Digital transformation
Digital transformation is the process by which an organisation adopts digital technology to create new products, services and operations, or to modify existing ones, by translating business processes into a digital form. Its purpose is to increase value through innovation, improved customer experience and greater efficiency.
The term is distinguished from two narrower ones. Digitisation is the conversion of analogue information into digital form, as when a document is scanned or a recording is captured as a file. Digitalisation is the use of digital technology to change an existing process, as when a paper approval chain becomes a workflow in software. Digital transformation is broader than either: it implies changing what an organisation does and how it is structured, not only the medium in which it does it. The Chartered Institute of Procurement and Supply defines digitalisation as the practice of redefining models, functions, operations, processes and activities by using technological advances to build an efficient digital business.
The distinction matters because a great many programmes described as transformation are in practice digitisation, and the literature on why such programmes fail returns repeatedly to that confusion. Converting a bad process into software produces a faster bad process.
Benefits, barriers and enablers
Benefits
Adopting digital technology can produce lower operating costs, faster response to customers, better use of data in decision-making, and the ability to offer services that were not previously possible. The Chartered Institute of Procurement and Supply has observed that digital capability supports transparency in supply chains and makes remote working practicable, both of which became considerably more valuable after 2020.
Other commonly cited benefits include the ability to personalise a service at scale, to measure what was previously unmeasurable, to enter markets without a physical presence, and to build products that improve as they are used because they generate data about their own use.
Barriers
The obstacles are more often organisational than technical.
Change management is the most frequently cited. Changes to processes affect how people work, what their jobs consist of and in some cases whether their jobs exist, and active resistance from workers is common and rational. Related to it is miscommunication between groups, which causes delay and in some cases complete failure.
Capability is a second barrier. Many organisations cannot develop the skills required internally at the pace needed, and buying them is expensive and difficult in a competitive labour market.
Culture is a third. Organisations accustomed to long planning cycles, detailed specification in advance and intolerance of failure struggle with methods that assume iteration, partial answers and the abandonment of things that do not work.
Legacy systems are a fourth and are particularly intractable in banking, insurance, government and healthcare, where core systems may be decades old, poorly documented, written in languages few people still know, and too central to be replaced without risk.
Enablers
The principal enablers are the organisation's resources and capabilities, the skills of its workers, the available technologies and its culture. Organisational resources and capabilities refers to the ability of an organisation to adapt to contemporary conditions, which depends on leadership attention, on funding that survives the period before benefits appear, and on a governance structure that permits decisions to be taken at the level where the work is done.
History
Digitisation, the conversion of analogue information into digital form using devices such as image scanners or audio converters, spread with the growth of computing from the 1960s and accelerated with the internet from the 1990s. Digital transformation is broader, and the term came into general business use during the 2010s as organisations began to treat technology as a matter of strategy rather than of operations.
A 2015 report found that the more digitally mature companies were using cloud hosting, social media, mobile devices and data analytics together, while less mature organisations were applying individual technologies to specific problems, a distinction that has proved durable: coherence across technologies correlates with results more strongly than the adoption of any one of them.
By 2017 one study found that fewer than forty per cent of industries had become digitised, although usage was high in media, retail and technology. As of 2020, thirty-seven per cent of European companies and twenty-seven per cent of American companies had not adopted digital technology in any substantial way. Over the period from 2017 to 2020, seventy per cent of European municipalities increased their spending on digital technology.
The coronavirus pandemic was the largest single accelerant. In a 2021 survey, fifty-five per cent of European companies said the pandemic had increased demand for digital technology and forty-six per cent reported that they had become more digital; half anticipated further increases, with the proportion higher among companies that had already been using such technology. A lack of digital infrastructure was reported as a constraint by a substantial minority. In a 2021 survey, eighty-nine per cent of African banks polled said the pandemic had hastened the digital transformation of their internal operations.
