Leslie Willcocks, Professor of Technology Work and Globalisation, London School of Economics and Political Science.
Digital transformation requires digitisation—converting something non-digital (e.g. a health record, an identity card) into a digital format that can then be used by a computer system. Digital transformation also requires digitalisation—enabling, improving or changing business operations, functions or activities by utilising digital technologies and using digitised data to create management intelligence and actionable knowledge. All three—digitisation, digitalisation and digital transformation—are needed to build a digital business. Digitisation and digitalisation are necessary but insufficient. Digital transformation focuses on the whole organisation, and large-scale change. It involves radical redesign and deployment of business models, activities, processes, and competencies to fully leverage the opportunities provided by digital technologies.
Today’s organisations are, however, facing a Digital Catch-22. On the one hand, digital transformation is difficult and costly, and short-term investment may be needed elsewhere to where it is really hurting. On the other hand, today’s organisations cannot afford not to become tomorrow’s digital businesses. Let’s find some evidence for this proposition. Yes, we are finding organisations surprisingly slow into digital transformation, given that this has been on many executive agendas since at least 2010. Many digitise, digitalise even, but this does not add up to digital transformation, though many might think it does. The reasons for the lack of speed are complex but failure is five times more likely than success. The high failure rate is indicative of the difficulty, but also can be very dissuading for others. Our work also finds that slow progress reflects how ‘siloed’ many organisations have become. What we call the ‘seven siloed organisation’ points to the barriers to change inherited from older business models. The siloes include processes, technology, data, culture, structures, skills sets, and managerial mind-sets. When it comes to digital transformation, any organisation with all these siloes is severely hamstrung from the start.
Yet there is another other side to the digital catch-22. There are relatively few ‘best performers’ on digital transformation. These are getting disproportionate gains, recording markedly higher profitability and revenues, are accelerating away from the others, and may well establish a competitive advantage that becomes irreversible. What are they achieving? According to one study , they had increased the agility of their digital-strategy practices, enabling first-mover opportunities. They had taken advantage of digital platforms to access broader eco-systems and innovate new digital products and business models. They had used mergers and acquisitions to build new digital capabilities and digital businesses. A significant feature was that they had invested ahead of their competitors in digital talent.
This is an emerging and fast moving area, so it is useful to look at a range of studies on the success and challenges of digital transformation efforts. Our own work suggests the best performers on digital transformation add up to around only 20% of organisations, all recording up to 30% increase in revenues as a part outcome of their digital technology investments over the previous four years. They come from most sectors and regions of the world and are not limited to the obvious hi-tech US and Chinese firms. To add even more urgency, our evidence, consistent with other studies, shows that being slow to adopt digital technologies may reduce risk in the short term, in terms of cost, talent and time, but builds growing business risk and reduced competitiveness in the long term. And this trend will be repeated and magnified by the growing adoption of automation and ‘AI’ over the next five years.
But what impact has the pandemic and economic crisis had? The crisis undoubtedly accelerated corporate moves toward digitisation and digitalisation—to survive in the short term, establish resilience, and to maintain competiveness. But we found that motives were mixed, capabilities variable, and planning horizons mostly short term. That said there is survey evidence that COVID-19 has pushed companies over a technology tipping point. For between January and October 2020, a McKinsey survey recorded acceleration in the digitisation of customer and supply-chain interactions and of internal operations by three to four years. Meanwhile the share of digital or digitally enabled products in corporate portfolios had accelerated by seven years. Nearly all respondents had put in place quickly at least temporary solutions, to meet many of the new demands on them. Funding for digital initiatives increased more than for anything else. Moreover, the largest shifts in the crisis were also the ones most likely to stick—think changing customer needs and expectations; more remote working/collaboration; cloud migration; customer demand for online products and services; and increasing spend on security. Those who had invested heavily into digital technologies over the previous three years also reported a range of facilitating technology related capabilities that others lacked in the crisis. This meant they were better prepared for the crisis.
Did COVID-19 make digital transformation easier? It may well give digital technologies a higher profile amongst the executives who make the key decisions, but the difficulties and complexities of large-scale organisational change on many fronts are not easily circumvented, and there remain many other pressing matters to deal with, distracting executive attention. And it is one thing to have a burning platform driving needed organisational change, but the particular emergency conditions during 2020 and into 2021 may not be repeated. The burning platform of fading competitiveness may not be sufficient motivation for all too many organisations. Clayton Christensen’s ‘innovators dilemma’ could kick in once again.
There also remains the management question. For many years, in study after study, we have found that when it comes to introducing information, communication and now digital technologies into organisations the majority of challenges and issues—up to 75 percent—are managerial and organisational, not technological. For digital transformation, the major challenge we have identified is getting to understand and develop competencies for large-scale radical organisational change shaped by disruptive technologies. Michael Wade and Jialu Shan’s research is consistent with this in pointing to past failures coming from unrealistic expectations, limited scope, poor governance, and underestimating cultural barriers. They found that, in the success stories like Cisco, Unilever, DBS bank, ABB, Nike and Disney, they all had precise, clear, unambiguous, realistic, succinct, measurable objectives that included everyone in the company.
Other studies add to this. From their findings Gerald Kane and colleagues identify the need for a whole organisation approach, but also stress the neglected role of people in digital transformation. They point to the importance of transformative leadership, developing a digital talent mindset, and making the organisation a digital talent magnet. It is a useful reminder that no technology is a silver bullet, a fire-and-forget missile or plug-and-play—despite the widespread use of these misleading metaphors. Jeanne Ross and colleagues recognise that for an established organisation, existing organisational structures, legacy systems, and embedded habits are significant obstacles. They suggest an evolutionary approach of gradual componentisation of parts of the business, producing digitised business operations and units that fit together over time building towards creating a digital business. They offer the example of Carmax, a $20 billion dollar used car retailer and wholesaler that benefited between 2015 and 2020 from gradual, but radical redesign of its systems, processes and people. Meanwhile, Jacques Bughin and colleagues suggest several practices for organisations in catch-up mode: make your strategy process more dynamic; lay out clear priorities; invest early and aggressively in requisite capabilities and talent (especially at senior executive level); invest the time and money—this will only happen if becoming digital is a top priority amongst corporate leaders; redefine how you measure success; and empower people. Digital transformations were more likely to be exceptionally effective when companies gave people clear roles and responsibilities and put an ‘owner’ in charge of each transformation initiative.
All this suggests that there are ways out of the digital catch-22, but senior executives responsible for digital transformation will need to take a much bigger view of the change process, if the potential business value of digital investments is going to be realised.
In summary, there are several interesting features to the long trend of moving to digital business. By 2015 most large organisations were espousing digital business strategies. But by 2021, if you exclude the ‘Born Digital’ companies, few had become digital businesses. This highlights first that organisational change can take a very long time. Secondly, it underlines the importance of execution capabilities, without which strategy mean very little. The third point of note is how an ostensibly support activity—IT—can move to the core of the business, and become not just a strategic weapon, in terms of cost efficiency and differentiation, but a fundamental platform for operating. The fourth observation is that the 2020–2021 crisis accelerated the adoption of digital technologies and the moves to digital business, but left much work to be done if organisations are to enhance competitiveness, streamline operations, improve organisational resilience, and become digital businesses.
Leslie Willcocks is emeritus professor at the London School of Economics and Political Science. The issues here are based on research for his forthcoming book Willcocks, L. (2021) Global Business: Management (SB Publishing, Stratford-upon-Avon, UK) - available from www.sbpublishing.org