Transformations are hard, digital ones even harder

I’ve experienced multiple digital transformations firsthand, from implementing the strategy to leading and driving transformation across entire organisations. Over time, "digital transformation" has become a generic term, meaning different things to different people and businesses. This lack of clarity is a problem. If leaders can't define and align their organisation around a specific digital transformation program, success is unlikely. On a side note, McKinsey’s research shows that less than 30% of digital transformation programs are considered successful.

I observed three levels of digitisation: incremental, transformative and disruptive. Incremental digitisation involves the digitisation of existing business processes and customer experience. Transformative digitisation involves new digital business models, while disruptive digitisation is a radical reinvention of the existing business. In reality, many businesses have a false sense about digital transformation. For some, digital transformation are often only incremental changes – such as adding digital components to existing processes, improving the current Customer Experience (CX) through digital channels, consolidating infrastructure in the cloud, and other incremental improvements. I would not consider incremental digitisation as digital transformation, and I would define transformative and disruptive digitisation as true Digital Transformation.

What is the definitive meaning of digital transformation?

Digital Transformation involves integrating digital technology across all business areas, changing operations, and delivering customer value. It aims to optimize costs or boost revenue, requiring a cultural shift to challenge the status quo, experiment and accept failure. Organisations that don't modernize risk becoming irrelevant, like Nokia in mobile devices. Companies over 20 years old often use outdated software and IT infrastructure, unlike newer, leaner competitors who leverage modern technology for better client engagement and user experience. Digital transformation is a continuous journey, requiring ongoing adaptation to stay current with technology and market changes. According to Statista’s projections, the worldwide expenditure on digital transformation is expected to reach $3.4 trillion by 2026. Going more niche, to financial services, IDC estimates that 75% of the banks are still running on legacy core banking systems while 98% of them are planning to upgrade their core banking systems to accelerate digital transformation within the next three years.

How do the strategies for driving digital transformation differ between start-ups and established organisations?

The Digital transformation strategies differ significantly between start-ups and established organisations due to their development stages, resources and structures. Start-ups are agile, running lean processes, quickly adapting to market trends and new technologies and pivoting strategies. With minimal bureaucracy and fewer management layers, they can experiment, innovate, make decisions and implement changes swiftly. They are founded with a digital-first mindset, embedding digital technology in their business models from the outset. With customer centricity in their DNA, they focus on creating digital solutions that meet evolving customer needs, leveraging the latest technologies to enhance user experience. According to EY, 44% of executives in high-performing transformations indicate their organisations had the digital skills and mindset needed for transformation.

Start-ups can attract tech-savvy talent more easily by offering innovative projects, a dynamic work environment and equity incentives, appealing to those passionate about digital technology. With limited resources, they must prioritize investments that offer the highest return on investment and scalability. Often relying on venture capital or other external funding, they need to focus on demonstrating rapid growth, innovation, and transformation if required.

With significantly more resources, larger businesses can invest in comprehensive digital transformation projects and create dedicated teams or departments, such as innovation labs. However, they may struggle to attract the right tech-savvy talent to lead and drive these initiatives. Larger organisations are often more risk-averse due to their market positions and stakeholder expectations, requiring a balance between innovation and risk management. They must also adhere to stricter regulatory requirements and ensure robust cybersecurity, especially with large volumes of sensitive data.

I have seen multiple established organisations failing in their digital transformation journey and then forming strategic partnerships with tech companies, start-ups and other organisations to redefine, penetrate and eventually accelerate their digital transformation programs. While start-ups can rapidly implement digital technologies and innovate due to their flexibility and digital-first mindset, established organisations need to strategically manage change, integrate new technologies with legacy systems and leverage their resources and scale to drive successful digital transformation.

According to McKinsey, Success rates also vary by company size. At organisations with fewer than 100 employees, respondents are 2.7 times more likely to report a successful digital transformation than are those from organizations with more than 50,000 employees.

What are organisations' common challenges in digital transformation, and how can they overcome them?

According to a Gartner study, only 3% link management of digital transformation with CEOs, and only 1% with the board. Instead, 81% of Digital Transformation initiatives are assigned to IT. IT teams excel at mitigating costs, risks, and providing security but often lack the influence to drive profound changes and the entrepreneurial mindset to recognise disruptive opportunities and identify new digital business models. Successful digital transformations require an influential leader, accountable for the program's success, who can navigate the organisation, identify disruptive technologies, manage change and communicate across all levels. One challenge that is frequently found as the main reason for failing digital transformations is resistance to change. Employees often resist altering established workflows, tools and adopting new technologies. Some fear automation and AI could make their jobs obsolete. Additionally, cultural inertia within the organisation can hinder transformation efforts.

