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BCG Digital Ventures: Fighting disruption on two fronts

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BCG must help clients transform to avoid disruption while also protecting against disruption to their own core business. BCG Digital Ventures is BCG’s innovation, incubation, and investment arm and helps client companies develop innovative products, platforms, and businesses to stay relevant in an increasingly digital world.

Boston Consulting Group is an international consulting firm that advises public, private, and not-for-profit clients all around the world. BCG is operating in an increasingly digital world in which clients depend on the firm for advice and strategy. In the past few years, BCG has noticeably increased their digital expertise through the development of more technically focused teams and creating several new subsidiary companies including the Gamma data science team and Digital Ventures, BCG’s innovation, incubation, and investment arm.

As clients corporations face increased disruption from technological advances and agile startups, BCG must be equipped to handle these threats. There are several key challenges. First, BCG’s legacy leadership and partners did not come up in a digital world. Most have MBA backgrounds and limited advanced technical expertise. BCG must bring in new leaders and experts knowledgeable in digital strategy, and begin filling the lower level pipeline with similar talent. Second, BCG is facing new disruptive competitive threats to its own business from newcomers like Catalant who offer a marketplace model for consulting services. Catalant enables companies to attain lower cost consulting work on a “per gig” basis and enables former professional consultants to work on a more flexible basis that they would through a traditional firm. Catalant already works with 30% of the Fortune 1000, the core customer base of traditional consulting. BCG is also facing pressure from traditional competitors (McKinsey, Bain) building up digital capabilities of their own. BCG must rapidly adapt to avoid being pushed out of the market. While consultants may believe the face-to-face nature of the business and the long-standing customer relationships protect them from disruption, this hasn’t held true in other professional service industries like accounting (TurboTax) or financial services (WealthFront, Betterment). Third, BCG will need to learn how to advise clients facing serious disruption risks, which may require them to advise damaging the core business to shift the innovation core. It will be very challenging to convince legacy client companies to suffer short term performance losses, especially when many of the decisions driving the existing core businesses were influenced by BCG in the first place.

In January 2014, BCG officially announced the creation of Digital Ventures, an independent subsidiary designed to form strategic venture teams to develop, launch, and grow transformational digital businesses and products.   Digital Ventures leverages BCG’s existing network of experienced advisors and extensive catalog of intellectual property coupled with a new network of seasoned entrepreneurs and operators to build successful businesses. Around the same time, BCG created or acquired several other companies with deep technical expertise, including Gamma, an advanced data science team.

Digital Ventures (DV) is headquartered in Manhattan Beach, CA, with other offices in Berlin, London, New York, and Sydney, with smaller “hatch” offices in a variety of tech-forward locations including the Bay Area, Seattle, and Tokyo. BCG president and CEO Rich Lesser firmly believes that Digital Ventures is a unique offering that will propel BCG and client companies into a digital future. At the launch he commented, “In today’s fast-changing environment, harnessing the power of digital technology is critical not only to stay competitive but to change the game. Building on our own digital experience and expertise, BCG Digital Ventures’ first-of-its-kind offering will enable executives and boards at BCG’s clients to accelerate innovation, disrupt markets, transform their businesses, and significantly increase shareholder value.”

DV enables BCG to bring in technical talent (engineers, designers, product managers) it may otherwise not be able to attract. The company was founded by Jeff Schumacher who has cofounded several digital advisory firms, held leadership positions at IBM and Accenture, led the North American marketing and sales practice for McKinsey, and served as the CMO, CSO, and executive vice president of Sports Authority where he drove a digital transformation effort. Schumacher is uniquely qualified to lead DV and firmly believes in the value the company can provide. “BCG Digital Ventures will strategically partner with the world’s leading companies to create and grow disruptive digital platforms. Digital is upsetting established business models every day. Our unique combination of capabilities and access to IP enables our clients to achieve exponential digital growth and outsized returns.”

