To meet the demands of the always-connected,buy-at-any-time consumer, many businesses have implemented technology to meet that demand and called those efforts “digital transformation”. Early transformation efforts were focused on initiatives like e-commerce, applications, customer experience, and others.1 But these disparate efforts have not been enough.
Digital transformation is a dramatic shift for any organization. Digital transformation is really a business transformation that leverages the use of technology. It is reimagining every aspect of a business using a “digital first” approach. But the initial allure of rolling out some point solution, using some latest and greatest technology, is often appealing.
Many of these forerunners are realizing that their businesses need to undergo an end-to-end transformation. This requires dramatic operational, structural, and cultural shifts.2 The shifts needed for digital transformation are not easy -or cheap – or quick – and require significant investment and patience in order to realize business benefits.
But being patient and staying the course – especially when the core business slows down a bit – may not meet shareholder expectations.
Shareholders aren’t buying in to digital transformation?
Digital transformation sounds great until the core business slows down and shareholders want better returns. When these two conditions are present, businesses have reacted by pulling back on dividends, changing leadership, or both. A few recent examples:
Mattel
Mattel outlined a digital transformation overhaul that focused on building toys that will teach and develop toddlers and prep them more for science, tech, and engineering careers well into the future. Mattel also talked analytics, user experience, and a design cadence that rhymed with what you’d hear from a tech company.
This transformation will come at a cost. Mattel announced a cut to its dividend and pulled its practice of shorter-term financial guidance and replaced it with longer increments. Mattel CEO Margo Georgiadis will take the funds that would have gone to a dividend and put it on digital transformation.
What’s not clear is how much time shareholders will give Georgiadis to make it happen.3
GE
GE CEO Jeffrey Immelt stepped aside for John Flannery, who was CEO of GE Healthcare. GE has made a big bet on digital with its Predix platform as well as a focus on the industrial internet. However, Wall Street was worried about GE’s cash flow and profit margins under Immelt. Flannery said he sees the value of digital and investing in transformation. However, Flannery also said he’s going to review the digital efforts going forward.
How will Flannery balance earnings, cash flow and investing in a digital business that is seeing increased costs to hire talent and develop platforms? Wall Street is already doing sum of the parts valuations for GE and wondering whether GE Digital should be spun off.4
Ford
Ford recently replaced CEO Mark Fields. Fields was one of the main players behind Ford’s push into digital platforms and new business models. The new CEO, James Hackett, ran Ford Mobility. The problem: Ford, like other automakers, is facing a slowdown ahead. Car leases could be a debt time bomb.
Investors need to know Hackett’s plans going forward; particularly, how he intends to reverse the earnings drag of the last 12 months and his strategy with respect to electrification and future mobility. And even if Hackett does move faster into digital, Ford shareholders may balk at the investment in digital transformation.5
Is Digital Transformation in trouble?
A June 2017 survey6 highlights the struggles that companies are having with digital transformation.
- Don’t call it “Digital Transformation” – The term “digital transformation” is being perceived negatively within many companies. Businesses are beginning to use terms like “digital strategy”, “digitization”, or “business transformation” rather than “digital transformation”.
- Challenges abound – Businesses are facing significant obstacles to achieving the full potential of digital transformation. Among the challenges were resistance to new ways of working, lack of a clear transformation strategy, lack of digital talent, and being overwhelmed by the complexity of digital.
- Wasted effort? – Nine of ten executives said that they get digital transformation strategy wrong at least one-fourth of the time. A third of the executives surveyed thought
that execution was successful 50% or less of the time.
Digital transformation, done well, reinvents current business models and may result in new business models. Business processes become transparent, streamlined, and data-driven. The culture of an organization shifts from activity-based to providing customer value. Most importantly, all parts of the business “buy in” to the transformation. Companies that are successful in doing this will thrive in the digital era. Companies that do not will (eventually) fail.
This means that to be successful, companies must invest in digital transformation, not just time and resources, but often significant amounts of monies. At the same time, the benefits of digital transformation take some time to pay off. And if the core business shows signs of slowing down, shareholders get antsy.
