Digital transformations are failing at an alarming rate – why?

Most projects are falling well short of their advertised objectives for one fundamental reason: companies are generally terrible at enterprise-wide change management

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Digital transformations always have a lot to live up to. The executives responsible for leading these projects must first convince their boards of the benefits, so they’re likely to fixate on the best-case scenarios that IT providers and consultants optimistically provide. Their clarion call is that going digital will create new revenue streams, improve productivity and reduce costs. But the results often aren’t quite so impressive.

A McKinsey & Co study covering 600-plus firms that had recently undergone digital transformations in 2022 quantified the gap between expectation and reality – and found it to be wider than many might have suspected. Only 20% of the companies achieved more than three-quarters of the revenue gains they had anticipated before embarking on their projects, while only 17% achieved more than three-quarters of the cost savings they’d hoped for.

Why are so many digital transformations falling far short of expectations? Experts put it down to basic flaws in how businesses research, commission and implement such projects.

For Ruben Schaubroeck, a senior partner at McKinsey, the fundamental problem is that many firms don’t understand how to embed a transformation across the whole organisation. 

“A lot of businesses simply aren’t structurally ready for what they’re trying to achieve,” he says. “Many will do something on the surface, such as developing an app that makes them look easier to work with, but underneath they haven’t rewired the company. This is about change management. Firms that want successful digital transformations must go deeper by ensuring that they have modern systems throughout their technology estate and equipping their people with the skills to operate them.”

Shifting the bottlenecks

Michael Rendell, partner at transformation consultancy MonstarLab, agrees. Many such projects aren’t helped by external IT consultants who predict exciting benefits that they won’t be around long enough to ensure, he says, but the main problem is that new technological capabilities are rarely delivered in a coordinated way across the enterprise. 

“The fundamental issue preventing many digital transformations from delivering their promised gains is that organisations are very bad at connecting strands,” Rendell says. “A company might put in a new system that works well in one area but later causes a problem in another part of the business that isn’t ready to work at a faster pace. Workflows can be accelerated, and new services and capabilities added, merely for customers to join a queue further down the line a little faster than before.”

Consider, for instance, an insurance firm that has adopted new tech that enables it to deal with incoming claim forms much more quickly than before. While the initial handling of claims has been improved through a digital transformation, the verification process – which still requires human input – has not. So, after a faster initial processing experience, the forms simply join the queue to be checked by a claims assessor, who continues working at the same pace as always. The firm hasn’t eliminated the bottleneck; it’s simply shifted it to the next stage of the operation.

The answer is to better align a process that’s being improved with what comes before and after it. For this to happen, digital transformations must be adaptable enough to solve the new problems that surface as they proceed. As Rendells puts it, such projects need to be “more directional than directed”.

Improvement comes in small steps

Another basic problem with many digital transformations is that, by pursuing the ambitious gains sought by their leaders from the conceptual stage, firms may inadvertently adopt strategies that are bound to fail.

Anthony Loy, vice-president of industrial digital transformation consulting at Schneider Electric, has run several projects, both internal and external, over the years. In his experience, companies are too focused on headline figures. This can cause them to pursue the wrong targets and/or become too cautious to activate new work.

Too many companies defer action because a new piece of technology emerges, rendering a project more expensive and delaying it

“There is a time for reflection, but there is a time to execute,” he says. “Too many companies defer action because a new piece of technology emerges, rendering a project more expensive and delaying it. You have to act promptly and then maybe include that new capability in a later iteration.”

Often, a company will focus on the wrong project in the wrong area, Loy observes. Organisations tend to be “attracted to the big projects that might deliver massive savings, but these are often too complicated and unrealistic. You’re better off going for several small gains than attempting a single huge one. Target saving 1% 20 times, rather than 20% once.”

He continues: “Companies often want to start in their showcase location, because that’s where they’re based, but HQ is typically not where digital transformations can make the biggest impact. In my experience, it pays to start further away.”

Digital transformations need to be more holistic and realistic

The general message from experts who have led digital transformations, both from within brands and through consultancies, is clear: companies must adopt a holistic approach. They need to use tools that connect functions so that, when a transformation is delivered, its success can be enjoyed throughout the organisation. Firms that fail to do this will tend to find that the new tech they have adopted will simply move bottlenecks further along a business process.

And business leaders also need to be more realistic about what such projects can achieve. They must question the benefits being touted. A digital transformation can deliver great value and a much better customer experience, but experts in the field warn that the proper groundwork must be laid before any of that can be achieved. 

It is far better to think of a digital transformation as an ongoing commitment than a huge standalone project. By making refinements in manageable steps, companies will start to derive value. As they do, they become more digital businesses, thereby providing a more conducive launchpad for transformation projects to come.