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Risk 2.0

Risk 2.0 A Workbook for the Post-Digital Age


Contents Executive Summary………....……....……....…….....page 1 Workshop Agenda……………………………….…...page 14 Detailed Curriculum…………....……....……….....…page 15 Research Overview…………………………......……page 134

The last decade has seen the emergence of four revolutionary technologies: social media, mobile devices, cloud computing, and big data. These developments have made it possible for upstart companies, commonly known as big-bang disrupters, to unexpectedly seize market share and even dominance from current industry leaders. This creates a new category of strategic risk. This workbook is designed to help Deloitte and its partners mitigate that risk and prosper.

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How did this come to be and what are the strategic risks that are emerging as a consequence? To answer this important question, we have developed a nine-module curriculum to help Deloitte and its clients better understand the risks they face today - particularly how they apply. The curriculum starts with an overview (module 1) of the key digital technologies and how they are changing the nature of risks and value for organizations:

1 2 3 4 Social

Mobile

Cloud

social media to communicate

phones and smart devices to

store personal and financial data

1.5 billion people are using and collaborate.

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5 billion people use mobile transact and interact.

Hundreds of millions of people there.

Big Data

In addition, the first module introduces what we call Balance Sheet 2.0 and examines how the systemic underreporting of new sources of value results in a misallocation of capital, as documented by IIRC’s research. The curriculum follows this initial module with a detailed look at the effect of risk 2.0 on strategy (module 2), operations (module 3), finance (module 4), technology (module 5), and compliance (module 6). It ends with two modules focused on how these technologies apply to business functions in four different industries – healthcare, financial services, retail, and technology. Module 9 is a request for feedback.

2.5 Quintillion bytes of new data is created every day.

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Module 2 Strategy: You Are What You Invest In

Module 3 Finance: From Unmeasured to Measured

All strategic decisions and long-range planning must take into the account the power, possibilities, and risks of the four key technologies. Given this fact, today’s strategists must think like investors and consider all the sources of capital sources available to them for investment.

This section is all about measuring what matters, or, in our parlance, tracking all the sources of capital, both tangible and intangible. Intangibles must be measured with an eye toward shifting from retroactive financial data to prospective big data, enlarging and redefining the role of chief financial officers. Further, the U.S. Securities and Exchange Commission’s newest ruling about the use of social media to communicate results opens a new and uncertain realm for all CFOs.

The bottom line: Consider both tangible and intangible sources of value, and allocate assets accordingly. It is important, this module argues, to consider these value-creating allocations as investments rather than expenses. Research: According to Ocean Tomo, 81 percent of the market value of the S&P 500 today consists of intangibles, while physical and financial capital comes to less than a fifth. That’s up from 17 percent in 1975.

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The bottom line: The technology-enabled CFO and the emergence of new forms of capital are the cornerstones of Finance 2.0. Research: A Massachusetts Institute of Technology/SAS survey showed that 67 percent of 2,500 respondents in two dozen industries reported that big-data analytics gave them a competitive advantage.

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Module 4 Operations: From Inside to Outside Processes have traditionally been performed and redesigned - that is, reengineered within an organization’s boundaries. No more. Today, everyone is a potential collaborator and co-creator. The bottom line: The work must get done - whatever it takes. What is the best approach? Shift process emphasis from inside to outside and employ social, mobile, cloud, and big-data technologies. Research: The McKinsey Global Institute reports that, “. . . businesses have only just begun to understand how to create value with these new [social] tools . . . which we find is potentially on a transformative scale (i.e., more than $1 trillion annually) . . . Most importantly, we find that social technologies . . . have the potential to raise the productivity of the high-skill knowledge workers that are critical to performance and growth in the twenty-first century by 20 to 25 percent.”

Module 5 Technology: From Physical to Digital Leaders must ensure that their organizations are exploiting the four technologies to their maximum benefit. The economic rewards of becoming a digital company are increasingly clear. Further, today’s technologies are providing unprecedented access to new sources of value. Leading companies are establishing mechanisms for using social and mobile technologies in order to mine the big data for the information most relevant to an organization’s needs. The bottom line: Today, every business is a digital business. Research: The McKinsey Global Institute reports that, “Digital data is now everywhere - in every sector, in every economy, in every organization. . . . The ability to store, aggregate, and combine data and then use the results to perform deep analyses has become ever more accessible . . . For less than $600, an individual can purchase a disk drive with the capacity to store all of the world’s music.” Business Insider reports that in just five years, there will be more Internet-connected mobile devices than people on the planet.

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Module 6 Compliance and Regulations: From Government to Network

Module 7 Industry Case Studies: Healthcare and Financial Services

Companies must still comply with the law, but they must also comply with the demands of the key technologies. The SEC’s rulings about using social media in investor communications and the recent $200-billion decline in the market due to a hacked Associated Press Twitter account both point to a dramatic change when it comes to compliance and regulations. Now, compliance is less about internal and legal activities and more about a world in which investors are mining social and mobile data every day - from consumer and employee Tweets, Facebook likes, and blogs – to improve their performance.

This module is the first of two that translate risk 2.0 theories into practice. It focuses on two industries: healthcare and financial services.

The bottom line: We need a broader view of compliance that incorporates the needs of a company’s networks in addition to government and leadership dictates.

This module shows, through examples and exercises, how risk 2.0 and its attendant social, mobile, and cloud technologies along with the new sources of value (capital) are affecting healthcare and financial services (and sometimes the intersection between the two)

Research: From the International Integrated Reporting Council: “The capitals are stores of value that, in one form or another, become inputs to an organization’s business model. . . . For example, an organization’s financial capital is increased when it makes a profit, and the quality of its human capital is improved when employees become better trained. “The overall stock of capitals is not fixed over time. There is a constant flow between and within the capitals . . . For example, where an organization improves its human capital through employee training, the related training costs reduce its financial capital. The effect is that financial capital has been transformed into human capital.”

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Module 8 Industry Case Studies: Retail and Technology

Module 9 Next Steps: Deloitte’s Vital Role

This module continues the interplay between examples and discusses and focuses on retail and technology, and, sometimes, the intersection between the two.

Now we have reached what is, for us, the heart of the matter: How can Deloitte help its clients adjust to the new world of risk 2.0? We use a model well known to Deloitte partners to identify new product and service offerings.

The idea behind this module is to generate ideas - ideas that Deloitte partners and consultants can use with their clients to make the most of risk 2.0.

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Our curriculum closes with a request for feedback - delivered, of course, using today’s technologies to continue the conversation and capture the interactions and insights of the partners and Deloitte’s clients.

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Workshop Agenda

Detailed Curriculum Risk 2.0: The Workbook

Day 1

Day 2

Day 3

3:30-5:30

8:30 AM – 10:00 AM

8:30 AM – 10:00 AM

Module 1: Introduction: From Risk 1.0 to Risk 2.0

Module 2, Strategy: You Are What You Invest In

Module 6, Compliance and Regulations: From Government to Network

Executive Summary

Overview of risk 2.0, the four key technologies (social, mobile, cloud and big data) and their impact on five critical business functions (strategy, operations, technology, finance, and compliance)

Exercise: Map existing investments versus best practices and explore new business models.

Exercise: Understand the consequences of self- and social governance.

Module 1, Introduction: From Risk 1.0 to Risk 2.0.

10:00 -10:30 AM Break

10:00 -10:30 AM Break

Module 3, Finance: From Unmeasured to Measured

Module 7, Industry Case Studies: Healthcare and Financial Services

Exercise: Measure and report for success with balance sheet 2.0.

Lunch 12:00 – 1:00 PM

Dinner

Lunch 12:00 – 1:00 PM 1:00 PM –2:30PM Module 4, Operations: From Inside to Outside Exercise: Examine each business process 2:30 -3:00 PM Break Module 5, Technology: From Physical to Digital

1:00 PM – 2:30 PM Module 8, Industry Case Studies: Retail and Technology 2:30-3:00 PM Break

Module 2, Strategy: You Are What You Invest In Module 3, Finance: From Unmeasured to Measured Module 4, Operations: From Inside to Outside Module 5, Technology: From Physical to Digital Module 6, Compliance and Regulations: From Government to Network Module 7, Industry Case Studies: Healthcare and Financial Services

Module 9, Next Steps:

Module 8, Industry Case Studies: Retail and Technology

Deloitte’s Vital Role

Module 9, Next Steps: Deloitte’s Vital Role

A discussion with partners to gain feedback and discuss possible new services.

Conclusion: We Want Your Feedback

Exercise: Identify new points of risk and reward, with a focus on digital business creation. 12 Risk 2.0

Dinner

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Executive Summary Peter Drucker once observed that “every organization has to prepare for the abandonment of everything it does.” He was right then. He’s even more right now. And “everything” means exactly that. Thanks to social, mobile, cloud, and big-data technologies the old top-down, command-and-control style of management is now defunct. Today’s organizations need a new, far more democratic style of leadership that focuses on intangible sources of value and the technologies that enable them.

According to a recent report by the International Integrated Reporting Council (IIRC):

The common is that today’s model . . . overemphasizes short-term financial data and neglects information that gets at the true sources of sustainable value creation – [assets] like innovation, brand equity, customer loyalty, and key stakeholder relationships. The consequence of the systemic failure of this lopsided model [of management and reporting] is that companies focus on short-term financial performance - because that is what they believe investors are interested in - to the detriment of long-term value creation. Investors, meanwhile, compensate for the lack of knowledge about issues central to longer-term value by pricing in a risk premium. This can result in market valuations that do not reflect the fundamental performance or prospects of the business, leading to a misallocation of capital and reduced visibility for investors, reinforcing short-term decision-making. And it is business that pays the price through more expensive capital, while furthering a flawed model of capitalism.

A little historical context: In the Industrial Age, commerce moved away from agriculture and measured physical output, asset utilization, and the value of hard assets. In the Information Age, businesses concentrated on intellectual property and digitizing content and measured creative output, research and development, and the value of ideas. Today, businesses succeed by focusing on social amd mobile networks and big data and measure network size, their crowdsourcing capabilities, and the value of intangibles.

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1 2 3 4 The purpose of this curriculum is to help Deloitte understand:

How social, mobile, cloud, and big-data technologies are changing the business landscape.

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A survey of the new sources of value that these technologies can tap.

How social, mobile, cloud, and big-data technologies apply to five key business functions: strategy, finance, operations, technology, and compliance.

What services can Deloitte deliver and how can it best deliver them today.

The economic case:

Research from the McKinsey Global Institute projects that social technology will influence fully one third of purchases across a wide range of industries. What does that mean in dollar figures? Let’s count the ways (and the revenue):

In electronics, the potential for social-technologyinfluenced spending is

$83 billion.

In the furniture industry, it’s

$129 billion.

In the clothing industry, it’s

$223 billion.

In the grocery industry, it’s

$179 billion.

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The research also highlights a series of industries where leaders are making savvy social investments in particular areas of their companies and enjoying substantial returns. Among them: Food and beverage processing, particularly when it comes to marketing.

Consumer products, with an emphasis on marketing, research and development, and customer service.

Transportation, which is netting good returns on social-technology investment in the customer-service function.

Telecommunications, especially when it comes to customer service.

Insurance, particularly in terms of customer-service investments.

Module 1 Introduction: From Risk 1.0 to Risk 2.0 Premise In 1975, the ratio of physical to intangible assets was roughly 80/20, making the average company’s market value only 20 percent greater than book value. Until the mid-1970s, physical and financial assets (e.g., cash; inventory, property, plant, and equipment) were prevalent, leading companies to be valued for what they owned and reported on their balance sheets. From a governance and risk perspective, the balance sheet provided a good guideline for asset protection. In the last four decades, companies’ ratio of physical to intangible assets has essentially been reversed, with the average companies’ market value at over 80 percent greater than book value.

