As we settle into 2019, we suspect New Year’s resolutions for executives included assessing their Digital Transformation initiatives.
According to IDC, estimated worldwide spending on Digital Transformation and associated technologies, including hardware, software, and services, is expected to cross the $2 trillion mark by 2022.
As defined by Enterprisers Project, “Digital transformation is the integration of digital technology into all areas of a business, fundamentally changing how you operate and deliver value to customers. It’s also a cultural change that requires organizations to continually challenge the status quo, experiment, and get comfortable with failure.”
Although many organizations have not yet undertaken a Digital Transformation, there is no doubt that many understand its importance. Some have been chasing the pot of gold at the end of the Digital Transformation rainbow for several years now with prototypes, pilots, proofs of concept, and other foundational projects to validate their success becoming digital. However, organizations typically want to speed through these foundational projects and move on to small, low-risk projects that promise quick payback and positive ROI while contributing to the organization’s long-term Digital Transformation vision.
As new markets emerge, profit pools shift, and digital technologies pervade more of everyday life, it is easy to assume that economies are already fully supportive of technological advances for its producers and consumers. According to our latest research, however, the forces of digitization have yet to become fully mainstream in standard business processes. On average, organizations are less than 40 percent digitized despite the relatively deep penetration of these technologies in scattered industries like media, retail, and consumer tech.
Digital Transformation is disruptive and causes companies to have to change the organization, talent model, policies, processes, and procedures – basically, the entire service model or business model. For this reason, it is much more difficult to execute a digital transformation than it is to pull off traditional change efforts.
Because of this, we ask the following question: will 2019 bring boom or bust to many organizations’ Digital Transformation aspirations? And, more importantly, what happens next for the future success of these organizations?
We believe the answers to these questions depend on many factors. One major determinant of Digital Transformation success is the type of organization involved, whether that is a traditional legacy or a digital-first business model.
What is Digital Transformation Success?
Legacy organizations who are embracing digital with both their investments and their strategic decision making are likelier to experience success. The ones investing at scale in technology, analytics, and digital talent—not just playing on the margins—and investing much more aggressively in business-model innovations derive the greatest benefits from Digital Transformation. Similarly, the organizations with the most successful Digital Transformations are far likelier than others to use more sophisticated technologies, such as artificial intelligence, the Internet of Things, and advanced neural machine-learning techniques.
As digitization progresses, incumbents competing in new, digital ways are already outperforming those that continue to operate traditionally. Companies competing in traditional ways (that is, without applying digital technologies and strategies) see lower rates of revenue and earnings growth than companies competing in digital ways. And those rates are tightly correlated with the level of digitization in their respective sectors.
Digital Transformation is Hard for Legacy Organizations
Organizations that operate with digital-centric or online business approaches are 85 – 95 percent more likely than legacy organizations to modernize dysfunctional business processes and adopt Digital Transformation techniques, technologies, and services. In contrast, traditional legacy organizations, with a rich history of success with historical business process methods, like manual or semi-automated business processes, siloed information channels, and large investments in capital assets, have taken a less aggressive approach to adopting Digital Transformation. Sectors such as Financial Services, Retail, Healthcare have had limited success with their Digital Transformation initiatives. Even government agencies such as the Department of Health and Human Services and the Department of Homeland Security are having success with their Digital Transformation projects.
The diagram to the left, from a survey conducted by Fujitsu Group in 2018, illustrates the struggles legacy organizations are having with their Digital Transformation journeys.
The digital landscape is uneven and, in some cases, unfair to legacy organizations. Legacy organizations have capital assets, historically successful business processes, and success in the marketplace, making it very difficult to undergo Digital Transformation because the barriers to entry are much higher than they are for younger, more agile organizations. Different sectors are adversely affected by digitization while others are prospering due to factors like regulatory conditions, customer base, product or service type, and more. Note that the success in the Financial Services industry far exceeds that of any other industry.
HEXstream believes the subject of Digital Transformation can be summarized in the following statement:
Digital Transformation is not just about disruption or technology. Digital Transformation is about the application of digital capabilities to processes, products, and assets to improve efficiency, enhance customer value, manage risk, and uncover new customers and growth opportunities.
