MASTERING

THE CHALLENGE OF
DIGITAL
TRANSFORMATION
By Karl-Heinz Streibich, CEO of Software AG

MARCH 2017 WHITE PAPER

Mastering the challenge of Digital Transformation

Digital disruption is the number one obsession haunting today’s management

teams worldwide. This is particularly true in traditional, established and physical asset-
based companies.
On the other hand, unlimited digital opportunities are the number one driving force
in today’s digital development hotspots, from Silicon Valley to Bangalore. “Make the
world a better place”, or at least, “change the world” and build the next Unicorn (a
digital company with a $1+ billion valuation) in a short period of time, are the mantras
of new “digital-born” players.

1. New digital business models are written in software and connect the
digital and physical worlds.
2. Every company must realize that their own software development will
be their primary source of innovation and growth, so become a “think
software first company”.
3. Digital companies have a platform-oriented architecture that leverages
micro services & API Management.
4. CIO roles are extending into Chief Digital Officer functions, with
a direct impact on business strategy and in full alignment with the
management board.

Digital and physical:

Two disconnected worlds? Not at all. Established
companies are building up software know-how and
are acquiring software companies to accelerate
their digital transformation by injecting software
innovation capabilities into their core business areas.

2 MARCH 2017
 Mastering the challenge of Digital Transformation

Digital business models are written in software

Why? Because digital companies - digital disrupters - base their business models
on software platforms which are able to manage large data streams in real time in
order to draw intelligent conclusions faster than any traditional company is able to.
Based on these software platforms, digital companies create enhanced or totally new
business models which offer completely new digital customer experiences.
The new digital-born enterprises are typically free of any physical assets such as
fleets, factories, machinery and other goods. This is the reason why they can move so
fast, often resulting in exponential growth. “The winner takes it all” is a consequence,
where traditional companies are reduced to pure asset providers, or device partners,
thus losing direct customer contact.
The threat, being reduced to a device or physical asset provider, exists for every
traditional company in any industry, and it is happening now. However, it is not
a natural law that the digital challengers can hijack the customer relationships
of traditional companies. If they fight back with the same weapons, a digitalized
weapon powered by a true digital software platform, then they can fearlessly face the
challenge.

To understand what makes today’s digital

challengers attractive to customers and consumers,
we have to take a look at their core competencies
and differentiators based on their digital software-
based technology.

3
Mastering the challenge of Digital Transformation

Digital challengers separate companies

from their customers
When digital challengers attack a market segment, they try to drive a wedge
between the existing companies and their customers and provide a completely
new way of customer interaction based on digital technology. Uber does it with taxi
DIGITAL
services. CHALLENGERS
Airbnb SEPARATE
does it with accommodation THE
rentals. CUSTOMERS
Alibaba does it withFROM
millions of
ESTABLISHED COMPANIES
manufacturing and retail businesses (see exhibit 1).

Hotels Retail Banks Insurance ... Any industry

DIGITAL DISRUPTION
DIGITAL DISRUPTION

Exhibit 1 - Digital challengers separate the customers from established companies

This not only happens in the business-to-consumer (B2C) market but also in the
business-to-business (B2B) world. The most advanced of the traditional large global
companies also try to create a barrier between competitors and their customers by
implementing a software layer between them to offer effective, in-house built digital
services for their customers, based on data from their smart products and from their
competitors.
Public organizations will follow as well, as a lot of state-owned monopolies will be
severely impacted. The provision of digital signatures, trusted paper delivery, or
any other form of physical stamp-based approvals, can be substituted by trusted
Blockchain technologies, for example, which are already used as a trusted payment
process. This has the potential to make banks obsolete.
Millions of customers, consumers and citizens enjoy, and now expect everywhere,
real-time, personalized and around-the-clock services (24x7). The technology
required, Big Data streaming analytics platforms, or digital platforms, is the same as
for Industry 4.0 (I4.0).

