The most under-appreciated reason that digital transformations fail is by going too big, too fast. There’s a learning curve to digital transformation, and most companies need to walk before they can run. The key is to start with modernization efforts that don’t transform the business—much less create a new one—but which create the capacity to succeed in more ambitious efforts later on.
Most digital transformations fail. Various studies from academics, consultants, and analysts indicate that the rate of digital transformations failing to meet their original objectives ranges from 70% to 95%, with an average at 87.5%. Yet, digital transformation has been at the top of corporate agendas for at least a decade and shows no sign of slowing down. On the contrary, many commentators have highlighted the accelerating impact of the Covid-19 period on digital transformation.
My consulting and teaching with hundreds of executives points to three main reasons why digital transformations fail.
First, when firms set their objectives (if they do so at all) they tend to be over-optimistic in their expectations of both the timing and the scope of the outcome. They think it’s like waving a magic wand.
The second aspect behind failed digital transformation is poor execution, including lack of proper governance, prioritizing technology deployment over user adoption, adopting the wrong metrics, and the like.
The third — and least appreciated — hurdle is also the most interesting, and it has to do with the pace of leading and managing the transition between the old and the new.
In short, there is a digital learning curve; you have to walk before you can run. For a digital transformation to succeed, senior leaders need to be aware of this learning curve, which has three distinct stages.
Three stages of digital transformation
The three phases present different opportunities for organizational learning. The first two stages, modernization and enterprise-wide transformation, are focused on reshaping the existing business. The last phase is about new business creation and uncovering new sources of value.
Our experience shows that it’s hard to avoid the school of hard knocks at each stage. If you jump to step 2 or 3 before succeeding at step 1, you’re likely to fail.
Modernization (step one) is about simplifying and digitizing existing processes and functions. For customer experience it can be about designing customer apps or implementing new self-service touch points. For operations, it can be about connecting products and digitally re-engineering core processes. For employee experience it can be about automating HR processes or providing a self-service portal for employees.
Do these digital programs transform the organization? Most likely not. This phase is often undervalued or even derided, but it shouldn’t be. Just like the foundations of a house, it makes the organization digitally stronger and smarter. It also provides reasonably quick returns that can fuel more complex digital investments. And it is a great chance for the organization to improve its digital capabilities.
Enterprise-wide transformation (step two) is a complex cross-value-chain change effort — for example, a retailer wanting to have a fully integrated customer experience across all its physical and digital channels. For operations it can be an internet-of-things application for condition maintenance or automating order-to-cash processes. For employee experience it can be institutionalizing agile methods of working or establishing a continuous learning and re-skilling culture.
Are these transformational efforts? Absolutely. Aligning traditional organizational silos, establishing proper governance models, adding new talents and the like — these are all critical muscles to develop for transformation success.
Enterprise-wide transformations are usually focused on improving existing operations. But, when successful, they very often open up new value creation opportunities, for example by reaching new customers or finding new efficient ways of running operations. Enterprise-wide transformations are cross-functional and complex, but are mandatory learning phases on the journey to digital-transformation maturity.
New business creation (step three) is about increasing the size of the existing pie or creating new revenue lines. For customer experience, it can be moving from selling products and services to new subscription-based business models. For operations it can be using data and analytics to accurately predict operational performance of products or systems.
These are true transformations because they challenge the existing processes, structures, and capabilities of the organization and require new ways of working. Leadership is key, as this is about transitioning from the existing model of operations to new ones. Often, this phase also demands rethinking the boundaries of the organization as it moves from traditional linear supply chains to ecosystems. It requires a high level of digital transformation maturity.
Are these three digital transformation horizons completely linear? Probably not, in the sense that most organizations will manage a portfolio of initiatives that may cover all three areas. For instance, they may undertake a certain amount of modernization to deliver quick wins, while at the same time having enterprise-wide global programs and/or innovating business models through experiments and controlled pilots.
But from an organizational learning perspective it’s rare to find examples of digital leaders in large corporations that have leapfrogged the early phases. The key to more successful digital transformation is to not skip ahead: Start with step one and invest the focus and resources to get it right. Growing your organization’s digital maturity through the digital transformation corporate learning curve will increase your chances of success.