Digital Transformation Success and Failure – Part I Insights from Industry and Grey Literature
The ability to leverage digital technologies is a business imperative. In pursuit of digital business, companies across the globe have dedicated significant resources to pursuing digital innovation and new digital business creation. Yet, industry and academic research consistently report a high failure rate.
Intrigued, I decided to explore what is known about the high failure rates of digital transformation initiatives, especially regarding the human and organisational factors that might contribute to the issue.
Given the attention the topic has received in the business and management media, on this post, I investigate what the industry literature has to say about the topic (on my next post, I will look at what academia has to say. So come back if you want to get hear from the other side).
For this investigation, I focussed on the outlets with most influence. Thus, I selected reports of research conducted by leading global consulting firms. Reports and articles on the topic were found for Bain & Company, Boston Consulting Group, and McKinsey & Company. In addition, a sample of articles were sourced from three actors with significant influence among practitioners: Forbes, MIT Sloan Management Review and Harvard Business Review.
Defining Success or Failure
According to the articles and reports analysed, success range from 5 to 30 percent. Flipping the coin, that means a 95 to 70 percent failure rate. However, the way success and failure is defined vary greatly from one source to the other. I found that while some focus on the success of the overall digital transformation over time, others counted each individual project developed as part of a digital transformation journey. In both cases, however, industry actors asked executives and senior managers to report to what extent their initiatives had succeeded.
My own thoughts were that more consensus is clearly needed on how to define and measure success and failure. Let´s hope that we can get more insights on this from the academic literature.
Table 1. Reported success and failure rates: Sample Bain & Company, BCG and McKinsey & Company
|Source||What is measured||Achieved or Succeeded||Partial Results||Failed|
|Bain & Company
|Success of digital transformation initiatives||5% Achieved or exceeded expectations||75% Settled for dilution of value and mediocre performance||20% Failed to deliver, producing less than 50% of the expected results|
|BCG (2020)||Success of digital transformation projects||30% met or succeeded their targets and resulted in sustainable change||44% created some value but did not meet their targets and resulted in only limited long-term change||26% created limited value (less than 50% of the target), producing no sustainable change|
|McKinsey & Company (2018)||Success of overall digital transformation||16 % have successfully improved performance and also equipped them to sustain changes in the long term.||7 % performance improved but improvements were not sustained.||77% performance did not improve*
* Implied, but not stated
Key Success Factors
Although the industry literature all start by highlighting the high failure rate, the bulk of the attention has been on the key success factors based on what leading organisations have done right. The most systematic or semi-scientific industry research has been along these lines. So, what do they say?
First, my assumption was right, industry literature state that people and organisational factors are much more determinant to success than technological elements (Baculard et al., 2017; BCG, 2020; McKinsey, 2018). Successful companies tend to focus on and invest heavily in the fundamental changes to their ways-of-working and culture that enable them to develop digital innovation initiatives rapidly and execute them at scale. That means that companies that succeed focus on developing human and organisational elements along with investing in technology.
Next, there are numerous commonalities regarding the factors cited as key for success in digital transformation. In general, these are:
- Clear digital transformation vision, strategy and roadmap, with aligned goals, metrics and monitoring tools
- Strong engagement of leadership and middle-management, with aligned ownership and accountability
- Development of talent within the organisation and engagement of key employees in developing and executing digital transformation
- Adoption of new ways of work, especially lean and agile, and enabling innovation
- Building foundational digital technologies guided by business needs
Interestingly (but not surprisingly given that the targeted audience tends to be executives), industry literature LOVES to talk about top leadership. The key success factors related to leadership tend to focus on strong involvement in design and implementation, alignment among leadership groups, encouraging and empowering employees to adopt new ways of work and innovate, communicating effectively and creating a sense of urgency, effectively monitoring initiatives, and having incentives attached to digital transformation. So, nothing new here…
Looking at the reasons why digital transformation fails, however, these success-focussed industry literature tends to equate the cause of failure to organisations not doing what successful organisations have done, or not doing it sufficiently (BCG, 2020) – that is to say, if organisations had done exactly what successful organisations did, they most likely would have succeeded.
In my view, however, this is overly simplistic as it does not investigate the specificities for why organisations have not succeeded in doing what others have done. It might often be the case that they have, indeed, tried to do exactly the same – it might not be a case of not knowing what should be done. In these cases, saying they have not done what others have done equate to saying “they failed because they could not succeed.”.
Key Failure Factors
While there are a few industry studies systematically listing the success factors of digital transformation, industry literature truly discussing failure factors tend to be more dispersed across multiple news articles, reports and case studies.
A common practice is to list reasons why companies fail based on personal experiences, anecdotical information or “previous studies” and tend to focus on well-known challenges and barriers to digital transformation.
