Technology4Directors: Boards need the capacity and capability to oversight technology and digital strategy

Last Friday I moderated a most insightful and highly experienced panel of Elizabeth Proust, Graeme Samuel, Doron Ben-Meir and Andrew Walduck to guide an important gathering of board members and senior executives through the complex issues facing enterprises in applying technology to achieve goals in today’s globally connected world.

It was a joy to work with a panel that had decades of experience on major company boards, directing the technology and digital strategies for major corporations, regulating Australian companies, experience in startups, entrepreneurship and government innovation systems.

The lunchtime session was put together by Michael Alf and myself to examine why major technology projects too often fail to achieve the goals that were used to justify the investment, run way over budget and more often than not take much longer than planned.

The Victorian Ombudsman’s 2011 report into the 11 failed Victorian Government projects highlighted MYKI, HealthSmart and the VicPolice Leap projects. Mainstream newspapers have for the last few years publishing the top 10 failed IT projects of the year referencing Obamacare website failing on day of launch, Sabre Ticking bring airlines to a halt in 2013 and the $1 billion Queensland Government Payroll systems disaster.

Our most admired companies and CEOs know the importance of technology but they also know they need the skills and experience on their boards and in their top executive teams to properly leverage technology to achieve their best outcomes.

At General Electric (ex CEO Jack Welsh top rated CEO and often listed as most admired company) they recognise the importance of technology experience and skills at all levels of the company and in their 2013 Proxy Statement the board listed the following attributes in appointing their board members:

  1. Leadership experience
  2. Technology experience
  3. Global experience
  4. Financial experience
  5. Industry experience
  6. Marketing experience
  7. Government experience

What makes technology one of the most important issues for board members in almost every enterprise? Consider:

  1. Technology enables most communication, collaboration and transactions in all developed economies of the world. Technology especially information technology underpins most innovation in enterprises and that innovation drives competitiveness which in turn increases productivity which is the only sustainable way to deliver prosperity and wealth for people.
  2. Machines that can learn and apply stored knowledge are now doing work previously that could only be done by people. Marc Andreessen the inventor of the browser and one of the most successful technology investors in the world today says software is eating the world. What can be put into computer code is being put into code and devices with that code are dramatically lowering the cost of many tasks.
  3. These inventions are creating better ways of working learning and living. IBM’s Watson beat Kasparov the World Chess Champion in 1997 but even today Watson cannot beat much less talented Chess Champions if the human Chess Champions are supported by software. Andrew McAfee suggests we are in a race against machines but this is becoming a race with machines.
  4. Embedded devices in roads, buildings and vehicles are providing masses of data everyday and applying analytics to this data is crucial to extracting useful insights and inferences to understand the signals in all this noise as Nate Silver says so that we better understand our environment, our economy and human behaviour. NICTA, Australia’s most highly recognised ICT research organisation, has shown in many infrastructure decisions that technology and particularly IT can better optimise our use of our resources. Data can tells us when water pipes need to be replaced before they burst, how containers can be loaded to avoid expensive duplication of the rail lines across the Port of Botany. Bienalto has shown us how customer online pathways can be optimised to buying insurance cover dramatically improving business. Alcidion health informatics software can use data to optimise a patient’s journey through hospitals at Western Health.
  5. Technology is changing how we work learn and live and enables entirely new ways of designing our organisations so that we can achieve our strategic goals in much less time and with greatly reduced resources.

Boards must determine what are the most important things they need to spend their time on and given what we see in today’s globally connected world technology and digital strategy must rate very highly.

Board Diversity

Yolanda Redrup reported last week in the Financial Review that a string of retirements among the top chairman of the ASX will be the catalyst for generational change in Australia’s boardrooms, with experts saying new chairs will drive a greater focus on digital innovation the question is will it require a generational change or can Australian boards acquire the capability and capacity to make the right decisions to embrace technology to achieve their strategic goals?

