By Russ Banham
Perspectives
Across industry sectors today, companies are mobilizing for a fourth industrial revolution, a digital transformation combining physical operations with virtual technologies like predictive analytics, artificial intelligence (AI), and the Internet of Things (IoT) to increase operating efficiencies, reduce costs, and make more insightful, data-driven decisions.
By evolving current business and operating models, the hope is that positive changes can be reaped in the products or services a company offers, and how it interfaces with customers and delivers on these interactions. Not surprisingly, given these varied benefits, nearly every company (94 percent) in an October 2018 global survey by Deloitte has made digital transformation a top strategic objective.
Yet a lesser number (68 percent) of survey respondents see digital transformation as an avenue for profitability. Other studies express similar muddles. A global survey on digital transformation by McKinsey & Co. in October 2018 indicates that more than eight in 10 respondents have been pursuing such change initiatives for the past five years, but success has proved elusive, with fewer than one-third reporting an improvement in business performance.
These findings compare favorably with a recent study by Dell Technologies indicating that while digital transformation is a corporate priority, progress is slow. The survey reveals that only 5 percent of respondents are “digital leaders,” yet an astonishing 91 percent of them say they continue to confront “persistent barriers” in their transformations.
A follow-up survey by Deloitte in March 2019 strikes the same chord, indicating that only 50 percent of companies considered to be “digitally mature”—or well along in their digital transformation—report net profit margins and revenues above average for their industry. Only 17 percent of “lower maturity organizations”—companies whose digital transformations have just begun—report above average net margins, while 19 percent of these companies report above average revenues. These surveys, while painting a bright future for companies that digitally transform, indicate some steep bumps along the way.
The report suggests several reasons why digital transformation success is lagging, including meager capital budgets, technological immaturity, and less-than-rousing executive sponsorship. “Functional leaders and teams cannot drive effective transformation without support from the organization’s leadership,” the report states. “Maximized business income depends on effective execution.”
David Schatsky, managing director of Deloitte’s U.S. Innovation Team, elaborates on the study findings. “Digital transformation is not just a technology upgrade,” says Schatsky. “It’s a phenomenon that pervades an entire organization, reimagining business processes around data and emerging technologies. When you have an initiative of this scope and breadth, you need senior leaders to set the tone, reinforce the importance of the initiative, and develop plans and processes to execute the project.”
At the Top
Leadership is crucial to every business initiative, of course. The CEO sets the tone at the top of the organization by establishing that a particular charge initiative is a strategic priority, creates the organizational conditions for its iterative development, and empowers people to work on the project. What the CEO does not do (nor should do) is pull all the levers.
Typically, a chief digital officer (CDO), chief information officer (CIO), or other IT leader is entrusted to lead a digital transformation on a day-to-day basis. When such digitally savvy leaders are in place to guide the initiative forward, organizations are more likely to wring what they want from the project, the McKinsey survey indicates, stating that companies with a CDO leading the transformation are 1.6 times more likely to achieve success.
Such leaders must be able to convey the crucial importance of the strategic mandate to business unit leaders and functional heads, since they will benefit the most from the transformation and should be engaged in the process. Not surprisingly, eight in 10 respondents to the McKinsey survey pointed out that their digital transformation involved either multiple functions, business units, or the entire enterprise.
Deloitte’s March 2019 report suggests that successfully engaging functional and department leaders in the objectives and implementation of the initiative is a key attribute of effective leadership. “Functional leaders and teams cannot drive effective transformation without support from the organization’s leadership,” the firm states.
Schatsky affirms the value of this top-down/bottom-up commitment. “It seems clear that for digital transformation to succeed, a technically savvy senior level executive with broad purview over the organization—someone who has nurtured relationships with business unit and functional leaders—is required.”
Leading the Charge
Certainly, adroit stewardship and enterprise-wide dedication are needed to tackle the difficulties inherent in a major change initiative, among them organizational resistance, legacy technology and business models, and inaccessible, opaque, and possibly inaccurate data stored in departmental silos, hindering information for decision-making purposes.
These challenges help explain why only 59 percent of organizations have reached what Deloitte calls “median digital maturity,” despite several years of effort to rebuild the business around data. Too many companies are blindsided by the promise of technology, without considering the business needs of users first. “Technology is an enabler of transformation; it’s not the driver,” Schatsky notes.
That driver is data, says Henna Karna, chief data officer at the large global insurer and reinsurer AXA XL, where she is leading the company’s Electronic Data Solutions (EDS) team in evolving the enterprise around digital transformation. “To become a disruptive market force, companies must pursue a data-driven approach, not a tech one,” Karna asserts.
She explains that an investment in robotics processing automation or machine learning to improve the efficiency of a particular process in a part of the organization is a tech-led solution, as opposed to a data-driven one.
“Breakthrough innovations come from the audacity to upend traditional business models and other operating paradigms based on what the customer wants and the data is telling you,” says Karna. “For digital transformation to succeed, leaders must make it a fully comprehensive effort involving every business unit, function, and department. That’s what a transformation is, after all.”
Her point resonates: Innovation was named one of the top five strategic priorities by 96 percent of CXOs in a 2017 Deloitte survey. Two-thirds of the respondents envisage innovation as the optimal way to differentiate and grow their companies. “Digital transformation supports an organization’s capacity to innovate, and without innovation, companies today are challenged to grow and thrive in the future,” says Schatsky.
To seize innovation, organizations must invest in a data architecture that facilitates the needs of business users, giving them access to data to think differently, experiment, and create new ways of doing things. Karna and the EDS division at AXA XL are building this architecture. Like all transformations, the effort requires tearing down parts of the old operating structure and bypassing accepted bottlenecks.
In this work at AXA XL, organizational buy-in was needed. While it was important to have CEO sponsorship and support of the company’s digital transformation, more important, in many ways, was for business unit and department heads to rally around the initiative. “These are the people who best understand the challenges in accessing transparent data for decisions; they literally feel the pain in their bones,” says Karna. “That makes them passionate advocates for the change initiative.”
Although the digital transformation is now in its second phase, it is being incrementally rolled out across the insurer’s global footprint. Some early wins are evident. “Previously, it would take several days for a risk analyst to offer insights into losses from a particular catastrophe, since the person had to rely on data provided from other parts of the enterprise,” said Karna. “Today, it takes minutes for the analyst to reliably search our data ecosystem and engagement platform [dubbed DEEP] to access what is needed.”
Reaching Maturity
Small wonder why digital transformation has ascended to the top of so many companies’ strategic agendas. Yet, the stakes are high as businesses invest in the change initiative. To assist leaders in transforming their business models to attain digital maturity, Deloitte has developed seven key factors or “pivots,” as the firm calls them, to achieving a successful digital transformation.
These factors include a flexible and secure technology infrastructure, data mastery, digitally savvy talent networks, and ecosystem engagement. Remaining pivots involve the implementation of intelligence workflows that make the most out of human and technological capabilities, the delivery of a seamless customer experience enterprise-wide, and business model adaptability to changing market conditions.
All the pivots should be executed in concert across multiple business functions, rather than on a selective basis. “We believe adherence to the pivots will generate tangible results,” Schatsky says.
In this era of rapid innovation, complacency with the company’s legacy business models and the technologies supporting them is counterproductive. “It’s increasingly clear that being a digital enterprise will soon become the equivalent to being in business,” continues Schatsky. “Those that fail to transform—that lack the ability to aggregate and analyze digitized data to improve what they make, how they operate, and how they engage with customers—will fall behind.”
Russ Banham is a Pulitzer-nominated financial journalist and best-selling author.