June 2023

Rewired to outcompete
Six signature moves led by the C-suite can
build organizations that will outperform in
the age of digital and AI.

by Eric Lamarre, Kate Smaje, and Rodney Zemmel

How companies navigate the technology world to achieve sustainable competitive

advantage is the defining business challenge of our time.

To be fair, this challenge isn’t new. But it’s an increasingly pressing one, with deep
implications for how companies navigate a world where digital and AI are fundamentally
reshaping how we work and live. Companies understand they need to meet the challenge,
but most of them are struggling. McKinsey research shows that while 90 percent of
companies have launched some flavor of digital transformation, only a third of the
expected revenue benefits, on average, have been realized.1

Yet it’s also a challenge with enormous potential for the companies that get it right. In the
banking sector, for example, where digital and AI transformations have been under way
for the past decade, compelling empirical data shows that digitally transformed banks
outperform their peers. We leveraged a unique data set, Finalta by McKinsey, to analyze
20 digital leaders and 20 digital laggards in retail banking between 2018 and 2022. The
results were startling. Digital leaders improved their return on tangible equity, their P/E
ratio, and their total shareholder returns materially more than digital laggards (Exhibit 1).
Digital excellence is translating into financial outperformance.

This outperformance was propelled by a deeper integration of technology across end-

to-end core business processes. This, in turn, drove higher digital sales and lower costs
in branches and operations. How did the digital leaders accomplish this? By bringing
business, technology, and operations more closely together to digitally innovate;

1
“Three new mandates for capturing a digital transformation’s full value,” McKinsey, June 15, 2022.
 Web 2023
McKQ-RewiredToOutcompete
Exhibit 1 of 2

Exhibit 1
Digital leaders are spurring more value for their shareholders.

Retail-banking example
Leaders1 Laggards2

P/E ratio TSR Return on tangible equity (ROTE)

Weighted peer group average Weighted peer group average Adjusted pretax ROTE, peer group
of P/E ratio, next 12 months of TSR, 2018–22, CAGR, % average, %

10.0 8.1
9.8 19.3

8.4
15.5 15.3
7.2
13.6
4.9

2018 2022 2018 2022

1
Top 20 retail banks between 2018 and 2022.
2
Bottom 20 retail banks between 2018 and 2022.
Source: S&P Global; Corporate Performance Analytics by McKinsey

McKinsey & Company

by upskilling their organizations; and by building a distributed technology and data

environment to empower hundreds if not thousands of teams to digitally innovate, day
in, day out. This gets at the nub of why digital and AI transformations are so difficult—
companies need to get a lot of things right.

Clearly, for digital and AI to deliver on their business transformation potential, the top
team needs to be ready and willing to undertake the organizational “surgery” required
to become a digitally capable enterprise. There are no quick fixes. You can’t simply
implement a system or a technology and be done. Instead, success means having
hundreds of technology-driven solutions (proprietary and off the shelf) working together
that you continually improve to create great customer and employee experiences, lower
unit costs, and generate value. But creating, managing, and evolving these solutions at
enterprise scale requires a fundamental rewiring of how a company operates. That means
getting thousands of people across different units of the organization working together
and working differently to digitally innovate, constantly.

The lessons learned from our work with more than 200 large companies across multiple
industries show that capturing this kind of value from digital and AI requires building six
critical enterprise capabilities (Exhibit 2). These allow rewired companies to integrate new
technologies, such as generative AI, and harness them to create value. While companies
may understand this at a high level, they struggle with how to build these capabilities
successfully and ensure that they work together across the enterprise.

2
 Web 2023
McKQ-RewiredToOutcompete
Exhibit 2 of 2

Exhibit 2
Six enterprise capabilities are critical for successful digital and AI transformations.

Transformational value comes from careful and coordinated execution across all areas of focus

Alignment 1. Business-led digital road map

on value Align senior leadership team on the vision, value, and road map for the transformation;
reimagine business domains to deliver outstanding customer experiences and to lower unit costs.

Delivery 2. Talent 3. Operating model 4. Technology 5. Data

capabilities Ensure that you Increase the Make technology Continually enrich data
have the right skills metabolic rate of easier for teams to and make it easily
and capabilities to the organization by use so they can accessible across the
innovate and execute. bringing business, innovate at pace. organization to help
operations, and improve customer
technology together. experience and
business performance.

