Business transformation through digitalization

• By Victor Venancio
• May 31, 2020
• Digital Transformation

Summary

Technology, culture, and processes are all essential to success

By Victor Venâncio

Oil and gas businesses around the globe are undergoing a broad range of transformations these days, pushed by nations needing to meet the United Nations’ 2030 Agenda for Sustainable Development, by the availability of new digital technologies, by the use of renewable energy, and by changes in consumer behaviors. Energy industry drivers of change known as the “four Ds”—digitalization, decentralization, democratization, and decarbonization—are boosting the adoption of new technologies and challenging the business models that the industry has been built upon. We are also globally experiencing a moment of major change accelerated by the effects of the COVID-19 pandemic, with transformation equally impacting organizations and individuals.

The digital transformation journey of any business is a period of organizational turbulence even in the best of global conditions. It is a time of information technology (IT) and operational technology (OT) convergence. It is when professionals with different skills should align their efforts toward overcoming challenges and delivering the elements of value that are important for clients and other stakeholders. The idea is understood differently depending on the department or a professional’s background but, for industrial companies, transformation encompasses three pillars: technology, organizational and geographical culture, and processes.

These three pillars are always immersed in a huge amount of structured or unstructured data, originating from several sources internal and external to the company. That data is the “digital” portion of the transformation journey. And the purpose of the journey is to answer a series of questions.

Are organizations prepared to ensure the sustainability of their businesses with the agility and responsiveness required at this moment? Are they prepared to move fast enough to build a solid bridge between strategy and execution? Can they link the company’s vision to the values that they will actually deliver to their clients?

Can leadership’s primary focus change from return on investment (ROI) to customer value, or from operational costs and efficiency to agility and adaptability? What percentage of budget is allocated to business as usual (BAU) activities, and what percentage is actually allocated to initiatives that will leverage digital transformation strategies?

Some paradigms of traditional management must shift so that transformation can actually occur. And this is no easy task. This article discusses how the three pillars of digital transformation correlate with each other and highlights issues that organizations must be careful about. Examples are specific to the oil and gas (O&G) industry, but the discussion applies to many other market segments as well.

The technology pillar

Digitalization is a construct different from digital transformation, which in turn is different from what is known as Industry 4.0. Several sources mix up these terms and cause a fair amount of confusion among readers less acquainted with automation or digital technology roots.

Digitalization has been happening for some years and consists of converting analog signals generated by sensors into digital signals. It is also activities that used to be carried out manually in spreadsheets that are now carried out using computers. Basically, the same processes that existed before have become digital—and that is it.

Digitalization is one of the characteristics of Industry 3.0, and most companies are still in this era. Digitalization activities are growing exponentially because of lower sensor prices, easy cloud storage of data, the evolution of the electronics required to process the data, and the new and powerful hardware and software tools available.

Digital transformation, on the other hand, fundamentally changes business models and activities, often with the use of Industry 4.0 technologies. Digital transformation challenges the cultural paradigms of organizations and promotes the use of cocreation networks (open innovation) as a way to leverage their sources of monetization or value creation. It develops new opportunities for companies and their employees, and also creates innovative products or services for society. Digital transformation occurs when its three pillars are being worked on simultaneously, following a well-defined corporate strategy.

Industry 4.0 is about adopting emerging technologies that, together or in isolation, offer better operational, business, or security performance to organizations. Among these technologies, the following stand out: robotic process automation (RPA), machine learning (ML), artificial intelligence (AI), cognitive intelligence, big data and analytics, system integration (OT and IT convergence), digital twin (simulations), 3D printing, Internet of Things and Industrial Internet of Things (IoT/IIoT), and cloud computing (enterprise resource planning [ERP], cloud), all supported by solid cybersecurity (OT and IT) governance.*

Automation, whether industrial or corporate, is a crucial part of the strategies applied for digital transformation and the adoption of Industry 4.0 tools. Massive automation is, in fact, the first step of the digital transformation journey.

Automating all repetitive processes has become almost mandatory for organizations, whether they are oil producers, freighters or drilling rigs, floating production storage and offloading (FPSO), or suppliers of equipment and services. The strategic use of data will offer new monetization possibilities, and therefore will allow companies to grow in an increasingly more competitive environment where new entrants from segments that have not operated in the energy industry before will challenge incumbents.

