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May 23, 2022 | 23 Mins Read

Clarifying Digital Transformation vs. Innovation

May 23, 2022 | 23 Mins Read

Clarifying Digital Transformation vs. Innovation


Dan Toma, Innovation Thought Leader and award-winning author of the Corporate Startup and Innovation Accounting, as well as co-founder of Innovation Advisory Firm OUTCOME, talks with Sarah about the differences between Digital Transformation and Innovation and why/how the terms can be erroneously used interchangeably.

Sarah Nicastro: Welcome to the Future of Field Service podcast. I'm your host Sarah Nicastro. Today, we're going to be clarifying the difference between digital transformation and innovation. I'm excited to share today's conversation with you all, because this is something that I noticed myself maybe using these terms interchangeably a bit more than I should. Recently had a learning on that and excited to share that with you all today. Welcoming to the podcast, Dan Toma, who is an innovation thought leader, award-winning author of two books, The Corporate Startup and Innovation Accounting, as well as co-founder of Innovation Advisory Firm OUTCOME. Dan, welcome to the Future of Field Service podcast.

Dan Toma: Sarah, thank you very much for having me.

Sarah Nicastro: Yeah, thanks for being here. Okay. So before we dig into it, tell our listeners a little bit more about yourself and your journey.

Dan Toma: Sure. My background is actually in entrepreneurship. So when I was 19, I founded my first company, software development. And then I was obviously attracted by the idea of startups, building products, building digital products in particular. And I was just were working with other people's startups, with accelerator programs. My startups, first two startups really failed. Now I am probably at the fourth and now this one seems to be going somewhere. So I'm approaching everything with the entrepreneurial mindset, if you want. But at one point in my life more by chance than by design, to be honest with you, I was head hunted by a large organization and actually they were a company and telco business. They wanted to get more blood from the startup world into their ranks. So they head hunted me and I've spent about three years with them.

Dan Toma: And that's actually where the first book, the Corporate Startup, was born because I was essentially seeing a big need and I was actually trying to solve my first problem to begin with and then probably create something for other people to follow. The idea was that large organizations were, and in particular, the one I was working for, terrible at building digital products. They were essentially building it backwards from what we were used to doing in the outside world, in the startup scene.

Dan Toma: Essentially they were starting from a business plan. Financing the whole thing they want and then probably after six months, they would put a prototype in the hands of a customer only to learn that doesn't work. Which was the exact opposite of what we were doing in the startup, where we were starting with a prototype, asking some people if they like it. And then maybe go to ask for some financing from some investors. So you saw where I was living in and I said to myself, I need to do something about it. I started blogging. I started speaking at conferences and that's how the Corporate Startup was born.

Sarah Nicastro: Okay. All right. So the Corporate Startup is the first book. Now I met Dan through the second book, Innovation Accounting, and that book is new. And so I have a copy of it. And Dan, I shared this with you. I'll be honest. Accounting is not my jam. So I got the book and I thought, "Whew, this is going to be a little heavy for me." It's such a good book. The content is great, but also the layout and the design and the way the whole thing's done is really good. But it actually urged me to buy the first book because there was reference to a lot of points that I just thought were super, super important for our audience. And so, as I was, as I was reading Innovation Accounting, the one point that really stuck out to me is this point about distinguishing digital transformation and innovation. This is where I said, I realized that there have been times where I've used those terms interchangeably and while they can maybe in some ways be connected, they're not synonymous. Okay, so can you define for folks each? So digital transformation and innovation?

Dan Toma: Sure. I can give you my working definition if you want. This is probably not going to make it in any dictionary anytime soon, this is just my working definition. The idea is the following: on digital transformation, what your company's essentially doing is putting the digital skin and digital interface to a legacy product. If that legacy product is called risk management for loan applications or something that has to do with a pen and paper process that now can be run more effectively and more efficiently through a digital channel, that's essentially digital transformation. However, in digital transformation, you are not necessarily creating any top line growth to your organization. You're still going to sell the mortgages. Now you're just selling them via an app that does the risk assessment in 15 minutes versus is three days, whatever. I'm just giving a random example here. So we are just becoming more efficient in our core business through digital transformation.

