What is digital transformation? A necessary disruption

Once a vanguard business strategy, digital transformation has become a perennial objective for business survival.

Most CEOs (72%) continue to prioritize digital investments, according to the 2022 CEO Outlook report from KPMG, in part due to concerns about emerging and disruptive technology, a top three risk to organizational growth. Executives know that if their businesses don’t continually evolve through digital transformation they risk being overtaken by competitors or shut down by startups that are more efficient, more effective, and more engaged with their customers.

Digital transformation is the integration of digital technologies into all aspects of business operations. That means identifying how to use technologies to deliver new products and services, to improve existing products and services, and to streamline processes.

Moreover, digital transformation means doing all that work on a continuous basis.

Digital transformation defined

Digital transformation has become a catchall term for describing the implementation of digital technologies to re-engineer existing processes or develop new services that better engage customers, support employees, improve business operations, and drive business value to the organization’s bottom line.

Digital transformation became a key strategic initiative in the mid-2010s, as mobile communications, cloud, data analytics, and other advanced information technologies took off, enabling businesses and consumers to easily engage via digital channels.

Digital transformation has remained a top objective ever since, having accelerated in 2020, as work, commerce, and everyday activities shifted online in response to COVID-19 lockdowns. And it continues at a rapid clip post-pandemic as artificial intelligence and immersive web technologies bring promises of new opportunities and disruptions.

“Digital transformation is the ability to adopt and apply technologies properly to continuously evolve and reinvent the enterprise for growth or competitive strategy,” says Tim Smith, a principle at professional services firm Deloitte.

Additionally, digital transformation marks a rethinking of how organizations use technology, people, and processes in pursuit of new business models and new revenue streams – growth opportunities that themselves are driven by changes in customer expectations for products and services.

“The end goal of digital transformation is to be more intelligent and improve total experience,” adds Sheryl Kingston, research director at 451 Research, a part of SP Global Market Intelligence.

Ideally led by the CEO in partnership with CIOs, CHROs, and other senior leaders, digital transformation requires cross-departmental collaboration to pair business-focused philosophies with rapid application development models.

Why digital transformation matters

The arrival of the commercial internet in the late 20th century followed by high-speed bandwidth and mobile technologies in the first decade of the 21st century drove earlier waves of digitalization, as people started to shift from in-person, analog interactions to online transactions.

Cloud computing, which enables anywhere, anytime access to applications and data, along with the smartphone largely drove the next wave of digital transformations. Companies that didn’t invest in modern technologies and digitalize their processes couldn’t compete, as entire industries were disrupted by new business models that leveraged cloud computing and emerging analytics capabilities to deliver improved and entirely new services and experiences. Amazon became a metaphor for markets upended in upstarts digitalization wake.

Today, companies must continue to re-engineer their processes as technologies evolve, and enable new ways to interact with customers, employees, and business partners to remain relevant and profitable.

“We live in a digital age where technology is embedded in every aspect of our lives. Companies are not exempt from that. They must embrace technology because what they stand to gain runs the gamut from mere survival and efficiency to an incredibly rewarding reimagination of their business,” says Parthiv Shah, global managing partner for cloud strategy and digital transformation Tata Consultancy Services, who points to a TCS survey in which 37% of respondents said they made progress toward cloud-enabled innovation in the form of new business models, underlining the growing power of cloud to drive new revenue.

Other research confirms the imperatives for engaging in digital transformation.

S&P Global Market Intelligence has found that digitally driven organizations outperform digitally delayed ones across a host of key metrics, including customer satisfaction, average time to respond to customer inquiries, customer lifetime value, customer acquisition, and marketing ROI.

“Companies engage in digital transformation to make sure their customers and employees are happy, to make sure they have efficient supply chains, and to make sure they operate effectively,” Kingstone says. “And companies that are more advanced, that have a culture of disruption, have better results, higher credit worthiness, and higher return on equity.”

Digital transformation strategy

To succeed with digital transformation, organizations must identify what processes they need to transform, create a vision for their end state, and determine what technologies will support that objective. They must then develop and deliver the supporting digital capabilities in an agile fashion with incremental releases and feature adjustments based on user feedback.