We have designed our own Maturity Model, keeping in mind the following key challenges to success by legacy organizations with Digital Transformation.
- Recognition that some Digital Transformation activity exists within the organization, regardless of its effectiveness
- Ad hoc senior leadership commitment and investment in Digital Transformation initiatives
- Extensive physical capitalized assets such as truck fleets, data centers, or brick-and-mortar locations
- Rigid, disparate processes, including order-to-cash and source-to-settle
- Siloed, disparate computer applications for customer experience, ERP, shop floor, and human capital management, among others
We believe organizations’ ability to mitigate and/or eliminate these five challenges will determine their Digital Transformation success in 2019.
HEXstream’s experience seeing organizations attempt Digital Transformation alone has led us to propose the following capability maturity model. Note that this model is for legacy organizations only. We will propose another model for organizations that are born digital at another time.
2019 Digital Transformation Maturity Model For Legacy Organizations
Given the boom-or-bust nature of Digital Transformation in the marketplace, HEXstream has created the Digital Transformation Effectiveness Maturity Model for legacy organizations. Our model is predicated on assessing a legacy organization’s Digital Transformation journey from the perspective of an advisory firm with a strong grasp of the available technologies needed to enable success.
Below is our exclusive Digital Transformation Maturity Model for legacy organizations.
The 2019 HEXstream Digital Transformation Maturity Model incorporates business processes, transformational technologies, and advisory services to help organizations accurately assess their digital health. We have segmented our maturity model into three levels focused on progressing through three phases of success in the Digital Transformation journey.
Phase I: Ad Hoc Digitization
In Phase I of our Maturity Model, legacy organizations are opportunistically digitizing their business. Most Phase I organizations are already integrating low-risk functional areas of their business. These organizations are not digitizing critical business processes, nor are they risking creating disruptive, digitally-enabled models and processes. Moreover, ad hoc digitization causes the formation of digital silos, which are as hard to integrate into a holistic digital strategy as legacy silos. Ad hoc digitization risks having projects that generate positive ROI, albeit modest, but which keep the organization from generating breakthrough ROI for its stakeholders.
Phase II: Digital Modernization
In Phase II of the Maturity Model, legacy organizations have digitized critical business processes and are incorporating advanced analytic technologies like artificial intelligence, machine learning, blockchain, Industry 4.0, IoT, intelligent robotics, and others into the business. The legacy organization has created digitally-disruptive business models and processes for their industry-specific core competency, like supply chain operations, customer segmentation, and pricing and cost optimization. Finally, the organization becomes forward-thinking with predictive and prescriptive analytics as a catalyst of its operations.
Phase III: Autonomous Frictionless Enterprise
In Phase III of our maturity model, transformational technologies are seamlessly integrated into the fabric of the enterprise to optimize operations, enhance customer-centricity, anticipate and mitigate risk, innovate, increase revenues and, most importantly, tap into entirely new revenue streams. Additionally, the same advanced analytic technologies described in Phase II are fully integrated into business processes to create autonomous business insights for strategic operational execution in real-time.
Digital Transformation is not about disruption or technology. Yes, digital transformation has the potential to disrupt industries and markets, if done correctly. Yes, information technology enables Digital Transformation. However, at its heart, Digital Transformation consists of a set of connected, intermediate goals, each of which should be judged on whether it brings measurable ROI to the organization. These goals will necessitate building bridges across different functions of an organization, e.g. front office and back office or sales and service, For these goals to succeed, they must incorporate data, decisions, employees, and partners into integrated processes that drive value.
Transformational Technology: Center of Success?
Whether or not a change effort has succeeded in an organization, our research points to a few shared traits of today’s successful Digital Transformations. Organizations tend to look inward when making such changes. When organizations focus their Digital Transformation efforts internally, they are more in control of the many variables (People, Process, Technology) that tend to derail and sabotage success. The most commonly cited objective for Digital Transformation is digitizing the organization’s operating model. A close second is either launching new products or services or interacting with external partners through digital channels. Digital Transformations also tend to be wide in scope, so organizations must evaluate their existing processes holistically rather than only zeroing in on individual bits and pieces that might be broken.
