Do you want all your digital operations to be in one location? Or do you need an outpost for each country where your company is based? This is an important decision for international companies. Each company will have its own caveats, including ownership structure, customer base and local regulations. The authors identified five key factors companies should take into consideration when analyzing 50 firms. The first is economies of skill. This means that you should centralize all digital assets wherever possible. There are three exceptions to this rule: when customer journeys vary significantly across operational areas; when you have a fast-faced model that requires quick local responses; and when your business has physical assets such as route-to market or supply chain. Many companies use local language or local regulations to justify localizing digital activities. However, this is less common than most people believe.
A heated argument broke out recently between the leaders of a large retailer of sporting goods. Although the retailer had initiated a digital transformation program, no one could agree on whether they should centralize or locally manage their digital talent. Others argued that digital activities should all be coordinated in one place. They cited Booking.com as an example, a $15B global leader for travel accommodations. Booking.com has over 1,700 developers working together in one location, optimizing the thousands of A/B testing that keeps them at the top. Others argued that digital must be local due to the nature of retail. They argued that each country needs its own digital team to adapt and meet local needs. They cited Amazon as an example of a company that has been successful in the U.S. but failed in other countries like the Netherlands where they don't have warehouses. Others suggested that there was a middle way to organize digital operations within regions.
Proponents of the local strategy won out after a lengthy debate. They soon realized that many differences between countries were more imaginary than actual. The fragmentation of their digital teams made it difficult to develop the digital expertise necessary to compete. They decided to eliminate the local plan and centralize almost all of their activities.
The dilemma faced by the sports retailer is an example of the global debate on digital transformation. Each company is subject to its own limitations: the ownership structure of their business, their customer base and local regulations all influence how they make their decisions. How can you get through all this noise and find the most important factors? We compared 50 companies going through digital transformation and identified five key factors that can help companies weigh the pros versus cons. These factors can help you choose the best balance for your digital transformation.
The Main Driver of Centralization: Economies Of Skill
Our evidence suggests that you should centralize all data digitally whenever possible. Why? The digital business needs specialized technical skills and short development cycles that are supported by high interaction. Distance makes all of this more difficult. Digital centralized activities enable critical specialization, faster learning, and scalable IT solutions. This helps to overcome digital talent shortage.
Because of the economies of skill, digital first players such as Uber and Booking.com will often move offices up to 12 times to make it easier for everyone to learn from one another. It's easy to see how it works: If one person is responsible for online marketing in each country they will also likely be responsible for other aspects such as PR and regular marketing. If you combine those 40 people, they can specialize in critical roles like UX conversion specialist and traffic specialist, CRM campaign leader, social marketer, SEO optimizers, and other roles that you didn't know were important. They can also learn from one another and collaborate better in morning standup meetings. This helps speed up the cycles of experimentation that drive growth.
Talent is difficult to find and keep. While a lone marketer may feel isolated and lonely, those who work with like-minded people are more likely to be engaged. Conglomerates such as LVMH are known for creating internal communities of practice. These groups include experts from a variety of fields. These experts are more likely stay if they feel part of a larger community than if they move to the competition.
These are the Three Drivers of Localization
Although centralizing is a good idea in general, there are 3 forces you need to consider. These are customer journeys and business model requirements, as well as physical infrastructure.
Localize around Customer Journey Archetypes
You may need to localize if your customer journeys are significantly different between areas. These differences should not be perceived, but they must be real. In the beginning, the retailer claimed that each country had a unique customer journey. In reality, the differences are superficial. Customers in the U.S. buy running shoes in a similar manner to Germans. This is why they first decentralized and only later brought all activities centrally.
The underlying customer journeys of the companies that we examined were almost identical in 80% of the cases. 15% of the customer journeys were comparable (meaning they can all be solved using a central solution), and less then 5% were country-specific (customer-driven but also regulatory-driven such as Portugal's 5 VAT zones). It is notable that B2B has more real differences than C2C.