“A good digital transformation strategy is one that delivers incremental value within a comprehensive and formal framework,” Shah explains. “You need to crawl before you walk, and you need to walk before you run. This gives stakeholders the opportunity to digest the change and appreciate the value.”

Shah points to his firm’s multi-horizon approach as an example of a digital transformation framework.

He says the first step, or Horizon 1, “is about laying a strong digital core with cloud, as the unifying digital fabric. Organizations focus on modernizing the core technology — infrastructure, applications, and data — while migrating workloads to the cloud to achieve greater business elasticity and operational resilience.”

Next, “Horizon 2 is about innovating business models. Organizations combine the power of digital technologies to enable transformation at an operating model level, reaping significant benefits from innovation and improvements in customer experience and business insights,” according to Shah.

Then there’s Horizon 3, which Shah says “is about changing industry structures and driving exponential value by orchestrating or participating in partner ecosystems. These ecosystems can consist of both traditional and nontraditional players, including competitors, to enable higher-order transformation.”

Experts stress the need to ensure that digital transformation initiatives are aligned with corporate objectives and the company’s strategic vision.

A 2023 Deloitte report quantifies the importance of that alignment, noting “the hardest part of any transformation is not deciding whether to embark on it; it’s understanding whether you’re seeing distinctive returns on your investment. Organizations often struggle to determine which actions drive the most impact and which investments yield the most enterprise value.”

In a 2022 article for Harvard Business Review, authors and business leaders Nathan Furr, Andrew Shipilov, Didier Rouillard, and Antoine Hemon-Laurens discussed what they see as the four pillars of successful digital transformation.

They listed IT uplift, digitizing operations, digital marketing, and new ventures, writing that “which pillar is the right starting point for your company depends on your context, needs, but also your digital maturity. Typically, companies tackle the first pillars we describe near the start of their digital transformation journey, although as they mature they may continually upgrade to add additional pillars.”

Furthermore, they wrote that companies should address what each pillar entails, as well as its benefits, required capabilities, C-suite sponsors, and key performance indicators (KPIs).

Digital transformation examples

Examples of successful transformation abound; here are three of note:

Sysco, a multinational food distribution company, morphed its pandemic-era pivot, which included helping its customers make their businesses more digital, into a post-pandemic hypergrowth strategy by leveraging analytics, AI, and other digital technologies. Its “Recipe for Growth” blueprint, announced in May 2021, calls for the company to grow 1.5 times the size of the entire industry — an ambitious plan that earned Sysco a 2023 CIO 100 Award for innovation and IT leadership. “The Recipe for Growth has everything to do with how we run the business — the cloud and the underlying technology, how we deliver software and all the fundamental foundational capabilities that underpinned our strategy,” says Tom Peck, executive vice president and chief information and digital officer at Sysco.

Over the past decade Domino’s Pizza, one of the world’s largest food delivery companies, transitioned away from legacy processes and technologies to reinvent how it engages and serves customers. This shift allowed it to successfully compete with digital-native food delivery platforms, streamline operations, and foster innovation. Key features of its ongoing digital transformation efforts include delivery tracking and personalized marketing campaigns, successes enabled by its modernized tech stack, analytics, and AI.

Deere & Co., better known as John Deere, has delivered its recognizable green tractors as well as other construction, farming, and landscaping equipment for nearly 200 years. But it has also been widely recognized for its use of data, analytics, and other digital technologies to deliver new products and services. For example, the company embeds AI into its farming equipment, enabling it to tell the difference between weeds and crops. It includes automation and intelligence into its machines, allowing them to operate without drivers. And it delivers data-driven insights to its customers in the fields, helping landowners and operators more effectively and efficiently manage their fields and forests. Of its commitment to digital innovation, chairman and CEO John May says: “We don’t create tech for tech’s sake. There’s purpose behind everything we do, so that our customers have the tools they need to tackle some of the world’s greatest challenges.”

