=Paper=
{{Paper
|id=Vol-2413/paper04
|storemode=property
|title=
The Impact of Digital Transformation on Economic of BRICS Countries
|pdfUrl=https://ceur-ws.org/Vol-2413/paper04.pdf
|volume=Vol-2413
|authors=Igor Fiodorov,Nixon Muganda Ochara
}}
==
The Impact of Digital Transformation on Economic of BRICS Countries
==
https://ceur-ws.org/Vol-2413/paper04.pdf
The Impact of Digital Transformation on Economic of
BRICS Countries1
Igor Fiodorov1[0000-0003-2335-0452], Nixon Muganda Ochara2[0000-0001-5736-7901]
1
Plekhanov Russian University of Economics, Moscow Russia
2
University of Venda, Thohoyandou Limpopo, South Africa
1
Igor.Fiodorov@mail.ru; 2Nixon.Muganda@gmail.com
Abstract. Developing countries face an acute problem of economic growth. In
situations of limited labor resources growth, the main factor of an increase in
the capacity of an economy to produce goods and services is the intensification
in labor productivity. Aggressive marketing claims that the digital transfor-
mation is the introduction of new breakthrough information and communication
technologies automatically ensure the explosive growth of the economy [1].
However, it is wrong to assume that economic growth takes place on its own,
without the participation of other factors. Integrated planning is about different
actors working together to re-align individual strategies to produce a common-
ly-defined objectives. We hypothesize that breakthrough technologies open up
new business opportunities, they can be considered a prerequisite for progress,
but their introduction is not sufficient to increase business efficiency, because
technology ensures success only in conjunction with serious changes in the
company's activities. Integrated planning can improve coordination between di-
verse actors by harmonizing uncoordinated strategies to obtain concrete
achievements [2].
Keywords: Digital Transformation; integrated planning; productivity paradox,
process oriented IT systems; business process management.
1 Introduction
Information technology is considered to be an important factor of sustainable eco-
nomic and social development. The Communiqué of the BRICS ICT ministers meet-
ing says that «The Parties acknowledged that Information and Communication Tech-
nologies (ICTs) have become a key factor for sustainable economic and social growth
and development. ICTs are of increasing importance in governance, business, and
social activities and their impact will increase in the future. There is a common
agreement on the importance of ICTs as essential tools for the growth and advance-
ment of developing countries» [1]. In this paper we discuss a hypostasis that to be
successful the implementation of IT must be accomplished by a tremendous changes
1
The study is funded by RFBR and NRF according to the research project № 19-57-60004/19
and RFBR research project № 19-07-01137 А
Proceedings of the XXII International Conference “Enterprise Engineering and Knowledge
Management” April 25-26, 2019, Moscow, Russia
2
within organization. Thus, concentrating on technology exclusively and ignoring the
organizational aspects of production makes digital transformation useless.
A term digital transformation is considered as a new stage of embracing
informational technologies (IT) to get their accelerating impact across business and
society. However, nobody canceled the productivity paradox posed by R. Solow,
postulating that it is impossible convincingly demonstrate the connection of IT
investments with measurable results in labor productivity growth [3]. As noted M.
Spence, over the years enterprises have invested billions of dollars in high technology,
but the growth of labor productivity in the world is almost imperceptible [4].
According to the theory of complementary assets by P. Milgrom and D. Roberts, a
modern enterprise should be considered as a complex of interrelated assets, so an
increase in any of them contributes to the profitability growth of the others [5]. One of
the essential complementary assets is the organizational capital; it includes a set of
practices in organization of production, of work and managements, adopted at the
enterprise [6]. Thus, the growth of labor productivity in the introduction of new
technologies does not occur directly, but through a change in organizational assets. E.