Change 6. Adoption and scaling

management Maximize value capture by ensuring the adoption and enterprise scaling of
digital solutions and by tightly managing the transformation progress and risks.

McKinsey & Company

Our new book, Rewired: The McKinsey Guide to Outcompeting in the Age of Digital and
AI, is all about the how. This article is adapted from that book and delineates the core
aspects of what it takes for leaders to spur transformation across all six capabilities.

Before we go into detail, it’s worth highlighting two key findings. First, no digital and AI
transformation can be successful without building a baseline of competence across all six
capabilities. Second, these elements are interconnected and need to be managed that
way: a good operating model, for example, can’t work without the right talent. Similarly,
great technology won’t make much of an impact if users don’t adopt it.

You do not have to be a tech company to achieve excellence in digital and AI. Large,
established companies can outcompete and capture value, but only when they are
willing to commit to the hard work of rewiring their enterprise. This is a job for the entire
C-suite, not just the CEO or the chief information officer (CIO). The cross-functional
nature of a digital and AI transformation requires an unparalleled level of collaboration
across the C-suite, with everyone having an important part to play in building these
enterprise capabilities. Rewiring the business is an ongoing journey of improvement, not
a destination. Let’s dig into the details of that journey.

Align the C-suite around a business-led road map

When evaluating stalled digital and AI transformations, we find that many of the issues
that impede a program’s success can be traced back to insufficient planning and
alignment. Misunderstanding among leadership at the strategic-planning stage will
invariably lead to muddled execution in a company’s transformation. Because digital and
AI transformations affect so many parts of the business, investing the necessary time to

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 help make the transformation a success pays significant dividends in terms of clarity and
unified action. The best companies make sure to get three early moves right.

Inspire and align the top team. Take the time to establish a common digital language,
learn from other companies that are further along the journey, develop a shared vision
among the C-suite, and explicitly agree on a set of commitments that match your
ambitions. Consider the example of DBS Bank, one of the world’s most successful
digitally transformed banks. CEO Piyush Gupta and his top leaders visited and learned
from top tech companies around the globe and used those lessons to shape a vision
around “Making Banking Joyful” and to commit to making DBS a tech leader. This kind of
leadership alignment is crucial to ensuring a successful digital and AI transformation.

Get the ‘bite’ size right: business domains. Some companies struggle from the start
of their digital and AI transformation by getting the scope of the change wrong. They
start too small—believing that implementing a few use cases will lower risk—or they
spread bets and resources too thinly across an uncoordinated set of initiatives. Both
approaches typically produce little value. Successful companies, on the other hand,
focus their efforts on a few important business domains, such as a production process
or the customer journey, and transform them from end to end. As many as 80 percent
of successful interventions in struggling digital and AI transformations are based on
reanchoring the scope to spur a concerted effort against a few well-defined domains.

Commit to a contract with the C-suite. Effective rewiring requires companies to tie
the transformation outcomes of each business domain to specific improvements in
operational KPIs, such as reduction in customer churn or improvements in process
yield. The team builds a road map where the digital solutions that underpin these KPI
improvements are sequenced in a way to produce meaningful value in the short term (say,
12 to 18 months) and transformational value in the medium term (three to five years, for
example). The plan explicitly accounts for the build-out of enterprise capabilities, such as
hiring digital talent or modernizing data architecture. C-suite leaders commit to these KPI
improvements, and the expected benefits are baked into their business objectives. Our
rule of thumb is that a robust digital road map should deliver EBIT improvement of
20 percent or more.

When business leaders define an ambitious yet realistic transformation of their business
domains with technology, they set in motion the flywheel of digital change. The resulting
digital road map is their signature move and effectively acts as a contract that they
commit to implementing.

Build your talent bench

No company can outsource its way to digital excellence. Being digital means having your
own bench of digital talent—product owners, experience designers, cloud engineers,
software developers, and so on—working side by side with your business colleagues.
Digital transformations are, first and foremost, people transformations. The following are
three actions that digital leaders take.

