Principal Martijn Geerling talks with Vice President of Research Erik Dorr about The Hackett Group’s new Digital World Class performance standard, and how it differs from the world-class standard that The Hackett Group has used for decades to measure operational excellence and business value in finance, procurement, HR, IT, and other business services areas.
Welcome to the Hackett Group’s Business Excelleration Podcast, where – week after week – we hear from experts on how to avoid obstacles, manage detours, and celebrate milestones on the journey to world-class performance. This episode of the podcast gets into changing ways of conceptualizing world-class performance, and it is hosted by Martijn Geerling, a Managing Director and Advisory practice leader for the Hackett Group in Europe. Martijn provides listeners with guidance and context as he interviews the guest for the episode, Erik Dorr, the Hackett Group’s Vice President of Research.
For decades, the Hackett Group has measured the performance of enabling functions such as finance, HR, procurement, and IT, identifying world-class organizations. Now, though, the Hackett Group is changing how it defines performance, transitioning from the ideal category being “world-class” to it being “digital world-class.” The alteration in methodology represented by this shift arose from a number of circumstances. First, the COVID-19 pandemic served as a triggering event. Longstanding trends also fostered the change; these include the ongoing modernization of architecture (in other words, digitization), as well as the entrance of a new generation of digital natives into the market (in other words, a workforce shift).
The traditional definition of world-class Erik explains, dealt with the intersection of effectiveness and efficiency performance, and based its valuations on empirical data and measurement. These same foundational pieces are still in place, but the Hackett Group has modified its definitions of effectiveness and efficiency. Effectiveness has been extended to be “Business Value,” adding in the component of customer experience and keeping an eye to relevant digital factors. Efficiency has been extended to be “Operational Excellence,” and the category incorporates specific measures for business process automation.
As the Hackett Group has begun to evaluate companies in this new way, it has gathered information about new trends and differences in cost profile for digital world-class organizations. Erik shares that the introduction of digital world-class companies has brought discontinuity in the cost levels associated with top-performance companies. IT cost is, unsurprisingly, higher than it generally is for world-class companies. However, there have been cost decreases in other functions (including labor, as there tends to be a substitution between labor and tech costs), leaving a net cost difference of about a 5% lower cost relative to world-class companies. Further, there is about a 30% cost advantage for digital world-class companies over peers.
The numbers are even higher when looking at the actual business value components of companies, and all of these metrics indicate that digital world-class companies are marked by a dramatic performance difference over other businesses. What, Martijn asks, characterizes these companies? Erik explains that they have a modernized architecture, having moved many of their apps to the Cloud and started to build on that foundation. They use this digital platform to extract and analyze data for continuous improvement. These companies are also characterized by higher levels of technological enablement, as well as the superior talent management capability needed to retrain employees and attract new talent.
It might seem that the status of digital world-class is only attainable to digital native companies. While they do have an advantage, that is not the end of the story. Size and complexity, which were significant factors in grading for world-class status, are still important. And while they have new obstacles to face, world-class companies can adapt to new standards. The obstacles before them include the challenge of re-engineering a legacy organization, developing an enticing brand to draw in new talent, and putting in place the kind of solid governance needed to determine investment decisions and priorities in a shifting business space. There is definitely a journey ahead of all companies aiming to become digital world-class organizations, but it is both a necessary and an exciting journey!
- 0:44 – Welcome to this episode, hosted by Martijn and featuring Erik
- 1:39 – What has led to the Hackett Group’s new change in methodology?
- 4:42 – Martijn asks what differentiates digital world-class from world-class.
- 7:12 – The conversation turns to differences in cost profile.
- 9:36 – What characterizes companies at the forefront of this dramatic performance shift?
- 13:16 – Martijn wonders about obstacles to becoming digital world-class companies.
- 16:45 – The shift is a journey, but a journey that is both needed and exciting!