As digital disruptions impose greater demands on IT systems and

organizations, companies must consider an end-to-end approach for

upgrading and managing business technologies.

Most companies face critical IT modernization issues, whether that

means digitizing the customer purchasing experience, managing or
moving away from aging software and hardware solutions, or shifting
to newer technologies such as cloud-based computing, serverless
computing, and microservices for delivering software.
Historically, companies have favored an incremental approach to
modernizing ITthat is, addressing the most immediate points of pain
and then subsequent issues as they occur. However, the threat of
digital disruption is creating an urgent need for companies to
modernize IT systems end to end, with the big picture in mind.
End-to-end modernization, or a holistic approach to tackling system
upgrades, completely redefines how a company thinks about IT. Under
this approach, the technology organization is no longer just a shared
service; IT becomes a critical part of the companys DNA, and IT
leaders become trusted partners, not just service providers.
Certainly, the long-favored incremental approach to modernization
may entail fewer risks: if something goes awry on a small softwaredevelopment project, the harm from bugs or faulty processes can be
contained and resolved before widespread issues occur.
Incrementalism can also offer short-term improvements faster:
through small service- or product-line changes, companies may be
able to realize quick benefits in, say, customer interfaces or tasks
associated with systems maintenance.

But incrementalism can also limit companies growth and

competitiveness in some important ways. Under this approach,
technology teams in different parts of the IT organization may
independently address discrete systems questions involving their own
areas of competence or internal business clients. They may create
islands of solutions, which in turn may breed more complexity, while
redundant systems and processes remain. And when companies
inevitably pursue digital initiatives, weaknesses in their traditional
product-development processes and IT-management systems can be
exposed. Customers may experience this as missing data links, slow
processing speeds, and disconnected products and services.
The end-to-end approach to modernizing IT is more effective for
creating and supporting viable digital businesses (exhibit). To pursue
this approach, executives must break down the change process into
three critical steps: defining the target state for their IT architectures,
deciding which elements of the IT landscape (systems, people, and
processes) need to change, and determining the sequence and scope of
change. Weve seen some companies tackle each of these steps in
isolation, often in the context of a business-unit request for a new
technology-enabled feature. But relatively few companies are
considering these three steps in systematic fashion, across all business
units and functions, and with input from both IT professionals and
business leaders.
Exhibit

Compared with incrementalism, the end-to-end path toward a modern

IT landscape can be more risky, and potentially more expensive. In

most cases, however, avoiding duplicate work leads to lower costs. It

may pave the way for seamless adoption of microservices, two-speed
IT,1and other emerging approaches for managing and enhancing IT
architecture. And, ultimately, end-to-end modernization may ensure
that companies have the right IT capabilities for decades rather than
just the next few years.

Pursuing end-to-end IT modernization

Nowadays, the technologies that support digital business activities
span the entire IT landscape; companies can no longer define bright
lines between front- and back-end information-systems management.
The sheer volume of technologies, processes, and decisions required to
build and maintain digital applications and operations means
companies cant afford to work in the same old ways. Business
executives and technology professionals seeking to change their
approach to modernizing IT architectures may want to focus on three
core tasks.
Define the target IT state

In end-to-end modernization, business and IT leaders come together

to define the target state of ITnot just for discrete business units or
projects but for the entire organization. They set realistic priorities for
modernization, asking questions such as: Which technology-driven

projects will generate the most value for the company, in reduced cost
and greater efficiency, and which would just be nice to have?
They define categories of business capabilities where processes,
products, and actions can be digitized or otherwise improved through
the use of technology. The overarching goals and vision at one bank,
for instance, were centered on the tools and processes relating to the
user experience and how to ensure that customers and potential
customers could find the information they needed through the banks
new digital channels. For an insurance firm, the highest-priority tasks
and tools included those related to ensuring compliance with emerging
regulations. And for a retailer, the target end state was better customer
segmentation, which required moving toward a centralized database
and advanced-analytics capabilities.
Whats most important is that the IT organization partners with the
business on this step. According to recent McKinsey research, IT
organizations that actively collaborate with the rest of the business to
shape an overall business strategy that effectively employs technology
tend to perform better on a number of dimensions, including
provision of core services and the creation of a healthy organizational
culture.2Conversations should include the CIO and top IT leadership,
business-unit or business-domain leaders, and product-group owners.
Decide which changes to make across the technology landscape:
Systems, people, and processes

With information about the desired target state in hand, IT leaders can
consider how and whether to make specific changes to elements of the
IT architecturefor instance, front-end applications, middleware

technologies, or back-end serversto help the business attain its goals.

This is less daunting than it sounds. Typically, there are just a few
critical systems that must be fully redesigned; effective use of
application programming interfaces and middleware can mitigate the
need for significant changes to back-end systems.
As a first step, the IT team should take inventory of existing
applications and other technologies and identify those that can be
improved, consolidated with other applications or other technologies,
or decommissioned. The team should come to the table ready to ask
questions such as: How much real-time data do we need to support a
digital customer experience? How quickly do we need to launch new
features to meet customers needs? How will service response times
need to change? Will workload grow or shrink among groups within
IT? A large telecommunications company, for instance, had to work
out which elements of its IT architecture to modernize so it could
launch a digital e-care feature for its 100 millionplus customers.
The e-care feature was designed to allow users with prepaid
smartphones to buy more SMS, data, and roaming services, in just a
few clicks. The telco realized such a digital program would mean giving
users 24/7 access to data stored in back-end servershence, data
storage and maintenance became an immediate target area for IT
modernization.
Once IT team members have explored core technology questions, they
must discuss the organizational- and operating-model changes that
may be required to support business efforts long termfor instance,
what new team structures or skills might be required? IT leaders,
business-unit heads, and critical stakeholders from adjacent business

units must consider each core business capability and determine

which processes, products, and activities would most benefit from
modernization.
Determine the sequencing and scope of change

IT and business-unit leaders can create a clear road map for

modernization efforts by having two- and three-year sequences of
updates in mind and identifying measurable outcomes. Indeed, a joint
IT and business team will need to be clear on business priorities and
how those will affect the scope and urgency of priority IT projects. The
team will need to identify technical interdependencies among various
business initiatives and quantify the cost and effort associated with
each incidence of systems change. The team must also have an
estimate in mind of the potential business value to be gained from
modernization efforts. The team can use any number of metrics to
guide these discussions, such as current IT investments (cross-unit
and within particular divisions), the amount of revenue being
generated by certain product lines, or the potential productivity
increases from digitizing certain internal processes.
Business and IT leaders can use these insights to outline the potential
sequencing and scope for modernization. In some instances, it might
make sense to modernize according to lines of business; in other cases,
by geographic location. Either way, the modernization team can devise
a timetable indicating the people and capital investments required, the
agreed-upon business and IT outcomes, and budget expectations. It is
critical to get CEOs and executive-committee members input on this
financial aspect of IT modernization; they will, after all, be the ones

overseeing the IT modernization team. CIOs must help CEOs and

board directors understand that the majority of the IT project budget
may need to be devoted to modernization efforts over a two- to threeyear period. The level of that commitment cannot be overstated. For
end-to-end modernization efforts to succeed, top management must
be clear about the spending required, and they must sign off on those
budget requirements before any real work can start.

Realizing end-to-end improvement: Case study

Most companies have a sense of what they want their modern IT
architecture to look like. And all are familiar with the core building
blocks they can use to achieve that goal. Still, an end-to-end IT
modernization program will look different in different industry and
company contexts.
For a regional bank, the primary objective for modernizing IT was to
introduce digital processes in the company. Its secondary objective
was to cut costs; margins had been slipping the past five years. After
considering the technology and management landscapes, as well as
issues with timing and scope, a team of IT leaders and business
executives at the bank developed and executed a series of staged
initiatives designed to produce both quick wins and a blueprint for
further modernization over the next three years.
As a first step, the team considered its current IT capabilities and its
target state of IT operationslooking not just at discrete technologies
but also considering potential business needs over the next two to five

years. Then it made a series of decisions to try to close the gap between
the two.

Two ways to modernize IT

systems for the digital eraRead the article
The bank had been using an incremental approach to upgrades that
left it with an aging, fragmented IT architecture, with multiple pointto-point connections between front-end applications and back-end
transaction systems. Because there were so many interfaces and
redundant gateways, customers banking experiences varied wildly.
And because the IT architecture was so fragmented, it had been hard
for the bank to design and build new software and services and launch
them quickly. Software development was done using the traditional
waterfall method; agile and DevOps approaches to development were
used in only one pilot project. The banks data were stored in disparate
systems across the bank, so there was no easy, single view of the
customer, and, as a result, the bank was not able to mount effective
marketing campaigns. Whats more, it was difficult, and time
intensive, to respond to regulatory inquiries because risk officers at the
bank had a hard time finding the information they needed.
The teams assessment of the technology landscape revealed the
fragmentation issues, and as a result, the bank consolidated its frontend applications and built a cleaner integration layer. Specifically, the

bank mapped application redundancies and identified all point-topoint interfaces. It documented its desired future capabilities and
design principlesfor instance, the ability to write code once and use it
everywhere, and minimal interdependencies among interfacesand
used that as a guide to determine which parts of the existing system
could be reengineered, discontinued, or rebuilt from scratch. The bank
built a multichannel management module, and the most advanced
branch was reengineered so that all channels could use its
components. Those components that shared similar functionality were
grouped together under one module. To avoid writing these modules
from the ground up, the most advanced and comprehensive elements
were reused and reengineered (if needed). Old components were
decommissioned and new ones set up and tested in a relatively short
period of time. Front-end integration layers were migrated to the
cloud and managed using agile methodologies.
In response to the teams review of business and IT capabilities and
operations, the bank introduced agile development practices across
the organization (not just in a pilot). This move had a second-order
benefit of attracting new talent; developers were lured in by the
promise of getting modern and challenging assignments, as well as the
chance to be creative, rather than simply taking requirements from the
business and making them happen in a mainframe environment. The
bank also established a data repository and built a platform for master
data management and analytics. This change allowed the bank to
target customers more accurately with products and services. It also
made it easier for risk officers to find information required to fulfill
regulatory requests. By creating a single hub for collecting, processing,

accessing, and delivering data, the bank has been able to continually
update its analytics programs and methodologies, ensuring that it will
be able to adapt as the market and customer needs change.

