Everything You Need to Know for a Successful Digital Transformation
The term digital transformation can mean many different things to different people.
According to Ray Wang, principal analyst and founder of Constellation Research Inc., digital transformation is “the methodology in which organizations transform and create new business models and culture with digital technologies.”
Wang goes on to flesh out his definition, saying that any business that expects continued growth in the future needs to have the tools, people and processes to take advantage of modern technology. Also keep in mind that digital transformation is currently ongoing in every sector every industry, as well as in universities, research labs, and local, state and federal government agencies, so those who refuse to transform will inevitably be left behind.
Digital Transformation Is Not Cheap
The large majority of successful digital transformations require significant expenses to undertake. You really can’t “do” digital transformation without a good bit of new hardware and software, as well as new employees with the requisite skills to get optimum value from these new technologies.
Constellation Research notes that firms all across the globe spent over $1.2 trillion on digital transformation in 2017, almost 20% more than they spent in 2016. Moreover, Constellation projects that total investment in digital transformation worldwide will continue to move upward at a good clip to reach $2 trillion by 2020.
ROI Does Not Tell the Whole Story
The costs of digital transformation may be hard to justify if digital transformation is not understood by all involved to be a process for developing new products and business strategies so the enterprise can compete in the rapidly evolving here-and-now as well as the future.
Business investments today are usually measured on the basis of payback period, internal rate of return (IRR), or some type of break-even analysis. At its most basic level, ROI is taking the profit from the investment and dividing that by the cost of the investment.
That means for many standard ROI calculation methods used today, digital transformation often appears to look like a poor investment. But that is almost always short-sighted thinking.
Think about it. If you spend a couple of million dollars for the top-of-the-line inventory management technology, it typically looks on paper that the digital transformation has a notably lower short-term ROI compared spending two million dollars on new product development or even a one-off marketing campaign for immediate increase in sales and a boost to the bottom line.
That said, it is pretty obvious that relying on aging systems to support the business activities of the future is a losing strategy. At some point, the lack of investment in the future will negatively impact the enterprise.
Digital Transformations Create Savings Throughout the Business
If carefully thought out and executed, a digital transformation will nearly always save your business money in the long run despite the poor ROI projections.
The transformation itself as well as the cost savings ramify throughout the enterprise over time. Eventually, the various divisions of your business will work together to improve processes, and take steps such as bypassing inefficiencies and automating steps in business processes that need expensive and time-consuming effort from employees or suppliers.
Moreover, IT capital expenses are typically reduced over time and those expenses gradually transfer to the operating budget as the business takes advantage of the convenience of the cloud.
Digital transformation also dramatically revamps the product development cycle. New tools allow for greater innovation, which results in shorter design cycles and less development time.
With a carefully planned digital transformation, you can also create a variety of new feedback loops spanning the enterprise, so you now own several useful new data sets such as chat conversations, videos, social media posts, and point-of-sale transaction data. These new data sets frequently lead to valuable insights and improvements to products and processes.
Almost all of the benefits flowing from digital transformation described above do not fit well into traditional measurements of ROI.
Employees with the Right Skillsets Is Critical to a Successful Digital Transformation
For many businesses, it is actually less of a challenge to purchase and integrate the new platforms and software required for your digital transformation than it is to find employees with the right skill sets to manage the new technology.
This means that digital transformation requires developing a new talent strategy. According to digital transformation experts such as Ray Wang, managers of businesses today are best off searching for talent with a general aptitude for learning. That is because technology needs change rapidly in the 21st century, and in many cases, the necessary skills needed to support new software and platforms can be learned in months or even weeks. This makes the relatively rare ability to easily learn new skills much more important than even a high level of expertise in a given technical skillset.
The lesson to be learned is that you really need to develop effective learning systems to enable employees to skill up for their new tools at the same time you actually purchase the tools (if not before!) Not having self-paced learning systems in place so your team can all get on the same page when you make the transition is a common problem in executing a digital transformation. But thinking ahead to provide your team with learning tools to help them get a grip on their new jobs greatly increases the odds of a successful long-term digital transformation project.