After a decade of digitization, many organizations are starting to feel increasingly frustrated about the outcomes of their digital transformation strategy. If you are one of them, you’re not alone.
The most recent edition of PwC’s annual Digital IQ survey, tracking the confidence of executives of large companies in their organization’s digital abilities, revealed that only 52% of executives rated their Digital IQ as strong. This is the lowest rate since the survey was created in 2007 and down 15% from the year before.
One of the causes for this frustration is our tendency to focus on success stories from disruptors. We tend to forget the many digital transformation initiatives that have failed to guarantee people’s engagement or weren’t able to deliver the expected results.
In this article we’ll explore the reasons that led to this lack of confidence and we’ll begin painting a picture of what lies ahead in the second wave of digital transformation.
Why are companies frustrated about their digital transformation strategies?
There’s “this digital pressure…”
Recent research conducted by McKinsey revealed that as industries become more digital, companies that fail to adapt, see their revenues and profitability shrink. The current levels of digitization have drained up to six points of annual revenue and 4.5 points of growth, on average, from EBIT, earnings before interest and taxes (Exhibit 1).
However, this doesn’t mean that all organizations are experiencing losses due to the digitization of their industries. As we’ll see next, in the digital transformation game, a disproportionate share of the gains go to early-movers and fast followers.
Winner takes all…
Another factor driving frustration with digital transformation strategies is the winner-takes-all nature of digital economics.
The same McKinsey research showed that returns are unevenly distributed in every industry, with a few players earning outsized returns, while many others in the same industries are experiencing returns below the cost of capital (Exhibit 2).
Only first movers and very fast followers are rewarded…
Furthermore, early-movers tend to capture most of the value generated by the digitization of an industry. The more aggressively they respond, the stronger the positive impact is on their projected revenue and profit growth Disruptors profit from the transformation; fast followers break even; and all others lose money (Exhibits 3 and 4).
Resetting your digital transformation mentality
In the beginning, it was all about tech
In the past 10 years, the term Digital Transformation has been generally used to describe any implementation and use of advanced digital technologies in a business context, with the underlying promise that technology could transform an entire organization. Digital transformation departments were created, big budgets allocated to developing products such as apps and virtual collaboration tools, and pretty soon, every major organization was preparing or engaging in a “digital transformation.”
This strong focus on investing in tools is still a heritage of the early days of the digital-transformation hype, when the majority of its audience consisted of CIOs and IT professionals. Ten years ago, the term digital used to be synonymous with “IT.”
Organizations are now starting to realize that technology is a tool in the transformation process, and not the transformation itself. This technology-centric view of digital transformation is giving way to a more systemic understanding of what it means to transform an organization by “digital.” As a result, digital strategy is becoming part of the roadmap of many departments, not just IT.
Transformation means adaptation
Boston College professor Gerald C. Kan, describes digital transformation as “adopting business processes and practices to help the organization compete effectively in an increasingly digital world”. This definition has two important implications for managers:
First, “it means that how an organization implements technology is only a small part of digital transformation. Other issues, such as strategy, talent management, organizational structure, and leadership, are just as important, if not more important, than technology for digital transformation.”
Second, it means that “much of the need for digital transformation is outside managers’ control and involves adapting to how your customers, partners, employees, and competitors use digital technologies to change how they act and what they expect.”
Not many organizations have this broader understanding of digital transformation. Even fewer have the organizational flexibility to constantly adapt the many elements required by an ever-changing business environment, not only technology.
The core business is your digital transformation strategy
With the winds of disruption blowing against every organization’s door, digitizing processes is increasingly becoming a top priority in every-leader’s agenda, as shown in PwC’s Digital IQ survey. Fully 68% of respondents consider their CEO a champion for digital (against only 33% in 2007).
Nonetheless, awareness is not enough for bridging the digital gap. As most companies worry about digital natives, they tend to forget about incumbents digitizing and disrupting their own industries A common mistake is responding to a digital threat with a completely new business model.
Completely reinventing the company is sometimes necessary. However, not many organizations are able to change direction at scale. The high cost and impact on the current operational model make it too risky, so rather than disrupting a market, most companies end up disrupting themselves. As companies focus their digital efforts inwards, or on the core business, their chances of succeeding increase, while the risk to transformation projects decrease.
The road ahead
An inward transformation strategy will be heavily based on process redesign and intelligent automation. With AI and machine learning much more widespread in companies of all sizes, we will likely see transformation in every realm of an organization. From the organizational structure and business model to the processes and individual roles, organizations will feel increasing pressure to transform from within.