Media and entertainment, with a social focus on marketing.

Software, publishing, and Internet services, as an industry, is seeing solid returns when it invests in research and development and customer service.

The list, and its attendant opportunities, goes on. 18 Risk 2.0

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Promise

We begin by setting the context, describing and detailing the forces that are propelling risk 2.0, namely, social, mobile, and big-data technologies that enable the market-changing companies that have come to be known as big-bang disrupters. We then show how the new sources of value are changing the very nature of organizations and industries. Throughout this module, and in all that follow, are a number of thought-provoking exercises showing how risk 2.0 can be employed by Deloitte’s consultants and clients to dramatically boost their clients’ business performance and reduce the risks they face.

Context

How has the world changed?

Consider this: More than 1 billion people are connected via social media. That means crowds of people now have the capability to create or destroy companies, even governments, as we saw in the Arab Spring.

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Research

Research from the McKinsey Global Institute shows that there are six areas five function-specific and one that applies to an entire enterprise where the nature of value is changing due to the new technologies. They are:

Operations and distribution. Social technologies, say when used with a retailer’s staff, increase sources of data about demand, which improves the efficiency and agility of a company’s outbound processes.

Marketing and sales.

The research shows that social and other new technologies are effective tools for collecting insights about everything from brands, products, competitors, and customers. They are also an extremely efficient way to deliver a message to consumers.

Customer service.

McKinsey’s research demonstrates that social and other new technologies can largely replace call centers, allowing customers to literally help themselves - and contribute to an ever-growing knowledge bank.

Cross-enterprise advantages. Social, mobile,

cloud, and big-data technologies, the research shows, can spark marked performance improvements because they make communication more efficient, facilitate collaboration, and enable people to share insights and best practices.

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The evidence mounts The 2012 Fortune 500 Social CEO Index showed that: • Fewer than 30 percent of CEOs themselves use social media to connect to their constituents. • In a survey just five years ago, half of all employees said their companies had blocked access to Facebook. Some 5.3 billion people use mobile devices, such as smartphones and tablets. Our research shows that: • Only 37 percent of companies use mobile technology when it comes to communicating with their customers, and just 31 percent use it to improve business-to-employee interactions.

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Workbook Exercise

How can Deloitte help its clients understand the four key technologies and start to use them to create value via improved customer, employee, and investor relations? Use the space provided.

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A few more mind-opening facts: • Google processes 1 million gigabytes of data every day. That’s thousands of times the quantity of all the printed material in the Library of Congress. • The number of messages on Twitter now exceeds 400 million a day. • If all the digitally stored data in the world were printedin books, they would cover the United States in a layer fifty-two feet thick.

The 2.5 quintillion bytes of information being created every day are an enormous resource for every industry, from finance and healthcare to automobiles and telecommunications. But much of the data is simply lost. The Conference Board and the Rock Center for Corporate Governance at Stanford University found that: • 93 percent of corporate boards do not receive information gathered from these reams of data.

Workbook Exercise

How can you help your clients get and analyze the big data they need to make informed decisions that reduce risk and generate value throughout their organizations? Use the space provided.

But smart leaders can turn big data to their advantage. A Massachusetts Institute of Technology/SAS survey showed that: • 67 percent of 2,500 respondents in two dozen industries reported that big-data analytics gave them a competitive advantage.

What kind of technology would be required?

These innovators - whatever their size or business model - are leading the revolution.

What processes would have to change?

How would you explain the benefits of big data to current or prospective clients?

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Consequence This new reality means that companies must comply not just with laws and regulations (which, given the SEC ruling on social media, are changing quickly), but with the conventions of fast-moving markets and the requirements of socially-enabled networks. The technologies discussed previously enable big-bang disrupters. That term was coined by Larry Downes and Paul Nunes in the Harvard Business Review. Big-bang disrupters are giant killers of traditional business strategies, operations, finance, and back-office infrastructures. Big-bang disrupters wipe out entire industries, companies, and product lines. Such intrusions “don’t create dilemmas for innovators,” Downes and Nunes write, “they trigger disasters.”

Example: Serial disrupter Barry Diller, head of IAC/Interactive,

plans to upend the entertainment business. His Aereo start-up will use antenna farms to capture television broadcast signals that can be streamed on the Internet and viewed on whatever devices his customers wish, cutting out cable outlets altogether and paying no fees to the originators of the programs.

These innovators - whatever their size or business model - are leading the revolution.

Example: Consider the threat that Google maps and other

navigation applications for smartphones have posed to GPS makers, such as Garmin, Magellan, and TomTom. Not only are the apps less expensive - many are free - than stand-alone, single-function devices, they are better.

These innovators - whatever their size or business model - are leading the revolution.

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Workbook Exercise

How have Deloitte clients been affected by big-bang disrupters? Use the space provided.

Example: Wal-Mart is trying to co-opt big-bang disrupters by enlisting

people outside the organization to help it innovate. The retailer recently ran a crowdsourcing contest, offering distinctive new products a chance to “Get on the Shelf at Wal-Mart.” The competition drew more than 4,000 inventors, entrepreneurs, and small businesses from across the United States, and more than 1 million votes were cast. The winners: • HumanKind Water, a bottled water company that gives 100 percent of its net profits to help provide clean drinking water for underdeveloped communities worldwide, took first prize. • PlateTopper, a kitchen product that transforms dinner plates into airtight food-storage containers, came in second. • SnapIt Eyeglass Repair Kit, a screw kit to tighten loose glasses in thirty seconds, was third.

Have they created or avoided any? How could a better understanding of risk 2.0 help?

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All three products will be available on Wal-Mart.com, and HumanKind Water will also be on shelves in some Wal-Mart stores.

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Workbook Exercise

Are your clients victims or victors when it comes to tapping outside sources of innovation? Use the space provided.

1.

Three Features, Three Responses Three features give big-bang disrupters the power to change and destroy markets.

Lightning-fast R&D In Silicon Valley, engineers, programmers, designers, and product developers from companies of every size and type get together in what are known as hackathons, an exercise done for fun to figure out what kind of new products can be put together in just a few days.

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Workbook Exercise

What kind of hackathons could you devise to accelerate R&D in your clients’ organizations? Use the space provided.

Example: While a few start-ups have sprung from hackathons, the more usual outcomes are apps, video games, or individual features

(the Facebook “like” button was born in a hackathon).

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2. Low Cost

As social, mobile, cloud, and big-data technologies become less expensive to develop and distribute, innovators can test new applications at minimal risk to investors. And if an idea or application attracts enough users, everything needed to develop it – computer processing, software, data storage, and communications capacity – can be leased or purchased in real time.

Example: HighlightCam is an online service that lets its customers set up a webcam for any sort of personal use. The service automatically monitors

the video every hour and puts together a short reel of highlights that includes the most active parts. The entire video is stored for viewing for twenty-four hours. But an $8.99 premium lets a customer watch it any time over the next two weeks – and also provides an e-mail alert if movement caught by the camera exceeds a specified level.

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Workbook Exercise

How can you accelerate Deloitte’s clients’ decision-making process and reduce the risk investors face when it comes to green-lighting or red-lighting prototypes? Use the space provided.

3.

Two Kinds of Customers

What role could technology, particularly social technology, play?

The classic product-adoption bell curve, with its five distinct customer segments – innovators, early adopters, early majority, late majority, and laggards – is obsolete. Only two kinds of customers remain: trial users who regularly take part in product development and beta tests and everyone else. The curve has become a cliff. Big-bang disrupters also collapse the product life cycle, leaving just three stages:

• Development • Deployment • Replacement

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Why Risk Management 1.0 Doesn’t Work in the Face of Big-Bang Disrupters Companies can invoke governance 1.0 in the board room and among senior leaders to impede a disrupter’s march to profitability in the short-term by lowering prices or locking in customers with contracts. But, eventually, they must know when to look to a new form of socially-oriented strategy. (The revolution will be tweeted.) The time is now. “You have to prepare for immediate evacuation of current markets and be ready to get rid of once-valuable assets,” Downes and Nunes say.

Example: Amazon.com is challenging offline retailers all over the country with its PriceCheck mobile app, which lets

people compare prices - and discover that Amazon’s are usually the lowest. This, along with a $15 credit, threatens to turn offline retailers and their big-box stores into nothing but costly showrooms where customers can inspect goods that they then buy from Amazon.

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Workbook Exercise

The solution Deloitte might use to help Amazon’s offline rivals could be to help them develop a digital advantage of their own. If, for instance, Deloitte gave sales representatives real-time data on promotional incentives, inventory availability, and customer sales history, they could offer concierge-like services that would justify higher prices. What would it take to develop such a system?

For the victims of big-bang disrupters, countermoves must be quick and effective. As Downes and Nunes pointedly warn, “Once customers shift to the new technology, it’s too late for a graceful exit - at best, it’s time for a fire sale.”

Use the space provided.

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Workbook Exercise

What have your clients sold - or bought - at a fire sale? Use the space provided.

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What’s Next Strategy in the age of risk 2.0 is no longer just about a grand vision or a breakthrough product - it’s all about investing. The key is to invest in what matters. And to invest in what matters, you must see what matters - new, often intangible sources of value. This module will open your eyes.

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Module 2 Strategy: You Are What You Invest In

Workbook Exercise

Premise

Promise

In the services age, it was based on how many people the company employed and how to maximize their billable hours. Industries that flourished during this time included insurance, financial services, information technology, and telecommunications.

There’s a new and better way of conceiving and visualizing corporate strategy - as investment strategy and this module will be instrumental in bringing it to life. But it’s a broad concept of investment. The sum of an enterprise’s assets and investments are no longer solely comprised of property, plant, equipment, and money. Instead, they also include human, intellectual, customer, and brand resources – all of which comprise strategy in the age of risk 2.0.

In the industrial age, strategy was based on the size of a company’s plant. The key industries in this era were manufacturing, transportation, and energy. Perhaps the key example is the railroad empire built by Cornelius Vanderbilt in the late nineteenth century, which included the New York and Harlem railroad and the New York Central and Hudson River railroad.

Today, when it comes to strategy, leaders and managers must see themselves as investors and understand all sources of value. Recent research by the McKinsey Global Institute proves that investing in social technologies creates considerable value today. In retail banking, particularly when applied to sales and marketing, savvy investing yields a revenue increase between 4 and 7 percent. In the professional-services field, the research shows, similar investments in operations, distribution, and business support functions generates a boost in revenues between 8 and 11 percent.

This module offers fresh look at strategy: a way to visualize and thus maximize all the sources of value and a new way by which leaders need to think of themselves – as capital allocators.

intellectual

customer

physical

Leaders at every level must keep these six categories in mind as they decide how to allocate time, money, and energy. Some assets may need more attention and funding than others. As you assess each category and its performance, ask whether these assets are unfamiliar to your clients’ approach to strategic thinking? Use the space provided.

What would it take to change that?

Brand

human

financial

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Example: Eastman Kodak transformed photography more than a century ago, bringing picturetaking to the masses. But all those decades of film supremacy ended abruptly because Kodak’s executives invested in the wrong assets. And by the time they realized their mistake, it was too late.