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 Create a cleansheet for your talent. Most companies have digital technologists, but many
still face the hard work of reskilling their technology and IT organization. The aspiration
should be to have 70 to 80 percent of your digital talent in-house, with 20 to 30 percent
coming from outside the company and focused on specialized skills, flexibility, or both.
Your talent pyramid should shift to a diamond shape, with more competent technologists
and fewer novices. That’s because there is a step change in productivity from more
experienced technologists. You should also have a healthy ratio of hands-on-keyboard
technologists versus managerial roles. Rewired leaders target a 4:1 ratio (or better) of
engineers to managers, versus the 1:1 found at many companies.

Get religion about skills. Rewired companies develop very granular skill progression
grids supported by credentials. For example, Big Tech companies have up to ten levels
of data engineers, each with different skill levels and compensation ranges. Without a
precise calibration of skills, it becomes difficult to recognize distinctive technologists and
compensate them accordingly. Skill progression also gets built into expert-based career
tracks and in learning and development programs. In short, the whole digital-talent
model revolves around fostering excellence in people devoted to their craft.

Build the team that will build your digital bench. Many HR organizations are hampered
by slow recruiting and onboarding processes, rigid compensation frameworks, and
outdated learning and development programs for digital talent. But transforming your
entire HR organization and underlying HR processes to make them digital ready may
not be practical. Setting up a special team focused on adapting current HR processes
to win digital talent is the most pragmatic—and successful—way forward. We call this
designated team the Talent Win Room (TWR). The primary mission of a TWR is to find
technologists with the right skills and to build and continually improve all facets of both
the candidate and employee experience.

These shifts in talent practices are not simple, but they are fundamental to becoming
rewired with the right talent. While every C-suite executive will have a part to play in this
talent reinvention, this is often the chief human resources officer’s signature contribution
to the enterprise’s digital transformation.

Adopt a new operating model that can scale

Most companies have succeeded in standing up a handful of cross-functional agile
teams. But scaling up so that hundreds or even thousands of teams work that way, as
rewired businesses do, is a daunting challenge. Developing the right operating model to
bring business, technology, and operations closer together is perhaps the most complex
aspect of a digital and AI transformation because it touches the core of the organization
and how people work.

Three leading models have emerged: digital factory, product and platform, and
enterprise-wide agile. Each of these models is built on two core ideas. The first is that
small, multidisciplinary agile teams, or pods, are the most effective and efficient way
to develop software. Second, pods work together most effectively when some are

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 focused on directly improving a customer or user experience (generally called product
pods, although they can also be called experience or journey pods) while others focus
on creating reusable services to accelerate the work of all pods (called platform pods).
Examples of such services could include a customer-360 data set or an easy way for
teams to provision compute and storage capacity.

The implementation of a new operating model is, in our opinion, one of the most
significant pivots a company can make to become a rewired enterprise. There are two key
moves to getting this right.

Select an operating model that supports your strategy. The digital factory is a
separate organizational unit where people work together to build digital solutions for
the business units or functions that fund the digital factory. Companies often initially
select the digital-factory model because it is a self-contained operating unit and can
be implemented relatively quickly (typically 12 to 18 months before it’s fully operational,
though it can get started in a matter of weeks). BHP and Scotiabank, for example, have
implemented this model.

The product and platform model is a more evolved version of the digital factory. While the
digital factory might contain 20 to 50 pods, the product and platform model will typically
have a few hundred pods, sometimes thousands for large companies. When companies
move to a product and platform model, they are making a major strategic decision to
realign large parts of the organization to better exploit technology in their core business.
Amazon, Google, Itaú Unibanco, and JPMorgan Chase have all implemented this model.

Finally, the enterprise-wide agile model builds on the product and platform model and
extends the benefit of agile to the entire business, not just the technology-intensive
areas. For example, key account sales and R&D can also benefit from working in small,
cross-functional teams. Companies adopt this model when they believe that customer
centricity, collaboration, and flexible resource deployment are key performance
differentiators across the entire enterprise. ING and Spark New Zealand have
successfully implemented this model.