Digital transformation technologies

Cloud computing is the foundation of a digital organization, experts say, because it delivers agility and scalability to meet changing demands as well as the anytime, anywhere access that customers and workers expect.

Cloud computing also supports the ever-growing list of digital tools — from AI to Web3 — that organizations need to support ongoing digital initiatives.

Now, in 2023, companies are using analytics and intelligence capabilities as well as IoT and edge computing. They’re investing in automation and hyperautomation technologies. And they’re deploying low-code/no-code platforms so that all workers, and not just technologists, can develop software to support and transform business processes.

Some are also investing in next-generation internet technologies. Nearly 75% of companies surveyed for the 2023 State of Digital Transformation Report from tech company Prophet said they’re either adopting, piloting, or exploring blockchain, the metaverse, and other Web3 technologies.

Most of the technologies supporting digital transformation today are data-centric, making data platforms — as well as a strong data management program overall — central to successful digital transformation strategies.

In fact, experts say data — and the ability to access and analyze data — has become an essential component of transformation today.

“Successful digital transformation is around the fluidity of the enterprise data as an asset across enterprise operations,” says Michael Bradshaw, CIO of Kyndryl, an IT services provider. “It’s how we become a data-driven operation, the use of data to drive decisions about what’s meaningful and valuable for our customers, our employees, and our business. If a company isn’t coming to terms with what this means to them, it may mean they won’t be around.”

Executives must be ready to use a full range of technologies and identify which ones will deliver the results they need, management advisors say.

“Ten years ago, digital transformation was about movement to the cloud. Five years ago, it was more about getting your data ready for AI. Now it’s this move to generative AI. And at some time in the future it will be about the movement to quantum cloud,” says Pablo Alejo, a managing director at management consulting firm West Monroe. “Every organization is trying to react to market forces by leveraging the greatest set of tools available at the moment.”

Many organizations, however, aren’t capable of using all the digital tools and capabilities on the market as they’ve yet to shed their legacy technology. A 2023 study conducted by Foundry for global tech company Insight Enterprises found that enterprise leaders listed technical debt resulting from reliance on siloed, legacy systems, and processes as a top roadblock to innovation. Moreover, 86% of respondents said they had been impacted by technical debt in the prior year, with 43% saying it limited their ability to innovate.

Stages of successful digital transformation

Although every organization follows its own digital transformation journey, experts say there are five common steps that most organizations follow as they advance the technical initiatives that support their transformations:

1. They align objectives with business goals. Successful organizations start with the questions: What business outcomes do I want to achieve for customers, and what problem is the business trying to solve? They then align their goals with the outcome the business is striving to achieve.
2. IT and business come together to co-create. Alignment and collaboration across functional areas of the company are essential to digital success. Many organizations create cross-functional teams to help drive digital transformations.
3. Companies pick the right strategic partners. Whether it’s a Big 5 consultancy, system integrator, or boutique design shop, IT leaders need help fulfilling digital imperatives to reduce time to business value. Findings in KPMG’s CEO report addressed the importance of such partnerships: “Businesses rely on their ecosystems as building successful partnerships can help a company deliver a competitive edge. … CEOs also say building strategic alliances with third parties is the most important strategy to help them reach their growth objectives over the next 3 years.”
4. They redesign business and products around customer outcomes. Customer experience is a key motivator for digital transformation, and most digital initiatives are tailored to improve customer interactions and open new avenues for business.
5. Retrain employees around digital. Upskilling on the latest technologies has become a business imperative for competing in the digital era.

Digital transformation roles and skills

While emerging tech and revamped processes are crucial, having the right skills on staff is essential to any digital transformation.

Software engineers, cloud computing specialists, and digital product managers remain key roles for companies seeking to roll out new products and services. DevOps leaders galvanize software development by merging development with operations, enabling companies to continuously iterate software to speed delivery.

Data scientists and data architects are also in high demand, as companies seek to glean insights from vast troves of data, and transformations lean increasingly on machine learning and artificial intelligence.

UX designers, digital trainers, writers, conversational brand strategists, forensic analysts, ethics compliance managers, and workplace technology managers round out the talent priorities.