Example: Suppose hard times prompt a com-

pany to lay off some of its highest-paid employees. What its leaders may have overlooked, or cavalierly dismissed to the company’s detriment, are the years of experience, knowledge, and connections those people made with customers and suppliers who may protest by taking their business elsewhere. Case in point: J.C. Penney. For the last ten years, the retailer had employed some 150,000 people in either a full- or part-time capacity. By February of 2013, the end of chief executive officer Ron Johnson’s first fiscal year

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with the company, that number had dropped to 116,000, largely driven by a move to give the company a more upscale image by distancing itself from the house brands that accounted for 50 percent of the chain’s revenues. Johnson was ousted weeks later, but the company, now under the leadership of Myron “Mike” Ullman faces not only sliding sales but a morale and talent deficit that will be difficult to overcome. Many of the laid-off employees were expert when it came to designing and selling the clothes that Penney customers wanted.

Investments in intellectual and physical assets grabbed and held all the attention at Kodak’s headquarters in Rochester, New York. Here’s why:

When digital photography came along, it was a major technological advancement, but the risk it presented to Kodak was the elimination of the cost constraint. Customers could take hundreds of pictures and save only the best. They could also print photos themselves, doing away with the processing cost and hassle of dropping off film and picking up photos. The Kodak Moment disappeared because the company failed to see its customers as assets and failed to alter its strategy by investing in them.

• Company leaders remained fixated on the film business while ignoring the fact that customers’ attitudes toward photos were changing. • Customers were used to spending a dollar or so on each click of the shutter, after film and processing expenses were factored in, and they seldom complained about the cost. • Nonprofessional shutterbugs shot sparingly, posing each subject and hoping to capture the perfect image - the cleverly advertised “Kodak Moment.”

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Workbook Exercise

What challenges do your clients face when it comes to investing in human, intellectual, customer, and brand assets? Use the space provided.

Example: Neville Isdell was enjoying his

third year of retirement when the Coca-Cola Company begged him to return. Coke had gone flat. • Between 1990 and 1997, annual net income grew by an average of 18 percent; thereafter, profit growth averaged just 4 percent.

Every company, every strategy, has an incumbent element. What could Deloitte partners and consultants do to reinvigorate and engage them?

How might social, mobile, and big-data technologies play a role?

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• The stock lost half its value in six years.

At the start of Isdell’s tenure, Coke was singlemindedly focused on carbonated beverages. The company was churning out low-cost concentrate and selling it at a considerable markup to bottlers. Then Isdell started traveling, spending his first three months as CEO talking with Coke employees, customers, and bottling-company executives. He was investing in people.

Here’s what Isdell heard: • “We’re arrogant.” • “Our brands are not performing anymore.” • “We don’t believe in management.” • “We’ve lost the will to win.”

• Two rounds of layoffs cut 6,000 people from the payroll. Four years later, Coke was chalking up record sales in more than 200 countries – and that in the recession year of 2008. But the company’s stunning financial success is not the crux of the story. Rather, it’s about another kind of success - and strategy.

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Workbook Exercise

Isdell gathered the company’s top 150 executives in a ballroom in London where he shared what he had learned. The sessions went on for three days. Isdell’s goal was to persuade the executives to buy into a program of major change, and it worked. Over the next six months, the company’s leaders produced a document called Our Manifesto for Growth, which laid out how the business would be run over the next decade. Its stated strategy: Make Coke the top non-alcoholic beverage company in the world, with an ever-expanding portfolio of brands. That’s not to say intellectual and financial assets were ignored. Isdell persuaded Coke’s directors to increase spending on, which is to say investment in marketing and new-product development by $400 million a year. He also got them to make a significant change in their own pay structure: each would receive stock worth $175,000 a year, but only if Coke’s per-share earnings increase averaged at least 8 percent in the previous three years. If that goal wasn’t met, the directors would be paid nothing. The message was clear: Everyone, top to bottom, was going to be held to a high standard of performance. And thanks to Isdell, they all got their reward. Coke’s strategy saved the company by investing in people instead of focusing mainly on physical and financial assets.

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How can Deloitte use social, mobile, cloud, and big-data technology to gather, and share, brutal honesty? Use the space provided.

That honesty was the starting point of Isdell’s strategic approach, and it gave him great insights into where he should invest. What would an audit of a company’s strategic investments in tangibles and intangibles look like?

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Example: LEGO Group is one of the world’s most admired companies. Yet just a few years ago, the Danish toymaker lost its way.

Founded in 1932 by Ole Kirk Kristiansen, LEGO is headquartered in Billund, Denmark, and is still owned by the Kristiansen family. The company has some 9,000 employees and sells its products in more than 130 countries. In the early 1990s, LEGO’s leaders stepped into a two-pronged trap.

1. They bought into the idea that they could

broaden their brand to create a “lifestyle” for their customers. The model: Harley-Davidson, whose passionate customers build their identity around its hats, T-shirts, and other accessories. LEGO branched out into movies, software, theme parks, and clothing - “non-core stuff that was absorbing vital management capacity,” recalls one executive. “We’d moved far, far away from what we did well.”

2. The company was so focused on its people and core mission “nurturing the child” - that making money had become incidental.

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In 2004, LEGO logged a record loss of $344 million. And even as it embraced its lifestyle concept, the bottom line was never uppermost. New-product development might take years, and production of a new part or figurine (“elements,” in LEGO-speak) might cost 50,000 euros, yet none of the managers thought to use the same part in another toy. Manufacturing and distribution lagged, and retailers began to complain that they couldn’t restock popular toys. When mounting problems culminated in the 2004 loss, private-equity firms and competitors went into takeover mode. It was time for a new strategy - one that put the focus, and the requisite investments, where they could generate the most value. CEO Kjeld Kristiansen quietly stepped down and Jorgen Vig Knudstorp, who had joined the company in 2002, replaced him. His assessment: “The company was very focused on doing good - that’s fine,” Knudstorp said. “But the attitude was, ‘We’re doing great

stuff for kids - don’t bother us with financial goals.’” His job, he said, was “to change the culture.” He told people, “We’re actually here to make money.” A series of short, sharp shocks to Billund ensued. • Suddenly, pay was governed by performance measures. “If performance is poor,” Knudstorp said, “you will be embarrassed, and embarrassment is stronger than fear.” • New-toy development time was cut in half from concept to box in twelve months. • To cut manufacturing costs, designers nearly halved the number of elements used in all LEGO toys, going from 13,000 to just under 7,000.

• LEGO’s worldwide payroll shrank from 7,300 to 5,300. That number included 1,000 of the 3,500 LEGO jobs in Billund, a town of just 6,000 people, but, astonishingly, Knudstorp wasn’t seen as a villain. The employees were eased out with generous benefits and retrained, and new companies came to town to hire them.

By putting the company’s strategic emphasis back on financial basics, Knudstorp turned LEGO around and got it onto a sustainable path. The social goals and human values important to both customers and LEGO employees are still being served – and everyone realizes it couldn’t have happened had the company failed.

“LEGO is razor-sharp right now,” Knudstorp says. Revenues rose an impressive 25 percent to $4.07 billion in 2012, and net profits climbed nearly 35 percent to $974 million.

• The company sold its theme parks in Europe and the United States to the Blackstone Group for $457 million. • Entire product lines were discontinued. • Manufacturing and distribution was outsourced to Mexico and Eastern Europe.

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Workbook Exercise

How can Deloitte help its clients see their strategies in terms of the entire portfolio of tangible and intangible assets? Use the space provided.

What’s Next? Strategy is all about investments, and investments are, of course, all about measurement and risk. In today’s big-data deluge, getting the right information and understanding the right risks is the key to making smart financial decisions.

Could there be an app or mobile technology that could let them track strategic investments in real time?

When does it make sense to focus on the physical and financial?

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Module 3 Finance: From Unmeasured to Measured Premise

To set the context for financial decision-making, leaders must move beyond using retroactive financial data and embrace prospective big data. Moreover, in the course of making each decision, they must determine whether risk comes from inside or outside their organizations.

Promise:

After completing this module, Deloitte partners and consultants will have a framework that they can use to help clients spot and mitigate risks and inform their financial decisions.

The Danger of the Unmeasured According to the International Integrated Recording Committee, fully 81 percent of business assets today consist of intangibles, while physical and financial capital comes to less than a fifth. The 81 percent goes largely unmeasured in favor of a fine-grain focus on the other 19 percent. That’s the equivalent of seeing just ten of the cards in a fifty-two card deck. What poker player would get into a game where he or she could only see 19 percent of a given hand? Should leaders and their boards of directors be worried? Absolutely. The financial implications are frightening.

Most leaders and managers, of course, are aware that this seachange has been happening. But they don’t have the tools to measure and make the most of the new reality. Employees and suppliers enter the books only as an expense; intellectual property may appear as goodwill, but only in the context of an acquisition; and customers appear only in the income column when they open their wallets. These misperceptions distort judgments, breeding false assumptions, bad investment (which is to say stra- tegic) decisions, and leave leaders, boards, and the organizations they run open to profound risks. And where there is mismeasuring, mismanaging inevitably follows.

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In times past, leaders focused on inside measured risks – revenues, earnings, stock prices, and other financial data. These decision-makers also wanted risks well-understood: What are the odds a new piece of equipment will break down? How high will turnover be during the holiday rush? Do we have enough inventory in the pipeline? Our map features a multitude of other risks that organizations face today. Once these risks are detected, they can be mitigated or defused.

OUTSIDE

Risk

INSIDE

“Thirty years ago, financial statements were dominated by tangible assets and historical cost accounting . . . Today, after rapid advances in technology, the development of innovative business models and the mind-numbing complexity of many investments, the balance sheets of an increasing number of companies are dominated by valuation estimates.”

source

Example: In a speech to the Public Company Accounting Oversight Board, member Jay Hanson related that,

outside measured

outside UNmeasured

INside measured

INside UNmeasured

MEASURED

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MEasurement

UNMEASURED

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Workbook Exercise

In your clients’ organizations, where are the boundaries between inside and outside? The clearly measurable, and hence largely manageable, inside risks relegated to the lowerleft quadrant of the map will seem familiar. They include the ups and downs of revenues, profits, and debt load, along with sales and marketing vulnerabilities, back-office mistakes, and poor hiring strategies. As for the inside-unmeasured risks located in the lower-right quadrant, think about employee alienation, perhaps, or the chance that people with mission-critical knowledge could leave.

In the quadrant labeled “outside-measured,” the risks might include drooping customer counts, cratering sales numbers, decreased brand loyalty, plummeting customer satisfaction, a malfunctioning supply chain, or ineffective retention policies.

The fourth quadrant, “outside-unmeasured,” is a risky place. It includes hazards related to customers’ feelings (often expressed via social media), the vitality of a company’s social networks, and surprise moves by competitors. What happens to companies whose leaders make financial decisions without the right understanding of whether their choices are subject to inside or outside risks? Consider two recent blunders and one not so recent, the third offering a classic illustration of the need to shift risk from one quadrant of the map to another.

Use the space provided.

What do they measure? How do they account for what they measure?

What do they want to measure? How could you help them?

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Example: Shell’s humbling lesson in new risks began in May 2012, when ArcticReady.com appeared bearing Shell’s logo. It included:

• Interactive social-media pages that featured advertisements, supposedly provided by Shell, which visitors were encouraged to caption. One featured a picture of a mother and baby polar bear bore the cold-hearted tagline: “You can’t run your SUV on ‘cute.’ Let’s go.”

Workbook Exercise

Where on the map would you place the risks Shell faced? Use the space provided.

• Another page dedicated to children featured a game called Angry Bergs. It told how “. . . right now, the polar ice caps are melting. That’s bad – but it’s also good!” The site’s creators went on to say that Shell could get more oil from open water, and “Mommy and Daddy can drive to the store to buy you new toys.” The fake site, obviously meant to provoke outrage at Shell among ecologically minded viewers, was created by Greenpeace and The Yes Men, two groups dedicated to raising awareness about issues such as environmental destruction that they believe are injurious to society. Not only did they perpetrate the original hoax, they kept it going by staging fake Shell responses - one a YouTube video and another purportedly from a Shell “social media response team” with a Twitter account. Shell barely reacted to the hoax.

