Oct 2022

Why digital infrastructure is a precondition for success – and why that is difficult to explain

After the Industrial Revolution, the emergence of the Internet, and the wave of IT at the end of last century, we are now facing the next wave of innovation, namely that of digitalisation. In a discussion about the future of IT, Nick Smaling (partner at the Boston Consulting Group) and Bart Deuss (owner of YaWorks) make it clear that, in order to make the most of the excellent opportunities that currently exist, it is essential to invest – precisely at the present time – in a future-proof digital infrastructure.

A digital infrastructure is the foundation – the digital backbone – for innovation but is increasingly a constraint for businesses. Bart Deuss explains why this is the case, ‘It's a largely invisible and extremely complex patchwork of systems without any overview and control. So maintenance is time-consuming and costly. Investment in the digital infrastructure is often postponed year after year. In order to continue competing with other providers and to meet the increasing demand from consumers for greater ease-of-use, businesses prefer to invest in innovations at the front, such as the introduction of a smart app, a new feature, or a new user platform. The irony is that such an outdated foundation is actually not suitable for supporting those technological innovations.’

This view is endorsed by Nick Smaling (BCG). ‘Whereas it used to take years for a small company to grow, these days, digitalisation means things can change really quickly. Last year, for example, it only took Clubhouse three weeks to achieve one million users. New digital native companies are now competing with established parties which have been around for much longer, but which have seriously neglected their digital backbone over the years.’

What is the most important reason for this neglect of IT backbones?
‘Back in the first IT wave, these major players, including many banks and insurance companies, had huge budgets and clout, and that made it relatively simple for them to gain an IT advantage,’ Smaling explains. ‘As a result, there was hardly any incentive for them to look for further improvement or progress. Now, in the new wave of digitalisation, they're suffering from a first-mover disadvantage. Established names would rather avoid getting their fingers burned on innovating the digital infrastructure due to the risks in terms of continuity and the lack of clarity about the return. In a black box, everything you touch represents a risk. So, it's very difficult for the established parties to stay competitive.’

You are both of the opinion that it isn’t just an IT problem, but also an organisational problem. Why is it so difficult to tackle?
Nick Smaling continues, ‘The business case doesn't seem attractive, and IT infrastructure isn't a sexy issue. I always explain it by using the analogy of a canal house in Amsterdam. Everyone is keen to live in one, but no one wants to have to redo the foundations. People prefer to spend money on a new conservatory or a new sofa, rather than on invisible foundation piles in the ground that nobody can see. The thing is, if you don't look after the foundations on time, subsidence will ensure there'll be little left of your beautiful canal house in the long run. The same applies to replacing your digital backbone.’
Bart Deuss explains how he has come across companies that have failed to make any significant investments in their infrastructure during the past ten years. ‘Infrastructure isn't a goal in itself and is regarded purely as a cost item for which there isn't really any budget. CIOs often find it difficult to explain to a board that maintenance work on something intangible like infrastructure should take priority over developing new functionality the business has already been waiting ages for. In many instances, it's then impossible to explain properly why this investment is necessary, and so the whole thing often gets put off.’

Are people starting to realise that digital ambitions cannot be achieved without a future-proof digital backbone? 
Smaling is cautiously positive. ‘Slowly but surely, I'm truly seeing some movement. An additional trigger to addressing issues is that I expect a wave of consolidation in the second half of this decade, as many vendors begin revamping their software. If there is no longer any support because software has become outdated, that's often the reason why people start getting to grips with their IT as a whole.’

Why is it so important to tackle things now?
Bart Deuss continues, ‘The consequences can be disastrous and may include faltering systems and applications, a lag in digital services, dissatisfied customers, established parties that are overtaken on all sides by newcomers, and, in a worst-case scenario, the vital infrastructure may even become paralysed. Without wanting to portray too many nightmare scenarios, as long as businesses keep seeing the digital backbone as a cost item rather than a necessary investment in order to become and remain future proof, they’ll never be able to take the next innovative step. It’s a precondition for success in the digital era.’ 

Do you have any tips for businesses with regard to a proper digital strategy?
According to Nick Smaling there is no quick fix. ‘There's no need to launch a hugely complex programme straight away. But you can stop immediately with building ad hoc things and start putting a new architecture philosophy in place. Companies that focus on a digital-first philosophy with a loosely coupled architecture can have their infrastructure adapt effortlessly and in a controlled fashion to the many changes that are coming down the line.’
According to Bart Deuss, digital strategy and digital architecture are inextricably linked, and that is precisely the challenge. ‘From a techwise perspective, the board has too little understanding of the actual situation on the shop floor, and conversely, a techie understands nothing of boardroom dynamics. Breaking with that status quo is a precondition for bringing vision and execution closer together.’ 
Nick Smaling has also noticed that there is still far too much distance between company strategy and technological interpretation. ‘If you can bring architecture and strategy closer together, you'll create a bridge. In our eyes, enterprise architecture is one of the most important business functions, and not an IT function. In effect, enterprise architects work out how you can stay ahead of the competition.’ 
According to Bart Deuss, if you turn your architecture into a strategic business function, you must also ensure that you are in close contact with the shop floor, where everything is actually implemented. ‘Architecture is a crucial means of control when it comes to using technology and ought to be linked directly with your organisation's engineering power. In this way, you can make the transition from the why of IT (“the business”), via the how (“the architecture”) to the what – the specific implementation on the shop floor (“the technology”). As soon as we embrace that crucial role which technology has to play, it's really absurd to hide IT away in a department, rather than allow it to permeate through the entire organisation. But that's a bridge too far for many organisations.’

Which economical and social opportunities can we capitalise on if we address these challenges properly?
As Bart Deuss explains, ‘This means themes such as the energy transition and sustainability, agriculture, water and food, health and care, and security. Key technologies such as AI, big data, blockchain, and a new generation of mobile networks also play an essential role. Successful organisations will be those that are supremely agile and are therefore able to use innovations effectively. Those who stand a good chance of having a social impact, irrespective of whether the theme is sustainability, the energy transition, or food scarcity will, in any case, have fulfilled those preconditions.’
Nick Smaling adds, ‘In this business, it's impossible to look too far into the future because developments are taking place at lightning speed. However, BCG does believe that AI-at scale is the next big thing. Computers are great at learning from huge quantities of data, organising all that information efficiently and retrieving it, and in processing it quickly in order to find solutions. This allows you to develop really attractive new propositions, provided you have a properly organised digital backbone. In the care sector, you can already see that combining diagnostic data with AI on a large scale makes it easier for you to supply the best care to any individual, which is also in line with their situation. Other benefits include optimising your digital sales and marketing using smart algorithms.’

Everything starts with a solid and flexible digital backbone, after which you can focus on building tomorrow's technological innovations. 

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