Business consultants have been advising companies to transform into digital enterprises for years; however, the failure rates of such efforts are reported to be around 70 percent. Little wonder some executives have shown trepidation about pushing their businesses down the digital transformation road. I don’t mean to imply there is a single path to digital transformation. Technology writer Joe McKendrick explains, “There is no single path. Every organization has its mix of functions that can and should be digitized, from call centers to field forces to e-commerce to factory floors. If you look at 1,000 companies, you will find 2,000 approaches.”[1] With so many possible directions to go, business leaders can be forgiven if they feel confused. Fortunately, McKendrick reports, a group of MIT Sloan School of Management researchers claim to have narrowed the choices down to four clear-cut pathways. He notes, “The pathways pursued depend on corporate culture, internal limitations, and even the fears of business leaders themselves.” Before examining those pathways, let’s discuss what digital transformation is all about.
What is Digital Transformation?
Business reporter Swapnil Mishra defines digital transformation as “the process of using digital technologies to change traditional and non-digital business processes and services, or to develop new ones to meet changing customer and market expectations. This process completely transforms how businesses are run and how value is provided to customers.”[2] Along those same lines, Tricia Wang, a self-described Tech Ethnographer & Sociologist, explains, “A lot of companies treat digital as if they are ‘doing digital’ — this is ‘digitization’ at its worst — as if it’s some checklist of things to do. It’s very transactional, and people are so busy doing digital they don’t even know WHY they are doing it in the first place! Whereas [some companies] embrace ‘being digital’ — this is ‘digital transformation’ at its best — it’s a total paradigm shift in the culture and operations — it’s not just about buying the latest digital tool, but about creating a new system, new cadence, new mindset.”[3]
Mishra adds, “To fully realize the potential of digital transformation, a company must transform into a digital enterprise, defined as ‘a company that uses technology to evolve all aspects of its business models continuously.’ … A transformation may or may not have a distinct end point because it is an evolution.” In fact, any business that believes it has reached an end point is doomed to find itself in history’s dustbin. Businesses are on a continuing journey to improve and grow — successful businesses are constantly transforming. Kelly Vincent, Vice President of Mid-Market Segment at Intuit, suggests there are four trends companies should keep in mind regardless of the transformation path they choose.[4] Those trends are:
1. Accelerating automation. Vincent writes, “McKinsey reported that 70% of organizations are at least piloting automation technologies in one or more business units or functions. One of this technology’s many benefits is time savings, so businesses can empower their teams to work smarter and focus on more important strategic or creative tasks. Automation also eliminates human error, which is an inevitable part of data entry and other manual processes that can have a notable impact on a business.”
2. Leveraging valuable data. The Digital Age is all about data and Vincent notes, “Businesses are leveraging data … but not [utilizing] it to the fullest extent.” Cognitive technologies (aka artificial intelligence (AI)), like the Enterra Revenue Growth Intelligence System™ (ERGIS™), can help businesses extract the greatest value from their data.
3. Investing in cloud-based tech. According to Vincent, “Driving a successful digital transformation strategy is possible only if you’re commanding a lean ship, and cloud-based software solutions make it easier to manage and streamline operations. More than 82% of businesses reported reduced costs after adopting cloud technology.”
4. Developing the team proactively. Although technology plays an essential role in any digital transformation, leveraging processes and people are equally important. Vincent notes, “Businesses are implementing processes to ensure the successful rollout of new tools. They are allocating resources for training and oversight to encourage the swift adoption of cutting-edge technologies. By dedicating time to help your teams understand how to leverage the tools available, you’ll be able to work more efficiently, and your business can be more focused on growth instead of playing catch-up.”
McKinsey & Company analysts conclude, “In [today’s] dynamic business environment, focusing on new ways of working, new capabilities, and new technologies is the way forward. Yet transformations are not easy to get right. Research by McKinsey has long documented that enterprise-wide transformation is difficult, with less than a third of transformations reaching their goals to improve organizational performance and sustain these improvements over time.”[5] Getting on the right path is an important step in avoiding failure.
Four Digital Transformation Paths
As noted at the beginning of this article, researchers from the MIT Center for Information Systems Research (CISR) identified four pathways companies can travel to achieve successful digital transformation. Those pathways are:
Pathway 1: Digitize first, then worry about customer experience. The researchers call this pathway “industrialization.” McKendrick explains, “[Industrialization is] a brute-force process to begin overturning everything across the enterprise to digital. Firms choose this pathway when they feel their customer experience is already good enough to hold competitors at bay. The goal is to begin ‘radically simplifying operations by focusing on what the firm is best at, and turning them into digital services.'”
Pathway 2: First, worry about the customers, then digitize. According to McKendrick, “This is the path taken by companies whose customer service is underperforming, or if there are competitors bearing down on them. This path has two phases: taking measures to amplify the customer’s voice inside the organization, then followed by building digital platforms.”
Pathway 3: Alternate between digitization and customer experience in “stair-step” style. McKendrick writes, “Firms that need to improve both their customer experience and operational efficiency may opt for this route. This ‘stair-step’ approach is partly driven by a perception that the digital revolution may pass them by.” According to the MIT researchers, “This pathway is the most popular because it makes perfect sense to many firms to deliver smaller but tangible improvements. … [At the same time, firms that go this route] have a surprisingly higher risk with a slightly lower-than-average financial performance.”
Pathway 4: Forget fussing with redirecting the business, just create a whole new digital-native business unit: McKendrick explains, “This is an option that established companies may pursue, as their corporate culture may be too rigid to support digital growth. … It enables the development of a digital-native enterprise from day one. Ultimately, as the separate unit gains traction in the market, it will be reunited with the mothership.” The MIT researchers note, “This pathway is more than just an innovation project, it’s a substantial investment in how the firm will make money in the future.” They go on to explain that the main company still needs to follow elements of the other three pathways to remain viable in today’s business environment.
Concluding Thoughts
Vincent concludes, “If your company is truly going to digitally transform, you must reexamine the foundations of its strategies and the systems that support them. This is where bottlenecks typically exist. … Digital transformation will help your organization usher in a new era of operating that will help you thrive under current and future market conditions.” McKinsey analysts add, “McKinsey research shows that the execution stage — embedding transformation disciplines into business-as-usual structures, processes, and systems — is key to generating value. Companies that have undergone successful transformations are more likely than others to have made substantial changes to their annual business planning processes and review cycles. … Finally, speed is of the essence. Companies with top-quartile financial performance typically capture 74 percent of their transformations’ value within the first 12 months. That value can be reinvested in new initiatives, creating a virtuous circle of improvement.” Although the track record for successful digital transformation efforts is not good, fear of failure should not discourage business executives from doing the right thing.
Footnotes
[1] Joe McKendrick, “There Are Four Paths To Digital Transformation, Each With Its Own Challenges,” Forbes, 18 October 2022.
[2] Swapnil Mishra, “What is Digital Transformation?” Enterprise Talk, 20 April 2023.
[3] Trevor Miles, “Let’s be clear: Digitization is not the same as Digital Transformation,” Kinaxis Blog, 8 December 2017.
[4] Kelly Vincent, “Digital transformation: 4 trends to pay attention to right now,” The Enterprisers Project, 20 April 2023.
[5] Staff, “What is business transformation?” McKinsey & Company, 17 April 2023.
