Digital Transformation – A journey to gain digital advantage
Digital is changing everything across all industries. The imperative is to seek advantage from digital engagement in every aspect of the business; but getting there is not easy. Digital strategy and digital transformation are top priorities for CEOs around the world, but a fundamental question remains: How do we make this happen? CEOs and business leaders must ask: How can we manage digital innovation, digitize and support the core business, and reduce complexity and risk? How do we accelerate the digital transformation? How do we create value with our technology function—now and in the future? How can we move at digital speed? How can we change the way we work across the entire enterprise? How can we create tangible value for the business—and for customers?
Due to varying degrees of digital maturity levels across businesses, they do not have a consistent definition of what such a profound transformation means. So let us start with defining what digital transformation really means. Digital transformation is the quest to enable digital engagement with innovation at speed to enhance customer experience, through data advantage and, with innovation of offerings, processes and business models. Hyper-connectivity, massive cloud-based computing power, streams of data tamed by predictive analytics— all are colliding with trillions in investment capital to produce a new era for business. This is characterized by constant innovation, the prevalence of predictive analytics and dramatically accelerating cycle times. Speed is no longer a nice-to-have, but an essential capability that will separate winners from losers. It is not just a matter of smart thinking and anticipation. Companies also need to accelerate the deployment of digitally powered processes, customer experiences and ways of working across global organizations and teams. The magnitude of this digital challenge can seem overwhelming and many companies are struggling with the scope of such a profound transformation.
Few companies are blind to the digital threat—far from it in most cases. Typically, teams in the field are well aware of the digital threats as well as the opportunities within their area of the business. They launch their own apps, establish partnerships with local and national digital players, or use data to analyze their businesses and make better decisions. The challenge: These efforts tend to be ad-hoc and uncoordinated. Without proper framing and orchestration at the enterprise level, the best efforts will fail to get the attention and investment they need. These become digital islands. But turning them into digital enterprise is where the true value lies. That requires ruthless prioritization around which projects to scale and in what order. A growing number of executives, though, are facing up to digital reality. They know that digital technology can significantly improve the performance of their current business. They know that first-movers have an advantage. And they are keenly aware that digital can give birth to entirely new business models that shake up sectors, leaving companies that fail to adapt struggling to survive. Many of them have therefore taken steps toward transforming their businesses.
Stages of digital transformation in the business
To set a digital transformation on the right course the company must place it at the core of its agenda, and understand the magnitude of that undertaking. Digital technology affects every company differently, but it tends to create or destroy value in four critical areas of the organization: customer engagement, digital products and services, operational performance, and preparing for disruptive new business models.
Stage 1: Top executive ambition & commitment
The initial assessment of digital readiness, diagnoses where the company stands relative to competitors in each of the areas and then lays out the ambition and milestones for the transformation effort. The CEO must communicate a vision of what needs to be achieved, and why, in order to demonstrate that digital is an unquestionable priority, make other leaders accountable, and make it harder to back-track. To set the organization’s sights at the right level, investments need to be linked to clear and ambitious targets. Targets are needed for each source of value creation—cost savings, revenues, improved performance, and satisfaction of employees and customers—and for new ways of working and the new capabilities required. Allocate adequate investments to improve the current business and to build new businesses. Finally, investments will be needed to acquire expertise in new fields and to keep abreast of innovation too.
Stage 2: Organizational change
Pull together a high-caliber team, including a “C” level assignment of accountability, to launch the digital transformation initiative. It often makes sense for the CEO to delegate this task to an orchestrator, in the form of a chief digital officer (CDO), who is fully empowered to compel change across the organization in the name of the CEO. There isn’t time for anything else. Digital innovation will leave a company behind if it can’t speed up its journey. Leaders need to evaluate which emerging technologies can solve specific problems, to what degree digital threats may neutralize their traditional sources of competitive differentiation, and how much their teams and operating models need to adapt. It is the people who finally have to embrace change. which is the most difficult aspect as it often requires a culture shift. So it makes sense that we keep people first as priority. First of all, gain speed by adopting a new, more agile development approach that can be applied to the company’s new set of digital priorities. Secondly, remember that change can be a deep source of anxiety for people, hindering their ability to execute. Leadership teams need to prioritize efforts aimed at generating buy-in. This means defining the change clearly and creating alignment behind it by translating what it means for each part of the organization. Finally, start nurturing digital ways of working, with a culture that emphasizes fast, collaborative and empowered behavior. Start with the critical few behaviors that will help shift the culture to become aligned with the digital ambition.