Digital Ventures serves as BCG’s corporate innovation, incubation, and investment arm. DV partners with client companies to identify opportunities for diversification or self-disruption, and then builds those opportunities into actual companies, with BCG contributing risk capital alongside client companies, a combination of corporate incubation and corporate venture capital.  DV works with clients in many industries including healthcare, transport, industrial, financial services, consumer services, and energy.

Corporate venture capital is not a new concept. Before the 2000 tech bubble burst, corporate risk investments were very common, with many corporations putting capital behind start-ups. Even after the bubble burst when most corporate VCs pulled back dramatically on funding, several major companies including Microsoft, Intel, Merck, and Qualcomm continued to invest in start-ups, contributing to future innovation success.

Corporate venture capital is not a “backseat” form of digital transformation. Rather, it is a recognition that start-ups are often able to do what corporate entities cannot. Start-ups have a comparative advantage over large corporations given the agility with which they can pursue new opportunities. Corporations have an opportunity to join forces with emerging start-ups to combine tremendous corporate assets and resources with agility to create innovation that captures value for both. This enables incumbent businesses to grow their business and self-disrupt and provides start-ups with resources they otherwise wouldn’t have access to, especially as traditional venture funding slows down.  Digital Ventures helps facilitate corporate venture capital investment by not only identifying the ideas and opportunities corporations should invest in, but by also building those ideas into actual companies targeting a corporate exit.

Corporations can own the next innovation horizon, especially when partnered with experienced venture partners like BCG Digital Ventures. As traditional corporate business models are disrupted due to the rapid pace of technological change and the agility of start-ups, corporations will need to step-up their innovation capabilities and partner with emerging companies.  Visionary companies can re-imagine themselves by challenging established business models with new ideas fueled by technology, but this can be difficult to do in-house due to conflict with the existing business. DV offers an out-of-house highly experienced incubation capability.

Currently, BCG Digital Ventures operates relatively independently from BCG. Except for the New York office, the offices are geographically separate. Employees at the two companies have very different backgrounds; BCG consultants typically have MBAs, while DV employees are often designers, engineers, and product managers. The companies are culturally very different.  DV offices feel like tech companies compared to the corporate nature of the traditional consulting offices. As both companies grow and BCG’s core business becomes more focused on digital transformation, the two businesses will need to come together more cohesively. This will be challenging due to the cultural divide and the legacy of BCG’s core business and leadership.

As BCG works to bridge its traditional teams with the DV team, it should consider several options to ensure the teams are able to work together effectively to create the maximum value for client companies and for BCG. First, BCG should work to reduce the cultural divide. Traditional offices should (and already are) be adapted to a more collaborative work style and be designed to promote creativity, as the existing DV offices are. If possible, DV and BCG teams in the same city should be physically co-located to encourage natural connections. Second, working relationships should be incentivized. BCG partners should be encouraged to bring DV into projects and vice versa. Employee sabbaticals across the companies should be offered to build excitement and understanding about the different nature of the work. Third, DV and core BCG should build and leverage a shared set of digital resources. This will enable both teams to speak the same language and recognize the value the other can provide.

No digital transformation is easy. BCG faces a double challenge in that it must transform its own business while simultaneously advising clients on how to transform theirs.  Digital Ventures represents an innovative approach to supporting clients in a rapidly changing world.  By thoughtfully integrating DV into the core business, BCG has an incredible opportunity to stay relevant in the digital world.

 

Resources:

https://finance.yahoo.com/news/boston-consulting-group-launches-bcg-170000414.html

https://www.businesswire.com/news/home/20151022006710/en/BCG-Digital-Ventures-Launches-DV-Hatch

https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapid=268000337

https://medium.com/@BCGDV/the-emergence-of-corporate-venture-capital-2d6c6c2a57cb

https://hbswk.hbs.edu/archive/making-sense-of-corporate-venture-capital

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