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Dealing with the architecture

challenges of digital

transformations

CONFIDENTIAL AND PROPRIETARY

Any use of this material without specific permission of McKinsey & Company

is strictly prohibited

Vijay Mehra | September 2017

OPEN GROUP CONFERENCE - CHINA

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2McKinsey & Company

Hello!

SOURCE: Source

[email protected]

Ex-CIO $20 Billion conglomerate (Steel, Oil, Telco, Shipping, Power, EPC)

25 years IT experience in USA and Asia

Launched Digital iJoin app for leading telco and two digital banks in SE Asia (2015-2017)

Dual Masters MIT. Dual Bachelors Cornell University

Vijay Mehra

Digital Expert AP

Leader McKinsey Digital Labs SE Asia

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3McKinsey & Company

Digital is fundamentally changing business

models and is defining the competitive

advantage of companies going forward

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4McKinsey & Company

Top digital activities that drive value for respondents' organizationsPercent of respondents, by industry

Healthcare/

pharma

n = 70

Today, top digital priorities which drive value across all industries

are digital engagement of customers and digital innovation

SOURCE: McKinsey IT Architecture Practice

1 Respondents working in other industries (i.e., industries that are not represented by a statistically significant number of respondents) are not shown

2 Includes innovation of products and services, business models, or operating models

Finance

n = 225

High tech/

telecom

n = 205

Total1

n = 1.140

Manu-

facturing

n = 180

Digital

innovation2 23

Digital

engagement

of customers

23

17

25

24

19

32

17 19

18

Ranked third

Ranked second

Ranked first

Drives value

across all

industries

Drives value

especially in high

tech, finance,

healthcare/pharma

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5McKinsey & Company

Tesla uses digital innovation to sell new services

SOURCE: Tesla, McKinsey

Available for software-

locked batteries right in the

car

Range upgrade

Ludicrous mode available

for purchase with new

software version

Acceleration upgrade

Free 1-month trial with in-

car purchase option

Autopilot trial

How is

Tesla able

to do this?

1 Focused on providing new services

2 Highly flexible software architecture through modularization, even in B2B

3 Shorter software lifecycles

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6McKinsey & Company

Cycle times are shortened, culminating in continuous improvement,

while innovations tend to be more disruptive

SOURCE: SAP, Mozilla

Release

1982 2010

HANA

2007

ECC

2003

mySAP ERP

1992

R/3R/2

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7McKinsey & Company

Innovation dynamics have changed towards customer-centric incremental

though disruptive changes

SOURCE: McKinsey

From fixed-product-oriented

cycles …

… to continuous, integration-oriented

improvement

Innovation dynamics in the digital era move from product-centric and full-featured releases in long

cycles to service-oriented, ongoing, incremental, and disruptive changes

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8McKinsey & Company

However, building this digital future

involves a series of very complex

technical challenges that general

management usually isn't

sufficiently aware of

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9McKinsey & Company

This lack of awareness might eventually expose your IT to risks

66

46

+43%

Digital is low on

the agenda

Digital is high on

the agenda

3.2

2.7 36

55

-19pp

Number of point-to-

point connections

Quality of business

process documentation1 - low; 5 - high

Reuse of servicesPercent

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10McKinsey & Company

Enterprise architects bear the challenge and focus on complexity

26

34

47

62

67IT complexity reduction

Digital transformation

Stability

Cost saving

Time-to-market

improvement

Key objectives of EA (multi-select)Percent

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What is the right architecture

for a digital transformation?

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More efficient services management and less technical debt

188

33

+470%

EA does not

contribute to

Digital

EA does

contribute to

Digital

48

29

+19pp

Number of servicesReuse of servicesPercentage

SOURCE: McKinsey and Henley Business School Enterprise Architecture Survey (February, 2016)

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Digital requires to selectively accelerate customer-facing capabilities

SOURCE: McKinsey

Technology stack

From ... ... to

Business operations

Product- or service-centered processes

Customer-centric journeys

Business capabilities

Incremental improvement with periodic revolution

Selective acceleration and perpetual change

Businessapplications

SOA and tightly coupled applications

Independent services

IT integration platform

Heavyweight bus Lightweight connections

Infrastructure services

Central management DevOps

Information andcommunication

technology

Strategic factor Commodity

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To accelerate customer-facing capabilities, the underlying architecture

archetype must be transformed from monolithic to capability-oriented

Perpetual EvolutionTM

SOURCE: McKinsey

Perpetual EvolutionTM solves issues of traditional SOA …

… while it requires a much more mature and sophisticated architecture management

Perpetual

EvolutionTMMonolithic Traditional SOA

Business capabilities

Technology platform

Architecture

archetype

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How can Enterprise Architects

support the transformation best?

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Enterprise Architects facilitate Business and IT collaboration through efficient

use of artifacts, benefits monitoring and more focus on strategic planning


Average score (1 - very low; 5 - very high)

How do you rate the

documentation of the layer?

EA does not

contribute to Digital

EA does contribute

to Digital3.1

2.4

Link between business

requirements/processes and IT

Capability and process

models are used to make …

3.1

2.2

… IT decisions

EA does not


EA does contribute

to Digital3.5

2.8

IT architecture and infrastructure

2.4

1.8

… business decisions

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EA facilitates Business and IT collaboration through efficient use of artifacts,

benefits monitoring and more focus on strategic planning


To what extent does EA

function monitor benefits

capturing?