Professionalize product management. A crucial difference between tech companies

and their peers in other sectors is the degree to which they have embedded product
management capabilities in their operating models. This capability, in our opinion, makes
or breaks the implementation of a new operating model. Some 75 percent of business
leaders in a McKinsey survey responded that product management best practices aren’t
being adopted at their companies, that product management is a nascent function within
their organizations, or that it doesn’t exist at all.2 That’s a problem. It’s also hard to recruit
great product managers because understanding the industry and the company context
matters. Most companies end up reskilling and building new career tracks for this rare
talent, but this requires substantial investments to ensure good results.

The shift to a new operating model is the signature move of CEOs in rewiring the company.
Only they can catalyze such large-scale organizational change.

2
 handra Gnanasambandam, Martin Harrysson, Jeremy Schneider, and Rikki Singh, “What separates top product managers
C
from the rest of the pack,” McKinsey, January 20, 2023.

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 Technology for speed and distributed innovation
The main purpose of technology within a rewired company is to make it easy for hundreds,
if not thousands, of pods to constantly develop and release digital innovations. This
requires a distributed technology environment where every pod can access the software
development tools, data, and applications they need. While leaders hoping to create that
environment have a raft of decisions to make, three priorities stand out.

Kit out a technology toolbox. Just like woodworkers, surgeons, or plumbers, software
developers need the proper tools to do their work. As an organization scales from five
agile pods to 100, or even more than 1,000, it doesn’t make sense for pod members to
be calling IT every time they have a basic request, such as additional storage capacity
or access to a collaboration tool. Leading companies build a developer platform: a self-
service portal that makes it easy to access and use all the standardized and company-
approved tools.

Use APIs without exception. Once developers have their tools, they need access to
data and existing app functionalities to build their solutions. Application programming
interfaces (APIs) do that by systematically minimizing dependencies in the architecture
by making application functionalities and data easily accessible. Without it, pods will
constantly find themselves depending on other pods. Amazon’s Jeff Bezos was so
adamant about using APIs that he wrote a famous memo about it, which fundamentally
changed Amazon and the world of software. The memo essentially said that all teams
were expected to expose their data and functionality through service interfaces (that is,
APIs) and to communicate with one another through only these interfaces. No other form
of inter-process communication would be allowed. No exceptions.

Automate software delivery. Have you ever wondered how an app on your phone can
be upgraded so frequently? That seamless functionality is made possible by software
delivery automation, also known as CI/CD: continuous integration and continuous
delivery. This is the method for systematically automating all steps, including quality
checks, testing, packaging (that is, containerization), and staged deployment of the
solution to the user. With CI/CD, updates that used to take weeks or months can now
be completed in minutes, allowing pods to release incremental improvements weekly or
even daily and thus unleash much faster innovation cycles. You won’t be able to achieve
distributed digital and AI innovation if pods aren’t able to release code to a production
environment quickly and easily.

This fixation on automation needs to carry over to AI and machine-learning (ML) models.
These models are like living organisms—they need to be constantly recalibrated as new
data accumulate and then monitored in real time for drift and biases. When this doesn’t
happen, AI/ML models fail to transition to full-scale production. Solving for this has
required a specialized type of automation called machine learning operations (MLOps). For
example, Vistra, a leading energy company, built MLOps automation to support more than
400 AI/ML models deployed to optimize different parts of its power plant operations.

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 Most CIOs have started their companies’ journey to build a robust developer platform,
decouple the components of the architecture from one another through APIs, and
automate their software delivery pipeline. But we know very few companies that have
scaled this across their enterprise. The change management efforts are significant, and the
software engineering talent required is in short supply. Creating a technology environment
that enables distributed digital and AI innovations is a cornerstone capability of rewired
enterprises and a signature contribution by the CIO, the chief data officer (CDO), or both.

Embed data everywhere

In established companies, data is often a source of frustration. As much as 70 percent of
the effort involved in developing AI-based solutions can be attributed to wrangling and
harmonizing data. Unless data is thoughtfully sorted and organized for easy consumption
and reuse, scaling solutions can be a big challenge. The ability to constantly improve
customer experience and drive down unit cost depends on giving each digital and AI
team (near) real-time access to data. Companies can focus on three areas to achieve this.