Elizabeth Proust: “We need greater diversity in all of its forms on every board, and that’s not just gender, but in background and experience including technology. Directors know that just as you can’t be on a board without being able to read a balance sheet you have to be able to understand the technology used at the company. Whilst board members are relatively older than executives in the business and there is a correlation between age and technological skills as younger executives join boards the level of technology skill on boards will improve. So generational change will help but so will professional development.

There is a need for cultural change at board level. A former board colleague of mine is a professor of innovation. And he’s in very significant demand both for consulting work and on boards overseas, but not in Australia. People with his sort of background do really interesting academic work but are not on the radar screens of Australian boards. Hence we are not even asking the question, what new ways of thinking and what new skills do we need to change that?

Andrew Walduck: Boards don’t need to be able to truly solve all the intricacies of what’s the right enterprise architecture for the organization, that’s management’s job. What we need is better quality of discussion around what are the customer and business outcomes. And, if the board is able to enable that discussion, then the necessary discussion will flow without the need for generational change.

Approach to Professional Development

The ASX Corporate Governance Council has formally recommended that companies provide appropriate Professional Development for directors to develop and maintain the skills and knowledge needed to perform their role as directors effectively.  Like finance, technology is complex and complicated. Does it take a technology career or can a non-technology experienced board member learn to effectively govern technology matters?

Andrew Walduck: What is evolving is just as people have acquired financial literacy, by the time there’s a notion of technology literacy and even digital literacy what is going to happen over that time is an understanding that boards need to be able to address emergent problems, and issues, and implications of technology and if we use these case studies in learning environments to enrich the learning experience we will provide an authentic and authoritative learning environment that will be embraced by company directors. Board members and senior executives need to be able to immerse themselves in what are the implications, what are the risks, and issues are of those real situations and what needs to be managed going forward.

Graeme Samuel: Technology has a mystique attached to it. If you have a lawyer on a board and there can be a deferral to the lawyer on every legal matter, which shouldn’t happen. And it shouldn’t happen with technology either. Directors tend to think this is all beyond me we’ll get a technology expert to address this. But, you don’t need to fully understand the technology to understand proper management practices and proper management disciplines that can hold those technology experts in line to do what ought to be done.

Doron Ben-Meir: Boards and senior executives who do not have a strong background in technology need to lose any hint of being proud of being ignorant about technology. There should be no pride in ignorance. No one can hide behind “I don’t understand that sort of stuff.” Or “Let’s leave it to the computer guys or geeks, however they refer to them.”

What form of professional development is best suited to building technology capability and capacity in today’s board members? Should we be developing “Technology for Non-Technology Managers” courses? Is the classroom always the most appropriate venue for such learning? If adults learn by doing how can board members learn without blowing up the enterprise with poor technology decisions?

Elizabeth Proust: Our last strategy day at the Bank of Melbourne had more than half a day being spent by the board just playing with the technology of the future to understand how the customers will use it, devices we haven’t yet rolled out yet. This worked for us.

At Perpetual, the leadership team had a week at Stanford Design School to ask what is the future development and opportunities for our business? The leadership team felt they needed a little time away with somebody who can challenge them.  This was a specific programme at the Stanford Design School for leaders of enterprises and they’ve come back with great energy, insights and ideas that are not for tomorrow or next week, but ideas to be tested for the future development of the company.

Can Regulation and Policy Help?

Can regulation and policy encourage the acceleration of this learning process?

Graeme Samuel: No, because regulation will not give us change and innovation and for example take the taxi industry in Victoria, where regulation is a major barrier to innovation and to the creation of new consumer-friendly type technology and consumer-friendly type services.

The Taxi industry said to me, “Graeme, the first thing you ought to do is stop the apps.” And I said, I’ll do that the day after you crown me King Canut, for Heaven’s sake, get wise, guys.

Innovation and Digital Disruption

What are some of the other barriers that we need to be aware of and boards need to overcome?

Doron Ben-Meir: Innovation particularly in established businesses is very challenging because organisations are designed around efficiently executing. And the bigger the organization, the more effort that is put into making sure the machine efficiently executes. So doing things differently, thinking outside the box is anathema to running an efficient machine. This presents a dichotomy of a really efficient, humming machine that performs exactly the tasks we need to perform and alternatively initiating a process that is all about changing things.

