Once again, digital transformation has become the talk of the town, following the recent advancements in generative artificial intelligence. However, the path from words to execution is long and cumbersome, and few digital transformation efforts fail to produce the expected outcomes. Why is that so, and what can we do about it?
According to an often-cited study from McKinsey state that 70 percent of digital transformation efforts fail. The reasons are many, and not surprisingly, McKinsey lists lack of management support, poor or nonexistent collaboration across silos, lack of employee engagement, and accountability as some of the main culprits. This is supported by Bain, which in a study of 100 companies states that 75 percent of those surveyed settle for dilution of value and mediocre performance. A mere 5 percent of companies involved in digital transformation efforts reported that they had achieved or exceeded the expectations they had set for themselves.
Despite statistics that repeatedly show the need for a different approach to digital transformation, resources are still flowing into digital transformation initiatives. According to an Accenture study of 1350 global businesses, investments in digital reinvention exceeded $100 billion between 2016 and 2018. Not surprisingly, the majority of respondents reported that their investments failed to materialize and resulted in poor returns.
With this backdrop, it is easy to be discouraged to embark on a digital transformation journey, but I believe that it is even riskier to attempt to solve the problems of tomorrow with the tools of yesterday. Instead of fearing the unknown, leaders should ask; what is the cost of doing nothing, and instead attempt to take learnings from the past.
These are in my opinion the main reasons why digital transformation fails.
1. Lack of shared direction
If no one agrees on where they are going, why they are heading in that direction, and what they aim to achieve, it is close to impossible to succeed. Lack of direction starts at the top, and all too often, C-level executives avoid acknowledging that they are not on the same page. This may be due to a lack of common understanding of the task at hand, a lack of technological insight, or downright competing priorities. If top managers aren’t on the same page, it is a downright guaranteed failure.
To ensure that top managers are on the same page, over-communicate and articulate not just what you’re trying to achieve, but the problem you’re solving. A common pitfall after reaching this stage is to sit down and create a game-plan with ambitious deadlines and even more ambitious goals. The problem is that those numbers rarely convince the employees of the company why they are suddenly urged to change.
Instead of presenting an endless barrage of charts, boxes, and figures, leaders should embrace storytelling as a tool to inspire and engage the organization. Spreadsheets and powerpoints may serve a purpose for strategic planning or budgeting, but in order to take the strategy from the boardroom and to the whole of the organization, those key figures and objectives should be translated into a compelling story that gets everyone on the same page.
2. Digital replication over digital transformation
When asked to define digital transformation, I often emphasize the last part of the term telling us in clear sight that we should prepare to transition from one state to another. Nevertheless, all too many times, digital transformation efforts end up replicating and marginally improving manual processes in a digital context.
In order to break free of this approach, I often encourage people to ask themselves, imagine there was no paper. Would you design your processes the same way you have today? Most likely you would utilize the possibilities given by technology to design a frictionless process with as few steps as possible. This is unfortunately not always the case when it comes to the digitization of legacy business processes. As we evolve from the use of IT for process assistance and caseworker support to intelligent automation, the need for a new approach to digitization is crucial. Rather than replicating obsolete practices, we should embrace the opportunity to reinvent existing business practices.
3. Digital becomes a goal itself
I may be tempted to argue that the whole concept of a digital strategy is the sworn enemy of a successful digital transformation. All too often, digital strategies divert attention away from goals that provide shareholder value, such as increased revenues, reduced costs, or increased customer satisfaction.
Instead of launching a separate digital strategy, leaders should make sure that their strategy is fit for a digital world. This brings us to the next reason why digital transformation fails.
4. Failure to understand the core concepts of digital
As many struggles to define digital transformation, it begins with having a diverse understanding of digital itself. Some may perceive this as an extension of what IT does, while others equate digital with digital marketing and sales. The lack of a clear definition of digital leaves leaders unable to grasp the implications of digital on their industry’s profit and revenue growth development.
The digital economy disrupts many of the core concepts of traditional financial theories such as economic rent, the profit earned in excess of a company’s cost of capital, as well as redefines traditional value chains by making distribution intermediaries obsolete. Digital offers absolute transparency and a potentially limitless choice, which on average creates more value for customers than for corporations. An inevitable outcome of technological innovation is according to The Zero Marginal Cost Society by Jeremy Rifkin that the marginal cost of products and services will eventually move close to zero. This will at best shift the profit pool of any industry, and favor those who are able to capture value from new revenue sources.
