But not so fast; firstly, what is digital transformation? Digital transformation requires digitisation – converting something non-digital (e.g., a health record, an identity card) into a digital format that can then be used by a computer system. Digital transformation also requires digitalisation – enabling, improving, or changing business operations, functions, or activities by utilising digital technologies and using digitised data to create management intelligence and actionable knowledge. All three—digitisation, digitalisation, and digital transformation—are needed to build a digital business. Digitisation and digitalisation are necessary but insufficient. My academic colleague George Westerman put it rather well: When digital transformation is done right, it’s like a caterpillar turning into a butterfly, but when done wrong (or we might add, incompletely), all you get is a really fast caterpillar. Digital transformation must focus on the whole organisation, and large-scale change. It involves radical redesign, then deployment of business models, activities, processes, and competencies to fully leverage the opportunities provided by digital technologies. I would guess you already have some idea of why it is so difficult.
Yet there is another side to the digital catch-22. What happens if, putting it colloquially, you fail to sail? There are relatively few best performers on digital transformation. These are getting disproportionate gains, recording markedly higher profitability and revenues, accelerating away from the others, and may well establish a competitive advantage that becomes irreversible. What are they achieving? According to one study, they had increased the agility of their digital-strategy practices, enabling first- mover opportunities. They had taken advantage of digital platforms to access broader eco-systems and innovate new digital products and business models. They had used mergers and acquisitions to build new digital capabilities and digital businesses. A significant feature was that they had invested ahead of their competitors in digital talent.
Our own work (here and here) suggests that the best performers on digital transformation add up to around only 20% of organisations, all recording up to a 30% increase in revenues as a part outcome of their digital technology investments over the previous four years. They come from most sectors and regions of the world and are not limited to the obvious hi-tech US and Chinese firms. To add even more urgency, our evidence, consistent with other studies, shows that being slow to adopt digital technologies may reduce risk in the short term, in terms of cost, talent and time, but builds growing business risk and reduced competitiveness in the long term. And this trend will be repeated and magnified by the growing adoption of automation and ‘AI’ over the next five years.
So, there is plenty of evidence for a digital catch-22, but is there an unlikely saviour here in the form of the pandemic and economic crisis? This has undoubtedly accelerated corporate moves toward digitisation and digitalisation – primarily to survive in the short term, establish resilience, and to maintain competitiveness. But we found motives mixed, capabilities variable, and planning horizons mostly short term. That said, a McKinsey survey suggests that COVID-19 has pushed companies over a technology tipping point. Between January and October 2020, the digitisation of customer and supply-chain interactions and of internal operations had accelerated by three to four years. The share of digital or digitally enabled products in corporate portfolios had accelerated by seven years. Nearly all respondents had put in place quickly at least temporary solutions, to meet many of the new demands on them. Funding for digital initiatives increased more than for anything else. Moreover, the largest shifts in the crisis were also the ones most likely to stick – think changing customer needs and expectations, more remote working/collaboration, cloud migration, customer demand for online products and services, and increasing spend on security. Those who had invested heavily into digital technologies over the previous three years also reported a range of facilitating technology-related capabilities that others lacked in the crisis. This meant they were better prepared for the crisis.
Did COVID-19, then, make digital transformation easier? Well, the evidence is that the digital catch-22 has not gone away. Digital technologies are gaining a higher profile amongst the executives who make the key decisions, but the difficulties and complexities of large-scale organizational change on many fronts are not easily circumvented, and there remain many other pressing matters to deal with, distracting executive attention.
by Leslie Willcocks, LSE | Read more:
Image: uncredited
[ed. See also: The New Leviathan is An Autonomous Digital Machine (LSE).]
