The logistics industry is frequently described as “antiquated” and with the rise of the “digital transformation” buzzword, companies are scampering to show their boards and investors it is a key focus. The problem is you can’t go out and get digital pixie dust that you can pepper your organization with and expect to be ready for Industry 4.0, consultants notwithstanding.
It’s important to understand that digital transformation is hard — and it's not hard because of the “digital” part, it’s hard because of the “transformation” part. One needs to get to what I like to call Mindset 4.0 before you can get to Industry 4.0.
First, companies must recognize that doing what has worked for them in the past can actually be counterproductive. A senior executive at a non-vessel operating common carrier (NVO) with offices all over the world proudly announced at a digital strategy meeting that “we make money because our customers are stupid [and] don’t do their homework on pricing, and our digital offering needs to be built with that in mind.”
To paraphrase, transform digitally, but maintain opaqueness around pricing are two inconsistent goals that are virtually impossible to reconcile. That spells digital transformation failure right out of the gate. The use of digital technology to echo old, archaic processes is not digital transformation. It may be “digital,” but it’s not “transformation” by any means. Indeed, digital transformation is not a panacea for legacy thinking nor is it just a sexier name for “IT.” Digital transformation is about embracing an ethos that centers around transparency and customer experience. It’s a broad, strategic initiative that crosses organizational silos.
Second, culture and talent are more critical than ever in any digital transformation initiative. Aside from the household names, even very large companies in the logistics space can be quite hierarchical. That approach works when a company is scaling up using a very clear playbook. But today’s world is more sophisticated. You don’t scale up with people following orders — you scale up with good ideas and people that look at problems in different ways.
Often, that involves listening to what some of the younger, more junior people on the ground are saying. That also means hiring talent from outside the industry. Ryan Petersen, the founder of Flexport, wasn’t from the freight forwarding industry. He has seen the scale of customer problems and saw how far behind the industry was in digital adoption compared with other sectors.
Digital talent needs autonomy
It’s also important that digital talent be given autonomy; they need the ability and the confidence to make calculated mistakes and rectify them. Finally, there is the cost of talent. Old school thinking is extremely price sensitive. But it’s not price; it’s quality and creativity that counts. Instagram had 13 people when they were acquired for a billion dollars. That billion-dollar price tag that everyone laughed at was a steal — today, Instagram is worth over a $100 billion. This underpins Silicon Valley’s obsession with 10x engineers with what industry outsiders consider to be outrageous salaries. Even at five times the price, they are the cheapest engineers you can find. If Instagram emerged from the Kodak company, they’d be figuring out how to use the tech to sell more cameras and would be relegated to a “support” business.
Third, senior management should not forget that it is good to be paranoid. Andy Grove’s bestselling book, “Only the Paranoid Survive” comes to mind. One logistics expert told me that freight forwarders will never go the way of travel agents because freight can’t move itself. Besides, it is a “complex business and freight forwarders provide real value.” Freight not being able to move itself is a distinction without a difference.
Let’s not forget there have been other “complex” businesses that have been disrupted. TV companies felt they’d never get disrupted because of their government-mandated monopolies, hotel chains never thought they’d get disrupted because they provide high-quality service, and apparel retailers never thought they’d get disrupted because people want to physically try on clothes in stores. Yet, the company derisively called “cat video” company — YouTube — is now worth over $100 billion, the “airbed rental company” Airbnb has a greater share of US consumer spend than Hilton, and the online apparel market is expected to exceed $872 billion in 2023. If there is one thing “digital” does well, it’s that it unravels complexity.
That said, there are no easy answers — if you are publicly listed you need to have the courage to make that change, and that change has a financial impact. Courage means willingness to take a short-term hit to prepare for the future. But a quarterly result-driven cycle doesn’t work. Public companies can’t afford to do that because they have too much to lose, and their stock price would take a beating with lower earnings — unless, of course, investor relations can sell the digital-driven growth story. This is where the newer digital freight forwarders are different — they have no such encumbrances. They do, however, face challenges in scaling up their ability to assist customers when shipments go awry, as that requires industry expertise that an algorithm can’t provide.
Digital startups apply the same techniques that drove the meteoric rise of the likes of Uber and Airbnb to the freight business — and they are doing so without the burden of a legacy business, which makes them a significant threat to the incumbents. This is essentially what Clayton Christensen, a business consultant, calls the innovator’s dilemma.
The most viable way for large logistics companies to adapt to the new world and resolve the innovator's dilemma is by spinning off a smaller, separate organization that doesn’t have the burden of legacy systems, people, and processes and is able to put the customer above all else. Perhaps most importantly, they can operate autonomously. This new organization doesn’t need to worry about how their success might frustrate another department — they aren’t bound by juggling a bunch of unwieldy trade-offs. Instead, they report to one master — the market and the customers within it. Once the spin-off has reached critical mass, it can either continue to operate independently or be rolled back into the larger organization and seed a mindset transformation that permeates the parent company.
Companies that fail to recognize that “digital transformation” is about transforming an entire company from the inside out — its processes, its people, and its culture — will find themselves on the wrong side of disruption.
Carlos Nicholas Fernandes is an entrepreneur, investor, and former adjunct professor who has taught Disruptive Innovation. He has advised numerous organizations on digital transformation, including the logistics company ECU Worldwide as its Chief Digital Officer. He can be reached at firstname.lastname@example.org.