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 digital transformation entails — and how to tell whether your organization is on the right path.

Clint Boulton Aug 01st 2018
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What is digital transformation?

Ask 10 CIOs what digital transformation means, and you’re likely to get 10 different answers, owing to different business models. At a high level, digital transformation represents a radical rethinking of how an enterprise uses technology to radically change performance, says George Westerman, principal research scientist with the MIT Sloan Initiative on the Digital Economy.

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

Such sweeping changes typically include the pursuit of new business models and, by extension, 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."

Catalysts for digital transformations may also include disruption from incumbents and startups. Witness Amazon.com’s steady encroachment on the turfs of virtually retailer and, more recently, its shipping partners such as UPS and FedEx.

Another way to look at digital business transformation? 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?” Successful companies construct customer journey maps to identify sources of and inhibitors to value creation, Schmarzo says.

Digital transformation vs. optimization

Here's the dirty little secret: What many CIOs describe as a digital transformation actually isn't. Mobile apps, AI-based chatbots, analytics and other digital services are often used to augment existing services.

"In a nutshell, we reserve digital business transformation for companies pursuing net new revenue streams, products and services and business models," says Gartner analyst Hung LeHong, whose job includes assessing whether companies are conducting a "digital business transformation" or a "digital business optimization."

Digital business transformations can include the creation of new digital business units or digital acquisitions. Sometimes the new business models lead to ventures in adjacent markets or new industries.

General Electric, with its "digital twin" initiative to sell locomotive engines and jet turbines as a software service, is orchestrating a digital business transformation, LeHong says. Bold as GE's digital strategy is, it’s what a company does because it fears disruption or because it intends to disrupt its industry.

GE is among the 10 percent of companies Gartner has surveyed that is actually doing this form of transformation. The other 90 percent are conducting various forms of "digital business optimization." This entails using digital tools to "supercharge" productivity, bolster generation of existing revenue streams and boost customer experience.

For example, Shake Shack this year launched a mobile app that enables mobile ordering, ostensibly to reduce customer wait times. ServiceMaster has tapped a mobile platform to improve the way it connects contractors with customers. UPS partnered with startup Latch on an IoT-enabled smart delivery service that allows drivers to drop off packages in multi-family apartments in New York City. By themselves, these tools are not transformative.

LeHong says part of his job is to meet with CIOs and the business executives ultimately responsible for driving the strategy, such as a CEO, COO or CFO. Getting IT and business leaders together helps the companies "double click" on whether they are transforming or optimizing their businesses. Once they answer that question, they can appropriately tailor and set their expectations.

Digital transformation strategy

Successful digital transformations do not begin with technology. Instead, they focus on overhauling the organization with a customer-focused goal in mind. As such, there is no singular playbook. But a common theme among digital journeys is that talent is what drives them, says CarMax CIO Shamim Mohammad, who in transforming the used-car retailer organized product teams that included a product manager, a lead developer/engineer and a user experience specialist. These teams took a customer-centric view in building new products.

Other organizations have adopted a holistic collaboration model. Pitney Bowes, for example, formed a tech strategy team and global innovation roundtables to foster greater collaboration. “All teams were sharing practices to test continuous integration and continuous delivery so all apps moving to the cloud were benefiting,’’ says James Fairweather, the company’s CTO of commerce services.

These companies also adopted a startup mentality, were unapologetic about change, and secured buy-in from senior management.

For deeper insights into digital transformation strategy, see “7 habits of highly successful digital transformations” and “4 things successful CIOs know about digital transformation.”

Digital transformation examples

While several enterprises are in the midst of digital transformations, some stand out, either for scope and scale or the industries they target. Nissan, for example, is in the midst of sweeping change under new CIO Tony Thomas.

Quick wins for Nissan include a move to Office 365 and mobile-enabling the workforce, though Thomas acknowledges that he must do more to help the company compete in a sector where autonomous driving is the chief disruption bar none.

Connex Credit Union CIO Dennis Klemenz has split IT into three key units: core processing, which facilitates financial transactions; infrastructure, which includes a migration to a private cloud leveraging hyperconverged infrastructure, in which storage is included in the compute nodes; and analytics and innovation. Klemenz has also rolled out interactive teller machines, which drive-up customers use to conduct their financial transactions from a touchscreen.

Digital transformation trends

Fearful of being outflanked by more nimble competitors, companies are innovating at a faster pace than ever. To avoid disruption, companies are 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. Pulling across business and technology domains, chatbots 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. 

There is a veritable digital ocean of complimentary possibilities, including applications of IoT, blockchain and quantum computing. The falling costs of compute, storage and bandwidth have also facilitated the rise of social, analytics, and artificial intelligence technologies. These tools, paired with design thinking, agile development and DevOps, are at the center of many digital transformations. IDC estimates spending on digital transformation will exceed $2 trillion in 2019, with 40 percent of all technology spending will be for digital transformation technologies.

Essential digital transformation roles

Savvy CIOs acknowledge that even with the latest and greatest technologies and agile processes that digital transformations fall down without the right staff to conduct them. Hiring enough software engineers, cloud computing specialists and product managers remain tall tasks.

But at a time when transformations lean increasingly on digital tools influenced by machine learning and artificial intelligence, IT departments supporting business-wide transformations require UX designers, digital trainers, writers, conversational brand strategists, forensic analysts, ethics compliance managers and digital and workplace technology managers.

Digital transformation misconceptions

A lot of people believe the term digital transformation is interchangeable with technology. It does, of course, include technology, but with emerging digital capabilities affecting all areas of the business, it’s important to remember that the transformation is just as much about leadership as it is about the technology itself, says Janice Miller, director of leadership programs and product management at Harvard Business Publishing Corporate Learning.

But perhaps the biggest misconception of all is that digital transformations are “done” when they reach a certain stage. Digital transformation is a journey; completion of one stage is often a stop-gap or bridge to the next leg. As emerging technologies and market forces heap new disruption upon the enterprise, the company must adapt to survive.

Why digital transformations falter

Digital transformations are lagging or even failing for several reasons, according to research from Digital McKinsey, Wipro Digital and other consultancies. The main culprits? Lack of agreement on what digital transformation means; little to no senior executive buy-in; diffuse focus, with too much emphasis on back-end execution; lack of budget; talent deficit; and, of course, unwillingness to change.

A July report from Capgemini Digital Transformation Institute and MIT Sloan School of Management says transformations are falling prey to poor leadership, disconnects between IT and the business, lagging employee engagement and substandard operations, among other reasons.

How to lead a digital transformation

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.

While necessary, these steps won’t work without buy-in. IT leaders must align themselves with any executive with enough clout to negotiate the changes required and get the requisite buy-in from the board of directors as well as the rest of the business, MIT Sloan’s 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.” Westerman, who wrote a book on the subject, Leading Digital: Turning Technology into Business Transformation, says that digital masters are 26 percent more profitable than their industry competitors. 

Of course, not every CIO is collaborating with Gartner or has the benefit of courting MIT academics for advice. So how do you know if what you’re doing constitutes a digital transformation? The key lies in the other “D” word.

Ask yourself whether what you're doing is disruptive to your business and to your industry. If you can say yes with a straight face, you may well be conducting a legitimate digital transformation.