Recent events have highlighted the significance of agile business models supported by flexible networks and technology. Digital transformation, already a key strategic initiative, has taken on heightened importance with developments such as the COVID-19 pandemic and emerging work practices.
According to a recent IDC study, direct digital transformation (DX) investment growth rates are accelerating, up to 16.5% Compound Annual Growth Rate (CAGR) for 2022-2024. Also, for the first time in history, most corporate organizations have a digital transformation strategy across the enterprise, according to Shawn Fitzgerald, research director at Worldwide Digital Transformation Strategies.
The most plausible reason for this is the success businesses have experienced so far through DX. So what is digital transformation, what will it look like in 2022, and what factors will drive the creation of a successful DX strategy?
What is digital transformation?
Digital transformation is a strategic change that allows companies to adjust their core services, how they operate, and how they deliver value to customers. Although digital transformation has been discussed for many years, a common definition of the term, aside from "changing things," has yet to be established.
New architectures, such as microservices, new processes, such as DevOps, and new technology, such as containers and application programming interfaces, are all sometimes referred to as digital transformation. When something can be interpreted in a variety of ways, it effectively means nothing. Digital transformation isn't a one-size-fits-all solution. It is a concept that each organization must define for itself. The companies that succeed in digital transformation are those that have a clear apprehension of their own objectives and culture.
As noted by Jim Swanson, who has served as CIO at both Monsanto and Johnson & Johnson,
“Digital is a loaded word that means many things to many people… Understanding what digital means to your company – whether you’re a financial, agricultural, pharmaceutical, or retail institution – is essential.”.
Simply presuming, however, that embracing digital technology in any way will transform an organization is a pitfall that frequently leads to hasty digital changes and investments with ineffectual outcomes. Instead of merely becoming digital, the goal of a digital transformation is to reimagine where value is created and how business models are built. So the challenge that most companies have yet to face is how to fully exploit the various kinds of value that digital technology has to offer.
Why does digital transformation matter for companies?
For years, digital transformation has been a buzzword in IT circles, and it's expected to play a bigger role in enterprise planning in 2022 than it has in the past. It's easy to grasp why: businesses that embark on a digital transformation journey benefit from increased efficiency, higher productivity, and lower operating costs, among other things.
Digital transformation equips companies to deal with the highs and lows that would otherwise cripple them. The pandemic has proved to be an excellent example of why businesses should not overlook digital transformation.
In 2020, the COVID-19 pandemic changed the way that we shopped, socialized, worked, and played. Supply chains shut down, lockdowns made it difficult to manage staff, and land-based businesses were forced to roll down the shutters and wait for the storm to pass.
The pandemic rendered some businesses completely inactive and forced others to adopt creative solutions in order to operate remotely and keep up with the shift in consumer behavior to digital channels. The businesses that had already embarked on their digital transformation journey were able to adapt more easily than the ones that had not and get ahead of the curve. New technologies allowed them to pivot their focus, fix the supply chain, and ensure that the wheels continued to turn.
Moreover, the companies that have managed to acquire better overall technological capabilities, talent, leadership, and resources, are already showing better economic performance, according to the McKinsey Global Survey on digital strategy. These top performers have already taken more actions than their peers to achieve their technological and transformational objectives, making it increasingly difficult to keep up with them. Furthermore, the survey's findings show that these leading companies are more willing to invest in talent, increase R&D spending, and establish new partnerships, the latter of which is becoming overly important as increasingly, value creation comes from outside the company rather than within.
Digital transformation is currently mostly used to improve the efficiency of existing operations. Of course, digital transformation can and should aid operational efficiency, and this is often the start, but it shouldn't end there. Digital investments can position the company to collaborate at scale with users, developers, and merchants while focusing on value creation. This would allow businesses to go beyond the constraints of using only the resources that they control and instead harness and orchestrate resources that others control.
