Digital Transformation - Economic, Social and Cultural Considerations

We all remember the study of Economics and have “fond” memories of our microeconomics and macroeconomics classes; for some of us this was our first introduction to the question of scale. One of the first strictures impressed upon us was “Do not make decisions based on sunk cost.” Then we join the real world and look around - chasing sunk cost is athletic exercise. Sunk cost does not have to be monetary, it could be relationships or other non-tangible assets. It describes any situation where we are pursuing a path based on past investment of any sort. Being aware of sunk costs is not inherently a bad thing - if you are engaging in an ongoing implementation that is generating progress, great!

The alternative could also be the case, we also need to have check points and governance on initiatives and be willing to reverse or stop when required. This is not always easy; sub-optimal activities continue on for all sorts of reasons - funds invested, reluctance to fail, sentimental attachment, charismatic leadership, misunderstanding of the actual situation, optics, or simply staying afloat for as long as possible. If a platform is being assembled, convergence of effort onto a common roadmap is essential. Points of divergence need to be rectified as soon as possible to avoid our ships from going off course. The RMS Titanic of last century has many analogies that can be made to our ambitions in the digital space today. In building a platform, we are essentially building our own “Titanic.” A pioneering project where a lot of considerations come together. The Titanic was a victim of “event cascade” - materials issues, sub-optimal decisions made by crew, oversight issues, math and physics realities, and environmental factors affecting safety all put it on a dangerous course. In digital, holistic governance is required to ensure that individual project components come together as a whole, and that the whole is truly greater than the sum if its parts.

When it comes to digital transformation, and the progress made so far, the traditional financial services sector has been slow. The world is changing, and we are not changing fast enough. Slowly augmenting existing investments in digital and upgrading our websites is not transformation. At least, it is not transformation in the sense that we will need it - we must be shooting upwards as a rocket, losing our boosters and preparing to navigate a new environment. Platforms need to be intuitive and useable (which is table stakes in digital), but also deliver on the promise of connectivity - we need to be where our members are. We hurdle as a rocket for the purpose of establishing this expanse.

Connectivity is not just technical. While it might sprout from the domain of information technology, it is fundamentally driving business in a new way. Businesses, their consumers, and their venders interact in an economy via multiple channels and providers - this impacts our overall operating environment. There is risk in not adopting soon enough, and this should be formally acknowledged. And it is not just our environment, many retail situations are shifting - Starbucks for example, is “transforming,” closing locations and focussing on being where their customer is. They have realized that the goal may not be to own the customer journey completely, but be part of it, where their customers are. Do we want to be where our customers and members are or delivering traditionally via digital? There is a critical distinction.

The tension is growing; let us dip back into the study of economics. Economics is defined as the social science that studies how people interact with value; in particular the production, distribution and consumption of goods and services.” Value is “the regard that something is held to deserve; the importance, worth or usefulness of something.” Economics is good at presenting information two dimensionally, GDP, Supply vs. Demand, etc. Of course, much complex work occurs outside of what is surfaced. Economics presupposes a free market for the most part to facilitate cooperation, and the exchange of value.

To be clear, cooperation is being spoken of here, not collaboration. John Maynard Keynes provocatively wrote that “Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.” Strong words, but words a demand side economist would use, free markets work but need to be tempered from their perspective, they may not facilitate collaboration on their own. The regulation of platforms that we are beginning to hear about reflects such tempering.

Going back beyond Keynes we have economic and social theorists such as Thorstein Veblen and Karl Marx. They were not just provocative, but heretics. Heretics should not be dismissed however, sometimes they have something to say from the outside, moving us from a 2D perspective to 3D. Veblen's thinking for example has been classified as "hyper-creative" and "troubling" at the same time.

Thorstein Veblen is best known for his book The Theory of the Leisure Class published in 1899. Often referenced yet not often read, Veblen coined terms like conspicuous consumption and pecuniary emulation; he focussed not only on economics, but also the associated social and cultural relationship. What is interesting is a concept coined as the "Veblen Dichtomy.” For Veblen (founding father of the Institutional Economics school), institutions define how technology is deployed. Veblen proposed a ceremonial vs. instrumental dichotomy to describe two ways to think about this.

Societies and entities need tools and skills to support themselves. In looking at these tools, the ceremonial side of the dichotomy represents “tribal legend,” and is rooted in the past and the way things have traditionally been done. The instrumental, or technological side of the dichotomy represents the future and the ability to augment value in new and innovative ways. Veblen would argue that historical norms create friction as we navigate moving from the past/present into to the future; our ceremonial situation (that potentially characterizes traditional finance) is imbued with rewards, power, opinions and attitudes that have flown with time. Innovators and digital challengers represent the instrumental side of Veblen’s dichotomy - they are pragmatic and look to deploy technology in a manner that aggregates value and delivers this in a new way to their customers. They are just as incentivized, but in a different way.

With respect to digital transformation we have a fire raging. When in this situation, the obvious response is to pull the fire alarm as soon as possible and get the firetruck on the way. The question is, are we perhaps lacking the impetus to move whole heartedly with a sense of urgency and defined purpose? Economics poses questions - the platformization of finance is underway, when does it make sense to make the investments required to make changes? When does it make sense to abandon sunk costs and consider something new?

But could it also be the case that “tribal legends” represented by the ceremonial side of Veblen’s dichotomy are shaping our current working environment and response or lack of response to digital thereof as financial institutions? Veblen’s theory raises the question as to whether the needs of the “ceremonial” side of the house are aligned to needs of of the "instrumental?" Do we have social and cultural barriers limiting progress? These questions must be considered fully before we are able to make investment decisions with the appropriate perspective, precision, and depth. The answer to these questions will also indicate why the fire alarm is not ringing across our system with the loudest possible blare.