How medium-sized enterprises can overcome hurdles to embrace digital transformation

Supply chain disruptions, labor shortages, price increases, and fast-changing consumer preferences are only a few of the consequences of the COVID-19 pandemic still affecting businesses worldwide.

This is part of the reason digital transformation has shown itself more of a strategic need than a matter of choice, as more and more companies leverage this process to transform their operations and value propositions. Our OMMAX experts have analyzed Germany's 150 largest family businesses by size and revenue, finding that 4 out of 5 board members are not equipped to govern this process. To make matters worse, this figure has barely improved from the equivalent study conducted two years earlier.

Today, I am outlining what needs to change for this process to bear fruit.

New people, new ideas

New joiners will likely bring fresh ideas and attitudes to the board, even better if they are digital natives. Although 13% of board members of the surveyed companies have been elected since 2020, only a quarter brought digital expertise or prior experience at leading technology companies. It’s possible to notice a positive shift in mindset, but these figures indicate a stalled adoption without enough momentum toward the necessary overhaul.

The push for change must come from top management so that the process can be embedded into all internal processes and structures.

On average, top-performing companies such as Haniel, Bertelsmann, SCHWARZ, Vorwerk, and OTTO have an average of four members with a digital background in their board rooms and integrate the next-generation owners to bridge the knowledge gap in traditional families.

With its young, digital, entrepreneurial supervisory board, OTTO is an innovative best practice example: four out of nineteen board members have substantial digital expertise, and one new member joined in 2020 with strong digital knowledge through a director position in venture capital. OTTO’s board members are, among others, Benjamin Otto, Start-up founder and VC investor and NextGen Owner at OTTO, Dr. Rainer Hillebrand, Corporate strategy, business intelligence and director at OTTO and Marius Marschall von Bieberstein, serial entrepreneur and investor.

Internal restructuring and IT legacy - hardware vs. software leadership

Having accounted for the organizational culture, its systems, and infrastructure must also be equipped to support digital transformation. This means breaking down data silos to ensure information can easily flow between departments and the management team and harnessing available data to drive digital initiatives and data-enabled growth.

According to digital expert Dr. Katrin Suder, the current competition that most German manufacturers face is how to use software to add new features and solutions to their products and turn their products into software products. We see examples in several industries where tech giants like Google and Tesla try to dominate the customer interface, and hardware producers are threatened to become providers to them.

An example from the automotive industry illustrates the competition: CARIAD

CARIAD is a technology firm specializing in automotive software. It builds on the Volkswagen Group's software capabilities and extends them further. Since its inception in 2020, more than 6,000 developers, engineers, and designers from across the globe have pooled their expertise at CARIAD. Their primary objective is to redefine automobiles as software-defined vehicles that seamlessly incorporate the driving experience into digital life.

Their vision is to transform the Volkswagen Group into a mobility provider driven by software. Volkswagen proposes that the car is akin to a “smartphone on wheels,” emphasizing the growing importance of software in the automotive industry.

CARIAD’s supervisory board consists of software, digitalization, and automotive experts from inside and outside the Volkswagen Group: CEO Dirk Hilgenberg is a senior leader in the automotive industry with more than 28 years of international experience in IT, software, and manufacturing. Lynn Logo, CTO, joined from SiriusXM, a satellite radio and audio streaming platform provider with over 40 million subscribers in the US. Rainer Zugehör, CPO, contributes to building agile organizational structures and supports cultural transformation.

Germany is not necessarily behind in software per se, but it is facing challenges in adapting to the rapidly changing global digital landscape.

There are several factors contributing to this challenge:

1. Legacy systems and processes: Many German companies have well-established processes and legacy systems that have been in place for decades. These legacy systems can be difficult to update and integrate with newer digital technologies, which slows down the pace of digital transformation.
2. Risk-averse culture: German mid-sized companies tend to have a conservative, risk-averse culture that can make them hesitant to embrace new digital technologies. There is often a strong preference for proven, well-established technologies, which can make it difficult to experiment with new digital tools and platforms.
3. Regulation and data privacy concerns: The strict regulatory environment in Germany, particularly around data privacy, can make it challenging for companies to adopt new digital tools and platforms. This can result in slower adoption of digital technologies compared to countries with more permissive regulations.

Digital presence & literacy

37% of supervisory boards in the study had no digital presence (e.g., on LinkedIn, Xing, Twitter, or other professional networks). This jeopardizes the long-term visibility of these companies and affects their capability to gain insights into the digital world and exchange about current topics and trends. Additionally, attempting to implement digital solutions without having the digital tools and literacy to interpret them severely hinders managers’ ability to measure these activities' sustainability and profitability.

If restructuring a team’s internal infrastructure ensures that information can be accessed, digital presence and literacy ensure that top management is equipped with ways to make the best assessment of results, such as being able to read and analyze digital KPIs.

Time to act now

In short, companies face diverse challenges related to digital readiness, from budgeting to finding the right strategy, tools and experts. A process that is this comprehensive must be overtaken with full leadership support, the right incentives for Management teams, and KPIs, including the implementation of mechanisms to support the cultural change that comes with it.

Since it’s less feasible to have digital experts in-house in the midmarket, where family businesses are most often represented, hybrid solutions are also possible. By setting up digital advisor networks to fill competence gaps through external expertise, SMEs can better access critical insights to embrace the crucial digital transformation process.

Our OMMAX study indicates that family businesses in Germany are far behind in digitalization and innovation, putting them at a disadvantage in a rapidly evolving business landscape where digital technologies are becoming increasingly important. To stay competitive, they need to look 5-10 years into the future, prioritize investments in digitalization, bring external digital experts into their board rooms, and develop a culture that embraces new technologies and digital ways of working, as we see in the CARIAD example.