Beyond the hype: The tangible value creation of Digital Transformation

Digital transformation has become a top priority for companies worldwide, with significant recent focus on adopting artificial intelligence (AI) as means to unlock value. However, many businesses have struggled to translate their digital transformation efforts into tangible operational and financial value creation.?

I found this recent article published in HBR interesting because it presents empirical evidence of digital transformation efforts and its impact on ultimate value creation (TSR and ROE) and links it to key operational drivers that move the needle from a performance perspective and then talks about the underlying capabilities needed to deliver a successful digital transformation journey. Interestingly they selected Financial Services as the sector for their analysis!?

The Need for Demonstrable Value:

The statistics are striking: 89% of large companies globally have embarked on digital and AI transformation, yet they have achieved just 31% of the expected revenue lift and 25% of expected cost savings. To win in the age of digital and AI, business leaders must be convinced of the value they can derive and confident in their strategy.

To explore the value of digital transformation, the study focused on the banking sector, given its significant history with digital transformations. Using a unique longitudinal dataset, the researchers identified 20 digital leaders and 20 digital laggards based on specific metrics related to digital adoption and sales channels.

Key Findings:

1. Financial Outperformance: Digital leaders outperformed laggards, achieving an average annual total shareholder return of 8.1% compared to 4.9% for laggards. Leaders also demonstrated better return on pre-tax tangible equity, growing it from 15.5% in 2018 to 19.3% in 2022, compared to a more modest increase from 13.6% to 15.3% for laggards.

2. Focus on Digital Sales: The value of digital transformation lies in driving digital sales rather than merely increasing mobile app adoption. Leaders significantly outperformed laggards, growing digital sales from 40% to 70% while laggards only grew from 8% to 17%.

3. Orchestrating End-to-End Transformation: Leaders transformed the entire customer journey, from origination to fulfillment to servicing. This required hundreds of teams capable of developing digital and AI innovations, leading to a well-designed digital workflow and an omnichannel experience.

4. Talent and Operating Model: Differentiated capabilities are essential for success. Leaders prioritize building a quality digital talent bench and adopting an operating model with cross-functional "pods" that mobilize resources against priority solutions.

Roadmap to Success in Digital Transformation:

The study highlights following aspects as the key enablers of success which resonates will with my experience in leading such projects in a large global bank:

1. Define Ambitious and Focused Transformation Roadmaps: Align efforts on specific domains that generate significant value for customers and the organization.

2. Cultivate a Quality Digital Talent Bench: Create an environment that attracts top-notch engineers and allows them to thrive, providing tailored career tracks and autonomy.

3. Embrace a Cross-Functional Operating Model: Mobilize small, cross-functional teams to drive solutions, with single journey or product owners responsible for the end-to-end experience.

4. Leverage Distributed Technology and Modern Software Engineering Practices: Enable the entire organization to develop digital and AI-based solutions, not just the IT department.

5. Develop Data Products and Modern Data Architecture: Make data easily accessible and consumable for various applications across the organization.

6. Prioritize Change Management: Ensure digital solutions are adopted and can scale by making them easy to use and reuse across the enterprise.

Digital transformation is not an isolated project but rather a continuous journey of innovation and adaptation and hard work across an organisation!!?

https://hbr.org/2023/07/the-value-of-digital-transformation