Stage 3: Initial digital projects
To ensure early efforts thrive and build momentum, companies should consider carefully which projects to start with and support them with the necessary resources. To win early support, companies should start with projects that offer potential for significant rewards with manageable risk. The more value a transformation captures as it progresses, the more it becomes self-funding and the greater the support it garners. Projects that are strategically important, pay back quickly, and reduce complexity, are the ones to be prioritized.
Innovating quickly in such businesses requires a new development model. Leading companies are moving toward developing several digital initiatives with prototypes, having clear time constraints for design and deployment. That forces cross-functional teams to create “minimal viable products” and test them on a part of the customer base to get early input. In practice, this brings together all functions during the inception of digital projects, representing all components of the process. And it allows teams to learn rapidly from market feedback and adapt accordingly before scaling up for deployment across the entire organization.
A company’s financial pressures will shape the sequencing of projects to some degree. So will its IT, if legacy systems restrict initial choices. And companies need to be flexible. It could prove hard to recruit the particular talent needed, while technology and customer behavior will continue to evolve. Tracking returns is essential to ensure all available value is captured. Often, targets can be raised during the course of the transformation as prototypes reveal greater productivity improvements than have been originally assessed on paper.
Stage 4: Scaling up
Digital transformation is a steady march forward along the journey. It happens day by day and month by month, as a flexible test-and-learn culture creates the digital solutions best suited to the company and its customers. As digital solutions, products, and/or approaches, are rapidly prototyped, tested and refined, the successful ones are scaled up into the production environment. The companies doing it best have embedded the new rules of the game deep within their cultures and operating models. Success for them means never going back to normal, but always moving forward toward a more flexible future. Moreover, digital transformation incurs costs at a time when competition is probably putting pressure on margins. Hence the imperative to thoughtfully pursue a manageable number of digital projects to tend the performance of the core business while cultivating future sources of growth. And when projects are successful and deliver the intended financial benefits, the board and top team should be encouraged to push for more projects to achieve more.
Companies will have to lean away from a traditional matrix structure with rigid functional boundaries if the digital transformation is to succeed. They will need a network structure, organizing around sources of value, with product managers empowered to make decisions with implications that cut across functions. Teams will not be permanent. They will be dissolved when they capture the value at stake, then re-group around new sources of revenue growth or cost reductions. Some companies call them scrum teams, others tiger teams, portfolios, or tribes. Whatever the label, the typical hardened matrix is giving way to a more agile one. In other words, the entire organization, not just IT, will adopt an agile approach to working. Ultimately, however, it will be important to help all employees rethink the way they work, as the end result of a digital transformation is the establishment of a company-wide agile operating model.
A digital transformation is not a science. The only way forward for a company is to learn as it goes and figure out how to apply lessons as scale is built. Along the way there will be important markers of success. Customer-centricity & value-focus will become paramount while pursuing innovation at speed. IT strategy will become clearer as early prototypes afford insight into decisions relating to technology architecture, data architecture, and platforms. Customer satisfaction is likely to jump. Cycle times will be shorter and costs will fall. New ways to accelerate revenue growth will reveal themselves. This is the time to double down on efforts.
Once the earliest digital initiatives prove their value, they catalyze the next wave of more ambitious follow-on projects. At the same time, a culture shift occurs within the organization, as the company adjusts to digital as a new way of doing business. A well-executed digital transformation doesn’t just even the playing field for large companies—it tips the odds in their favor. With speed, scale, and value on their side, incumbents can fend off attackers and win in the digital economy.
The practical effect is a shift in the mindset of teams, because it forces them to work across functions and accelerates how quickly they move from design to action. That alters the culture by expecting people to accept more risk-taking and granting the right to learn from failure. This will promote the much needed experimentation necessary for innovation. They discover that success will no longer be measured by how they maneuver within their functions; instead, success will depend on the results they produce in the market.
In this sense, digital organizations need to be regularly re-programmable. They need to anticipate the next wave of digital projects, recognize the signals requiring a new or different response and move in concert to deliver solutions through agile operating processes and channels of engagement. Leadership sets the direction, but the line executives must lead this culture upgrade, with the right support from all domains and significant input from human resources.
A closing thought and perhaps one that reframes the challenge is that the term digital transformation puts the emphasis on technological change. But it becomes clear to anyone who understands digital technology’s potential that what is afoot is less of a "digital" transformation and more of a fundamental rethink of the corporate model, for which digital technology is the catalyst. Sources of revenue, efficiency, and the organization’s structure are all up for scrutiny, as are talent models, which need to offer more flexible, more empowering, and more rewarding career paths. That is why digital transformation is considered to be a profound and long journey in business transformation.