Dan Toma: That will be my, my definition. Now, if we want to build top line growth, if we want to expand beyond our current court day, if we want to look into, let's say banking for, I don't know, inhabitants of Mars. Again, totally random example. That will be probably more towards the innovation side. So innovation is creating top-line growth, is helping you explore areas that fall outside of your today's core and digital transformation is essentially making your core today more efficient, and it's helping you survive with today's core longer into the future. So your core won't die tomorrow or next year, but probably in five years, 10 years, or longer. Organizations need both, unfortunately.

Sarah Nicastro: Yeah., no, I agree. And so in the book, I just thought this was so well said. So innovation is the crew of new value. Digital transformation is around keeping existing business models and processes valuable in the digital age, which improves customer satisfaction and lowers operational costs. Now I think where it can get confusing for folks is the improving customer satisfaction part. But this is where the distinction gets important, because are sort of incrementally improving on what you've always done or are you creating something net new? And I think that it isn't uncommon for people to think of or refer to the two terms interchangeably. So to your point, companies need both, but what are the reasons you think people can sometimes confuse the two or consider the synonymous when in reality they're different?

Dan Toma: Right, well, it's common for people to use the terms interchangeably or use them as a synonym, to some extent, because in all fairness, digital transformation is to some extent incremental innovation. We're just taking something that we've been doing and making it slightly better. That's the nature of companies today. That's the nature of what they do. Continuous improvement, seeking continuous improvement and doing continuous improvement on their for business. This is what they are known for. Look at the look at the automotive industry. They're building every year on the experience and on the success of the previous year. They're just making the new model a bit more fuel efficient, and giving it a bit more flavor in terms of high tech features and so on and so forth. But essentially it's the same car as the year before.

Dan Toma: Especially if you look at it from a business model perspective. It's just like, I'm going to the Toyota dealership and I'm buying a Toyota, that's it. It doesn't different any way from the Toyota that bought five years ago or a year ago, or the one I'm going to buy next year. Now this is why the confusion, because some people believe that innovation is a one size fits all type of word. And you can just use it for everything. I think that one of the big lessons learned for us, and I think it's actually in chapter one of the book, whenever you want to start doing innovation, the first thing you want to do and you need to do is to define what innovation means for your organization. Because different people can mean different things whenever they say innovation. Some people might refer to innovation as being digital transformation, and they will not be necessarily wrong in thinking that, but some people might be, let's say thinking more about the disruptive side of innovation. Flying cars. Again, let's take the automotive company example.

Dan Toma: Some people might think that yes, pay per use or pay per minute for a car might be innovation. Or a flying taxi, or an autonomous vehicle might be innovation. Whether some believe that if you just take the, I don't know, hybrid engine and make it a bit more fuel efficient for next year is innovation. And actually everybody's right. This is why it's very important in your organization to have very clear definitions and very clear boundaries between various types of innovation, digital transformation and innovation, or different parts of the spectrum of innovation. Because essentially the way you are defining these, is going to inform how you approach them, the tools you use, the processes you use, the indicators you put in place. Speaking about innovation, accounting. We can't hope to measure in incremental innovation or digital transformation with the indicators that we propose in the book for breakthrough transformation and vice versa. This will not work. This is why it's very important to define because from the finishing, you can draw actions and you can draw all the other things.

Sarah Nicastro: So as I think about how your content to our audience specifically, I think that where some of the, I wouldn't even necessarily say confusion, but some of the interchangeability of the terms comes in is because for a lot of folks within our audience, the reason that they are digitally transforming is to enable new business models, i.e. innovation. And so that's where I think the intersection is. But I think the definitions you lay out, I think could be very helpful for people to think through that lens. Because I also think that sometimes companies think if we digitally transform, we can just innovate. Like it's just a cause and effect type of situation. When in reality, it takes a lot more strategy and concerted effort, so...