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How should it have invested to mitigate that risk?

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Example: Chick-fil-A offers another cautionary

tale regarding the perils of ignoring the new risks every company faces today. Never shy about his beliefs, Dan Cathy, the fast-food chain’s president, volunteered to the Baptist Press early in 2012 that he was “guilty as charged” of bankrolling anti-gay charities, donating millions of dollars.

Fearing a backlash, the company’s public-relations department inadvertently made the controversy go viral by posting its ostensible apology on its Facebook page. The post read, in part: “The Chick-fil-A culture and service tradition in our restaurants is to treat every person with honor, dignity and respect – regardless of their belief, race, creed, sexual orientation or gender. We will continue this tradition in the over 1,600 restaurants run by independent Owner/Operators. Going forward, our intent is to leave the policy debate over same-sex marriage to the government and political arena.”

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Workbook Exercise

Where would you place the risks Chick-fil-A faced on the map? Use the space provided.

How should clients invest (and in what assets) when it comes to mitigating this kind of risk?

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Example: For JetBlue’s more than 100,000 stranded

passengers, the February 14, 2007, ice storm was truly a Valentine’s Day Massacre. It featured endless lines, interminable gate waits, and passengers stuck for more than ten hours in tarmac-bound planes. The storm (certainly an outside risk) hit JetBlue’s operational center at JFK airport, creating delays across its entire route map. More than 1,000 flights were canceled, 2,500 bags went astray (many of them piling up in a huge mountain at JFK), and it took six full days to get back to normal. Altogether, the airline paid $10 million in refunds, $4 million in overtime pay for crisis work, and $16 million in vouchers for future travel.

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JetBlue, which had soared from its founding to become the nation’s eighth-largest airline in just eight years by providing top-flight service as well as low fares, immediately went into action. Its founding CEO, David Neeleman, shouldered the blame on a media tour of mea culpas, appearing everywhere from the morning news shows to Anderson Cooper and David Letterman, and he apologized again via YouTube and in full-page newspaper ads: “Words cannot express how truly sorry we are.” Prior to the catastrophe, Neeleman had considered flight cancellations the absolute last resort. That meant JetBlue’s incoming flights were neither canceled nor turned back in the face of the storm. So when planes arrived at JFK, the gates were full of aircraft that had never left. “We had planes on the runways, planes arriving, and planes at all our gates,” said company spokesman Bryan Baldwin. “We ended up with gridlock.”

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“It was a perfect storm, coming on a holiday where our load factors were completely full,” recalls Charles “Duffy” Mees, JetBlue’s chief information officer. Among JetBlue’s problems was its inadequate system for matching planes with available flight crews. Because federal regulations limit the hours crews can work, many pilots and flight attendants on waiting planes had run out of flying time. But the airline’s crew schedulers were having problems finding replacements. And when eligible pilots or flight attendants volunteered their help, the airline’s phone system, overwhelmed by thousands of incoming calls, blocked their offers to help. The crew-scheduling glitches have been fixed, Mees said, and a web-based application now tracks flight crews more accurately. It allows the airline to broadcast a message to crew members’ cell phones, asking them to check in. Crews can also go online to post their locations and availability, and they can volunteer for duty, even if they are not scheduled.

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It goes without saying that you can’t measure what doesn’t exist, but what can’t be measured can still create havoc. The airline’s baggage-tracking system, which was then still in development, was one such example. Because “80 percent of our flights are point-to-point,” Mees said, the airline hadn’t felt the need to track baggage for connecting flights. But after the storm, with bags piling up in the claim area and no way to sort them, hundreds of passengers couldn’t find their luggage. In the crisis, Mees and his crew improvised a system for scanning unclaimed bags and listing them on an online database that alerted the entire route system of their whereabouts. Similarly, when flight monitors proved unable to list all the delayed flights, Mees’ people improvised an application that could display all the schedule changes on a BlackBerry. Then they handed out BlackBerrys to the counter attendants in the terminal so passengers could stay informed. In the weeks after the storm, JetBlue’s managers debated whether Neeleman’s no-cancellation policy should be abandoned, or at least modified. And when two more storms hit, on February 26 and March 16, JetBlue responded by canceling flights wholesale - many of them the night before they were scheduled to fly so that customers could make other plans. The result: Only minor disruptions to the airline’s operations. Neeleman left JetBlue in 2007, but the way he and his team worked to mitigate and manage outside-unmeasured risk still flies high.

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Workbook Exercise

Where would you place the risks JetBlue faced on the map the day of the first storm? Use the space provided.

What’s Next

The province of processes has traditionally been within the boundaries of individual organizations. No more. The four key technologies don’t just break down silos within businesses; they break through walls between them, as the next module demonstrates.

Where would you place them in subsequent months?

How would you apply similar changes in your clients’ organizations if they were facing a crisis?

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Module 4 Operations: From Inside to Outside Premise

Processes no longer respect boundaries. Work must be performed, whatever and whoever it takes - and today’s social, mobile, and big-data technologies make it happen.

Promise:

Improving how processes work across organizations usually requires a situationby-situation approach - no two systems are alike. The key is to understand who is involved and how an understanding of risk 2.0 changes their roles. This guide will clarify this crucial aspect of cross-organizational process improvement.

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A telling bit of research from the McKinsey Global Institute: “Social technologies multiply the potential sources of information about demand, adding another level of granularity to improve distribution efficiency and responsiveness. Based on information shared on social networks by customers or people in the distribution network (e.g., retail store staff), suppliers can respond to very localized variations in demand and detect stock-outs earlier. Companies can use information derived from social platforms to improve inventory control; government agencies, such as the U.S. Department of Homeland Security, feed social data into emergency management plans, using input from social networks to guide deployment of first responders.” The report goes on to say that productivity across a company’s value chain can increase anywhere from 2 to 11 percent (in the industries McKinsey focused on - financial services, consumer packaged goods, professional services, advanced manufacturing, and the social sector) thanks to savvy investment in social technologies.

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The Walls Have Fallen Two decades after James Champy and Michael Hammer upended the world of business with their seminal book, Reengineering the Corporation, we are entering another era of sweeping change. Today, we must not just reengineer, but reinvent the very concept of the corporation. Champy and Hammer understood that most companies were poorly equipped to deal with the growing demands of sophisticated customers and the looming loss of once-safe markets. All too many businesses were being strangled by their own outmoded structure.

The two authors were the first to see companies as the sum of their processes, and the essential message of reengineering was that work should be reorganized in terms of processes rather than tasks or functions. This idea swept through the corporate world. Leaders could see that their divisions were operating as individual fiefdoms, treating other divisions as rivals rather than allies. With a reengineering perspective, leaders could see the gaps in their operations and reorganize around processes to close them. Company after company achieved new efficiencies and fattened their bottom lines. Reengineering, however, was largely inwardly focused. Today, that doesn’t suffice. Risk 2.0 dictates that processes, and the benefits derived from improving them, must incorporate all stakeholders and their networks.

It’s people that animate processes, and, as those processes cross more and more organizational boundaries, it’s important to help them understand their changing roles. Let’s take it from the top:

Chief executive officer

Leaders today have to expand their skill sets and leadership styles to succeed in cross-organization process redesign. Here’s what it takes: Then: The focus was on high-level, internal expertise and centralized leadership. Now: Leaders must search out expertise and ideas wherever they can find them, while engaging people at all levels.

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Chief marketing officer

A company’s chief marketing officer will have to understand that marketing today works from the outside-in, not the inside-out, particularly as different organizations’ networks connect to form new processes. Here is the fundamental change we believe they must keep in mind: Then: Marketing was about promoting a company’s products. Now: Customers promote products directly to one another.

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Chief innovation officer

Some companies still conceive and develop new products in secrecy. But unless they embrace cross-organizational processes, they forfeit the potential fountain of ideas from customers and other creative people, whether an employee, supplier, or investor, all available for the asking. Here’s the shift we’ve observed: Then: New products are created in-house. Now: New products are co-created with customers and other members of a company’s extended network.

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Chief operating officer

Here’s how the world of execution has changed: Then: Assemble teams of insiders, set goals and milestones, and measure results according to financial data. Now: Connect with outside networks, collaborate on goals and milestones, and measure results according to both financial and big-data information.

Chief human resources officer

When it comes to Risk 2.0 process design, the chief of human resources must take on an expanded role that reaches beyond corporate walls to include customers, prospects, suppliers, partners, and anyone else who might be interested in his or her company, its products, and its role in the world. And that role has changed: Then: Hire, train, and retain the people you need. Now: Engage outsiders.

Chief financial officer

As with strategy, when it comes to cross-organization process design, CFOs must reassess where and how their companies spend money. They have to consider what they are managing and reporting, what data they are using, and the channels from which they are accumulating that data. Here’s how that function has changed: Then: Measure, manage, and report financial results. Now: Gather data via social and mobile technology and integrate big data into decision making.

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Workbook Exercise

Chief technology officer

Chief technology officers must find ways to identify and map all the networks surrounding a company, identify and participate in pertinent interactions, and measure the depth of participants’ engagement. This is vital every day, as Module 6 argues, but gains particular importance when it comes to redesigning cross-organizational processes. That requires a change in mindset:

What technologies and techniques could Deloitte partners and consultants use to help each of these players understand how their roles and activities must change, particularly as outside processes broach their organizations’ walls and vice-versa? Use the space provided.

Then: Invest in proprietary hardware and software. Now: Invest in open-source, social, mobile, and big-data technology.

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What’s Next

Risk 2.0 places a high premium on going digital, whether with social connections, data collection, or mobile technology. The next module shines a spotlight on the digital advantage.

Module 5 Technology: From Physical to Digital Premise

Every age has had a signature transformative technology, from chariots to sailing ships to railroads to the telegraph. Today that technology is digital.

Promise

Through examples and exercises, this module will help Deloitte partners and consultants understand that in the age of risk 2.0, all companies are, in fact, technology companies and spark discussion about what technology services Deloitte might offer its clients. Social, mobile, cloud, and big-data technologies are now vital to business. Currently, most corporate leaders don’t understand the transformative power of technology. They allocate enormous amounts of capital on IT projects with far less information or analysis than they would if, say, they were constructing a factory or retail outlet. Understanding the transformative power of technology is a key skill for every leader today. The following examples and exercises are designed to help Deloitte partners and consultants understand, communicate, and ultimately unleash technology’s ability to turn the physical into the digital. Research: According to the McKinsey Global Institute, in the consumer packaged goods industry alone, investments in collaborative technology in product development, operations and distribution, marketing and sales, customer service, and business support functions yields a full 2.4 percent increase in revenue.

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Example: Starwood Hotels & Resorts Worldwide, the Stamford, Connecticut-

based owner of such iconic hotel brands as St. Regis and Sheraton, is planning to sell $2 billion to $3 billion of hotel properties in the next few years. Starwood doesn’t want to own properties anymore; it just wants to manage them, leaving the problems associated with periodic economic slumps to others. (That’s something it knows quite a bit about, having recently salvaged a credit rating that was cut to junk in the 2009 downturn.)

Workbook Exercise

Which Deloitte clients might benefit from letting go of physical assets? Use the space provided.

How then will Starwood make money? It will earn fees for managing the properties it is selling to hotel owners in places like Dubai, which boasts fourteen Starwood hotels. The company aims to up its management revenue to 80 percent of its total from 60 percent currently and just 25 percent as recently as 2008.