Brazil: A case study

Even with so many Industry 4.0 technologies available, Brazil’s O&G industry still mostly belongs to the Industry 3.0 era. Initiatives to adopt Industry 4.0 tools are rare, and it is even more difficult to find companies that are doing digital transformation.

A few companies have launched initiatives to implement a digital transformation strategy, working on the three pillars simultaneously. But many times, companies adopt emerging technologies and plan to check later what type of value they can derive from them. This is the first mistake of organizations that focus only on the technology pillar of digital transformation. So how can companies make gains from the use of Industry 4.0 technologies and promote digital transformation?

 

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The first step is to formulate a digital transformation strategy by relying on the collaboration of business and technology experts who have multidisciplinary knowledge about the industry. The choice of emerging technologies that will add value to the company should be based on corporate, business, and functional strategies. Support services to both internal and external clients should be implemented after processes (1) are well-defined and validated, (2) are aligned with the organizational culture and the mindset of company teams, and (3) comply with corporate governance, risk, and compliance rules.

An effective digital transformation strategy goes far beyond technology adoption and requires a multiskilled group dedicated to checking interactions and potential synergies between several departments. With such a comprehensive view, we will find the value created by adopting those technologies. In other words, a well-designed digital transformation strategy goes beyond which technology to adopt.

All company departments should be aligned around a corporate mindset that may help people to participate in the cocreation of the strategy and perform a real digital transformation. However, challenges to this alignment are posed by merging different departments, personal interests, desires, egos, cultural dimensions, and goals that are too often ruled by key performance indicators that clash with the common good.

Essential OT/IT convergence

The first step for a company starting its digital transformation journey—relying on a formulated strategy duly shared with everyone—is the adoption of OT and IT convergence. Industrial assets, through the automation systems already in place, are a major source of data. Industrial automation systems (sensors, programmable logic controllers, distributed control systems, supervisory control and data acquisition) process a huge amount of data that is restricted to these “factory floor” systems. This comprises what we know as OT.

Data from different corporate departments, such as finance, procurement, human resources, and tax, are concentrated in and confined to the ERP system, which generates reports and dashboards for department and C-level executives. In several organizations, data from the industrial area is still coming from Microsoft Excel spreadsheets fed manually into the ERP.

In both cases, the equipment already exists in companies, and data is processed separately in its corresponding OT and IT silos. In most cases, companies do not make strategic use of the data to create value for the organization and its clients. Value comes from more reliable information for C-level executives to use for decision making, and also from a better internal client (employee) or external client (customer) experience. OT/IT convergence means contextualizing and combining data in a data lake, so highly skilled professionals and data scientists, supported by experts in industry business, can create that value. This total integration creates a sustainable competitive advantage.

OT/IT convergence is the first step in joining the Industry 4.0 era and starting the journey for a true digital transformation. Up to this point, the transformation initiative does not require major hardware and software investments. It is about using existing assets in a strategic manner with higher medium- and long-term goals that include fast and significant gains at the very start of implementation. This provides financial support for setting up the other pillars of digital transformation.

To the extent that additional data is necessary in alignment with corporate strategy, the next step is the implementation of other emerging technologies used in an Industry 4.0 environment. The strategic goals of companies for how to carry out digital transformation will determine whether the implementation of these technologies makes sense.

 

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The cultural pillar

Management literature says that culture is the set of values and beliefs shared among the members of an organization. However, this construct is discussed differently by anthropologists and sociologists, showing the complexity of the topic. Global companies should pay attention to organizational culture and also the culture of individual countries or geographic regions.

The quantity, scale, and price of the products produced by a company no longer guarantee its survival. The aggregate intangibles, or elements of value perceived by clients, have become of utmost importance for success. This ability to deliver elements of value depends on the speed and adaptability that companies manage to introduce in their decision-making processes. And that is a function of culture.

Flexibility, adaptability, agility—all are characteristics that organizations should develop in their cultures to create competitive advantages in this moment of transition. Organizational and country culture should be aligned with the digital transformation strategy, so that any strategy for adopting emerging technologies is actually used to create value for the organization. That is not always the case.

