Why companies need to make sustainability a priority and treat it like the next stage of digital transformation
- Junta Nakai is the global industry leader for financial services at Databricks, a big data and AI company valued at $6.2 billion.
- In this op-ed, Nakai details the benefits of companies undergoing a sustainable transformation that will allow for a more future-proof business model to be built.
Digital transformation has become a major focus for CEOs over the last decade. Defined as the adoption of technology to replace manual processes, digital transformation promised to fundamentally change how businesses delivered value to customers.
But for years, digital transformation was more hype than reality, and the vast majority of companies failed to successfully 'transform' their businesses. As recently as October 2018, a McKinsey study found less than 30% of companies had succeeded in digitally transforming their businesses.
One good thing about 2020 is that this year is shaping up to be a transformative one for digital transformation. The pandemic and the resulting economic volatility has accelerated the adoption of the various technologies that are foundational to driving transformation, especially with respect to cloud adoption.
At the beginning of 2020, a KPMG study found 67% of CEOs expressed concern about migrating all of their business to the cloud. Now, that hesitation has nearly vanished. Changing consumer behaviors, work from home, and volatile economic conditions necessitate a new generation of digital solutions for customers and employees alike.
While digital transformation finally seems to be transitioning from buzzword to reality for many corporations today, CEOs must start preparing for the next big transformation on the horizon — a kind of transformation that may require an even more fundamental reorganization and rethinking of what it means to be a business: sustainable transformation.
Stakeholder capitalism
Sustainable transformation goes hand in hand with stakeholder capitalism, an idea that has gone from fringe to mainstream over the last few years, with prominent supporters such as Marc Benioff, CEO of Salesforce.
Stakeholder capitalism is the idea that companies should serve the interests of all stakeholders, not just shareholders. While simple in principle, it is quite a departure from the kind of capitalism that has prevailed in the post-war era. Stakeholder capitalism at its core is about sustainability.
The long-term viability of a corporation depends not just on maximizing profits for shareholders, but making sure the interests of consumers, employees, and the environment are maximized as well.
While results so far have been mixed, proponents believe stakeholder capitalism is good business. They believe companies can generate sustainable profits while simultaneously practicing a 'kinder form of capitalism' and avoiding risks that may pose existential threats to their businesses.
For example, consider a mining company harvesting materials underground on an island. If the company solely focuses on maximizing short-term profits by digging in the most efficient manner possible, they will soon run out of minerals to extract.
After the last ton of earth is extracted, there is no more source of profits. The land is bare. The negative externalities of the digging are severe for inhabitants and for the environment. So after maximizing short-term profits, there is no more business for the mining company and all stakeholders are worse off.
Stakeholder capitalism is about thinking about the broader constituents of a corporation, not just its equity shareholders, in making decisions. The idea is that by taking a wider range of stakeholders into consideration, companies become more viable over the long run.
It impacts duration as companies plan for the next quarter century, not just the next quarter. It impacts actions, as companies think through second and third derivative consequences of their activities.
Going back to the mining example, without digging sustainably, the company will run out of fertile mines or productive miners. Without considering the environment, residents and employees alike will be left with an uninhabitable land. Without engaging community groups, archaeologically significant sites may be accidentally destroyed and elicit negative feedback from customers, regulators, and the media.
Beyond the negative headlines, doing such a thing will likely have long-term impacts on operations as mining businesses are fundamentally dependent on local government licenses. While destroying historically important sites for profit may seem extreme, it isn't. A mining company was recently accused of doing just that after failing to engage all stakeholders. The CEO resigned as a result.
Digital transformation is a necessary condition for sustainable transformation
If you distill to the core what digital transformation was about, it was about efficiency and agility. Despite the challenges associated with moving from a legacy technology stack to a digital one, it still fits neatly into a narrow paradigm of profit maximization.
Sustainable transformation builds on top of efficiency and agility by also mandating operational changes, organizational realignment, and expanding the dimensions of strategic planning. Simply put, the challenge for CEOs is that sustainable transformation is harder than digital transformation because it is a departure in terms of both mindset and prioritization.
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The good news is that the foundational building blocks of digital transformation (cloud, big data, open source, and AI) are also the critical components necessary for building a more sustainable business.
However, while businesses were given a decade to undergo their digital transformations, CEOs do not have the same luxury for sustainable transformation.
Recent events have shown that taking a comprehensive, stakeholder-driven approach to your business is a 'must have', not a 'nice to have.'
For example, the CEO of Lululemon recently told Fortune CEO Alan Murray that the company had to shut more stores in the US due to climate issues (fires and hurricanes) than they did for Covid-19. The systemic risks associated with climate change, geopolitical risks, and shifting consumer/employee expectations will require transformation on a much shorter timeline.
Sustainable transformation requires rethinking and reorganization
Consider a bank that makes housing loans.
Let's say that the bank holds onto the loans until maturity. Today, the mortgage underwriting and risk management process relies on data tools and human processes that digital transformation enabled. The underwriters analyze data about the customer (credit score, income history, etc) as well as basic data about the home itself (single family home, value of nearby homes, etc) to make decisions.
But going forward, this paradigm is likely not robust enough. Simply put, a lot of things can change during a typical 30-year duration of a fixed-housing loan (rising sea levels, changing weather patterns, wildfires, etc).
For this bank to remain viable and to manage risks effectively, it must bring sustainability to the core of its operations.
Sustainable transformation happens when the bank leverages the tech infrastructure gained from digital transformation to convert millions of addresses tied to mortgages into geo coordinates. The bank then merges the latitude and longitudes with topographical information at scale to index how many feet above sea level each home is. Finally, the bank runs billions of simulations on how changing weather patterns (from rising sea levels to hurricanes to wildfires) impacts the default probabilities or the underlying collateral values of those loans.
Sustainable transformation is when underlying mortgage risk no longer just about credit scores or income levels. It requires new ways of thinking and processes. It changes the mindset and skill sets required for an underwriter to make better decisions. It's not about just short-term profits, but about building a more sustainable and viable business model so that the bank can continue to underwrite profitable mortgage loans into the future.
Conclusion
Digital transformation was about efficiency and agility. Sustainable transformation adds duration and action to the matrix.
It is about thinking through the multi-dimensional impacts of a business decision and having the technological tools to analyze and act on them. It's about building a future-proof business model.
CEOs can take comfort in knowing that digital transformation has created the building blocks for sustainable transformation. The on-going efforts of the last decade enable it when paired with the right human capital, priorities, and data tools.
But time is not on their side. Consumer expectations, shifting environmental patterns and investor demand will necessitate that business leaders move quickly. Sustainable transformation is the next big thing, but the amount of time afforded to companies to achieve it will not be as large.
Junta Nakai is the global industry leader for financial services at Databricks. In his capacity, he is responsible for driving the world wide adoption of the Unified Data Analytics Platform across Capital Markets, Banking/Payments, Insurers and Data Providers. Prior to joining Databricks, Junta spent 14 years at Goldman Sachs, where he most recently served as the Head of Asia Pacific Sales for the Americas in the Equities Division.