How might they replace them? What role could social, mobile, or big-data technologies play??

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Example: Amazon is transforming its customers’ physical assets by sending their CDs and vinyl records into the cloud. The company recently announced AutoRip, initially launched in January 2013, will include vinyl records along with compact discs.

Here’s how it works: AutoRip automatically sends MP3 files of every CD or record a customer has bought in Amazon’s Music Store, dating back to 1998, to his or her Cloud Player library. The music can then be played on a wide variety of mobile devices.

Workbook Exercise

Going from physical to digital isn’t just about eliminating factories and brick-and-mortar retail outlets. How might Deloitte partners and consultants help their clients find other transformative opportunities? Use the space provided.

According to Steve Boom, Amazon’s Vice President of Digital Music, “It’s a fun experience to suddenly find CDs you purchased just today - or 15 years ago - added automatically and free of charge to your digital library.”

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Workbook Exercise

Example: Newcomers to Athens, Michigan,

population 1,024, shouldn’t expect to open an account with the local bank. There isn’t one. After taking deposits and handing out lollipops to for almost seventeen years, Southern Michigan Bank & Trust left Athens in 2011. Not since the Great Depression have Athens citizens been without a brick-and-mortar bank. Yet customers can still get the services they need digitally.

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Research: Last year, 2,267 bank and thrift

branches shuttered their windows, according to Charlottesville, Virginia-based SNL Financial. By 2023, the bank-branch count in the United States is expected to drop to 80,000 from 93,000.

Why the race to close branches? More and more customers are switching to online and mobile banking. A Bank of America spokesman says “tens of thousands” of its customers do their banking on mobile devices each week.

Customer pull (and no small amount of cost-cutting) is driving the physical-to-digital switch in this case. How might Deloitte partners and consultants use social or big-data technology to find places where that pull exists? Use the space provided.

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Example: Warby Parker is an online retailer that sells premium eyeglasses at a fraction of the cost of designer versions. The company’s secret? Founder Neil Blumenthal found a way to cut out the cast of middlemen - they avoided physical assets. “I’d been to the factories and knew what it costs to manufacture glasses,” Blumenthal says, and the process didn’t warrant a $700 price tag. He and his partners sketched some frames and hired the same people who make the designer labels. Then they started advertising and selling their products directly to consumers online. When the designers, manufacturers, branders, wholesalers, and retailers were eliminated from the business model, Warby Parker could sell its glasses for just $95 a pair.

Workbook Exercise

Is it only startups that can avoid physical assets? Use the space provided.

Are there ways to employ Warby Parker’s digital, no-middleman strategy for existing Deloitte clients?

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Example: (continued): In addition to shopping for eyeglasses

online, many Warby Parker customers are still eager to try on glasses in person. So the company has made deals with several upscale stores in big cities to show sample frames. It is also opening a physical store in Manhattan.

Workbook Exercise

Are there Deloitte clients that might benefit from a hybrid digital/physical strategy? Use the space provided.

How would you identify them?

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Module 6 Compliance and Regulations: From Government to Network Premise

New technologies and big-bang disrupters demand a new take on compliance - one that incorporates the demands and norms of a company’s extended network.

Promise

Here’s how to develop that broader view, and create value in the process.

What’s Next

Now that the Securities and Exchange Commission has acknowledged the power of social technologies, companies everywhere need to rethink compliance.

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Companies must still comply with the law, but they must also comply with the demands of the key technologies. The SEC’s rulings about using social media in investor communications and the recent $200-billion decline in the market due to a hacked Associated Press Twitter account both point to a dramatic change when it comes to compliance and regulations. Now, compliance is less about internal and legal activities and more about a world in which investors are mining social and mobile data every day - from consumer and employee tweets, Facebook likes, and blogs – to improve their performance.

Research: From the International Integrated Reporting Council: “The capitals are stores of value that, in one form or another, become inputs to an organization’s business model. . . . For example, an organization’s financial capital is increased when it makes a profit, and the quality of its human capital is improved when employees become better trained. “The overall stock of capitals is not fixed over time. There is a constant flow between and within the capitals . . . For example, where an organization improves its human capital through employee training, the related training costs reduce its financial capital. The effect is that financial capital has been transformed into human capital.”

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Workbook Exercise

How can Deloitte partners and consultants help their clients develop a broader view of compliance that incorporates the needs of a company’s networks in addition to government and leadership requirements? Use the space provided.

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What’s Next

The next module provides a survey of two vital industries: healthcare and financial services. It also includes a set of illuminating exercises.

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Module 7 Industry Case Studies: Healthcare and Financial Services Premise

It’s time to get practical. This module is the first of two that translate risk 2.0 theory into practice. Our focus: the healthcare and financial-services industries.

Promise:

This module shows, through examples and exercises, how social, mobile, and cloud technologies are affecting healthcare and financial services (and sometimes the intersection between the two). It’s designed to generate discussion - and, perhaps more important, ideas - among Deloitte partners and consultants.

Example: When a parent complains that his or

her college-age children are spending too much time playing video games, they may well discover that their gaming is actually a scientific endeavor. Thanks to social technology and crowdsourcing, many college students have joined hands and minds - and computers - with Massachusetts Institute of Technology neuroscientist Sebastian Seung to better understand the human brain. It sounds impressive and it is. Players of EyeWire are given a virtual bundle of information crammed with a maze of neurons that challenge them to map out neural pathways. Each player gets a rough diagram to start the mapping of a single neural branch. Amid the tangle of neurons – all 100 billion of them - the player’s job is to separate the strands and fill in the missing pieces to build a connectome, a generalized map of links between the neurons related to vision, memory, and brain disease. If the fact that video-game players spend $3 billion a week pursuing their passion is any indication of their total numbers, the potential ranks of gamers - i.e., fledgling citizen-scientists - are huge. And that’s good, because it will take an army of people, says Seung, to uncover the secrets lying along the estimated 1 million miles of connectivity in the neuron jungle.

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Workbook Exercise

What other medical and scientific mysteries or seemingly intractable problems in your clients’ businesses might be solved by harnessing a game-based platform? Use the space provided.

Example: Radiate Athletics wants to help its customers have a better, more productive workout, whether they’re pumping iron at the gym or pumping up the minutes they spend on a treadmill.

Thanks to Kickstarter.com, a social-funding platform for projects ranging from films to art, music, games, and technology, Radiate has designed the first interactive exercise shirt that pinpoints performance levels while also keeping an athlete or weekend warrior dry in even the most taxing situations. Using thermochromic inks that change color as body temperature changes, Radiate’s shirts can tell the wearer which muscles are “burning” based on the amount of heat his or her body gives off.

What might that platform look like? Would it have mobile or social aspects?

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Could this unique and innovative technology have made it to market without social funding? Perhaps, but the kick start from Kickstarter.com has clearly been a boon for Radiate.

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Workbook Exercise

Since its launch on April 28, 2009, more than 3 million people have given over $500 million to Kickstarter participants, funding more than 35,000 projects. Is social funding the trend of the financial-services future? Use the space provided.

How will that trend spark or spurn innovation?

Example: Even UNICEF, the United Nations International Children’s Fund, which seeks to bring its mission

of providing humanitarian care to children and mothers to every corner of the world, is tapping into the power of social technology to spread word about the need for clean drinking water in developing countries. Its seventh annual Tap Project has transformed Facebook into a water network aimed at saving children, and a band of highprofile Hollywood tweeters are pumping up the publicity. The project’s goal is to send clean drinking water to developing countries to prevent the deaths of children - 4,000 of whom die from unsanitary conditions every day in impoverished nations ranging from Belize and Cameroon to Guatemala, Haiti, and Iraq. As for Facebook, it has been turned into a pipeline that can save lives by enlisting people across the planet to help provide access to safe, clean water. The Tap Project Facebook app turns its users into “taps” and the connections they solicit become “pipes” to be filled with water as the connections multiply. Here’s how it works: When a Facebook user donates $5 via text message or PayPal to the project, he or she can then designate two friends to receive water and a chance to donate. As the Facebook taps multiply the skein of pipes, the friends will be able to see how the web of connections carrying water from friend to friend around the world is helping needy children get and stay healthy.

How might Deloitte help its clients tap or provide this source of finance??

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Workbook Exercise

What, if any, problems or complications do you envision if Facebook and other forms of social and mobile technology become arms of healthcare organizations? Use the space provided.

Workbook Exercise

Can a game dealing with difficult issues and altruistic values stand a chance against the likes of FarmVille and CastleVille? Use the space provided.

How might this inform your work with clients?

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Workbook Exercise Example: A group of British surgeons have come up with a new iPhone and iPad app that helps train surgeons to learn how to operate. The app, formally known as a “mobile surgical simulator,” is a revolutionary new model of interactive training.

The idea for the simulator emerged after European surgeons’ working hours were slashed by 60 percent. With so little available time, the issue of training new surgeons became problematic. Into the gap stepped Advait Gandhe, an orthopedic surgeon with a talent for digital modeling. Many different procedures with names like “laparoscopic cholecystectomy” and “emergency leg fasciotomies” can be downloaded for free, along with instructions for operating-room setups - i.e., the right kind of table, positioning the patient, suitable draping, and so forth. Then the operation begins, with the fledgling surgeon substituting a finger for a scalpel. To perform each step, he or she drags a green circle into the correct spot over a pink circle; everything is modeled and animated in real time. A test function lets students assess their abilities and track their progress.

Workbook Exercise

There’s more to surgical medicine than cut and stitch. How might a mobile operating app affect patient care? Use the space provided.

Are mobile apps better or worse than human hands-on training in which the instructor shares situations and best practices that might never make it into the literature?

Repeating an old surgical saw, Dr. Jean Nehme, one of the developers of the app, says that “decision is much more important than incision.” The interactive learning process helps identify risks: Where is this artery? Where is that nerve? Consequentially, there are fewer mistakes. Patients are using the app, too, as a way to understand their procedures, which lessens anxiety.

How might you automate and mobilize training for Deloitte clients in other industries?

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Workbook Exercise

Example: Twenty-five hundred interactive kiosks will

soon be installed in Wal-Mart and Sam’s Club stores. The kiosks, provided by SoloHealth, can check a person’s weight, eyesight, and blood pressure. They can even track their customers’ eating habits and provide information about diet, vitamins, and pain management - all for free. How does SoloHealth do it? With patented, interactive technology that allows consumers to test themselves without benefit of hands-on medical intervention. The kiosk offers access to a database of local physicians, but no one advises a person to contact a doctor.

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Workbook Exercise

Big data is often seen as a panacea when it comes to rising healthcare costs. Has that been the case with your clients? Use the space provided.

If so, what measures did you take and what best practices can you share?

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Example: HealthSpot, another designer of con-

venient and affordable walk-in health stations, is turning heads with its futuristic ovoid pods. Unthe SoloHealth version, these kiosks alpatients to speak directly to doctors in a private, on-screen setting. Patients are greeted and checked in by an attendant, after which the doctor takes over, givinstruction on how to use tools that gather pertinent data - blood pressure, weight, temperature, and on. HealthSpot diverges from SoloHealth model in anothway, too: It charges between and $80 per visit.

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like low

ing

Workbook Exercise

Some 40 million people will become eligible for insured care under the Affordable Care Act. How can Deloitte help the medical community take advantage of big data’s benefits? Use the space provided.

so the er, $60

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Workbook Exercise

Example: Citibank is getting social to get to know its

customers. Stacy Small, a Citibank customer was so frustrated by a forty-minute hold during a call to the bank’s customer-service center, she tweeted about it. Minutes later, a Citibank representative responded with a tweet: “Send us your phone number and we’ll call you right now.” Small’s phone rang almost immediately, and she was speaking with one of some thirty Citibank customer-service agents who have received special training when it comes to watching and reacting to social media. To this day, whenever Small has an issue with the bank, she connects via Twitter.

