Overcoming the challenges of digital transformation
published October 19th, 2023
12 min read
In 1984, Apple launched the Macintosh. It felt like a miracle. But in reality, it was part of a much longer journey that started a decade before, with Douglas Engelbart’s Mother of All Demos and the development of the Alto at Xerox PARC. With hindsight, the Macintosh story epitomizes the perpetual evolution that takes place in tech. Changes are never solo events. All that comes before, shapes each successive step after. And the exact same path of progress has unfolded, as companies navigate the challenges of digital transformation.
Director, Content and Communications at Tiny
While the term ‘digital transformation’ may seem brand new, the foundational part of what it entails began in the 1960s, when technology took its first, tentative steps towards digitization. Over time, the miracle of scanning paper documents and saving them as digital documents (eg, a PDF) expanded into different technologies (see sidebar) to suit the needs of information conversion.
However, as wonderful as that sounds, only the information was being digitized, not the processes. Digitalization was the next step on the journey.
Digitalization leverages digital technologies to improve and transform both business processes and business models – allowing you to create new revenue streams and value-producing opportunities. It leverages the power of cloud computing, artificial intelligence (AI), and the Internet of Things (IoT) to:
- Increase productivity and efficiency, while reducing costs
- Optimize and automate processes and workflows
- Create new products and services
- Enhance customer experiences.
Together, digitization and digitalization pave the way for digital transformation to occur.
They enable its dependence on easily accessible, consumable information and/or data. And every organization must go through both, before it can successfully navigate its own digitalization roadmap, leading to digital transformation.
Forrester defines the journey towards digital transformation from a more holistic viewpoint:
“Digital transformation is not just about technology. It’s the necessary but challenging journey of operating digital-first with the speed and nimbleness to change rapidly, exploit technology to create lean operations, and free people to do more complex tasks.”
In other words, digital transformations aren’t just about being digital. They’re about creating end-to-end value. For everyone involved.
TABLE OF CONTENTS
WHAT IS DIGITIZATION?
According to TechTarget, “Digitization is the process of converting information into a digital format.”
This conversion of physical objects or attributes, can occur through scanning, optical character ecognition (OCR), recording (in the case of sound or an image), or sampling.
Exactly what is digital transformation?
Digital transformation refers to the reinvention (or adaptation) of a company’s capabilities to suit the digital age, with the end goal of creating new sources of value through digital products, services, and experiences. It necessitates fundamental changes to how a business operates and the way it delivers value to its customers.
The global disruptions of the 2020 pandemic kick-started and accelerated investments in business transformation, which in turn, necessitated organization-wide mandates to be agile and resilient. This catalyzed many organizations – both large and small – to embark on extensive digital transformation plans.
A successful digital transformation requires the organization to rethink the collective way it functions, including its:
- Procedures, and
to achieve the new designed business models and revenue streams. These changes are about making the organization customer-driven, end-to-end.
However, according to McKinsey research, “Seventy percent of transformations fail. Contributing factors include insufficiently high aspirations, a lack of engagement within the organization, and insufficient investment in building capabilities across the organization to sustain the change, among others.”
These stumbling blocks continue to challenge companies when they implement a digital-first strategy. Alone, a successful digitalization roadmap doesn't work, unless all three – tech, people and processes – are included, embedded and actioned.
How much is being spent on digital transformation?
The global digital transformation spend is forecast to reach $3.4 trillion in 2026 with a five-year compound annual growth rate (CAGR) of 16.3%, according to the International Data Corporation (IDC) Worldwide Digital Transformation Spending Guide.
The pandemic forced much of the initial spend in 2020, but post-pandemic customers have continued to demand end-to-end digital experiences and customer journeys – of higher value, personalization and flexibility. Brands also realized that a digital-first strategy and technologies made them more agile in response to fast-changing markets, it enhanced their ability to innovate, and therefore made them more resilient.
"As organizations accelerate their pursuit of a digital-first strategy, they are channeling these investments into both internal operations and external direct engagement," says Craig Simpson, senior research manager at IDC. "The investments in internal operations are largely focused on improving efficiency and resilience while customer experience transformation has become a digital transformation priority for many companies."
