What is digital transformation?
Digital transformation is a key component of an overall business transformation strategy, and while not the only factor, it’s critical to the success or failure of any transformation effort. The right technologies – coupled with people, processes, and operations – give organizations the ability to adapt quickly to disruption and/or opportunities; meet new and evolving customer needs; and drive future growth and innovation, often in unexpected ways.
In the first of the four Industrial Revolutions, steam power was the disruptive technology that changed the world. In the second it was the assembly line; in the third it was the computer. Today, we are in the fourth Industrial Revolution and it is digital. Intelligent digital technologies like artificial intelligence (AI), machine learning, Internet of Things (IoT) networks, advanced analytics, and robotics, have the power to reinvent how we work and do business – and how companies engage with their customers and the world.
Digital transformation definition
Digital transformation involves integrating digital technologies and solutions into every area of a business. This is as much a cultural change as a technological one as it requires organizations to make fundamental shifts in the ways they operate and how they deliver customer experiences and benefits. Digital solutions also help to augment the workforce and can lead to business process and business model transformation.
Digitization: Converting information and documents from analog to digital formats.
Digitalization: Integrating digital technologies into existing business processes.
Digital transformation: A fundamental rethinking of customer experience, business models, and operations. It’s about finding new ways to deliver value, generate revenue, and improve efficiency.
The importance of digital transformation in today’s business climate
As we move into the 2020s, it has become increasingly apparent that if businesses are to grow and compete, they must take steps to become more resilient, competitive, and responsive. Companies must develop and transform their digital landscape – starting from raw materials and the earliest supply chain tiers, to meeting rapidly changing customer demands for more personalized service and fulfillment, and to modernizing and innovating traditional business models.
In its latest survey of senior business executives, McKinsey found that since the pandemic, there is a palpable sense of urgency among business leaders to digitalize and modernize their processes and legacy systems. According to the survey, many respondents recognize that their companies’ business models have become obsolete. Only 11% believe their current business models will be economically viable through 2023, while another 64% say their companies need to build new digital businesses to help them get there.
For today’s businesses, it’s no longer a matter of if they need digitalization to compete in the current business climate, but how soon they can get started on their digital transformation journey.
Business innovation and three facets of digital transformation
Today’s businesses are in a time of rapidly increasing competition and customer demands. A major objective of digital transformation initiatives is to help support business leaders and teams in making their operations more streamlined and competitive. New technologies (discussed below) play a central role in driving transformation, but so do business process, business models, organizational culture, and receptiveness to transformation.
Any transformation plan should look at these three areas:
- Business process transformation: This involves changing and adapting core – often long-standing – processes and workflows to meet changing business goals, competition, and customer demands often through process automation. Despite the terms often being used interchangeably, digital transformation is a subset of business transformation – it builds a connected, technological framework that underpins and supports process changes.
Evidence of business process transformation can be seen from end to end within business operations thanks to improvements in workflow management. For example, by implementing a digitalized, cloud-based supply chain management system, businesses can lower downtime, streamline production, and increase profitability.
- Business model transformation: Business process transformation focuses on workflows and task-related areas of the business whereas business model transformation aims at the foundational building blocks of how value is delivered in a specific industry. In essence, companies are using digital transformation to change traditional business models.
In the auto industry, digital technologies give the ability to centralize and automate subscription-based business models and billing processes. Coupled with rapidly changing customer demands and a general cultural shift, traditional car buying is being transformed with subscription-based models.
- Organizational and cultural transformation: A successful digital transformation should align itself with the culture and values of the organization. An internal loss of faith in corporate culture can impact the productivity, initiative, and wellness of the workforce. Slow or pessimistic adoption of new digital technologies can cause missed targets and lead to a loss of competitiveness, revenue, and brand value.
Organizational transformation is best achieved through collaboration and open discussions from the top down – as to how this digital transformation will impact roles and workflows and why the leadership teams feel that it will be worth the risk and effort in the long run.
Changing customer preferences, among them the waning interest in owning physical products, have been accelerating the shift to subscription-based offerings beyond software and digital service.
Boston Consulting Group 2021
Digital transformation benefits
Digital transformation integrates every level and function in a modern business. Intelligent technologies give organizations the essential tools they need to survive and thrive. Here are some potential impacts of transformation:
- Delivers deep insights to inform real-time decision-making: For many businesses, assessing performance and ROI has often been a backward-looking process. By the time data is gathered, processed, and manually analyzed, the ship of opportunity has long since sailed. With a modern ERP system and advanced analytics, businesses can see real-time data and customize powerful analysis algorithms to make the best decision in the moment.
- Improves efficiency and productivity: IoT network devices and machines continually transmit data, machine logs, and performance reports. Through the application of advanced analytics, this data can support predictive maintenance, lowered downtime, and deliver insights for more productive and efficient workflows.