Letting everyone have his or her own ideas will screw with the machine. Hence particularly larger organizations have a difficulty in having an innovative and ultimately disruptive culture disrupting their machine that has to function.

The challenge for boards today is twofold, firstly, to work out a way for senior management to cope with this dichotomy and secondly to recognise that the pace of change today, the capacity for change is greater than it’s ever been. The capacity for that business’ model to be disrupted has increased in terms of its weight and possibility in the marketplace.

Elizabeth Proust: The dichotomy between running an efficient, well managed organisation, especially as it gets larger, and your competition, whether it’s in financial services or anywhere else, is by definition small, nimble, often a startup with a great idea, probably not a lot of money or other resources is often not recognised by the large organisation. They don’t see what is coming, whether it’s peer-to-peer lending or something else until it’s too late. Some organisations create a sort of skunk work somewhere where there’s a group of people charged with being the challengers to the organisation. The successful ones actually develop that mindset across the whole organisation. But, from a board’s perspective, it’s a real challenge.

Graeme Samuel: CEO ignorance and fear is the biggest barrier. If you’ve got a CEO who doesn’t nurture the right culture to address the areas that are changing, where the competition is starting to mount up in a whole range of different ways then a board has a problem. And the biggest potential competition today is the destructive technologies. If you’re a CEO who doesn’t understand it, doesn’t accept it, and doesn’t make the challenge in a whole range of ways — and that doesn’t mean you need a technology smart CEO. You need a technology receptive CEO, someone who’s actually prepared to look, and to take advice, and to understand the advice given, and not to just delegate it through to the CIO, or whoever saying, “Look, it’s your problem. You sort it out.”

On the other hand boards can’t delegate to a subcommittee what appears too complicated for them to understand. A board member who says this means I’m inert, I’m apathetic, and I’m probably arrogant. Boards have got to be led by a culture that says we’re going to try and understand what this is about. We won’t understand the exact details of every technological issue that’s going to be put before us.

Elizabeth will attest to this in terms of dealing with government. You can be the brightest economist in the world or the brightest IT specialist in the world, but you’re actually useless if you can’t communicate a message to those that have got to make decisions. You have the brightest public servants in the world. They’re useless that they can’t communicate to ministers as to the issues that they have to address in making decisions because they’re the ones that make the decision. And, therefore, you need to have people around a table that will be able to communicate to a board, who have got to make a decision about an investment, what it is that they have to deal with.

Andrew Walduck: There is an important difference between technology change and technology disruption. Change can be things that are incremental, things that you can look to introduce, with the appropriate vehicles to realise the value from the change. Disruption is fundamentally rethinking how you might approach a particular market, a suite of customers by doing things in a totally different way.

Change can be delivered within an operation that has been built to run as part of an existing entity. But disruption that is fundamentally different and requires completely rethinking how you might go about a particular problem or an issue. Often you need to unshackle it perhaps from the things that might constrain it. You have got to give it the opportunity to disrupt what is in place. Disruption creates different problems ultimately because, if that something’s going to become the mainstream for an organization in future, you effectively create different operations different ways of doing things that end up needing different cultures. And, so, bringing them back together is really the challenge.

Graeme Samuel: It’s the value of competition because, if you involve the markets, it’s the quick or the dead. About two years ago, the CEO of a major retailer in this city, got up and announced that they were starting to feel the pressure of online. And, so, what they were going to do was to set up their own Australian online operation. I thought, you don’t get it, mate. This is not about online where people are buying things at Australian prices from Australian suppliers. This is about online where people are able to import products at much, much lower prices. The groups like Kogan, have done it and are well ahead of the market. I think executives are starting to realise that competition is going to take over.

The younger entrepreneurs that have said, “Well, we’re going to provide a service that can be done at a very, very low price and make it work.” I think it is those entrepreneurs that we need to understand.