- Not understanding digital transformation
- Placing technology at the centre of digital transformation, instead of approaching it as a business transformation
- Mistaking digitization, converting digital products or processes to a digital form, for digitalization, making the most out of opportunities of digital products and processes
- Miscalculating efforts
- Overestimating benefits and underestimating costs, especially by senior management
- Underestimating the amount of legacy applications that need to be digitally transformed
- Lack of understanding that “it is going to be hard” and commitment despite the challenges
- Not doing implementation well
- Working with poor onboarding and implementation processes for digital transformation projects and initiatives
- Misaligned goals and stakeholders (across levels, teams, business units, partners, etc.) and lack of coordination
- Issues at the project level
- Poor user-market-solution fit of digital innovations, low focus on customer value, or lack of alignment to company’s strategy and strengths
- Miss-alignment between digital capabilities supporting pilot and capabilities for supporting scale
- Issues with employees
- Employees’ resistance to change and fear of losing their jobs
- Not having the proper skills, technical, business and innovation
- Issues with culture
- Fear of failure
- Not being willing to spend time changing behaviours and how people make decisions (culture change).
Digital Transformation is crazy hard
Digital transformation is significantly harder than conventional transformation (Baculard et al. 2017, p.1) and thus traditional change management best practices might not be sufficient or adequate to deal with the challenges at hand.
Part of the challenge is the need to manage an increasingly multi-faceted and diffused set of organisational transformations, while trying to create new digital businesses aligned to the needs of customers and the readiness of markets, and while also maintaining a healthy high-performing core business.
Another part of this challenge would be a consequence of digital technologies. Even if traditional companies are used to innovating in the product development realm, few are adept in deploying digital technologies to solve problems and boost performance across the organisation (Baculard et al. 2017, p.2).
Initiatives do happen, they just don’t scale
Another element worth highlighting is that companies embarking on digital transformation tend to struggle to translate prototypes or pilots into products and capabilities that can have a meaningful impact on the company’s performance (Sutcliff, 2018).
While there is a proliferation of initiatives, they tend to plateau somewhere short of broad organizational impact. Indeed, a recent McKinsey & Company survey found that most (38%) of digital transformation initiatives stall at scaling phase (McKinsey, 2020). This has given placed to the expression “stalled in pilot purgatory” (Denning, 2021).
Most common indicated reasons for this include resourcing issues, misaligned culture and ways of working, lack of skills and competencies to bring these initiatives further (Sutcliff, 2018), lack of internal alignment and commitment, and lack of a well-integrated and communicated strategy and aligned initiatives (McKinsey, 2020). Also, noteworthy, the disconnect between those in charge of pilot initiatives and those in charge of operations (and thus potential scaling) has also been highlighted by industry literature (McKinsey, 2020). This happens even in the case of organisations that have built internal digital innovation units to pursue ambidexterity (Baculard et al., 2017), but without a clear indication of how to best concretely build this integration. This ends up creating “two-speed” organizations that are responsive in limited respects but still held back by legacy systems (Baculard et al. 2017, p.2).
The hidden leadership issues
Interestingly, some articles have started scraping the surface of potentially hidden leadership elements that might play an important role in digital transformation implementation. For instance, Baculard et al. (2017), writing for Bain & Company, hints to scepticism of managers as an element, suggesting that despite survey data reporting that digital investment is a top priority of management, anecdotal evidence suggests that many executives are sceptical that they can translate the buzz around digital into meaningful improvements in performance. This scepticism, in turn, could lead them to make day-to-day decisions that, paradoxically, deprioritises digital innovation and digital transformation.
As another example, Bughin et al. (2018), writing for McKinsey & Company, hint towards the misalignment between management’s “intuition” – developed though years of formal education and practical experience based on traditional economic, strategic and operating models – and the new logic of a reality shaped by digital technologies. Denning, S. (2021) also talks about an “efficiency-driven” (decrease costs and maximize profits) mindset that does not fit the need for constant investment in skills and innovation of the digital reality. Managers have built their career on top of such intuition and are likely to make day-to-day decisions accordingly – even subconsciously and while understanding well the so called imperatives of successful digital transformation. Furthermore, this traditional intuition might clash with the requirements of digital transformation and digital innovation, leading to the emergence or exacerbation of tensions and paradoxes and the aggravation of challenges and complexities.
On the other hand, Sutcliff et al. (2018), in an article published by the Harvard Business Review, talk about the allure of a new exciting digital business model causing executives to not pay enough attention to the issues of the core business, especially when things are not going well for the existing business lines. In short, the illusion that a new tech-based digital business will solve all the companies problems without the need to deal with the rest.
So, what next?
In general, industry research indicates a clear need for academic investigation of digital transformation to gain a deeper understating of the challenges and potentially hidden complexities of digital transformation, including by moving beyond the focus on top leadership teams.
