Is your Digital Transformation Too Heavy on the Digital and Too Light on the Transformation?
A Path Forward. If you’re reading this, you’re likely among the 63% of business leaders having difficulty scaling a Digital Transformation. Although cybersecurity is often cited as the major constraint to scaling, in my experience, there is a bigger challenge blocking the way forward. More effort is put into building Digital Capability while Transformation Capability is often an afterthought. The resulting failure mode is that change management is underestimated and poorly executed causing a low success rate.
In this post, I’ll lay out the business case and a framework to rebalance Digital and Transformation Capability to greatly improve the success rate at scale. You can draw on your own experience and apply what fits your unique situation. This framework is based on my transformation work, Digital or otherwise, with dozens of companies around the world. Recently published research from notable practitioners validates the framework elements as best practice for successful scaling and business impact. In later posts, I’ll expand on the details of the framework, and apply it to cybersecurity where the same failure mode is in play.
If the Digital Transformation is failing, or not scaling, why bother to keep going? The answer – it’s worth it, and it’s fixable.
Big Investment for a Big Prize. Per IDC, worldwide spending on the technologies and services that enable Digital Transformation totaled $1.1 Trillion in 2018. At stake is the potential to unlock $11 trillion of economic value by 2025, per McKinsey Global Institute. Despite the allure of a big potential ROI, capturing the value from this investment hasn’t been a no brainer.
Low Success Rate. According to a recent McKinsey Survey of Executives, the success rate of Digital Transformations is 37%; this is considered low given the high level of investment and effort. The definition of success is the ability to scale out of pilot projects for meaningful business impact. McKinsey cited that a contributing factor to the low success rate is that 75% of efforts cut across multiple business units and functions. Organizations are still struggling with working across organizational boundaries. This is consistent with a Deloitte Survey documenting the struggle organizations have in scaling out of pilots. The common theme is that successful pilot projects, typically executed in a functional silo, are not scaling across the organization. We call this achieving islands of success.
As a result, there’s a lot of fallout. Many name brand companies are cutting back their Digital Investments as they’ve learned how hard it is to capture the value for a reasonable ROI.
Is It Worth the Effort? Yes it is. “Digital Masters” generate a performance premium compared to their digitally average competitors, per research by MIT1. The researchers define a Digital Master as having achieved a high level of both Digital and Leadership Capabilities (critical to transformation). Digital Masters generate revenue more efficiently (+9% in their study), and are more profitable (+26% in their study) than digitally average competitors. On the other end of the spectrum, “Digital Laggards” way underperform (-4% revenue efficiency, and -24% profit). Other studies show similar results. The punchline is that getting the Digital Transformation right provides a large positive impact, while getting it wrong creates a large performance deficit. With so much at stake, as Yoda from Star Wars says, “do or do not…there is no try”. Given the high stakes for most organizations, dismantling the effort is not a good strategic choice.
Why is Success Elusive? The decision to go forward isn’t the problem. The failure mode is launching projects with more emphasis on technology implementation than on the change management aspects required to be cross-functionally successful. The latter poses more of the real challenge. Properly-sized investment of time and effort for a digital-based transformation is typically much larger than investment in the technology itself. If this is not your investment profile, then there are Transformation-related gaps to be closed.
It’s easy to look at an $11 Trillion opportunity and think about going after a piece of the action. This certainly grabs the attention of the organization, and even the Board. Add to this apparent big upside the strategic imperative to gain, maintain, or not lose competitive advantage, then it seems obvious that the decision should be to invest. The go decision is sound.
The difficulty is in the execution which depends on change management. Effective change management is hard. It requires commitment, persistence, and a much broader perspective, time frame, and solution set. Even with perfect implementation of technology, it’s rarely possible to be impactful on the business if people, process, the business model, and culture are not considered central to the effort.
Balance Digital and Transformation. Change management is a fairly well-documented domain area. The Digital aspect adds a wrinkle that requires some consideration. The implication is that being too focused on Transformation Capability is as much a failure mode as being too focused on Digital Capability. Replacing one with the other is not the path to success. Finding the right balance is critical. At any given point in time, more focus may be applied to one aspect or the other to close gaps that bring the initiative back into balance. This is a key takeaway to improve the odds of success.
Framework for Success (Figure 1). To achieve the balance between Digital Capability and Transformation Capability, there are five Key Results Areas (KRA’s) that make it happen:
- Leadership – The aspiration, guidance, investment and support from the top of the organization. Without strong leadership, there is no chance for success.
- Technology Acumen – Know-how, experience, and past success in applying technology to improve the business, and innovate products, services, and business models.
- Business Model and Process Redesign – A Value Stream perspective, and understanding of the power a Digital Platform provides to better serve customers, shareholders, and employees; continuously improved and adapted to deliver and capture value.
- People Engagement – Environment in which people closest to the action know the priorities, have the motivation and skills to act, are given appropriate decision authority, and are encouraged to take acceptable risk.
- Innovation Culture – Principles, values, mental models, behavior, and tools to learn and problem solve with purpose, at an accelerating rate.
Figure 1: Digital Transformation Framework – Five Key Results Areas (KRA’s), each with Critical Success Factors (CSF’s). Together, these make or break a Digital Transformation.
