Why digital transformation programs fails and how to overcome it

Introduction

In this blog post, I would like to share some thoughts around the key role of digital transformation in business growth and success. Digital Transformation can generate significant long term benefits which the companies cannot avoid to consider. However, it is no easy feat and presents challenges that, if not properly managed, it can lead to program failure. This post explores the human-centric factors often at the heart of these challenges. These insights stem from over 15 years of direct experience in this field, as well as continuous market research to learn from successful as well as failing case studies.

I hope you enjoy the read!

The promise of the Digital Transformation Market

This is the decade of digital disruption. As I write this article, companies across the globe are investing heavily in digital transformation programs. And they do it for good reason. The promise of digital transformation is really tempting: increased efficiency, agility, and competitiveness. Global spending on digital transformation is expected to reach $2.7 trillion by end 2026, with a CAGR of 17.42% (ref. Mordor Intelligence via My Hub, WE Forum). It's clear that companies are focusing their efforts on digital transformation as a critical path to future success.

A study by BCG shows that more than 80% of companies plan to accelerate their digital transformations. It's understandable why - successful digital transformations can drive performance and competitive advantage, pushing companies towards a great future of continuous innovation. Still the same BCG study shows that digital leaders achieve earnings growth that is 1.8 times higher than those leaders who oppose digitalization, and more than double the growth in total enterprise value.

In the short term, digital technologies and ways of working offer productivity improvements and better customer experiences. In the medium term, they open up new growth opportunities and business model innovation.

For example, let's take the financial sector. Banks have more and more to deal? with fintech startups and increasingly demanding customer expectations. As a result, they're investing in digital transformation to offer online banking, mobile apps, and AI-powered services like chatbots and robo-advisors. JPMorgan Chase, for example, has an annual technology budget of $11 billion, a significant portion of which is devoted to new digital initiatives.

All nice, all great! Sure, but…

… despite the benefits and increasing investments, digital transformation is not an easy horse to ride. It is a complex and risky journey. Too many companies yet face significant challenges to reap the full benefits of their efforts.

The Digital Transformation Program Failure

A significant number of digital transformation projects fail to meet their goals. Recent studies reveal some non-encouraging statistics. A McKinsey survey found that:

• 84% of digital transformation initiatives fail?
• Only 16% of organizations register long-term sustainable benefits as result of digital transformations?
• 45% is the average chance of delivering less profit than expected?
• only 10% of initiatives exceed expectations
• 89%-96% is the digital transformation failure rate of traditional industries like pharmaceuticals, oil & gas, automotive and infrastructures.?

Other studies are on the same line, showing that:

• 70% of digital transformations do not meet their objectives (BCG)
• 75% of digital transformation initiatives resulted in a decrease in value and underwhelming performance, worse than conventional transformation at 68% of decrease (Bain)
• 40% to 50% of sales employees reveal that they do not use their CRM software (Hubspot)
• More than 75% of sales leaders claim the majority of the CRM features are never used by their teams (Hubspot)

Of course, these numbers do not intend to cover the full, varied and complex spectrum of all companies in all geographies and markets. These numbers are related to a small representation of the reality. However, these numbers show a trend, a symptom than clearly needs to be studied and cured if we want to make the most of the incredible opportunities that digital transformation programs can offer.

The reasons for this high failure rate are varied and complex, but there are common themes across industries, being tightly related to the human aspect.

Take the pharmaceutical industry, for example. Pharma companies are investing in digital transformation to improve R&D efficiency, personalize patient treatments, and streamline/automate supply chain processes. Yet, many initiatives fail due to a lack of clear strategy, resistance to change, competing objectives within the same organization and difficulties in integrating new digital tools with legacy systems.

Oil and gas industry share a similar destiny. Despite significant investments in digital solutions to improve exploration, production, and operations efficiency, many companies find hard to scale up their pilot projects and achieve long term sustainable benefits as result of digital transformation.

Across functions, we observe a similar pattern. In procurement, for instance, companies invest in digital tools to automate routine tasks, enhance visibility into spending, and leverage analytics for more intelligent decision-making. Yet, many initiatives fail to deliver expected savings due to poor data quality, lack of user adoption, challenges in accurately understanding the internal customers actual needs and obstacles in modifying established processes and behaviors.

It is less about the digital technical solution itself.?

It is more about how this solution is understood by the users and made integral part of the company’s ecosystem.

Key Success Factors to Overcome Failure

While the failure rate is high, it's not all bad news. There are companies that successfully navigate their digital transformation journeys, and their experiences offer valuable lessons. From my research and direct experience, I've identified three key success factors common among these digital champions.

1. Clear Strategy and Strong Leadership: successful digital transformations requires a clear vision of what the organization aims to achieve and how digital technologies can help realize this vision. This vision must be sponsored by top leadership and communicated clearly throughout the organization. Let me share two successful examples, one of which I had the privilege to experience directly:

• Novartis' Digital Transformation: Novartis is a global healthcare company. Novartis formulated a clear strategic vision focused on digital innovation. This vision was championed by the CEO Vas Narasimhan, who is a strong advocate for digital health. Narasimhan wanted to transform Novartis into a 'medicine and data science company', effectively integrating artificial intelligence and machine learning across the organization. This strategy aimed to improve the efficiency of drug discovery, strengthen patient outcomes, and streamline operations. Under his leadership, Novartis created strategic partnerships with technology companies, launched digital innovation hubs, and integrated digital technologies into its core operations.? A key aspect of this transformation was effective communication. For Narasimhan it was key to communicate his digital vision clearly throughout the organization, helping employees understand the strategic direction and the fundamental role they play in its implementation, at any level. This leadership and strategic clarity were instrumental in driving Novartis' successful digital transformation.
• Shell's Digital Procurement Transformation. Shell's procurement organization acknowledged the potential of digital solutions to enhance efficiencies, cut costs and improve relationships with suppliers. Shell's Chief Procurement Officer, Donavon Webb, took the lead in sponsoring this digital transformation. He developed a lucid plan to leverage digital technologies, such as AI and machine learning, to optimize procurement processes. He wanted to transform Shell's procurement into a more agile, data-driven, and strategic function with clear and recognized contribution to Shell's overall business objectives. Webb aligned the procurement division with this digital vision. He communicated the strategic objectives clearly to all stakeholders, ensuring that everyone understood benefits and role in this transformation. The result was a successful digital transformation that significantly improved Shell's procurement efficiency and support to the business.