What can you do to deal with customer journey differences? Are you able to group customer journeys around archetypes A global beverage manufacturer that sells primarily B2B products faced a huge heterogeneity of customer journeys in each market. Customers in the United States might place orders online, while Mexican customers may prefer to meet with a representative face-to-face. They had to localize the differences in customer journeys. However, they discovered these three archetypal journeys face, wholesale and hybrid selling, which allowed them to capture some of both centralization and localization's benefits.
Localize to Support High-Frequency Business Models
Different business models have different revenue models and clock speeds. This can make it difficult to localize. Some business models require you to interact with customers for long periods of time, such as subscription-based or platform-based business models. Others are more dynamic and require that you win new customers weekly, such like food retailing.
For fast-paced business models, it is often necessary to be more localized in order to provide quick response, local customization and deviation from the rules. B2B relationships, such as selling pet food and container ships to shipping firms, or professional services require a local presence, even if it is a sales team. Finally, customer needs may dictate localization. For example, a physical presence is necessary to build trust. Surprisingly sometimes, a less physical presence is required than expected. An international consumer bank studied the retail banking market and found that very few branches are needed to build trust with customers. The sports retailer was initially perceived as a high-frequency retailer that required a physical presence. However, customers purchased only a handful of times per year, so a physical presence became less important over time.
For high dependency on physical assets, localize
Some local customization may be required due to the tie to physical assets such as supply chain and route-to-market. Producing beverages is an extreme example. These products are produced in a distributed organization structure because the product must be made locally. Shipping across borders is impossible because of the low ratio between product weight and price. Decentralization may be necessary if your digital business depends on physical infrastructures. This could be product, logistics, route to market, or product. Many things that are not dependent upon physical assets can be digitalized regionally or centrally.
The Red Herring Driver: Language & Regulation
Local language and local regulations are often cited as reasons for localizing digital activity. In the majority of cases, however, these were distracting from the true drivers. These digital differences can often be managed from one central location or sourced together with a partner.
To be clear, digital is not about product development, regulatory compliance, or product development. Digital is often more centrally managed than it might seem. For instance, ING has one global overview for legal requirements and one IT backlog. This allows for faster delivery and integrated products in all regions. Booking.com is able to operate across regulatory and language boundaries, with fully centralized customer service and marketing departments. Local regulations and language may sometimes require a smaller local team. However, the benefits of localization far outweigh any loss in skill economies!
How to apply the Framework
It can do two things to help you apply the framework. These forces can be viewed in terms of their impact. The second is to consider choices as not being local vs central, but rather as the degree or types of centralization. Is there a regional archetype, or a country-level archetype? (
This is an example of how the global beverage company mentioned previously operated before this framework. Each country had a new digital team and a local level. They realized the potential advantages of economies of skills, both in attracting digital talent to older incumbents and developing their capabilities. They then analyzed the customer journeys of each country, and discovered that there were critical similarities. Some countries had sales reps selling directly to retailers. In these cases, they created smartphone apps for reps and point-of-sale tools for retailers to allow them to collect and share data on customer trends. Instead of selling on relationships only, sales reps can now give data-based advice to retailers about how they could increase sales. They sold direct to wholesalers in other countries and built digital transfer tools for better managing the relationship. The rest of the countries used a mix of both these tools.
The company did not localize the tools used in these customer journey archetypes. However, they co-created them with the central digital team and tested them in collaboration with local units. They also centralized data warehouse activities wherever possible, but gave local teams the ability to perform their own data analysis using best-in class, off-the shelf tools, as well as providing them with reports and insights.
In conclusion, companies have faced the dilemma of coordinating or localizing their business activities ever since they started to operate outside their home markets. These decisions were made on the basis of local culture and physical infrastructure. Digital has made it easier to connect, create and transact online. While economies of skill place a premium upon centralizing digital activities and customer journeys, significant differences in business models, dependence on physical infrastructure, and high levels of customer satisfaction will push the company to local solutions. These forces will help you make an informed decision about where your digital talent should be located.
