There is no such thing as digital transformation (and why that matters)
What is transformation?
Per the Cambridge dictionary definition of transformation, it’s a complete change in the appearance or character of something or someone, especially so that the thing or person is improved.
The key definitive words here are “complete change.” When it comes to digital transformation, we do not have very clear definitions.
I feel there is no such thing as digital transformation. Here are my three definitions of digital transformation.
- The first definition is that there is no such thing because you can’t transform digitally. It is about transforming business, improving the experience, lowering costs, leveraging process people, information, technology, data, new ways of working, and many other things.
- Digital Transformation is not about being digital but about business transformation to improve the experience and lower costs.
- It is a way to sell you more hardware and software that you do not need.
Transformations are very complex.
APIs should expose the core business system functionality so that you can build flexible software that is low code and highly reusable. But if you look at a transformation and the components, you find that there are many components that are quite complicated. In addition, there is online and offline selling. There can be service issues while selling online, which can be a challenge. How do you personalize the experience? How do you proactively anticipate problems? How do you influence decisions? Then there are data-driven decisions that can replace humans; for example, call centers are replaced by intelligent chat. For companies that manufacture, the supply chain can be a huge issue.
There are logistics, how you try to deliver goods; manufacturing, you need to create the physical products; and robotics, how do you replace human action? When you put all this together, you can see how complicated transformations are. It is still very complicated even if you’re doing the backend or the front end, not doing the entire company-wide transformation.
Why is a transformation so complex today?
Let us break it into three levels.
The first level is Why are we doing it? / What are we doing? Let’s take a simple example. Data is the new goal because we need to manage it as a strategic resource. The problem today is that because of the shrinking knowledge gap and the pervasive use of the Internet, knowledge of such things has become very commonplace. So the Why or What can no longer differentiate you. If you go down one more level, you get to the heart. Then you need to think through how you establish the lineage? How do you link to ensure that every single piece of data can be linked back to an entity or person? You have to think of how you will centralize data creation; make sure that it is described properly and maintained. You need to consider how you will govern it because it is a very strategic resource. How can you be governed by the top of the organization and not the bottom? And then, of course, you’ve got to ensure that there’s very little replication as a single source of truth. But the real action happens now in the how. How do you define the data dictionary with the right descriptor fields? How do you catalog the business rules? How do you change and yet retain control and auditability? What are the frameworks processes, standard operating procedures, and so on? At level three, things become complicated, even though it starts very simple in level one. The major differentiation you can bring the transformation is at level three because, at level one, everybody knows it, but not many people know how to bring it about. The other major complexity comes from alignment. How do you align the “How” to the “What” to the “Why/What”? This is one of the reasons why digital transformations are so complicated.
And hence, most digital transformations fail. BCG estimates success rates to range from 5% to 30%. So the other 70% to 95% are transformations that don’t achieve their stated objective.
How can you succeed in a complex world?
So how can you succeed in a world that’s complicated?
Focus on the problem, not the solution – This sounds very easy. Still, it’s very hard to do, especially in technology-driven companies, because in technology-run companies, instead of thinking about the problems to solve, there is a tendency to jump immediately into the solution to implement AI or to implement something that is the new-fangled thing.
Learn the right way to manage complexity – You can often make the complexity disappear by simply ignoring it. Therefore you have to work out the interactions and linkages that are key for you to grasp and manage this complexity.
Ensure it is desirable, viable, and feasible – But most ideas don’t end up as innovations. And therefore, understanding how your idea can be viable, wanted by the customers (desirable), feasible, and make you money will probably result in successful execution.
Design and process are more important than Tech –
The weakest linkages are design and process though they are most important. In today’s situation, designing processes are more important than the technology.
Find the right combination of internal and external talent – Talent is very scarce. But I don’t think the solution is to look all external or internal. The best I’ve seen is a combination of external and internal talent. The external people know the new technology, while internal talent knows how the organization makes money.
Focus on the problem and not the solution.