An incremental approach to systems upgrades may continue to be

optimal for companies that believe they will be bought out or that are
in industries that arent anticipating substantial technology changes.
For most companies, however, this will not be the case. Technologies
and processes are only becoming more sophisticated as companies
explore digital business opportunities. Therefore, IT organizations can
no longer continue to implement system changes piecemeal, always
backtracking and reengineering to correct for uncoordinated
modernization efforts. They must join with the business units to think
systematically about how to phase in digital technologies and faster
processes while still supporting business day to day. The companies
that dont do this risk falling behind competitors and further impeding
any ability they may have to catch up in the long term

The countrys investment model for growth is losing steam. Shifting to a

productivity-led model could add more than $5 trillion to its economyif
China can make the transition.

For decades, Chinas economy has been driven by investment

and the continual stream of workers from rural to urban areas. But its
time for the country to move beyond a if you build it, they will come
philosophy to focus on how investments translate to real economic
productivity and growth. In this episode of the McKinsey
Podcast McKinsey Global Institute director Jonathan Woetzel and
McKinsey senior partner Kevin Sneader talk with McKinseys Cecilia
Ma Zecha about how China has the opportunity and the ability to
boost growth over the next 15 years by making productivity more
inclusive and less focused on the financial sector.
Podcast transcript

Cecilia Ma Zecha: Hello, and welcome to this edition of

the McKinsey Podcast. My name is Cecilia Ma Zecha. Im an editor
with McKinsey Publishing, based in Singapore. Chinas economy has
been powered by investment, and its been hugely successful. But
China is now experiencing growing pains. The investment model is
losing steam. Growth has slowed, debt has risen, and return on
invested capital has fallen. The economy is distorted. More than 80
percent of economic profit comes from the financial sector.

22:20
Audio

Meeting Chinas productivity challenge

Could Chinas economy be facing a hard landing? McKinsey Global
Institutes latestreport on Chinas economy says there are risks, but
China can face such challenges. In fact, China has a choice, and it can
choose to shift gears, decisively, to an economy centered on
productivity instead of investment. MGI estimates that this approach
could add $5.6 trillion to GDP, and $5.1 trillion in household income.
Here to tell us more is MGI director Jonathan Woetzel and McKinseys
chairman in Asia, Kevin Sneader.
Jonathan, let me start with you. What are the trade-offs, to begin with,
between an economic growth model that is driven by investment and
one that is centered on productivity?

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the McKinsey Podcast?

Jonathan Woetzel: The history of Chinas economic growth in the

past couple of decades has been all about investments. Its been about
savings, which have translated into investments in infrastructure and
urbanization which, in turn, have created opportunities for literally
hundreds of millions of Chinese people to become more productive.

That said, its been very much a story of, if you will, quantity over
quality. So thats simply that the strategy in China was all about simply
showing up. Literally building something and then people would come
there, and almost anything they would do would be more productive
than what they were doing before.
Today, infrastructure stock, as a share of GDP, is over 70 percent,
which is roughly the world average. Now its less about showing up
and making those investments than, What are we doing with those
investments? And how good a job are we doing in making those
investments? And how do these investments translate into real
economic productivity, quality growth? Thats the transition. Its
from quantity to quality, and from, How much of it are you
doing? to, How well are you doing it?
Cecilia Ma Zecha: Kevin, why do you think its urgent for China to
make that transition now?
Kevin Sneader: There are several reasons to urge a more rapid
move from what Jonathan has described as showing up, to actually
being productive. And the reason for this, I think, stems from both an
opportunity and a challenge. The opportunity is that there really is a
potential here for China to take the next step in terms of consumption
and actually create an economy that has a more inclusive nature to it
and has the potential to allow members of the Chinese economy to
participate in a way that some have not.
Let me put some numbers behind this. What is quite striking today is
that the rate of growth has seen 600 million people raised out of

poverty. Thats what Jonathan said when he talked about quantity. It

has seen an economy that has sustained double-digit growth for
almost 25 years. All of that has translated into huge progress on many
dimensions.
But heres the challenge. There are some clouds that really, now,
cannot be ignored. If you look at nonperforming loans, the official
number says somewhere around 1.7 percent. An estimate today is
probably that number is 7 percent. One could get to a place in a few
years time where that number is 15 percent. At 15 percent, while we do
not doubt that China could afford, given the scale and nature of its
financial assets, to maintain the health and well-being of the financial
sector, you would face a liquidity crunch that would have significant
implications for many Chinese financial institutions.
Thats a matter of real concern. Secondly, the reality is that,
asurbanization inevitably slowsand its been worth 23 percent a
year in terms of incremental growth in urbanizationas that rate
slows to 1 percent, the big driver of a lot of the economic growth that
has happened, namely, taking people from a rural environment and
putting them in an urban environment, that starts to slow. As that
slows, the economic opportunity could slow too. Then, perhaps, the
third most urgent reason why its time for this change to occur is that,
in some regards, the inequality within the Chinese society has been
getting much sharper.
You now find that that top 20 percent of people who have household
income in the top 20 percent, they are, in effect, controlling

somewhere between over half of all the economic growth. Theyre

gaining from that growth disproportionately.
Jonathan Woetzel: As Kevin highlights, the economic liabilities
that have been accruing, by lending to enterprises, which are no longer
earning a return on capital, those are real. They will have to be dealt
with. Theres no scenario where that doesnt happen.
The only question, really, is how much growth will the rest of the
economy, the productive economy deliver? How will we direct capital
to the rest of the economy? We know that 50 percent of commercial
bank lending is still going to capital-intensive, heavy industries
dominated largely by state enterprises, which are not, in fact, earning a
return on capital. How that changes over time, and how quickly that
changes, is the central question.

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about the McKinsey Global
Institute?Visit our Asia / Pacific page
Cecilia Ma Zecha: How are Chinese business and government doing
right now with productivity, in general?
Jonathan Woetzel: We see a vast disparity between the
performance of the top quartile of the firms and the long tail, the
bottom 50 percent, and on a much broader span of performance than
we would in a North American or any competitive OECD
[Organisation for Economic Co-operation and Development]

economy. That reflects this fundamental transition in that its been

about showing up. It hasnt been about performance.
So we have a really broad range of performance here. Thats the big
challenge for China, is how does it help narrow that span of
performance? If you bring up the bottom tail, or simply allow the top
performers to grow and expand, and deliver products and services to
Chinese consumers at a more competitive cost.
Kevin Sneader: To build on Jonathans point, Chinese productivity,
on average, is 1530 percent of the OECD average. And as Jonathan
says, within that headline, there are enormous differences. I work with
Chinese clients who are every bit as productive as their Western
counterparts. In fact, if you look at some of the high-tech
manufacturing, you can absolutely see Chinese firms who are
productive in the same sense that you would see it in the West.
The difference is that range is enormous. For example, in retail, where
I spend a lot of time workingwhereas in the West, the role of B2B, in
terms of the e-commerce engines, using that to control supply chains,
making sure that goods are tracked throughout the chain, theres a big
distance between what happens here, in China, and what happens in
the West. Therefore, the productivity gap there is particularly large.
That is the challenge. How does this productivity gap, which is acute in
a number of industries, and offset, in part, by labor, but the problem
is, labor costs have been rising dramatically.
The Chinese competitiveness, in terms of the labor-cost equation
versus the productivity equation, is not what it needs to be. You can

see in a number of sectors where that is resulting in Chinas share

dropping. Theres the opportunity. If China can get just that bit more
productive, then you actually would start to see that equation look a lot
more balanced than it is right now.
The reason why its important to answer the question you had about
the trade-off is China has shown itself rather adept at handling
significant transformations in the past. We are in danger of
underestimating the ability of this actually to react to the environment
which now exists.
If we think about it in consumer terms, there were two million
households who had disposable income, lets say, ahead of 20,000 US
dollars, back in the year 2000. That number today is 115 or 116 million
households, and you can see that number rising to well over 300
million in the event of material-productivity gains being delivered.
That matters, because I think that talks to the transition, which needs
to happen, toward a consumption economy. One where goods and
services play more of a role domestically than has been the case in the
past.
If that happens, then you can be much more optimistic about the
country being able to handle the scale of transition that it now needs to
do. Its also worth remembering that its not that long ago that SOEs
[state-owned enterprises] were 50 percent-plus of all employment.
And today, they are, what, 15 percent? A much smaller number.
Cecilia Ma Zecha: Is there business confidence that China will make
the right choice?

Jonathan Woetzel: There is a high degree of confidence, if for no

other reason than this is an optimistic place. Theres a track record of
success. In some ways, most people look at China and they say, Well,
you know, theyve done the hard part, which was double digit growth
for 25 years. There are very few economies, if any, that could actually
state that. That, plus the reservoir of savings, of capacity to intervene,
from both companies and government, thats very high.
The pace of the change, and the rapidity of the change, that one is very
much up for grabs. There is a sort of very near-term question about
how will China manage what is a relatively low-growth global
environment?
If theres one thing thats on the mind of the Chinese government, it is
how to be resilient in the event of a new OECD recession.
Kevin Sneader: I think thats right. What Im very struck by, as I
travel domestically here in China and overseas, is that overseas
business leaders are a lot more worried about China than Chinese
business leaders are worried about China. The reason for that is, for
many Chinese business leaders, there remains a real sense of
opportunity, because they can see the transition taking place.
In particular, if youre in the consumer sector, for example, you can see
a number of trends actually working in your favor, whether its
thepremium-ization of products, the continued development of
income amongst those moving into the consuming classes, and you
therefore see that opportunity. When youre overseas and youre

looking at China, you hear the headlines and you get a lot more
nervous.
Thats a disparity if anything is growing. But domestic Chinese
businesses and their leadership, or businesses in China, they remain
quietly confident because theyve already been through a lot. Quite
frankly, they remember from where they came. If you remember from
where they came only a matter of years ago, you can see why they see
reason to believe and be the optimists that many of them are.
Jonathan Woetzel: We underappreciated exactly how
entrepreneurial Chinese society is. There have been more
entrepreneurs in China than anywhere else on the planet for the last
decade. Were in the era of the Carnegies and Mellons and Rockefellers
and Rothschilds, for that matter. Dynasties are being created now.
Kevin Sneader: The other reality is Chinese companies have a
number of areas where they still need to hone the skills needed for
success. A simple area: branding. If you look at China, despite the
enormous growth of its consumer-goods sector, it only has two brands
in the top 100. That talks to a skill gap on the creativity side which still
needs to be closed in the area of consumer goods.
More generally, theres still work to be done in the R&D area when it
comes to science-based breakthroughs. China still does not pull its
weight in areas like pharmaceuticals. Now again, there are an awful lot
of entrepreneurs working on both those topics. Ive certainly spent
quite a bit of time with Chinese business leaders on the subject of

