I Recently visited with senior executives at Exela Technologies to discuss the interesting strategy their company undertook to succeed in the digital world. Exela's success is like a caterpillar that goes into a cocoon and emerges as something completely different. The "caterpillar" was stodgy, low-margin, traditional BPO services – uninteresting work in a very mature market. They went into a digital cocoon, worked for several years reinventing the business and came out as a beautiful butterfly with fabulous – tested and working – digital platforms and turned the business from mildly profitable to very profitable. Many executives believe their companies can reengineer back-office processes onto a digital platform; however, they encounter problems in trying to do this. How did Exela's strategy succeed where others fail?

The company began as a group of private equity investors. In 2005 Exela bought very mature labor- and process-oriented BPO companies providing services such as mailroom and claims processing, which had large client bases. Exela then spent the last five to 10 years systematically re-engineering those processes, using the data and customer experiences from those BPO companies', to build a set of digital platforms.

The Empty-Room Problem In Building Platforms

It's one thing to build a platform in a lab; it's another thing to have actual customers and actual experience and build a platform with live data.

The problem for startups and others building in a lab is overcoming the empty-room syndrome. They lack access to real work and real client data because clients don't want the service provider to work with them before the platform is fully working and tested.

Building a multi-company platform requires multiple client companies. One company is not enough because (a) you will end up building something just for that company and (b) the benefit of the platform is to aggregate data and scale across multiple companies. You can build a platform, but you still must test it across multiple companies. Getting them to agree to do that is very difficult. Furthermore, the best-laid plans seldom survive contact with the enemy. So, however good you are at building your initial design in a lab, it will be off target.

The empty-room problem is very expensive to overcome. It's the classic chicken-and-egg problem. You have the idea, you can see the idea potentially has merit, but you need multiple companies to collaborate with you to build the product. If you don't have the product, they won't collaborate with you, and you can't build the product until they collaborate with you.

Overcoming Risks In The Strategy

Exela Technologies overcame the empty-room problem with strategic investments. The company acquired old-school BPO companies that already had many clients for which they performed the same process/function. Exela also invested in 2,000 engineers to build the digital platforms. This is the first company I'm aware of that has achieved this digital-platform success. Others talk about it, but they encounter the empty-room problem.

I think Exela was brave to attempt this strategy, as it was not without other risks beyond investment. Effectively, it required changing the business model of the acquired BPO companies. Exela also had to maintain the contracted-for level of service and delight the existing customers while building a digital platform that would fundamentally disrupt and change forever the way that service would be performed once it moved to a digital platform.

The company generated cash while building the platforms because it made the mature BPO companies far more profitable and increased cash flow from them. Those profits helped offset some of Exela's investment and delight the acquired existing BPO customers.

This article was originally published on Forbes.com March 14, 2018