The most underrated reason digital transformations fail is going too big, too fast. There’s a learning curve to digital transformation, and most businesses have to walk before they can run. The key is to start with modernization efforts that don’t transform the business, let alone create a new one, but create the ability to succeed in larger efforts later.
Most digital transformations fail. Various studies by academics, consultants and analysts indicate that the rate of digital transformations not achieving their initial goals ranges from 70% to 95%, with an average of 87.5%. Yet digital transformation has been at the top of business priorities for at least a decade and shows no signs of slowing down. On the contrary, many commentators have highlighted the accelerated impact of the Covid-19 period on digital transformation.
My advice and teachings to hundreds of executives highlight three main reasons why digital transformations fail.
First, when companies set their goals (if they do at all), they tend to be overly optimistic in their expectations of both the timing and the scope of the outcome. They think it’s like waving a magic wand.
The second aspect behind digital transformation failure is poor execution, including lack of proper governance, prioritizing technology deployment over user adoption, adopting wrong metrics, etc.
The third obstacle – and the least appreciated – is also the most interesting, and it has to do with the pace of driving and managing the transition from old to new.
In short, there is a digital learning curve; you have to walk before you can run. For a successful digital transformation, senior leaders need to be aware of this learning curve, which has three distinct stages.
Three stages of digital transformation
The three phases present different opportunities for organizational learning. The first two stages, enterprise-wide modernization and transformation, focus on overhauling the existing business. The last phase concerns the creation of new companies and the discovery of new sources of value.
Our experience shows that it is difficult to avoid the school of hard knocks at every stage. If you skip step 2 or 3 before succeeding in step 1, you may fail.
Modernization (first stage) is to simplify and digitize existing processes and functions. For customer experience, this can mean designing customer applications or implementing new self-service touchpoints. For operations, it can mean connecting products and digitally re-engineering core processes. For the employee experience, this might mean automating HR processes or providing a self-service portal for employees.
Are these digital programs transforming the organization? Preferably not. This phase is often undervalued or even ridiculed, but it shouldn’t be. Just like the foundations of a house, it makes the organization digitally stronger and smarter. It also offers reasonably quick returns that can fuel more complex digital investments. And it’s a great chance for the organization to improve its digital capabilities.
Enterprise-wide transformation (stage two) is a complex cross-value chain change effort – for example, a retailer wanting to have a fully integrated customer experience across all of their physical and digital channels. For operations, it could be an Internet of Things application for status maintenance or order-to-cash process automation. For the employee experience, this may mean institutionalizing agile ways of working or establishing a culture of continuous learning and reskilling.
Are these transformation efforts? Absolutely. Aligning traditional organizational silos, establishing appropriate governance models, adding new talent and the like – these are all essential muscles to develop for successful transformation.
Enterprise-wide transformations typically focus on improving existing operations. But, when they succeed, they very often open up new opportunities to create value, for example by reaching new customers or finding new and efficient ways to manage operations. Enterprise-wide transformations are cross-functional and complex, but are mandatory learning phases on the path to digital transformation maturity.
Business creation (third step) is to increase the size of the existing pie or create new revenue lines. For customer experience, this may mean moving from selling products and services to new subscription-based business models. For operations, this can mean using data and analytics to accurately predict the operational performance of products or systems.
These are real transformations as they challenge existing organizational processes, structures and capabilities and require new ways of working. Leadership is key as it is about moving from the existing operating model to new ones. Often, this phase also requires rethinking the boundaries of the organization as it moves from traditional linear supply chains to ecosystems. This requires a high level of digital transformation maturity.
Are these three digital transformation horizons perfectly linear? Probably not, in the sense that most organizations will manage a portfolio of initiatives that can cover all three areas. For example, they may undertake some modernization for quick wins, while having enterprise-wide global programs and/or innovative business models through controlled experiments and pilots.
But from an organizational learning perspective, it’s rare to find examples of digital leaders in large companies that have moved beyond the early stages. The key to a more successful digital transformation is not skipping steps: start with the first step and invest the attention and resources to get it right. Increasing your organization’s digital maturity through the digital transformation learning curve will increase your chances of success.