branding, and trust me, they will crack it. Its just a matter of when,
not if.
Cecilia Ma Zecha: The report highlights five opportunities to raise
productivity: better serve the middle class, using digital technologies,
and improving business operations, and so forth. Can you talk a little
bit more about them, Jonathan?
Jonathan Woetzel: These opportunities are, first of all, theyre all
getting attention by the folks that are in China. We drew those five by
looking at that top quartile of companies, the ones that are the
outperformers. These are the things that they are doing. Theyre
globalizing, theyre digitizing, theyre focusing on the middle-class
consumer. And they are trying to move up the value chain. These are
the habits of the successful companies.
As to which ones will really move the needle, Im actually probably
where Kevin is in terms of the value-chain opportunity. If we just look
at what is the opportunity for branding, and for higher productivity of
products and services. China earns half the margin in pharma of what
its OECD counterparts do, Chinese companies do. That, or, for that
matter, in semiconductors. If they or any other sort of innovationintensive industries, theres just a massive opportunity for Chinese
companies to capture the fruits of their labor, if you will, or of their
talent.
Anything that can be done to raise services productivity will have a
huge multiplier effect. In the case of China, the ability to bring a better
product or service via the web to the Chinese to consumer pays off. Or

it pays off dramatically, as weve seen in the growth of theChinese

Internet companies.
Kevin Sneader: The digitization thats happening in China is
happening at a remarkable pace. If you recall that today, not the
future, today, the Chinese market for online commerce is larger than
the market in the United States by quite some distance, by about 80
percent. The gap is enormous. As that continues, the learning and
experience that Chinese companies are building will lead to sustained
innovation. It already is.
The innovation thats happened around the whole payments industry
in China is far superior to that which has happened in other parts of
the world. At the same time, there are areas where China lags on the
digital side. If you look at the amount that China invests in digitizing
its supply chain, its roughly half that of Western companies. Well,
thats a major opportunity for productivity gains.
If that investment can translate into better management of
infrastructure and supply, then that should boost economic returns
quite significantly. That does require investment, and it does require
complementing the huge focus on the consumer side of the digital
experience with an equal focus on the supply side and the business
elements of it. Once that focus happens, well see enormous gains,
because Chinas proven to be very, very good at process-based
innovation, and less good at other types, and thats whats required
here.

Jonathan Woetzel: I agree, and I would add some numbers: the

SMEs [small and medium-size enterprises] in China may be only at
1015 percent of any kind of web enablement. Compared to 40
percent, 50 percent, 60 percent in OECD countries. So that, in and of
itself, is just a massive opportunity. As those SMEs come online, as
they will through integrated supply-chain management by larger
downstream OEMs or by customer-relationship-management
programs to reach the middle class. It will just speed up the pace of
Chinese business.
This is something that will happen. Its a massive opportunity for
productivity growth. Its also a massive opportunity for demand
growth. We also see that in many ways, that there are products and
services just simply not reaching the customer right now. With
enablement through digitization, that can happen, and that will
translate into income, into demand, and ultimately, into employment
as well.
Kevin Sneader: Lets also not forget that one of the five that we
highlighted was Chinese companies going global. While China has
dramatically ratcheted up its investment overseas, I think its growing
at 25 percent per annum over the past decade; the reality is were still
in the early stages of that phenomenon.
Whats happening now is its a shift from acquisitions, and resourceheavy areas, into technology and services. And as Chinas acquisitions
overseas shift into technologies and services, well, so too will the
capabilities associated with them build. And those capabilities will be
very relevant back here in China, just as they are overseas.

Capturing Chinas $5 trillion

productivity opportunityRead the article
Cecilia Ma Zecha: Hearing you talk about the pace of digitization in
China being very fast, what are the risks, and how should China
address them? For one, helping displaced workers shift into different
jobs and industries.
Jonathan Woetzel: China is in a relatively fortunate place because
its catching all of this at a fairly early stage of development. Were still
only halfway through the urbanization journey, so we still have a lot of
folks who simply dont have any legacy, and so theyre not hanging
onto anything. They come into the city, and they just look for what
they can get.
Now in the past, those folks would have gone to the job site, the
construction site, and theyd say, you know, Give me a pick and a
shovel, and Ill do something. Those jobs arent there anymore.
Where do they go? Well, they go to become an express-delivery guy on
a scooter serving an e-commerce company. In many ways, Chinas
taking this entire agricultural population and leapfrogging them right
into a postindustrial-services economy.

Thats the massive transition. Of course, some folks wont be able to

make it, and that is a risk. So the risk is about how does one enable this
workforce for a 21st-century economy coming out of a 19th-century one.
There is a mobility challenge, theres a training challenge, theres an
income-inequality challenge.
Kevin Sneader: One other, you can call an advantage or maybe its
just a reality, which is the Chinese working-age population is
shrinking. Chinas population of the working age has peaked, two
years ago, and will decline 0.5 percent per annum over the next 20 or
so years. Its not necessarily a good thing, but it does actually help
when it comes to the issue were discussing of how do you handle this
displacement of workers.
The reality is, China has a shrinking labor force, which makes the need
for skilled employees even higher. The combination of the facts that
Jonathan described, plus the reality of whats happening
demographically, means that China probably has more reason to be
able to do this successfully than one might think.
Cecilia Ma Zecha: Finally, Chinas transition will provide a new set
of opportunities for businesses that are operating in China and
competing companies around the world. Whats your advice for CEOs
to navigate this transition?
Jonathan Woetzel: The first piece of advice is please come to China.
Theres more to be learned. Chinas a full-body experience. The context
is all-important in interpreting the numbers. Theres a high level of
risk in trying to develop ones China thinking from outside the country.

Kevin Sneader: The other simple observation I would make about

the importance of understanding whats really happening on the
ground in China, by being here, is dont fall victim to simple headlines.
Some seem to believe that Chinas economic miracle, as its called,
has been based purely on cheap labor and actually has very little to do
with technology.
There are some numbers that can talk to that, so Ive had people tell
me, Well, China doesnt have very many robots in its factories. Thats
one way of looking at it, or you can say that China accounts for about
25 percent of all demand of robots today, let alone whats going to
happen in the future. If anything, its going to ratchet up as this
transition occurs, as the need to do things differently. Couple that with
a very entrepreneurial class of business leaders, the private sector in
China is very vibrant. When youre here, you sense the pace and the
way with which messages such as the ones weve been discussing today
get translated into action very quickly.
Thats the consequence for everyone looking at China, which is dont
underestimate the rate of change, the capacity of this market to make
the shift, and the way in which business leaders will see that and
translate it into very tangible and real opportunities. I really hope that
companies listening to this overseas take that as a sense of, OK, we
need to get closer to whats happening, and view this as part of a
broader set of changes, which are positive.
Jonathan Woetzel: People generally get that China is a big story at
this point. They dont always get that China is a fast story. Its a bit
hard to see. Its like being on a train. You know its going there, but you

dont realize exactly how fast youre passing the landscape until you
either get off the train, or the train hits you. Most people need to look
at how quickly events are changing in their industry, how quickly
Chinese competitors are entering, and how quickly the Chinese market
is becoming the market. Then, step back and say, So, where do we
fit?

Three millennia ago, Akhenaten began construction of the

Egyptian city of Amarnaperhaps the first example of planned urban
infrastructure in recorded history. Within a decade of Akhenatens
death, Amarna was abandonedancient evidence that building
infrastructure and convincing people to use it are two fundamentally
different challenges.

Building an economic infrastructure

King Abdullah Economic City (KAEC) is the worlds largest privately
funded city. Located about 100 kilometers north of Jeddah on the
coast of the Red Sea, KAEC is a publicprivate partnership with the
government of Saudi Arabia; it is built with private capital,
independently of oil revenue. KAEC is an image of what Saudi Arabia
could look like without hydrocarbons: a trade and logistics gateway
offering companies access to a fast-growing regional market of 620
million people.
KAEC is master planned to accommodate a population of two million
people over an area of 181 square kilometersabout the size of
Washington, DC. Today, around 25 percent of the total area is either

developed or under development. KAEC could be home to about

10,000 people by the end of the year. By 2020, 40 percent of the
planned area will be developed, and the population should be around
50,000 people.
KAEC was conceived to attract new industries to the city by meeting
latent demand within Saudi Arabia, which is the largest economy in
the region. For example, 80 percent of Saudi Arabias pharmaceuticals
are imported; KAEC therefore encouraged leading pharmaceutical
companies to establish operations in the city. Today, pharmaceuticals
is one of its fastest-growing clusters.
More than 100 global and local companies are setting up operations in
the city in nonoil industries, including pharmaceutical, automotive,
logistics, and consumer goods. One European oil company operates a
blending plant for its lubricants business in the city; a carmaker is
assembling commercial trucks; an air-conditioner firm is getting ready
for production and exports. Next year will see the addition of a bonded
zone and sophisticated warehousing operations.
An integral part of KAECs economic model is the construction of trade
and logistics infrastructure. The city operates King Abdullah Port, a
deepwater port and the first in the region to be built entirely with
private capital. The port now has the capacity to manage 3 million
containers a year. This will increase to 4.5 million by the end of 2016
and 20 million by the time it is finished in 2025.
The port is connected to the national road network to facilitate
transportation, thus attracting companies that need improved access
to the Saudi market. The port is also adjacent to the citys Industrial

Valley light-manufacturing zone, allowing companies to ship raw

materials in to their manufacturing plants and ship product out, either
to the Saudi market or the broader region.

Voices on Infrastructure,
Number 3Read the issue
This economic infrastructure creates jobs and thus growing demand
for residential and civic infrastructure, such as housing, schools,
healthcare facilities, and recreation. KAEC builds this civic
infrastructure to scale.
The ghost cities developed elsewhere are an eloquent example of the
risk of building for long-term end use without an economic base.
Facilities that lie idle until the population expands to support them are
expensive to maintain. In a private-sector model, however, facilities
must be economically viable almost from the outset to mitigate
maintenance costs. Infrastructure is built to meet near-term
projections and then expanded as the economic cycle gains
momentum.
KAECs main medical center at the moment, for example, is a
secondary-care facility providing emergency support, general
medicine, laboratory services, and a rotating schedule of specialist
clinics. There is insufficient demand for a full hospital in the city today.

If built, it would be largely mothballed until the population expanded

to accommodate it. Hospital construction is a project for the future.

