What Is Digital Transformation & Why Is It Important In 4.0 Era?

Digital transformation involves restructuring a company, aiming to generate value by consistently implementing technology on a large scale.

1. What is Digital Transformation

Digital transformation entails a fundamental restructuring of an organization's operational framework. The objective of this transformation, as outlined in the recent McKinsey publication "Rewired: A McKinsey Guide to Outcompeting in the Age of Digital and AI" (Wiley, June 20, 2023), is to establish a competitive edge by consistently implementing technology at a large scale to enhance customer experience and reduce costs.

Similar to many frequently used expressions, the term "digital transformation" has lost its precise meaning and varies in interpretation. This ambiguity poses a challenge. Digital transformation is indispensable for organizations not only to compete but to endure. If leaders fail to articulate the essence of a digital transformation and rally their organization around a specific initiative, achieving success becomes unrealistic.

Digital transformations differ from conventional business overhauls, in both subtle and significant ways. Conventional business transformations typically conclude once new behaviors are adopted. On the contrary, digital transformations are enduring endeavors that continually reshape how an organization improves and adapts (and this is a genuinely long-term commitment; most executives will remain on this journey throughout their careers). This is because technology is progressively woven into business operations and is in a constant state of evolution. For instance, given the rising significance of AI in generating business insights and facilitating decision-making processes, any digital transformation should inherently encompass an AI transformation as well.

As we will elucidate, the success of digital transformations relies less on how companies utilize digital tools and more on how they evolve into digital entities themselves.

2. What capabilities are necessary to drive progress in the realm of digital transformation?

Achieving a successful digital transformation demands a range of synchronized actions. "Rewired" outlines six pivotal capabilities crucial for ensuring the success of digital transformation:

• Strategic Clarity: Developing a well-defined strategy that centers on business value is essential. Companies should channel their transformation efforts into specific areas (such as customer journeys, processes, or functions) that yield substantial value for the business. This transformation should be guided by a roadmap that delineates the required solutions and resources for effecting change in prioritized domains.
• Skilled Talent Pool: No organization can attain digital excellence solely through outsourcing. True digitalization necessitates having an in-house pool of digital talent working collaboratively with business counterparts. Exceptional digital talent initiatives extend beyond mere recruitment. They encompass employee value propositions that attract and retain top talent, agile and digital HR processes for talent discovery, management, and training, and a conducive environment where talent can thrive.
• Scalable Operating Model: The success of digital transformations relies on cross-functional teams composed of individuals from various departments. While many companies already employ such teams, scaling up to support hundreds or even thousands of them calls for a new operating model. Three primary operating models come into play: the digital factory, the product and platform model, and the enterprise-wide agility model.
• Distributed Technology Infrastructure: The organization's technological infrastructure should facilitate teams in continuously developing and launching digital innovations to users. Creating this environment requires fostering a distributed technology framework that grants every team access to necessary data, applications, and software development tools. Recent technological advancements contribute to establishing such a distributed environment, including the thoughtful utilization of APIs for application separation, availability of developer tools, selective migration of high-priority workloads to the cloud, and automation of infrastructure setup.

• Data Accessibility: Reliable and up-to-date data are pivotal for the triumph of digital transformations. The data architecture should generate data that are easily accessible to teams across the organization and should undergo consistent evaluation and enhancement. This capability necessitates strong governance. The central element is the data product, which organizes diverse data components into a coherent unit easily usable by a range of teams and applications.
• Effective Adoption and Change Management: Traditional technology adoption proceeded linearly, involving requirement gathering, solution development, testing, and end-user training. However, this approach often resulted in low adoption rates and limited business value. Digital transformations follow an iterative path of design, prototyping, feedback collection, and solution enhancement to fully realize value. A rule of thumb is to allocate at least an equivalent amount of resources for process changes, user training, and change management as for digital solution development. Prioritizing adoption and scalability from the outset of a transformation ensures that sufficient resources are allocated for successful change implementation.

None of these areas can be neglected for a digital transformation to achieve its intended success.

3. What is a domain and why is it significant?

In the context of digital transformations, a domain refers to a comprehensive scope of change that encompasses an entire area such as a customer journey, process, or functional segment, rather than focusing solely on isolated use cases (individual steps within the area, like addressing a customer service call). Emphasizing domains, as opposed to singular use cases, greatly enhances the probability of successful change. This approach encompasses all interconnected activities required to deliver a complete solution. For instance, instead of concentrating solely on one step in a process—like establishing the process for customers to open bank accounts through an app—the domain includes all associated activities (account setup, verification, workflow automation, etc.) necessary for account opening. Addressing these related activities is what enables a solution to deliver its full value.

A domain should be substantial enough to provide value and impact to the company, yet manageable enough to undergo transformation without excessive reliance on other business components. Skilfully managing the interrelations between use cases and solutions within a domain serves as a key determinant of transformation success.

4. What are the primary leadership roles in a digital transformation?

For a successful digital transformation to occur, various functions within an organization need to collaborate in innovative ways. This necessitates substantial and coordinated investments, and the person responsible for driving and sustaining such transformative change is typically the CEO. A critical aspect of the CEO's role is to ensure alignment, commitment, and accountability among the leadership team, as the absence of any of these factors can lead to stagnation in the progress of digital transformations.

Leaders occupying roles in the C-suite and business units also play pivotal roles. The Chief Information Officer (CIO) usually concentrates on enhancing the internal workings of the company through technology, while the Chief Technology Officer (CTO) focuses on enhancing customer offerings using technology. Chief Digital Officers (CDOs) often serve as co-leaders of the transformation, working with digital and AI technologies to create novel digital experiences for users. The Chief Human Resources Officer (CHRO) is instrumental in the initial stages of the transformation, ensuring the acquisition of digital talent and implementing talent management practices that cultivate and retain this talent. The Chief Financial Officer (CFO) oversees the transformation's business case and tracks the realization of value. Finally, the Chief Risk Officer (CRO) is responsible for integrating risk assessments into the development process and addressing emerging risks like data privacy and cybersecurity arising from digital and AI transformations.

5. How can you determine the effectiveness of a digital transformation?

Assessing the progress of a digital transformation can be surprisingly challenging. Without accurate tracking and measurement of outcomes, leaders struggle to gauge performance and validate the value generated by the ongoing changes.

Selecting the appropriate metrics is a significant part of this endeavour. In the context of digital transformations, key performance indicators (KPIs) generally fall into three main categories:

• Value Creation: Digital solutions typically target specific operational KPIs that often translate into financial gains.
• Team Health: Many digital transformations experience slower progress than initially planned due to understaffed teams, failure to adopt modern work methods like agile, or lack of critical capabilities like product management and user experience design. High-performing teams can be significantly more productive than their low-performing counterparts.
• Change Management Progress: These metrics gauge advancements in building new capabilities and the overall health of the transformation process. Are teams being mobilized as intended? Is engagement high? Are capabilities and talent being developed? Is the technology, tools, and products being seamlessly adopted? A balanced approach to change management is essential, prioritizing progress over perfection.