Digital Transformation - 7 Success Factors

Digital transformation or digital disruption, seems to be the hot topic across many boardrooms these days. To quote some numbers from a recent PWC CEO survey, 86% of CEOs believe technology will transform their business more than any other global trend through digital transformation. According to Gartner 2015 survey found that by 2017, CEOs expect revenues attributable to digital (products, marketing and sales) will reach 42 percent.

If you, like me, are passionate about this topic, I’m sure you have already read a lot on this subject. There is no shortage of material and opinions about the topic of digital transformation (I have shared some references at the end of this article). I have tried to take a very practical and simplistic approach for how I see the topic, both through my own experiences with these projects and through ideas from colleagues, friends and customers. I hope you will find value in this and appreciate any feedback or suggestions you may have.

Note: I have made simple references to key technology trends in this article. I am not going to expand on technology trends and predictions as that’s a topic for another article by itself.

What is Digital Transformation? Why now?

In simple terms, digital transformation is using technology to radically shift the way in which companies conduct business, how they reach their customers and improve business outcomes. Often this may include changing business processes and even new business models to make the most of those technologies, or even creating new products or services in a completely new industry (is Tesla making electric cars or are they making big computers that move fast and challenging incumbents?). I will expand on this definition later in the article. For now, this simpler overview will help us understand what is driving it.

I propose we look at it from three dimensions:

• The world around us – The macro-economic environment
• The world of consumers – Changes in consumer behaviour
• The world of Technology – Enabling forces

If we step back and look at the world around us and the macro-economic conditions we currently see, world GDP growth is slowing down, almost to a standstill. At the same time productivity is also slowing down. Oliver Scalabre put forward a great perspective on this topic with his TED talk “The next manufacturing revolution is here”, where he explains this context, and he goes on to explain how he believes manufacturing is the next source of growth. I’m not going to debate if it’s going to come from manufacturing or not. The point I want to call out is the slowdown in both GDP and productivity.

The world around us – The macro-economic environment

Source: 2016 World Economic Forum – Global outlook  

If growth is slowing down and productivity is dropping, it’s only natural that enterprises need to look at different ways of addressing this problem in order to innovate and survive in the market. This is driving new types of competition, and is challenging companies to re-look at traditional business models, supply chain efficiencies and any other ways to drive growth. In my view, this slowdown in growth is fundamental to the real wakeup call (the burning platform) triggering every CEO to challenge the status quo and to look for avenues for growth.

The world of consumers – change in consumer behaviour

In addition to slowdown in growth and productivity, another important dimension is the sophistication of our consumers: Their ever-growing requirements, and the speed at which they expect goods and services to be delivered [on their terms and to their custom requirements]. A lot of this is driven by millennials, their work habits and what they expect from today’s corporations. The way in which today’s consumers operate is radically different to 10 years ago. The level of trust they put on technology is different to previous generations and trust is also a big factor for the 4th industrial revolution and digital transformations to be successful with consumers.

According to Gartner, by 2020 the average consumer will have more conversations with bots than with their spouse!

So, it’s clear we have a captive audience willing to consume goods and services (if they are delivered on their terms, to their requirements).

The world of Technology – Enabling forces

On the technology front we need to understand three underlying principles helping to enable tomorrow’s technologies and solutions.

• Moore’s Law – This is by far the most popular know law associated with technology advancements. It states that the number of transistors in an integrated circuit doubles approximately 18 months. Moore's law predicts that this trend will continue into the foreseeable future. Although the pace has slowed, the number of transistors per square inch has since doubled approximately every 18 months.
• Metcalf‘s Law - States that the value of a telecommunications networks are proportional to the square of the number of connected users of the system. For example, if a network has 10 nodes, its inherent value is 100 (10 * 10). The end nodes can be computers, servers and/or connecting users. The more users connected to a network, it’s value goes up. This is part of the reason why every Cloud computing vendor is driving to increase their active user count.
• Koomey’s Law – This law might be most relevant to consumers looking to make the most use out of their mobile devices. Koomey’s law states that the energy efficiency of computers doubles roughly every 18 months. I think we can all relate to this as we look for more and more battery life out of our mobile devices. Health care is a prime example of the transformational power of these new business architectures and technologies. This big industry is at the beginning of a transformation. The cost of sequencing a human genome in 2001 was $100 million, and mapping just one took nearly ten years. Today it costs less than $1,000. In two or three years, it will cost $100, and sequencing will take just 20 minutes. The number of sequences has grown as the cost has fallen. The Million Human Genomes Project is up and running in Beijing. Gene mapping is shifting from an abstract research activity to a clinical one, in which a doctor customises treatment to the patient’s unique genomic makeup!