Doron Ben-Meir: It has been reported that of the S&P 500, three out of four companies may not be there in 15 years. So, what are the fundamentals that are changing to bring about this change? The reality is we are going to start to see a startup get to a billion dollars of revenue within 12 months, but they’re not quite there yet. But, all these things are then enabled by technology. How can you suddenly have a challenger within 12 months? With only 20 people! And, so, if you broaden the width and the fact that there’s a burning platform for change that’s going to have to drive different ideas, that’s one of the bigger forms of motivation.

Cabcharge have dominated the taxi industry for years, but then Ingogo come along and GoCatch or Uber and they completely disintermediate the Cabcharge model. Now, for Cabcharge to directly compete with that, they’d have to be prepared to dismantle their entire business as it is today and, in a sense, take two steps back to be able to go three steps forward. That’s gutsy. And, when you’ve been sitting on a river of gold for years that’s another perfect example of this phenomenon, and it’s really hard to make that call. And the same thing happened with Seek and Realestate.com disintermediation of Fairfax. It would have been really hard for them to say, “No. Let’s not worry about the billion revenue now. Let’s make it $100 million, but we’ll dominate online.” It’s a hard call to make.

Thank heavens for slow, big companies to make the opportunity for small companies. If startups had to compete with large companies that really got it, there’d be no startups because what are the biggest challenges for a small company? Brand, recognition, and credibility. A large company’s got that from the get go. So, if they have the same idea and want to pursue the same outcome, they’re going to smash the startup every time. But, time and again we see they don’t get it because it’s counterintuitive most of the time for them to get it. It would be self destructive at that point in time for them to pursue a model that it’s already been taped to put them out of business.

The public sector has different barriers. For 24 years, I was building small businesses or investing in them and then I got involved with the government. There’s no question that, in the public sector, the drivers are completely different. They are dominated by fear, and fear of error, and fear of failure. It is far, far more important to avoid making a mistake than it is to do something well. That’s the reality. What did Lindsay Tanner say at Russell’s earlier workshop? It’s the front page of The Herald issue that dominates. And, then, what happens is you become completely process driven because the only way you can avoid being blamed for the error, when it inevitably occurs, is to have followed the right process. So, you end up with a process that absolves every individual of any kind of a responsibility that inevitably ensures that you get a mediocre outcome, which doesn’t matter as long as you’re not on the front page of the newspaper.

This is a real problem and I don’t know the answer to it. But I am amused because within the department I work there is a whole area that’s devoted to innovation in government and I always ask them, “So, what do you do?” So, we have a committee and… So, it’s just one long-running utopia episode. But, it is a problem. It is a real problem. And you contrast that with a startup, where you’ve got all of five minutes to decide what you’re going to do and you just do it. And, if it doesn’t work, you lose your house and no one cares.

Capital Allocation and Decision Making

There has been criticism of major government projects where the business case wasn’t sufficient or wasn’t done. When the executive presents major proposals to boards, what is the role of the business case? What does the board need to make the right call? What are the key things that boards need to make the right decisions?

Elizabeth Proust: When I joined one board, all of the IT services were provided in-house by a fairly large team of IT people. The business case was put that all of the processes be outsourced. A business case was made over a period of time. What the board needed was not particularly different from any other business case that goes to the board whether it be to acquire something, to divest something, to invest in a new product. What the board needs is to be an informed buyer. And as in this case, a well put together business case, but it meant divesting hundreds of people from the business. We went with global supplier in Australia and a major Indian global supplier in India, and it was the first time we had outsourced outside Australia. We had a very acute understanding of the finances, the business case, the transition to the new providers, the fact that this was not a one-off transaction and a series of new relationships were being established. And, of course, what happens to the people involved?

What is often forgotten is that once the transaction is done and the contracts are signed, there is an important need for really good service agreements because this is a long-term relationship where you don’t want to reach for the contract as the first thing you do when something inevitably goes wrong. To do this well there is a need for a series of iterations at board level. And I’ve seen in other places, government and elsewhere, where these things have been done badly.

