On Digital Transformation

So I write this asking for a bit of largess. I am aware this is only indirectly about growth stock investing. But the board has found my posts useful in the past, and PoleekoCowboy’s recent post/thread ( https://discussion.fool.com/mongodb-the-digital-tranformation-34… ) on digital transformation led me to believe that my thoughts on this subject might be worth a thread.

“Digital Transformation” is a term that is has taken me years to absorb. I confess that for many years all the term “digital transformation” did for me was trip my b*hit detector. 99% of the time when I heard that term it came from someone selling trying to sell me something (sometimes an internal initiative, sometimes actual money). But when pushed to explain what “digital transformation” really was, no one could ever give me anything but pithy platitudes that were as true in 1990 as there are in 2020. When I was learning computer science we were transforming processes built on paper forms into digital applications. Maybe that fact blinded me a bit. Because that was a true digital transformation. And what we are going through now is a indeed transformation, but we are already digital and the term digital transformation bothers me because the term is inherently inaccurate.

I am of the belief that anytime you hear the word “digital transformation” you should substitute it with “cloud transformation”. The world was already digital. But what we are being forced to transform into is a digital world that is operating at a scale previously unimagined and with a “pay as you go” business model. Where IT isn’t just an enabling technology, but the core of our businesses. Where we have new business models that are based on elasticity and “on demand” and “vendor supported” business models. “Digital” is old hat. I’ve been building tranformational digital projects since the mid nineties. What is new is that fact that the systems I built in the 90s were based on hundreds of thousands of records. The systems I build now are based on hundreds of thousands of records per second.

So, how can I tie this back to investing?

Well, first I propose that any company that builds its value proposition on “digital transformation” should be subjected to the test of how “how does this enable a cloud based business model?”.

But, mostly I just want to reaffirm this board’s core principles. “Digital Transformation” is more about the SaaS business model that any specific technology. Red Violet may or may not be a good stock pick, and it may or may not be adversely affected by COVID, but I would argue that it as much as a “digital transformation” pick as anything else. Similarly, I think evaluating Mongo on it’s technical merits is moot. In fact, I’ve argued here that it’s technical merits are questionable. The core investing value of Mongo is Atlas. Which was ridiculously far ahead of its time, and a sign of how sharp the business-value side of Mongo is. (I’ve argued previously, and still maintain, that DataStax/Cassandra is the better technical product, but that Mongo has repeatedly demonstrated a better capacity for delivering business value.)

–CH

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“Digital Transformation” is a term that is has taken me years to absorb.

Yeah, we just gotta get over it. As you point out, many things have been “digital” for a while, companies just haven’t taken real advantage of what can be done in software. I do, however, disagree that we can substitute “cloud transformation.” Yes, most of the software being adopted today is on the cloud, but that’s not the most important aspect.

What’s important is that companies are learning how to extract value out of their data. Decades ago, getting out of physical spreadsheets into something like Excel was a big help. And yes, things are rapidly going to the cloud, but I’d argue that something like Smartsheets, while a logical extension from the desktop to the cloud, isn’t really part of a “Digital Transformation.” OTOH, something like Alteryx, which helps companies extract value out of their data, and was not cloud-first, is transformational.

The Marketing people I’ve talked with recently felt that the type of data analysis tools like Alteryx provided totally changed how they work. They have greatly reduced their use of customer or in-store questionnaires, for instance, since the data they get from directly from customer purchases and usage and store traffic monitoring is far more accurate and insightful. It doesn’t matter that both the questionnaire and data analytics are digital, one wasn’t transformational and one is.

As for DataStax, they’ve had a few management changes over the past couple of years, so we’ll see if the new team can right the ship. They’ve been wanting to go public for a while, but all I see is churn and nothing appealing.

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I think we need to be careful substituting “cloud” for “digital”. There are many workflows that are digital today, but there are an enormous set of use cases that are not.

Everytime you change the process, if the system is not “digital transformation” friendly, somebody is going to be forced to use a work around.

Everytime a new use case appears, somebody has to catch up the app or software, or workflow to accomodate it. (unless it’s DT friendly)

Example: Quest laboratories uses a check in process that supplements their back office processes that has digitalized appointment scheduling, checkin, records notation and sample labeling. This feeds their backend “results” database for providers to reference. They don’t answer the phone anymore. Use the digital process or don’t interact with Quest.