Brinjolfson, L. Hitt and S. Yang proved that the combination of IT and certain
organizational practices creates more value than each of them separately [7] [8]. They
consider the consistent creation and development of complementary practices as a
prerequisite for the enterprise effective development [7]. Similar studies on the
analysis of the impact of investments in IT on the economic results of Russian
companies carried out by V.I. Ananin, K.V. Zimin, M.I. Lugachev, K.G. Skripkin [9],
[10], confirmed named results.
Publications on the transition to the digital business usually distinguish: digitization
of analog information; digital information processing and digital transformation of the
enterprise [11]. The first two facets of the digital transformation are quite fully covered
in the literature, while the third is less evaluated. As part of this work, we propose to
separate the external and internal aspects of the digital transformation. The external
aspect is associated with a change in the business model and ways of doing business
[12]. As an internal aspect we propose to consider the transformation of organizational
capital. In our opinion a success of IT implementation critically depends on enterprise
transformation, otherwise, an economic impact will not be obtained due to productivity
paradox. Thus without enterprise transformation a digital transformation will become
yet another IT automation that locally influence few operations but have poor overall
impact on economics of an enterprise.
In this paper we consider as an example Business Process Management (BPM).
According to Gartner, BPM is an innovative IT approach, as well as a management
initiative [13]. We analyze a change in organizational and economic relations between
workers, participating in a fabrication of a product or a service, and hypothesize that
enterprise transformation is a complex arrangement, which includes modification of all
aspects of business at the enterprise. The approach of this research is based on works
of H. Minzberg [14], who studied the forms of coordination among the work group; J.
Galbreith [15], who considered an information management to be a major factor of
labor productivity; and M. Hammer [16] who developed a concept of a process
management. The goal of this study is a development of principles of a complex
transformation accompanying an implementation of Business Process Management
(BPM) system.
3
2 Functional Approach To Enterprise Operation
We talk a lot about the deficiencies of functional management and call on switch to a
process management, however, nobody has yet defined the notion of functional man-
agement. We guess that functional management can be understood as a combination
of several concepts: division of organization into functional units and a bureaucratic
behavior. H. Mintzberg defines organizational «as the sum total of the ways in which
it divides its labor into distinct tasks and then achieves coordination among them»
[14]. The division of an organization into functional units involves grouping of em-
ployees performing cognate operations within one business unit. The concept of ra-
tional bureaucracy was defined by M. Weber [17]. A bureaucratic organization imply
a hierarchy of authority, where an employee gets all the instructions from his direct-
line manager, and if the instructions are given behind the manager’s back, the latter
will not be able to monitor its performance and will not be responsible for a result.
H. Mintzberg calls this way of coordination a direct supervision [14]. Consequently, if
the employee wishes to hand-off his result to the next participant, he exercises it
through his direct supervisor. But if the next participant is located in a different busi-
ness unit, the task has to climb up to the hierarchy level, where both units have a
common manager. Consequently, several additional steps are being taken: a task
move upwards – escalation and downwards – delegation. These additional steps do
not increase the value but add to the cost, therefore they can be eliminated. Since the
manager assigns the work to his subordinate and supervises the performance, he is a
consumer of a result. As pointed out by M. Hammer and J. Champy, manager see the
result basing on his interests, not on the interests of the client, who pays for the goods
or services [16].
We can make the following conclusions. The managerial method, which we got
used to refer to as «functional management», is in fact a combination of the functional
structuring a company into business units and the bureaucratic method of organization
behavior. Both methods are foundational for modern institution development. The
result of this combination is numerous overabundant information flows up and down
the company hierarchy. Evidently, the efforts spent to support those flows increase the
cost but not the value, therefore overabundant flows should be eliminated.
3 Labor Productivity: the Information Processing Perspective
J. Galbraith associated enterprise labor productivity with its capability to process
internal information flows [15]. He states that in order to increase labor productivity it
is necessary to strain for the reduction of internal information flows and enhance the
employees’ ability to process this flows. He demonstrate that the better the production
task is formulated, the less time is spent on its execution, whereby labor productivity
increases. We use this approach to reveal the factors of labor productivity increase
from the information management perspective. Let us consider a modification of
internal information flows as a result of a switch to process-based management.