Dan Toma: And capability and skill.

Sarah Nicastro: Right.

Dan Toma: The skill that you need for digital transformation, the capabilities you need for digital transformation are not going to be sufficient once you're trying to innovate. Let alone talent. If you are trying to hire somebody and that particular person has an amazing track record of helping organizations digitally transform, it doesn't mean that that's the right person for you to build, let's say, flying cars again. It's not going to be the right person for disruptive innovation. You need different skillset, different personalities, if you want. So this is why I always say guys, make the distinction before you start investing.
Sarah Nicastro: Yeah. So, all right. So we talked about the working definition of each and some of the areas where they intersect. Now, you said companies need both. Okay.
Dan Toma: Yes.

Sarah Nicastro: So that makes sense. But what are your thoughts on how a company should determine which to focus on at any given moment or how to prioritize or do organizations just have to become comfortable doing both in parallel?

Dan Toma: Well, to some extent, utopia would be if an organization can do both at the same time. We're talking about ambidexterity. You're able to operate the core business while at the same time inventing the core business of the future. But that's utopia. I'm not saying that it doesn't exist. I'm not saying that organizations that do this don't exist. On the contrary, there's a lot of examples. I'm a big fan, for example, of New Pond. They are an organization that's always searching for new while at the same time operating the core business and digitizing the core business. And there's so many the other names I can think of. Now to your question. How do we decide which one do we put first? And how do we decide which one do we focus on?

Dan Toma: Well, it really depends on your organization. It depends on your industry. Obviously you have to build a roof in the summer, not in the winter. So if the seas are still calm, I think you should definitely start investing in innovation. If you believe that you have a strong market position today, if you are profitable, by all means start investing innovation because innovation will definitely cost money. It will go from failure to failure initially, before you will see any form of success. If on the other hand, you are under pressure from competitors, from the industry landscape changing, from any other things that might cause the ship to rattle if you want. Then probably digital transformation should be prioritized. Prioritize what's happening today, what's happening in front of you in the next, I don't know, 12 months, 18 months, five years max. You don't have the luxury at that time to start thinking about flying cars and going to Mars and all this innovation stuff.

Dan Toma: However, if you are, as I said, when you have a market position that allows you to start thinking about the future, you are the leader in your market, the market is pretty stable. You've been winning in that market with that particular competitive advantage or particular competitive advantages that you have, then by all means start to investigate innovation today. It's better to invest sooner than later. Don't get yourself to a point where you really, really needed innovation. And there was nothing in the pipeline. Take, for example, the cases of companies that we've seen struggling at the beginning of the pandemic. Most of them weren't digital. Most of them, they didn't have any other revenue stream besides walk-in stores. And the walk-in stores were like literally overnight closed. And think about airline agencies, airline companies.

Dan Toma: They were so used to operating aircraft and they had absolutely no revenue coming from any other source, besides I'm taking this plane and moving it from airport a to air point B and I'm making a profit because there is people there. Well, all of a sudden there weren't any people. So I'm just wondering why haven't they invested earlier or sooner into teleconferencing solutions or something that would essentially mitigate against the potential scenario where the core business no longer exists or is being slowed. There was a very interesting infographic. I actually encourage the listeners to go look it up. When at one point in 2020, Zoom's valuation was bigger or equal than the valuation of all the U.S. based airline companies combined. So I was like, okay. So I'm just wondering how many CEOs of those airlines were pitched by a junior staffer, a conferencing tool at one point, or at least the idea of let's invest in Zoom.

Sarah Nicastro: Right.

Dan Toma: That was a really funny seeing that infographic.

Sarah Nicastro: Yeah, yeah. And I think you mentioned the utopia is to be able to do both of these things in parallel. And while that might not be realistic for everyone, I do think that we need to be challenging ourselves more to think about innovation and how that fits into the business. And because you see a lot of those thoughts and ideas and practices just getting pushed, because it isn't the thing right now, but that's the whole point. So, I think it's something that companies that aren't doing both simultaneously need to be the thinking about how they can make more room for innovation without sacrificing the current business. I think honestly, segueing to the next point.