Building a social infrastructure

A significant challenge with planned cities is creating spaces in which
people want to live and interact while keeping the city affordable,
particularly in Saudi Arabia, where there is a shortage of affordable
housing. It is one thing to build a city that works. It is another thing to
build one that lives.
Ultimately, the residents themselves will add color and vibrancy as
they begin to define the space in which they liveopening boutique
businesses, creating cultural neighborhoods, and initiating
community-led programs. KAECs residential communities are built to
encourage interaction, incorporating green spaces, community
centers, cycle paths, and ready access to the citys recreational
facilities.
Social infrastructure also needs to adapt to emerging and future
technologies. KAEC is constantly updating its master plan to adapt to
the fact that technologies that were prohibitively expensive a decade
ago can be installed today at low cost. The original master plan has
evolved to incorporate advanced fiber optics, smart-utility networks,
and a wide array of sensors to manage city operations.
Technology is also profoundly changing the relationship that people
enjoy with their cities and city administrators. Citizens of KAEC can
report municipal issues directly to the city management via a
dedicated app, allowing information to be acted upon quickly while

reducing the time and cost of providing essential community-care

services. A central incident-control room monitors more serious issues
such as traffic accidents and petty crime, coordinating the emergency
and security services through a real-time city-information system.
Technology will be a major factor in city planning far into the future.
The adoption of autonomous vehicles (AVs), for example, could have a
profound impact on urban design. What will it mean to be able to
significantly decrease the number of vehicles on the roads? What do
AVs mean for residential spaces? To commuters? To parks and
pedestrian areas? These are among the many questions that KAEC is
working through today. The widespread use of AVs may be a decade or
more away, but planning a new city requires thinking at least that far
ahead.

Amarna is an object lesson in the dangers of building cities on little

more than a political whim. Every city needs a reason to exist. Its not
enough to build infrastructure: cities need to compete economically
and be attractive to all kinds of people. Those that fail in these respects
will, like Amarna, disappear into the deserts of history. By focusing on
creating and maintaining a sustainable economic cycle, KAEC is
applying the lessons of the past to build for the future.

From supply chains to production to customer experience, digitization is

transforming the way industry functionsand unleashing global
opportunities for value creation.

In the past few years, we have seen digitization bring its first
benefits to the industrial sector, particularly in processing
andmanufacturing, yet enormous untapped potential remains. Digital
capabilities such as e-commerce platforms can significantly improve
traditional customer-supplier experiences. Additional advances in
automation, big data and analytics, and the Internet of Things create
additional opportunities for substantial gains along the entire industry
value chain.
Another industrial revolution

Early signs of the digital revolution are already here. Amazon

Business, a B2B e-commerce platform launched in April 2015, turned
over $1 billion in sales in its first year, growing at an impressive 20
percent per month. B2B buyers increasingly prefer digital, with 94
percent conducting some form of online research before purchase.

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about our Digital McKinsey
Practice?Visit our Transformation & Implementation
page

Further changing the rules of the game are the decreasing costs of new
processing technologies such as additive manufacturing and advanced
robotics. For example, 3-D printing costs came down by 60 percent
between 1990 and 2014, and industrial robot costs decreased 5 percent
annually between 2000 and 2012.
Put concretely, what does digital bring in terms of performance jump
across functions? Lets start by looking at operations, where our
experts have recently shown that the impact potential is significant
across all functions (Exhibit 1).
Exhibit 1

And this is not science fiction! Pockets of excellence exist across

industrial sectors that have proven it can be done (see sidebar
Complex operations optimization):

In the oil and gas industry, predictive maintenance is

eradicating unplanned downtime and costly repairs. Connected
plants use remote sensors to forecast and report on the condition
and performance of machinery. Early signs of problems are
detected and corrected, maintenance resources are directed at the
areas of greatest need, and machinery availability is maximized.

The pulp and paper industry has seen significant increases in

productivity through the use of remote temperature monitoring.
Kiln sensors monitor lime mud temperature, a leading indicator
of calcination. Sophisticated tools aggregate and analyze the
temperature readings and automatically optimize the shape and

intensity of the flame driving heat through the kiln. The process
has resulted in fuel savings as high as 6 percent and a lime
throughput increase of 16 percent.

In manufacturing, repetitive, strenuous, and complex tasks are

performed by robots working alongside operators on the shop
floor. The operators themselves spend less time waiting for goods
or processes or filling in routine documentation, because
information systems optimize materials flows and track key
performance indicators. Real-time analytics and advanced process
control enable errors and quality lapses to be picked up
immediately, minimizing rework and scrap, and automated
inventory systemssuch as wireless-connected boxes with
cameras that automatically reorder when their fill level drops
below a certain limitensure that inventories are accurate, goods
can be easily located, and safety stocks are adequate but not
excessive (Exhibit 2).

Exhibit 2

Sidebar

Complex operations optimization

Lets not forget the customer: digital has the potential to profoundly
reshape the way industrial companies interact with and serve their
customers. Lets have a closer look:

Where customer access was once constrained by minimum

order sizes and the cost to serve in a particular market, ecommerce and web shops allow companies to reach

customers they could never have reached before; hence cost to

serve can be cut by 50 to 70 percent. Online marketplaces such as
Amazon Business and Alibaba virtually connect unlimited buyers
and sellers, and established players like Grainger are leading the
way with their own platforms, capitalizing on 2015s estimated $1
trillion in B2B digital commerce sales in the United States.

Suppliers who once relied on subjective analysis and historical

knowledge to determine prices can now use faster, data-driven
tools to optimize pricing. For example, a leading technical gases
company with a large and highly fragmented product portfolio
used advanced data analytics and modeling to design a more
strategic and logical approach to pricing. The newly developed
value-based pricing led to an increased return on sales of 5
percentage points (see sidebar Pricing). Emerging markets can
tap the potential of digital in the food chain through innovations
such as precision agriculture, supply-chain efficiencies, and
agriculture-focused payment systems.

Sales directors can make smarter resource-allocationdecisions

based on timely inputs from sales reps, individual performance
data, and automated recommendations from tools. Reps making
sales recommendations no longer have to rely on hunches about
what their customers want, but instead make use of targeted
insights about products to sell, customers success stories, and
simulations run with the customer during the sales visit. The
ability to attract new customers, improve cross-selling, and reduce
leakage can increase revenues by 5 to 15 percent, while customer
satisfaction can be increased by 20 to 30 percent.

Digitals disruptive power

But digital is not only a means to optimize a companys existing

operations. It also gives both attackers and incumbents the power to
disrupt value chains, enter new sectors, and create innovative business
models. Established companies face threats from new competitors like
Amazon Business, which offers millions of products, from automotive
components, industrial lifts, and ramps to lab products, protective
gear, and electrical equipment.
Sidebar

Pricing
To get ahead of threats like this, industrial companies can use digital to
transform and extend their own business models before change is
imposed on them by attackers reshaping their industry. Some
incumbents are joining digital platforms and B2B marketplaces to
aggregate demand and sell direct to end users. BASF, for example, was
the first chemicals company to sell products online through Alibaba.
Other businesses, such as the 3-D printing start-up Sculpteo, are
selling services rather than products. Still others are offering their
manufacturing capacity as a service to third parties.
But are companies ready?

Compelling though the opportunities are, our analysis indicates that

industrial sectors in general are lagging behind other sectors in terms
of digitization: the MGI Industry Digitization Index1shows that while
advanced manufacturing and the oil and gas sectors have already gone
some way in their digitization journeys, basic goods manufacturing
and chemicals and pharmaceuticals are still in the early stages.2

Moreover, the McKinsey Industry 4.0 survey of more than 300

manufacturing experts in Germany, Japan, and the United States from
January 2016 shows that only 16 percent of manufacturers have an
overall Industry 4.0 strategy in place, and just 24 percent have
assigned clear responsibilities to implement it.

Five priorities for competing in

an era of digital globalizationRead
the article
Five ways to win

Companies that want to get ahead of the digital pack would be wise to
take five key steps:

Prioritize and scale up. Use structural assessments to

determine the customer appetite versus willingness to pay by
using mockups to conduct interviews with potential customers
and external experts. In addition, weigh the potential impact
against the ease of implementation by assessing the degree of
innovation or disruption (Is it a substitute? an extension? a
breakthrough?), defining the scalability, studying the feasibility of
the pilot and full solution, and ascertaining the fit with existing
assets and capabilities.

Adopt a test-and-learn approach. As technology-driven

change accelerates, forecasting and planning are becoming less
relevant and reliable. Agilityremaining open to learning and
experimentationis key. And it is crucial when investing in digital

solutions to adopt the mind-set of a venture capitalist. This

includes trying out ideas quickly with target customers as soon as
they exist to check market interest and price points. It also means
being ruthless: if the idea isnt worth it, kill it immediately. In
addition, successful ventures think about monetization potential
as soon as interactions with potential customers start, and they
proudly copy from other sectors. A focus on scale is also essential,
with the ambition being a tenfold increase.

Put foundations in place. To maintain the efficiency and

stability of existing operations while providing the processing
capacity and speed required by new data-driven activities, smart
companies move to a two-speed IT infrastructureoverlaying a
fast, next- generation cloud-based IT system on their secure,
robust, resilient legacy systems. New talent is another priority,
especially data and process experts who can connect up various
functions, systems, and levels of management; draw insights from
all the information generated across the enterprise; and use their
knowledge of the whole production chain to help design new
products. Meanwhile, job profiles must be rethought to meet new
needs, such as maintenance staff who oversee predictive
maintenance rather than acting as troubleshooters, and quality
specialists who intercept quality issues online rather than
detecting faulty parts after production (Exhibit 3).

Exhibit 3

Treat data as a competitive advantage. Data fuels the

algorithms that provide insights into markets, customers, and

business processes, so ensure that data management has a clear

structure and governance. And considering that even tech giants
such as Google have been vulnerable to malicious attacks, be sure
to put cybersecurity high on your management agenda. Physical
targets such as connected machinery and systems installed for
remote access could also be highly susceptible to sabotage by
hackers and other attacks.

Work across functions, and manage change in the

organization. Digitization requires that all departments work
together to capture joint benefits for the whole business.
Moreover, because these innovations have a major impact on how
people work, it is essential to anticipate concerns and build a
persuasive case for the employees.

When thinking about digital priorities, identify the

technologies and applications that would have the greatest
potential impact. But also make sure not to ignore possible
barriers to adoption: devise a plan for helping employees use the
new technologies and the related new methodologies most
effectively. Remember that no organization achieves a successful
digital transformation without taking a thoughtful approach to
change management, and that its the people applying the
technology in their daily jobs who will create the additional value.