Welcome to the era of digital transformation or as the world Economic Forum called it, the 4th Industrial Revolution.

In my view, these three dimensions helps drive tomorrow’s technology platform. There are lot of examples that can show how these three laws have come together at a scale that is different to what we have seen before. Below is good example from the Boston Consulting Group paper – Navigating a world of Digital Disruption.

• 1st Revolution - Steam, water, mechanical production equipment in 1784
• 2nd Revolution - Division of labour, electricity, mass production in 1870
• 3rd Revolution - Electronics, IT, automated production in 1969
• 4th Revolution - Blurring the physical and the digital divide - 2016 and beyond

"There are various ways of looking at the 4th revolution. There are two ways of looking at the various revolutions – the outcome that characterizes the revolution or the catalyst that enables it. I believe that the 4th will be defined by the catalyst – ambient intelligence. The outcomes will be defined by who decides to leverage the intelligence and how they use it." - Norm Judah, Microsoft Services WW CTO 

The three laws we discussed above are driving a world where technology is ubiquitous and possibilities are endless at a hyper scale and it’s blurring the physical and the virtual life. JD Meier and Roy Sharples from Microsoft wrote a paper on “How to lead in the digital age” where they identified number of technology trends driving the transformation:

• Human-Computer Interaction - Advancing human interaction and automation, the coupling of intelligent systems with direct manipulation

• Internet of Things – A network of connected objects and devices to collect and exchange data
• Machine Learning - Pattern recognition to learn from and make predictions on data
• Data Science - Predictable analytics in machine translation, speech recognition, robotics and search engines
• Mixed Reality - Merging real and virtual worlds to produce new environments and visualizations to interact and co-exist in real time
• Artificial Intelligence - Reasoning, knowledge, learning perception and ability to manipulate objects

I will add two additional trends to this list.

• New Secure Transaction Processing – secure, distributed and de-centralized models for processing and handling transactions (e.g. blockchain). According to Gartner, by 2022, there will be a blockchain services business that will be worth at least $10 billon.
• Quantum computing - Quantum computers have the potential to build scenarios that can invent a significant rethink in how we approach cyber security among many other areas where calculations could be done faster than ever possible.

Why now?

As we discussed, lack of growth is driving the hunger to innovate, re-invent and change the status quo, in search of new growth possibilities. A new generation of consumers are demanding, creating and defining the possibilities for new product, services and industry segments. Technology is enabling this to happen in a way it was never possible due to its pervasive nature through a combination of the three laws and the emerging and enabling trends.

What is Digital Transformation?

Earlier in the article, I outlined in simple terms digital transformation is using technology to evolve the way in which companies conduct business and improve business outcomes. Often this may include changing business processes and even new business models to make the most of those technologies.

At Microsoft, we extend this further and look at digital transformation through four pillars for any organization to be effective with its transformation.

• Engage your customers – How you connect and engage with your customers and suppliers.
• Empower your employee – Driving a culture of learning and empowering your team.
• Optimize your operations – Re-thinking and optimizing your operations and the supply chain for efficiencies.
• Transform your products and services – Innovating on your products and services to take advantage of technology to serve the needs of your consumers.

For a true digital transformation, we need to look at how one would effectively address each of these pillars;

The effectiveness to address these four pillars will significantly depend on the culture and maturity of the organization than any other factor.

A couple of years back, Gartner made a startling statement: By 2017, 20% of all market leaders will lose their number one position to a company founded after the year 2000, from lack of a digital business advantage. I would argue the companies found after the year 2000 took full advantage of the three laws I discussed earlier. They were looking at explosive growth in the business models they considered. They looked at the needs of the modern consumer, and how to serve them better than any traditional business would. Finally, they had no legacy or technological constraints, so they took full advantage of the technology driven by the three laws outlined earlier.

Example: In late 2015, Airbnb had 1.5 million rooms available for rent, and their bookings were projected to double to 80 million over the year before. The world’s three largest hotel chains – Hilton, Marriott and Intercontinental – have 700,000 rooms each worldwide. Now, Airbnb have more rooms than these three combined, and this is without owning a single hotel! The same story is true across many categories, whether it be Uber in personal transportation, YouTube in video, or Amazon in retail.

Is digital transformation hard to achieve?

At Microsoft, we work with many customers across the world with their digital transformation journey. We help our customers implement digital transformation strategies through a number of roles and services, in particular we have a Digital Advisory role focused on this agenda. I reached out to this worldwide Digital Advisory community to hear what they have to say about their experience in working with our customers.

My question was: What are the success factors and common mistakes in achieving digital transformation?

I have provided a summary of the top 7 digital transformation success factors, based on their feedback as well as what I have observed first hand in working with our customers across Asia.