What would a social-media training program look like for Deloitte’s clients? Use the space provided.

What would be the best way to roll it out?

How might social-media-based customer service change performance expectations and measures?

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Workbook Exercise

Often, technology is about providing benefits and performing services. Here, it’s about denying them, albeit in the service of a good cause. Could this model work for any Deloitte clients?

Use the space provided.

Example: Charalampos Doukas, the author of Building Internet of Things, is a man in

need of strong motivation to stick to his workout schedule. To rein himself in, he devised a hack that uses a FitBit tracker and a Belkin WeMo to cut off the power to his fridge if he skips a worko ut. The FitBit tracker can monitor steps taken and calories burned, and if Doukas’ efforts aren’t up to par, forget foraging in the fridge.

What technologies and services might be involved?

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What’s Next

Our next module focuses on risk 2.0 in two more key industries: retail and technology.

Module 8 Industry Case Studies: Retail and Technology Premise

This module continues the interplay between examples and exercises and focuses on the retail and technology industries, and, sometimes, the intersection between the two.

Promise:

The idea behind this module is to generate ideas - ideas that Deloitte partners and consultants can use with their clients.

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Example: Did you know that the first vending machine

dispensed holy water? It was in the first century in Alexandria, Egypt and it relied on the weight of an inserted coin to push a lever to release the liquid. Twenty centuries later, Coca-Cola is sprinkling its customers with happiness from a new vending machine that employs video streaming technology to connect Coke drinkers around the world. The soft-drink maker’s Happiness Project is designed to show that enjoyment and optimism can be found in the smallest pleasures – like sharing a smile with another Coke drinker halfway around the world.

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Workbook Exercise

How could you help Deloitte clients connect their customers with each other at the point of purchase, whether in a retail store, on a Web site, or even at a vending machine? Use the space provided.

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Workbook Exercise

Think about it: Is this the beginning of the “anti-social media”? Use the space provided.

Example: Savvy shoppers have found a way to bypass

crowded stores: the Avoid the Shopping Crowds app. The brainchild of a Dutch creative group, the app, with the help of social media sites such as Springwise.com, collects realtime photo uploads, check-ins, location-based Tweets, and webcam activity. Putting it all together, the app can estimate where crowds are congregating. Its creators boast that they’ve reversed social media conventions, using data to avoid people rather than connect with them.

What might that mean in the business world? Could there one day be an Avoid the Meetings app?

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Workbook Exercise

Example: Customers tired of fishing through wallets or billfolds full

of credit and debit cards when making a purchase, whether online or in a store are embracing MasterCard’s MasterPass digital service – it’s turning every tool into a shopping tool. Brandishing a payment card or enabled device, shoppers can take advantage of in-store and online shopping offers by scanning a QR or bar code, or by using near-field communication (NFC) to buy anything at the register or in the aisle. Their preferred payment system pops up on their mobile device, allowing them to either enter their card information or sign in to pull the information from the cloud. With digital receipt on screen, a customer can present it to a salesperson on the way out the door.

How can you learn more about the choke points that frustrate your clients’ customers and how could you help them employ mobile or cloud technology to loosen them? Use the space provided.

How could big data help?

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Example: Some men’s apparel sites put as many as 6,000 sneaker options at a customer’s shopping cart’s disposal, with still more choices when it comes to boots or jeans. Frank & Oak has tapped into big data to customize its catalog of clothing to its customers’ lives and styles, thus streamlining their choices and making shopping quick and easy. The site offers reviews of each collection and gives style pointers. For new shoppers, however, Frank & Oak offers a Facebook-enabled login and a simple three-question survey that triggers a custom-curated catalog of options to fit the buyer’s taste. As shoppers make purchases, the site becomes more personalized.

Workbook Exercise

How can you help Deloitte retail clients make the most of big data and create customized shopping experiences? Use the space provided.

Would it only work online, or could big-data insights be incorporated into a traditional retail environment?

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Workbook Exercise

Example: Thanks to Chirpify, the social commerce and

payments company that introduced Twitter and Instagram users to online business, Facebook members can now make a purchase, a contribution, or take part in a giveaway just by tapping “buy,” “donate,” or “gimme” in response to a listing in the news feed. No need to enter credit-card numbers - their Chirpify accounts, which are a requirement for participating, automatically pay for purchases or donations and dispatch a secure download or e-mail receipt. All transaction data is stored in the Chirpify dashboard, easily preventing mistaken purchases.

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Chirpify has potentially created a big-bang disruption by giving people the ability to do even more when engaging in social media. What extra features would you add to a social site for your clients? Use the space provided.

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Workbook Exercise

Example: Online shopping is a long-standing threat to traditional retailers. Competition is often so

What’s your retail clients’ version of dwell time? Use the space provided.

cutthroat that store owners don’t care if customers buy anything, they just want them to come see what the merchandise looks like in person. To that end, in her Japanese operations, women’s clothier Kate Spade serves espresso to get customers into its stores. Another ploy is to showcase a new piece of merchandise every Saturday, hoping curiosity will lure shoppers in. But, in a clever move, the store is mimicking the online shopping experience by putting its signage on iPads.

Spade’s sister line, Kate Spade Saturday, is trying on some of the same tactics. On weekends, it showcases bright colors and new products not found anywhere else. Nonetheless, it felt the need to bring in a design tech company to digitize the experience. More iPads replaced signs, making it easier to quickly change displays and promotions, while adding a much-needed layer of customer contact with the Spade products. Brand immersion and more so-called “dwell time” is the goal in this new era of retail, and young, online shoppers seem receptive to store displays if the inventory is new and fresh.

How could you maximize it?

How could Deloitte help its clients counter the store-as-showroom phenomenon, where shoppers visit a store to inspect products, then order them online?

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Workbook Exercise

What measures matter in your clients’ organizations? Example: Zappos sees its business as extraordinarily dependent on

keeping its customers happy. Therefore, call-center representatives bear responsibility for keeping shoppers satisfied around the clock and over the phone.

Buyers don’t have to fill out extensive forms and online ordering is simple. Rambling conversations with employees are encouraged and helping customers choose and order shoes, apparel, and accessories is second nature. There are no scripts or time limits on calls, and representatives are happy to chat about everything from a customer’s orthotics to gardening to teen-age children and errant spouses. If a caller has a sore foot, a comfort specialist will be suggested. And if Zappos doesn’t carry the shoe a customer wants, a referral to a rival store will be forthcoming.

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Call-center employees, who are chosen for their gregariousness and enthusiasm, are encouraged to do nearly anything they think will make a customer happy, even if it means sending three styles of shoes in two different sizes and getting all but one pair back. And if a representative wants to send a flower arrangement to a customer who has just lost a family member, go ahead. “We don’t view the contact as an expense,” says CEO Tony Hsieh, who himself uses Twitter to stay connected to both customers and employees. “We view it as an investment. It’s a branding opportunity . . . and it gives us the opportunity to deliver great customer service in a very personal way.”

Use the space provided.

What measures could be constraining their employees and possibly compromising customer service?

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What’s Next

The following module details the role that Deloitte can play when it comes to Risk 2.0.

Module 9 Next Steps: Deloitte’s Vital Role Premise

Now we have reached what is, for us, the heart of the matter: How can Deloitte help its clients adjust to the new world of risk 2.0?

Promise:

The potential to develop a new service line for Deloitte.

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The world of business has fundamentally changed, almost overnight.

A few thoughts:

Social, mobile, cloud, and big-data technologies have toppled the old top-down, command-andcontrol leadership style that was already becoming obsolete, but a new phenomenon has sounded the death knell.

• Think of all stakeholders as a network of people with mutual interests.

That factor is big-bang disruption. Even the best products may suddenly become obsolete, and their business models are subject to change without notice. What does this mean in real-world terms, and how can Deloitte best approach the job of helping its clients learn to live with disruptions and the world of risk 2.0?

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• Think of the traditional view of assets and liabilities as just part of the information-gathering and decisionmaking process. Clients must learn to visualize all of their assets, and to weight each in proportion to its importance to their own businesses.

• Even as Deloitte clients are absorbing this new world• Think of social media not just as a marketing view, they must learn to use our risk chart - with its tool, but as an essential way to communicate outside-to- inside and measured-to-unmeasured and collaborate, tapping into everyone’s ideas, axes - to understand the hazards and opportunities information, experience and contacts to help they face. improve processes, recruit employees, develop new products, and fend off competitors.

What’s Next How did we do? Conclusion: We Want Your Feedback Many thanks for your time, attention, and ideas. We’ve told a lot of stories and posed a lot of questions, but can’t resist asking one more:

How did we do?

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Research Overview

1 2 3

Digital technologies are fundamentally reshaping business and the world. To put the magnitude of today’s new technologies in perspective, this document examines the following:

Four primary digital technologies.

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Five primary business areas that are being affected by those technologies.

Four key industries that are being transformed by those technologies.

1.

The Four Primary Digital Technologies

McKinsey Global Institute research shows that there are six areas - five function-specific and one that applies to an entire enterprise - where the nature of value is changing due to the new technologies. They are:

• New product development. Social technologies give companies the opportunity to connect with large communities and take on problems, and co-create products and services, that are too vast to be solved in-house.

• Customer service. McKinsey’s research demonstrates that social and other new technologies can largely replace call centers, allowing customers to literally help themselves - and contribute to an evergrowing knowledge bank.

• Operations and distribution. Social technologies, say when used with a retailer’s staff, increase sources of data about demand, which improves the efficiency and agility of a company’s outbound processes.

• Cross-enterprise advantages. Social, mobile, cloud, and big-data technologies, the research shows, can spark marked performance improvements because they make communication more efficient, facilitate collaboration, and enable people to share insights and best practices.

• Marketing and sales. The research shows that social and other new technologies are effective tools for collecting insights about everything from brands, products, competitors, and customers. They are also an extremely efficient way to deliver a message to consumers.

Given the pervasive nature of social, mobile, cloud, and big-data technologies, all major business functions are now subject to dramatic change. We examine five of them here.

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Social • Thirty billion pieces of content are shared on Facebook each month.1

• Facebook is the social login of choice of 49 percent of Americans.7

• Eighty percent of online users interact with social media each day.2

• Social media consumption on mobile devices now tops desktops.8

• Facebook boasted 1.11 billion active monthly users as of March 2013 - a number equal to the population of the United States and Europe combined.3

McKinsey research projects that Social technology soon will influence fully one third of purchases across a wide range of industries.

• Facebook reported 751 million active users of its mobile products as of March 31, 2013. That’s more than the entire population of Europe.4

1. In electronics, the potential for socialtechnology-influenced spending is $83 billion.

• People spend nearly 20 percent of their online hours on social networks.5 • Fewer than 30 percent of CEOs themselves use social media to connect to their constituents.6

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2. In the furniture industry, it is $129 billion. 3. In the clothing industry, it is $223 billion.

McKinsey research also highlights a series of industries where leaders are making savvy social investments in particular areas of their companies and reaping substantial returns. Among them: 1. Food and beverage processing, particularly when it comes to marketing. 2. Consumer products, with an emphasis on marketing, research and development, and customer service. 3. Transportation, which is getting good returns on social-technology investment in the customer-service function.

