.

The architectural requirements for a digital services platform are concerned with facilitating continuous innovation without risking the reliability of the underlying operational backbone. Common elements of a digital services platform include:

• Digital components—often referred to as microservices—including both technical services like biometrics and business services like customer alerts 
• A technology hosting environment, i.e., platform as a service, where the company can store and access large numbers of loosely connected microservices
• Repositories for collecting massive amounts of data from sources such as sensors or that are public (e.g., social media) or purchased
• Analytics engines for converting the above data into meaningful insights
• Connections to both data and processes residing in the operational backbone

As companies recognize the limitations of their operational backbone with regard to enabling rapid digital innovation, they architect and build their digital services platform: 

• Kaiser Permanente built what it calls a Generation 2 platform to support a set of twenty-one (and growing) technology components for clinical and operational services that can be assembled on a cloud-based self-service portal. The platform, along with Kaiser’s IT services management model, has greatly reduced the barrier to entry for digital innovations at the department level.[foot]M. Kagan, I.M. Sebastian, and J.W Ross, “Kaiser Permanente: Executing a Consumer Digital Strategy,” MIT Sloan CISR Working Paper No. 408, March 2016, https://cisr.mit.edu/publication/MIT_CISRwp408_KaiserPermanente_KaganSebastianRoss[/foot]
• Royal Philips describes its HealthSuite digital platform as “an open eco-system optimized for rapid innovation."[foot]“How does connected care Healthsuite work?” (Video), Philips, http://www.usa.philips.com/healthcare/innovation/about-health-suite[/foot] This cloud-based infrastructure currently collects, aggregates, and analyzes health, lifestyle, and clinical data from more than seven million connected devices, sensors, and mobile apps, as well as from electronic health record systems.[foot]"Philips strengthens collaboration with Amazon Web Services to expand digital health solutions in the cloud," Philips, October 9, 2015, https://www.usa.philips.com/a-w/about/news/archive/standard/news/press/2015/20151008-Philips-strengthens-collaboration-Amazon-Web-Services-expand-digital-health-solutions-in-cloud.html[/foot] The data and related algorithms are accessible as services through a public API.[foot]“AWS Case Study: Philips Healthcare,” Amazon Web Services, https://aws.amazon.com/solutions/ case-studies/philips/[/foot]
• The LEGO Group has cited a need for an engagement platform to allow for rapid introduction (and elimination) of functionality. This digital services platform will host loosely coupled microservices aimed primarily at personalizing customer experience. 

The Two Sets of Capabilities Are Distinct but Complementary 

The operational backbone and digital services platform address very different but complementary business requirements. Together these sets of capabilities enable a company’s digital strategy, targeting either customer engagement or digitized solutions, but eventually encompassing both.[foot]Companies must pursue one of two possible digital strategies. See J.W. Ross, I.M. Sebastian, and C.M. Beath, “How to Create a Great Digital Strategy,” MIT Sloan CISR Research Briefing, Vol. XVI, No. 3, March 2016[/foot]

As you might expect, the two sets of capabilities impose different organizational demands. Figure 1 represents the major differences and highlights the organizational transformation in implementing a digital services platform environment. 

Companies carefully design [architect] their operational backbone to meet requirements for enterprise-wide integration and standardization. Building an operational backbone involves massive organizational changes and significant investments in large systems—or in vendors providing major enterprise services. Because enterprise systems wire in core processes and collect and manage the company’s crown jewels (i.e., master data), implementation is slow. Some teams have tried to adopt agile methodologies, but their efforts usually result in faster waterfall. 

In contrast, the digital services platform typically does not require the massive investment that companies made in their operational backbone. The underlying technologies usually rely heavily on cloud-based vendor and partner solutions. They support rapid development and reuse of microservices targeting the needs of individual products, customers, or channels. Small cross-functional teams deploy iterative, agile methodologies to build and test new microservices through minimum viable products and user-centered design. As they learn what works, these teams incrementally grow the digital services platform. 

It is important to note that the distinction between the two sets of capabilities is not technological. Admittedly, much of the digital services platform will rely on cloud technologies; these technologies enable the speed essential to digital services. The operational backbone, however, can be supported by mainframe, server, or cloud technologies. IT leaders must continue to assess what technologies are most practical. 

It is the scope and duration of the business processes and capabilities—and consequently the governance processes, security requirements, and ownership responsibilities—that distinguish the operational backbone and digital services platform. As companies master the linkages between the two, they will feel less like they are managing two different environments and instead think in terms of the multiple capabilities of their enterprise backbone—just as the human backbone allows individuals to both dance gracefully and run fast, but demands different training and skills to deliver on those capabilities.

How to Develop a Digital Services Platform 

The digital services platform is intended to facilitate innovation at multiple levels and in all areas of a business. But it isn’t easy to empower people to design new digital services while synchronizing their activities and ensuring that everyone stays focused on strategic priorities. 

Established companies must learn how to design and leverage a digital services platform while continuously improving on the operational competencies that made the company successful. It is not useful to try to quickly adopt the design of born-digital companies. Those companies don’t have the same legacy habits as established companies. They have taken a different path and, over time, they may well adopt some of the habits that made long-established companies successful. 

As you start to develop microservices and continuously innovate, you’ll need to introduce far more responsive governance and architecture practices to ensure that you are building reusable capabilities. You cannot address these demands by simply restructuring your company. Ultimately, processes, skills, culture, and partnerships will change as much as your technology environment. You’ll need time to absorb all these changes. So we suggest you start your journey now.