According to J. Galbraith there are several approaches targeted at helping a
functional organization manage the information flows. In order to reduce internal
4
information flows he suggested using slack resource and self-contained tasks; enhance
lateral relations between the actors at the similar hierarchical level. To increase the
enterprise ability to process information he suggest so-called «vertical information
systems», automatizing information exchange between the employees at different
levels of organizational hierarchy [15]. Let us deal with these suggestions in detail.
Slack resource implies the use of greater amount of resources (human, production
and financial) than it is required for standard production. It is used to overcome
unanticipated overload or in case of changes in existing situations [18]. Slack resource
may be immediately available for use (e.g., employees on standby), recoverable (e.g.,
overheads) or potential (e.g., a capability to borrow funds for development). The
impact of slack resources on the company efficiency is the subject of scientific disputes
[19]. On the one hand, slack resources can be considered as redundant, increasing costs
and reducing the enterprise efficiency. On the other hand, a slack resource provides the
enterprise with a potential for immediate response to changes in business situation. As
provided by the neoclassical microeconomic theory the company’s goal is to maximize
the profit, so the managers acting to the benefit of the owners should strive to reduce
costs. Bearing this goal in mind an enterprise should minimize slack resources to
operate with maximum efficiency. According to this approach slack is synonymic to
prodigality and thus is inadmissible. However, it is acknowledged that most
organizations keep a certain reserve of non-used or underemployed resources, which
means that for some reason these organizations do not operate with maximum
efficiency and the backup level is approximately the same in different countries and
different industries [20]. Modern economic science acknowledges existence of slack
resources. As demonstrated by H. Leibenstein, companies do not aspire to be efficient
to the maximum possible degree except for some highly competitive markets [21], thus
backup of resources is acknowledged to be standard behavior. At the same time, the
issue of choosing the necessary extent of slack resources remains open.
Self-contained task implies that everything required for job execution is
immediately available: raw materials and components, tools and accessories,
knowledge how to perform this work. J. Galbraith addresses two ways to increase task
independence. First, the task should be fully understood by the worker, otherwise its
fulfillment will require studying and mastering of new practices. For this purpose
production tasks are supposed to be divided into standard, well-formalized jobs, and
non-standard assignments, the number of which should be minimal. Second, he
suggests regrouping company employees by products or services instead of by
functions, so that each group has its own set of required resources. This, in his opinion,
reduces redundant information flows. Vertical information systems connect the
workers at different levels of management hierarchy, help collecting information from
lower levels, accumulate and process it in order to facilitate managerial decision- at the
upper level. They serve to inform the management of all the exceptions happening
during production task execution. Lateral relations happen between allied workers,
performing interrelated tasks. Since such employees belong to different departments,
which are traditionally viewed as functionally isolated business units each having its
own local interests, it is common practice to introduce the so-called coordinating or
liaising positions. The coordinator’s role consists in supervising the progress of the
production task in order to promptly identify all deviations during its execution and
immediately inform all stakeholders. Notice that the coordinating position is not
5
authorized to solve the conflicts, only to escalate the problem to the functional
managers in charge, so the amount of information flows does not decrease.
Reengineering critics note that the division of labor and narrow specialization of
the workers lead to a decrease of each production task in the size and result in an
increase in the number of performers. That, in turn, increases the demand for
coordination. As noted by M. Zheleny, the special class of employees who are not
engaged in production but are meant to coordinate the work emerges, the cost of
coordinating increases [22]. That is why M. Zeleny thinks that reengineering means
“partly spontaneous response to the extremes of labor specialization and
differentiation”. In his opinion, reengineering equals reintegration and should go in
three main directions: reintegration of work into bigger combined units; reintegration
of workforce enables the workers to perform and coordinate bigger tasks; reintegration
of knowledge – refusal from narrow specialization in favor of specialists of a wide
profile.