Overall, in today's digital, global and hyper-connected world, the constant emergence of new market entrants, off-site mobility, and continuous connectivity demand both social and technological changes. Boards are pressured to inform the market about their company's digital technology investments and their role in helping them keep up with competitors. At the same time, CFOs need to make larger and faster decisions on investments in digital technologies, whereas chief human-resources officers need to hire new types of talent. All that tells us is that digital transformation is not an option; you can either bow to the inevitable and embrace it as the turning point necessary to escape the comfort zone, reinvent yourselves and get to fight another day in this world overrun by technological advances or you tap out and lose.
The Digital Transformation Journey
What facilitates transformation, presents a clearer picture of a company’s digital fitness, and reflects its business priorities is how different tools and solutions, if any, are woven throughout an enterprise.
The following maturity stages can serve as a blueprint to help you assess your as-is-state and determine where you need to be on the road to digital transformation.
Step 1: Business As Usual
The first step is technically the pre-digital transformation stage. This is the point at which businesses continue to operate as normal, failing to see the potential pitfalls that lie ahead and openly accepting the status quo.
Think about Blackberry prior to the launch of the iPhone; Blockbuster before the streaming revolution; Polaroid before everything went digital. These companies were very profitable and successful, but rather than accepting the fact that times were changing, and they needed to adapt, they dug their heels in, fought against the trends, and hoped that everything would blow over.
If Blockbuster had embraced the world of streaming, the modern on-demand landscape would look decidedly different. If Polaroid had anticipated its own decline, it could have led the digital camera revolution instead of being forced to watch from the shadows.
In many ways, the first stage of digital transformation is like the last stage of grief: acceptance. Because only when you accept that it’s time to make a change will you take the first step and make those important changes.
Step 2: Present and Active
The second step occurs after businesses have accepted the need for a digital technology transformation but haven’t quite coordinated their efforts. They are excited, keen, and hopeful, but their lack of experience and focus means that everything is a little messy.
Oftentimes, different departments will be trying to do their own thing. Essentially, the right leg is acting independently from the left leg and yet the body is trying to move in a straight line. It’s chaos, and so it’s important to find some solidarity and ensure that those departments are acting as a whole.
Step 3: Formalized
Experimentation is key in any strategic digital transformation. It’s how they discover which technologies and methods work best. It’s a time for innovation and creativity, a time when failure should be embraced as a tool for learning.
The third step may also require substantial changes to the company culture, including the introduction of more tech experts and visionaries who can take the business to new heights.
Step 4: Strategic
For a company to reach the fourth stage of the digital transformation, it means they have likely faced some difficult truths and have made some changes at multiple levels of their organization.
They have now moved toward developing a digital transformation roadmap and have acknowledged the benefits that digital investments and collaboration can bring.
The business is on the precipice of substantial change.
Step 5: Converged
Hope, ambition, and change converge to take the business down a transformative path. At this stage of the digital transformation process, the business has found the team that will take it forward and has a clear plan of action ahead of it.
It’s ready to go where it needs to go and has overcome the many roadblocks that stood in its way.
Step 6: Innovative and Adaptive
Digital transformation is achieved during the sixth and final step. The roadblocks are a fleeting memory, the cultural and technological changes that were once problematic have now been cemented, and all employees are comfortable not only working with digital technologies but also applying them to solve problems, and drive innovation and growth.
Of course, the increasing demand for and confidence in digital transformation opportunities doesn’t mean that every organization’s pursuit of innovation is successful. While we’ve known for years that a holistic approach to transformation is more conducive to lasting change, the average success rate has in fact remained persistently low. The results of the latest McKinsey Global Survey, confirm that success remains elusive as less than one-third of surveyed companies that had been part of a transformation in the past five years have been successful at both improving organizational performance and sustaining the improvements over time.
Fundamentally, the reason behind the unsuccess of most digital transformations is that although most digital technologies provide opportunities to achieve operational efficiency and customer intimacy, if people do not have the right mindset to change and current organizational practices are flawed, DX will only magnify these shortcomings.