Which presents the conundrum.
There are many factors and challenges surrounding transformation that are not possible to know at the outset. Many transformation initiatives fail because leaders develop detailed plans and budgets before they understand the realities of the adjustments required in a multi-year initiative. Yet, it’s too risky to not have control over the funding of the initiative.7
In addition, budgeting needs to shift from legacy operations to the new environment and the new business model. Changing a business model requires significant capital reallocation across business and functional units. It may require rethinking many cost-component aspects embedded in the company’s existing business model.8
On the other hand, if companies do not transform, they will eventually cease to exist. So how can a company enter the digital era, invest in transformation, and keep shareholders happy?
Big Vision, but take Small Steps
Perhaps an Agile approach can help businesses walk the fine line between shareholder expectations and the investments required by digital transformation.9
Rather than develop a detailed plan for the entire effort, break the digital transformation project into a series of phases, with each phase representing a step along the transformation journey. Develop detailed plans and budget for only the current phase of the project up to the next phase. Each phase then becomes a goal. After achieving a goal, develop the plan and budget for the next phase of the journey.
Here are some tips for taking an Agile approach to digital transformation.
- What’s the vision? What is the business of the future? What would characterize success? Developing the vision provides critical overarching guidance for digital transformation.
- Digital transformation is not accomplished in a single step – Unless your business is a start-up, your business has had success doing what it does how it does it for some time now. Changing the course and culture of a business takes some time – don’t try to do everything in a single step.
- Iterate – Break down larger transformation projects into smaller deliverables, with each deliverable becoming a decision gate for the next phase of transformation.
- Read the Tea Leaves and Course Correct – Data must drive transformation efforts. Use the data resulting from current efforts to confirm planned outcomes, identify new opportunities and make course corrections.
- Steer new projects toward digital transformation – As projects for new systems are proposed, compare the proposed outcomes to the business of the future. If the outcomes are not aligned with this vision, challenge the need and longer-term intent of the project – perhaps a digital-first approach can help. New initiatives should be aligned with the business vision and the funding associated with those initiatives can routed to digital transformation.
Digital transformation is not just a “once and done” activity or project. True digital transformation first requires vision and strategy, followed by execution. An iterative approach not only softens the blow on the company coffers, but also helps contain and limit exposure to risk.
Sources
1 Rickards, Tuck and Rhys Grossman. “The Board of Directors you need for a Digital Transformation”. HBR. 7/13/2017. Web. Retrieved 8/15/2017.
2 Ibid.
3 Dignan, Larry. “Digital Transformation about to face a business reality vs investment tug of war”. ZDNet.com. 8/3/2017. Web. Retrieved 8/15/2017.
4 Ibid.
5 Ibid.
6 Beal, Alex. “A Crisis in Digital Transformation”. WiPro Digital. 6/1/2017. Retrieved 8/7/2016 from slideshare.net\WiproDigital\digital-transformation-roi-survey-from-wipro-digital-7656182
7 Bendor-Samuel, Peter. “How to Budget a Digital Transformation Initiatvie Despite Unknown Risks”. Forbes. Web. 4/4/2017. Retrieved 8/7/2017.
8 Ibid.
9 Ibid.
Great insights, Doug. Semantics matter – both in advertising copy as well as in ‘messaging’ from leaders, internally and externally. Perhaps thinking about how to describe the road ahead is part of the way to getting the journey underway. One thing’s for sure – doing nothing will, in the end, take decisions away from those ‘in charge’.
Appreciate your thoughts, Cherri. I agree that describing the road ahead – and that there will be some ‘pain’ to get to the ‘gain’ – is a critical aspect of any organization’s digital transformation. While shareholders may not like the reduced dividends near-term, shareholders also need to understand the longer-term plan and strategy of an organization’s transformation. History has a few examples of radical transformation…. Toyota started out making looms, not automobiles; Pitney Bowes has transformed from just making postage meters to becoming a software company providing location intelligence, global e-commerce, and customer information management solutions. Transformation is possible and does happen. (And, I may have just found an idea for a future post!)