A good example of this would be the transistor. The transistor was invented in 1947. One of its first uses was the amplification of signals, and it was used in radios and hearing aids. By 1954, a transistor radio for consumer use had been produced. But it wasn’t until 1958 that transistors began to be used in integrated circuits. Today, all of you carry billions of transacted transistors in your pockets. Since 1971, with the advent of the Intel processor, transistors have now been widely used in microprocessors.
If you start with a solution, which is how most technology companies would work, you have to pivot, which may take place over a long period. Most companies are not in the business of pivoting; they are in the business of leveraging technology. So when you create something and find that there’s no big use case, you may have to write it off. IDC estimates that in 2019 $1.3 trillion was spent by companies worldwide on digital transformation. But they estimated that 800 billion of that was wasted, most likely written off, because the problem was not very clear.
There are two ways that you can go about it. One is to start with the solution, but one of the problems in this solution-based approach is that you’re not clear whether this is a solution that everybody wants, how many people want it, and who is willing to pay for it. So for most companies, my advice would be to start with a problem and clearly define the problem. This is the way for most companies because pivoting is overrated. If you have to pivot, most startups that pivot run out of money. They have a solution to something nobody wants, so they need to pivot. Most incumbent companies can’t pivot; they would have to write off the investment. Focusing too much on the solution is a failure point.
To fully understand the problem, you have to know the problem better than your customer. Understanding the problem better than your customer requires you to answer three questions – What is the problem? Why does it exist? How do you fix it?
And the steps that encompass this approach: Identify the segment that you’re interested in, then the segment should lead you to the gaps. What are the gaps that the segment is facing? The insights will come from there. Why do these gaps exist? Once you understand why these gaps exist, most companies can construct the experience, and finally, you have to separate the experience from the process. Because by doing so, you can trade-off between the experience the client wants and the process you need for internal efficiency and productivity. So the input is to get the insights, and the output is the customer value proposition.
Learn the right way to manage complexity
It is complex to manage a transformation well. So the key dimensions you need to think about are –
Customer Dimension – Segments, Gaps, Insights, Experience, and Process.
Business Dimension – How can you make money in a time period aligned with your risk appetite? That looks at Differentiation, Path to profit, Scaling, and the Core competence gap. These elements also interact with each other. For example, if your differentiation is very large, then you probably have less problem scaling because it’s very different. If you decide to have a shorter path to profit, you may have to scale down the differentiation, but this may lead to issues with profits. So, you can see how some of these interactions are cyclical; therefore, managing them well is very important to the successful outcome of any transformation.
Capabilities dimension – There are six elements around design methodology, data, information technology, ecosystems, and new disciplines of which design methodology data and IP are standard in any transformation in any company.
People and Leadership dimensions – The culture. The values. What are you trying to do? What’s your ambition? How do you measure? How do you lead the organization to foster an innovative culture and environment? How do you narrow the talent gap, and how do you structure the entire organization?
It gets fairly complicated, and you must manage these things separately and distinctly. But yet, they are interconnected. They have complex circular loops, so the whole thing must also be managed holistically.
Ensure its desirable, viable, and feasible
When creating a product or service, it must be difficult to understand whether something is desirable, viable, or feasible. For example, let us look at the Segway. It costs more than 100 million in research and development to produce it. The founders did show it to Steve Jobs, and Steve Jobs told them that they would never succeed. A Segway weighs 100 pounds, which means that you need the ecosystem. If you’re going to ride it to the office, you need a place to charge it; you’re not going to carry it to your office because it’s very heavy, and it’s not small. It was priced very high at the launch at 5000 US Dollars. It didn’t have the ecosystem support; they expected to sell 10,000 units a week, but they sold only 140,000 in its entire life and have been discontinued.
The worst story is that the company owner that eventually bought the Segway while using the Segway fell off the cliff and died. So it can’t be desirable. So, it is at the borderline of feasible because they managed to produce it. It is not viable because it couldn’t make money in the timeframe aligned to their risk appetite, and it clearly can’t be desirable if it kills someone.