Digitals potential in industry is massive, not only in operations, but

across all functions of the sector, and the levers that make the most
difference to a companys bottom line varyfrom e-commerce to

automation to advanced analytics. But industrial companies must

begin taking advantage of digital opportunities in order to avoid losing
the value to others. A commitment to digitization from top
management is critical to succeeding, as is a systematic method of
defining priorities and the ability to leverage early success to drive
change.

As the price of healthcare rises and safety lapses persist, developed

countries are seeking ways to lower costs and improve quality. Many are
finding the solution in digital innovation.

Health systems in developed countries face a twofold challenge:

ensuring financial sustainability and improving quality. Digitization
can help health systems achieve both these objectives and unlock
substantial value through lower spending and superior healthcare
delivery.

Rising costs, uneven quality

Healthcare is claiming an ever-increasing share of national wealth. In
recent years, healthcare expenditure in Organization for European
Cooperation and Development (OECD) countries has been rising at a
rate one to two percentage points faster than GDP. If this trend were to
continue, healthcare would represent more than 25 percent of Frances
GDPand more than 35 percent of the USsby 2050. Clearly, action
is needed to bring costs under control.
Moreover, medical errors and other safety lapses persist even in the
strongest health systems and are often caused by inconsistencies in
care and lack of adherence to good practices. Outcomes vary
enormously across healthcare systems and among the care providers
within them. For instance, maternal mortality is four per 100,000
births in Italy, but more than three times higher in the US, at
14.1Postoperative pulmonary embolisms and thrombosis affect 865 of
every 100,000 patients leaving a hospital in France, but just 107 in
Belgium, a difference of 706 percent.2Regular albumin screening to
prevent complications is provided annually for 88 percent of diabetics
in the Netherlands, but for fewer than 30 percent of those in France.3

A recent study revealed that medical errors are the third-mostcommon cause of death in the US after cancer and heart disease,
accounting for more than 250,000 deaths every year.4Addressing
these issues and the variations in care practices and quality that cause
them is another priority for all countries.

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about our Healthcare Systems &
Services Practice?Visit our Technology & Information
Strategy page

Addressing the challenges through digital

innovation
Digitization offers benefits in both costs and quality. One large OECD
country estimated that by implementing existing digital technologies,
it could reduce its healthcare expenditure between 7 and 11.5 percent
(see exhibit). At the same time, it could improve quality through
measures such as monitoring chronic conditions more effectively to
avoid acute events, increasing adherence to best practices, improving
clinical decisions, and promoting healthier behaviors.
Exhibit

Digital innovation can transform healthcare in three main ways:

By improving care-delivery models through seamless data and
information exchange. The rise of chronic conditions is making it
more important to integrate patient care pathways across care
settings. Digital solutions can greatly facilitate the seamless exchange

of patient and other information and data between providers.

Telehealth and mobile health solutions can improve the effectiveness
and efficiency of maintaining patients at home, thereby avoiding
unnecessary hospital stays, improving clinical outcomes, and reducing
the costs of care. Finally, the use of digital tools to enhance clinical
decision making and the monitoring of treatment protocolsas Kaiser
Permanente does through the use of its eHR (electronic medical
record) systemcan significantly reduce variability and increase
adherence to good clinical practice.
By harnessing the power of data through advanced analytics and
transparency. More and more applications that rely on healthcare
data analytics are available to support patients in understanding and
managing their medical condition and influencing their medical care.
New data-enriched tools and algorithms are constantly emerging,
including decision-support tools, online services, and smartphone
apps. Examples are Indigos Archimedes, which helps care providers
influence patients lifestyle and behavior choices, and www.drugs.com,
a website helping patients identify potential contraindications and
drug-interaction risks.
Providers making crucial clinical decisions about diagnosis and
treatment will increasingly be supported by tools such as algorithms
that compare a patients clinical and other data with large datasets and
draw on the full body of scientific literature. As the number of
diagnostic tools (such as imaging and omics sciences) continues to
expand, and as the sum of biomedical scientific literature doubles
every five to seven years, more initiatives supporting medical decisions

and patient care, such as IBMs Watson, Syapse, and Flatiron Health,
will emerge and mature.
Analytics also promises to support drug and device developers in
many ways, such as by helping them identify the patients likely to
respond best to a particular drug. In addition, the use of medicoadministrative databases can in some cases provide a more effective
way to address requirements for real-life drug evaluation and
monitoring.
Finally, the collection and publishing of data on outcomes and quality
of care can also allow healthcare systems to modulate tariffs and
orchestrate competition among providers based on their quality of
care, and should be a major lever for raising the overall standard of
care across healthcare systems.
Through process automation. Many healthcare processes can be
digitized, including appointments, logistics, patient records,
admissions, human resources and rotation management, and billing.
In addition to providing efficiency gains, automation can also improve
patient care: for instance, remote monitoring of intensive-care units
via patient sensors and a central control room led in one case to a 22percent reduction in mortality rates and a 23-percent reduction in the
average length of hospital stays. Digitization can also bring significant
benefits in the area of clinical trials, such as improving the efficiency
and reliability of clinical data collection and trial monitoring and
optimizing trial design through the use of modeling tools.

Why digital transformation

should be a strategic priority for
health insurersRead the article
Three ways to accelerate digitization
Although there are clear benefits from extending the digitization of
healthcare, obstacles remain. Healthcare systems often struggle with a
range of issues including limitations and constraints on data
collection, access, and sharing; resistant mind-sets; an excessive focus
on risks to the detriment of potential benefits; and misaligned
incentives.
To help overcome these obstacles and accelerate digitization,
healthcare systems should seek to:
1.

Enhance data and modernize data infrastructure,

management, and access. To capture the full benefits of data
analytics, healthcare systems will require ready access to a hugely
expanded array of data. They should consider investing both to
enhance the data collected (for instance, through the development
of patient cohorts and registries and the collection of data on
patient-reported outcomes) and to develop their data-analytics
capabilities, as value will reside as much in algorithms as in the
data itself.

Legacy systems are unlikely to be able to cope with these

demands, so a new, modern data infrastructure will be
needed. One possible model could be an open cloud-based
platform aggregating data from different sources, with an
operator who manages the infrastructure and data access,
promotes data collection and quality, and provides a means
for patients to manage their informed consent. The
operator would have to collaborate closely with regulators,
understand healthcare delivery, appreciate the need to
protect sensitive patient data, and be trusted by patients. If
a national health system or a national payor in each
country were to take on this role, a step-change in mind-set
and capabilities would be needed, as it involves acting as
an ecosystem manager and attracting, certifying, and
managing a community of innovators as well as operating a
technical platform loaded with sensitive data.
2.

Create incentives to support new practices and mindsets.Digitization involves a shift toward a more data-driven
culture with continuous and transparent evaluation of
professional practices, that in turn requires changes in the mindsets of healthcare professionals. To achieve such a shift, providers
need to develop and communicate a clear change story that
outlines the benefits as well as the risks of a digital
transformation.

They also need to adopt funding mechanisms that provide

incentives to adopt new behaviors, such as episode-based
payments, outcomes-driven performance payments, or
even capitation-based models as adopted in Alzira, Spain,
in which a private provider takes responsibility for providing
care for a given population in return for a fixed per-capita
payment. Current approaches such as fee-for-service
models reward the volume rather than the value or quality
of care provided, and seldom provide incentives for robust
clinical data collection and collaboration across care
settings.
In addition, digitization will require changes in professional
training and medical education as well as training, funding,
and other forms of support for healthcare professionals and
institutions as they implement new digital tools and
methods.
3.

Adjust legal and regulatory frameworks to improve data

exchange. The sensitive nature of healthcare data requires its
usage to be regulated to protect patients privacy, but scope
remains to enhance data exchange. Todays fragmented country
regulations often leave health data in silos, impeding projects that
rely on diverse sources of information. For example, one EU
country may permit the use of historical clinical data while
another prohibits it, and yet another allows it under a specific
licensea complex situation that reduces the range of information
on which researchers can draw for their studies.

Establishing a common European framework to harmonize

the collection, processing, and use of patient and
healthcare data would be an important improvement.
Another option would be to move toward a more open
approach that relies on a risk/benefit assessment of
individual cases and a robust tracking and monitoring of
each permitted usage of the data, as at Kaiser Permanente,
which provides access internally to clinical and claims data
for specific uses, with tight monitoring to flag and address
any potential misuses.

Harnessing the full potential of digital innovations in healthcare could

have a profound impact on the quality and financial sustainability of
health systems. It would also involve profound changes for care
providers and healthcare professionals. To shift mind-sets, healthcare
authorities will require a clear and compelling vision and ambitious
action. But the benefits for both quality and economics will be well
worth it.

e way digital technologies are reshaping the relationship between

consumers and brands has been hotly debated over the past few years,
with much discussion of the reshaping of consumer decision journeys,
the advent of multichannel marketing and sales, and the impact of
smartphones and the mobile Internet on customer behavior. Yet an
even bigger opportunity has been largely overlooked. By taking
advantage of big data and advanced analytics at every link in the value
chain from field to fork, food companies can harness digitals
enormous potential for sustainable value creation. Digital can help
them use resources in a more environmentally responsible manner,
improve their sourcing decisions, and implement circular-economy
solutions in the food chain.
Huge untapped potential

So far, most of the excitement about digitals potential in the

consumer-packaged-goods industry has centered on marketing and
sales. But for food producers, the opportunities begin higher upstream
and end lower downstream. At the upstream end, the agricultural

practices followed by dairy farmers, cacao and coffee producers, wheat

and barley producers, cattle farmers, and so on result in enormous
variations in commodity costs in an industry where raw materials
represent easily 60 percent of the cost of goods sold (COGS) (Exhibit
1).
Exhibit 1

Manufacturing and packaging also represent a substantial share of

COGS, as well as contributing to companies environmental and social
footprints and food-safety risks. At the other end of the food chain, big
data and advanced analytics can be used to optimize downstream
activities such as waste management. Food waste causes economic
losses, harms natural resources, and exacerbates food-security issues.
About a third of food produced for human consumption is lost or
wasted every year in a world where 795 million peoplea ninth of the
populationgo hungry (Exhibit 2).
Exhibit 2

Cutting postharvest losses in half would produce enough food to feed a

billion more people. Global food waste and loss cost $940 billion a
year, have a carbon footprint of 4.4 Gt CO2-equivalent (more than 8
percent of global greenhouse-gas emissions), and a blue-water
footprint of about 250 cubic km (3.6 times the annual consumption of
the US). In 2007, the amount of food wasted globally equated to 1.4
billion hectaresan area bigger than Canadaof agricultural
production.

