The Stages of Digital Transformation

Article ImageA quick glance at the list of unicorns (aka privately held startups that are worth a billion dollars or more) reveals a common thread of digital technology used to disrupt existing industries. These digitally native companies (such as WeWork in shared workspaces, Airbnb in hotels, and SpaceX in aerospace) are causing their competitors serious market share problems. Not surprisingly, digital transformation, which is the digital rewiring of legacy companies to become nimble, has become a trillion-dollar industry. However, there’s a minor detail that’s causing 70% of all digital transformation projects to fail: There’s mass confusion about what, exactly, digital transformation is.

Digital transformation is the number one priority for boards, and it hasn’t been lost on the IT industry. Suddenly, anything that is remotely related to automation and digitization is being branded as digital transformation. That ranges from the latest messaging/email systems to AI technologies. These technologies do have roles to play in digital transformation, but the roles vary from basic digitization (capturing orders on paper versus online or digitally) to replacing certain human decision making with robots (using AI to determine which customer complaints are important). However, digital transformation is more than technology.

We can’t forget the challenges related to people. The best thing we can do to help business leaders—who don’t often come from a technology background—would be to frame these various levels of technology and people transformations into simple stages. Creating a simple model would allow leaders to set appropriate goals for their respective digital transformation efforts (Do I want to just automate internal business processes for productivity or create entirely new business models?) and also help cut through the confusing hype of technology vendors (Does this IT product deliver productivity, or top-line growth or people transformation?). That’s the purpose of my five-stage digital transformation model.

During my 3 decades of global, I noticed that digital transformation fell into five clear stages. This model has two advantages. It helps cut through the technology hype by defining digital transformation as a spectrum of goals. Additionally, it provides a checklist to ensure success at each stage.

  • Stage one: foundation—This is where enterprises are actively automating internal processes (such as selling, manufacturing, or finance). Implementing most enterprise resource management systems—such as SAP or Oracle—or setting up an online portal to accept orders are examples of this. In reality, this is automation or digitalization—not transformation—but it provides an important foundation for digitization.
  • Stage two: siloed—You might see individual functions or businesses start to use disruptive technologies to create new business models. These efforts are siloed, and there is no overall company strategy driving transformation. The change is restricted to areas in which passionate leaders are pushing for disruptive change.
  • Stage three: partially synchronized—The owner, leader, or CEO has recognized the disruptive power of digital technologies and defined a digital future state. However, the enterprise has not completed transforming to a digital backbone or new business models nor has the agile, innovative culture become sustainable. This is where GE’s effort to become a data company stalled. It created a corporate strategy, but fell short in executing it.
  • Stage four: fully synchronized—This marks the point where an enterprise-wide digital platform or new business model has fully taken root. However, you are still one technology (or business model) change away from being disrupted. To be successful at this stage, it’s important to restructure the digital skills and capabilities of the organization.
  • Stage five: living DNA—This is the step at which the transformation becomes sustainable. Netflix is the best example of Stage Five digital transformation. It reinvented its business model from mail-in DVDs, to streaming media, to original content, and to global personalization—all within a period of 20 years.

Digital transformation is an opportunity of historic proportions. Business leaders can set up their organizations to win consistently and repeatedly if they are able to avoid the 70% failure rate of digital transformations. The ability to set clear goals and metrics for each year makes a huge difference. Ultimately, organizations deliver whatever is being measured.

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