Andrew Walduck: By the time any proposal gets to the board it’s an investment of a pretty significant order of magnitude because it’s going to drive some sort of step change. The board needs to understand what is the capacity of the organisation to be able to drive that type of change? Do we really have the capability to understand what that step change needs to be?

Investments are approved because boards want to build something new, something that an organisation hasn’t done before. And it is in this situation when projects often fail. The enterprise doesn’t have the capability, the executives, the skills, the outside help, or whatever it needs to deliver the type of result that is needed. Boards needs to dtermine that the enterprise has the capacity and capability at the right level of experience to achieve the desired outcomes.

The critical success factor of delivering big, important programmes is programme sponsorship. Is must be business led and technology enabled, not technology led. Large enterprises need to ensure that they are not the first to be deploying the chosen technology. Importantly boards need to understanding the simple questions they can use to test their teams to understand if this is something being pushed from a technology department or whether it’s truly being led by the business and that it’s going to deliver something that’s valuable to the business. And what is being proposed is the kind of project that will make a difference.

Delivering the Benefits

How does a board determine that a major project is going well? How can the board avoid the Watermelon Experience where it is all green until it explodes and then it is all red?

Andrew Walduck: It’s an interesting scenario that a project was green, green, green, then red. And, if that’s the case for a project, then does that scenario exist for many other areas of that business? Does the culture of the business encourage people to raise issues, solve problems, and do what you need to be able to do to achieve the anticipated benefits from the project? Boards need honest reflection to determine if this is the type of environment that enables the enterprise to process issues, and solve problems, and do it in an open way, and with a level of transparency that is essential to successfully deliver major projects. Boards need to know the enterprise is at the point now where there is a maturity in what it takes to be able to execute and deliver any type of transformational program and to do it well.

Graeme Samuel: We have suddenly got excited about cost benefit analyses. And cost benefit analyses, for those that are familiar with them, all rely upon assumptions. And assumptions, when you start thinking of technology beyond five years, have got some real guesstimates involved in them. The business case is really saying I want to know when will I get a return on this investment? As to what will happen 10, 20, 30 years out, you have the lifecycle of a particular infrastructure or technology change, that’s something that I’m not going to get into because they’re actual just guesses.

One Minute Closing Comments

Andrew Walduck: We live in the Internet age. It is upon our organizations now and as a result disruption comes with it. Disruption’s not a bad thing. It enables great things. And what I think needs to be challenged for every enterprise to not be one of those S&P 500 that is the three out of four that are not there in 15 years. The challenge is not the national legacy systems but the national legacy revenue. And because of that legacy revenue, is it stifling your ability to create what you need for tomorrow? And creativity, people who are in your organisations who can rethink how to get things done and then challenge what has been the traditional forms of management that have delivered that efficient result, I think they are the differentiating capabilities that are needed in future.

Doron Ben-Meir: The job of a board in a company that wants to survive and thrive is to embrace opportunity rather than fear of failure. And that’s easy to say. But, if you don’t do that, if you don’t create that culture through the whole organisation, you will suffer all the problems we’ve described. It’s just that different. Embrace opportunity. Pursue opportunity. Don’t fear failure.

*Graeme Samuel: *About 15 years ago, the High Court of Australia issued a pretty harsh judgment on business and it said this that competition is going to be the greatest discipline that can be imposed on business no matter what regulation you’ve got. And competition will mean that those that innovate, and those that are entrepreneurially, and those that can adjust to change will survive and thrive. And those that don’t will probably fail. And that’s the rule of the market. That’s the way the market works. And the greatest source of innovation today, the greatest source of change has to be technology. And, so, I just repeat the words of the High Court, innovate and adjust, then you won’t fail.

Elizabeth Proust: I think the key is the culture, the environment of the organisation, whether it’s about presenting good business cases and getting them through, whether it’s about when the green lights go to red, it is having a culture of speaking up. And I think there is still too few places, in particular, large organisations, government and private sector in this country with the right environments created so that people are both free to innovate, free to speak up when something is potentially going wrong, and I think that is still an issue holding us back.