Using technology to improve areas such as climate forecasting,

demand planning, and the management of end-of-life products could
bring enormous social, economic, and environmental benefits. For
example, the French start-up Phenix runs a web-based marketplace to
connect supermarkets with end-of-life food stocks to NGOs and
consumers who could use them. The platform enables the
supermarkets to save the costs of disposal, gives consumable products
a second life, and alleviates some of the social and environmental
burden of waste.

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about our Consumer Packaged
Goods Practice?Visit our Big Data & Advanced
Analytics page

The opportunities for digital innovation in the food chain are

enormous and vary by context, with some well suited to emerging
markets and others more appropriate to mature economies.
Efficiency opportunities for emerging economies

Emerging markets can tap the potential of digital in the food chain
through innovations such as precision agriculture, supply-chain
efficiencies, and agriculture-focused payment systems.
Precision agriculture is a technology-enabled approach to farming
management that observes, measures, and analyzes the needs of
individual fields and crops. By allowing farmers to apply tailored care
and manage water more effectively, it boosts production, improves
economic efficiency, and minimizes waste and environmental impact.

Its development is being shaped by two technological trends: big-data

and advanced-analytics capabilities on the one hand, and robotics
aerial imagery, sensors, sophisticated local weather forecastson the
other. According to 2014 estimates, the global market for agricultural
robotics is expected to grow from its current $1 billion to $1418
billion by 2020.
New entrants and large companies alike are developing products and
services for precision agriculture. The start-up CropX offers sensors to
help farmers adjust irrigation to the needs of their soil, while Blue
River uses computer vision and robotics to determine the needs of
individual plants. At the opposite end of the scale, IBM has developed
a highly precise weather-forecast technology, Deep Thunder, and an
agriculture-specific cloud technology.
Recommendations can be adjusted in real time to reflect changing
weather conditions. Soil sensors and aerial images help farmers
manage crop growth centrally, with automated detection systems
providing early warnings of deviations from expected growth rates or
quality.
Automated systems showing the status, performance, and potential
bottlenecks of critical equipment in real time can be used to optimize
fleet management, thus increasing delivery reliability and preventing
spoilage. Transport times can be cut in half by using smart meters to
improve routing. Coupling transport-management systems with
agricultural sensors can allow unified hauling of inbound
transportation, generating average savings of 10 to 20 percent.

Agriculture-specific payment systems and financial services can help

farmers make their economic models more resilient. Some growers
use insurance contracts to offset weather risk, for instance. Insurers
calculate a premium on the basis of the likelihood of a particular
weather event, such as frost, and the impact it would have on a crop at
a specific point in its growth cycle. The premium is paid out when the
number of occurrences surpasses a predefined threshold.

Toward a circular economy in

foodRead the article
Payments is another area where digital solutions can make food chains
more efficient. In Kenya, Sokopepe provides a trading platform for
agricultural commodities that links small-scale producers to retailers
and bulk purchasers via mobile-phone messaging. Another Kenyan
initiative, MFarm, provides up-to-date market prices via an app or
SMS and connects farmers with buyers, offering a group selling tool
for those farmers too small to market to a large buyer by themselves.
Solutions to systemic challenges for mature economies

Developed countries can use digital tools and methods to tackle

challenges such as improving the safety of food, the sustainability of
sourcing decisions, and companies environmental footprints.
Food safety could be improved through the adoption of innovative
technologies such as consumer food scanners that analyze a dish using
spectroscopy and give users immediate information on its composition
(Exhibit 3). The European Commission recently launched a

competition to develop a viable, affordable, and noninvasive food

scanner, with a prize of 800,000 in funding for the winning team.
Exhibit 3

Two groups of people would derive particular benefit from these

devices: sufferers from food-related illnesses such as obesity, allergies,
and intolerance, and health-conscious individuals wishing to use food
scanners as a complement to activity trackers. In view of the global
epidemic in obesity and type-2 diabetes, estimates suggest that the
market for personal food scanners could reach US $1 billion by 2020.
Sourcing decisions could be made more sustainable by adding yieldforecasting and risk-assessment tools to agronomic modeling methods
to assess the impact of hyperlocal weather forecasts on a particular
plants yield and soil conditions. This would allow global food
manufacturers to not only choose the best regions and countries to
source from, but also to adapt their sourcing routes to weather
challenges. These tools could also be used to determine the ideal mix
of commodities in a countrys agricultural portfolio, taking into
account productivity levels by region.
Given the unpredictability and volatility of raw-materials costs, global
food companies could derive huge benefits from finding ways to
mitigate these risks while maintaining a responsible sourcing strategy
toward growers.
Environmental-footprint management is another challenge that
digitization can help to address. For instance, Ciscos Internet of

Everything will provide consumers with the means to trace a food

product back along its entire chain of production, from farmers field
to supermarket shelf. A scannable code on packaging will take users to
a website that provides a detailed analysis of every stage and process
undergone by that products specific production batch.
The technology could be used to provide consumers with a guarantee
of a products environmental credentials. One of the challenges of
advanced environmental practices is the difficulty of demonstrating
the reality behind marketing claims and overcoming consumer
skepticism, particularly where price premiums are concerned. A
robust method for tracing sourcing through to origins could support
this practice and make it more economically viable for food
manufacturers.

Digital methods and tools are opening up opportunities for leading

food companies to improve their management not only of the last
mile of marketing and sales, but the entire journey from field to fork

Is cybersecurity
incompatible with
digital
convenience?
Imagine this common scenario. Two customers log onto your site
at the same time. The first one struggles to remember his log-in and
password, goes through a password-reset process, and winds up
feeling frustrated at what seems like a clunky process. He thinks Why
cant this site just remember my password for me?
The second enters her password and gets right into her accountand
then worries that, in an age of escalating cyberattacks, your site does
not seem very secure. She would have appreciated a second challenge,
or even the delivery of a secure one-time password giving her access to
her account information.
These two customers have very different expectations about their
digital security: One values convenience, the other security. How can
you possibly make both of them happy? Our research and experience
indicate that there is, in fact, a way.

The solution lies in changing the way companies think about both
digital security and digital experience, moving away from a one-sizefits-all approach to a more granular understanding of how different
customers think and feel about their security experiences. For decades,
customer segmentation has been a crucial strategy for the disciplines
of marketing and sales. It is time to put it to work for digital security.
By focusing on the range of customer journeys, companies can deliver
a superior digital experience without compromising either customer
perception of security or the underlying risk exposure for the
enterprise.
What its worth

In recent years, firms have responded to the increased frequency and

complexity of cyber threats by putting higher security burdens on
customers. The result is that the quality of the digital experience for
customers has decreased dramatically. According to our research,
customers have to remember more than 14 passwords on average and
increasingly complain about the inefficiency and complexity of the
authentication experience. Yet, ironically, consumer perceptions of
security have worsened. Digital security and privacy are eroding
consumer trust online.1

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Improving the digital security experience for consumers is a highvalue task for companies for several reasons. First, it drives digital

adoption rates. The hassle of authentication is a key reason customers

turn away from digital services. On the other hand, when consumers
find the authentication process easy, they use digital services 10 to 20
percent more than customers who are frustrated by
authentication.2This is important, because customers who use digital
channels regularly spend roughly 45 percent more than customers
who use digital channels sporadically. These customers also cost
significantly less to serve since they are less reliant on customersupport calls or in-person servicing.
Secondly, delivering an experience that is both secure and convenient
also has a direct material impact on customer-satisfaction scores.
More than any other aspect of a customers journey, failing to
authenticate drives down customer satisfaction and overall brand
perceptions. It is also the highest-volume customer journey by far and
often the number-one pain point for customers. Companies that
successfully deliver a remarkable digital experience while also keeping
customers data safe can see a potential 20 to 35 percent boost in
customer-satisfaction scores.
Finally, there are cost implications. Authentication-related calls from
customers are a significant resource drain. Password-reset inquiries
can account for up to 6 percent of call-center activity, which could cost
$5 million to $20 million per year for larger operations. Other call-in
identity verification represents another 5 to 10 percent of agent handle
time and an additional $5 million to $40 million in costs. A hassle for
customers, most of these calls represent unnecessary costs, and the
goal should be to eliminate them with a convenient and secure
experience.

Finding the right balance between convenience and security for customer segments

Our research shows that companies should consider three buckets of

customersthose who prefer convenience, those who prefer security,
and those who are comfortable with a blended model. Although all
customers, if you ask them, will say they want both security and
convenience, a deeper analysis reveals that a growing minority cares
more deeply about one than about the other.
In our research, we find that roughly 30 percent of the population
prioritizes ease and convenience over security. These consumers do
still want a basic level of security operating behind the scenes, but they
say that having access to account information without the need to
enter a password (e.g., with automatic device recognition) is attractive
or very attractive. They also reject the idea of having a one-time
password sent to them for every log-in.
On the other side of the divide are the 10 percent of people who place a
higher value on security. These consumers like the idea of a one-time
password and feel that not having a password at all is unsafe. The
remaining 60 percent are willing to make reasonable tradeoffs in both
convenience and security.
So how do you address such a diverse customer base? Our model is
two-pronged (Exhibit 1).
Exhibit 1

1. Tailor the digital experience

With the help of data analytics, insights into customer preferences

should be applied systematically across the four main elements of
authentication:
A. Identification. Different customer segments want different ways to
identify themselves. People who value convenience, for instance,
might be most comfortable using their email for an ID and social
security number for a password, at least online. Security-aligned
customers might want a user ID and eight-character alphanumeric
text.
Biometric verification technology, which allows consumers to be
identified by their face or fingerprint, can be used for the minority of
customers who like this option, but due to the permanent
consequences of fingerprint hacks or theft, it is not the across-theboard security panacea many once hoped it would be.
B. Identity Management. Give customers clear and concise options for
how they can tailor their security preferences. In consolidated
security centers or pop-ups that ask customers if they want to
remember this device, lay out the options and let them opt in either
for security (send one-time passwords for each access) or for
convenience (save their user name and password or allow unmasking
of passwords on mobile to solve the fat finger problem, i.e.,
mistakenly clicking a key).
C. Segment access based on risk. Not all transactions are equally
prone to fraud and losses. Predictive analytics and transaction
segregation can help align authentication with fraud exposure.

