McKinsey on Digital Services Volume II: Turbocharging the next-generation operating model April 2019 Editorial Board: Tod Camara Adele Hu Somesh Khanna Eric Lamarre Debasish Patnaik Barr Seitz Alex Singla Rohit Sood Jasper van Ouwerkerk Contents Introduction 2 Part 1: Core learnings Six lessons on how to embrace the next-generation operating model 6 Banks and the digital flywheel: An engine for ongoing value capture 12 Accelerating the shift to a next-generation operating model 18 Unlocking success in digital transformations 25 Part 2: Customer-centric journey design How to extract maximum value from a zero-based design approach to customer journeys 38 Mastering the digital advantage in transforming customer experience 43 Managing a customer-experience transformation in banking 49 Part 3: Next-generation levers and technologies Payments disputes in banking: A pathway to deeper customer relationships 58 The automation imperative 65 Using analytics to increase satisfaction, efficiency, and revenue in customer service 73 Insurance 2030: The impact of AI on the future of insurance 81 Part 4: Foundational capabilities Leading agile transformation: The new capabilities leaders need to build 21st-century organizations 91 Retraining and reskilling workers in the age of automation 96 The continuous improvement leader: Engaging people for a digital age 102 Five enterprise-architecture practices that add value to digital transformations 106 Part 5: Next-generation operating model in action An insurance company transforms itself by putting technology first 114 The Western Union Way of digital transformation 118 A bank transforms itself by transforming its culture 122 Scaling and accelerating a digital transformation 125 Finding talent and speed to transform a credit-card company into a digital native 129 Introduction Companies are pushing hard to become digital. Many have embarked on aggressive programs to reinvent their operating models so that they can move and adapt quickly and capture value. But we’ve found that, in many cases, the reality doesn’t match the aspiration. The transformations have either stalled or been caught in “pilot purgatory,” where initial successes have proven too hard to scale. With more companies embarking on creating their next-generation operating models,¹ however, lessons and best practices have started to emerge (exhibit). We have found, for example, that the most successful companies are pragmatic in how to get moving, tackle the talent challenges early in 1 See Albert Bollard, Elixabete Larrea, Alex Singla, and Rohit Sood, “The next-generation operating model for the digital world,” May 2017, McKinsey.com. Exhibit Best practices have emerged for next-generation operating models. End-to-end customer journeys Customer-centric journey design Next-generation levers and technologies Digitization Advanced Automation Process Business-process analytics at scale redesign outsourcing Foundational capabilities to drive rapid and sustainable Agile IT Management Culture and implementation architecture systems capabilities Introduction 2 the process, and build teams that can manage the change from the front lines to the back office—and the effort is well worth it. Companies that have been successful in building out core elements of their next- gen operating model have seen step-change improvements on the order of 30 to 50 percent along key dimensions of costs and customer satisfaction, retention, and acquisition. As we outlined in 2017, the transformation from how companies work today to how they will need to work tomorrow requires two significant shifts: — from running uncoordinated improvement efforts within siloes to launching an integrated operational transformation program organized around customer journeys (the interactions a customer has with a company) and internal journeys (end-to-end processes inside the company) — from using individual technologies and operations capabilities in a piecemeal way inside siloes to applying them to journeys in combination and in the right sequence, thereby achieving compound impact Making these shifts is not easy. Pressing questions persist on a number of fronts: End-to-end customer journeys — Is the entire leadership team in my organization aligned on the top 20 end-to-end journeys? — Is my organization tracking customer satisfaction at every interaction along the customer journey? — Have we taken a zero-based design approach to the most critical customer journeys? Next-generation levers and technologies — Can we clearly articulate all the investments being made across next-gen levers (for example, process redesign, automation at scale, advanced analytics, digitization, business-process outsourcing) and their respective return on investment? — Do we have an integrated road map for transforming the top 20 journeys across the enterprise using a complete set of levers? Foundational capabilities — Do we have an enterprise management system that integrates analog and digital processes seamlessly? — Are there at least two examples of end-to-end journey transformations using cross-functional agile teams that we can use as a reference for the rest of the business? — Have we successfully found a way to transform to next-gen operations that overcomes our legacy IT infrastructure? — Do we have a clear road map for the future of talent in our organization, given the implications of automation on the workforce? — What is the role of a CEO in leading the organization in a transformation to the next-gen operating model? 3 Introduction As might be expected, there are no easy answers to these questions. But in working with companies to answer them over the past year, we thought it would be helpful to reflect on and share what we’ve learned and bring in leaders from various companies to share their stories as well. We look forward to the conversations in driving forward the next-generation operating model that creates sustainable value. Somesh Khanna Eric Lamarre Debasish Patnaik Alex Singla Senior partner, New York Senior partner, Boston Senior partner, London Senior partner, Chicago Rohit Sood Kurt Strovink Jasper van Ouwerkerk Senior partner, Toronto Senior partner, New York Senior partner, Amsterdam Introduction 4 Part 01 Core learnings Six lessons on how to embrace the next- generation operating model Realities on the ground highlight what’s really needed to pull off the transformation. by Tod Camara, Adele Hu, Alex Singla, Rohit Sood, and Jasper van Ouwerkerk © Getty Images January 2019 6 Companies that hope to compete in the Lesson #1: Start by working on a high- digital world are coming to see that it requires impact end-to-end journey a fundamentally new way of working. On the Some companies start their digital operations customer-experience side, digital natives have transformation with small pilots that don’t generate raised the bar considerably; for example, banks significant benefits. Others spend a lot of time today benchmark their websites and apps against analyzing which journey to tackle first. But there’s companies such as Amazon and Uber. Internally, no single right way to get started. The key is to despite big investments in digitization, process identify a journey that’s important and begin there. redesign, and automation, the efficiency ratio at most large companies has stalled. Their There are two primary approaches for deciding improvement initiatives reside in different pockets, where to begin: such as a digital factory or automation center of excellence, and are seldom integrated. — If a “burning platform” at the company is already in mind—an issue with potential to have a big A next-generation operating model (NGOM)¹ is impact on customer experience, new-customer needed to give companies the ability to move acquisition, customer service, and/or cost/ quickly and adapt to changing circumstances. productivity—simply start there. Alternatively, The rewards for making the leap to the NGOM identify no-regret areas (every company has are significant: step-change improvements that a few) and pick one. Set up a cross-functional, produce 30 to 50 percent productivity gains, up to agile team to tackle the chosen area. 80 percent reduction in turnaround time, up to 10 percent enhancement of customer experience, and — If there are several burning platforms, evaluate 20 to 25 percent growth. the potential of the next-gen levers across the most important customer journeys at the Last year, we identified the two key shifts that are enterprise level. This will help prioritize and necessary for companies to build the NGOM: sequence journeys for the next two to three years after embarking on the transformation. From uncoordinated improvement efforts within siloes . To an integrated transformation Whichever path is chosen, it’s important to get program organized around customer journeys (the started quickly in order to demonstrate the from- interactions a customer has with a company) and to path for the next-gen transformation and win internal journeys (end-to-end processes inside the over skeptics by showing the value the model can company). generate. We have found that it’s generally better to take on customer-facing journeys before internal From using individual technologies and capabilities ones. If it’s hard to get the buy-in needed to begin in a piecemeal way inside siloes . To applying them with a whole journey, it’s possible to start smaller— to journeys in combination and in the right sequence, inside a single business unit or geographic site—and thereby achieving compound