Some ways to overcome the resistance to change are:

• Implement a robust change management plan with clear communication, training and support to help employees understand the benefits of digital transformation.
• Ensure leadership is visibly committed to the transformation and can effectively communicate its importance and benefits.
• Engage employees early to gather input, address concerns and build buy-in. Make them active participants in the transformation, not just observers.

Most organisations, especially established ones, lack the right digital skills and expertise to manage new technologies. Companies should invest in ongoing training to upskill employees and prepare them for the new status quo. Fresh talent with digital expertise is also needed. Partnerships with tech firms, consultants or educational institutions can provide access to specialized knowledge and lessons from other digital transformation programs.

Due to the significant financial investment required, many companies face CFOs questioning the ROI of digital initiatives. The digital transformation leader should conduct a cost-benefit analysis to prioritise high-ROI projects, phase investments to manage costs and demonstrate incremental value. Start-ups may need various funding options, including loans or venture capital, to successfully complete digital transformation programs.

Difficulty in defining and measuring success in digital transformation initiatives can jeopardize the program. Companies need clear metrics and KPIs to measure success and ROI, regular monitoring and reporting to track progress, and stakeholder feedback to make data-driven decisions, ensuring a smooth and successful digital transformation.

How can established organisations foster a culture of innovation similar to that of start-ups?

This requires deliberate efforts to create an environment that encourages creativity, experimentation and agility, but above all, a safe environment where employees and teams are allowed to fail, learn from failure and try again. Creating and propagating an innovation culture in established organisations is challenging from the bottom up. It must come from visionary leaders who articulate a clear mission and communicate its impact. Leaders should demonstrate innovative behaviours, take calculated risks and embrace new ideas while empowering and incentivising employees at all levels to contribute ideas and take initiative in innovation projects. Providing a "sandbox" for employees to experiment with new technologies, processes and ideas without affecting core operations fosters bottom-up creativity and innovation.

Cross-functional teams working together in designated collaboration spaces can enhance communication, collaboration and idea-sharing. This fosters interaction between different departments or organisational levels igniting potential innovation. Recognising and rewarding innovation through regular awards within an organisation fosters innovation in established organisations. This should be part of corporate culture, emphasising successes and inspiring others. Additionally, allocating dedicated time for employees to work on innovative projects, such as hackathons or new ideas (like Google's 20% time policy), is beneficial. Partnering with academic institutions provides access to research and skilled resources, while collaborating with tech start-ups brings new perspectives, insights and cutting-edge technologies.

Last but not least, fostering an open and inclusive culture across the firm encourages communication and provides forums for brainstorming and feedback without fear of criticism for different perspectives. Actively engaging teams in discussions about the organisation's future and involving them in innovation decision-making fosters empowerment and ownership. This approach helps employees feel invested in the organisation and develops an intrapreneurial spirit similar to that of a start-up.

In your experience, what role does leadership play in the success of digital transformation efforts in both start-ups and established organisations?

Leadership plays a pivotal role in the success of digital transformation efforts in both start-ups and established organisations. Effective leaders drive vision aligned with business goals, inspire change, allocate resources, empower teams and navigate challenges and politics in any company. In established organisations, they should foster a culture of innovation, encouraging experimentation and adoption of cutting-edge technologies. Effective leaders guide their organisations through digital transformation complexities, ensuring efforts align with strategic goals and that the organisation remains adaptable and resilient in a rapidly evolving digital landscape.

According to McKinsey, companies with an engaged Chief Digital Officer are 6 times more likely to report a successful digital transformation. However, not all companies have a CDO, let alone an engaged one with the right digital DNA. Regardless, no digital transformation will succeed without leadership presence and support.

I've never seen a successful transformation program without heavy lifting by senior leadership. In start-ups, a visionary leader can penetrate layers more easily, but they still need to be present, communicate, empower and drive the transformation. In established organizations, leadership is even more critical due to complex layers, legacy systems, heavy processes and staff reluctance to change. Nonetheless, leadership is crucial to ignite and drive change.