Despite years of discussion, understanding what digital transformation means for established businesses remains a daunting challenge. Leaders tasked with digital transformation feel pulled in many different directions, with competing demands from IT, marketing, sales, and operations. Without a clear understanding, the wrong people are often tasked with the wrong resources and the wrong KPIs, causing the digital transformation project to fail.
The key to clearing up the confusion is to see that digital transformation is not a single thing, but a multi-faceted journey with different goals depending on your industry and digital maturity. Just as we had to evolve our view of computers after their introduction – from a device performing a narrow set of tasks at the edge of the organization to a device that performs many tasks, in different ways – it is time to do evolve our vision of digital transformation from a monolithic concept to understanding that digital transformation means many different things to different parts of the organization. This will help you define what type of digital transformation you are really talking about and plan accordingly.
Based on our collective research on businesses undergoing digital transformation, we offer a simplifying framework to overcome confusion and conflicting demands. The framework outlines the four pillars of digital transformation we see today: improving IT, digitizing operations, digital marketing, and digital businesses. All four are part of most companies’ digital transformation journey. But without understanding how they’re different, it’s confusing to understand what to do next or how to invest – the resources, tools, goals, C-Suite sponsors and KPIs needed for success are totally different in each case. Being clear about their different demands can help you make smart trade-offs and move forward clearly.
Below, we outline the four pillars and how to invest properly to set yourself up for success. Which pillar is the right starting point for your business depends on your context, your needs, but also your digital maturity. Typically, companies address the first pillars we describe at the start of their digital transformation journey, although as they mature they can continually upgrade to add additional pillars.
The four pillars
For many companies, digital transformation starts with upgrading the enterprise IT infrastructure as well as mobile infrastructure, data lakes and cloud. This is essentially an opportunity to use the budget allocated for “digital initiatives” to modernize the IT and communication platforms within your company. Once complete, an IT upgrade gives your business access to up-to-date tools that deliver increased employee efficiency, reduced IT maintenance costs, and increased employee satisfaction.
Some companies are already deeply committed to this journey, but many other companies are struggling with how to upgrade digital infrastructure. This is often the first step in the digital journey. It requires IT architects and time, but promises up-to-date platforms with more efficient tools to serve customers at lower maintenance costs. But for more mature digital businesses, investment is still needed to use advanced tools like artificial intelligence.
Typically, the CIO or CTO should lead this pillar of digital transformation and the KPIs to indicate success are access to new tools, reduced maintenance costs, improved employee satisfaction and better business performance. In support of this, recent research from IDC indicates that organizations that had started an ERP migration to the cloud as part of a digital transformation initiative before the COVID-19 pandemic fared much better than others.
Digitization of operations
A second critical pillar of digital transformation, often discussed earlier in the digital transformation journey, is using digital to optimize, simplify and streamline existing processes. The goal here is to use digital tools, including more advanced technologies such as AI, 5G, and IOT, to streamline business growth.
In its most basic form, this pillar can mean replacing analog activities with digital ones. But other times it’s about re-architecting the system to meet the needs of today’s customers. For example, in the past, when PayPal sent payments via email, they had plenty of time to ensure regulatory compliance. But to enable the instant payments demanded in today’s market, PayPal’s organization had to be reorganized, merging formerly separate divisions for payments and compliance into a single entity. It’s not just about exchanging analog processes for digital processes; it’s about restructuring the digital organization and operations to better serve customers.
The digitization of operations is a fundamental pillar of digital transformation in the sense that without it, your company will be left behind by more efficient operators. A business can begin its digital transformation journey by digitizing processes and, as it matures, reengineer processes entirely. When a company revamps its processes, it also begins to open up more possibilities for transformation. For example, when a European retailer changed its platform to better serve its customers, it discovered that it could also offer other retailers’ products with its improved e-commerce platform and digitized logistics, enabling the retailer to create an ecosystem of third-party seller products and services to offer to their customers.
Due to the need to understand how the business works, digitizing operations often goes best when led by the CFO or COO. It takes time and technology, but the benefits, measured by core KPIs, are savings in time, money, and people to solve business problems and serve customers.
If you are looking for digital solutions to win customers, build brand awareness, profile customers, or simply sell online, you are pursuing the pillar of digital marketing. This pillar stands out from the others for its focus on digital tools to interact and sell to customers. Unsurprisingly, this requires different resources, such as investing in own data capture, digital tools including artificial intelligence to understand customers, and an omnichannel presence.
Several global retailers are using digital channels, AI and predictive analytics to access leads and customers, set up digital marketplaces, viral campaigns and geo-targeting campaigns. Similarly, companies are using artificial intelligence to identify and act on critical customer behaviors, for example, by identifying customers who are likely to leave your service and then intervening before they do.
Typically, the CMO leads this initiative and should focus on KPIs such as marketing ROI, reducing customer acquisition costs, and generating a large amount of valuable data that can be used to acquire new customers and better serve existing customers.
Finally, digital opens up many new opportunities for established companies. Seizing these opportunities, some of which can be quite disruptive, requires both developing the innovation and digital capabilities to test and pivot to new sources of growth. Digital can be an opportunity to create new business models, new products and services, or even to collaborate with a large ecosystem to create new sources of growth.
Typically, the CEO, or sales manager, leads such initiatives because of the requirement for investment, agility, but most importantly a team capable of conducting experiments to validate the new business opportunity. The payoff is new revenue streams, but KPIs are more nuanced, typically unit economic metrics you create to solve a significant customer problem and grow profitably. Most companies have these opportunities at their fingertips, but seizing them requires greater digital maturity than for an IT ramp-up or process digitization.
For example, one large retail bank we studied entered a range of different industries, such as transportation (ride-sharing), content distribution (music and TV), e-health, and retail for n to name a few. The first Deputy General Manager was in charge of this transformation and assembled a team of individuals with strong innovation capabilities who tested and built each new business. As part of the digital function, executives were also tasked with digitizing the entire ecosystem as well as a separate department responsible for building and maintaining the resulting ecosystem. To measure their success, the bank carefully analyzes their ability to increase customer retention in the core financial services industry, but more importantly, for new business, measures the number of average daily/monthly users, the engagement and cross-selling opportunities.
The digital journey
Everyone who has been part of the digital transformation describes it as a journey. Digital transformation takes time and consists of a series of evolutionary and sometimes disruptive steps. As with any trip, you have to decide where to go first. Typically, companies start with IT modernization and digitization, followed by digital marketing and new business creation. But all four pillars are important for digital transformation, so they can happen in a different order. The key to success is simply understanding that digital transformation is not one thing, but rather several different things. Having the right leader, resources, and measures of success for the journey to each different pillar can go a long way toward success.