- Enhances customer experiences: Your customers want their needs met on their terms. Personalization, omnichannel access, customized service plans, and real-time access to data can help you deliver to their ever-changing expectations while increasing leads and driving retention and loyalty.
- Helps drive business model innovation: There’s no question that changing consumer and market demands are seeing an increased focus on business model innovation as a means of value creation. But to change and modernize fundamental business models and customer experiences, companies require the ability to gather and analyze real-time data and develop automated and intelligent processes to manage new business, payment, and service models.
- Supports a robust and competitive corporate growth strategy: When businesses digitalize their operations and optimize their services with connected technologies, they find new ways to connect and collaborate and to streamline future business growth strategies, including:
- Developing new products and services
- Improving profitability and strengthening revenue channels
- Attracting and retaining new leads and customers
- Fosters agility and resistance to disruption: The COIVD-19 pandemic served to shine a light on a lot of vulnerabilities in modern business processes and models. But it was only one of many cultural, economic, political, and market changes that businesses have been increasingly facing in the past few years. Modern companies now look to digital transformation to equip them with the tools for rapid new product and service development, and predictive analytics to help better see disruptions coming, or anticipate market changes and opportunities. They want to be able to scale up and down with ease and have a full suite of cloud-connected solutions that can drive innovation – without having to jump from provider to provider.
Technology transformation enables business transformation
Digital transformation is underpinned by some of these core and new technologies:
Modern ERP and database technologies
The best cloud ERP solutions use in-memory database technology, making them highly scalable and adaptable. This is important because they are essentially the “brains” behind digital business transformation. ERP takes all the core processes needed to run a company (such as finance, HR, manufacturing, and supply chain) and integrates them into a single system. And when a modern ERP is powered by AI technologies, it has the power to not only manage and process Big Data, but to analyze and learn from it.
In order to deliver value, data needs to be harnessed and understood. Using AI and machine learning algorithms, advanced analytics provides insights and reports that are deep, accurate, and actionable. Businesses can also customize data analysis configurations on demand. This gives business leaders the power to act quickly and decisively – by seizing an opportunity or responding to risk.
Cloud-based infrastructure is an essential component to successful digital transformation and the establishment of IoT networks and connected business systems. On-demand, centralized access to all systems, assets, and data allows organizations to scale infrastructure as needed and rapidly change or automate workflows. This helps to support rapidly changing business priorities and operational models. And as Forrester tells us, as of 2021, almost 60% of enterprises in North America rely on cloud platforms, which is five times the percentage it was just five years ago.
AI and machine learning solutions
Big Data grew up alongside AI and machine learning. In order to process and make sense of Big Data, it’s necessary to have the power of AI and machine learning. For AI and machine learning to deliver accurate and meaningful results, both must have large enough data sets to support robust learning and analysis. The partnership of Big Data, AI, and analytics is at the core of business and digital transformation – driving predictive planning and responsive automation.
Internet of Things
Devices and machines in an IoT network can send and receive digital data. Machine logs and maintenance reports are analyzed to optimize performance and efficiency. AI-powered business systems continuously analyze this information for patterns, trends, and correlations. These insights help drive predictive maintenance and automated workflows, increasing efficiency and productivity over time as the machine learning applications “learn” from the IoT data.
Robotics and robotic process automation (RPA)
Both robotics and RPA use automated processes to accomplish repetitive or pre-programmed tasks. Robotic devices are comprised of moving, mechanical parts set to execute specific, physical tasks. RPA processes are similarly programmed and automated – however, they exist as software processes rather than physical devices, and the tasks they perform are administrative in nature.
Digital transformation examples
Supply chain, procurement, and manufacturing
In a report from July 2020, Gartner points out that if businesses are to thrive and optimize their supply chains, “They must look to innovative technologies that have the potential to disrupt supply chain operating models and provide a competitive advantage.” Digital transformation in supply chains and manufacturing provides centralized visibility – from raw materials to end customers – and drives resilience.
Service industries and HR
In the past decade, digital technologies have been driving change in the workplace. VR, chatbots, and mobile devices are customizing the onboarding process, as well as improving employee service and support. Blockchain is securing the privacy and accuracy of information. Machine learning is helping to eliminate bias and ensure that businesses are champions for diversity and inclusion.
Healthcare and life sciences
Digital technologies in healthcare have a complex workload. Research and diagnostic programs rely heavily on AI and machine learning. Surgical and medical devices require the speed and accuracy of powerful cloud and database technologies. Healthcare workers providing patient care and support are improving mobile and monitoring options so users can feel safe and confident with self-serve mobile technologies.
