Wherever a CEO or Board Director turns, they’re hearing about something called “digital transformation.” Competitors are touting their success transforming; consultants are offering to help you transform; the business press is telling you it’s “transform or die.” But nobody seems to have a clear and actionable explanation of just what digital transformation actually is.
So, here we go…
Digital transformation is “a CEO/BoD led reimagining of an organization’s culture, markets, products, customer experience, and employee experience that is driven—in part or entirely—by the promise or threat of technology.”
Notice that technology is the last word in the definition—that’s deliberate. And notice what comes first? CEO/BoD led. That’s also deliberate. Digital transformation isn’t about speeding up a production line by adding digital controls or upgrading your ERP application to get better reports, or even about building a mobile app for convenient customer service.
It’s about answering these key questions:
- How must your culture evolve to resonate with the needs and desires of your stakeholders in today’s Acceleration Economy?
- What markets will you focus on based on upcoming social and cultural changes, and how must you invest and divest to get from here to there? (For example, the impact of evolving ESG sentiments on legacy energy firms.)
- How must your products evolve in the world of 5G/Starlink networking, Internet of Things, additive manufacturing, supply-chain disruptions, and other advances?
- How do you create the customer experience that delights (because anything short of “delight” is failure!) customers and prospects in your target markets and for your target products?
- What must your employee experience be to enable productivity while delighting your workforce in the “next normal” world of labor scarcity: Work From Home->Work From Anywhere (WFH->WFA), and Generation Z?
Digital transformation is, to use the term coined by Jim Collins in Built to Last, an interdependent set of “Big, Hairy, Audacious Goals” that can—and must—transform most organizations. The alternative to such internally led transformation is bleak: You might get “Amazoned” or “AirBnbed” or “Ubered” out of business, or maybe an activist investor with a digital transformation agenda will transform you against your will.
The audacity and size of a proper digital transformation mean it must be driven by the most visionary, most strategic, most influential leaders at the organization: the CEO and the BoD. I’ve seen CEOs point at their CIO or CFO and say, “We need one of those digital transformations. Let me know what it’s done.” Such a directive might keep analysts at bay for a few quarters, but they are doomed to fail in one of two ways: Either the result is digital optimization—which I’ll define in a moment—or they will divert resources and distract senior leaders chasing ideas that will never be implemented because the rest of the organization knows the corner office isn’t driving this disruptive and often chaotic initiative.
Digital Optimization is Valuable, but it’s Not Transformation
Organizations that don’t feel ready to undertake such a strenuous mission as digital transformation can opt for something quite different that sounds about the same: digital optimization. By digital optimization I mean, Doing the things you already do, but using technology to do them better, faster, and cheaper. Embracing a digital optimization program—which can be led by a CIO with support from the CFO and other C-Suite executives—is a great way to:
- understand your actual processes (vs. what “the manual” says) and update them to reflect current reality
- flex the organization’s change muscles and get folks ready for bigger changes
- deploy innovative technology in small doses, fostering organizational learning
- reduce operational costs and cycle times while streamlining customer experiences
- reduce audit exposures and audit costs
Reduce Audit Pain/Cost
The first four of these benefits seem like no-brainers and will be universally understood and accepted by the organization. The last benefit, related to audits, warrants more explanation.
Since IT budgets and audit budgets usually hit cost centers that are far removed from one another, audit cost-saving opportunities are often overlooked. And if you sign the SOX Section 404 Management Assessment of Internal Controls report—often referred to as the “go to jail letter”—you should care deeply about the degree of real automation in your in-scope processes. (By real automation, I mean no humans are involved from beginning to end vs. processes that put people in between two automated process steps. From an audit perspective, “semi-manual” is “manual.”)
Auditing manual processes is laborious and time-consuming (i.e., slow and expensive), and often involves testing many cases in a row looking for repeatable successes. Auditing an automated process generally involves evaluating the automation and testing a few cases. Ask your internal auditors about costs but be sure you factor in internal audit costs plus external audit costs plus process owner/operator costs incurred in preparing and documenting the test cases.
It’s important for Directors and CEOs to understand the distinction between digital transformation and digital optimization so they don’t fall for glossy sales pitches from vendors and from enthusiastic internal technology champions. In future columns I’ll cover how to get started with each type of digital work and share some examples of successes—and even better, failures—I’ve seen.
- I can’t write about process improvement without mentioning the seminal article on “reengineering,” written by Michael Hammer. Most people think reengineering is about “fixing processes,” or—if they’re cynics—about cutting staff. The article title reveals the true nature of the concept: Reengineering Work: Don’t Automate, Obliterate
Here’s a link to the HBR article: Reengineering Work: Don’t Automate, Obliterate (hbr.org) ↑