Leadership Necessary for Realizing Digital Management

For Japanese companies, promoting DX (Digital Transformation) and setting their direction toward digital management are top-priority issues. On the other hand, in terms of business, some people argue that “vital parts of corporate operations are supposed to have been digitalized by introducing ERP and equipment, and decisions are actually being made at worksites based on information collected by these tools. What more can we do?”

What does true digital management look like and what kind of leadership and mindset are necessary for promoting it? Masayuki Chatani and Tim Denley of KPMG Ignition Tokyo (KIT) discussed this with Shintaro Nakabayashi, Head of DX Solution 2 Division of KIT.

*Professional affiliation and official position in the article are at the time of publication.

• Agility Is Essential for Leadership in the Age of Digital Management
• Mindset of Leaders in the Digital Age

• Need to Update Management Sense

Denley:        When conducting digital management, it is extremely important to understand that “there is a significant difference between the old-style leadership and the leadership required in the age of digital management.” It can be said that the key point is that leadership with agility that is in tune with the age of digital management, which the old style of leadership does not have, is indispensable. 

Daily learning is also essential for acquiring the ability to adopt agilely to a world that is changing at a bewildering pace. However, I imagine that many of today’s executive-level leaders have lost their willingness to put aside their previous experience and knowledge and “learn quickly about change and its essence.”

The agility I am referring to here is the “ability to shift to the direction that is believed to be appropriate in a very short period of time with full understanding of the risks.”

Chatani: It is definitely necessary to be aware of the importance of agility. What I am focusing on the most in the context of “the gap between the old type of leadership and leadership in the age of digital management” is “the difference in the perspective of failure.”

For many companies, “failure” is recognized as something that is on the opposite side of success. It is understandable that a business entity that has been steadily building up its success would classify “failure” as “something that should never happen.”

However, if we look at agility from the aspect of technology, we can recognize that “failure” is merely an intermediate step on the way to success. It is easy to imagine that people who have been in a conventional management position would feel that the mindset of digital management is “disparate.”

That said, if we look at GAFA, which have expanded steadily by creating completely different business models by repeating changes and evolutions without being afraid of failure, there is no doubt that their approach is one of the successful cases, even though becoming a giant company may not necessarily be the only correct thing. Therefore, I think that leaders with the awareness that “failure is a passing point to achieve success”

need to exercise leadership at Japanese companies as well.

Nakabayashi-san, you worked for a U.S.-based digital-related company for many years so you probably know well what kind of leadership is exerted at companies that are actually conducting digital management.

Nakabayashi: When I was young, I learned about many major business management approaches which were believed to be universal at a Japanese business school. However, with the time moving much faster than before, I thought that I should have a different perspective to understand “the specific methodology for business management and business processes to possess agility.” So, I then attended a business school attached to an engineering university in the U.S.

I learned about aspects of technology management such as “management and business processes are operating systems themselves,” “enhancing management efficiency through standardization and high reusability of management resources” and “how to keep pace with the unavoidable evolution of information processing technology, which has entered the very foundation of companies and businesses.”

When business processes are digitalized in every detail, data and algorithms, which are the unique competitive edge of a company, will have a major impact on people’s decision-making. When a business rule changes, parameters in the business rule engine are revised and the standardization process is completed instantly with agility. When I was exposed to these engineering and mathematical approaches and ideas, I was amazed at how they were “minimizing risks and accelerating the pace of responding to change by making full use of advanced information processing mechanisms.”

There were many companies that were carefully developing inhouse engineers who possessed these advanced physical approaches. I feel that the reason why they are able to manage business processes, data and algorithms at such a high level is that they have such a strong technology management perspective and awareness.

When thinking about the use of digital technology in management, it is necessary to  separate management and operation (execution of business operations). The management teams of U.S.-based digital-related companies seem to have a good understanding of “how to operate by minimizing the pain even if they are faced with failure at an early stage.” Another characteristic, I think, is that “many companies are able to objectively review their strengths and weaknesses based on a process-centric approach that views all corporate activities as processes.”

As all listed companies are on the “same platform”, that is, the capital market, the broad framework of corporate management is also the same for GAFA. However, companies are now required to resolve social issues and create value by using mathematical methods as mentioned earlier. In other words, when considering things in a process-centric way, the use of analytics for data that are acquired from processes is becoming more important.

The speed at which we can get the information that matters for success out of the process, analyze it, and link it to measures has further increased. As processes become more digitalized, it will be possible to realize a situation where the necessary data will come up, unless they are very ad hoc. However, what is important is to be able to make decisions based on these data. When management executives make decisions at meetings, it will become possible to unify the awareness of the management team by conducting sensitivity analysis, such as “if this figure falls, what other impact will it have?” during a short management meeting based on the data acquired through such processes. This is a distinctive benefit of digital technology.

We often hear that it is difficult to manage business management KPIs and operational KPIs by linking them together. There are two key points included here. One is to accurately acquire data from business processes as much as possible and the other is to manage the acquired data within the financial/non-financial managing/monitoring framework. What’s important is to set up one’s own algorithm and manage it as an index within this framework.

Chatani: You have a point there. You talked about enabling the use of process data but the Ministry of Internal Affairs and Communications recently sent guidance to each ministry on how to create data with spreadsheet software such as Excel*. This document was publicly disclosed and is much talked about. Many people said that it is very helpful as this method of creating data is not yet practiced even at companies.