But, while creating value and improving customer experience are crucial goals, transformation is a journey not a destination, and many challenges are being faced along the way by a multitude of companies.
Why is digital transformation failing?
True digital transformation is about the customer, which is why it involves multiple stakeholders and relies heavily on integration across business units, with system-wide change. That doesn't happen quickly. And there’s no silver bullet.
Quoting the same failure rate as the McKinsey research, the Boston Consulting Group (BCG) research says 70% of digital transformations “fall short of their objectives, often with profound consequences.” Time and again, Fortune 500s have (often embarrassingly) shown that success was dependent on a complete overhaul – across every area of business operations and company culture – to fit the digital age. Without that, they’ve failed.
“... in many cases, companies have a long way to go. Many companies have yet to apply digital technologies and ways of working at scale. Or to create a culture that embraces change, experimentation, and continual learning and improvement. Still other companies are planning end-to-end transformations but have yet to move beyond the drawing board.”
Digital transformation, and all it entails, is far from easy. The average enterprise has more than 200 technology solutions in its organization-wide tech stack, and research suggests the majority of DX initiatives still don't consider the end-customer, nor the people or jobs implementing the changes, which ultimately results in inefficient adoption.
Digital transformation requires a radical reshaping of the way you unlock and deliver value – both inside and outside your digital walls.
- An evolutionary architecture that handles radical change
- The use of agile, scalable practices to achieve growth goals
- Brave ideas and the boldness to challenge every aspect of tradition.
While there's many reasons why a business initiates a digital transformation, by far, the most likely reason is they have to – it's a survival issue. But you don’t get far without a 3-part shift: in mindset, processes and toolkit.
EVOLVE AND RESPOND TO CHANGE
According to the MIT Sloan Management Review, "Digital Transformation is better thought of as continual adaptation to a constantly changing environment." Its goal is to build a technical and operational foundation, to evolve and respond in the best possible way to unpredictable and ever-changing customer expectations,market conditions and local or global events.”
Why is digital transformation essential for business growth
Business growth is the ‘big’ end goal of all digital transformation initiatives. By employing digital technology to build new business processes, cultures, and customer experiences, you’re enabling the organization to better satisfy shifting business and market requirements.
In turn, this leads to expanded growth opportunities that would be unachievable without changes in digital capabilities, processes and people/roles.
McKinsey research from 2021 reported that back then many executives saw their companies' business models as being obsolete. Only 11% said their current models would be economically viable through 2023, while another 64% said their companies needed to build new digital businesses to help them get there. These fears drove the spread of transformation initiatives.
Now, BCG cites that 80% of companies plan to accelerate their companies’ digital transformation – overwhelmingly for business growth reasons.
Where’s the proof it works? Successful transformations have driven performance and competitive advantage, propelled companies towards greater efficiency, profit and success. Digital transformation leaders achieve earnings growth that’s 1.8 times higher than digital laggards – and more than double the growth in total enterprise value.
Quoting more BCG research:
“In the short term, digital technologies and ways of working offer productivity improvements and better customer experiences. In the medium term, digital opens up new growth opportunities and business model innovation. Successful transformations also set companies up for sustained success; they won’t have to digitally transform again as they master continuous innovation.”
Likewise, McKinsey notes that successful transformations front load activities, to unlock value quicker. “Those activities can include agile sourcing strategies, clean-sheeting the portfolio, or optimizing the balance of engineering and non-engineering roles – changes that often unlock millions of dollars.”
Challenges of digital transformation
But transformation efforts aren’t without their challenges. When you’re taking an organization from an existing position and giving them a digital-first strategy vision of where to go, there’s many hurdles to overcome.
A huge part is the realization that not all digital transformations are the same. You can’t just copy-paste another company’s plan. Tech stacks differ, people, cultures and skill sets differ, as well as knowing what the new ‘value’ for your business and its customers looks like.
Here’s five key challenges of digital transformation that need to be overcome along your transformation path:
1. Unclear digitalization roadmap and implementation plan
The point of a digital transformation isn’t to become digital. It’s to generate value for the business. Many transformations fail because the CEO hasn’t reimagined where that transformative value is possible in the organization.