Leadership from the top, and an Innovation Culture in the organization drive how Technology Acumen (a focal point for Digital), Business Model and Process Redesign, and People Engagement (a focal point for Transformation) work together to stay in balance.
Critical Success Factors (CSF’s). Several Critical Success Factors (CSF’s) drive the performance of each KRA. In my experience, together, these make or break a Digital Transformation. The KRA-CSF Framework provides a scaffold for attaching metrics to identify and shore up gaps that keep the Digital and Transformation Capability in balance for an improved success rate. This is meant to be a flexible framework that you can adapt. If your experience and situation dictate other CSF’s, swapping or adding is appropriate.
Each Critical Success Factor (CSF’s) has an importance behind it. Here is the short hand list. I’ll expand on these in my next post.
- Bold Digital Strategy with “Good Projects”
- Constraint Busting Investment
- Platforms to Accelerate Communication and Share Ideas
- Authentic, Transparent, Engaged Leadership
- A “Burning Platform” and Compelling Vision
- Priorities, Metrics, and Governance of What Matters
- Data, API, and Algorithm Strategy
- Strong IT and Business Relationship
- Skills and Fluency in “Digital” at all Org Levels
- Smart and Connected at the “Strategic Edge”
- “Not Invented Here” Snuffed Out – Buy / Partner
Business Model and Process Redesign.
- >12 High Impact Project Use Cases
- Value Capture = Streamlined, Easy, “As-a- Service”
- Uncovered Raw Customer Need
- Value Stream Perspective
- Constraint Relief at a Cross-Functional Level
- Understanding the Impact on the Team
- Focused Attention and Effort on What matters
- Decision Making Near the Action
- Trained “Middle” to Find High Impact Use Cases
- Role as Problem Solvers and Innovators
- Prototype Strategy
- Rapid Prototyping Capability
- Design Thinking
- Disciplined Innovation Process with Fast Cycles of Learning
People Matter. A key takeaway is that many Critical Success Factors (CSF’s), regardless of KRA, relate to people. People are at the center of any Digital Transformation. If they aren’t at the center of yours, you have a big gap.
How to Use the Framework (Figure 2). A way to apply this framework is to evaluate the performance of each CSF to identify the underperforming KRA’s that require attention. Then, establish a visual of how the strengths and weaknesses stack up against one another. Illustrated in Figure 2, there are four conditions that provide clarity on next steps to improve.
Figure 2: Digital Transformation Framework, Four Scenarios – Shore up gaps to bring establish balance, then strive for excellence.
- Balanced – Strengths and weaknesses are evenly distributed requiring a shoring up where it is needed within each KRA. In this case, balance is not the issue. The focus should be on striving for excellence.
- Technology-Oriented – Companies with strong technical prowess often have this profile. Digital Capability is strong, while Transformation Capability is the gap. Closing the Transformation gap will have the biggest business impact.
- Transformation-Oriented – Companies with strong continuous improvement cultures often have this profile. Shoring up the Digital gap is the top priority.
- Broken – This is the profile of a Digital Laggard. In this scenario, the entire initiative should be restructured for any chance of success. The KRA’s and CSF’s can provide some gaps to target. The restructuring should start with: a) Leadership to provide focus, the path forward, and investment in what matters; and, b) Innovation Culture to provide principles and values that drive behavior and accelerate improvement.
In all four scenarios, strong Leadership, with a strong, or emerging, Innovation Culture are prerequisites to having a reasonable chance for success.
The Elephant in the Room – What About Cybersecurity? Cyber is not explicitly called out in this framework because it is a constraint to be addressed. It is inherent in many of the CSF’s. In a future post, I will apply the framework to the “Cybersecurity Transformation”. My observation is that, similar to the Digital Transformation, there’s too much cyber and not enough transformation to address the cybersecurity challenge.
Now What? Start by answering the question, is our Digital Transformation successful relative to our own goals, then relative to the industry. Honestly assess whether you’re average, a leader, or a laggard. With this understanding, use the Framework to guide your focus, investment, and effort to close the competitive gap, take the lead, or extend your advantage.
What Market Voices Are Saying. According to a recent World Economic Forum/Bain & Company Report, companies without a coherent Digital Strategy suffer from one or more of eight early-stage failure patterns.
- Planning to Plan – Heavy on enablers; unclear on business value
- Pure Experimentation – Heavy on business applications; lacking enablers to scale
- Blind Spots – Underinvestment in key constraint areas
- Scattershot – Lots of small investments with no coherent strategy
- Nearsighted – Investments weighted to the short term
- Farsighted – Investments weighted to the long term
- Big Brother – Excessive centralization; lack of business ownership
- Islands – High decentralization; duplication of investments
Shout Out to a Digital Freedom Fighter. To our visionary, innovative, and inspiring General Manager, Debra Delise. She’s leading our effort to develop leap ahead technology, and instilling a strong security culture that supports our company’s digital aspiration.
1 Westerman, George, Didier Bonnet, and Andrew McAfee. 2014. Leading Digital: Turning Technology into Business Transformation. Boston, Massachusetts: Harvard Business Review Press.