7 Digital Transformation Success Factors

Go from the top down. This seems to be by far the biggest factor in how well a digital transformation program would be successful or not. I have yet to come across a true digital transformation project that has started from the bottom of the organization. It needs to start with the CEO having a clear vision of what digital transformation means for the company, its employees and most importantly its culture. Make sure there is a clear business sponsor at the CEO level driving the digital transformation agenda. I still come across many organizations where CIOs and CTOs are reluctant to let go or have the Digital strategy owned by the business. This is one of the fundamental issues to look at in the digital transformation plans and strategies – Get the business to drive the digital transformation agenda. This is critical as we have seen in the past many ERP projects that start and end in IT as failure. Successful digital transformation efforts will change the core, challenge the culture – it needs top executive vision and relentless support.

Show me the money. A successful digital transformation strategy needs to start with the end in mind. The end needs to be about increasing the value of the organisation to its shareholders, to its customers, to its suppliers and to its employees. Don’t start with a digital-led or a technology-led approach. If it’s an established business, at times you may even need to take a ‘big bang’ approach, else you may get run over (e.g. Blockbuster vs Netflix). However, there are also times it may be better to look at how to add incremental business capabilities. Unfortunately, there is no simple formula that can define which way you should go. One thing for sure, gone are the days of doing a 3-year strategy and a plan. No one can tell you what’s going to happen in 3 years. Start small with a minimum viable product (MVP), test the market response and improve, and show value along the way. In many cases, companies find value that they had not originally predicted – market becomes the new test ground – not focus groups sitting behind four walls. (refer the 7 questions from Peter Theil’s book Zero to One, when testing the market. I have outlined these in the Make the role of IT clear section below).

Fail fast, learn and improve. The concept of making mistakes and failing is a big cultural barrier to many organisations when it comes to realising their digital dream. Most organisations and individuals have nurtured a culture of having to master and perfect everything, and their reward systems have encouraged people to shy away from failure. In digital transformation, it’s all about learning as you go and adding incremental value. (you can call it agile if that works for you). The book Mindset by Carol Dweck is a must-read for all digital leaders to help drive this cultural change.

How Microsoft Uses a Growth Mindset to Develop Leaders by Carol Dweck, Kathleen Hogan. In this brief Harvard Business Review article, Carol Dweck and Kathleen Hogan (Microsoft Senior VP of HR) discuss how Microsoft uses Growth mindset in developing our leaders.

Example: Shoes of Prey is a successful start-up that has developed a business model for manufacturing custom shoes (i.e. making one shoe at a time, as designed by the consumer), which is totally different to the conventional model of mass produced shoe manufacturing. Speaking with Jodie Fox, their Chief Creative Officer, she explains the culture they encourage at Shoes of Prey is to:

• Start everything before you are ready. You will never be fully ready and you need to build a learning organisation.
• Try something new and see what happens. This is another big part of how they drive learning is by encouraging people to try new and radical ideas.

You can read more about Shoes of Prey story and my interview through the book I’m writing: Motivating Mavericks – The Secret to High Performing Teams.

Digital transformation is also a cultural shift driven by people, not just technology. If you want it to be built to last, then it needs to be built for change with the right culture. A key building block for organisational cultures that will rise and thrive in the digital age is that they are built for change and commit to being a learning organisation – that is adaptive and continuously improves with time and necessity. (read more about this on the paper How to lead in the digital age by JD Meier and Roy Sharples from Microsoft)

Walk in your customer’s shoes. This is all about how well you understand and engage with your customers. Are you creating deep connections, are you being relevant, are you empathising with your customers? You need to design and deliver services and solutions with their perspective in mind, by focusing energy on the things that matter to them, and maybe their own customers as well. Inclusive design is at the heart of this approach that Microsoft is taking. At Microsoft we have a practice focused specifically on inclusive design, where we work with CEOs, boards of directors and their users on how we engage them in the digital transformation strategy. Make sure you have a clear way of addressing this in your plans. User experience design skills will drive most of the discussions in this plan – picture is worth thousand words and this is where vision demonstrators and sketches bring life into digital scenarios.

“Get closer than ever to your customers. So close, in fact, that you tell them what they need well before they realise it themselves.” - Steve Jobs.

Crawl, Walk and Run. The success of a digital transformation program depends on where an organisation is today in terms of their digital maturity. It’s important to clearly understand its maturity across number of areas in order to determine how to structure a digital transformation strategy for a given organisation. At Microsoft, when we engage with our customers, we carry out an assessment to get a clear understanding of their digital maturity across the four pillars we discussed. (Engage your customers, empower your employee, optimize your operations and Transform your products and services). Once we understand the baseline level of capabilities and maturity, we define the strategy and the plan accordingly. Make sure to structure the digital transformation journey based on the culture, context and maturity of the organization. There’s no one-size-fits-all approach here.

