Why do Digital Transformations fail?

There are many articles recently looking at why Digital Transformation projects are failing. A recent survey by Accenture among 1350 global executives, which collectively invested over 100 billions USD on scaling digital innovations, shows that 78% of companies struggle to see results. This confirmed the 2017 survey results from Bain that showed that only 5% of digital transformation projects were successful.

we learned that few companies win, most struggle and some are left with complete disappointment. This rings true especially as companies shift from improving the efficiency of their operations to generating new value for customers. 

Accenture, Retink, Reinvent, Realize

There are multiple cases of companies that have failed in at least part of their transformation General Electric, Ford, Procter & Gamble, Nike are just a few of the examples that come to mind. For GE the effort to build a digital business unit did not reach the desired results, because the company did not understand it had to establish a new business model and focus on the relationship with customers. Also, Ford started a Digital Service unit but failed to integrate it with the rest of the company, where it was needed. P&G instead failed to consider the entire market as it developed a digital investment. Nike failed to consider the important value of data, with its Digital Sports division failed to deliver upon expectations.

But why does this happen so often? What makes companies fail so frequently in a transformation that is so relevant and strategic?

A collection of challenges

The first two challenged have been identified in the above-mentioned Accenture research by Mike Sutcliff, Raghav Narsalay and Aarohi Sen and published on HBR.

1. Unspoken disagreement among top managers about goals: if senior managers’ don’t agree on the priorities, or on how to measure success, it is difficult for the organisation to achieve results.
2. A divide between the digital capabilities supporting the pilot and the capabilities available to support scaling it: this issue is frequently reported, and is often linked to the fact that it is easy to fund a pilot in an organisation with ad-hoc money. But it becomes more challenging to fund and support its overall adoption, especially when this requires the adoption of new methodologies (for example agile), a new organisation, new measures of success etc.

Professor Michael R. Wade at the IMD Global Center for Digital Business Transformation has identified five ways organisations fail in digital Transformation:

1. You focus on disruptors rather than disruption: way too often, companies focus on the companies that initiate a disruption (think of Napster, Airbnb, Uber) rather on the disruption itself.
2. You build a digital strategy, separated from the rest. Digital should be a key component of your strategy, not a separate one.
3. You pay too much attention to digital disruption: too many leaders focus their attention on digitally heavy industries, forgetting that, for example, one of the most disrupted sectors in recent years has been transportation and logistic.
4. You focus on digitising silos: taking something analogue today and making it “digital” is not a sound strategy. It would help if you rethought your organisation to be able to scale up Transformation.
5. You pursue agility without knowing what it means: agility is probably the single most abused term in the current business. The word is abused, and many organisational setups are agile only in words.

According to Peter Bendor-Samuel, CEO of consulting company Everest Group, there are three Exhausting Reasons:

1.  Lack of up-front commitment: with company leaders failing to sustain the scale of change that is necessary to support true TransformationTransformation. 
2. Failing to take an iterative sprint approach: many companies try to develop digital projects with a waterfall approach… which does not work.
3. Taking a technology-first approach: too many companies start their journey replacing their large legacy ERP solutions. This drives a level of “technical exhaustion soon” and often does not show positive impacts on the consumer side until a later stage.

McKinsey has identified five pitfalls in a 2018 article by Jacques Bughin, Tanguy Catlin, Martin Hirt, and Paul Willmott

1. Fuzzy definitions: lacking a clear and shared definition of what is digital, companies struggle to connect digitally to their business strategies.
2. Misunderstanding the economics of digital: many leaders still think that traditional economic principles apply to all aspects of digital. The truth is that digital usually is creating more value for customers than for firms, and this often delivers scary surprises to executives not ready to understand the novelty.
3. Overlooking ecosystems: digital means that strategies identified only within one company or industry, independently from its size, are going to fail. All success stories are about delivering “platforms” and building networks of relationships. But few companies are adopting this approach. 
4. Over indexing on the ‘usual suspects’: too many companies concentrate mainly on digital natives, trying to trail their journeys. But there are several success stories of traditional incumbents that have been successful in. Digitising parts of their business, and that is taking off fast. 
5. Missing the duality of digital: many companies venture in totally new digital business endeavours, forgetting their core business. Digital should be applied in both directions, and transforming the core brings many benefits quickly.

