The most underrated reason why digital transformations fail is that they are too big, too fast. There is a learning curve for 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, much less create a new one, but that create the ability to succeed in more ambitious endeavors later on.
Most digital transformations fail. Various studies by academics, consultants and analysts indicate that the rate of digital transformations failing to achieve their original goals ranges from 70% to 95%, with an average of 87.5%. Still, digital transformation has been at the top of business agendas for at least a decade and shows no sign of slowing down. On the contrary, many commentators have highlighted the accelerated impact of the Covid-19 period on digital transformation.
My consulting and teaching with hundreds of executives point to three main reasons digital transformations fail.
First, when companies set their goals (if they do) they tend to be overly optimistic in their expectations of both the timing and the extent of the outcome. They think it’s like waving a magic wand.
The second aspect behind failed digital transformation is poor execution, including lack of adequate governance, prioritizing technology implementation over user adoption, adopting wrong metrics, and the like.
The third – and least appreciated – obstacle is also the most interesting and has to do with the pace of driving and managing the transition between the old and the new.
In short, there is a digital learning curve; you have to walk before you can run. For a digital transformation to be successful, senior executives need to be aware of this learning curve, which has three distinct phases.
Three stages of digital transformation
The three phases present different organizational learning opportunities. The first two phases, modernization and transformation at the enterprise level, focus on remodeling the existing business. The last phase concerns the creation of new businesses 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 jump to step 2 or 3 before succeeding in step 1, chances are you will fail.
Modernization (phase one) it concerns the simplification and digitization of existing processes and functions. For the customer experience, this can include designing customer apps or implementing new self-service touchpoints. For operations, this can involve connecting products and digitally redesigning core processes. For the employee experience it can be to automate HR processes or provide a self-service portal for employees.
Are these digital programs transforming the organization? Most likely not. This stage is often underestimated or even mocked, but it shouldn’t be. Just like the foundation of a home, it makes the organization digitally stronger and smarter. It also provides reasonably fast returns that can fuel more complex digital investments. And it is a great opportunity for the organization to improve their digital skills.
Enterprise transformation (step two) is a complex effort to change the value chain, for example a retailer who wants to have a fully integrated customer experience across all of their physical and digital channels. For operations it can be an Internet of Things application for maintaining conditions or automating cash ordering processes. For employee experience it can be institutionalizing agile ways of working or establishing a culture of continuous learning and retraining.
Are these transformational efforts? Absolutely. Aligning traditional organizational silos, establishing proper governance models, adding new talent and the like – these are all critical muscles to develop for transformation success.
Business-wide transformations are generally focused on improving existing operations. But when they are successful, they very often open up new opportunities for value creation, for example by reaching new customers or finding new efficient ways to manage operations. Transformations at the enterprise level are cross-functional and complex, but they are mandatory learning stages on the journey to digital transformation maturity.
Creating a new business (step three) it’s about increasing the size of the existing pie or creating new revenue lines. For the customer experience, it can move from selling products and services to new subscription-based business models. For operations, it can use data and analytics to accurately predict the operational performance of products or systems.
These are real transformations because they challenge the organization’s existing processes, structures and capabilities and require new ways of working. Leadership is key, as it involves moving from the existing operating model to the new ones. Often, this stage also requires rethinking the boundaries of the organization as it moves from traditional linear supply chains to ecosystems. It requires a high level of maturity in digital transformation.
Are these three digital transformation horizons completely 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 a certain amount of modernization to achieve quick wins, while at the same time having global company-wide programs and / or innovative business models through controlled trials and pilot projects.
But from an organizational learning perspective, it is rare to find examples of digital leaders in large companies who have bypassed the early stages. The key to a more successful digital transformation is not to jump ahead: start with the first step and invest the attention and resources to get it right. Increasing your organization’s digital maturity through the business learning curve of digital transformation will increase your chances of success.