Is "Cost of risk to change" hindering digital modernization?

Here is why you cannot afford Delay to modernize your business.

In 1964 the average life span of S&P500 company was estimated at 33 years. By 2027 it is forecast that the lifespan will be 12 years. (source: Innosight:2018 Longevity Forecast)

Digital disruption is a key factor in reducing the average life span of a company. A Mckinsey report called “The best response to digital disruption Click”, makes a couple key points which I feel talks to the challenge of company life expectancy.

• 9 out of 10 companies believe their industry will be digitally disrupted.
• Only 1 in 6 believe they are responding with a bold strategy at scale.

The report states that companies which adopt bold offensive strategies in the face of industry digitization will come out the winners.

By my math, 30% to 40% of the companies we see today will not survive unless they find a way forward into digital commerce.

So, what’s stopping a company from digitization?

“Cost of risk to change” (CORTC) is a monster which only rears its head when there is a discussion about a change in any of a company’s key critical strategies to deliver the stated desired outcomes.

"Cost of risk to change” is not always a structured discussion. Many companies don’t have any metrics or definitions laid down so they can put a finite measure or value to it. So it becomes a subjective discussion and ends up being more emotional than factual.

What’s the concern?

Although change is recognized as being needed to move forward for growth or survival, there is also fear that any changes may harm whatever performance one has today. It seems obvious change always carries a cost, but what are these precise costs and is there a net new positive outcome after change occurs?

"Cost of risk to change” can be a vital component of any transformation idea which kills a lot of projects. Especially where the initiative is focused on work effort of change versus the overall outcome of gains to be had from the change.

In an engagement of this type, the "Cost of risk to change” analysis process needs to focus on the value impact of the technology features and how it links back to the end user’s financial key business performance indicators. This needs to include how you move the technology or mobilize transformation, not just buying the technology.

Financial institutions by their very nature have a handle on how they measure this change risk cost. However, most companies struggle to answer this question internally. This is where the project gets killed. When the opportunity is presented to the company board or C-suite, the executives have a fiduciary responsibility to ensure that business continuity is not impacted. In such assessments of change risk, the executive board want to understand what the potential specific risks and cost to the business can be, especially in the eventuality of the outcome not being achieved as anticipated.

Quite often there is also a risk officer on the board or reports to the board to advise. The risk officer can be an internal employee or a management consulting firm.

If answers to the change risk cost metrics can be defined, then an assessment of the following formulas is conducted.

$ (Cost enhancements/savings) - $ (Assessment of Cost of Change Risk) = $ Net business impact.

Pending the outcome of the executive assessment, if the net business impact is big enough to absorb the potential “Cost of risk to change”, with a significant positive uplift to performance of the companies stated KPI’s, the project is approved.

If the outcome is not favorable or the data is not available, then the project in most cases will not move forward. It can be deemed a career limiting move if the desired outcomes of transformation are not achieved.

In the case of changing or digitizing applications or I.T. infrastructure, If a net positive KPI impact is not established, or the "Cost of risk to change" cannot be understood, then the decision to change most often gets declined. This is the case even if the technology acquisition costs are much lower than the current established architecture.

I am working with companies today to highlight ways to push pass the risk. I am working here at AWS and there are AWS cloud services that can ofset or even zero out "Cost of risk to change"

If you find your company in this situation where risk is delaying or halting your path to digital modernization, I would love to hear from you.

micbhara@amazon.com

Thank you for taking time to read.

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