Sarah Nicastro: One of the things that prevents companies from maybe integrating this, this being innovation, integrating innovation better into the business is that it's difficult to measure the success of. So that's what the whole second book innovation accounting is about. Talking about how some of the standard ways that we measure success do don't fit innovation. So obviously we don't have time to get into all of the details of that book, but can you sort of give an overview of why those standard practices don't work for innovation?

Dan Toma: Sure. Again, Innovation Accounting is the book that, to be honest with you, I always wanted to write, but I had to write the Corporate Startup before writing Innovation Accounting. First of all, I was not mature enough. I didn't understand innovation as well back then, as I understand it now. This is why it took probably five years to start thinking about Innovation Accounting against for writing that. One of the interesting things about the world that we live in is that the value of tangible assets, if you want, the value, not in terms of their monetary value, but their value in terms of your business is going down. They are becoming the commodity. If we want, Dan and Sarah can start an airline tomorrow. It's not a big competitive advantage to buy an aircraft or to buy a parking spot at Heathrow or something like that.

Dan Toma: That's becoming a commodity. Why we will never win against British air or Southwestern or Lufthansa is on operating the airline, operating that asset. And obviously with digital companies, this is getting even more interesting. Think about Twitter. Think about Spotify. Think about Netflix. What is the value of their physical assets? Well, the servers, the desks, the computers, that's fine. I mean, everybody can buy that. What people can't buy is the culture within, within Spotify. What, who can't buy and replicate is the algorithm that Netflix is using to suggest all those videos for you to watch. What we can't buy is the customer centricity of Zappos. We can buy the desk that Zappos is using. We can buy the computers people are using whenever they upload products online on the platform, but we can't buy that culture. We can't buy their approach, their process.

Dan Toma: And as I said, with digital companies, this is even more interesting because the amount of physical assets that they have is sometimes very low, but their evaluations is probably higher than a company that has a lot of physical assets on their books. Why? Because us as society, we value them differently because we look at them through the problems that they solve, through how much they are being used, to the network effects that they have baked into their business models. And this is why innovation and standard accounting don't go well together. Because in innovation, we are essentially trying to build things that are not that heavy on assets and financial accounting, in particular is looking at the value of a company or value of an idea through the number of assets it employs. And actually with innovation, we're doing the exact opposite.

Dan Toma: We want the employee as little, assets as we can. Take, for example, Airbnb or Uber. How many cars does Uber have? Well, zero because they don't own anything. And the same goes for Airbnb. How many rooms do they own? Unlike Hilton, which they only have millions of rooms around the world, Airbnb doesn't. And this is why the two systems, if you want, innovation system and the financial accounting system were not meant to go hand in hand, this is why we struggled. As I said, for quite some time to build a complimentary system to financial accounting, that's able to account for digital innovation. That's able to account for early stage innovation, even more interesting to account for early stage innovation when you have an acute absence of financial data. If we started a startup tomorrow, we are probably not going to be profitable for the next quarter or for the next two years.

Dan Toma: And in some companies, take Tesla, for example, or FedEx or Amazon, they weren't profitable for the first five years. We need to have a system that allows us to say, "Yes, this idea is going to be successful, but in the future, not now, let's not discontinue it." Otherwise, we might fall into the classical corporate trap where we value everything through the lens of financial accounting, and guess what we're going to do? We're always going to prioritize the core business and investment in the core business. And we are going to do that by always putting on the back burner innovation and innovation ideas until we actually need them. And when we need them, we're going to be sitting there and looking at our ourselves and say, "Okay, so where's our innovation that should have saved us now?"

