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, along with tips to ensure your company is on the correct course.

Digital transformation defined
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CIOs have come to disdain digital transformation as a concept because it’s meaning has been rendered nebulous from overuse.

You can blame CIOs who use it as a euphemism for modernization, including migrating from legacy on-premises systems to cloud software, Or you can blame vendors who have abused the term when marketing solutions designed to satisfy every IT leader’s requirements. You can even blame both.

But 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,” as it’s become more mainstream, says Genpact CEO Tiger Tyagarajan, who advises enterprises on digital strategy.

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

But what, exactly, is that money funding? Replatforming on new technologies is critical. Forrester Research, for instance, recommends a disruptive approach to transformation that includes everything from incremental improvements to moonshot approaches. Read on for a drill down into digital transformation.

Digital transformation defined

Digital transformation marks a radical rethinking of how an organization uses technology, people and processes to fundamentally change business performance, says George Westerman, MIT principal research scientist and author of Leading Digital: Turning Technology Into Business Transformation.

Digital transformation, which Westerman says should be led by the CEO, 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, 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 Uber’s hijacking of 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.

Amazon.com’s steady march across nearly every retail vertical has heightened consumer expectations for not only how quickly they receive goods, but the consistent availability of goods. The so-called Amazon effect has retailers 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.

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.

Restaurant chains such as TGI Fridays and IHOP, fearful of being rendered irrelevant by hipper, more tech-savvy boutique brands, are experimenting with virtual assistants to facilitate mobile ordering.

Grocery chain Albertsons is working on anything from personalized product deals and one-touch payments for gas to AI software and robots that move product around its warehouses, says Ramiya Iyer, general vice president of IT for omnichannel sales and services.

Startups play a critical role in many organizations’ transformation strategies. BMO Harris Bank accelerated the loan origination process with software from startup Blend to become a preferred digital destination for consumers, says Thomas Parrish, the bank's director of consumer lending product management. Previously, bankers spent up to an hour drafting the loan applications while customers waited.

"We didn't have a good user experience," Parrish says. With Blend, consumers complete applications in minutes. Moreover, applicants can fill them out on weekends rather than be beholden to the banker's hours. 

As a result, online mortgage and home equity application volume at the bank has risen 275 percent over the same period last year, and more than 80 percent of mortgage and home equity applications are now submitted using Blend. The technology enables BMO Harris’ bankers to spend more time serving customers rather than filling out and filing paperwork, Parrish says. “It keeps up cutting edge and current," says Parrish.

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.

How to lead a digital transformation

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

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 Genpact’s 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 algorithms and mobile applications, consumers and claims officers can 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.

Digital transformation tips

Making accountability — who is responsible for what — clear is critically important upfront, but companies can follow several other steps to affect the kind of change they desire, says Laura LaBerge, a McKinsey senior knowledge expert.

Ruthlessly focus on a clear set of objectives. Whether you’re transforming an existing model or starting from scratch, leaders must reach a consensus on the best path to pursue.

Be bold when setting the scope. Successful digital transformations are 1.5 times more likely than others to be enterprisewide in scale. This will also help CIOs recognize the biggest bang from their tech investments. "If they're stuck on incremental changes they may miss the big move they might have seen," LaBerge says.

Embrace adaptive design. The days of upfront investment requirements and rigid KPIs are over. Adaptive design enables CIOs to pursue monthly or even weekly tweaks to the transformation strategy, including reallocating talent.

“We see this adaptability ingrained in the design of successful transformations,” LaBerge says, adding that business leaders reporting success were more than three times more likely to facilitate monthly adjustments to strategy.

Adopt agile execution. Encourage risk taking, enabling even lower-level employees to make decisions, fail fast and learn.

It’s okay to disrupt yourself. Successful digital transformation requires preemptive changes rather than reacting to competitive pressures or disruptors, says Martin Reeves, of BCG’s Henderson Institute.

But when should you make preemptive changes? Reeves adds, “The observation of biological systems teaches us that it is optimal for companies to begin searching well before they exhaust their current sources of profit, and that firms should use a mix of ‘big steps’ to move to uncharted terrain and ‘small steps’ to uncover adjacent options at low cost.”

Regardless, having a strong bias toward change is critical.

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. DevOps leaders galvanize software development by merging development with operations, enabling companies to continuously iterate software to speed delivery.

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.

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.

“Our obstacles include the ability to move fast and to innovate while stripping down legacy processes and technical debt investments that have served us well for a long time,” says PenFed Credit Union CDO Bozena Kalita, who is leading the bank through a major technology transformation.

As Genpact’s 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.

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.”

Digital disruption lurks for laggards

For financial services organizations, disruption comes from Silicon Valley more than it does from competitors.

Google, Facebook, Amazon.com and other tech giants drive transformation in consumer experiences that non-digital companies must follow, says PenFed’s Kalita, who is making a platform switch to Salesforce.com and introducing virtual assistants for employees and customers.

“Customers are expecting the same experiences and it's been difficult for us to catch up with these tech giants,” Kalita says. “Whether it’s Bank of America or Chase, every bank has been trying to transform themselves.”

But speed is not a friend for most large enterprises and 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. Sixty-six 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, according to Gartner.

“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 2018 research note. “This chasm leaves most enterprises vulnerable to digital disruption.”

Copyright © 2019 IDG Communications, Inc.

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