The results of KPMG’s 2019 CEO Outlook Survey show a potential imbalance between these two important pillars of digital transformation. Companies have been found to invest more in new technologies than in training for their employees: 68 percent report investing in buying new technology, but only 32 percent say they are investing in developing their workforce’s skills and capabilities.

Repetitive work performed by people is likely to be fully automated. Therefore, unskilled professionals may become jobless, causing a range of social problems. Although several jobs may be terminated, more skilled professionals will have new opportunities. However, the professional who carries out repetitive tasks usually is not the same professional who is prepared to seize the new opportunities—unless companies invest in upskilling.

Because digital transformation will affect not only the organization but also the environment and the society where the company operates, many companies focus on environmental and social governance (ESG) strategies. However, the organizational culture, mindset, and training issues will have to be addressed, so that adopting emerging Industry 4.0 technologies and new processes has the effectiveness expected by executives.

Addressing cultural dimensions that affect the relationships between employees of a broad range of departments and hierarchical levels and incorporating these new technologies into the company’s daily routines are key factors in ensuring the success of a digital transformation strategy. Human beings have a natural fear of the unknown. Many times, out of self-protection, they are against the adoption of an emerging technology, impairing the company’s strategy.

Using Brazil as an example once again, a high power distance gap and low trust levels are part of its cultural dimensions, making it very different culturally from other countries, such as Norway. A Norwegian company that is trying to replicate the headquarters’ digital transformation strategy in its Brazilian operations may have serious implementation problems if it does not address cultural and mindset issues properly. The cultural pillar may have a determinant impact on the digital transformation strategy as a whole.

In other words, no matter how easy the adoption of new technologies is, culture may slow or impair a successful implementation of a digital transformation strategy. Hence the need for a more comprehensive and broad view of what is beyond technology in digital transformation processes.

Oil and gas companies started to have a strong market presence at the end of the 19th century and have expanded their activities by acquiring tangible assets and fostering a robust operational performance culture. A digital transformation process requires a view of the company’s intangible assets, which several industry professionals are not yet used to delivering. Without a constant effort to adapt organizational culture to the new era we are experiencing, with massive automation and digitalization, the whole digital transformation process will certainly be useless.

 

 

The processes pillar

Processes are another important pillar of a digital transformation strategy. If they are not well analyzed, defined, validated, and tested, emerging technologies will run inefficient processes in a more accurate and fast manner. That will be even worse for organizations, destroying value and generating financial losses. Both in the industrial and corporate areas, processes are crucial for the organization to positively perceive the results obtained from OT/IT convergence.

Lean Manufacturing methodologies support operational efficiency and allow constant improvements in production routines to eliminate or mitigate losses and waste reported in production processes. These methodologies are used in several industrial segments still today, even in the O&G industry. Well-structured processes both in the industrial and corporate areas help organizations to be more efficient and more competitive.

Working on the pillar of processes simultaneously with the pillars of culture (organizational and country) and technology will help the company implement the new tools. It will also send a message to employees that the company is working to facilitate their daily activities to allow them more time to understand the new technologies, acquire new skills, and have more free time for creativity to boost the company’s businesses through entrepreneurial activities.

In conclusion, whatever your line of business within the O&G value chain, it will be affected by digital transformation. The company that does not have a clear digital transformation strategy and does not simultaneously address these three pillars is putting its own survival at risk.

New entrants using disruptive technologies or new business models are already having an impact on business in the O&G industry, and every company should be aware of the risks of not keeping abreast of the most recent developments. As a country, Brazil and several other nations have to be more agile in this shift from Industry 3.0 to Industry 4.0.

This situation is not different in the O&G industry specifically. Some governments have excellent initiatives to encourage the adoption of new Industry 4.0 technologies. This is good, but it is up to organizations to formulate their own strategies to act on the three pillars simultaneously in an orchestrated manner. If possible, organizations should use external knowledge sources in a collaborative manner by tapping the key skills of expert business and technology companies, startups, universities, and other institutions to help them undertake this journey.

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