As noted by H. Mintzberg the method of work coordination influences the
controllability and the size of a business unit [3]. Since it is difficult to monitor
execution of complex tasks, direct supervision is frequently replaced with mutual
coordination. In this case the employees have to be in close communication, which can
be effective only in a small business unit. In cases when the enterprise substitutes
standardization for direct supervision controllability increases, which is confirmed by
examples of industrial enterprises, where the managers are capable to supervise big
production sites. Industrial enterprises started with standardization of work, set out
strict requirements to results, which required standardization of workers’
qualifications, so they finally came to the standardization of workflows. The switch to
process management implies the use of the same forms of standardization and
abandoning direct supervision.
4 Process Management
Business processes consist of a sequence of well-formalized tasks, so the execution
logics of each of them may be easily understood by all the employees. In order to
eliminate redundant information flows up and down the management hierarchy a set of
conditions should be established, by fulfilling which an employee can transfer the
production task directly to his allied employee along the production line without
agreement with the direct supervisor. The «virtual» channel, linking the allied
employees in the execution of a common production task, will be called a business
process. Thus, standardization of work processes makes it possible to reduce the need
for direct supervision and increase the controllability. However, only those tasks,
which meet clearly defined requirements, will be transferred this way, while other task
that does not comply with the established standards it will be transferred in a
traditional way, including all escalations and delegations. With this method of
performing work, the manager does not lose control levers, since he is sure that he will
be promptly and timely informed about all situations when the process deviated from
the standards.
However, interpretation of process management as pure process model re-design,
limit our capability to control a process. Model modification is an essential but not the
6
only way of process management. We suggest distinguishing between management of
an enterprise with the use of business processes and the process controlling. The first is
a holistic management approach focused on aligning all aspects of an organization with
the wants and needs of clients. The second is an effort to maintain normal operation of
the process. We allot three levels of process controlling. The level of operational
control implements the concept of proactive BPM. Its main idea is to exclude
managers from the routine duties to manage the process instances. Their involvement
happens only in cases where it is really necessary. The level of a tactical controlling is
carried out through the manipulation of additional layers and aspects of the process
models that are not covered by the process map. Thus it is possible to achieve, for
example, the optimal allocation of human resources involved in the process. Finally, a
strategic management involves improvement of the process model and is applicable
only if the first two levels are no longer able to achieve their goals.
5 A Transformation of Organizational Structure
Let us suppose that the switch to process management is not limited to modification of
organizational relations between the immediate participants, but requires drastic
modification of the entire company management structure.
Transformation of management structure may follow several directions. First, the
company may focus its attention on standardization and formalization of production
tasks, introduce task execution standards. However standardization does not guarantee
that the tasks are completed in full and in due time, therefore the company strengthens
horizontal relations between actors, introduces the roles of process owner and process
coordinator. This form is called the functional management structure with a horizontal
annexe. Notably the process owner cannot contact an actor directly, but via respective
functional manager only, which significantly embarrasses supervision and increases
overheads. Also, the owner does not manage resources, he cannot take an independent
decision with regard to the actor, only through his functional manager. The owner’s
role becomes degenerated and is reduced to coordination, he does not have any real
leverage over the actor. Since communication through functional hierarchy is not
sufficiently effective, the company switches to the matrix organizational structure.
In the matrix organization a worker finds himself in dual subordination, first, he
reports on all the current issues of business activity within a process framework
directly to the process owner, second, he is accountable for all the other issues to his
direct supervisor. The process owner is entitles to reward and punish the executor,
therefore he has leverages over the process. Here it is important to strike the balance
between the two branches of power. It is usual to differentiate the relations of
subordination and those of coordination. In the matrix structure the employee is
subordinate to the functional manager and coordinates its work with the process owner,
that’s what underlies deficiencies of the matrix management system.
