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What is digital transformation? A necessary disruption

Digital transformation is a foundational change in how an organization delivers value to its customers. Here is what transformation truly entails — and how to tell whether your organization is on the right path.

Digital transformation defined
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Contemplating the concept of digital transformation has become an agonizing feat for CIOs, many of whom view it as a catchphrase that has become confusing at best and meaningless at worst.

Much of the blame lies with vendors who have abused the term when marketing solutions designed to satisfy every IT leader’s requirements. Savvy CIOs will tell you: Digital transformation doesn’t come in a box — or a cloud.

“It’s like most tech trends that get hyped up and overused,” says Genpact CEO Tiger Tyagarajan, who advises enterprises on digital strategy. “It’s become more mainstream.”

So mainstream, in fact, that 40 percent of all technology spending will go toward digital transformations, with enterprises spending in excess of $2 trillion by 2019, according to IDC. 

Indeed, some CIOs use “digital transformation” as a euphemism for their modernization efforts: moving from legacy architectures, on-premises systems and waterfall development to API-driven microservices, the cloud and agile.

Yes, digital transformation includes technology and process changes such as these, but such shifts alone do not define an organization’s digital journey. So what, then, is digital transformation?

Digital transformation defined

Digital transformation marks a radical rethinking of how an organization uses technology, people and processes to radically change business performance, says George Westerman, principal research scientist with the MIT Sloan Initiative on the Digital Economy.

Digital transformation, which should be led by the CEO, Westerman says, requires cross-departmental collaboration in pairing business-focused philosophies with rapid application development models.

Such sweeping changes are typically undertaken in pursuit of new business models and new revenue streams, often driven by changes in customer expectations around products and services.

"Customer expectations are far exceeding what you can really do," says Westerman. “That means a fundamental rethinking about what we do with technology in organizations."

Digital transformation drivers

Companies often embark on digital transformations to counter the potential for disruption from incumbents and startups. Consider Amazon.com’s steady march across nearly every retail vertical. This has heightened consumer expectations for not only how quickly they receive goods, but the consistent availability of goods, says Tyagarajan.

Taking a page out of Amazon.com’s playbook, retailers such as Target and Walmart are using algorithms to complement logistics and ensure that anything from food items to beauty aids quickly make their way from local warehouses — before their store locations run out.

“Retail and consumer goods need to continually reinvent themselves to meet ever-changing customer needs,” Tyagarajan says.

Keeping ahead of the competition on new technology offerings is another digital transformation driver. For example, restaurant chains such as TGI Fridays and IHOP, fearful of being rendered irrelevant by hipper, more tech-savvy boutique brands, are experimenting with virtual helper applications such as Google Assistant and Amazon Alexa to facilitate mobile ordering, in hopes that millennial customers will embrace their brands.

Transforming products into services is another key motivation. Digital twins, for example, are a new reality in the manufacturing sector. Organizations from General Electric to Boeing and McDermott International are creating software versions of their physical assets, ideally to generate application revenue.

And let’s not ignore the disruption Uber has injected into the transportation sector, forcing everyone from taxi companies to car rental concerns to automakers to figure out how incorporate similar ride-sharing or other on-demand services, including bikes and scooters, into their business models.

How to lead a digital transformation

To meet shifting customer expectations, many CIOs are making sweeping organizational changes, adding key roles, reskilling employees, setting up innovation labs and experimenting with emerging technologies to meet strategic mandates issued by their CEOs and boards.

IT leaders must also align themselves with an executive with the clout to negotiate the changes required for transformation and to get the requisite buy-in from the board of directors as well as the rest of the business, Westerman says. Such partners could be the chief digital officer or chief marketing officer. CIOs and their partners must then loop in product managers and other functional heads to build digital services intended to boost customer engagement.

“You need technology on one axis while the other axis has to include the ability to envision and continuously drive change,” Westerman says. “Put those two together and you get [companies that are] digital masters. If you only have one you're going to be off diagonal.”

One of the first things companies should do in embarking on a digital transformation is answer the critical question: What business outcomes do you want to achieve for customers?

“It starts with the business outcomes and the new business models you’re going after and working backwards from there,” says Tyagarajan.

Here, a keen understanding of your customer journey map and lifecycle is key. Consider the process of settling an insurance claim, which typically takes 7 to 14 business days and requires a lot of paper shuffling. Thanks to carefully curated algorithms and mobile applications, consumers and claims officers can now resolve claims in minutes. Allstate, for example, allows its customers to snap a picture of their damaged motor vehicle via their smartphone and upload it for a claims officer to review.

Such technologies are often developed in one- to four-week sprints using agile methodologies. But ultimately, reimagining a business model like this requires a fundamental transformation of the organization and its processes, in addition to new technologies, Tyagarajan says.

For many organizations this means using data and analytics to re-engineer commercial business processes and capture new value creation, says Bill Schmarzo, CTO of digital technology firm Hitachi Vantara. “If it can’t drive economic value, why do it?”