Given the gravity of change related to Digital Transformation, the adoption of technologies plays an important role across the matrix of success incorporating not only the technologies, but also the people and process.
According to a recent survey conducted by McKinsey, responding organizations are, on average, using only four of 11 asked-about technologies, with traditional web tools cited and used most often in most of these efforts. At the same time, the results from successful transformations show that these organizations deploy more technologies than others, which seems counterintuitive at first blush given that a broader suite of technologies could result in a more complex execution of transformational initiatives and, therefore, more opportunities to fail. But the organizations with successful transformations are likelier than others to use more sophisticated technologies.
See the diagram below.
This is exactly why Phase II: Digital Modernization of our maturity model lists the incorporation of transformational technologies as a key driver of success during this process.
What Digital Transformation Success Looks Like
Having these technologies on hand is only one part of the story as we mentioned earlier in our discussion. Digital Transformation is more about innovating processes essential to an organization’s core competencies and identifying the people needed to execute these critical activities.
So we asked business leaders, “what are the most successful processes you and your firm have enabled during your current Digital Transformation journey?”
The diagram on the left from Capgemini’s Digital Advantage survey provides insight into responses centered around three critical core competencies: Customer Experience, Operational Improvements and Business Model Change. We have also broken up each bar to highlight the contributions from each core competency.
The chart on the left is an illustration of examples of use cases under the Customer Experience category. As you can see, improving Customer Experience and its associated process activity was a top response from participants. This means most organizations will invest more heavily in digitally transforming the customer-facing, revenue-generating business processes than any other core competency.
Who’s Our Business Champion?
The first step to reset and/or energize current Digital Transformation Initiatives is to find or create a digital-savvy senior executive as your evangelist for Digital Transformation and Transformational Technologies.
We see two groups of executives as digital champions driving success with Digital Transformation initiatives: Futurists and Modernizers.
Futurists aim to change their organizations by improving the overall structure of their business models. They are most likely to embrace constant innovation, flat and data-driven decision-making, and the integration of technologies across the business.
Many legacy companies, accustomed to the old approach, lose market share to a new group of companies. Futurists embrace the promises of digital: new ways of solving problems, creating new experiences, and accelerating business performance. They make better use of big data to help inform decisions and refocus on external competitors to seek new ideas and identify potential threats. Don’t count on legacy strengths or efficient operations as a hedge for the next wave of disruption.
Futurists have helped wring profits and secure revenue, but the big prize will be in the full realization of digital. They evolve digital beyond software, hardware, and technical tools and into a way of operating and encouraging innovation across the organization.
Modernizers are focused on doing business smarter and faster using technology. These executives have a sharp eye for measuring digital outcomes and acting on vital trends in the marketplace. Collectively, these digital champions are creating practical and tangible business cases with a commitment to incorporating transformational technologies into the fabric of their organization’s strategic operations.
Modernizers are out to bring new capabilities to their companies, and they’ve used investments in digital and more agile ways of work to begin building success. They view digital as an investment into integrative technology across the business. That focus is contributing to strong financial performance. Modernizers realize the promise of digital, by embracing broader definitions that include collaborative, flat ways of working and bolstering the digital acumen of senior leaders.
Futurists and Modernizers alike already exist within just about every organization. As decision makers determine the right fit for a Digital Transformation leader, here are some questions to ask.
- Does the potential Digital Transformation leader prioritize organizational success over their own individual aspirations?
- Does the individual possess the ability to recruit, motivate, train, and sustain others as the Digital Transformation process takes hold?
- Does this person have the confidence and tenacity needed to see the Digital Transformation process all the way through despite the potential for challenges and setbacks?
Both Futurists and Modernizers can succeed in executing Digital Transformations. The key is for the chosen leader, whether a Futurist or a Modernizer, to embrace that the process is indeed a marathon, not a sprint, with the overall benefits to be derived far exceeding what can reasonably be accomplished in a short period of time.
So How Do You Succeed with Your Digital Transformation Initiatives?
While the Digital Transformation outcomes for many legacy enterprises have fallen short in improving performance and equipping companies to sustain changes, all is not lost. Our main premise for this paper was a focus on legacy enterprises and the unique challenges they face while planning and implementing Digital Transformation initiatives.
