Digital transformation is essential for businesses to remain relevant in the future, but it is never easy or straightforward. Even the most experienced business leaders can require handholding through the process of transforming businesses that may have met major milestones over the decades.
For CXOs, engaging with the digital transformation of enterprises has required learning new approaches their business. On the one hand, no industry or sector is immune to the changes precipitated by cloud-era technologies, philosophies, and practices. On the other hand, the nature of these changes has challenged business thinking fundamentally.
A critical challenge for enterprises of all sizes and industries
Successfully bringing about digital transformations has proven difficult even for businesses that are no strangers to digital processes. According to a 2018 McKinsey study, a mere 16 percent of the businesses surveyed recorded a sustainably improved business performance after digital transformation. This rate of success was only marginally higher for the so-called digitally savvy businesses, at 26 percent. The study also found that smaller organizations handled the digital transformation of business almost three times better than larger firms. Interestingly, the more successfully transformed companies leveraged a greater variety of digital technologies and tended to deploy more complex tools, including techniques powered by big data and AI.
One way of understanding digital transformation is by comparing it with the transformational methodologies that preceded it, such as Lean and Six Sigma. Lean principles emphasized minimizing wastefulness and, through the associated kaizen philosophy, continually improving organizational processes. The Six Sigma method brought in a data-based approach to ramping up process efficiencies as a way of solving business problems.
While some businesses have since integrated the two approaches, as Lean Six Sigma, the changes necessitated rethinking business processes to improve performance rather than significantly reshaping the business itself. Digital transformation for business offers the next level of performance acceleration via a fundamental reimagining of both business models and processes.
Digital transformation is, however, not a replacement for Lean Six Sigma principles. Shades of both Lean and Six Sigma can be seen in the digital transformation of businesses, which is underpinned by data transformation and big data analytics. While decision making is now almost entirely data-driven, the use of artificial intelligence (AI) algorithms, and particularly machine learning (ML), solves current business problems and uses available data to optimize solutions and answer further questions. In a sense, digital transformation can also rely on automating kaizen, by using algorithms to suggest business process improvements based on the data collected as key performance indicators. Then again, there is the possibility of bringing together Lean transformation levers with digital technologies for a digital lean approach.
The radical promise of digital transformation also stems from enabling decision-making in a more distributed manner. While Lean Six Sigma training was often restricted to business headquarters-based middle and upper management, digital platforms allow building a digital culture across hierarchies and geographies. This gives employees at all levels a greater stake in business performance while incentivizing them for embracing a digital-first work culture. In this sense, digital transformation of business can be ushered in top-down, like Six Sigma, or bottom-up, like Lean.
Such a transformation can also start from one or more business areas and spread across the organization. Often, businesses start by “going digital” in one operational aspect, such as marketing, as a test case. Based on subsequent cost-benefit analyses, they can plan to digitally transform other business areas. Equally, an office-based approach is also possible wherein a particular location rather than business function is chosen as the first target of transformation and the impact on local business studied before other offices follow suit.
I. Digital transformation through a top-down culture change
The more favored approach among businesses is one where the top management is convinced about digital transformation’s benefits and resolves to implement organization-wide changes, in effect altering the operating model. Arriving at this resolution may require extensive discussions with business area heads and other stakeholders in terms of identifying the most critical aspects that can be digitally transformed as well as the kind of technologies that are most suitable while being cost-effective. Since a digital transformation for business can require considerable training and adapting to the use of new technologies, managers across business functions and levels may also need to participate in developing a timeline that is least disruptive of existing processes.
In a top-down approach, the cultural shift that is a prerequisite for the digital transformation of business begins right at the top, with a change in leadership or style of leadership. Some firms may appoint a chief technology officer or a chief digital officer, while others hire or promote into managerial roles people who already possess the necessary digital-age skills. Such moves follow the traditional business logic for finding the right people for the right job, but the preference for a digitally-skilled person can often mean hiring young, irrespective of business experience.
One example of a top-down digital transformation involves businesses deciding to use a data-based decision-making platform as a way of planning business continuity during the ongoing pandemic. At first, top tier executives may begin using the platform to monitor higher-level business indicators. Then, business area managers and select team members can be trained to utilize the platform for their decisions besides also adding their layer of business performance indicators. Their team members may also contribute their datasets which in turn can offer richer, more granular insights. In this example, employee participation is critical in ensuring that the data platform leverages the most relevant datasets.
II. Downward-up or downward-out digital transformation of business
The ubiquity of digital technologies tends to thwart any attempts at gate-keeping or imposing a hierarchy. It also enables employees to undertake digital transformation within their workgroups which, if significantly successful, can radiate outwards and upwards across the organization. Such a scenario usually follows when one or more managers believe that a digital transformation business case is lacking. In this respect, this approach to digital transformation is kaizen in how process improvements are adopted without needing an order from above.
Often, those initiating the transformation are experts at using digital technologies and able to inspire others in their teams to acquire the necessary skills. However, without recognition within the organization and support from a business area head, such efforts may remain contained within the specific team. For instance, a team operating an oil well could undertake a data transformation that involves training machine learning algorithms using diverse unstructured data sources including historical drilling data, new drilling sensor data, environmental data, and geological data. The trained AI algorithm can then, for instance, help avoid adverse incidents during drilling.
III. Limited digital transformation
Some organizations may prefer a limited digital transformation and choose only to bring in digital culture in one aspect or business area. By doing so, organizations can take a trial-and-error approach to digital transformation without exposing the entire business to disruption. This can also be a compromise between employees wanting to go digital and management not willing to consider the risk. However, this may still necessitate appointing a chief digital officer as well as technical experts, which may need thinking through potential leadership conflicts. So while technological experts may have resources at their disposal, they may still need the backing of the upper management to implement transformative processes.
Consider the example of a consumer-facing firm that chooses to migrate to a digital-first sales approach by integrating social media marketing with a newly appointed digital payments team. They may need to bring in digital marketers as well as enhance marketing and sales spend. Both these decisions may require top-level approval, which may not have been forthcoming until made imperative by an external crisis. It is worth highlighting that agility is one of the goals of a digital transformation, with data-driven decision making helping managers cut down the time to action necessary changes. In some cases, embarking on digital transformation for business may itself require business leaders to be agile.
No matter which approach businesses take to achieve digital transformation, they need to start with a holistic understanding of the transformation’s purpose. This can be a strategic reorientation of the organization’s operating model, or it can be ushering in a digital mode of thinking and culture into organizational practices. But it is not simply about using digital channels for marketing or adopting AI to speed up data crunching. Digital transformation for business needs to be accompanied by a shift in business philosophy, with the firm-wide acknowledgment that there may not be a destination or exit point for digital transformation, embracing a digital culture will deliver process improvements, unlike previous transformative techniques.