Example2: Check in a most doctor’s offices still has a pen/pencil manual process with a “label” that gets placed, uselessly on a paper article. Patient forms are all paper, information is transcribed frequently at each step in the process. They DO NOT accept information on paper or other format from other sources. As a result, errors and omissions are very frequent and are a major concern in small practice medicine.

Companies of today like EPIC, Cerner, Veeva and a vast swath of proprietary softwares(white label or not) provide digital pathways to link records, remove transcription and reduce clutter in the processes.

This is mirrored in most small businesses, whether manufacturing or services bases.

Bill.com is a great example of DT enablement. It works, if you can get everyone to follow standard processes.

Digital records management and business process management is even further behind central data collection systems for back office.

To the extent that user entry, RFID chips, and IoT sensors, processors and data collection devices provide digital information, systems must be developed around processes that are DT friendly to accommodate new capabilities.

Dashboards fed with manual data and coupled with some back office central systems, some 3rd party provided application data and a workforce that has not be imbued with rigorous doctrines of follow the process and report the exceptions will hamper this at the user work face.

Green fields which stand to benefit enormously will not be easily monetized without significant reductions in complexity at the data entry and records interface to processes.

Information does not become data until a system is developed (and maintained!) to handle important aspects of the process for critical uses. Data cannot be consumed until it is standardized enough to allow for analysis.

I’m excited about the capability development. I’m overwhelmed at the cultural shift that must occur to make this a feature of business today in the norm.

Long VEEV

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I think it is time we go more granular with what we mean.

First, in the short term - as in these 3-4 months of pandemic - businesses are transforming how they use technology in a hurry. It is about speeding up adoption and integration. That isn’t really a digital transformation as much as it is a workflow or business transformation. This is good enough for us investors as we see subscriptions climb though!

Tech doesn’t transform THAT fast. Only small things can be refined or updated in a 3 month period. I do not dispute
The fact that seemingly new, creative or complex solutions can be wiped up quickly from various offerings, but that isn’t transformational. It is the power of modularity and APIs and platforms and such, which we talk about all the time around here.

The areas I see our companies transforming (and a few examples):

  • security: protection, authentication, access control - E.g. CRWD, OKTA
  • data: transparency, analysis, visibility - E.g. DDOG, AYX, SPLK
  • workflow: communication, process automation, reducing friction, platforms - E.g. ZM, AYX, DOCU, WORK, SHOP
  • Stack: networks, computing, databases, hooks, functions - E.g. MDB, FSLY, NET

I guess you could throw LVGO in the “workflow” bucket out of laziness.

Note it is late and this isn’t exhaustive. It’s just what comes to mind. Feel free to pick at it!

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Let me go granular with RafesUserName and land it from the companies view. I had lunch w/ an IT executive for a large Regional Bank and asked what Covid has done to their business. Their learnings came in two buckets.

Business Agility - they had long ago invested in Salesforce to manage their business processes with small/medium businesses. When PPP came out, they were able to process more of these loans than anyone their size and more than many that were a lot larger, because they used Salesforce to scale out. They did so well processing loans that it became material and was reported in their 10-Q.

IT operations - CIO long ago was convinced that when IT groups needed to collaborate on projects/problems they would physically get together. Covid didn’t allow them to meet anymore and now needed tools to “see” their operations in order to collaborate remotely. They turned to SAAS services to do this, because they could plug them in quickly and integrate into the teams. Think DDOG, CRWD and OKTA, that was the reason they purchased my tool, we are a security, cloud based SAAS service.

These two experiences have changed their strategy to focus on two areas in order to enable business agility. New tools have to be SAAS Services and secondly they are in Azure and moving their development patterns to leverage Serverless. If you aren’t familiar with Serverless, think of it as mini SAAS services in Azure, AWS, GCP that are consumed in code. This gets them out of the patching and maintenance business (IAAS) and spending time making the infrastructure work (PAAS).

When we got back to business outcomes, they weren’t focused on a new business opportunity to create or different consumer experience. It was more about driving efficiency in their business processes to take advantage of different ways of receiving deposits. Which lends credence to the statement this is a cloud transformation and not necessarily a business transformation.

Long DDOG, CRWD, OKTA

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I had lunch w/ an IT executive for a large Regional Bank and asked what Covid has done to their business. Their learnings came in two buckets…

Thanks MacDaddy, it’s always so interesting to hear what is going on from someone actually out in the field.

Saul

Sorry, I messed up the link:

https://discussion.fool.com/let-me-go-granular-with-rafesusernam…

Saul