EA does not


EA does contribute

to Digital1.8

1.4

Average score

(1 - very low; 4 - fully done)

Time of EA dedicated to

strategic planning

35

26

Percent,

part of 100% activity time

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In monolithic architectures and traditional SOA, dependencies across the

technology stack often prevent selective acceleration and slow down

innovation

SOURCE: McKinsey

Element of

technology

stack

Dependency Tightly

coupled

code base

of different

modules

requires time-

consuming

dependency

checks

Schedules

of software-

testing people

and resources

define soft-

ware release

cycle

ESB or API

teams are

often major

bottle-

necks when

decoupling the

integration

layer from

applications

Data layer is

often tightly

coupled, even

when software

functionality is

decoupled

Hand-overs

with the infra-

structure

team slow

things down

when moving

from develop-

ment to

production

Decision

making

processes

across mana-

gement levels

can result in

major depen-

dencies

Code Testing Integration DataInfra-

structure

Decision

making

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Ensuring independence within the technology stack is the key

objective of our Perpetual EvolutionTM architecture

Eliminating depen-

dencies within the

technology stack is

especially important

for bringing digital

capabilities to small,

specific customer

segments

Perpetual

EvolutionTM aims

at decoupling

all parts of the

technology stack

Highly coupled

Monolithic

SOURCE: McKinsey

Perpetual

EvolutionTM

1 Service-oriented architecture

Data

Integration

Code

Infrastructure

Decision making

Testing

Fully decoupled

Data

Integration

Code

Infrastructure

Decision making

Testing

Traditional SOA1

Code decoupled

Code

Infrastructure

Testing

Integration

Data

Decision making

Independent

Tight coupling

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Perpetual EvolutionTM is a holistic approach – its success

depends on its weakest link

SOURCE: McKinsey

Independent

Tight coupling

Decision making tightly

coupled

Weakest link with maximum

coupling defines coupling of

whole stack

Transition to Perpetual

EvolutionTM

Data

Integration

Code

Infrastructure

Decision making

Testing

Dependency on

weakest link

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How complex should

the architecture be?

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Having more services and less point-to-point interfaces is a key differentiator

for lower integration cost

62

-73%

17

Lower than

average

integration cost

-65%

694

245

2,242

-77%

522

Point to point

connectionsShare of p2p connections Number of applications Number of interfaces

Higher than

average

integration cost

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Companies able to create value from product complexity while maintaining

simple processes outperform others

SOURCE: CIONet survey 2012; n = 195; sig ar .05 level; Profitability measured as 3 year average operating income before depreciation as a percentage of

revenue; net margin and ROA show comparable results; Process simplicity measured as the degree of standardization of core business processes

(sales, customer service, operations, manufacturing, logistics, etc.)

x%

Y

% of 195 companies in quadrant

% points above or below industry

average profitability

26%

-1.9

23%

-3.5

32%

+6.3

19%

-2.0

Product

complexity

High

Low

Less More

Process simplification

Complexity

sweet spot

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Companies who leverage EA artifacts for both business and IT are more

likely to decommission more applications


To decommission

more applications

it is good to use ...

EA does not


EA does contribute

to Digital18

6

+200%

Reuse of services

Percentage

Products offered to customers

Number of products

48

29

+66%

... a process/capability model as a common tool for IT and

business stakeholders in decision making

... a process/capability model within business functions to

make decisions

... capability/process models within IT to make decisions

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Being successful

involves communication

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Companies who are not aware of what EA function does, are most likely

not to benefit from it to the full extent


Yes

41No

59

Business stakeholders are

aware of what the EA function

does

Percentage

... no help by an EA to deliver business solutions

... lower adherence to guidelines

... no capability or process model in place and no

benefit capturing in place

... a lack of right talent to cope with business and

technology challenges

... a low chance of modeling the future

On average, in those companies that have

no awareness of what an EA does, there is ...

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The more IT becomes an investment the more architects have to establish

investor relationship skills

SOURCE: Gartner IT Key Metrics, Amazon’s annual reports

0

11

10

9

8

7

6

5

3

2

4

1

15142012 16

Retail IT

average

Amazon

13

IT cost as percentage of salesPercent

IT was more seen as a cost –

a mindset shift is required

IT is viewed as an investment

with an ROI view on each

architecture decision

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Getting the right team

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… is one of the core challenges

SOURCE: McKinsey Global Digital Survey

Most significant challenges to meeting priorities for digital programsShare of respondents1, percent, n = 967

1 Respondents who answered “don’t know” are not shown

20

21

21

23

25

25

25

31

Misaligned or competing interests between digital

projects and traditional businesses (e.g., cannibalization)

Organizational structure not designed appropriately for

digital

Lack of senior-management involvement or desire to

change current practices

Lack of technology infrastructure and insufficient IT

systems

Inability to keep pace with fester speed of business

under digital

Lack of internal Ieadership or talent (both functional and

technical) for digital projects

Inability to adopt an experimentation mindset that is key

for best practices

Lack of data and understanding of how digital trends

affect Industry and organization’s competitiveness

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Architects are more attracted by interesting problems than by money!

43

50

52

71

90Interesting challenges 1

Recognition as a

valued function

Monetary incentives

Way of working 2

Structured career path

Incentives for talent

Percent (responses high + very high)


1 Transformation program, innovative business models, innovative technology

2 Interaction, work model

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Communicate and educate about the

complexity involved in a digital transformation

Establish a modular platform following a

perpetual evolution

Build one framework, process and approach

for business and IT

Tackle complexity reduction – jointly with the

business!

Invest in marketing and communication

Invest in talent and provide them with

interesting task

Summary

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Vijay Mehra

[email protected]

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BACKUP

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The percentage of digital initiatives sponsored by the CEO is increasing

SOURCE: McKinsey IT Architecture Practice

The CEO is increasingly

sponsoring digital initiatives

at respondents’ organizations

Share of respondents in

percent (2013/14: n = 850,

2015: n = 987)

46

38

31

142013 2015

Dealing with the architecture challenges of digital ... · Business capabilities Incremental...

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