4 MARCH 2017
 Mastering the challenge of Digital Transformation

Implementing digital capabilities for

digital use cases
Digital capabilities
There are 5 key digital building blocks which contain the core digital capabilities that
every enterprise needs (see exhibit 2). All digital capabilities are modular, API enabled
and event-driven, which is ideal for creating a micro-services oriented architecture.
Hybrid Integration and API Management is at the heart of any digital architecture
DIGITAL
since CAPABILITIES
these architectures are built on heterogeneous and distributed IT landscapes.
5 BUILDING BLOCKS OF THE DIGITAL BUSINESS PLATFORM
BUSINESS & IT ANALYTICS & Business Process Process
TRANSFORMATION DECISIONS dashboards discovery monitoring

Business strategy Pattern Visual Predictive Event

& planning detection analytics analytics processing

Collaboration
PROCESS Process Application Case
automation development management
Design &
analysis Mobile Task Rules Process
enablement management management orchestration
Risk & compliance
management
INTEGRATION Application B2B Integration Cloud service
Audit integration integration services integration
management
IoT Mobile Services API API
Portfolio integration integration governance gateway portal
management

Enterprise IN-MEMORY In-Memory data Universal Search & Continuous

architecture DATA management messaging compute query

Exhibit 2 - Digital capabilities. 5 building blocks of the digital business platform

The digital transformation journey for classic organizations requires a digital

roadmap, describing the business strategy and milestones and clear goals defining
the “when and how” to implement the digital capabilities that make digital-born
companies such dangerous competitors.

So what should traditional or so-called

classic organizations do?
The answer is simple: Become digital. To become a
company with digital capabilities is a transformation
journey. And the faster it happens, the better.
5
Mastering the challenge of Digital Transformation

Digital use cases

Digital end-to-end customer experiences include real-time customer interaction, but
also real-time operational performance transparency, for predictive maintenance,
smart logistics or smart manufacturing, consumer location detection and
personalized information feedback. These are currently the major topics and there
DIGITAL
are many moreBUSINESS
to come (see SERVICES
exhibit 3). (USE CASES)
BASED ON THE DIGITAL BUSINESS PLATFORM

Predictive Cloud Service Agile Partner Rapid

Maintenance Integration Integration Process Change

Corporate
Smart IT-Project and API Management
Performance
Manufacturing Portfolio Management
Management

Customer High Performance

Smart Digital Workplace
Experience Database
Insurance Automation
Management Offload

Digital Customer Risk & Compliance Predictive Analytics

Process Digitalization
Journeys Management

DIGITAL BUSINESS PLATFORM

PLATFORM SERVICES FOR THE INTERNET OF THINGS
Exhibit 3a - Digital business services (use cases). Based on the digital business platform

IoT IoT IoT IoT

Integration Analytics Hub Modeling &
Portfolio
Application Visual Management
integration analytics Device
Connectivity
Big Data Artificial
integration Intelligence
Device
Business strategy
Management
Cloud service Pattern & planning
integration detection
Edge Services

Device Design &

B2B Adaptive Decision Agents analysis
integration Predictive Analytics
Edge Portfolio
API Event Analytics management
portal processing

Digital Business Platform Container

Exhibit 3b - Digital business platform. Platform services for the internet of things

The Internet of Things (IoT) is the core driver of new digital business models. IoT
services are the means to enable new data centric digital use cases.

6 MARCH 2017
 Mastering the challenge of Digital Transformation

Rebuild your software expertise

Building software skills and expertise is core to surviving in the digital world.
Becoming a digital enterprise can be achieved by taking the following actions:

1. The first step: Make your products and services “smart” to deliver
relevant data in real time.
2. The new center of innovation: Think software first when thinking
about business innovation. Think of the layer of differentiation and
innovation, as Gartner calls it, as a platform from which you develop
your digital capabilities to counter digital challengers and gain a
competitive advantage.
3. Regain IT know-how: Take back the full responsibility and insight of
your IT architecture, from wherever it is today. If software is at the heart
of today’s innovations, then you must have the power to shape your IT
architecture yourself.
4. Expand the IT scope beyond applications and IT operations
management. Appoint a Chief Digital Officer, reporting directly to
the Board to assist the business units in operationalizing their data-
centric new digital business models. Implement Chief Digital Officer
equivalent in each of your relevant business units.