The PostIt was desirable and viable but not feasible because they meant to make very sticky glue when it was first produced. But eventually, it wasn’t sticky, and they had to change the use case for glue that couldn’t stick very well before it was all three.
It is quite hard to go from idea to innovation because you’ve got to meet these three hurdles. And many companies are not closely looking at whether they meet the desirable, viable, and feasible criteria.
Design and process are more important than Technology.
At this stage, most of the issues we see with transformation are around the design and process rather than technology. As an analogy, if you’re asked to build the best building in your hometown. And money’s not a problem. Most people won’t showcase the builder first. So, why do we showcase technology every time we talk about business transformation? Then, why is it called digital transformation? So if you’re going to build the best building, let’s say in Singapore, you’re going to focus on the architect first. The architect is the one that thinks through the future of work and living and then understands the needs of the segment that you are targeting.
Different segments have different gaps. The architect is going to understand the insight and create the experience. So an equivalent of that is the designer of your service, entire business model, and operating model. And after the architect does his job, you still need to think about the civil engineer because the architect doesn’t ensure that the building can stand independently. An equivalent of the civil engineer is the process team. Even if the architect and civil engineer are good, we need good builders. So, technology is still important, even if we have a good design and process. But if the design and the process are very weak, then most of the time at the technology stage will be a wasted effort. And one of the things we noticed most is that the process piece is often the biggest weakness because it is often ignored. You should translate the product service requirements into stories. Then, you need to do data mapping, design the entire experience interface, etc.
Where is the process even more important?
On the vertical axis is what I call singular performance impact. That means there are one or two things you can do that will significantly change the impact of your product or service on the customer. And this could be speed over costs, enjoyment over price, duration over price, or quality over price. And we categorize categories here as small and large. On the horizontal axis, you have whether it’s less difficult or more difficult in terms of adoption by the customer. If something is easy to adopt and use, it may be less difficult; if something’s difficult to adapt to use, it would be in the difficult quadrant. So you end up with four different quadrants here. The first is to ensure that you’re not in the quadrant, whereby you don’t have any singular performance impact. The breakthrough category is where the impact is large, but it is easy to adopt. E.g., Uber, Netflix, and Airbnb. The example I like to highlight is the LED light bulb. An 8-watt LED outputs as much light as a 60-watt light bulb. So it’s a seven times savings in your power bill annually for five times the price but lasting three times longer. When you work it out, you’ll find that you have significant savings over a long period. And that’s why LED light bulbs have replaced most incandescent light bulbs. Therefore companies in this category can work on their minimum viable product because there are one or two things they will do that can completely revolutionize your performance. But most of us are not in this quadrant, although the industry is inundated by the few companies in this breakthrough quadrant. You can be in a breakthrough quadrant and find that your adoption is much more difficult. With an electric car, you need to charge for at least an hour, but with a petrol car, it is 10 minutes to fill up. So this illustrates that because of the difficulty of adoption, you need to think through the whole ecosystem needed to support it. This is the transformational quadrant.
But most of us are in the experience lead quadrant, e.g., The digital bank. The iMac is a very good example. Many of the iMac components are sourced, but Apple focuses on integrating the entire hardware and software into a brilliant experience. And that’s why Apple can still charge a premium in a sea of competitors that are probably more in the insufficient value quadrant. Once you understand this, you understand that if most of us are in the experience-led quadrant, the process becomes even more important. But a lot of companies are not focusing on that.
Best practices in design, process, and technology
Design: Pay attention to what is important and irreversible. Irreversible decisions are the ones that you need to spend more time over. You cannot pivot. You need to think through it properly, make the right decision, and understand the considerations because you can’t turn back once you decide.
Design: Knowing what customers want is very good. Why they want it is the key.
Insights come from understanding why not what. Without insights, the chance of breakthroughs is very low.
Process: Where can you change your process to fit the solution? Customizing creates a lot of extra code to manage and makes upgrades harder. So, ask yourself, where can out-of-the-box work first?
Process: It is the business process that delivers the experience.
Technology enables the process to be faster, better, and less costly. But, it is the process that delivers the experience, not the technology.