Bold, tightly-integrated digital strategies will be the biggest differentiator between organizations that win and organizations that don’t, and the biggest payouts will go to those that initiate digital disruptions at the enterprise level. Fast-followers with operational excellence and superior organizational health won’t be far behind.
When companies respond to digitization assertively and across multiple dimensions, they improve their performance. These companies believe Digital Transformation will enable them to embrace the mindset of constant innovation, flat decision-making and the integration of tech across the business.
Digital technologies such as the Internet of Things (IoT) and Artificial Intelligence (AI) are being embedded into core value-generation processes in business and society, transforming people’s work and daily lives and generating innovation. This is Digital Transformation. Business leaders around the world are becoming aware of the power of Digital Transformation and taking action to realize its huge potential.
Advanced Analytics Is Crucial for Digital Transformation
Advanced analytics is far more than just another name for Business Intelligence 3.0. The maturation of technologies like advanced visualization, mobile analytics, and machine learning, coupled with a boundless supply of data and new ways of interacting with systems, is creating entirely new capabilities and opportunities.
Organizations that thrive on change use data and analytics as a competitive asset. They adapt quickly and predict trends by continuously curating, enriching, and analyzing data and developing insights that drive new value. Advanced analytics complete the feedback loop between strategy and execution. This feedback loop creates a capability that is so central to the operation of the enterprise, it becomes the business model. It does so by providing quick feedback on what happened and why, allowing the organization to adjust rapidly to changes in the outside world.
Customer Experience Use Case Example
Driving continuous, agile product enhancement to maximize revenue per customer
To gain critical insights into players and their behavior, a major gaming company uses advanced analytics to analyze game event log data and user profile data to make real-time enhancements to its products. Using advanced analytics, they pull data from more than 3,000 servers, make it available to the developers and designers, and run more than 2,000 daily reports. They can test to see whether, for example, giving away a free sword during certain parts of the game would entice power players to pay for a second sword, given their determination to win.
The diagram below provides a high-level view of the execution process of this use case. Please note that the unlabeled green catalyst in the center of the screen represents the advanced analytic and machine learning process.
After completing an initial process like the example with the gaming company, organizations should then move towards implementing self-serve technologies, like data visualization tools, for employees and business partners to use; overall transformational success is much likelier when organizations do so. In addition to digitizing the customer experience, organizations should also focus on technology used in company operations such as Supply Chain Optimization and Smart Manufacturing to provide the organization with an opportunity to digitally modernize standard operating procedures that include new transformational technologies.
Being successful in this new digital era requires reinventing your business, your capabilities, and your organization. That’s much more significant than changing pieces and parts of the company.
As we document in Phase II: Digital Modernization, digitizing an organization’s core competency has significant financial and operational payback. For all the fundamental change that Digital Transformation demands, it’s worth emphasizing that it doesn’t call for a “throw it all out” approach. An engine-parts company, for example, will still likely make engine parts after a Digital Transformation, but it may do so in a way that is much more agile and data-driven, which is better for their bottom line. Alternatively, the company may open up new lines of business by leveraging existing assets.
The journey toward Digital Transformation entails harnessing its benefits – such as productivity improvement, cost reduction, and innovation – while navigating through the complexity and ambiguity brought about by the changes within a legacy organization.
Organizations can both rise and fall with astonishing speed in today’s global digital marketplace as new customer needs are uncovered and new ways of meeting them are developed. We fundamentally believe that organizations that take the right steps to execute the principles of Digital Transformation with accompanying transformational technologies will enable those organizations to adapt, learn, and find new solutions more quickly than their competition. They can do more than just retain a market position. They will thrive, whatever disruptions come their way.
About the Author
Jim Bradford is the Digital Transformation and Technology Lead at HEXstream. He brings over 20 years of experience delivering real-time analytics, big data, and other BI solutions to his clients. Jim joined HEXstream from Oracle, where he enabled organizations to implement prescriptive analytics in his role as a Digital Innovation Strategist. He hails from Chicago and received his BA in Business Communications from the University of Texas, where he also played baseball.