A 2020 JD Power report states that “…it is safe to say we’ve reached the tipping point, where banks that get their digital formulas right are seeing strong gains in both adoption and satisfaction.” Digital transformation in the financial services sector delivers customized and hyper-personalized services, better mobile functionality, and free remote access to more complex services such as financial planning and credit management.
Digital transformation in retail can automate and optimize logistics networks – customizing and speeding up delivery. And as in every consumer sector, the growing demand for personalized services is also driving digital innovation. A recent Epsilon study saw 80% of shoppers more likely to choose a retailer that offers personalized services – including 24×7 chatbots, personalized product suggestions, predictive recommendations, and fluid omnichannel mobility.
The automotive industry was an early adopter of manufacturing robotics and digital automation. But as one of the world’s most competitive industries, many of its latest digital innovations relate to customer service and retention. Personalization and driver interface applications provide safety and enjoyment to the driver and give the business valuable data to help with more accurate product development, marketing, and customer experience provision.
The greatest challenges to digital transformation
Studies from thought leaders like McKinsey and Harvard Business Review have shown us that up to 70% of business and digital transformation initiatives do not succeed. But if you dig a bit deeper, you learn that it’s not really the new technologies or the business innovations that are flawed. The weaknesses lay in poor planning, poor communication and change strategies, and the general failure of leaders and project managers to include and seek buy-in from all teams impacted by the change. In other words, of the three main areas of digital transformation mentioned above, “cultural transformation” is often the least talked-about but in reality may be the most crucial of all.
In 2020, Oxford Economics undertook an extensive survey of over 3,000 executives across 10 of the largest global industry sectors. What they found was that business transformation works best “when every part of an organization, including its external partners and customers, is agile and interconnected. Executives need to ensure that high-quality information is flowing across their entire business ecosystem, allowing all participants to interact in ways that advance the goals of the organization.”
Preparing for digital business transformation
In a challenging business climate, companies need to seize every competitive advantage – and increasingly, those advantages are digital. By 2018, over 89% of executives had adopted a digital-first business policy. And by 2021, that number has only grown. However, as we discussed earlier, many digital transformation projects get stalled by poor communication and planning.
Consider these four early steps as you progress on your digital transformation journey, and speak to your software vendor to help you get started with crafting a transformation strategy and road map and learning which solutions are best for your unique business needs.
- Determine your starting point. Audit your existing systems and assets. Which machines are already digitalized? Which ones will require IoT gateways? Is your ERP modern and scalable, or is it still running on disk-based database memory? To give your project an early leg up, look first for processes within your business that are a high operational priority and have the least complicated path to transformation.
- Define your priorities. Don’t plan a marathon before you’ve even made it around the first block. The beauty of digital transformation is that it does not have to happen all at once. Like building blocks, smart technologies are designed to evolve, scale, and integrate.
- Build your roadmap. A significant benefit to smart technologies lies in their immense scalability and capacity for rapid adaptation and reconfiguration. A great transformation road map should allow for agility and growth but start with a road map that has a few strong and attainable goals. Build solid change management and migration strategies into your plan as well – digital transformation is as much a human journey as a technological one. These are important early steps. Look for support from specialized professionals who understand your unique needs and can help chart the best course for your business.
- Prepare your teams. Thoreau said, “Things do not change; we change.” Smart technologies can help reduce repetitive and tedious tasks, improve employee engagement, and support collaboration. But these benefits can only be realized when all your people are on board. Don’t spring the news on your teams. Learn from their input and ideas, openly address their concerns, and give them time to change.
More in this series
FAQs: Common questions about digital transformation
Digital transformation is a business transformation and a company-wide change management project. When digital transformation projects fail or stall, it is seldom a technical problem – it is almost always a cultural one. In reports and articles from McKinsey and others, we learn that poor planning, misaligned goals, and unclear strategies are the cause of the bulk of transformation setbacks.
In their fifth annual State of Digital Transformation report, the Altimiter research group finds that, typically, the bulk of ownership is shared between the CIO and the CEO. But as digital transformation is no longer seen as an exclusively technological initiative, businesses are starting to rely more upon internal business process specialists to ensure that digital technology integrations have the best benefit for all.
Of course, this varies from business to business, but for most companies a modern, AI-powered cloud ERP with an in-memory database is at the center of any digital enterprise. Within the ERP system are the brains that analyze, direct, and process all the data and information from across the business.
Start simple by choosing a few key metrics that are most important to your specific industry and organization (lead acquisition, manufacturing productivity, predictive planning). Figure out where you are today on those criteria, set realistic target goals, and measure again at fixed points in time.
Unlike software upgrades of the past, digital transformation is not an isolated IT project. Digital transformation affects all areas and functions in a business and requires technological and cultural adaptation and resilience. Before this kind of project, reach out to your software vendor to ensure you’re charting the best path for your unique situation.
SAP Insights Newsletter
Gain key insights by subscribing to our newsletter.