7
Mastering the challenge of Digital Transformation

Rebuild your IT architecture competencies

Digital companies have a microservices-oriented, scalable IT architecture. To exploit
the potential of digital capabilities and digital use cases, the IT architecture has
to be agile and flexible (see exhibit 4). According to Gartner Group, this can be
best achieved through anintegration-centric, modular digital services architecture,
IT ARCHITECTURE
enabling TRANSFORMATION:
real-time data insights.
FOUNDATION FOR “DIGITAL” SCALABILITY
Target Architecture
Status
Cloud usage enablement
Origin The transformation to a cloud-ready Implementation of an Integration-Centric Architecture (ICA)
Integration-Centric and Service- Orchestrate use of existing business logic and cloud apps
Application-centric Oriented Architecture has started
Development of new agile digital real-time applications
infrastructure connected via practically everywhere
“spaghetti code”

Inflexible, not scalable Unbundling, modernization Extremely scalable architecture

Exhibit 4 - IT architecture transformation: Foundation for “digital” scalability

NEW
Looking DIGITAL
back BUSINESS
over more MODELS
than three decadesARE in IT,WRITTEN
we are nowINinSOFTWARE
the third IT
infrastructure evolution phase (see exhibit 5):

Data Logic &

New digital innovations Internet of Things (IoT) Framework
Algorithm

Integration layer centric Integration &

Integration
IT architecture Enterprise Process Automation
Logic

Systems of Records Enterprise … … Business

Applications
Logic

Exhibit 5 - New digital business models are written in software

8 MARCH 2017
 Mastering the challenge of Digital Transformation

The 1st phase, decades ago, was built based on application silos
connected through point solutions; this was the packaged application era.
The 2nd phase, years ago, was building an application infrastructure and
middleware layer to compensate for the phase 1 “silo deficiencies”, this
was the middleware and application infrastructure era.
The 3rd phase now is being centered around a real-time, event-driven
platform, such as an Internet of Things (IoT) platform providing streaming
data analytics required for almost any digital use case in B2B (Industry 4.0)
or consumer area (B2C) (see exhibit 6).
OPEN IOT FRAMEWORK
IoT Condition Performance Predictive Location INDIVIDUAL
…
SOLUTIONS Monitoring Management Maintenance Awareness IoT SOLUTIONS

IoT FRAMEWORK

IoT DEVELOPMENT SERVICES

Streaming Machine Visual Edge Predictive …
Analytics Learning Analytics Analytics Analytics BEST IN CLASS
IoT PLATFORM
IoT INTEGRATION SERVICES SERVICES
Application API Device Process …
Integration Management Integration Integration

FLEXIBLE SYSTEM
IoT CLOUD INFRASTRUCTURE
INFRASTRUCTURE
External Services Admin IT Partner / Devices
Customers
Ext. Cloud SAP, CRM, APPs , Portale,
Integration, PLM, CAD, Mobile Integration
OEM Portal, … … …

Exhibit 6 - Open IOT framework

All three IT layers will continue to exist in parallel and need holistic integration.
In comparison, the current application silo-based architecture is inflexible, expensive,
is lacking agility, and is slowing down the speed of change in becoming digital.
As a result, the digital business transformation is based on an IT architecture
transformation with a roadmap for digital capability implementation.