In order to overcome this, leaders must invest sufficient time to really understand how digital is impacting their industry, and how to benefit from these changes. This points back to the importance of a shared direction, unless everyone is on the same page when it comes to understanding digital, it is difficult to harvest any returns from digital transformation efforts.
5. Lack of talent
The ability to succeed with digital transformation all depends on the people of your organization. Lack of experience and/or expertise in digital transformation leads to basic mistakes such as unrealistic goals, lack of a clear strategy, underestimating risk, and not allocating enough resources. It may be tempting to fill the gaps through outside hires, but no matter how many experts you acquire from the outside, nothing gets done without leading change within the existing organization.
Leaders need to acknowledge that behavioral change does not occur in the employee’s free time and set aside sufficient time and attention to promote the desired change and adjust behavior accordingly. Don’t expect every single employee to both deliver on today’s targets and adapt for the future at the same time.
It is widely recognized that digital change requires employees to learn new skills, but in addition to learning new skills, focus equally on unlearning old habits and obsolete practices. In my many years as a management consultant, the phrase “this is how we’ve always done it” was all too often the go-to explanation for why certain tasks were performed that way. When challenging existing practices, make sure to identify and break down any informal organizational hierarchy that either knowingly or unconsciously directs a web of resistance to change.
Change management is not only limited to top-level management but needs to be embraced by middle management as well. An important question to ask oneself is whether you have any change agents at the middle management level in place. Change agents are those employees that are passionate about new technology and the opportunities that arise in times of uncertainty. Many start out as digital advocates and, over time, develop into experienced business transformers. They recognize the impact of digital and they’re driven to help their organizations adapt.
6. Inability to scale
Digital initiatives are often conceived in a small part of the organization as a pilot initiative, and all too often there’s a stark divide between the digital capabilities supporting the pilot and the capabilities available to support scaling it.
This may be due to the fact that there is a skill gap between various parts of the organization, or in my opinion due to a lack of understanding on how a successful pilot is “handed over to production”.
Instead of separating the entities doing innovation sprints and the entities taking care of business as usual, one should assign initiatives to cross-functional teams that are both expected to continuously improve their operations, but perhaps most importantly, given the necessary autonomy to make decisions along the way. It is important to note that autonomy does not spell absolute freedom, autonomy is only productive when paired with quantifiable goals, KPIs, and deadlines. Some may argue that adhering to strict deadlines is a relic of the past and the enemy of agile development where it is done when it is done reigns supreme. Setting a time to market requirements encourage autonomous/agile teams of putting a “minimum viable product” in front of customers quickly and improve it incrementally based on real-world customer data. Unless the effort is time-boxed in this way, teams naturally gravitate back toward the habit of overdesigning solutions that are obsolete upon delivery. This burns precious time and resources.
Since digital initiatives by nature often transcend traditional organizational silos, this requires an organizational culture where it is not only accepted but celebrated when digital innovations break free of their existing organizational boundaries. As a direct consequence, the organization’s operational model must be sufficiently agile to adapt to a constantly changing environment.
7. Assuming that digital transformation is a one-off
This one is in my opinion one of the biggest pitfalls when it comes to digital transformation. All to often digitalis transformation is treated like procuring a physical server or an ERP system that is placed in a basement somewhere and tucked away in the balance sheet as a depreciating asset.
This mindset directly counteracts building the necessary internal skillsets, as it is viewed as a temporary job that can be solved by hiring development capacity as external consultants. The problem with this approach is that, while the intention to avoid raising internal fixed costs makes perfect sense from a financial perspective, organizations become dependent on external expertise that is often more than twice as expensive as establishing your own in-house development capacity, but the operational risk increase as core competence related to your technical platform has their loyalty elsewhere.
This is not to say that one should build everything in-house. Every decision regarding expanding one’s technical platform should include a make vs. buy alternative but establishing a strong internal IT technical department is necessary to get ahead. There’s no silver bullet to this, but this is how we did it in Sbanken.
Apart from development capabilities, leaders must acknowledge that once digital becomes an integral part of their business, the organization must prepare for a state of perpetual change and continuous improvement. The organization needs to be agile, while still staying true to long-term goals and overall vision. There must be a culture that allows employees to challenge the existing and always seek to reinvent the organization. To do so, the organization must embrace life-long learning as a core value and invest in acquiring and developing talent. But above all, top management must be prepared to put words into action and acknowledge that digital transformation is hard.