Thomas H. Davenport and George Westerman have also analysed why many investments in digital do not pay off in a 2018 HBR article, where they examined what led companies that seemed successful in being early investors in digital, but where not able to sustain their efforts over time.

Amid the excitement and uncertainty of a new technological era, it can be very difficult to distinguish between investments you need to make ahead of the market and investments that must be in sync with market readiness. 

Thomas H. Davenport and George Westerman, Why So Many High-Profile Digital Transformations Fail

Here the elements they identified:

1. Many factors influence companies’ success. Seeing digital as the sole salvation is not an answer, especially when the issues are around brand awareness or product desirability.
2. “Digital is not just a thing that you can you can buy and plug into the organisation”. It requires a thorough understanding of the impacts on the organisation, as Digital transformation alters the way itself you do business.
3. You need to calibrate your investment to the readiness of your customers, which links to the concept of avoiding a technology-first approach, but rather starting with the design of their customer in mind.
4. New business model can be dangerous. Although sexy, moving fully in entirely new business models dominated by digital is not easy. There is no single success case of traditional companies creating from scratch a new business model. So be careful.

One last piece of the puzzle comes from the book we have reviewed named The Technology Fallacy. The idea that Digital Transformation is just about Technology is plainly wrong.

Understanding, Strategy, Culture, Alignment: the key reasons for Digital Transformation that fail.

Summing up all contributions, it’s easy to identify fours groups of reasons why organisations fail in their digital TransformationTransformation:

1. There’s not enough understanding of what Digital is. The definition varies among executives and managers, with technology literacy often limited. With this premise, it is difficult to start a Transformation journey, and just delegating this to a CDO or CIO does not work.
2. The Digital strategy is disconnected from the rest. This is often a consequence of the first issue and, as we have seen, can take different forms.
3. It’s just a copy: meant as “we could copy the strategy of our competitor”. Or simply, “we do it because everybody else does”. This doesn’t work. Surroundings, events, culture, strategy are all different. Yet the idea of just copying is really embedded in many realities. The mirroring of a well-designed strategy will not get you to al the same results!
4. People and Culture are not included in Transformation. But we know that this doesn’t seem right and will not lead to lasting results. Culture is key and is really important to focus on an intentional design of its key components to enable such a transformation.
5. Organisational Alignment is where the most significant problems hindering success come from. Some organisation might come up with a shared definition of Digital; they might make Digital a core component of the business strategy, a focused change management plan takes into consideration people and Culture. But if you forget to sync in your budgeting process, align your policies, integrate your shared practices, you will stumble continually on small missteps hindering results. The absence of a shared operational governance model is one of the worst missteps in this journey.

Plus, whoever sees Digital Transformation as just a project limited in time, will have a problem, as we’ve seen already.

Conclusion

There is much detailed analysis of the reasons that can lead to successful transformations. My thinking is that what works for one company does not necessarily work for everybody. It’s not a world where Best practices really exist. But there is for sure strong learning on the pieces of the puzzle that, if missing, will derail your effort for sure.

Should HR have a role in this? Certainly, it needs to have a strong role exactly because organization design and culture are two key enablers for the transformation, and HR should lead in both fields. But we have also seen that I’m critical on the idea that HR can really lead the way.

I also think that a big issue resides in the usage of digital. Yes, technology is a big component of the overall economic and business revolution that is happening in the outside world, but it is not the only reason why organisations need to transform. There is also an issue with the word transformation, excellently captured by Bjarte Bogsnes in a tweet.

The biggest misconception is exactly this, the ideas that this transformation can be reduced as a project with an end date. Big learning that came out for example from the conference I recently attended in Amsterdam, where we learnt that telcos are digitally transforming since at least 11 years.

And you? What issues have you seen? Why do Digital Transformation Initiatives fail?

Note: this post was originally published on October 19, 2019. It was reviewed on December 21st, 2019 with a few more content items and alignment to other posts published on this blog.

Photo by Matthew T Rader on Unsplash