6 minute read 22 Jul 2020
Rainbow bridge at night

How digital natives are influencing traditional organizational design

By Matt Watt

EY Global Organization and Workforce Transformation Co-Leader and Design Leader

Partner at Ernst & Young LLP, leading globally for EY on aligning organizational models and organization design to achieve strategic intent. Champion for workforce inclusion and well-being.

6 minute read 22 Jul 2020
Related topics Workforce Corporate culture

Many established organizations look to digital natives for the secrets of success in the transformative age.

Digital native organizations increasingly dominate our attention and choices as consumers in many markets such as media, entertainment and retail. As growth leaders and the darlings of investors, it is unsurprising that all five of the world’s highest-valued companies are now digital natives, in contrast to just one in 2006. Long-established and traditionally-organized companies look enviously at their valuations and business models and wonder: do we need to be more like that?

In response to the challenges of the digital age, organizations are making choices around the design of their organizations. Organization design choices are one way to embed strategy into the organizational model and start to drive longer-term cultural and behavioral change. Choices drawn from parallels with digital natives are therefore made in the expectation that they will drive both operational improvements and the disruptive innovation that the digital natives are known for.

When it comes to their organization design, digital natives have had an advantage in the digital age: they have not needed to transition at scale from legacy systems and ways of working. The structures, roles, capabilities and resources needed to continuously experiment, learn and adapt have been embedded in their organizational DNA. They have built a continuous cycle of digital innovation into their business models, enabling them consistently to out-grow their competitors, capture existing markets and create new ones, and continue to attract talent and investment - even while not making a profit. This gives them organizational advantages that competitors can observe and can try to replicate.

In contrast, non-digitally native organizations have turned to ‘digital transformation’ programs and projects. Due to their size and complexity, many established companies have taken an incremental approach to transforming the organization. However, by ‘doing’ digital rather than ‘being’ digital, the full benefits of digital transformation have often not been realized, or not at the expected pace.

If the structures, roles, capabilities and resources needed to thrive in the digital age are embedded in the organizational DNA of digital natives, what patterns exist in the organizational choices that they have made? Are these really drivers of success? Could these also drive success for organizations that are not digitally-native?

In exploring these questions, we used a hypothesis-based approach. What did we expect to see across some prominent digital natives? Did we see it? If not, why not? If we did, what outcome did it drive? We examined publicly available data such as annual reports, company websites and analyst reports for a sample of digital native organizations across four key areas of their organization design:

  • Structure: How are they organized?
  • Roles: Who is accountable for what?
  • Capabilities: What skills do they have and develop?
  • Resources: Where and how do they invest in their workforces?

When thinking about the specific characteristics we would expect to see in a digital organization, we tested the ability of a digital organization to innovate and disrupt traditional services and industries and to quickly iterate through the product development lifecycle. The capabilities for this are:

  1. Capability to think, orchestrate and unblock
  2. Capability to disrupt and create like a start-up
  3. Capability to design, test and iterate like a tech giant
  4. Capability to plan, invest and scale up like a venture capital firm
  • What do we mean by ‘digital native’ organization?

    1. They were born and have grown up in the digital age: Digital native companies’ purpose, strategy and business model have been shaped, from inception, by the digital age. They have not needed to adapt from more traditional structures and legacy systems.
    2. They have been disruptive: Digital native companies have employed the disruptive thinking that has shaped product design and business models in the digital age.
    3. They are thriving in the digital age: The digital age has seen a decline in the average organizational life-span due to disruption, but a rise in valuation of ‘digital’ organizations.

    We see three stages in the life cycle of the digital natives, and we focus in this paper on the middle and later stages:

    • Start-ups: Typically these have little observable organization design, or any design that has been implemented is rapidly changing.
    • Rapidly-scaling digital natives: Rapidly growing, single disruptive entities focused on a single core product or service.
    • Conglomerate digital natives: Digital natives having expanded from stage two into a corporate structure more akin to a digital conglomerate.  

Key finding: Digital natives use their organization design to support and enable organizational culture and ways of working.

