What is digital transformation?
What is digital transformation?
Why does digital transformation matter?
What does a digital transformation framework look like?
What role does culture play in digital transformation?
What drives digital transformation?
How can I get started on digital transformation?
Digital transformation is imperative for all businesses, from the small to the enterprise. That message comes through loud and clear from seemingly every keynote, panel discussion, article, or study related to how businesses can remain competitive and relevant as the world becomes increasingly digital. What's not clear to many business leaders is what digital transformation means. Is it just a catchy way to say moving to the cloud? What are the specific steps we need to take? Do we need to design new jobs to help us create a framework for digital transformation, or hire a consulting service? What parts of our business strategy need to change? Is it really worth it?
This article aims to answer some of the common questions around digital transformation and provide clarity, specifically to CIOs and IT leaders, including many quotes from digital transformation experts. Because technology plays a critical role in a businesses' ability to evolve with the market and continually increase value to customers, CIOs must lead their organizations through digital transformation [Click to Tweet].
Because digital transformation will look different for every company, it can be hard to pinpoint a definition that applies to all. However, in general terms, we define digital transformation as the integration of digital technology into all areas of a business resulting in fundamental changes to how businesses operate and how they deliver value to customers. Beyond that, it's a cultural change that requires organizations to continually challenge the status quo, experiment often, and get comfortable with failure. This sometimes means walking away from long-standing business processes that companies were built upon in favor of relatively new practices that are still being defined. [Click to Tweet]
With a plethora of articles and various definitions of digital transformation, it's easy to see why there is some confusion around the topic. For instance, author Greg Verdino focuses on what businesses that undergo digital transformation may expect to achieve. He says, “Digital transformation closes the gap between what digital customers already expect and what analog businesses actually deliver.”
A definition from The Agile Elephant emphasizes all the ways businesses may need to adjust their existing practices: “[Digital transformation] involves a change in leadership, different thinking, the encouragement of innovation and new business models, incorporating digitisation of assets and an increased use of technology to improve the experience of your organisation’s employees, customers, suppliers, partners and stakeholders.”
And the Wikipedia definition, while vague, touches on how the effects of digital transformation extends beyond businesses to society as a whole. “Digital transformation is the changes associated with the application of digital technology in all aspects of human society,” it states.
There are a number of reasons that a business may undergo digital transformation, but by far, the most likely reason is that they have to. It's a survival issue for many. [Click to Tweet]
Howard King, in a contributed article for The Guardian, puts it this way: “Businesses don't transform by choice because it is expensive and risky. Businesses go through transformation when they have failed to evolve.”
John Marcante, CIO of Vanguard, points this out, as well: “Just look at the S&P 500. In 1958, U.S. corporations remained on that index for an average of 61 years, according to the American Enterprise Foundation. By 2011, it was 18 years. Today, companies are being replaced on the S&P approximately every two weeks. Technology has driven this shift, and companies that want to succeed must understand how to merge technology with strategy.”
Recent studies back this up time and time again. The IDC report “FutureScape: Worldwide CIO Agenda 2016 Predictions” emphasized that, "One-third of the top 20 firms in industry segments will be disrupted by new competitors within five years," and that it's a matter of "transform or perish."
Yet, the same IDC report goes on to predict that, by 2018, “70 percent of siloed digital transformation initiatives will ultimately fail because of insufficient collaboration, integration, sourcing or project management."
CIOs should not only care about digital transformation for the sake of their company's survival, they should focus on securing company-wide support and collaboration to get digital transformation right – before they get disrupted by a competitor or a startup.
But even if business leaders don't believe they have to transform, there are many reasons why they should consider it anyway.
- Their competitors are doing it. According to a Forrester Research report, executives predict that nearly half of their revenue will be driven by digital by the year 2020.
- It will make them more profitable. According to the MIT Center for Digital Business, “Companies that have embraced digital transformation are 26 percent more profitable than their average industry competitors and enjoy a 12 percent higher market valuation.”
- It will make them more efficient. Research shows, “Nine out of 10 IT decision-makers claim legacy systems are preventing them from harnessing the digital technologies they need to grow and become more efficient.”
- Their customers will thank them. Whether external customers, or internal employees, people have already largely adopted digital practices in all facets of their lives, from shopping online via their mobile devices to adjusting their home thermostat remotely. They are waiting for businesses to catch up.
Although digital transformation will vary widely based on organizations' specific challenges and demands, there are a few constants and common themes among existing case studies and published frameworks that all business and technology leaders should consider as they embark on digital transformation.
For instance, these digital transformation elements are often cited:
- Customer experience
- Operational agility
- Culture and leadership
- Workforce enablement
- Digital technology integration
While each guide has its own recommendations and varying steps or considerations, CIOs should look for those important shared themes when developing their own digital transformation strategy.