For more, see “7 secrets for getting digital transformation right” and “7 skills of successful digital leaders.”

Digital transformation examples

Fearful of being outflanked by more nimble competitors, companies are seeking to accelerate innovation, experimenting with new digital services and capabilities to augment existing offerings or to slide into adjacent markets.

Consider the soaring interest in virtual assistants, particularly chatbots, which leverage natural language processing to establish a new digital pathway directly between the customer and the business. Behind the scenes, powerful analytics serve up recommendations via the chatbot. Banks, industrial manufacturers, retailers and just about every other type of business are implementing these digital tools. 

Some organizations are exploring partnerships as a critical part of their transformation strategy. Genpact, for example, recently opened a digital innovation hub near Walmart’s headquarters in Bentonville, Ark.

The move positions Tyagarajan and his peers to work more closely with Walmart CIO Clay Johnson and his IT team on the retailer’s digital transformation efforts, which include using robotic process automation (RPA), machine learning (ML) and artificial intelligence (AI) to drive efficiencies into financial accounting.

While the hub is open to any enterprise client willing to work with Genpact on those digital capabilities, Tyagarajan and his staff have already conducted “dreaming sessions” with Johnson and his team to come up with new innovation. “Clay is one of those CIOs who is extremely visionary and the dreaming kind,” Tyagarajan says.

For more examples of digital transformations, see “10 digital transformation success stories.”

Essential digital transformation roles

While emerging tech and revamped processes are crucial, having the right skills on staff is essential to any digital transformation.

Software engineers, cloud computing specialists and product managers remain key roles for companies seeking to roll out new products and services. Data scientists and data architects are also in high demand, as companies seek to glean insights out of vast troves of data, and transformations lean increasingly on machine learning and artificial intelligence. Plus, IT departments supporting business-wide transformations also require UX designers, digital trainers, writers, conversational brand strategists, forensic analysts, ethics compliance managers and digital and workplace technology managers.

Getting costs under control

Driving digital change is hard when you don’t have your financial house in order. Before tackling innovation in support of a digital transformation, CIOs must reconcile legacy investments for which business value has not been adequately tracked.

"CIOs are under a lot of pressure right now; there is a ton of expectations around digital transformation and CIOs are figuring out how to move money left to right in a way that is responsible,” says Trevor Schulze, former CIO of chipmaker Micron.

The trick, Schulze says, is figuring out how to shift money tied up in legacy investments to innovation. “We had to control costs but at the same time invest and be strategic,” Schulze says. “But we didn’t have enough insight into where the money was being spent.”

By implementing a technology business management (TBM) taxonomy and accounting software from Apptio, Schulze was able to identify contracts to phase out in favor of cloud services and new innovation investments. Increasingly, RPA, ML and AI are being brought to bear on such challenges, as underscored by Genpact’s partnership with Walmart.

Digital transformation pitfalls

Digital transformations are lagging or even failing for several reasons, including poor leadership, disconnects between IT and the business, lagging employee engagement and substandard operations, according to a report from Capgemini Digital Transformation Institute and MIT Sloan School of Management.

As Tyagarajan sees it, the key culprits of a derailed digital transformation are obsession with big bang change, focus on cost cutting as a business driver, and failure to loop in the business.

“Boardrooms and C-suites talk about digital and there is pressure to show something and show results, which creates wrong expectations about how quickly what can be done and when,” Tyagarajan says. When the investments don’t pay off, people blame the CIO, who finds himself or herself out of a job.

“The reality is that it’s the wrong strategic approach to boil the ocean,” Tyagarajan says.

Organizations also gravitate too quickly to using technology to cut costs. Going from 100 people down to 30 is all well and good, but are those 30 people meeting the business outcome you’re after?

“Of course cutting costs is important, but how is it going to help me grow and make customer relationships incredibly sticky, as well as getting better margins, working capital, more market share and more growth,” Tyagarajan says.

Moreover, approaching digital transformation as a technology journey independent of the business is a recipe for failure.

“If a clever CIO comes up with a clever idea to change something with new tech, that’s great. The next step is bringing it to the business and having the business own the process. When they own the process, you drive end-to-end transformation that includes processes, people, policies and tech,” Tyagarajan says. “The siloed approach always fails.”

For more, see “8 digital transformation mistakes (and how to fix them)” and “15 ways to salvage a troubled digital transformation.”

Digital disruption lurks for laggards

Most CIOs know they must carefully calibrate what their digital transformation strategy is against the expectations of their C-suites and boards.

The reality is that most CIOs admit they are optimizing business models with digital rather than creating new business models. Indeed, Gartner notes that 66 percent of CIOs say they are also pursuing “transformation,” compared to 85 percent who say their ambition is simply to use digital to optimize the business.

“But based on discussions with clients about their actual digital business initiatives, we believe that the number is closer to 10 percent,” wrote Gartner analysts Ed Gabrys and Jenny Breresford in a September research note. “This chasm leaves most enterprises vulnerable to digital disruption.”

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