They do this in five key ways:

  1. Mindset over skillset. Digital natives recruit people for their mindset rather than their skillset. This enables them to build a workforce with the flexible capabilities needed to respond to evolving priorities and shifts in customer or market demand.
  2. The obligation to innovate. Rapid innovation is what often makes digital natives stand out; it is key to their ability to disrupt. Responsibility for innovation doesn’t rest with any single person or department – everyone is empowered and expected to innovate. This creates an environment where the focus is on teaming for the best ideas and outcomes.
  3. Everyone is in customer service. Consistently delighting customers enables digital natives to keep ahead of their peers. Responsibility for the customer flows down from the c-suite and underpins many core capabilities across the organization (e.g. product management, data analytics, behavioral insights etc.).
  4. Feedback and learning. The digital native approach to risk is very different to traditional organizations. It isn’t expected that every idea or investment will work: digital natives are comfortable failing and failing fast. Employees are empowered through the design of their roles to take risks and this creates a culture of continual growth and learning.
  5. Connected team and workplace design. Digital natives make conscious decisions about how they align and connect team design with expected ways of working and the physical environment they work in. Collaboration, innovation and productivity are driven through aligned team design and workspace set-up. This joined-up employee experience in turn drives employee value proposition and impacts positively on talent attraction and retention, ultimately driving up employee engagement and productivity.

We look at each of the four key areas of organization design in turn.

Structure. We tested two expectations about the structure of digital native organizations:
  1. Digital natives have embedded agile structures as the dominant model in their organization design
  2. Digital natives have fewer layers and are structurally ‘flatter’ than traditional organizations

The reality is that very few digital natives have a scaled agile organizational model across large parts of their organization: it is generally used only in specific parts of the organization that are required to drive rapid iteration and evolution, for example, in product development. As digital natives have scaled and become more organizationally complex, they have become more hierarchical in structure. However, they have tempered the common downsides of hierarchy (such as slower pace and centralized, consensus-based decision-making) by establishing strong cultural norms that empower teams to make data-driven decisions, minimize silo effects and maximize impact. As a result, digital natives have retained their distinctive culture and velocity as they have grown, while balancing this with the clarity and stability of hierarchy.

For traditional organizations, introducing formal agile structures into their organizational structure at scale is therefore not necessarily the ‘silver bullet’ to driving the kind of culture that they seek. Instead, they need to work out which parts of the organization would benefit from working in a more adaptable and dynamic way, and address this through multiple cultural changes rather than relying on structure alone. They also need to retain the benefits of structural stability, role clarity and simplicity that are required of a large organization under the scrutiny of regulators and investors.

Key finding: Structures are flatter and more agile – but enabled through culture, not structure.

Roles: We tested two expectations about key roles in digital natives:

  1. Accountability for innovation, product and emerging technologies is elevated to the c-suite
  2. New formal roles emerge in digital natives as they grow and protect brand capital

Unlike more traditional organizations, digital native organizations rarely have a chief innovation officer and associated function. Innovation is seen as an intrinsic part of everyone’s role, not centralized in a function or the accountability of an individual leader. It’s more important that everyone in the organization knows how they contribute to impact and outcomes, so the organization brings the full suite of its capabilities to innovate at pace. They achieve this by being customer- and product-led, using enterprise technology as an enabler and empowering all employees to innovate by design.

Having a customer or a design/product voice at the c-suite is therefore more critical than a dedicated innovation role. Almost all digital natives have a leader and function heading up product development, with chief product officers taking end to end accountability for the customer experience and typically product investment. Similarly for technology, with chief technical officers taking accountability for efficient provision of technology platforms and enablers, and embedding emerging technologies and data into business processes and products.

Digital natives have cleverly identified under-served markets and moved quickly to design solutions that are customer-centric and technology-enabled. Many of these markets are unregulated or under-regulated. For most digital natives, their valuations and ability to attract capital are heavily reliant on their intangible assets like their strong brand, and investor expectations of successful future products and services. This means the risk of regulatory action or adverse community sentiment becomes significant as they grow. These factors have led to the creation of new c-suite roles designed to address risks such as trust, social impact, public policy, privacy and employee experience. These roles have a direct role in maintaining public and consumer trust and therefore have a real impact on enterprise valuation and in some cases even license to operate.

Key finding: Chief innovators need not apply – but trust-makers and influencers are welcome. Product management needs to have end-to-end responsibility for return on investment and needs to commission technology as an enabler.

Capabilities: We tested the organizational capabilities that digital natives draw upon to consistently adapt and deliver value to customers at pace:

  1. They have the capability to use cross-functional teams that are customer-focused, use agile widely, are highly skilled, and are highly motivated by setting audacious goals aligned to a meaningful purpose
  2. They take a different approach to risk and measurement of success, taking smaller, incremental risks and being more open to learning from failure, so they can make decisions on whether to pivot or persevere accordingly
  3. Customer-centricity is deeply embedded in culture rather than falling to specific functions, but is enabled through investment in specific customer capabilities
  4. They scale capability rapidly by either buying or building capability

By setting audacious goals aligned to their organizational purpose, digital natives direct the skills of their workforce and engage cross-functional teams around a common objective. Digital natives apply agile methods and processes extensively to achieve their objectives and these form an engrained part of the language and culture – indeed they never really knew any other delivery paradigm. Digital natives therefore develop agile capabilities and formal roles (e.g. in their product development functions) enabling them to quickly develop minimum viable products and introduce them to market. They hire for mindset over skillset, employing people who will fit well with their culture and be motivated by the company’s purpose. They undoubtedly attract and hire capable people with all the right skills – but what matters and drives value most is mindset.

