Digital transformations frequently end in failure, often catastrophically so, but it does not have to be that way. When businesses focus on what really matters – their people – success rates soar
What kills corporations? Hostile takeovers and plain mismanagement are obvious culprits. Occasionally, a business falls victim to a “black swan” – a sudden, severe, unpredictable event, such as the coronavirus pandemic. But the single issue that keeps most leaders looking over their shoulders is digital disruption.
The threat is widely misunderstood, however. The theory of disruptive innovation, expounded by late Harvard professor Clayton Christensen in his book The Innovator’s Dilemma – When New Technologies Cause Great Firms to Fail, does not refer to incumbents’ inability to respond to superior, tech-enabled business models. Indeed, today’s dominant companies are well placed to remain so tomorrow, as they possess tremendous advantages in sector expertise, economies of scale, research and development budgets, brand recognition, datasets and supplier relationships.
The problem appears to be a failure to grasp a simple truth about the task ahead: organisations don’t adopt new technologies at all. People do
Instead, disruption happens when incumbents lack the awareness or the will to reimagine themselves for the modern world by placing technology and adaptability at the heart of their business. The corporate world strains with the effort of such digital transformations. Market intelligence firm IDC estimates that companies spent around $1 trillion on them each year, but research indicates that 70 per cent of these initiatives fail to reach their goals.
The consequences of failure can be dire. According to research by Credit Suisse, the life expectancy of large, listed corporations has collapsed from around 60 years in the 1950s to less than 20 today, and the pattern does not appear to be improving. In a survey conducted by McKinsey & Co, only 8 per cent of companies believed their existing business models would remain economically viable if trends toward digitisation continued.
How can so many organisations fail in a task as essential as preparing themselves for the future when they fully recognise the existential nature of the threat?
Given the amount spent on transformation programmes, lack of funds is clearly not the issue, nor is lack of access to the necessary know-how. Not only is there a thriving market for quality third-party solutions, there are also innumerable examples of technology companies that have themselves fallen victim to disruption.
Frequently, the problem appears to be a failure to grasp a simple truth about the task ahead: organisations don’t adopt new technologies at all. People do.
Rahmyn Kress, former chief digital officer at German consumer goods giant Henkel, put it succinctly at a recent Dmexco digital marketing conference. “Every digital transformation needs to start with the people first... it’s a cultural change that employees need to go through. And you [the employers] need to help,” he said.
New way of working
In this sense, digital transformations are unlike the IT transformations of 30 or 40 years ago, which were all about improving back-end processes, usually to cut costs or streamline specific processes. Instead, they often question the very core of a company and how it makes money, they blur the lines between industries, and they even cannibalise critical product lines – hardly an environment for business-as-usual thinking.
In a recent report, It’s Not a Digital Transformation Without a Digital Culture, Boston Consulting Group described five features that thrive in such an environment: autonomy, boldness, collaboration, a bias to action, and an orientation towards the customer.
We sometimes fail to understand that transformation can be existentially challenging for senior leadership. And when we’re existentially challenged, we can do two things if we are not careful. One is denial. The other is to try to outsource the problem to some big technology consultancy, which is just a disaster
If employees do not or cannot subscribe to this way of working, no amount of technology investment will be sufficient. BCG’s analysis of 40 digital transformations found that 90 per cent of companies that focused on culture achieved strong financial performance. Among those that neglected culture, the percentage dropped to just 17 per cent. Such focus can take many forms. At Henkel, Kress and his team set up a unit, Henkelx, which was tasked with changing the culture and digitally upskilling the workforce, running interactive events, drawing on the skills of start-up partners and experimenting with agile working practices.
Hult International Business School professor Amit Mukherjee argues that change has to run deeper still, to the level of rethinking what good management even looks like today. “In the 20th century, executives led for productivity – doing more with less. In the 21st Century if you are only doing more with less, you will fail when you are faced with someone who leads for creativity,” he says.