Companies that report the greatest levels of success say their organizations ruthlessly focus on a handful of digital themes tied to performance outcomes. When defining their transformations’ scope, they also boldly established enterprise-wide efforts and new business opportunities.
Another key step is the creation of an adaptive roadmap that:
- Allows the strategy and resources to adjust over time
- Adopts agile execution practices and mind-sets
- Encourages risk taking and collaboration across parts of the organization.
Working with the implementation’s management team, a successful CEO-led transformation consistently works through the most important elements at a digital theme or domain level – talent, tech and data, operations – to produce and manage the numerous implementation phases of the plan.
2. Not empowering people or building internal engagement
Just as the transformation’s roadmap must be adaptable, so must the execution of its initiatives. While IT/engineering play an important role, the hard work of successful implementations, adaptations and iterative change falls to everyone across an organization. That’s why digital transformation is as much a people issue as a technology challenge.
Digital transformation initiatives often reshape company structures, workgroups, job titles, and longused processes. These changes cause people to feel insecure, fear their value and believe their jobs are at risk, so they push back.
The earlier and deeper that a CEO can engage the entire company, the more likely people feel involved in the initiative and realize its positive business impact. A crucial part of its success is cross-functional teams and it's here where the soft skills of leadership and empathy are most needed. When the company culture is supportive, engaged and fully onboard with the transformation efforts, the more likely success happens.
3. Complex technology integration
Tech transformations are notoriously difficult and complex. When transforming organization-wide digital systems, you’re revising immensely complex, interconnected software that’s often not been touched for some time (or worse, patchworked together). Strategically updating those legacy systems requires analysis, foresight, and expertise to ensure minimal downtime and seamless interaction between the different software in your ecosystem.
All that takes time.
However, the newest technology is only one part of the puzzle. Don’t be misled, it’s crucial to a digitalization roadmap, but leaders often concentrate excessively on the technical part of the tripartite transformational requirements – technology can’t work without the right people and processes in place and as noted, transformation is about generating value, not going digital.
Another important aspect is accessing well developed, third-party components, platforms and tools that aid the creation of new IT-driven revenue streams. Organizations are increasingly adding value by leveraging their wider digital ecosystems and using APIs to unify and structure code and data from across multiple platforms – whether that’s their own or its partners.
4. Failure to test, iterate and adapt
For the last few decades, digital has driven change at break-neck speed. And it’s this fast pace that explains why so many companies are initiating digital transformations in an effort to survive and grow.
While a multiyear transformation project does require investment budgets, performance targets and implementation plans up front, it's been found that those plans must be flexible and require monthly, sometimes weekly adjustments as the project phases progress.
Adaptability is ingrained in successful transformations, with the agile methodology of continual testing, iteration and adaption being the management mantras. McKinsey, BCG and other consultants all report that companies who implement at least monthly adjustments to their strategic plans, based on business leaders' input, are three times more likely to succeed.
How can you overcome the barriers to digital transformation?
An important element of digital transformation is, of course, technology. But often, it’s more about shedding outdated processes and legacy technology than it is about adopting new tech. It’s also about enabling innovation.
Each digital transformation is different. But there are some common themes, steps and considerations that can be leaned on when developing your own digital transformation strategy. A few digital transformation frameworks that can be used as inspiration, include:
MIT Sloan: The Nine Elements of Digital Transformation
Altimeter: Six Stages of Digital Transformation
While there’s many companies who’ve initiated digital transformations and fallen short in improving performance and equipping themselves to sustain change, lessons can be learned from those who’ve succeeded.
The process of digital transformation is inherently uncertain – changes need to be made provisionally and then adjusted, decisions made quickly and cross-company teams need to get involved. That requires the organization to deal better with change overall, essentially making it a core competency as the enterprise generates greater value end-to-end. And that has to be a good thing for all.
Director, Content and Communications
Messaging strategist and copywriter whose passion lies in working with brands like Tiny, that have deep-seated values and embrace the power of their story. She gets a kick out of solving problems, loves learning new things and making stuff, every day. When she’s not thinking through clever copy lines or clarifying value propositions, she’s knitting amazing socks for everyone she knows.