By Basel Hammoda
After the quick fixes in 2020 to digitize operations, companies must ensure their digital transformation is permanent.
Digital transformation (DT) is the process of embedding organizational change and leveraging digital technologies and business models to boost performance and competitiveness. It can vary from a single technology, product or process to a companywide program. Without transformation at its core, however, any digital initiative is likely to be a short-term fix.
Although 94% of CEOs view DT as an opportunity (Forbes Survey), it represents one of the biggest challenges for any company. For executives, the situation can sometimes seem like gambling at a roulette table: They know they need to bet to win, but they have no idea where to put their chips.
More than 70% of large DT projects fail, with that figure rising to 90% in traditional industries such as oil and gas, healthcare, and education (McKinsey). SMEs and microenterprises, being more agile and savvy, have nearly three times the success rates of traditional businesses.
Though DT is a complicated and risky endeavor, it is the inevitable path for survival in today’s market. When done well, it can secure sustainable positive results. When approaching DT, it’s important to remember the first law of digital innovation: Technology changes quickly, but organizations change slowly.
Because, for all its emphasis on technology, DT is fundamentally a human process. That’s what leaders need to understand: Adopting technology for technology’s sake is a red herring.
Egypt has taken strides in digital transformation with its Digital Egypt program to improve IT infrastructure and national capabilities. That presents opportunities for collaboration and growth to many local and multinational enterprises. The ultimate goal is to transition the nation to a knowledge economy with a highly skilled workforce, create intellectual property, and produce goods and services based on information-intensive activity.
DT programs are based on three pillars: digital transformation, digital skills and jobs, and digital innovation. With 70% of large businesses in Egypt already on their digital transformation journey (CIO Magazine), expanding digital skills, creating innovative testbeds, and building a supportive infrastructure have never been more pressing.
What can go wrong?
No matter how well companies design their digital transformation and how much the government supports such a transition, there will always be obstacles and surprises. Only 26% of DT initiatives have achieved their stated goals (McKinsey).
DT can fail to achieve the desired benefits for several reasons, such as cultural and behavioral resistance to change. From management’s perspective, the lack of a clear strategic plan will lead the organization to hit a wall. Other reasons for DT failures include the absence of due diligence, leadership apathy, lack of resources, technological complexity, organizational structure, and one-off initiatives or marginal transformations.
Fortunately, the warning signs are easy to spot before DT projects derail. Too often, though, company culture conspires to prevent red flags from being seen and acted upon.
Before the journey
For a company to improve its chances of success, DT must complement the broader business strategy. First, there should be in-depth input from all stakeholders. Companies must then follow a framework that includes all key stakeholders and focuses on governance, vision, and purpose. It’s equally important to check the motives behind DT. A McKinsey study found the main drivers are improving efficiency and profitability (68%), responding to new customer needs (48%), and solving business challenges (34%).
The second guideline is having a skilled team implementing that transformation. It must include executives from multiple areas with a deep understanding of the mechanics of the business and expertise in change management and digital technology.
Not every organization has adequate leadership. That’s why research found that nearly 70% of leadership changed before or during transformation (McKinsey).
It is crucial to have a sufficient budget. One of the main reasons for DT failures is an inability to scale innovations beyond the early phases due to budgetary constraints. DT budgets of international corporations can be as much as $50 million or more. That is expensive, considering only 26% of companies are satisfied with their return on digital investment (Harvard Business Review).
The solution lies with a targeted and balanced allocation of capital and operating expenditures. The CEO and DT leadership team should pull the plug on projects that don’t meet expectations and invest more in those that do. Thus, DT budget cycles should shift from annually to quarterly or even monthly.
Companies also must have the proper infrastructure and people. DT is essentially a human effort and having adequate skills is essential for success. Yet, many organizations rely on outside resources due to the scarcity of DT skills. Proper assessment of in-house skills and the potential for training employees is crucial. DT initiatives tend to be built around existing systems, so it’s essential to avoid “legacy bias.”
DT also works for organizations whose leaders go back to the company’s fundamentals. That includes changing mindsets and organizational culture and on employee processes before introducing digital transformation tools. An organization’s vision for the future drives the technology, not the other way around.
That leads to the critical realization that no single technology can deliver “speed” or “innovation” as such. The best combination of tools for a given organization will vary based on the vision guiding the transformation. An overly broad suite of technologies could needlessly complicate transformations. To leverage a network’s strengths, CEOs need to figure out which capabilities, skills, and technologies are available in the ecosystem to complement and support their strategic business ambitions.
Adopting industry best practices is a good starting point via a detailed, dynamic, and forward-looking analysis of the market and sector. Companies also can look to approaches used by digital innovators within and outside their industries.
Once top management sets the overarching strategy, executives must start planning for interdependencies. Digital transformations tend to span multiple departments and an array of business functions. Those interdependencies could also emerge from new behaviors and business models that demand developing new value propositions. Typically, a DT program touches on processes, procedures and roles, business models, partner relationships, ecosystem networks, organizational culture, assets, people management, and customer experience.
The second step is to create target operating models (TOMs) to reimagine processes and experiences. The other target is to coordinate efforts, integrate operations and break down silos. It also helps organizations focus on journeys rather than individual tasks and units. Lastly, it sets in motion sequences by improving value cycles.
Digital transformation involves more than just updating technology and processes; it impacts revenue and shareholders. Many companies are hesitant to invest in digital transformation, not knowing if and when the investment might pay off: 93% of CEOs believe the lead time to deliver results is too long (Forbes survey).
However, when done strategically, digital transformation can result in efficiency savings and new revenue streams, thus enhancing a company’s value and revenue. It is no surprise that 94% of CEOs view DT as the most significant opportunity to improve their organization’s prospects (Forbes survey).
Accordingly, DT leaders need to adopt a multi-stage approach to implementation. The success rate of digital transformation increases threefold when organizations follow a rigorous multi-staged plan (Mckinsey). CEOs should carefully decide how to sequence the transformation for quick wins to sustain momentum. That requires clear payoff evaluation criteria of various parts of the transformation program.
Also, DT leadership teams and executives should not underestimate the power of communication, knowing that transparency increases the chances of success eightfold (Mckinsey). Not surprisingly, digital technologies and platforms are the preferred and most successful method for communicating DT programs.
Change management also is vital as the digital transformation process is inherently uncertain. Challenges include a non-digital mindset, siloed behaviors, aversion to risk, and lack of focus on customers. Adding to those challenges are the frequent changes and adjustments involving different groups across the organization.
For these reasons, traditional hierarchies get in the way, and agile decision-making, rapid prototyping, and flat structures are needed. Modifying organizational culture enhances employees’ ability to embrace DT.
Executives must be proactive in shaping the new culture, so fostering a sense of urgency is necessary.
Engaging everyone in the company is vital. Studies have found that leaders who clearly define roles and demand accountability increase the odds of DT success. Leaders must recognize employees’ fear of being replaced by technology by framing DT as an opportunity rather than a threat.
Disconnected leaders and unengaged and resistant employees can ultimately lead to a loss of momentum, which can undermine even the best transformation efforts.
Finally, continuous improvement is a must. Once initiatives are fully implemented, the change effort does not end. It is essential to realize DT is constantly evolving. Therefore, creating a culture of continuous improvement needs to be disseminated throughout the organization — not only to facilitate further transformation initiatives but to generate new innovative programs organically.
Successful digital transformation can be thought of as a looping cycle of four well-coordinated endeavors: upskilling, innovating, monitoring, and upgrading.