Transformation is more than a set of processes and technologies. It is a mindset. So, before deciding what digital tools to use and how to use them, successful transformations focus on shifting the mindset of the people in the organization, as well as the organizational culture and processes. The technology is thus driven by the vision for the organization's future, not the other way around.
All in all, successful digital transformation requires a more holistic approach, which can only be achieved when people, processes, and technology all work together.
What is a digital transformation framework and how to use it?
Most teams today have difficulties in combining strategy with the execution of the best solution for a variety of reasons. Strategy definition is not a one-dimensional process. Since the future is full of uncertainty and new information is constantly being discovered, it is impossible to predict it. To complicate matters even further, strategy and execution are frequently divided among teams, which makes it more difficult to learn new information. We also have a tendency to trust our instincts or knowledge without seeking confirmation, but our biases can skew our intuition, even if we have years of experience in a field. Thus, solutions are often defined and pursued before the opportunity space to be fully understood.
As a digital transformation consulting company, Design Thinking is at the heart of our product and service design process at Prime. Design Thinking's exploratory nature aids us in getting to the root of our clients' problems.
We follow the Double Diamond framework which divides the Design Thinking process into four distinct phases:
A trigger sets the tone for the journey. This could be an idea, a revelation, a market shift, or a macroeconomic event such as the pandemic. In this phase, we seek to understand the current situation before responding to the trigger with a vision or a plan. This is a divergent and exploratory phase in which we are seeking to raise new questions, discover customer behavior and business drivers through observation and inquiry, and identify opportunities for further consideration.
Once we gain some understanding, we begin to synthesize knowledge into insight, focusing on the most compelling opportunities to pursue. This phase is about converging on a vision and defining the first expression of our plans for the future. The viability and impact of our plans should then be evaluated, and we need to determine how to measure success. The execution of a solution or in this case, a digital transformation, is guided by this initial strategy, but the strategy is never complete. When new discoveries are made, the strategy should adapt and evolve.
Now that we've established the vision, it's time to look into the best possible solutions. We know what we want to accomplish, and we will figure out how to get there by experimenting with and validating various options. This is an iterative and divergent activity. The right solution is discovered rather than details and requirements being defined.
Finally, delivery entails experimenting with various solutions on a small scale, discarding those that do not work, and improving those that do. Prepare for setbacks, pivot when necessary, and keep collecting data. As a result, your knowledge will grow, your understanding will deepen, and new discoveries will influence a continuously evolving strategy.
The Double Diamond framework can be used to determine which methods and activities are best suited to pursue a problem or opportunity. The model scales well to fit a variety of scenarios. Solving problems and developing solutions quickly during a crisis can be difficult, which is why design thinking should be at the forefront of both adapting to new situations and improving products, services, or processes.
Design thinking is an iterative process that allows stakeholders to evolve their thinking, discover new patterns, and generate new innovative ideas. Following the steps outlined above will assist businesses in identifying the sweet spot for innovation.
What trends are driving digital transformation strategy right now?
The trends that are expected to unfold in 2022 do not necessarily imply that businesses should rethink their DX strategies. Instead, these trends foreshadow future challenges and opportunities. The majority of them have been in the game for some time, but recent challenges with security and other business priorities may shift digital transformation perspectives in their direction this year.
1. Remote work evolves from a temporary shift to a more permanent pervasive reality
Market research suggests that the workplace as it used to be is never coming back. The pandemic has thrown conventional thinking about work into disarray - perhaps permanently. The workplace is no longer considered a location and according to a global survey conducted by Economist Impact, over 75% of respondents believe that hybrid/flexible work will be the future for their companies in the next three years. As a result, in 2022, business leaders will need to figure out how to create a new work environment that will keep employees happy and productive after COVID.
