Overturning a failing digital transformation is worth as much as getting right at first

Digital transformation is not a hype. It is a necessity if one considers the risk of cannibalisation of traditional businesses enabled by digital disruption- which the evidence from case studies and general statistics suggest to be at least one third of the incumbent top line [1]. Frontier technlogies such as AI as well as shocks like covid-19 that have constrained firms to accelerate the digitization of their physical interactions, make the risk only to grow. 

As most of large companies have been launching their digital transformation to mitigate the risk of cannibalization, another risk has lured,- that of a transformation failure. The common wisdom is that less than half of incumbent companies has been able to return a premium over capital cost from the digital journey[2].  Accordingly, top executives have been advised to follow a recipe that includes organizational agility[3], radical innovations[4], reallocation of investments towards digital and analytics[5], as well as digital M&A to consolidate digital position.

1. The large option value of a second chance in digital transformation

Still, despite those advices, success remains evasive.

Digital transformation is however a journey, where failure does not come in one day. By monitoring digital transformation against ambition, there might be a valuable option to relaunch and redeploy to overturn an increasing gap versus ambition.  In recent research[6], grabbing this second chance is rather valuable.

Only 1/3 of companies are succeeding in their first attempt of their digital transformation. This second chance when used, doubles the success rate of digital transformation (see figure 1).

Figure 1 : The importance of trying the second chance in digital transformation

By the simple virtue of relaunching, the option might be valuable if there is a positive probabiltiy to over-turn.

The good news is tha the odds of success during the second chance also increases versus the first attempt, by about 20% on average ; the odds go up from 31% to 36% in automotive/assembly, and even from 39% to 51% in high tech for example[7] .  

At current incumbents’ share of digital in their total profit, the option to overturn a failing trnasformation amounts to a shareholder value creation potential of at least 15%[8]. 

2. Five ways to maximize the returns during the second chance

Given the  large size of gains, what can executives do to push even more the odds of success during this second chance? Our research leads five key insights :

1. Scrap a digital transformation that fails the pilot test. This might seem obvious, but there is no profitable second chance to be given for digital transformations which do not pass the acid test of the pilot stage.  20% of failing companies do not succeed at the pilot stage,- and only 10% manage to overturn their failure, or twice lower the market rate. This im)plies that companies that do not pass the pilot stage have no choice but to take a full clean sheet approach to digital transformation, not a fix and relaunch per se.

For all the other failing companies, we have explored the suitability of a large list of levers for overturning a failing transformational journey . This brings to four additional recommendations :

2. Resist changing your digital transfromation leader. If the change leader is ever to be blamed, he also may have the right to have a second chance. I

In fact, companies overturning the failing transformation have kept their programme leader more often than those which have failed in their second chance. We see two reasons for this. First, there isn’t a lot of time to overturn a failure, and changing leadership only adds delay to the fix. Second, the change leader has been successful in the piloting phase -- the reason of not scaling must then be mostly linked to factors external to the leader .  

3. Prefer a broader than narrower fix. Failure to scale is usually based on multiple root causes. Companies which successfuly overturn their failing transformation adapt twice more components than other companies. In particular, they feature the next two actions :

4. Reanchor the architecture of the programme into key organizational units. This anchoring should be both with the operations (so as to ensure its fits the workflow of changes), and with finance, (( so as to guarantee that the programme is monitored tightly with the right performance indicators). Companies overcoming the failure of digital transformation do this three times more often than the others ; in eneral, also they revised the framing of the transfromation in terms of risk, pay-off and time of deployment, so as to anchor the right types and milestones of performance indicators for full transparency within the organization. 

5. Focus on the cultural change bottleneck. This is not only a issue of tangible architecture- but as well a issue of how people may want to play the digitization as a real change. Culture, incentives matter as much as workflow and metrics, on top of a real communication towards the lines. In general, overturning a failing transformation require that the CEO and the Baord of directros reiterate their commitment to the success of digital transformation—so that the organization gets a clear message that this second chance is vital for the company future.

Those above elements have the highest impact on increasing the odds of success, in our research.  Our last message is that a contingent plan should by structured along those points for  any transformation programme- surprisingly, for a large set of companies, this contingency plan is missing. But this also means that companies are leaving a lot of value on the table by not anticipating the option value of readjust their plan.

[1] Bughin, J and N. van Zeebroeck, 2017, The right response to digital disruption, https://sloanreview.mit.edu/article/the-right-response-to-digital-disruption/

[2] https://www.mckinsey.com/business-functions/mckinsey-digital/our-insights/digital-transformation-improving-the-odds-of-success

[3] https://www.forbes.com/sites/danielnewman/2017/04/18/agility-is-the-key-to-accelerating-digital-transformation/#15c0bd157277

[4] https://sloanreview.mit.edu/projects/accelerating-digital-innovation-inside-and-out/

[5] https://hbr.org/2017/12/what-successful-digital-transformations-have-in-common

[6] We have computed the option value of fixing a failing digital transformation from a major top executives survey launched during the year 2019 on a worldwide scale, out of a panel of 12500 representative companies. The share of companies filling the questionnaire has led to a sample of 1100 incumbent firms, or roughly a 10 percent answer rate. We also found that the sample is globally representatve of the total panel, in terms of company size, sectorial distribution, revenue, ebit growth, or digital maturity. For panel representativeness, see among others, The anatomy of successful digital transformation: The role of analytics, by Jacques Bughin, Barbara O’Beirne and Jonathan Deakin, Applied Marketing Analytics, 5 (2), 121-128 (2019). For the companies which have succeeded in the first attempt, ( or 28% of our sample), we confirm the key success factors of successful transformation, eg they have clearly articulated their corporate digital strategy ( so that all resources are adequately mobilized), they have made as strong commitment from the top, by CEO, Board and business unit leaders, as well as an established culture of collaboration, with earmarked IT and human talent resources to deliver on the digital transformation

[7] The only exception is the healthcare sector where the odds of success seem to decrease in a second trial in our research

[8] Current digital contribution to profit for companies which have failed in current 15% of total revenue/EBIT. The value upside of second chance is 34%*50%=17% more, with compounds with an average marekt digital growth of 15% versus 4% nominal of traditional business. Assuming weighted cost of capital of 10% ; the total entreprise value is boosted by 16,2%, with no additional debt.