Dan Toma: Well, it's nowhere to be found. Why? Because we just used the wrong metrics whenever we had to take investment decisions. I always give this simple example. I try to dumb everything down. Whenever I'm explaining this, I always say, well, if we take our kids and take them to a swimming competition, they have their own benchmarks for their age bracket. We are never going to evaluate a 10 year old swimmer or a 15 year old swimmer for the performance of somebody that just won't medal of the Olympics, because it's just impossible for a 10 year old to compete with a 20 year old and be able to hit the same benchmark.

Dan Toma: This is why for every age group, we have different benchmarks. So if we do that in sports, if we do that with athletics teams, why don't do this with business? Why not do this with innovation? Why do we compare an idea that was essentially founded three months ago or three weeks ago, or three days ago with a core business that we've been having for about a hundred years? We should never do that because we're going to be super disappointed by what we have in front of us, what we've learned. And as a result of that, we're just going to invest in the core business.

Sarah Nicastro: Yeah. And to your point, failure is a natural part of innovation. So then what happens is these companies reach that first failure point panic and jump ship. And so the book is it gives some really good perspective on why we need to be thinking about this differently and what those more reasonable and worthwhile metrics are. So I'm going to ask you a couple of pretty unfair questions, because I'm really asking you to sort of scan the memory banks and give us a nugget out of a whole lot of knowledge. But so thinking about digital transformation specifically, what would you say is the biggest myth or misstep that you would caution folks against with digital transformation?

Dan Toma: I would say that probably the biggest mistake organizations make when they want to do digital transformation is thinking that they only need digital transformation. That after they do digital transformation, everything will be fine. There will be no more competitors. There will be no more fires to fight. Everything will be sunshine and rainbows. And another mistake that they make very much connected to this one, is that they think that digital transformation is a destination and it's not a journey. I've been seeing that. Once we're going to become a digitally transformed, like really? What does that make? What does it mean? It's a journey. It's not a destination. And again, stop thinking that you only need that.

Sarah Nicastro: Yeah. I wrote an article not too, too long ago about the term itself. Should we just start calling it something different. Like the digital continuum or the digital journey, or I don't know what else. I think I threw some other options out, but yeah, the word transformation, I think gives companies the connotation that it's step, step, step, complete, and it's just a false reality. Okay, so same question, but for innovation. What is the biggest myth or misstep you see related to innovation?

Dan Toma: I think, again, from my experience, one of the biggest mistakes I've seen organizations make is that they focus too much on the technology side. They believe innovation equals technology, and they only focus on technology. They ignore customer experience innovation, they ignore channel innovation, they ignore business model innovation. They just believe that if they're just going to invest in blockchain or invest in AI, that will be enough. My question to them would be okay, you invested in this amazing AI technology, what do you do with it? What is the product that you were building? What is the value that you were creating for an end user with that AI?

Dan Toma: Just saying that we acquired and we're going to sell it to our customers is not enough. And that's not innovation. That's at the very best some low key entrepreneurial mindset, but that's definitely not innovation. I think too many organizations focused too much on the next shiny technology without actually remembering the fact that the technology needs to work in an ecosystem. It needs to be built within a product that people would like, and people will benefit by using that particular product, so on and so forth. So stop thinking technology, think wider than technology, think business modeling, think customer experience, think customer engagement. Think channel.

Sarah Nicastro: Yeah. Good. So I thought of one other question, Dan, which is you mentioned that you were, you were head hunted and you went to work for this telecom and they wanted you specifically because of your entrepreneurial background. And so I think kudos to them for understanding that they needed more of that to innovate, but obviously you got in there and were like, "Whoa, whoa, whoa, what did I sign up for?" So I think the idea is a good idea. I think the idea of recognizing that if you are relying solely on your legacy to innovate, that could be significantly more challenging. It's sometimes very helpful to have outside perspective, outside ideas, outside talent. What though is the key to companies creating a better culture for innovation to exist? And I realize that's not an easy question to answer, but if you had to give some initial advice for people on, okay, if you recognize you want to create more innovation and you want to bring people into the business to do that, then you know, start doing x or not doing y.