2. Preparing for the unexpected necessitates more automation
COVID-19 caught everyone off guard, and it's only natural that businesses want to avoid a repeat of the same level of chaos. Artificial intelligence combined with automation can finally make this possible, by dynamically combining relevant data and alerting workers to take action in advance of an event. Therefore, companies are expected to continue investing in machine learning and artificial intelligence technologies that would be seamlessly integrated into infrastructures, frameworks, applications, and services to supercharge and automate data processing and insights in order to standardize AI engineering practices that capture business value.
This can have a variety of effects on different business units. In sales and marketing teams, well-structured, high-quality granular data on prospects and customers may be used to train models that show which leads are most likely to convert, A/B-test marketing campaigns and content, and indicate what drives sales and revenues per channel. In customer service, representatives can be alerted to reach out to potentially angry customers before they call in.
At Prime, for one of our clients, we introduced a BOT solution that can be connected to a call when a customer service representative is in a call room with a customer to listen for keywords. The entire conversation is processed in real-time, and the keywords that the BOT should detect can be customized using third-party software. When a certain word is detected, the BOT displays information about the respective keyword on the screen of the customer service representative. This eliminates the need for the representative to search for information during the conversation, which facilitates and speeds up the process. In addition, sentiment analysis is performed to detect when the words that the customer uses are negative. When this happens, a red flag is raised and the BOT notifies the supervisor of the respective customer support representative that the customer they are talking to is not happy with the conversation and provides the supervisor with two links through which he can either connect to the customer support rep via chat or directly join the call.
3. Consumers demand digital-first experiences
According to Forrester, 8 out of 10 consumers will see the world as entirely digital in the next 18 months as a result of how they adopted technology in the previous 18 months. That means everything from mobile apps to chatbots must function as seamlessly and consistently as possible.
One critical factor in creating seamless digital experiences for everyone is adopting a composable enterprise architecture that allows organizations to access data, expand their digital capabilities, and ultimately drive innovation faster. As a result, it's not a bolt from the blue that cloud solutions are being prioritized as a means of achieving long-term success in the post-COVID era.
Also, businesses that have a flexible and secure network infrastructure can be more agile in their digital transformation strategy as their needs change. Few people could have predicted the digital transformation five years ago, so building network foundations for future innovation now is the best way to plan for the next five to ten years.
4. Cybersecurity continues to be a key factor in any strategic business decision
Тhe shift to remote working, the increased complexity of cloud and distributed architecture, as well as the rise of cyberattacks, have raised cybersecurity concerns to the forefront of digital transformation. Enterprises are now under increasing pressure to provide secure access to users across applications, and devices. And with good reason. Following an onslaught of ransomware attacks and data breaches in recent years, board members have become increasingly aware of their vulnerability. According to PwC’s 2022 Global Digital Trust Insights report, more than half of organizations anticipate an increase in reportable incidents in the coming year, compared to 2021 levels.
As a result, security is no longer an afterthought, but rather a business necessity and investments continue to pour into cybersecurity. According to PwC's 2022 Global Digital Trust Insights report, 69 percent of respondents expect their cyber spending to increase in 2022. Spending on information security and risk management is estimated to reach $172 billion in 2022, up from $155 billion in 2021 and $137 billion the previous year, according to Gartner.
Digital Transformation: Summary
- Digital transformation is a strategic change that allows companies to adjust their core services, how they operate, and how they deliver value to customers.
- Digital transformation isn't a one-size-fits-all solution. It is a concept that each organization must define for itself.
- What facilitates transformation, presents a clearer picture of a company’s digital fitness, and reflects its business priorities is how different tools and solutions, if any, are woven throughout an enterprise.
- There are 6 steps in the digital transformation journey. It begins with a realization that something needs to change and ends when all employees are not only comfortable working with digital technologies but are also applying them to solve problems and drive innovation and growth.
- The Double Diamond framework can be used as a blueprint for digital transformation that would allow stakeholders to evolve their thinking, discover new patterns, and generate new innovative ideas.
- Hybrid work, seamless digital experiences for everyone, increased automation to prepare for the unexpected, and secure access across users, applications, and devices are among things shifting digital transformation perspectives in 2022.