Companies could, for instance, allow for basic account access without
any specific authentication (e.g., view account balances), but require a
password for monetary transactions and a one-time SMS password for
high-value or unusual actions (e.g., changing mailing address). This
could be further segmented based on customer desire, tolerance, and
expectations. For convenience seekers, low-risk transactions could
require only that they be using an already registered device, whereas
high-risk transactions would require a password.
D. Exception management. When something goes wrongpasswords
or usernames are forgotten or unusual activity occurs on the account
only the security-seeking minority will appreciate having to jump
through hoops to identify themselves. For them, this offers
reassurance that hackers cannot easily gain access. But most
customers will want a quick resolution to the problem. Slack, a
messaging and communication start-up, has pioneered an innovative
system that sends users who have forgotten passwords an email with a
magic link to automatically log them in. Capital One prompts users
to call for forgotten passwords and uses communication to help
minimize frustration, putting the blame on itself (We are having
trouble signing you in) (Exhibit 2).
Exhibit 2

We have found that the exception verification methodhaving

customers use their phone to take a picture of their drivers license or
passport next to their faceappeals to 80 percent of people who have
smartphones. They prefer it to answering security questions (which

they may have forgotten) and view it as both secure and convenient.
The remaining 20 percent prefer a verification phone call.
2. Make the experience clear, simple and consistent for all customers

In addition to delivering different experiences for distinct customer

segments, there are ways to improve the authentication experience for
everyone. This includes existing options such as device or number
recognition and omnichannel authentication (customers do not want
to be treated like strangers just because they are on a different device).
Log-in credentials should be the same across all channels and should
allow for customers to log in on one channel in order to use another,
eliminating duplicative authentications. At Capital One, for instance,
customers on the site can request a secure and convenient push
notification to be sent to their registered mobile device. Additionally,
customers who are logged in online and call the customer-service
number are not asked by the automated voice prompts to
reauthenticate.
Another simple yet powerful improvement is better visual and
functional design of the digital experience. The perception of security
drops significantly with inconsistent designs, poor error messaging,
clunky communication, and site slowness or unavailability. Fixing this
improves the overall perception of security with no trade-offs in actual
underlying security. When consumers rate companies as having a
visually appealing digital experience, they give them a 15 to 20
percent higher customer-journey satisfaction score.

From touchpoints to journeys:

Seeing the world as your
customers doRead the article
Finally, communication about security initiatives is often
underappreciated. On its own, without changing any back-end system
functionality, improved messaging on how a company is approaching
security can lift the customer-satisfaction score by 5 percent.
Sophisticated cyberattackers and high-profile breaches have made
security a top concern for consumers. Targeted marketing can help
educate customers about the hows and whys of the authentication
journeyand let them know about the firms real-time fraud
monitoring and under what circumstances the company will tell them
about unusual activity in their account. Proactively reaching out to
customers via text when there are transactions in two cities on the
same day, for instance, and giving them a chance to confirm or deny
the transactions, is a simple way to boost customer loyalty.
The right capabilities

Making different types of customers happy at the same time requires a

suite of elegant and subtle solutions across many interactions and thus
presents organizations with no small challenge. Rising to meet these
challenges entails the merger of several capabilities. Laying a strong
foundation of customer-journey analytics is critical for developing a
segmentation algorithm to rapidly identify patterns and opportunities
that need to be addressed. This can include looking at interaction
history, such as people who viewed fingerprint ID options but chose

not to use them vs. those who did, or those who opt to have a password
reset by email vs. a phone call. This data can be augmented by
carefully worded customer surveys to further identify preferences and
pain points.
The second capability is customer-centered design. This means that
every initiative is framed by the question, How will this affect or be
received by customers? Part of delivering on this approach entails
empowering customers with various simple but noninvasive options.
One simple example is to accept all passwords but provide a red,
yellow, or green indicator for password strength, letting customers
calibrate based on their preferences.
Lastly, it is critical for companies to have sophisticated security and
technology expertise. In order for changes and innovations to have a
net positive impact and not create genuine security risks, companies
must understand the latest fraud and hacking threats and exposures
from both a legal and technical point of view. This way they can
distinguish between cases where risk exposure is minimal and thus the
allowance of customer preferences is acceptable, and instances where
additional monitoring or controls may be necessary. Creating a
successful customer-authentication team requires directly engaging
with the security and fraud teams early on in the customer-experience
design processinstead of seeking their review after the fact.

The new era of the customer requires that companies think of security
and ease of use as compatible goals. Instead of focusing exclusively on
how to enhance protections in the back office, companies need to

reimagine security from the customers point of view. Organizations

that do this will not only become more adept at digital security; theyll
build trust with their customers and develop a crucial competitive
advantage.

How advanced
analytics can drive
productivity
make data and analytics more than just buzzwords, companies
need to think about whether theyre following best practices, hiring the
best talent for their needs, and getting what they want from their data.
In this episode of the McKinsey Podcast,McKinsey senior partners
Nimal Manuel and Bill Wiseman talk with Cecilia Ma Zecha about how
more companies can make the best use of the data they collect and
what the potential is for advanced analytics to help both business-toconsumer and business-to-business companies.
Podcast transcript

Cecilia Ma Zecha: Hello, and welcome to this edition of

the McKinsey Podcast. Im Cecilia Ma Zecha, an editor with McKinsey
Publishing, based in Singapore. Organizations have more data than
ever at their disposal, but actually deriving meaningful insights from
that data and converting knowledge into action is easier said than
done. Today were talking to Nimal Manuel, a senior partner in
McKinseys Kuala Lumpur office. We also have Bill Wiseman, a senior

partner normally based in Taipei, but who joins us today in Kuala

Lumpur. Thank you both for being here
21:31
Audio

How advanced analytics can drive productivity

Bill Wiseman: Thank you.
Nimal Manuel: Thank you.
Cecilia Ma Zecha: What is the potential of data and analytics to
transform how companies organize, operate, manage talent, and
create value? These are words that we hear all the time, but whats the
real potential?

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Bill Wiseman: When you just look at some basic statistics, like the
fact that half of the worlds data was created just in the last ten
months, meaning that half of the worlds data, in the history of
mankind, was created in less than the last year. Its just truly shocking.
The pace of change that were seeing is completely radical. I serve
primarily industrial companies, and the way that I seecompanies
taking action and using that data really is to drive another wave of
productivity.

You had the wave of lean, you had the wave of outsourcing, and now
were seeing the wave of productivity driven by data and analytics,
enabling organizations to refine the way that people work together, the
way that processes perform, and the way assets are productive. If you
think about an oil well, for example, youve got more than 300 sensors
downhole that are spewing out data at the rate of about a gigabit a
second, in some cases.

Video

Turning data into action

Senior partner Bill Wiseman discusses how to derive usable insights from data and turn that into
action.

Cecilia Ma Zecha: So whats the potential, Nimal?

Nimal Manuel: I want to build on what Bill said because there are
two important steps here. Theres a lot of data being generated. A, not
all of it is being captured, and then B, of whats captured, a fraction is
being used.
The cost of storage has gone down, so I see many of my clients storing
more and more data but still struggling with how to best harness this
data. Now at least weve got more and more of the relevant data to be
used. Bill serves a lot of the B2B industrial-type companies. I serve
more of the B2C, consumer-oriented companies, mostly in emerging
markets.
Theres an increasing awareness that to compete and to be sustainable,
theyve got to go beyond gut instinct for doing business. Its got to be

data driven, its got to be analytics oriented, and thats how business
decisions have got to be made, on the commercial side as well as the
operations side. The interesting thing is we are starting to see more
and more use cases and applications of this data, but its nowhere near
at scale.
Cecilia Ma Zecha: And why is that? What are the challenges that
organizations face in adopting analytics? Bill?
Bill Wiseman: The biggest thing I see actually has nothing to do
with data science or mathematics or data storage, it has to do with
legal and governance frameworks. Most of the clients I work with are
multinational. Theyre dealing with different legal domains across
countries. Theyre dealing with different issues of consumer
protection, different levels of employee protection.
Just having a legal framework around what data they can use and what
they cant, and how they can process it and what theyre allowed to do
with itits a massive challenge, just getting your head around the
legality of what youre allowed to do with the data that you have, what
consumers are allowing you to do with it, what employees are allowing
you to do with it. Generally, when youre signing someone up for a
subscription service, or when youre collecting subscriber information
or customer information, theres an implicit or even an explicit
promise of trust that the information is going to be secure, and youre
going to do with it only what you need to do with it. You hear a lot of
times from companies, Oh, we anonymize everything. That still gets
people a little bit scared, and they have that inclination to protect some
information from you.

With employees, its even more explicit. If you go to some of the

Scandinavian countries or some of the more mature European
countries, you have a lot of works councils and labor unions. The
whole idea of being able to use communication informationwhen are
you badging in and out of work, what files are you collaborating with
colleagues onbeing able to use that information somehow to manage
performance and potentially even establish performance-management
paradigms is not allowed by a lot of the unions. So just getting people
comfortable with, Here is how were using this information, and
explaining that to them, it takes a lot of overhead and a lot of time to
get that right.

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Nimal Manuel: The other angle in this is more the regulatory angle.
And here the onus is on policy makers to make it clear in terms of
where those boundaries are. In many markets, there are, increasingly,
data-protection laws and confidentiality laws, and this is appropriate.
But the law is not clear in all countries. So companies, especially
multinational companies (MNCs), struggle with where is the white
versus where is the gray.
Cecilia Ma Zecha: Are there organizational barriers, Bill?
Bill Wiseman: Let me take a step back. One of the terms that you
hear used in advanced analytics is the concept of a data lake.
Cecilia Ma Zecha: A data lake.