4.Telecommunications, especially when it comes to customer service. 5. Insurance, particularly in terms of customer-service investments. 6. Media and entertainment, with a social focus on marketing. 7. Software, publishing, and Internet services, as an industry, is seeing solid returns when it invests in research and development and customer service.10

4. In the grocery industry, it is $179 billion.9

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Mobile • More people have mobile devices than electricity or drinking water.11

• Mobile advertising revenue doubled in 2012.15

• Only 37 percent of companies use mobile technology when it comes to communicating with their customers and just 31 percent use it to improve business-to-employee interactions.

• Facebook pocketed one-fifth of all U.S. mobile display advertising revenues.16

• People now spend more time on mobile apps than the Internet.12 • The number of people accessing Facebook via mobile devices increased from 30 percent to 60 percent in the 12 months ending in March 2013.13 • comScore reports that mobile commerce now accounts for 10 percent of all online sales.14

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Cloud • Mobile phones will overwhelm PCs as the most widespread Internet-access device on the planet this year. By 2015, over 80 percent of the handsets purchased in mature markets will be smartphones.17 • “Food and cars can’t be replaced by smartphone apps. But restaurants now depend on online reservations, customer-

generated reviews, coupons delivered through mobile devices, and location-based services to drive business. In automobiles, information technology powers sophisticated dashboard systems and, in the not-too-distant future, may control self-driving cars.”18

In a 2013 survey of 2,300 Americans, Strategy Analytics reports that: • 27 percent use Apple’s iCloud, 17 percent Dropbox, 15 percent the Amazon’s Cloud Drive, and 10 percent Google Play. • Usage of cloud storage is heavily skewed toward younger people, in particular those twenty to twenty-four years old. • Cloud storage is overwhelmingly dominated by music; around 90 percent of Apple, Amazon, and Google’s cloud users store music. Even Dropbox – which has no associated content ecosystem – sees around 45 percent of its users storing music files.19

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Big Data “Everyone knows that the Internet has changed how businesses operate, governments function, and people live. But a new, less visible technological trend is just as transformative: ‘big data.’ Big data starts with the fact that there is a lot more information floating around these days than ever before, and it is being put to extraordinary new uses. Big data is distinct from the Internet, although the Web makes it much easier to collect and share data. Big data is about more than just communication: The idea is that we can learn from a large body of information things that we could not comprehend when we used only smaller amounts.” 20

• There are 2.5 quintillion bytes of information created every day.21 • Google processes 1 million gigabytes of data every day. 22 • The number of messages on Twitter now exceeds 400 million a day.23 • If all the digitally stored data in the world were printed in books, they would cover the United States in a layer fifty-two feet thick.24 • The Conference Board and the Rock Center for Corporate Governance at Stanford University found that 93 percent of corporate boards do not receive information gathered from these reams of data.25 • 67 percent of 2,500 respondents in two dozen industries reported that big-data analytics gave them a competitive advantage.26

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• “This explosion of data is relatively new. As recently as the year 2000, only one-quarter of . . . the world’s stored information was digital. The rest was preserved on paper, film, and other analog media. But because the amount of digital data expands so quickly - doubling around every three years - that situation was swiftly inverted. Today, less than 2 percent of all stored information is nondigital.” “. . . it is tempting to understand big data solely in terms of size. But that would be misleading. Big data is also characterized by the ability to render into data many aspects of the world that have never been quantified before; call it ‘datafication.’ For example, location has been datafied, first with the invention of longitude and latitude, and more recently with GPS satellite systems. Words are treated as data when computers mine centuries’ worth of books. Even friendships and ‘likes’ are datafied, via Facebook.”27

2.

Areas Affected by Digital Technologies

McKinsey Global Institute research shows that there are six areas - five function-specific and one that applies to an entire enterprise - where the nature of value is changing due to the new technologies. They are: • New product development. Social technologies give companies the opportunity to connect with large communities and take on problems, and co-create products and services, that are too vast to be solved in-house. • Operations and distribution. Social technologies, say when used with a retailer’s staff, increase sources of data about demand, which improves the efficiency and agility of a company’s outbound processes. • Marketing and sales. The research shows that social and other new technologies are effective tools for collecting insights about everything from brands, products, competitors, and customers. They are also an extremely efficient way to deliver a message to consumers.

• Customer service. McKinsey’s research demonstrates that social and other new technologies can largely replace call centers, allowing customers to literally help themselves - and contribute to an ever-growing knowledge bank. • Cross-enterprise advantages. Social, mobile, cloud, and big-data technologies, the research shows, can spark marked performance improvements because they make communication more efficient, facilitate collaboration, and enable people to share insights and best practices.28 Given the pervasive nature of social, mobile, cloud, and big-data technologies, all major business functions are now subject to dramatic change. We examine five of them here.

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Strategy • According to the McKinsey Global Institute, which studied the consumer packaged goods, consumer financial services, professional services, and advanced manufacturing industries, the annual value creation potential of investing in social technologies is $900 billion to $1.3 trillion. Some $345 billion of this value would come from product development and operations.29

• Based on its global survey of some 400 large companies, Capgemini Consulting reports that companies that allocate capital to both technology and to developing leadership skills are 26 percent more profitable than their competitors, generate 9 percent more revenue via their physical assets and employees, and enjoy 12 percent higher market valuations.31

• Recent research by the McKinsey Global Institute proves that investing in social technologies creates considerable value today. In retail banking, particularly when applied to sales and marketing, Risk 2.0-style investing yields a revenue increase between 4 and 7 percent. In the professional-services field, the research shows, similar investments in operations, distribution, and business support functions generates a boost in revenues between 8 and 11 percent.30

• According to the International Integrated Recording Committee, 81 percent of business assets today are comprised of intangibles. That 81 percent goes largely unmeasured in favor of a fine-grain focus on the other 19 percent, comprised of physical and financial assets.

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Until the mid-1970s, physical and financial assets (e.g., cash; inventory, property, plant, and equipment) were prevalent, leading companies to be valued for what they owned and reported on their balance sheets. From a governance and risk perspective, the balance sheet provided a good guideline for asset protection. In the last four decades, companies’ ratio of physical to intangible assets has essentially been reversed, with the average companies’ market value at over 80 percent greater than book value.

• “Thirty years ago, financial statements were dominated by tangible assets and historical cost accounting . . . Today, after rapid advances in technology, the development of innovative business models and the mind-numbing complexity of many investments, the balance sheets of an increasing number of companies are dominated by valuation estimates.” - Jay Hanson, board member, Public Company Accounting “Oversight Board • “Once customers shift to the new technology, it’s too late for a graceful exit - at best, it’s time for a fire sale.”32

In 1975, the ratio of physical to intangible assets was roughly 80/20, making the average company’s market value only 20 percent greater than book value.

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Finance • Thirty percent of businesses will directly or indirectly “monetize their information assets by trading, bartering, or outright selling them by 2016.”33 • Research by Drexel University Professor Gray R. Wesley confirms that “investors share price-relevant information via their social networks.”34 • “In a 2011 paper published in the Journal of Computational Science, researchers reported improving prediction models of Dow Jones Industrial Average (DJIA) closing values by adding a public mood variable that was calculated using content from Twitter feeds. . . . Adding this social data into the model improved model accuracy from 46.7 percent (using only historical DJIA values) to 86.7 percent.”35

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Operations • The value created by better internal communication facilitated by social technologies can increase by 100 percent.36 • “We estimate that implementing social technologies, along with innovations in management practices and cultural changes, has the potential to raise the productivity of interaction workers by 20 to 25 percent.”37 • Knowledge workers spend 28 hours each week “writing emails, searching for information, and collaborating internally.”38

• According to The McKinsey Global Institute, “Social technologies multiply the potential sources of information about demand, adding another level of granularity to improve distribution efficiency and responsiveness.”39 • “Social technologies multiply the potential sources of information about demand, adding another level of granularity to improve distribution efficiency and responsiveness. Based on information shared on social networks by customers or people in the distribution network (e.g., retail store staff), suppliers can respond to very localized variations in demand and detect stock-outs earlier. Companies can use information derived from social platforms to improve inventory control; government agencies, such

as the US Department of Homeland Security, feed social data into emergency management plans, using input from social networks to guide deployment of first responders.” The report goes on to say that productivity across a company’s value chain can increase anywhere from 2 to 11 percent (in the industries McKinsey focused on - financial services, consumer packaged goods, professional services, advanced manufacturing, and the social sector) thanks to savvy investment in social technologies.40

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Technology • A worldwide survey of IT leaders by Gartner reports that 42 percent of respondents had invested in big-data technology, or intended to do so within the next twelve months.41 • Multiple surveys by Gartner indicate that just 30 percent of potential users adopt analytics tools sponsored by their organizations’ chief information officers.42 • “But the strategic model of disruptive innovation we’ve all become comfortable with has a blind spot. It assumes that disrupters start with a lower-priced, inferior alternative that chips away at the least profitable segments, giving an incumbent business time to start a skunkworks and develop its own next-generation products.

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That advice hasn’t been much help to navigation- • In the consumer packaged goods product makers like TomTom, Garmin, and industry alone, investments in Magellan. Free navigation apps, now preloaded collaborative technology in product on every smartphone, are not only cheaper development, operations and but better than the stand-alone devices those distribution, marketing and sales, companies sell. And thanks to the robust platcustomer service, and business form provided by the iOS and Android operating support functions yields a full 2.4 systems, navigation apps are constantly improvpercent increase in revenue. 44 ing, with new versions distributed automatically through the cloud.”43

3.

Four Key Industries

Every industry is feeling the impact of today’s digital technologies. Four industries in particular are experiencing real change in real time. They are healthcare, financial services, technology, and retail.

Larry Downes, Paul F. Nunes, “Big-Bang Disruption,” Harvard Business Review, March 2013.

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Healthcare • Capgemini Consulting reports that just 7 percent of the pharmaceutical industry has invested appropriately in technology and leadership development.45 • The healthcare industry stands to gain $300 billion in value through the use of big data.46 • In February 2009, Google created a stir in healthcare circles. Researchers at the company published a paper in Nature that showed how it was possible to track outbreaks of the seasonal flu using nothing more than the archived records of Google searches. Google handles more than a billion searches in the United States every day and stores them all. The company took the 50 million most commonly searched terms between 2003 and 2008 and compared them against historical influenza data from the Centers for Disease Control and Prevention. The idea was to discover whether the incidence of certain searches coincided with outbreaks of the flu - in other words, to see whether an increase in the frequency of certain Google searches conducted in a particular geographic area correlated with the CDC’s data on outbreaks of flu there. The 148 Risk 2.0

CDC tracks actual patient visits to hospitals and clinics across the country, but the information it releases suffers from a reporting lag of a week or two - an eternity in the case of a pandemic. Google’s system, by contrast, would work in near-real time. “Google did not presume to know which queries would prove to be the best indicators. Instead, it ran all the terms through an algorithm that ranked how well they correlated with flu outbreaks. Then, the system tried combining the terms to see if that improved the model. Finally, after running nearly half a billion calculations against the data, Google identified forty-five terms - words such as ‘headache’ and ‘runny nose’ - that had a strong correlation with the CDC’s data on flu outbreaks. All forty-five terms related in some way to influenza. But with a billion searches a day, it would have been impossible for a person to guess which ones might work best and test only those.

mon. But the sheer size of the data set more than compensated for its messiness. The result, of course, was simply a correlation. It said nothing about the reasons why someone performed any particular search. Was it because the person felt ill, or heard sneezing in the next cubicle, or felt anxious after reading the news? Google’s system doesn’t know, and it doesn’t care. Indeed, last December, it seems that Google’s system may have overestimated the number of flu cases in the United States. This serves as a reminder that predictions are only probabilities and are not always correct, especially when the basis for the prediction - Internet searches - is in a constant state of change and vulnerable to outside influences, such as media reports. Still, big data can hint at the general direction of an ongoing development, and Google’s system did just that.47