* Notation system for creating machine-readable data in statistics tables (Bureau of Statistics of the Ministry of Internal Affairs and Communications)

In Japan, there are many types of “data” that are unprocessable with computers, for instance, using unique notations such as expressing negative numbers with a black triangle rather than “-” and merging cells to improve the appearance.

They are certainly digital as the data are created with applications but they are not digitalized to be processable. This can be seen as a very big issue when promoting digital management.

Nakabayashi: I was once told at the U.S. company, “Don’t say ‘I think I should do it.’ There is no work that should be done. What matters is whether you want to do it or not.” At such a company, I felt that there were more opportunities to think about what we want to do and what kind of future we want to create. Because there is something we want to do, we think of the shortest distance to achieve it. This is purpose-driven and the speed of achieving this purpose is extremely fast. What they are valuing is to consciously create an organizational structure, business process and governance model that can actually achieve it from the beginning.

Chatani: We can understand that it is important to pick up the habit to consciously “think for ourselves at all times.” We are in an age where we can easily get answers by asking but if we think for ourselves first then ask to check if the answer is correct, there will be a great difference in what we will be able to learn.

Chatani: We discussed earlier that “because there is something we want to do, we can think of the shortest distance for achieving it” but I think this leads to the question of how to change the awareness of organizations to promote digital management. In some cases, the more organizations are established, the more difficult it is to change their awareness.

When business is growing steadily, “how to minimize noise” becomes extremely important in the operation of the organization. Also, the criterion for determining whether it is noise or not is that it “does not disrupt the momentum.” Eliminating incoming “noise” that might disrupt the momentum is a necessary action when the business is growing steadily. It is also true that things have been going well because of this action.

However, in a rapidly changing age like now, it is not good enough to maintain the same momentum. We need to think of something new.

To come up with “what we want to do in work” is probably what we call artistic thinking. Things like what we want to express and what we can do to be recognized by society  as worthy of existence is similar to the basic concept of art, which is how to express our inner spirit outwardly.

We are taking on a challenge to make this more specific or utilizable using engineering and technology. In this regard, I feel that art and technology really exist side by side.

Nakabayashi: When we come across high-ranking executives such as the management team and managers of companies with confidence in technology listening intently to the problems and ideas of employees at the worksite, we get an extremely sincere impression and at the same time feel the essence of companies that have been changing the world with technology. After all, this is a world where success and failure have been determined by each fine mechanism and each line of source code embedded in products.

What’s important is the specific reality and what is truly happening at the worksite, and if business management is conducted broadly without considering these things, it will entail great risks. If this way of thinking is pursued, I think that it is only natural to want to understand the business process that flows through the end and make decisions by acquiring good information from the worksite, as we discussed earlier. Management teams of many global companies had a habit of conducting in-depth interpretation by linking small issues occurring at the worksite with management issues.

Denley:        I can think of reasons why people with experience as a software engineer tend to have this tendency. As software engineers work together to create one thing, they are aware that unless the problems of each engineer can be resolved, they will eventually be affected themselves. They also know the advantage of understanding what people on their left, right, above and below are trying to do.

If the act of creating one thing has been replaced by management, the manager will naturally take action to “solve internal issues” with the same mindset as when he or she was an engineer. This may be a situation where the difference can be seen between managers with and without experience of being an engineer.

Chatani: I would also like to add that the content of “what the person you are listening to said” is extremely important while “who said it” is not so important. There may be organizations that emphasize the latter but this may possibly lead to bias. However in a sense, new employees have been in contact with society until recently the longest in the company and they can be considered to have a value that is closest to that of customers. Therefore, I think that the management team and managers would want to listen to them and consult them. 

Nakabayashi: That’s true. “Who said it” may be important at times but the greatest interest of companies that are focusing on data and processes is to understand “what is happening” objectively. Companies that are focusing on “who said it” and have this atmosphere throughout the company are those whose data and processes are not modernized and they tend to depend heavily on people. It is important to develop an awareness of whether this area is becoming the source of their competitiveness or whether they are just not able to keep up with modernization.

When companies are heavily dependent on the senses of specific people, I feel that it will then be difficult to create a sense of fairness among employees. Without fairness, employees will start to refrain from saying what they notice regarding issues that occur ad hoc at the worksite and, in turn, correct information will not be conveyed to management. Focusing on data and processes also leads to fairness to employees.

Currently, the quality of decision-making at the worksite is gradually increasing. We are in an age where worksites with awareness can advance strongly by providing persuasive explanations to management based on data. I believe that the leadership required for realizing digital management is the ability to open the way to the future with a consistent image from start to end. Activities to further strengthen both worksites and management will be required. For instance, we need to accelerate specific DX support, conduct simulations and sensitivity analysis of management decision-making using the outcomes obtained from accelerating DX, and visualize external risks while management need to understand various situations faced by employees.

Companies where digital technology will become the basis of their business will further increase going forward and as their management teams will conduct management with an image of everything being digitally connected, their management approach will incorporate digital usage from the beginning.

From the standpoint of developing these personnel, I think that it will be meaningful for companies to prepare themselves by digitalizing their current mechanism and utilizing digital technology in management from the viewpoint of personnel development.

Chatani: In order to realize future digital management, organizations may be required to have a clear vision of what they want to do and make efforts to constantly develop their management sense, which will be necessary for them to grow in tandem with changes in society. I think that as long as they have a “digital mindset”, they will have a strong foundation that can flexibly respond to an uncertain future.

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