The automotive industry transitioning from hardware to software

Companies in the automotive sector currently face the challenge of fostering a hardware mindset while at the same time cultivating a software mindset – and intertwining both realms effectively. Because both approaches represent very different ways of thinking, operating and steering, this is no easy task. Whereas traditional concepts, rooted in the hardware mindset, are characterized by long development cycles, fewer but larger projects, hierarchical structures and an ROI-driven approach, the concept stemming from software development advocates short-term, iterative development processes and a project-centric approach.

Since there are currently few executives in the automotive industry who are proficient in both domains, curiosity, openness and pioneering spirit must be relearned and actively incentivized. Governance functions are tasked with supporting the development of the required competencies and actively driving the integration of both approaches. At the same time, the various governance functions must reflect on the different worlds in their own work and examine the implications for aspects such as the employees' skill profiles or work processes.

A transformation of the magnitude currently occurring in the automotive industry can only succeed with joint efforts. Everyone has to contribute. Each function is starting from a different position and must define, plan and implement its own path. The starting point for the development of function-specific transformation paths is provided by so-called baseline or zero-point measurements. In our case, zero-point measurement describes the starting point of a function in terms of its contribution to the transformation.

As catalysts for change, governance functions can support the entire organization in defining transformation paths. The primary goal is to bring the functions closer to what the customer needs and thereby enhance their value proposition. As most employees in governance functions traditionally do not engage directly in project work, this task has, in most cases, been conceptually sound but notably reactive.

The notion that only directly affected functions are responsible for certain tasks will not bring about the change in mindset required for the transformation. A culture of shared responsibility and problem-solving ("every problem is my problem") is necessary, which values and encourages a proactive approach to identifying and addressing challenges across functions.

Governance can ensure such a cross-functional approach by envisioning processes across departmental boundaries and bringing together expertise. To achieve this level of integration, the respective functions, like all other departments, need to actively emerge from their ivory towers and connect with the operational frontlines. By proactively embracing change and increasingly aligning their operating model with intensive integration into day-to-day operations, governance functions actively contribute to fostering a culture of efficient, collective problem-solving.

Many Group employees will be familiar with this phenomenon: While resolving specific issues or embracing new trends might be in the interest of the entire company, this often goes unnoticed if the required activity does not align with incentivized tasks. These control mechanisms lead to missed opportunities year after year in large, complex organizations, where employees' own playing field is restricted and they have limited insight into each other's priorities.

Governance can play an important role in overseeing the comprehensive transformation process and considering all implications from a customer standpoint. This is a demanding new realm of responsibility for the various functions, providing ample opportunity for innovation. Numerous functions still demonstrate deficiencies in critical areas such as end-to-end thinking. Cultivating and refining pertinent skills must correlate closely with incentivizing outcomes.

Successful transformations build on a high turnover of ideas. However, it is ultimately the ability to select the right ideas from this abundance that determines the success of the transformation. The problem is, in most large corporations there is a lack of decisiveness. Companies therefore need new approaches that empower employees to think and act entrepreneurially, even in their own decisions.

US professor Margaret Heffernan, teaching at the University of Bath (UK), suggests an even more radical step for important decisions: the introduction of investment committees composed of a selection of top talents. Governance can provide the appropriate framework for the outlined evaluation and decision-making process. As part of its "shape & protect" role, it ensures comprehensive oversight. Additionally, governance functions should leverage collective intelligence to address important questions within their own areas and assume the role of orchestrator to guide the involved functions in decision-making.

To navigate the transformation successfully, companies need a balanced mix of seasoned professionals and young talent – which tends to be the exception rather than the rule in the automotive industry. Consequently, OEMs must understand how to attract and retain talent with diverse backgrounds, career paths and educational trajectories equally effectively.

Governance functions can support the establishment of diverse teams by bringing new perspectives, opening up to new profiles, and fostering the dynamic development of competencies. Moreover, governance functions must also question their own profile, establish a target picture for the required mix of competencies, and continuously develop their teams.

The necessary prerequisites for governance functions to take on the key role in the transformation described above are currently only met in a limited number of firms. In most cases, governance functions thus face the imperative of adapting their processes, structures and competencies to meet evolving requirements and undergoing self-transformation in the process. Nevertheless, we see promising initiatives and steps in many places that confirm our impression that change is faster and more successful when the governance functions are involved in the best way.