This requires a far greater degree of emotional intelligence, with an emphasis on inclusivity, collaboration and openness, he explains. “You can no longer lead by telling people what to do, because you need them to uncover stuff you might not have imagined.”
Many businesses are not set up for that kind of leadership, either culturally or in their processes. In traditional firms with a low-risk appetite, for example, performance evaluation and decision-making structures often inadvertently discourage experimentation, rather than reward it.
Ian Shepherd ran UK high street retailer Game until it went into administration in 2012, hit by the disruption of online retail and video game streaming. He later became chief commercial officer at cinema chain Odeon, and now advises retail and hospitality firms on how to reimagine themselves in the digital age.
Analysis of 40 digital transformations found that 90 per cent of companies that focused on culture achieved strong financial performance. Among those which neglected culture, the percentage dropped to just 17 per cent
Emotionally aware leadership
One retail client was struggling to change from a bricks-and-mortar model to an omnichannel one. The problem, Shepherd found, wasn’t with the technology. “It turned out that online purchases made by customers in an area didn’t count towards the local store’s revenue targets. On the other hand, if a local customer bought something online and returned it to that store, it was deducted from its revenues. So you can imagine how the staff viewed omnichannel retailing – as a real pain in the backside,” says Shepherd.
Having the empathy to listen to front-line staff is an essential element of any successful digital transformation attempt – but companies must be prepared not to like what they hear. Changes of the magnitude required to rethink business models are rarely painless. As legacy business lines are scaled back and old skills are supplanted by new ones, the atmosphere can rapidly fill with anxiety.
This again requires emotionally aware leadership, with a clear, convincing narrative for why the transformation is necessary, and the consequences if nothing changes. Language is important. Shepherd says of Odeon’s digital transformation: “There was originally a lot of resistance.
Then, quite by accident, we started using the phrase ‘test and learn’. In a business that has maybe been command-and-control for a very long time, it can be uncomfortable for managers to try something that doesn’t work, but with these words, we found a way of saying that it’s safe to try things. Yes, what you’re trying might be a complete disaster, but what’s the smallest experiment you can do?”
Shepherd says it had an “energising” effect on staff morale and resulted in innovations such as dynamic pricing and an industry-leading decision to remove online booking fees to drive web sales.
The benefits of bringing front-line employees on board can be critical, but they are not the only ones who need convincing. Indeed, Shepherd says that, in his experience, it is often the leadership team that is most afraid of the consequences of digital transformation: “If you’re the buying director of a big retailer, you get a lot of money, you have a lot of authority and you’ve got there because of a certain set of skills and instincts that you’ve honed over the years. Then someone comes along and says being a buying director in the modern world is all about data analytics and machine learning, and you’re thinking, ‘I might know the least about data analytics of anyone who works in this company’.
“We sometimes fail to understand that transformation can be existentially challenging for senior leadership. And when we’re existentially challenged as individuals, we can do two things if we’re not careful. One is denial. The other is to try to outsource the problem to some big technology consultancy, which is just a disaster. The last thing you should be trying to do is give a load of money to someone to solve a problem you don’t even understand.”
Companies spend around $1 trillion on digital transformations each year, but research indicates that 70 per cent of these initiatives fail to reach their goals
Facing the fear of change
For most management teams, therefore, when it comes to digital transformation, they need to look at themselves first. Have they faced up to their own fear of change? Do they really understand the technologies that will allegedly save their business? If not, what will it take to find out? Are they willing to admit they don’t know yet, and look for help?
Judging by the failure rate of so many digital transformations, it would seem this isn’t happening anything like enough. Hult’s Mukherjee recently canvassed some 700 mid- and senior level executives globally about how they approached digital transformations. Nearly 60 per cent said their efforts were technology-driven – three times more than those who said their transformation was people-driven.
“At its core, design thinking – which lies at the heart of successful digital processes and business models – answers yes to three simple questions: is it feasible (technology), is it profitable (business) and is it usable (people)? Take one out and you usually have a failure,” says Mukherjee. “But we are generally still chasing shiny baubles.” n