Processes are most often differentiated by the output goods, therefore horizontal
working groups are usually based on the product principle. At the same time an
organization can use the territorial principle of differentiating its activities, in this case
the matrix structure becomes three-dimensional and more difficult to create and
7
control. The drawbacks of this system are the difficulty of differentiating authorities
between the two branches of power and consequently potential conflicts.
In order to get rid of dual subordination companies switch to process-based
organizational structure. In the process-based structure all the activities are hinged on
the company business processes. First, main processes are singled out with a dedicated
owner assigned to each of them, who has sufficient resources at his disposal to manage
all the workers. All the workers are directly subordinate to him thus eliminating any
ambiguity in relations. In order to unite individual processes into a single system the
company establishes a process committee consisting of the owners of individual
processes, they are responsible for the coordination of execution of individual
processes. Each process is linked to a competence center, whose tasks are: continuous
improvement of processes and formalization of working methods. For example, if the
enterprise faces the necessity to solve a new task for the first time, a new process may
be required to be developed. The company may keep functional support units but only
for the purpose of solving corporate-wide tasks, e.g. for personnel management,
calculation of wages, provision of IT services, the latter are considered as services
rendered to business units.
Let us have a closer look at a process-based organization. Its overall activity is
divided into different areas, with main productions processes distinguished for each
area. To align main processes the company needs a process committee uniting the
owners of all processes. Modifications of processes and their interaction are carried out
with participation of company process architect. For each area of activity there is a
special process competence center, which, along with the process owner, includes: a
process engineer, who is responsible for correct execution of production process, an
analyst, who is responsible for process modeling and project executors. The downside
of exclusively process-based organizational structure is the loss of communication
between the employees exercising similar functions in different company units.
Therefore, it is possible to make provision for a functional manager role, coordinating
the work of specialists with similar functions in different enterprise processes. This
structure is called process-based organization structure with a functional overhead.
6 Conclusions
The analysis demonstrates that a new IT implementation require a complex
transformation of business relations in the enterprise as the essential prerequisite for
labor productivity growth. Reengineering and improvement of the business process are
essential but insufficient conditions for a transition to process-based management. To
exercise BPM advantages it is necessary to switch to a continuous-flow production
methods and modify a management structure. Within a functional organization
process-based management is constrained due to the conflict of interests of different
business units and impossibility for the process owner handle required resources
directly, which is a possible cause of reengineering project failures. The organizational
structure should be transformed in such a way that it honestly reflects managerial
relations evolving within this production system. It can be noted that there is a demand
for new up-to-date IT instruments connecting the employees at the same hierarchy
level, ensuring managerial supervision over the progress of production tasks. To
8
support process-based management at an enterprise we argue a new class of
«horizontal» information systems which perform the transportation and coordination
functions: they transfer tasks between the participants in strict compliance with the set
up procedure, notifying the management of all violations, deviations and emergencies.
We conclude that a digital transformation to be successful must be attended by a
complex enterprise transformation. We considered a case of BPM system
implementation and explore that a process transformation requires a cohesive approach
to reorganization of the entire complex of business relations, including a switch to
mass production methods, structuring of activities around their business processes, an
implementation of process controlling at three levels, restructuring of management
structure in accordance with the chosen forms of labor organization at a particular
enterprise, implementation of new information systems aimed at supporting lateral
relations.
Thus, one should not deem a digital transformation unilaterally, as a global
computerization using modern IT, rather as a profound change affecting the basic
principles of doing business. A new IT initiative will doomed to failure if it is not
supported by effective changes in the organizational and economic relations existing at
the enterprise.
The results of this study are important for the BRICS countries, which, aimed at
developing their economic potential, heavily invest in IT, but at the same time are not
satisfied with the achieved results of growth. It can be argued that the reason lies in the
lack of attention to the organizational changes that occur within enterprises
implementing IT [23]. The obtained results not only explains the cause of the of
productivity growth problem, but allow to outline a set of organizational measures
aimed at overcoming the described limitations.
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