Supporting and enabling innovation and agility demands that digital natives have the capability to take risk in an effective way. This is more than a formal risk management or assurance process. It extends to the way they think about and plan for risk-taking in their day-to-day activities (e.g. in assessing backlogs and prioritizing activity). Digital natives build a culture where it’s ok that not every investment will pay off, and where failures are just as valuable as successes. Most important is the ability to fail fast; not only are lessons learned quickly and fed back, but typically the financial losses are lower.

Digital natives have a reputation for their customer centricity. They have built capabilities in data analytics and behavioral insight, which feed into product development capabilities. They don’t just know what their customers want now, they anticipate their needs through market and customer insight.

Digital natives have used a range of methods to scale their businesses, including building and entering into joint ventures. However, acquisition is the dominant growth mechanism, buying up successful scaled start-ups and bolting them on to invest in their growth. This is supported by investors’ growth expectations and enabled by substantial cash reserves. Usually, it is the intellectual property, brand and customer base that the digital native is buying. Digital natives therefore seek to integrate and exploit customer data before they integrate their workforces.

Key finding: A strong, resonant purpose; agile, customer-focused mindset; and ability to make calculated experiments and continuously learn is what keeps investors, customers and employees coming back for more.

Resources: We tested two expectations about how digital natives invest resources to get the best out of their people:

  1. Digital natives remove barriers to productivity and enable creativity by aligning physical and digital environments with culture and ways of working.
  2. Digital natives emphasize employee ownership of personal development.

Digital natives drive employee productivity and business performance by investing in their physical work environment and facilities. These facilities facilitate collaboration and enable agility and innovation. We’re not just talking table football and bean bags. Design choices and investments made in the layout, look and feel of the working environment connect employees directly with the company’s intended ways of working and ultimately to their purpose.

Ways of working, employee experience and culture – and ultimately, business performance – can be influenced positively through the design of the physical environment. However, implementation is as important as effective design to reap the benefits. For example, collaboration spaces tend to remain un-used when workers have little incentive or the local leadership needed for them to leave their desks. It is therefore important to think about the other ways in which new behaviours will be supported.

Digital natives have fostered a culture of self-directed and peer learning, with employees expected and empowered to own and drive their careers. This includes flexible career paths and a greater focus on roles rather than capabilities, access to a wide catalogue of training and development options, and an outcome-based approach to compensation. This fits within and supports a wider strategic workforce plan, which lays out which skills and resources will be needed for the future, when and where.

However, as they have scaled and have been required to meet a broader range of stakeholder and investor expectations, they have also invested in a more programmatic approach to talent development, for example, investing in leaders and establishing career paths for support functions required by a large listed company. Individually-motivated and self-directed learning has therefore become augmented and balanced with clearer career paths and more structured learning for critical capabilities.

Key finding: Investing in productivity and the workplace needs to be done carefully as part of a wider cultural change and talent development programme. Enabling people to be productive and cross-functionally collaborative is more than just providing table tennis and smoothie bars.

Not every company wants or needs to be like a digital native. However, companies are becoming increasingly more “digital.” By learning and applying the organization design approaches adopted by the digital natives, companies can accelerate their transition to the strategic capabilities and culture they need to compete successfully in a digitally-disrupted world.

Yes, there is much we can learn from the way digital natives use organization design to enable the outcomes they’re known for in the digital age. But just copying agile structures, dismantling hierarchy and buying football tables won’t enable those same outcomes for more traditional organizations. The starting point must be defining what capabilities and aspects of culture are most important, such as improving adaptability and flexibility, increasing the pace of decision making, creating a stronger culture of innovation, etc. Only when this is really understood, can the right organization design lessons be learned from the digital natives.

Summary

In the transformative age, digital native organizations are thriving. Many established organizations look to model digital native organizational design structures in order to discover the secrets of their success. Typically these efforts include adopting flatter and more agile structures, however, corporate culture plays a crucial role in enabling true success.  

About this article

By Matt Watt

EY Global Organization and Workforce Transformation Co-Leader and Design Leader

Partner at Ernst & Young LLP, leading globally for EY on aligning organizational models and organization design to achieve strategic intent. Champion for workforce inclusion and well-being.

Related topics Workforce Corporate culture