9
Mastering the challenge of Digital Transformation

CIO function has to expand to a Chief Digital

Officer function and cascade into the business units
Despite some 50 years since the birth of the CIO role, its relevance in many
companies has suffered over time and declined to a pure technology enablement
role—outside the business and, over time, outside the boardroom. Most CIOs had
been downgraded to IT operations management with no real impact on business
innovation and transformation, after IT had been outsourced and packaged
applications had been implemented.
However, the data centers and the administrative packaged application systems have
to scale on an enterprise level; the same applies for the heart of digital IT—the Big
Data streaming analytics data layer, the IoT platform.
The roles are therefore clearly defined for classic companies to become digital
enterprises:

1. Smart products and services are the responsibility of the business units
and the CDO.
2. The data collection, monitoring and analysis to take action are a joint
responsibility of the CIO and the CDO’s business units.
3. The data analysis experts are in the business units. They have to
analyze the data collected from the smart products, detect patterns
and develop predictive models and algorithms to draw conclusions
and fuel event-driven actions to respond in real time for the creation of
new business models.
4. The CIO organization has to provide the enterprise-class, Big Data
processing platform (IoT platform) to operationalize the analysis of
large streams of data from smart products, from smart machines in
the field, or from smart manufacturing plants. This accelerates the
development of new, software-based business models much more
efficiently than ever before.

10 MARCH 2017
 Mastering the challenge of Digital Transformation

A lot of traditional enterprises lost the core IT

capabilities they had in the past:
Outsourcing of their IT infrastructure resulted in the loss of architecture
know-how.

Through implementation of packaged applications, thus avoiding software

development projects, enterprises lost software-based innovation
competencies.

CIOs contributed to standardization and simplicity, meaning risk avoidance,

but not to IT-driven innovation and differentiation of the business model
(see Gartner’s report “Pace Layering”). As a consequence their relevance in
business affairs declined.

The weaker a CIO position became, the more he or she focused on a

single-supplier strategy.

In the digital world, software innovation capability

can neither be outsourced nor bought as a
standard product. As software becomes a business
differentiator, IT becomes a core part of the business.
Enterprises have to regain their software-based
innovation power.

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Mastering the challenge of Digital Transformation

Conclusion
Transforming a traditional enterprise into a digital company is possible. Five
major steps should be taken immediately:

1. CEOs have to put software innovation first in order to maintain customer

ownership and to create new digital business opportunities and new revenue
streams.
2. Business units have to learn to analyze the data from their smart products
and, using machine-learning capabilities, to develop predictive models
and algorithms to create new data-centric business models and service
innovations in order to maintain customer ownership in the digital world.
3. Extend the existing IT landscape/architecture into a digital platform-based
architecture to enable digital business capabilities, fast.
4. Implement an enterprise-level IoT platform to enable IoT and Industry 4.0
use cases for the business units.
5. Transform the CIO organization through a Chief Digital Officer function with
impact on the core business by cascading CDO functions into the business
units.Consolidate the enterprise IoT/I4.0 platform operations in the CDO
organization.

Winning in the digital world is possible for traditional or classic companies. It

requires openness to rebuild software know-how and courage to start now. IoT,
Industry 4.0 or Industrial Internet are all synonymous for the digital paradigm
change. The journey is defined, the milestones are known, now it is all about
execution.

ABOUT SOFTWARE AG
The digital transformation is changing enterprise IT landscapes from inflexible application silos to modern software platform-driven IT architectures which deliver the openness,
speed and agility needed to enable the digital real-time enterprise. Software AG offers the first end-to-end Digital Business Platform, based on open standards, with integration,
process management, in-memory data, adaptive application development, real-time analytics and enterprise architecture management as core building blocks. The modular
platform allows users to develop the next generation of application systems to build their digital future, today. With over 45 years of customer-centric innovation, Software AG is
ranked as a leader in many innovative and digital technology categories. Learn more at www.SoftwareAG.com.

© 2017 Software AG. All rights reserved. Software AG and all Software AG products are either trademarks or registered trademarks of Software AG.
Other product and company names mentioned herein may be the trademarks of their respective owners.

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