Why Every Company Needs a Digital Transformation Program

February 17, 2020 · Paolo Timoni

Digital transformation is a hot topic nowadays and executives in all industries are moving forward with digital projects to change customer relationships, internal processes and value propositions. However, more than 70 percent of digital transformation efforts fails. Organizing digital projects in a cohesive digital transformation program designed according to four proven change management practices will help companies be more successful.

Enterprises are expected to invest $1.3 trillion (USD) in digital transformation initiatives. Tragically, research tells us that 70% of these initiatives, worth over $900 billion of spend, will not reach their stated goals.

Steven Zobell, Forbes Technology Council, March 13 2018.

What is digital transformation

Digital transformation is the integration of digital technology into all areas of a business in order to fundamentally change how a company operates and deliver value to its customers. It’s also a cultural change that requires an organization to challenge the status quo, experiment, and quickly iterate when initial efforts fail to produce the desired outcome.

An important element of any digital transformation is, of course, digital technology. However, an even more important factor it’s the ability to transition away from long-standing business processes in favor of relatively new practices that are still being defined. Like for any change program, digital transformation is primarily a management challenge.

Nowadays digital transformation is imperative for all businesses, from the small company to the enterprise, across all industries. That message comes through loud and clear from seemingly every article, panel discussion, or study related to how businesses can remain competitive and relevant as the world becomes increasingly digital.

Why do most digital transformations fail

Implementing a successful digital transformation is very difficult. While googling “digital transformation” will reveal a large number of articles describing how important this is for all businesses, an equivalent number of articles will be returned reporting how and why most of these projects fail to deliver positive results.

Fatigue from continuos change is a top reason why more than 70 percent of digital transformations fail.

Peter Bender-Samuel, The Enterprises Project, Aug. 27, 2019.

While an exhaustive analysis of all possible challenges and reasons for failure is beyond the scope of this article, I believe that in addition to the lack of a defined timeframe for the change program there are five additional major issues that are worth mentioning:

  1. Lack of up-front commitment from senior leaders: understanding and agreeing to the concept and vision for transformation is not the same as committing to what it takes to succeed once the degree of cross-functional change and the resulting organizational issues become more evident.
  2. Unspoken disagreement among top managers about the goals: if top managers aren’t on the same page, it makes it difficult for their direct reports to agree on what to prioritize and how to measure progress.
  3. Failure to take an iterative stepwise approach: trying to come up with a detailed plan and business case for a multi-year transformation program is often overwhelming and result in paralysis by analysis. Breaking the project into shorter-term goals and adjusting the project based on the data-driven learnings generated by each step always produce a better outcome.
  4. Taking a technology-first approach: starting a digital transformation by big, expensive legacy-replacement activities is starting from the wrong place. It will use up too much money and people resources. A better approach is to start with understanding how the business needs to change to deliver improved experiences to customers and employees and then focus on implementing technologies that will deliver a part of that value early on.
  5. A divide between the digital capabilities supporting the initial pilot and the capabilities available to support the scaling of the program: when this problem isn’t addressed, companies are left between accepting long delays in scaling the project or attempting rapid, unwieldy change that produce more harm than benefit.

How to design a successful digital transformation program

To increase the chances of success companies need to group their digital efforts into a cohesive digital transformation program defined as a series of shorter-term goals and designed according to four proven change management practices:

1. Lead from the front

Digital transformation demands executive vision and leadership. Since the change to an organization’s business and culture will be profound, the management team as a group needs to be digitally savvy and able to use the right combination of carrots and sticks to move the organization through the next steps in its digital journey. With the executive vision and approval in place, disparate digital transformation initiatives can be consolidated, combined, prioritized, and properly coordinated for maximum impact.

2. Put strategy before technology

Strong executive leadership must be coupled with a compelling and time-boxed digital transformation strategy. Organizations should begin by clearly documenting the end state of what the digital transformation looks like, with particular attention to the pain points and experience of the customer and an emphasis on accelerating organic revenue growth. By beginning with the end in mind, organizations can pursue the overarching cultural and technological changes needed to support their digital transformation.

3. Encourage new cultural norms

Digital transformation demands that innovation and risk-taking be encouraged and rewarded. Organizations should look beyond the normal paradigms of their traditional markets and competitors, borrowing business models from other industries. Many things will be unknown, so the best way to bring clarity will be to try small experiments, gather feedback from stakeholders, plan the next small experiment, and repeat until an effective and sustainable strategy emerges.

4. Adopt an adequate performance-based compensation system

While risk-taking and experimentation are a necessary part of any successful digital transformation program, companies will need to make sure that they don’t become an end in itself and avoid being trapped in a chaotic endless cycle of change. The digital transformation program should have a very well defined timeframe, a clear measurement system to track the resulting value creation, and the senior leader and his or her immediate reports driving the effort should be compensated with a performance-based incentive system directly linking rewards to actual value creation.

Why is digital transformation important

Digital transformation is certainly a challenging and complex effort but it can have a big impact on value creation. Over a 4 year period, when both a market opportunity and a digital capability gap exist, executing a successful digital transformation program can drive an additional increase in EBITDA of 15% to 20% and a multiple expansion of 5% to 10% (relative to a base case without such a program). This will typically results from:

  • A cumulative 10% to 20% increase in organic revenue;
  • A 10% to 15% reduction in IT costs driven by cloud migration;
  • A 2% to 4% reduction in other operating costs driven by intelligent automation of selected activities and processes.

For a typical middle market portfolio company with total revenues ranging between $250M to $1B, achieving the above results will drive an increase in equity value at exit typically ranging between 30% to 50% with a proportional increase in the value of both management stock options and LPs and GPs returns.