Bill Wiseman: A data lake. And what that basically means is pulling
data out from all of the siloed systems across an enterprise, pulling it
and linking it all together so that you can look at that in any one of 50
or 100 dimensions. It enables you to find massive amounts of insight
because none of this data has really been linked before.
That comes with political cost a lot of times for business units because
if you think about five executives, all vying for the next CEO job, they
all want to retain as much of their own personal capital as they can to
be able to succeed. Sharing what they would perceive as proprietary
information with some of their so-called competitors, which are
obviously business units in the same organization, why would they
want to do that? Id much rather retain control of my own information
for my own benefit. You also run into challenges of data spillage. So,
Hey, I have this data on my customers. If I put it in the lake and the
IT system leaks that out somehow, its no longer in my control.
That creates a new category of risk that executives never really wanted
to face before. Sure, there are organizational barriers. Were going to
have to get over that.
Cecilia Ma Zecha: Nimal, do you agree with that? You have to really
put in the right incentives to encourage silos to create this data lake
and make it operational.
Nimal Manuel: Data and proprietary data is power. You need to find
ways to motivate and incentivize people to share that because its often
not in the interest of any particular executive to do so. Now, thats one

dimension. Theres another very interesting organizational dimension,

which is how you then decide what to do with the data.
If you think about it, any organization, you could conceive of 50 or 100
different use cases. When I say use cases, I mean ways to apply this
data to benefit the organization. It could vary from commercial-type
use caseslike up-sell, cross-sell, retention, migrationto more
operational ones like call-center optimization or asset optimization.
So there are multiple different use cases that are relevant to an
organization. Another aspect of organization, and maybe this is more
governance within the organization, is ensuring theres clarity of focus
in where the data and analytics are going to be purposed toward.
Bill Wiseman: Ive seen clients implement this in a couple of
different ways. One way is to start with the plumbing. You look at this
from an IT perspective. Lets get the plumbing in place as best we can.
Lets create a central team that is supposed to mine that for insights
and be able to publish that out to the businesses. That approach tends
to not work very well. We would call that kind of an IT-led approach.
Because youve got a bunch of people that are looking at a bunch of
data and maybe coming up with insights that arent that interesting or
arent that believable. Trying to sell those into a business and convince
the business to take advantage of those is sometimes a hard sell.
The alternative way of doing this is being business led, which is going
to a business leader and saying, Hey, Id like to pilot some ideas of
using advanced analytics to drive your business, and letting a
business executive shape how he or she wants to deploy that and what

kind of insights to go and pull out and use. That kind of business-led
approach does tend to be more effective, at least in the experience that
I have. Nimal, is that in line with your experience?
Nimal Manuel: I fully agree. Lets take a commercial example, right?
It needs to be business led, by the chief marketing officer (CMO) or the
CMO equivalent. But then again, he needs the chief information
officer (CIO) to be working with him. I call this a marriage of the CMO
and the CIO.
For a commercial use case, it needs to be CMO-led, business-led, in
terms of directing where the value is and what I want done, but then
working hand in hand with the CIO on what needs to be put in place in
terms of what data I need in the data lake. What analytics I need
applied to the data, what IT stacks need to be upgraded to automate a
lot of this, are all anchored on the business priority put forth by the
business-unit head or the CMO.
Cecilia Ma Zecha: It sounds to me like there are connections to the
talent question. How do you look at the issue of talent in making
analytics work for companies?
Bill Wiseman: Talent issues are myriad. If you think of the new roles
that these opportunities create, youve got the plumbers of the data
lake. I like to call these people data engineers. These are the folks that
are breaking data out of those silos, putting it in the lake, and making
sure that theyve got real-time feeds set up so that this can be kept
fresh over time.
Cecilia Ma Zecha: Is there a shortage of people with that expertise?

Bill Wiseman: Theres a shortage of good ones, thats for sure. That
shortage depends on where youre looking. If youre looking in a place
like the United States or somewhere in Europe, theres a huge shortage
of these.
I would say there are great talent sources. Indias a great source of
talent for data engineers. Its all a question of global mobility.
The second role that people always point to is the role of the data
scientist. These are the mathematicians who understand how to do
complex algorithmic and model-building tasks and can make
something out of that dataa descriptive model or a prescriptive
model or a predictive model.
Then probably the least appreciated, but the most rare and most
important individual, is the person who links the business domain
with the data science. Understanding whats in the realm of the
possible, what can be digested by the business, and, frankly, how to
close the last mile between the insight that the data scientists are
coming up with and the predictions theyre making, and how to go out
and drive business impact with that. Thats a very rare individual.
Nimal Manuel: At McKinsey we call those the translators, the folks
that can bridge between the technical and the business. These are
people who can roll up their sleeves and can understand the statistics,
can code in RSS on the one hand but have sufficient business evidence
to be able to apply that to a business issue, as opposed to getting lost in
the technical duty of the solution. Thats very hard to find.

You either find folks who talk a good talk on the business side, but
cant really roll up their sleeves, or folks who are a bit too immersed in
it and cant elevate themselves and look at the business challenges.
You can find the pure technical data scientist. Its not easy, but you can
find them. Finding these translators is the biggest challenge.
Cecilia Ma Zecha: So weve talked about a host of challenges. What,
then, is the business case or the best-case scenario? Share with us
some impact stories that you may have seen.
Nimal Manuel: Well take pricing. How do I set pricing in an
effective, segmented fashion? Both for what we call above the line,
meaning pricing that everyone sees, mass kind of pricing, as well as for
more targeted, segmented pricing.
As you can imagine, theres a ton of value to being able to deploy
analytics to understand different segments of consumers, their
willingness to pay, what extent of that surplus companies are leaving
on the table today, and how you can price in a more segmented fashion
to capture all that surplus. On the one hand, its very simplistic saying
it that way. But the amount of analytics that go into understanding the
elasticities of individual segmentsit takes quite a lot of work.
Now many organizations get it wrong and lose a lot of value to pricing.
So its low-hanging fruit in the sense that its a very strong and easy
lever to pull, but its challenging to get right, and analytics can really
help inform the decision.
Cecilia Ma Zecha: What about you, Bill? Where have you seen
analytics really work and take off for companies?

Bill Wiseman: Ive seen it in a few cases. To stick to this commercial

theme for a little bit, one of my favorite applications that Ive seen is
large, complex sales transactions. Lets think about a commodities
space like chemicals.
A lot of times, you get large account teams that have an account
manager, many technical sales reps, and maybe some technical
support reps that are there to service a particular account. The
company might have thousands of customers that it is trying to
service. Being able to figure out what good looks like from an accountservicing capability is very interesting.
The problem was framed as, Hey, I have hundreds of technical sales
reps. I dont know what my returns on those technical sales reps really
are. Would it make a difference if we didnt have any? Would it make a
difference if we doubled the number of them? This means going in
and being able to use account-by-account analytics and figure out
which account managers leverage technical sales reps, how they do
thatbeing able to unpack that and get down to the level of account by
account, what is the impact that a technical sales rep is having, and on
average how big is that? It allows companies to figure out, Do we have
the right level of technical support staff? Do we need to double that?
What kind of return are we going to get on that?
In this particular case, I would say we have two outcomes. One was
that educating the account managers that were not making adequate
use of technical resources was a big lift. These were account managers
that just didnt see the value in that or didnt know how to use them.
Being able to retrain those folks to effectively use technical sales

resources was a good thing. Then we recognized that we had about half
as many as we needed. We needed to scale the total number of
technical sales resources that we had.
It was very interesting because the hypothesis going in was, These
people really dont add a lot of value. We might want to just get rid of
them. That was totally the opposite of the outcome. Another
counterintuitive insight that I saw some clients get to was when we
were looking at large engineering forces. A lot of times in a productdevelopment organization thats churning out hundreds of products a
year, engineers are staffed in pools.
You have a pool of software engineers, a pool of mechanical engineers,
a pool of electrical engineers. If youre going to design a product, you
pull a team of engineers together, and thats who is assigned to that
project team. Its always a question of, Do I dedicate resources to a
project? Do I fragment them across a certain number of projects?
Oftentimes thats not managed.
So you get an engineering chest-thumping culture, where a software
engineer wants to be on seven different projects, or an electrical
engineer says, No, I really want to focus and shut my door and get
work done. By going through and mining years of real experiential
projects, you can get down to answer the question of what is the right
level of fragmentation that you want in your engineering workforce.
Its quite interesting that you find, by domain, its very different. You
would think its different by individual, but in reality its not. At one
company, and this probably is not something you could extrapolate,

we did not find the limit to which you could fragment software
engineers. We got up to 12 projects. We were fragmenting software
engineers on a given week across 12 different projects. Their
productivity was continuing to increase.
We never did find that limit. We found the limit with mechanical
engineers. The limit was two projects. If you span them across more
than two, their productivity started to drop. This was very
counterintuitive, and it led to building almost a smart staffing tool, so
that when youre dealing with a 7,000-person pool, youre able to
much more intelligently deploy resources across projects.
That led to massive lifts in productivity. They were able to get products
out in 20 percent less time, with over 20 percent less engineering
hours of input. That leads to either better product-velocity output,
which leads to better pricing, or it leads to a better cost position. The
impact is definitely there, when youre talking about top-line growth or
youre talking about cost to develop.

Straight talk about big dataRead the

article

Nimal Manuel: One of the things Bill said just now was focus on the
business, not the technology. Thats critical. The first thing is
creatingalignment within the organization of where the business value
is. What are the two, three, four, five use cases Im going to prioritize?
Thats so important because that then allows the whole organization to
engineer the analytics engine behind those use cases, those three to
four priorities. Thats very important.

Number two, Bill and me were talking just now about this concept of
how you architect the big data or the analytics journey. And, again,
youve got to be pragmatic about this because you need momentum up
front, which means you need a few quick wins. You dont want to be in
a position where youre trying to pull together a big data-scientist team
or a big IT infrastructure and then two years down the road, start
thinking what to do with it.

Video

How to prioritize data transformation

Senior partner Nimal Manuel explains how companies can manage the process of maximizing
their data.

You want to be in a scenario where you use whats available. You beg,
borrow, steal, get some early wins. Once everyones a bit more
convinced that theres value here, then youmake the bigger
investments and scale up and automate and all that good stuff. But get
a few wins early in the game.
Bill Wiseman: I think thats completely right. The only thing that I
would add to build on what Nimal said is getting that couple of use
cases right, where business leaders in your organization can see the
impactits going to generate a lot of pull.
The other thing I like to see CEOs doing with their top teams is really
drawing inspiration thats new and a bit farther away from their
business, so they can, again, see what is truly possible out there. You
can look from business. But I wouldnt limit yourself just to business. I
would look at sports. Moneyball was a fantastic story about reshaping

the game of baseball using analytics to bring down the cost of

developing teams. If you look at Formula One sports racing, if you look
at basketball or Premier League soccer, these are very data-driven
businesses now.
When youre talking about athlete-injury prediction, youre seeing
teams that are actually saying, I believe this athlete is going to be
injured in the next two weeks because hes not showing the right level
of strength and flexibility. Im going to bench him because that athlete
is a multimillion-dollar investment, and if he gets hurt, he cant play
anymore.
I would look at security applications. Some of the ways that
intelligence organizations are being able to isolate and hunt for
terrorists are very interesting when it comes to applications of fraud
detection. Having executives look to analogous areas where I would
say the use of analytics and the use of big data is light-years ahead of
where it is with business really is a great source to draw inspiration
and figure out what that road map looks like. So get the quick wins to
build a business case for the teams, but then really be inspired by
whats possible out there.