CIOs love to claim they are conducting “digital transformations,” which are often digital optimizations in disguise. Here’s what digital transformation really means — and how to tell whether your organization is on the right path.
Ask 10 CIOs how they define digital transformation and you're likely to get 10 different answers with one common theme: a laundry list of technology projects intended to foster sweeping business changes. Even so, digital transformation isn’t so easily defined. Surely, digital transformation involves a radical rethinking of how an organization uses technology in pursuit of new revenue streams or new business models. And it also requires cross-departmental collaboration in pairing business-focused philosophies with rapid application development models. But for many organizations, digital transformation is really digital optimization in disguise, as new digital initiatives merely augment existing services. In the end, many who struggle to define digital transformation resort to the old adage: "They know it when they see it."
George Westerman, principal research scientist with the MIT Sloan Initiative on the Digital Economy, is one of those who knows digital transformation when he sees it. "Digital transformation is when companies use technology to radically change the performance or reach of an enterprise," says Westerman. The drivers tend to be disruption from market newcomers or innovation from rivals seizing the opportunity to win new customers.
"Customer expectations are far exceeding what you can really do," says Westerman. "Boundaries between office and work and customer and supplier are also morphing. That means a fundamental rethinking about what we do with technology in organizations."
Embracing that broad definition, CIOs can claim the creation of anything from corporate mobile applications that boost employee productivity to customer-facing tools such as chatbots and ecommerce websites are part of a digital transformation. But most CIOs have been doing some or even all of these projects for years. Isn't digital transformation essentially the modern version of IT?
Yes, but with some caveats. Westerman says that CIOs once worked on one or two Big Bang IT siloed projects at a time. But CIOs are no longer bound to their corporate versions of Chutes and Ladders. Cloud and mobile technologies have helped them break free from the data center and desktops. The falling cost of compute, storage and bandwidth have also facilitated the rise of social, analytics, artificial intelligence and internet of things (IoT) technologies. CIOs today rarely worry about technology limitations; they worry about what to eliminate from their massive menus.
Pairing business-focused philosophies such as design thinking, aka human-centered design, with rapid application development models such as agile or devops, CIOs are teaming with chief marketing officers, product managers, and other functional heads to build digital services intended to boost customer engagement.
Consider the soaring interest in virtual assistant technologies. The most popular today are chatbots. Using natural language processing and other AI capabilities, the chatbot model governing customer service calls is now available via a mobile application, perhaps triggered when smartphone sensors recognize its owner is walking by a favorite retailer. On the back end, powerful analytics serve up recommendations via the chatbot. In this display of combinatorial innovation, human-centric software — serving as a proxy for a brand — is engaging with humans, trying to lure them into the store. Here, a multifaceted technological effort, pulling across business and technology domains, has established a new digital pathway directly between the customer and the organization’s information architecture. That's just one transformative example in a digital ocean of possibilities.
Digital transformation or optimization?
Here's the dirty little secret: What many CIOs describe as a digital transformation actually isn't. Mobile apps, AI-based chatbots, analytics and other digital services are often used to augment existing services. Just ask Gartner analyst Hung LeHong, whose job includes sussing out whether companies are conducting a "digital business transformation" or a "digital business optimization."
"In a nutshell, we reserve digital business transformation for companies pursuing net new revenue streams, products and services and business models," says LeHong. This can include the creation of new digital business units or digital acquisitions. Sometimes the new business models can lead to ventures in adjacent markets or new industries.
General Electric, with its "digital twin" industrial Internet initiative to sell locomotive engines and jet turbines as a software service, is orchestrating a digital business transformation, LeHong says. Bold as GE's digital strategy is, it’s what a company does because it fears disruption or because it intends to disrupt its industry.
GE is among the 10 percent of companies Gartner has surveyed that is actually doing this form of transformation. The other 90 percent are conducting various forms of "digital business optimization." It entails using digital tools to "supercharge" productivity, bolster generation of existing revenue streams and boost customer experience. According to the Gartner 2017 CEO survey, 42 percent of respondents plan to use digital to optimize rather than transform their business.
"When we ask clients to put pencil to paper, they're optimizing" with digital, LeHong says. For example, Shake Shack this year launched a mobile app that enables mobile ordering, ostensibly to reduce customer wait times. ServiceMaster has tapped a mobile platform to improve the way it connects contractors with customers.
LeHong says part of his job is to meet with CIOs and the business executives ultimately responsible for driving the strategy, such as a CEO, COO or CFO. Getting IT and business leaders together helps the companies "double click" on whether they are transforming or optimizing their businesses. Once they answer that question, they can appropriately tailor and set their expectations.
Digitial transformation requires business vision
CIOs can’t trod the digital transformation alone, says Westerman. Instead, he adds, CIOs should align themselves with any executive with enough clout to negotiate the changes required and get the requisite buy-in from the board of directors as well as the rest of the business. “You need technology on one axis while the other axis has to include the ability to envision and continuously drive change,” Westerman says. “Put those two together and you get [companies that are] digital masters. If you only have one you're going to be off diagonal.” Westerman, who wrote a book on the subject, Leading Digital: Turning Technology into Business Transformation, says that digital masters are 26 percent more profitable than their industry competitors.
Of course, not every CIO is collaborating with Gartner or has the benefit of courting MIT academics for advice. So how do you know if what you’re doing constitutes a digital transformation? The key lies in the other “D” word.
Ask yourself whether what you're doing is disruptive to your business and to your industry. If you can say yes with a straight face, you may well be conducting a bona fide digital transformation.