In 2022, fifty-three per cent of businesses in the European Union reported taking action or making investments to become more digital, and seventy-one per cent of companies in the United States reported using at least one advanced digital technology, similar to the average of sixty-nine per cent across European organisations.
Because there are no comprehensive datasets on digital transformation at the macroeconomic level, the overall effect remains difficult to assess, and assessments published as of 2020 described it as too early to judge.
Approaches
Discovery-driven planning
Approaches to transformation differ principally in how much they attempt at once.
One school treats it as an opportunity that must be seized quickly if the dangers of delay are to be avoided, on the reasoning that an incumbent facing a digital competitor has limited time and that incremental change will be outpaced.
An alternative, discovery-driven planning, has been shown to help solve digital challenges, particularly in traditional firms. It proceeds step by step rather than attempting an all-or-nothing change, and its distinguishing technique is to make the assumptions underlying a plan explicit at the outset and to test the most uncertain and most consequential of them first, at the lowest cost. Investment is released as assumptions are validated rather than committed in advance against a forecast that cannot be reliable.
The method suits digital work because the principal uncertainty in most transformation programmes is not whether the technology will function but whether customers will behave as assumed, and that question can be answered only by trying.
The TOP framework
Digital transformation is treated in the literature as a means of reducing the adverse effects of simultaneous and interconnected disruptions while strengthening the resilience and adaptability of organisations and of supply chains. The TOP framework organises this around three elements.
Technology enhances predictive power and responsiveness through the internet of things, large-scale data analytics, artificial intelligence, simulation, additive manufacturing, blockchain and digital twins. A digital twin, a continuously updated model of a physical asset or process, allows conditions to be tested without disturbing the real system.
Organisation concerns structure, governance and skills: whether decisions can be taken quickly enough, whether teams are assembled around outcomes rather than functions, and whether the organisation can learn from what it discovers.
People concerns skills, incentives and culture, which is where most programmes encounter their difficulties, since technology can be purchased and organisational charts redrawn while behaviour cannot.
Sectors
Banking and financial services have transformed further than most, driven by competition from firms without branch networks or legacy systems. Retail banking has moved substantially to mobile applications, payment has moved to cards and instant transfer systems, and the principal constraint in established banks is the age of core systems that process accounts and that cannot easily be replaced.
Retail has been reshaped by electronic commerce, by the use of physical shops as fulfilment points for online orders, and by the application of data to assortment and pricing. Retailers that treated online as a separate channel generally performed worse than those that integrated the two.
Manufacturing has applied sensors, analytics and simulation under the heading of Industry 4.0, principally to predictive maintenance, quality inspection and the reconfiguration of production lines.
Healthcare saw a decade of expected change compressed into months in 2020, as remote consultation moved from a marginal practice to a routine one. Progress on the harder problem, the interoperability of clinical records between institutions, has been considerably slower.
Government has pursued digital service delivery with results that vary widely between countries. Estonia, Denmark, Singapore and India are frequently cited as having built national digital infrastructure, in identity, payments and data exchange, that private and public services are then built upon, an approach sometimes described as digital public infrastructure.
Criticism
The term has attracted criticism on several grounds.
It is imprecise. Because almost any use of technology can be described as digital transformation, the phrase has been applied to projects ranging from the replacement of a finance system to the redesign of an entire business model, which makes claims about success rates difficult to interpret.
It is commercially motivated. Consulting firms, software vendors and system integrators have a direct interest in organisations believing that a large programme is necessary, and the frequently quoted statistic that seventy per cent of transformation programmes fail originates largely in material published by firms selling assistance with them.
It understates the human cost. Programmes that increase efficiency frequently do so by reducing the number of people required, and accounts written for management audiences tend to treat this as a benefit without examining where the displaced work goes.
It encourages technology-led thinking. The most common diagnosis in post-mortems of failed programmes is that the organisation began with a technology and looked for a use, rather than beginning with a problem, and that the resulting system automated an existing process instead of questioning whether the process was necessary.