In both these examples, the digital transformations worked because their top leadership sponsored a clear vision of what the organization wanted to achieve with digital technologies. In addition to this, the vision was communicated clearly throughout the organization, increasing the probabilities of success of these initiatives.

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2. Organizational Agility and a Culture of Innovation: digital transformation isn't just about technology; it's about changing the way an organization works. This requires a culture that promotes experimentation, tolerates failure, and supports a growth mindset. Let’s consider two examples:

• Amazon's Supply Chain Transformation. Over the years, Amazon has continuously innovated its supply chain to improve efficiency, speed, and customer experience. It has become a pioneer and, for some aspects, a role model of supply chain innovation. Key is Amazon's culture, which encourages experimentation and learning. They consistently test new methods and technologies, such as drone deliveries, AI for demand forecasting, and robotics for warehouse automation. Amazon's leadership is aware that not all of these experiments will succeed, but failure is considered an opportunity for learning and growth. In a way, it is an investment to improve performances in the future.
• WeWork's Transformation. WeWork disrupted the traditional office space market by offering flexible, collaborative workspaces, with technology having a key role in its business model. WeWork's organizational culture supports innovation and experimentation. They continuously experiment with new offerings and workspace designs to meet the needs of their customers. Similar to Amazon, they see failures as an opportunity to learn and improve. The company's agility is reflected in its ability to quickly adapt to market changes. For example, in response to the COVID-19 pandemic, WeWork quickly shifted its commercial approach and offered more flexible terms and enhanced safety measures.

Both examples show the importance of company’s culture and mindset. New technologies can successfully flourish especially when they find a “fertile” ground/eco-system which accepts innovation and tolerates failure as part of the learning process.

3. Capability Building: the third and equally important ingredient for a successful digital transformation is people. Like any other transformation, it might need new skills and capabilities. Retraining existing staff, hiring new talent, or partnering with external providers are alternative ways to approach this very crucial success-factor. Let me share two more examples:

• Walmart: as response to Amazon’s e-commerce rise, Walmart, the world's largest retailer, initiated a robust investment plan aiming to strengthen its digital capabilities. To this end, the company made significant investments in its technological infrastructure (e.g. revamping its website and mobile app, building a better user-friendly interface, developing a strong omni-channel retail strategy). This required building new capabilities within its workforce, creating extensive training programs to upskill its existing employees in areas like data analytics, digital marketing, and e-commerce operations. Moreover, the company established Walmart Labs, a tech-incubator that hires top talent in technology and data science. Walmart also strategically partnered with technology companies and startups to strengthen its in-house capabilities (e.g. it acquired Jet.com, an e-commerce platform).
• Goldman Sachs: as fintech innovations were changing the financial market landscape, Goldman Sachs launched Marcus, an online bank, with the aim of digitizing its operations and services. Coming from a traditional investment banking model, Goldman Sachs had to develop a vast capability building program in areas like mobile banking technology, user experience design, digital security, and data analytics. To build these capabilities, Goldman Sachs retrained its existing staff, created new roles in technology and digital services, launched "Goldman Sachs University" (with courses such as coding and data science), hired new talents with expertise in digital technology. In addition to this, Goldman Sachs created strategic partnerships with fintech companies and invested in external tech startups through its venture capital arm, GS Growth.?

In summary, successful digital transformation programs require (often robust) capability building plans to develop digital-related skills and expertise.?

Conclusions

As mentioned earlier, digital transformation is not an easy horse to ride. Challenges and risks are not small, and the statistics are admittedly confirming this picture.

However, I'd like to end on a positive note. Despite the high failure rate, the potential of digital transformation is immense. Many financial analysts, focused on assessing the potential of companies to invest in the stock market, openly admit we are at the beginning of a long “digital wave”. We have just scratched the tip of a huge iceberg which will show its full potential only in the next decade.

Digital transformation (in its varied forms like automation, robotization, AI solutions, etc.) offers opportunities for improved efficiency, agility and competitiveness that companies cannot ignore if they want to stay in the market.

Yet, it's important to remember that digital transformation is not just a technological upgrade or a replacement of an old solution with a new one. Digital transformation touches most, if not all the parts of the organization. This is why a successful digital transformation can bring the entire company to the next level of efficiency and effectiveness.

In order to do so, effective digital transformation requires a shift in mindset, a willingness to innovate, to test new avenues knowing that not all of them will be successful. Digital transformation requires the courage to disrupt traditional ways of working. The companies that understand this, that invest not just in new technologies but also in changing their culture and building new capabilities, are the ones that most likely will get the full benefits of digital transformation.

Digital transformation is here to stay and it's reshaping our economies and societies in profound ways.

It is about using technology not just to do what we do better, but to do better things.

It is about imagining new possibilities and creating new value for our customers, our employees, and our societies.

It is about re-imagining the way we work and the way we serve the market

And all that, I believe, makes the journey worthwhile!

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