Turn to reusable building blocks: data products. Data products are the secret sauce
for scaling AI. They help deliver data-intensive applications as much as 90 percent
faster, at 30 percent lower cost, and with a reduced risk and data governance burden. A
data product delivers a high-quality, ready-to-use set of data in a way that people and
applications across the organization can easily access and consume. For example, a
data product could provide a 360-degree view of an important entity, such as customers,
employees, product lines, or stores. Companies can prioritize building data products that
have the broadest application, that are critical for teams developing priority solutions,
and that are unique. Building data products requires dedicated teams and investments.

Install the data architecture ‘plumbing.’ Data architecture is the system of “pipes” that
deliver data from where it is stored to where it is used. When implemented well, data
architecture hastens a company’s ability to build reusable and high-quality data products
and to put data within reach of any team in the organization. We have seen very rapid
technological progress in this field. The emergence of new architectural patterns such
as the “data lakehouse” (an innovation that combines the capabilities of a data lake and a
data warehouse into a single, integrated platform) makes it easier for companies to solve
for both their business intelligence and their AI needs.

Federate data governance. Data touches all aspects of an organization, so its governance
needs to account for that complexity. Rewired companies deploy a federated model where
a central function (that is, a data management office) sets policies and standards and
provides support and oversight, while business units and functions manage activities such
as developing data products and building data pipelines to enable consumption.

A data environment that allows for easy data consumption by hundreds of distributed
teams is another signature move of the CIO in collaboration with the CDO. It enables

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 data-driven decisions, feeds real-time decision-making systems, and propels faster
continuous-improvement loops.

Unlocking adoption and scaling

Developing a good digital solution can be complex and difficult. But getting customers
or business users to adopt that solution as part of their day-to-day activities and then
scaling that solution across the enterprise are often the biggest challenges. Successful
companies concentrate on the following three moves.

Focus equally on adoption and development. User adoption starts with developing
great technology solutions that offer an excellent customer experience. But companies
often underestimate all the additional elements of the business model that need to be
changed to secure adoption. For instance, an insurance company that developed analytic
solutions to help agents upsell customers on policies also needed to make changes to
pricing algorithms, sales force incentives, distribution and customer engagement models,
and metrics and performance indicators. That end-to-end system approach, with a focus
on the people side of the equation, is what differentiates digital leaders. They achieve this
by making the business accountable for the end-to-end transformation of the domain.
As a rule, for every $1 spent on developing digital and AI solutions, plan to spend at least
another $1 to ensure full user adoption and scaling across the enterprise.

Scale with ‘assetizing.’ Replicating the adoption of a solution in different environments,

such as a network of plants, or in different geographic markets, customer segments, or
organizational groups is challenging. Companies often find themselves redoing a lot of
work and struggling to tailor solutions to local environments. All this extra work is a scale
killer, and that’s why 72 percent of companies stall at this stage. Digital leaders solve
this by “assetizing” solutions, which typically allows 60 to 90 percent of a digital and AI
solution to be reused, leaving just 10 to 40 percent in need of local customization.

Track what matters. No one will debate the need to measure the progress of a digital
transformation. But the question is what to measure and how. Performance tracking that
is poorly designed and lacking the right supporting tools can quickly crumble under its
own weight. Rewired companies take the pods responsible for objectives and key results
and link them to operational KPIs, tracking the progression of each pod in a disciplined
stage gate review process.

The ability to capture the full economic potential of digital innovations is a core
differentiator between digital leaders and laggards. Building this capability is the
signature move of business unit and function leaders.

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 The capabilities we have laid out for a successful digital and AI transformation present a
rich “how to” agenda. You may be wondering where to start your rewiring journey. Why
not start where we began this article: by bringing the top team together and having
them reflect on your journey thus far? A digital and AI transformation is ultimately an
exercise in constant evolution and improvement. If you accept this premise, it will change
your perspective on how you approach this critical challenge. To borrow Jeff Bezos’s
expression to Amazon shareholders about the importance of operating like a digital
native: it’s always day one for digital and AI transformation.

Eric Lamarre is a senior partner in McKinsey’s Boston office, Kate Smaje is a senior partner in the
London office, and Rodney Zemmel is a senior partner in the New York office.

Copyright © 2023 McKinsey & Company. All rights reserved.

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