GE has talked of its ambitions for digital transformation for years.

Yet the cloud of negative news surrounding the company these days stands in stark contrast to this grand vision. GE has hit a rough patch in the past few months after missing earnings. And John Flannery, the new CEO, has indicated a new set of priorities for the 100-plus-year-old industrial giant. Does this mean that the efforts of GE Digital, the business unit in GE responsible for digital transformation, have failed?

Yes, unfortunately, it does.

I have followed GE's transformation efforts for many years and through various conversations with former GE employees. What follows is my analysis of why GE Digital hasn't transformed GE. But, first, some background.

Behind the curtain.

GE's digital transformation efforts have been ongoing for many years, dating back to 2013 with references to Predix, which GE intended to be its software platform for the industrial internet.

Then, one year later, in 2014, GE released a press release that said it was generating more than $1 billion in revenue from productivity solutions, highlighting Predix.

In 2015, GE announced the creation of a new business unit, GE Digital with a CEO, Bill Ruh, who was previously the VP of GE Software. 

And, finally, in 2016, reports came out that GE Digital had more than 1,500 employees in its San Ramon office in California.

Publicly, things looked very good at GE Digital.

But internally, the picture was less rosy. There were a few factors behind the scenes that meant the public picture GE was painting around its digital transformation didn't match the internal reality.

  1. Despite its grand aims, in practice GE Software was created as an internal development shop. GE has a series of business units, such as GE Aviation (jet engines), GE Transportation (railroads), GE Power (wind turbines), and others. These business units all had IT development needs. So they used the resources from GE Software to implement "innovation." The innovation that was invested in was technology and IT for each business unit, as primarily determined by the CEO and executives of those units. It was less about digital transformation and more like digital enablement. Much of the revenue GE Software was generating came from billing other GE business units, not external customers.
  2. GE Digital was created as a separate business unit in an effort to give GE Software more autonomy. The goal was to make the new business unit less of an internal development shop and to be able to invest more in building out its intellectual property like Predix.
  3. Yet at the same time, GE Digital was given a P&L and had to make quarterly commitments on performance. The revenue was tied to the work it was doing with internal GE business units and one-off partnerships with outside software companies. So when Predix integrated with a new partner, the focus was usually on generating short-term revenue and not long-term value to GE's end customers. GE talked of making Predix a true development platform for third-party developers. But in practice almost all the software being built around Predix was from GE's own business units or paid partners.
  4. GE Digital started selling its services to outside industrial companies, offering to help them on their own digital transformation journeys. GE Digital also became a consulting firm. Returns on these efforts were reportedly mixed.  

Unfortunately, this set of circumstances is inimical to bringing about true digital transformation, especially in a company the size of GE. There are definitely some significant improvements that were created out of GE Software and GE Digital. However, there were no game-changing, multibillion-dollar innovations. These were incremental improvements making GE slightly more competitive or innovative in its industry.

GE Software and Digital were set up for failure.

True digital transformation is about rethinking your current business model for the 21st century. The process is not just about adding technology to the existing model. Most companies do the latter, because doing the former is extremely difficult.

Even more challenging, true digital transformation will almost always fail if executed from within the organization. Why? Because the change is so disruptive that the existing organization chokes it off.

For GE Digital to have succeeded, it needed to be separate from GE. Making GE Digital its own business unit was a step in the right direction, but it also inherited the roles and responsibilities of GE Software. Digital transformation initiatives don't need thousands of people. They need a small team with very little time and very little money. Even worse, GE Digital was saddled with a quarterly P&L, which oriented its business around short-term revenue growth rather than long-term strategic objectives. This setup is the exact opposite of what digital transformation initiatives need to thrive.

Large businesses often struggle with setting up these initiatives correctly because it runs contrary to how they structure sustaining innovations. For another example of this failing approach to digital transformation, see Walmart's initial Walmart.com Marketplace.

Focus is key.

Lastly, digital transformation initiatives need to start small. Too often they try to take on the task of changing a whole business all at once. Trying to boil the ocean, especially within such a large organization, is a prescription for failure.

With GE Digital, it was working for almost all of the business units of GE at once. Was it going to transform each and every one of those? No way.

Digital transformation starts with one industry and one business unit, executes ruthlessly, gets traction, and then uses that momentum to spread to other divisions.

It's important to start small with user acquisition as well. Instead of doing large partnerships with well-established businesses, a new initiative needs to find a value proposition that appeals to small players that are fragmented and bound to grow over time. You need to find partners and customers that believe in your new value proposition and who won't be attracted by your brand name alone.

What's next for GE?

A lot of credit is owed to the hard-working team members at GE who had the guts to try something new. Unfortunately, except for a few members of executive leadership, very few of them had the power to influence the setup of GE Digital to make it a success story for digital transformation.

So what comes next? While GE may be scaling back its digital transformation ambitions under its new CEO, there's no reason it can't still be successful. However, like Walmart, GE needs to structure its digital business correctly.

A platform business could gain a lot of traction in two particular areas: health care and the smart factory. GE already has control over the data running its hardware and software in these industries. Opening up that data to third-party app developers could create a lot of value for their end customers.

For these initiatives to succeed, GE Digital will need to be unchained from its current structure. Shackled to a quarterly P&L, it will continue to be unable to make the kind of long-term investments and strategic decisions needed to capitalize on these opportunities.

Published on: Jan 8, 2018