In particular, understanding of the challenges and complexities that drive failure in digital transformation is anecdotal at best. This is very little regarding the concreate challenges and complexities that managers can expect to experience on a daily-basis. In this regard, as Denning S. (2021) puts in a recent Forbes article, senior executives are frustrated by the slow pace and limited return on investment of their digital transformations, and are (still) unsure what is holding them back.
So next, let´s see how much better academic research is…
Baculard, L.-P., Colombani, L., Flam, V., Lancry, O., & Spaulding, E. (2017). Orchestrating a Successful Digital Transformation. Bain & Company, November 2017. Available at: https://www.bain.com/contentassets/dd440ca288d34c16ba8cd3ab6ef69a04/bain_brief_orchestrating_a_successful_digital_transformation.pdf
Bock, R., Iansiti, M., & Lakhani, K. R. (2017). What the Companies on the Right Side of the Digital Business Divide Have in Common. Harvard Business Review. Available at: https://hbr.org/2017/01/what-the-companies-on-the-right-side-of-the-digital-business-divide-have-in-common
Boston Consulting Group (BCG). Flipping the Odds of Digital Transformation Success. October 2020. Available at: https://web-assets.bcg.com/c7/20/907821344bbb8ade98cbe10fc2b8/bcg-flipping-the-odds-of-digital-transformation-success-oct-2020.pdf
Bughin, J., Catlin, T., Hirt, M., & Willmott, P. (n.d.). Why digital strategies fail. McKinsey & Company, January 2018. Available at: https://www.mckinsey.com/business-functions/mckinsey-digital/our-insights/why-digital-strategies-fail
Bughin, J., Deakin, J., O’beirne, B., Manyika, J., & Catlin, T. (2019). Digital transformation: Improving the odds of success. Available at: https://www.mckinsey.com/business-functions/mckinsey-digital/our-insights/digital-transformation-improving-the-odds-of-success
Davenportand, T. H., & Westerman, G. (2018). Why So Many High-Profile Digital Transformations Fail. Harvard Business Review. https://hbr.org/2018/03/why-so-many-high-profile-digital-transformations-fail
Denning, S.. Why Digital Transformations Are Failing The Meager Returns From “Digital Transformations. Forbes, June 2021. Available at: https://www.forbes.com/sites/stevedenning/2021/05/23/why-digital-transformations-are-failing/?sh=6184178e7617
Deloitte. (2021). A new language for digitaltransformation. https://www2.deloitte.com/us/en/insights/topics/digital-transformation/digital-transformation-approach.html?id=us:2em:3na:4diUS164855:5awa::MMDDYY::author&pkid=1008296
Forbes Technology Council – Expert Panel. 13 Industry Experts Share Reasons Companies Fail At Digital Transformation. Forbes, June 2021. Available at: https://www.forbes.com/sites/forbestechcouncil/2021/06/15/13-industry-experts-share-reasons-companies-fail-at-digital-transformation/?sh=1a544ce47a3f
McKinsey & Company (McKinsey). How to restart your stalled digital transformation. (2020). March 2020. Available at: https://www.mckinsey.com/~/media/mckinsey/business%20functions/mckinsey%20digital/our%20insights/how%20to%20restart%20your%20stalled%20digital%20transformation/how-to-restart-your-stalled-digital-transformation.pdf?shouldIndex=false
McKinsey & Company (McKinsey).Why do most transformations fail? A conversation with Harry Robinson. July 2019. Available at: https://www.mckinsey.com/business-functions/transformation/our-insights/why-do-most-transformations-fail-a-conversation-with-harry-robinson
McKinsey & Company (McKinsey). Unlocking success in digital transformations. October 2018. Available at: https://www.mckinsey.com/~/media/mckinsey/business%20functions/people%20and%20organizational%20performance/our%20insights/unlocking%20success%20in%20digital%20transformations/unlocking-success-in-digital-transformations.pdf?shouldIndex=false
Mike Sutcliff, Raghav Narsalay, & Aarohi Sen. (n.d.). The Two Big Reasons That Digital Transformations Fail. Harvard Business Review. Retrieved March 21, 2022, from https://hbr.org/2019/10/the-two-big-reasons-that-digital-transformations-fail
Rogers, B. (2016). Why 84% Of Companies Fail At Digital Transformation. Available at: https://www.forbes.com/sites/brucerogers/2016/01/07/why-84-of-companies-fail-at-digital-transformation/?sh=d987290397bd
Sutcliff M., Narsalay R., & Sen A. (2018). The Two Big Reasons That Digital Transformations Fail. Harvard Business Review, October 2018. Available at: https://hbr.org/2019/10/the-two-big-reasons-that-digital-transformations-fail