The LEF Take on Digital Transformation
In recent years, the term ‘digital transformation’ (DT) has pervaded the business press, becoming one of those buzzwords that’s almost impossible to avoid. But while it’s easy to mock and dismiss the catchy phrases of the day, their rise and fall is usually telling us something about developments in the real-world marketplace. The question is: what?
For more than a decade, large organizations have been migrating to cloud computing, software-as-a-service (SaaS), and other internet-based services. But the technology community now anticipates a much more powerful wave of change based upon smart products, machine learning, industry-specific business platforms, algorithmic processes, robotics, and more self-service, data-driven operations. Taken together, these capabilities provide a vision for transformed, 21st century organizations that look much more like today’s digital giants than the traditional global firm. It’s hard to over-estimate the potential of such changes.
To help our clients better understand where we are in what will be a decade-long journey, we have conducted in-depth, face-to-face interviews with leaders in some 30 large organizations. In doing these, it quickly became clear that the term ‘digital transformation’ is unusually divisive. For some, it’s a useful way to describe their major change initiatives. Yet with quite a few others, it’s seen as either vendor-driven hype that distracts them from the real challenges they face, or even as a potentially demeaning way to portray how things are currently done.
While there is surely a lot of puffery in the market today (when hasn’t there been?), we disagree with those who largely dismiss the overall DT concept. Virtually every traditional large organization we work with is wondering whether it will eventually need to operate much more like today’s dot.com leaders, and there is great interest in what others are doing, as well as a real fear of missing out.
To provide tangible, working definitions, LEF segments things that are often called ‘digital transformation’ into three broad categories:
- IT modernization is far and away the most prominent form of change observed, as just about every firm wants to build a more agile and efficient digital foundation, or core. This usually involves moving to various cloud and SaaS capabilities and developing the skills and culture to use them effectively. If one sees significant operational modernization as a form of transformation (as many people understandably do), the DT market is very large indeed.
- Business transformation (BT) is considerably less common, as it occurs when an incumbent organization successfully makes a major shift in strategy, business model, organization or culture. BT is how existing firms successfully adapt to major marketplace shifts. If you only use this narrower definition, the DT market is highly strategic, but considerably smaller in terms of customer spending.
- Industry disruption is clearly another major buzzword of our time, as new technology-led rivals have already restructured some industry sectors and threaten many others. To us, industry disruption is essentially the opposite of business transformation. In the former, the new players win; in the latter, the incumbents prevail.
Challenges, barriers & solutions
Virtually everyone we talked to mentioned how difficult both IT modernization and, especially, business transformation can be. Although most companies can easily imagine a highly transformed digital future, day-to-day priorities, politics and financial pressures tend to get in the way. Organizational silos, excessive duplication and the logjams of matrix management were also cited as major barriers to change. Taken together, these challenges help us understand why -- while it is easy to launch exciting internal digital initiatives and incubators --making change stick at scale often proves elusive.
The full report identifies six main ways that firms are cutting through today’s DT inertia. They are a mix of strategic shifts, financial innovations, ecosystem leverage and overt senior leadership commitment. However, even when these diverse strategies and approaches are used effectively, business transformation remains a long-term journey that will run deep into the 2020s. We have seen no real short cuts.
Successful digital transformation requires a considerable amount of faith, confidence and perseverance at the highest levels of the organization. No one really knows how societal tastes and pressures will change, how quickly machine intelligence will advance, what powerful new platforms will emerge, how China and India will alter the competitive playing field, or how different the organizations of the future will ultimately be.
What we do know is is that information technology has already transformed or disrupted huge parts of the global economy. We also know that the current wave of automation and intelligence technologies holds at least as much – and we think even more – potential than anything we have seen thus far. Today’s digital business leaders understand this intuitively.
It is this tension between highly significant expected changes and highly uncertain timing that shapes today’s two-pronged digital transformation mission. First, companies need to modernize their core IT foundations so that they are prepared to respond to market changes whenever they come. But, more fundamentally, they need to believe that data, intelligence, connectivity and automation are destined to reshape virtually every industry. And once an organization embraces this view, the phrase ‘digital transformation’ is no longer just a glitzy buzzword; it’s the term we use to describe the process through which 21st century global market leadership will eventually emerge.