Of course, leadership matters. Many CIOs have appended the chief digital officer (CDO) title to describe their remit, while some are simply rebranded as a CDO. Sometimes the roles CIO and CDO roles are distinctly bifurcated. Typically, these calls are up to the CEO.

But it doesn’t matter who owns the digital imperative, as long as someone is competent using technology to drive revenue growth — and is capable of bringing together all the elements.

“They’re orchestrators,” says Nitish, Mittal, a partner leading the technology practice at research firm Everest Group, adding that they understand that technology is not the main goal but rather a means to an end — whether the end is driving more productivity or creating more customer engagement.

Challenges with digital transformation

Digital transformations can lag or fail for multiple reasons, including poor leadership, disconnects between IT and the business, lagging employee engagement, and substandard operations.

For example, an IDC InfoBrief commissioned by Insight Enterprises found that data privacy/security concerns (50%), lack of essential technology skills (39%), and insufficient resources for change management (31%) were the greatest digital transformation hurdles organizations faced.

The report also found that organizations struggle with cybersecurity (56%) and operational resilience (52%), while 46% said legacy technology/technical debt hold back their organizational strategy. Many organizations also struggle with aligning digital initiative to their business objectives, getting executive support, obtaining the money needed for investments, and prioritizing the most impactful initiatives.

Additionally, they often fail at managing the process changes and human adoption, expert say

“One of the biggest challenges is getting internal alignments on the outcome you’re trying to achieve on the investments you’re making. The definition of success for one part of the organization versus the definition of success in another area aren’t always aligned,” says Rajesh Varrier, executive vice president at Infosys and head of Infosys Americas and the firm’s head of digital experience.

Additionally, some companies fail with their digital transformations because they’re not focused on what their customers want, says Kamales Lardi, author of The Human Side of Digital Business Transformation and CEO of Lardi & Partner Consulting.

“They’re sitting within the company bubble and not looking outside,” she adds. “It’s like sitting in a fish tank and the world outside the tank is changing and you’re not noticing beyond the environment outside the tank is changing until the tank breaks and you’re in the open ocean.”

Key trends in digital transformation

Executives see the ability to continuously engage in digital transformation at an ever-quickening pace as a critical component of success.

“We cannot ignore the fact that even the most stable companies could be disrupted,” Lardi says, adding that companies must use their digital technologies and data-analytics capabilities to “keep their ear to the ground for the [market and customer] trends that are happening and can happen almost overnight.”

The IDC InfoBrief commissioned by Insight Enterprises speaks to that point: 82% of surveyed executives said companies must invest in digital transformation or be left behind, and 49% said the ability to keep up with technology innovation compared to competitors is one of the greatest threats to their organization looking ahead.

The survey identified digital transformation trends as well, noting, for example, that 34% were planning to invest in digital transformation in the next 12 months to scale distribution and monetization of products and services and 33% intend to achieve deeper digitalization of customer experiences.

At the same time, the survey revealed that executives are scrutinizing their investments, with 61% of respondents saying they expect to see impactful return on investment from digital investments by 2024.

To ensure successful transformations, Lardi says companies must intertwine their digital transformation strategies with their business objectives, identifying how digital technologies can transform their current offerings and operations as well as using those technologies to support and enable new endeavors. They must be doing that work in an agile manner, delivering improvements and innovations on an ongoing basis and using data to confirm they’re on the right trajectories. And they must have the ability to shepherd people and processes through those changes – especially as the pace of tech evolution becomes even quicker.

“Businesses have always had to transform, but [today’s potential for digital disruption] is really keeping businesses on their toes,” Lardi adds. “Only those with strong ecosystem that link everything together are the ones that achieve strong business value with their digital transformations.”

More on digital transformation:

• 7 secrets of successful digital transformations
• 10 ways to accelerate digital transformation
• 13 essential skills for accelerating digital transformation
• 5 hot digital transformation trends — and 2 going cold
• 8 reasons why digital transformations fail
• What’s next for digital transformation?
• 5 surefire ways to derail a digital transformation (without knowing it)