Digitization involves standardizing business processes and is associated with cost cutting and operational excellence. In essence, it imposes discipline on business processes that, over the years, were executed by individual heroes in a variety of creative (but not always optimal) ways. SAP, PeopleSoft, and other integrated software packages that burst onto the scene in the 1990s helped lead the way into more digitizing, but it remains a painful process.
Today, companies are confronting something new and different: digital. Digital, of course, is an adjective. It refers to a host of powerful, accessible, and potentially game-changing technologies like social, mobile, cloud, analytics, internet of things, cognitive computing, and biometrics. It also refers to the transformation that companies must undergo to take advantage of the opportunities these technologies create. A digital transformation involves rethinking the company’s value proposition, not just its operations. A digital company innovates to deliver enhanced products, services, and customer engagement. Digital is exciting, thrilling — and a bit unnerving!
The problem is this: We have found that many business leaders are thinking of digital as advanced digitization, such as enhancing the customer experience with mobile technologies or implementing internet of things capabilities to improve operations. But “becoming digital” is a totally different exercise from digitizing. Companies today must become digital to compete in a world in which both end consumers and business customers expect products and services to meet their needs on demand across channels. In most industries, digital is already a business imperative. Digitization is an important enabler of digital, but all the digitization in the world won’t, on its own, make a business a digital company. I would argue, in fact, that failing to distinguish increased digitization (even radically increased digitization) from a digital transformation could be a fatal mistake.
Digitization Is an Operational Necessity
The benefits of digitization are significant: efficiency, operational excellence, predictability. For all the pain that it entails, digitization is an essential undertaking in companies. Without digitization, companies cannot scale; they cannot absorb the complexity of expanded product portfolios; they cannot personalize services. Disciplined, standardized business processes, where appropriate, ensure the accuracy and security of core transactions and back-office processes. They make data accessible and reliable.
Most companies have grossly underestimated the challenge of digitization. Shedding habits — imposing discipline — has proved to be harder than business leaders imagined. In many cases, leaders have committed to digitization initiatives thinking they are funding new and better technology. Many didn’t recognize that digitization requires a commitment to fundamental changes in how people work. Consequently, most digitization efforts cost more — and generate fewer benefits — than anticipated.
Despite more than 20 years of business digitization history, MIT Center for Information Systems Research (CISR) has found that only 28% of established companies have successfully digitized. This is a problem, because companies must be digitized if they hope to become digital. Without digitization, management’s attention will be consumed with fixing whatever is going wrong today in a company’s operations. There will be no time for innovation. Leaders won’t have the resources to invest in a digital transformation or the operational excellence to support their digital value proposition.
Digital Is a Customer-Centric Value Proposition
To become digital, leaders must articulate a visionary digital value proposition. This value proposition must reassess how digital technologies and information can enhance an organization’s existing assets and capabilities to create new customer value. Being digital is not just introducing mobile apps for customers. It is taking advantage of the opportunity to redefine a business — and possibly even an industry.
Big, old companies have started to define visionary digital value propositions. Schneider Electric SE has moved beyond selling electrical products to providing energy management solutions. Kaiser Permanente views itself not as a health care provider but as a patient-provider collaboration. BMW is not just an automobile manufacturer; it’s a provider of individual mobility. Philips has sold off multiple businesses, including its foundational lighting business, to focus on “improving lives through health care innovation.”
These are bold strokes. They are risky. But the alternative is to try to succeed in a digital economy with a pre-digital value proposition. That could be the riskiest alternative of all.
To become digital and pursue a digital vision, companies must define their digital offerings. They must embrace information-enriched customer solutions delivered as a seamless, personalized customer experience. Digital offerings are the specific solutions that deliver on a company’s digital value proposition. The benefits of a successful digital transformation include growth in revenues and margins, undying customer loyalty, and the ability to attract top talent (and thus continue to grow).
Successful companies in the digital economy will be digital (to provide customer value) and digitized (to provide for scale and efficiency). Although companies still struggle to digitize, what it means and how to do it are now well established. It’s just hard to do well. How to be digital, in contrast, is less well established. Defining a value proposition that will attract customers who are actually willing to pay for a given solution is more art than science.
Five Guiding Principles for a Digital Transformation
If you want to get started on a digital transformation, I suggest you embrace five guiding principles:
- Don’t hand off responsibility for your digital transformation to your IT unit. This is a business transformation. If you think IT can make it happen, the game is over!
- Do engage IT leaders in defining your vision and mapping your initiatives. Your embedded culture and structures will be your two biggest obstacles to your digital transformation, but your legacy IT systems are more likely a liability than an asset. IT leaders can help establish what’s possible.
- Bring in professional help. If you wouldn’t add a room to your house without consulting an architect, make sure you understand that in trying to coordinate the business components, roles, structures, processes, and systems that will enable you to deliver digital offerings, you need professional business architects. Stop thinking of architecture as an IT issue and engage in developing your business architecture.
- Be persistent and patient. Understand that you will need to invest time and money in your digital initiatives just like venture capital companies invest in innovative businesses. The cost savings from digitization were easy to track. The new revenues from digital initiatives probably won’t flow in quickly. Track some intermediate metrics like reuse and time to market.
- Prepare to co-create with customers. Unless you have Apple cofounder Steve Jobs’ gift for anticipating what customers want, you’ll need to engage them in the process of defining your offerings. Otherwise, you may never see those new revenues you’re counting on.
It will take time to settle on a pattern of digital offerings that bring value to your customers and your business. It will take even longer to identify, build, and reuse business components so that new solutions can be easily configured. And for many companies, there is still much work to be done to ensure that they are sufficiently digitized to support a digital transformation.
In short, your digital transformation will be a long journey. It’s important to get started.
This article first appeared in www.sloanreview.mit.edu
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