A few examples of digital transformation frameworks include:
MIT Sloan: The Nine Elements of Digital Transformation
Altimeter: Six Stages of Digital Transformation
In recent years there has been a fundamental shift happening in the role of IT. A recent report from Harvey Nash and advisory firm KPMG found that “CEOs are focused on IT projects that can make money (63 percent), rather than those that save money (37 percent).” The same report shows “long-standing CIO priorities have seen the biggest drop in importance during the past four years. Increasing operational efficiencies, for example, has dropped 16 percent, and delivering stable IT performance has dropped 27 percent.”
No longer are companies building software or running IT for cost savings and operations, but rather IT has become the primary driver of business innovation. Embracing this shift requires everyone in the company to rethink the role and impact of IT in their day-to-day experience.
Bryson Koehler, CIO of The Weather Company, says, “There is a very different mindset at work when you take IT out of an operating mode of, 'Let’s run a bunch of packaged solutions that we’ve bought and stood up' to 'Let’s build and create new capabilities that didn’t exist before.' If you look at the vast majority of startups, they’re not starting with giant, shrink-wrapped software packages as the base of their company. If you’re trying to create innovation inside of a large enterprise then you shouldn’t start with that either. You’re not here to run the mainframe anymore. You’re not here to run the servers. You’re not here to run the data center, or the network, or operations. That is table stakes. That’s what you can outsource.”
Although IT will play an important role in driving digital transformation strategy, the work of implementing and adapting to the massive changes that go along with digital transformation falls to everyone. For this reason, digital transformation is a people issue.
“Finding ways to help people across this digital divide and the culture shock that rapid change brings is going to be just as important as the technology we use to get there,” Marc Carrel-Billiard, global tech R&D Lead on digital transformation at Accenture, is quoted as saying in an article for TechCrunch.
Dr. David Bray, CIO of the U.S. Federal Communication Commission, perfectly captures how this cultural shift sets the stage for transformation. “Throughout human history, the things that we could do with tools changed what we could do as humans, and as a result, changed what we could do as cultures,” Bray says. “Our species is 'smart' because we know how to use tools collaboratively together. At the end of the day, when we talk about technology change – whether it’s the Internet of Everything, big data, or machine learning – it’s really about people and organizational cultures, first and foremost. Then, it’s about how those people get stuff done together – and that's really what it comes down to when you talk about transforming organizational cultures.”
An important element of digital transformation is, of course, technology. But often, it's more about shedding outdated processes and legacy technology than it is about adopting new tech. Nextgov reports, “Around three-quarters of the $80 billion the federal government spends on information technology each year is used just to keep legacy systems running.”
In the healthcare industry, “Despite widespread use of smartphones and other mobile devices among healthcare providers, 90 percent of hospitals still use pagers and overpay by 45 percent to maintain legacy paging services, according to a study by Tiger Text and using research conducted by HIMSS Analytics.”
Examples like these span all industries, and the prevalence of legacy technology hinders CIOs' ability to successfully embark on a digital transformation strategy. Research from Forrester suggests, on average, CIOs spend an average of 72 percent of their budgets on existing IT concerns, while only 28 percent goes to new projects and innovation.
If businesses want to evolve with the rapid pace of digital change today, they must work to increase efficiency with technology wherever possible. For many, that means adopting agile principles across the business.
FCC CIO Bray recently conducted a major overhaul of the agency's 207 legacy systems, including two 11-year-old servers that weighed one ton each. The effort reduced ongoing maintenance costs from more than 85 percent of the agency's budget to less than 50 percent. Now, moving forward, agility is a No.1 priority for Bray.
“Things today aren’t changing linearly; they’re changing exponentially. It’s not good enough that you were fast last year. If you’re not faster this year, you’re going to fall increasingly behind. Agility trumps everything else,” Bray says. “Personally, I don’t commit to any organizational effort that takes longer than six months because the world will change in that period of time dramatically. You need to have stopgaps along the way so that you can reevaluate and pivot if you need to, along that six-month effort. One should have a long-term plan that exceeds six months, yet commit to deliverables in six months or less along the way.”
As businesses formulate their own digital transformation strategy, there is much to be learned from CIOs and IT leaders who have already begun their journeys. Below is a collection of stories and digital transformation case studies you can explore further.
Digital transformation is a massive undertaking, especially for larger, established companies. When done right, it will result in a business that is more aligned with customer demands and resilient in the fast-moving digital future.
For more insights on digital transformation, see our archive here.
Learn more about how leading CIOs are driving revenue generation in their IT organizations in this Harvard Business Review Analytic Services report.