Dan Toma: Right. It's definitely a difficult question and I'm not hoping to have the right answer here. I mean, it's probably one of the questions that's been puzzling thinkers for years now, decades. I would venture definitely venture here, a suggestion. First of all, you should really make a point out of the fact that you really want to grow for innovation, meaning that you are heavily investing in innovation and not just investing dollars, but investing time. Make sure that your leadership speaks about innovation on an ongoing basis. That they champion innovation with every opportunity that they have. And that innovation really sits on their agenda. Literally sits on their agenda. Like they have time booked in every week, every day, every quarter to just focus on innovation. And then the other point would be start improving your innovation process, because process will drive culture.

Dan Toma: And if you want to have a new culture, if you want to attract people with a different mindset, build a system that will force some old people to realize that probably innovation is not for them and will force HR to start recruiting for innovation. It's a very good point. You brought up and this reminding to me of some work I've done with an insurance company out of Germany, I'm not going to name names here, but the idea was the following: the head of the innovation lab, this was the lab passed with building beyond core experiences, beyond core solutions. Bear in mind, this company was 150 years old. So something like that. And some people actually, I think were 150 years old as well. And this guy was tasked with running the lab building, building the insurance of the future, think beyond core.

Dan Toma: So on and so forth. The problem for him was that in spite of the new lab that he had, the new processes that he used, all the thought leadership that he brought in, the problem was that HR was only hiring people that had insurance written on their CVS. People that worked with other insurers in the region, sometimes even brought them from abroad. And he said like, "I can't innovate with these people because these people can only think insurance in the way that insurance has been fought about for the past 100. And I don't know, 50 years, I need to have people that come from automotive. I need to have that come from the music industry from entertainment, from travel, people that think differently about insurance, because they don't have that legacy."

Dan Toma: Obviously it was very difficult for him to do that. And obviously he was fighting an uphill battle with HR. But the point I'm trying to make here is that if you want to really become an innovative organization, make sure that you have a strategy, make sure that you speak about innovation, make sure you champion. And by all means, make sure that HR is on board with you. Because if HR is not on board with you, if HR is not helping you recruit the right talent, it's not helping train the people that you already have. You won't be getting very far.

Sarah Nicastro: Yeah, no, that's really good advice. And I was thinking about that because like I said, I think the idea is good, but you have to understand that you can't bring one or two great people on and expect them to transform the whole business. There has to be a structure behind it. And I think the HR point is a really good one. And I think it also ties back to Innovation Accounting, because the other challenge is are your expectations realistic for what that journey is going to look like? They could have brought you on to innovate. And then, like I said earlier, you hit the first failure and they panic and send you on your way. Because they don't have the understanding of what that's going to take. So all very much tied together, all really interesting. And I really appreciate you coming and sharing, tell folks where they can find the books, where they can learn more about you and how to stay in touch

Dan Toma: The books, you can find them on Amazon. We're just starting delivering in the U.S., I think as of last week or two weeks ago. So is a great source for the book. Just type the Corporate Startup or Innovation Accounting.

Sarah Nicastro: Have them here.

Dan Toma: Ah, here we go.

Sarah Nicastro: And it's, like I said, they're really, really well designed. I don't know. I thought that the layout of them was really cool. There's some workbook type stuff, there's different exercises to do. And it's something that, like I said, just knowing myself, I wasn't expecting it to be as engaging. And so yeah, they're definitely worth ordering.

Dan Toma: Yeah. Thank you very much for that. And if you want to stay in the much with me, LinkedIn or Twitter are the best places you can find me. So on Twitter, you can find me with the tag danto_ma and on LinkedIn, just type in my name, Dan Toma and I'm going to pop there with the books as the cover.

Sarah Nicastro: That's cool then. All right, Dan. Well, thank you so much. I appreciate you being here and really enjoyed the conversation and your content and hope to have you back again sometime soon.
Thank you very much.

Sarah Nicastro: You can find more by visiting us You can also find us on LinkedIn as well as Twitter @thefutureoffs The future of field service podcast is published in partnership with ifs. You can learn more As always, thanks for listening.