End to end supply chain matters. You need to take a good look at the entire supply chain, especially if you are a well-established business. Take a look at how your supply chain connects your employees, customers, partners, suppliers, and in some cases your customer’s customers. Building listening systems for regular and real-time feedback is a critical factor in your success. In my earlier example (Shoes of Prey), when Jodie started the business, every traditional shoe supplier she spoke with told her that that she was going to fail given how unconventional she was. In my interview with her, she said “I’m glad that I didn’t have a background in shoe making; perhaps those shoe manufacturers were coloured by their traditional experiences and they had no other ways of thinking anything outside of the status quo”. There is a great lesson here we should all think about!

Make the role of IT clear. While we need to ensure that the digital transformation agenda is owned and driven by the business, there is a clear role for IT to play in this journey. The role of IT is flipped on its head – it not about what you cannot do – but to be the biggest enabler of technology. IT at established companies needs to act as a start-up – this is radical shift that many established enterprises are facing today. The role of IT is to show what is possible with technology today, help draw parallels with other industries or the adjacent possibilities. I highly recommend Peter Thiel’s book – Zero to One, where he talks about the 7 questions any startup should ask themselves as they think about an innovation or enter a market:

1. Engineering – Can you create breakthrough technology instead of incremental improvements?
2. Timing – Is now the right time to start this business idea?
3. Monopoly – Are you starting with a big share of a small market?
4. People – Do you have the right team?
5. Distribution – Do you have a way of not just to create but deliver the product/service?
6. Durability – Will your market position be defensible 10 & 20 years into the future?
7. Secret – Have you identified a unique opportunity that others don’t see?

At Microsoft, through our Digital Advisory Services team, we offer a program that we call ‘Digital Ready’. It’s a program that is targeted at creating a permanent capability for change and innovation through number of techniques. As we deliver this service, we find that most customers don’t use this as a one-time transformation or a solution in response to an immediate need. Rather, it is being used to develop a ’program of change‘ and a permanent capacity for change through constant, rapid iterations of innovation and technology adoption. Make sure your digital transformation plan has a clear approach for how you are going to handle and sustain change.

In summary

A lack of global growth is driving the need to innovate, re-invent and change the status quo. A new generation of consumers are demanding, creating and defining the possibilities for new product, services and industry segments. Finally, technology is enabling this to happen in a way it was never possible due to its pervasive nature through a combination of the three laws and the emerging and enabling trends.

As you prepare your digital transformation strategy and plan, utilize these 7 success factors outlined here as a guiding checklist and ask yourself how you are going to address each one of them and build that in to the plan. I hope these will help you make plans that are successful and keep your Digital Transformation journey on its rails.

Hope this article was useful and practical. I would very much appreciate if you can share your own observations and lessons so we can all learn from them as well.

Thank you!

Acknowledgement

As friends and colleagues at Microsoft, you all responded to my questions with passionate points of view on this topic. I have learnt a lot from the discussion and your input and working with you.

Alok Srivastava, Andreas Erlacher, Andy Winskill, Ankur Agarwal, Arturo Aduna Zu?iga, Brad Clayton, Daragh Morrissey, Dean Dobson, Eiko Ermold, Gil Pettegrew, Grant Peters, Jeff Fryling, Kadri Umay, Karsten Str?b?k, Laura Krupka, Michael Vermeersch, Nick Katsivelos, Norm Judah, Raman Johar, Ramesh Siva, Sarah Mocke, Scott Bowie, Scott Lengel, Robert Stackowiak, Shane Putman, Srinivasan Rakhunathan, Wayne Wu, Yalle Elehu, Yatty Wu.

Thank you!

Here are some additional references that you may find useful:

• “How to Lead in the Digital Age" by envisioning the art of the possible to re-imagine your digital future. By Roy Sharples, Director of Digital Transformation Marketing, & JD Meier, Director of Digital Advisory Services, Microsoft Services
• Microsoft Digital Transformation Stories
• Digital transformation within Microsoft IT
• Embracing Digital Transformation: Experiences from Australian Organisations.
• Leading Digital: Turning Technology into Business Transformation by George Westerman, Didier Bonnet, Andrew McAfee
• The Digital Advantage: How digital leaders outperform their peers in every industry (Capgemini Consulting)
• How Smart, Connected Products Are Transforming Companies by Michael E. PorterJames E. Heppelmann (Harvard Business Review)
• CIOs: Moving from digital tailgaters to digital trailblazers
• Organizational Capital: A CEO’s Guide to Measuring and Managing Enterprise Intangibles By Baruch Lev, Suresh Radhakrishnan and Peter C. Evans
• Internet Trends 2016 – Code Conference