Why most companies suck at digital transformation

Digital transformation (DX) is one of those buzzwords we don’t understand. It’s also being applied to most IT transformation projects. So, let’s look at the best definition of DX—mine.

Digital transformation means making computer-based systems systemic to an organization’s products, processes, and strategies. The core idea is to bring value back to the business through better engagement with the workforce, the customers, and the customer’s customers. The desired outcome is more operational efficiency and cost optimization and to drive net innovations to define the future of the business.

DX is essential stuff. It’s crucial. We’re going to see prominent companies go belly up due to their inability to get their DX strategies working while their competitors figure it out. The ability to do digital right ends up being everything.

Companies spent $1.6 trillion in 2022 on digital transformation (by whatever definition, I guess), which is expected to reach $3.4 trillion by 2026, according to Statista research. However, the research shows that the return on those investments has been mixed to poor.

According to McKinsey & Company research, transformation projects’ long-term positive impact is rare. A majority (56%) of respondents said their organizations had achieved most or all their DX goals, which is good news. However, only 12% report sustained goals over three years: uh-oh. Also, an average of 42% of financial benefits are lost during the latter stages of a large-scale change effort.

What’s going on?

If you bottom-line this, enterprises have invested much into DX for several years. However, it’s not driving any real sustainable change to the business. Companies make tactical improvements to IT that have little real value beyond making them feel good that something is getting done.

This failure has been blamed on a lack of budget, inability to find the talent needed, no support from execs, or focusing too much on technology fads, which are all likely contributing factors. However, the core reasons that organizations suck at DX are systemic issues that are easily fixed—if there’s the political will. This is the largest impediment to success, in my experience.

The technology, cloud and not-cloud, is often blamed for these failures because most people don’t want to take direct responsibility. Here are a few tips on how to avoid DX missteps.

Put a holistic DT strategy in place. It’s best to have a master plan and detailed breakdowns because DX is a massive systemic change over time. The plan must include the predicted benefits and relation to the market, workforce, and customer. When I hear the term digital transformation, I ask to see the plans; they never exist, and most enterprises run DX as a project, not something strategic to the business. True digital transformation is not tactical; it’s strategic and needs to be operated and funded as such. Else, get used to failure and poor ROI.

Focus on architecture in the wide, without forgetting architecture in the narrow. Enterprises need to understand the holistic architecture required to support accurate DX positive outcomes and not just focus on individual systems. This is an outcome of a comprehensive strategy, in that we’re utilizing all systems in place, including legacy and other on-premises assets, and establishing how they will work and play well with migrated or net-new systems existing on public clouds.

If companies focus only on small systems or architectures, they usually neglect to understand how they will exist within a strategically defined DX ecosystem. This results in decoupled projects that may be impressive on their own but provide little or no value to the larger strategy that is more important than just the parts that make it up.

The best example I’ve seen lately is those looking to build cloud-native applications as part of their “DX efforts” (note that they did not say “strategy”). They ended up with an awe-inspiring system that all who designed and built it can be proud of. However, it’s just a tactical improvement that can worsen the DX strategy if it drives too much heterogeneity and complexity. This is why there is a considerable lack of ROI for this “DX investment” since companies don’t consider the overall macro architecture or DX strategy. Many small successes can still lead to overall failure without coordination, planning, and strategy.

Not an easy fix

I wish I could tell you that just moving everything to “the cloud” will fix DX failures. It’s much more complicated than that and requires change from people and cultures, which is difficult.

The most significant issue is that most don’t even understand what digital transformation is, even those with the term in their titles. Instead, they focus on the tactics, meaning tools and technology, never understanding the plan to make things incrementally better.

This change needs to come from the top, from new or current executives who understand why this needs to change and have the power to make it happen. So many times, companies hire heavyweight tech leaders but don’t give them the authority to drive actual changes. If you see CTOs that are in roles for less than three years, that’s usually the case. Yes, I do speak from experience.

Can you do what it takes to fix this before it’s too late? I suspect the market will end up weeding out those companies that don’t get it. Natural selection?