“Moreover, the data were imperfect. Since the data were never intended to be used in this way, misspellings and incomplete phrases were com-

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Financial Services

Retail

• Research from Tata Consultancy Services (TCS) shows that banking and financial services firms expect a return on investment (ROI) of 33 percent on their big-data investments.48

• Deloitte Digital reports that smartphones influenced $159 billion, fully 5 percent, in U.S. store sales in 2012. And it predicts that, by 2016, this trend will more than triple to $689 billion.51

• McKinsey reckons that “some banks have been able to double the share of customers that accept offers of loans and reduce loan losses by a quarter, simply by using data they already have.”49

• According to the McKinsey Global Institute, by employing big data, retailers could see a 60 percent increase in operating margins.52

• Capgemini Consulting reports that fully 35 percent of the banking industry has invested in technology and leadership development.50

• Capgemini Consulting reports that 26 percent of the retail industry has invested in technology and leadership development. Its report points out that, “Retailers and generally confident in their potential for social and mobile, as well as their digital skill set.”53 • Retailers’ share of consumer time spent on shopping apps grew to 27 cent of the total in December 2012, up from 15 percent the year before.54 • According to McKinsey, in 2010, 41 percent of shoppers conducted online research related to their purchases. By 2012, that number rose to 50 percent. During the same period, the number of consumers employing mobile devices to conduct product research went from 12 to 21 percent.55

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Technology • Capgemini Consulting [reports][estimates?] that 38 percent of the high-technology industry has invested in technology and leadership development.56 • Peter Sondergaard, senior vice president at Gartner Research, reports that, “By 2015, 4.4 million IT jobs globally will be created to support big data, generating 1.9 million IT jobs in the United States . . . In addition, every big data-related role in the U.S. will create employment for three people outside of IT, so over the next four years a total of 6 million jobs in the U.S. will be generated by the information economy.”57

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Footnotes

1. James Manyika Michael Chui Brad Brown Jacques Bughin Richard Dobbs Charles Roxburgh Angela Hung Byers Big Data: The Next Frontier for Innovation, Competition, and Productivity, The McKinsey Global Institute. 2. Michael Chui, James Manyika, Jacques Bughin, Richard Dobbs, Charles Roxburgh, Hugo Sarrazin, Geoffrey Sands, and Magdalena Westergren, The Social Economy: Unlocking Value and Productivity Through Social Technologies, The McKinsey Global Institute. 3. Facebook.com 4. Facebook.com 5. Michael Chui, James Manyika, Jacques Bughin, Richard Dobbs, Charles Roxburgh, Hugo Sarrazin, Geoffrey Sands, Magdalena Westergren, The Social Economy: Unlocking Value and Productivity Through Social Technologies, The McKinsey Global Institute.

11. “More People Have Mobile Devices Than Electricity Or Drinking Water,” Business Insider, April 30, 2012. 12. Jay Yarrow, “More People Have Mobile Phones Than Electricity or Drinking Water,” Business Insider, April 30, 2012. 13. Facebook.com 14. 2013 U.S. Digital Future in Focus, comScore, 2013. 15. Alex Cocotas, “U.S. Mobile Ad Revenue Doubled Last Year,” Business Insider, April 17, 2013. 16. Marcelo Ballve, “Facebook Now Controls One-Fifth of U.S. Mobile Display Ad Revenue,” Business Insider, December 28, 2012.

6. The 2012 Fortune 500 Social CEO Index.

17. Shelly Singh, “Mobile, Applications, Personal Cloud, and Big Data Among Top 10 Technology Trends for 2013,” The Economic Times, October 26, 2012.

7. Jim Edwards, “Facebook Dominates Social Logins But Google Is Closing The Gap, Business Insider, April 11, 2013.

18. Larry Downes, Paul F. Nunes, “Big-Bang Disruption,” Harvard Business Review, March 2013.

8. “How Consumers Are Using Their Phones and What It Means,” Business Insider, April 27, 2013.

19. Jon Fingas, “Strategy Analytics: iCloud, Dropbox, and Amazon Top Cloud Media in the U.S.,” Engadget.com, March 21, 2013.

9. Michael Chui James Manyika Jacques Bughin Richard Dobbs Charles Roxburgh Hugo Sarrazin Geoffrey Sands Magdalena Westergren, The Social Economy: Unlocking Value and Productivity Through Social Technologies, The McKinsey Global Institute.

20. Kenneth Neil Cukier and Viktor Mayer-Schoenberger, “The Rise of Big Data,” Foreign Affairs, May-June 2013.

10. Michael Chui, James Manyika, Jacques Bughin, Richard Dobbs, Charles Roxburgh, Hugo Sarrazin, Geoffrey Sands, and Magdalena Westergren, The Social Economy: Unlocking Value and Productivity Through Social Technologies, The McKinsey Global Institute.

22. Viktor Mayer-Schonberger and Kenneth Cukier, Big Data, Houghton-Mifflin, 2013.

21. Viktor Mayer-Schonberger and Kenneth Cukier, Big Data, Houghton-Mifflin, 2013.

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23. Viktor Mayer-Schonberger and Kenneth Cukier, Big Data, Houghton-Mifflin, 2013. 24. Viktor Mayer-Schonberger and Kenneth Cukier, Big Data, Houghton-Mifflin, 2013. 25. The Conference Board, “What Do Corporate Directors and Senior Managers Know About Social Media?”, October 2012. 26. Massachusetts Institute of Technology/SAS Survey. 27. Kenneth Neil Cukier and Viktor Mayer-Schoenberger, “The Rise of Big Data,” Foreign Affairs, May-June 2013. 28. Michael Chui, James Manyika, Jacques Bughin, Richard Dobbs, Charles Roxburgh, Hugo Sarrazin, Geoffrey Sands, and Magdalena Westergren, The Social Economy: Unlocking Value and Productivity Through Social Technologies, The McKinsey Global Institute. 29. Michael Chui, James Manyika, Jacques Bughin, Richard Dobbs, Charles Roxburgh, Hugo Sarrazin, Geoffrey Sands, Magdalena Westergren, The Social Economy: Unlocking Value and Productivity Through Social Technologies, The McKinsey Global Institute. 30. Michael Chui James Manyika Jacques Bughin Richard Dobbs Charles Roxburgh Hugo Sarrazin Geoffrey Sands Magdalena Westergren, The Social Economy: Unlocking Value and Productivity Through Social Technologies, The McKinsey Global Institute. 31. George Westerman, Maël Tannou, Didier Bonnet, Patrick Ferraris, and Andrew McAfee, The Digital Advantage: How Digital Leaders Outperform their Peers in Every Industry, Capgemini Consulting. 32. Larry Downes, Paul F. Nunes, “Big-Bang Disruption,” Harvard Business Review, March 2013 33. “Gartner Predicts 30 Percent of Businesses Will Be Monetizing Their Information Assets Directly By 2016,” M2 Presswire, January 10, 2013. 34. Wesley R. Gray, “Facebook For Finance: Why Do Investors Share Ideas Via Their Social Networks?” Social Science Research Network, 2010.

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35. Michael Chui, James Manyika, Jacques Bughin, Richard Dobbs, Charles Roxburgh, Hugo Sarrazin, Geoffrey Sands, Magdalena Westergren, The Social Economy: Unlocking Value and Productivity Through Social Technologies, The McKinsey Global Institute. 36. Michael Chui, James Manyika, Jacques Bughin, Richard Dobbs, Charles Roxburgh, Hugo Sarrazin, Geoffrey Sands, Magdalena Westergren, TThe Social Economy: Unlocking Value and Productivity Through Social Technologies, The McKinsey Global Institute. 37. Michael Chui, James Manyika, Jacques Bughin, Richard Dobbs, Charles Roxburgh, Hugo Sarrazin, Geoffrey Sands, Magdalena Westergren, TThe Social Economy: Unlocking Value and Productivity Through Social Technologies, The McKinsey Global Institute. 38. Michael Chui, James Manyika, Jacques Bughin, Richard Dobbs, Charles Roxburgh, Hugo Sarrazin, Geoffrey Sands, Magdalena Westergren, TThe Social Economy: Unlocking Value and Productivity Through Social Technologies, The McKinsey Global Institute. 39. Michael Chui, James Manyika, Jacques Bughin, Richard Dobbs, Charles Roxburgh, Hugo Sarrazin, Geoffrey Sands, Magdalena Westergren, The Social Economy: Unlocking Value and Productivity Through Social Technologies, The McKinsey Global Institute. 40. Michael Chui, James Manyika, Jacques Bughin, Richard Dobbs, Charles Roxburgh, Hugo Sarrazin, Geoffrey Sands, and Magdalena Westergren, The Social Economy: Unlocking Value and Productivity Through Social Technologies, The McKinsey Global Institute.

44. Michael Chui, James Manyika, Jacques Bughin, Richard Dobbs, Charles Roxburgh, Hugo Sarrazin, Geoffrey Sands, and Magdalena Westergren, The Social Economy: Unlocking Value and Productivity Through Social Technologies, The McKinsey Global Institute. 45. George Westerman, Maël Tannou, Didier Bonnet, Patrick Ferraris, and Andrew McAfee, The Digital Advantage: How Digital Leaders Outperform their Peers in Every Industry, Capgemini Consulting. 46. James Manyika, Michael Chui, Brad Brown Jacques Bughin, Richard Dobbs, Charles Roxburgh, and Angela Hung Byers, Big Data: The Next Frontier for Innovation, Competition, and Productivity, The McKinsey Global Institute. 47. Kenneth Neil Cukier and Viktor Mayer-Schoenberger, “The Rise of Big Data,” Foreign Affairs, May-June 2013.

51. The Dawn of Mobile Influence, Deloitte Digital. 52. James Manyika, Michael Chui, Brad Brown Jacques Bughin, Richard Dobbs, Charles Roxburgh, and Angela Hung Byers, Big Data: The Next Frontier for Innovation, Competition, and Productivity, The McKinsey Global Institute. 53. George Westerman, Maël Tannou, Didier Bonnet, Patrick Ferraris, and Andrew McAfee, The Digital Advantage: How Digital Leaders Outperform their Peers in Every Industry, Capgemini Consulting. 54. Alex Cocotas, “Traditional Retailers Succeed in Winning Back Mobile Shoppers,” Business Insider, January 30, 2013. 55. iConsumers: Life Online, McKinsey & Company.

48. Tata Consultancy Releases Big Data Report,” Entertainment Close-Up, March 28, 2013.

56. George Westerman, Maël Tannou, Didier Bonnet, Patrick Ferraris, and Andrew McAfee, The Digital Advantage: How Digital Leaders Outperform their Peers in Every Industry, Capgemini Consulting.

49. “Crunching the Numbers; Big Data,” The Economist, May 19, 2012.

57. “Gartner Says Big Data Creates Big Jobs,” M2 Presswire, October 22, 2012.

50. George Westerman, Maël Tannou, Didier Bonnet, Patrick Ferraris, and Andrew McAfee, The Digital Advantage: How Digital Leaders Outperform their Peers in Every Industry, Capgemini Consulting.

41. “Gartner Survey Finds 42 Percent of IT Leaders Have Invested in Big Data or Plan to Do So Within a Year,” M2 Presswire, March 12, 2013. 42. “Gartner Says Actionable Analytics Will Be Driven by Mobile, Social, and Big-Data Forces in 2013 and Beyond,” M2 Presswire, February 11, 2013. 43. Larry Downes, Paul F. Nunes, “Big-Bang Disruption,” Harvard Business Review, March 2013.

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Notes

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