Why digital transformations fail: Top 6 reasons
Digital transformation is essential to business survival, but companies keep failing at it. Find out why and what organizations can do to avoid the missteps that sabotage success.
Digital transformation has come a long way from being a buzzword to becoming imperative for business success. However, digital transformation failures continued to plague businesses, even as they invested more than $1 trillion in transformation efforts.
In fact, an astounding 70% of digital transformation initiatives fall short of their objectives, new research from Boston Consulting Group shows.
"Too many people treat digital transformation as something around infrastructure and IT," said Antony Edwards, COO at software testing and monitoring company Eggplant. "It's not; it's about the company culture, it's about DNA, and it's about business models. And if you don't approach it from that kind of business and customer perspective, it's going to fail."
3 categories of digital transformation failure
Kristin Moyer, a distinguished vice president analyst in Gartner's CEO and digital business leader practice, buckets digital transformation failure into three categories: regression, underperformance and failing at new digital initiatives.
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- Regression is where businesses are "transformation-washing." They are saying they are transforming, but they're actually embarking on initiatives that should have been implemented a while ago, like e-commerce for example.
- Underperformance happens when businesses fail to place bigger bets on their transformation efforts and don't put enough focus on these projects that can create new value for their business. They still end up reaping digital transformation benefits, but at a much smaller scale.
- The final flavor of failure is where companies fail at new digital initiatives. They are trying to launch a new digital product or service, for example, but it fails and businesses are forced to discontinue it.
Measuring and improving ROI on a continuous basis will help ward off digital transformation failure. "The thing about digital business is that it takes a long time to transform, so you need to pace yourself," Moyer said. "You need to be initially measuring the results that you're getting using leading indicators, like the number of customers, the number of transactions and the growth over time. And then, you use lagging indicators after some time, like revenue and net profits to measure your success."
Key reasons why digital transformation failures happen
No matter the size of your business, a successful digital transformation strategy begins with the leadership team having a clear understanding and vision of what the business is transforming into, experts agreed.
As businesses continue to pursue their transformation initiatives, accelerated over the past year by the COVID-19 pandemic, it is essential they avoid the missteps that can lead to failure. This overview of the six key reasons why organizations encounter digital transformation failures -- and advice on how your organization can avoid these hurdles -- will help your teams build a digital transformation roadmap that brings business value.
1. Lacking the correct mindset
Not having the right transformation mindset is often the first reason why digital transformation initiatives can either regress, underperform or fail outright, according to Gartner's Moyer. People are naturally averse to change, but CEOs can play a pivotal role in helping bring about the mindset change required for successful transformations, she added.
"CEOs really need to get behind the transformation. They need to set the tone, they need to model the behaviors for transformation and then they need to operationalize those behaviors," Moyer said.
CEO support for digital initiatives is also critical for securing an adequate digital transformation budget, said Jason Fruge, vice president of business application cybersecurity at Onapsis.
Another mindset that drives digital transformation failures is when the rest of the organization views IT as a "necessary evil," Fruge added.
But Fruge said he believes CIOs who act as an engine for change and education -- instead of just being execution partners -- and have the executive buy-in from the very beginning will be successful in establishing IT as a transformation enabler.
"It's really up to the CIO to be that salesperson and educate and convince people that this is the direction that the company should go," he said.
2. Not having the right culture
An organization's inherent culture can make or break an organization's transformation initiatives, experts agreed.
Culture change is at the heart of digital transformation, and existing cultures that are going to be more successful with digital transformation are going to be those that embrace change and collaboration.
That's because, regardless of whether it's changing products, internal operations or how a company engages with customers, digital transformation always involves getting different departments and different groups within departments to work together in a more coherent and effective way.
"If you don't have a culture of collaboration across the different functions, across different divisions, the transformation is really going to fail," Eggplant's Edwards said.
Experts agreed change management is a key component in bringing about successful culture change; effective change management can identify people who are most resistant to change and then provide them with the right training and education to turn them into digital transformation champions.
3. Not hiring the right talent
Failing to hire appropriate talent to drive transformation initiatives is another factor why digital transformation failures happen.
Companies often fail to bring in people who have a digital understanding and experience implementing such transformations.
"Anyone who thinks they can transform their company in such a fundamental way with all the same people and the same executive team is kidding themselves," Edwards said.
And that's especially applicable for truly nondigital companies.
But finding people with the right skills for your digital transformation team can be a challenge. So much so, that even the pandemic-induced unemployment rate hasn't loosened up the talent market, Moyer said. There's still a dearth of talent in high-demand fields like artificial intelligence and cybersecurity.
Devin Redmond, co-founder and CEO of Theta Lake, advised companies to hire people who are aware of what can go wrong with such initiatives and can actually impart that knowledge to the rest of the organization. These change agents can help create the right focus, business processes and training procedures needed for success.
However, it is equally important to retain employees who really "understand your market, your business, and your customers," Edwards said.
4. Lack of clear goals
Companies implementing transformation efforts just for the sake of it, without setting any clear goal, is another reason why such initiatives fail, according to Avi Shua, co-founder and CEO of Orca Security.
"Organizations need to understand what the key areas of focus are and what they are trying to achieve from the business point of view -- be it reducing costs, or being more agile or being more secure," Shua said.
Not defining clear goals means your organization will end up with people going in lots of different directions; there will be no alignment and, eventually, it will lead to failure, Edwards reinforced.
"Like any change initiative, the number one thing is just to make sure you have got your goals defined properly and then defining initiatives that actually deliver those goals," he said.
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Not having a clear vision also means companies often end up with an underfunded and misunderstood concept of what such transformation efforts entail.
Doing technology for the sake of technology has always been a bad idea, Shua warned.
While companies are utilizing cloud adoption to accelerate their digital transformation, it is important to remember cloud environments are dramatically different from on-premises environments, he said. He advised companies to avoid the lift-and-shift approach to the cloud, because while it may work in the short term, the outcome will always be suboptimal.
5. Failing to think through the required technology
When implementing digital transformation projects, focusing solely on the enabling technology can lead to failure, according to Theta Lake's Redmond.
Say, for example, a business in a highly regulated industry is looking at enabling a video-first communication environment. If it only focuses on how a tool like Zoom or WebEx can improve employee communication and fails to consider the compliance implications of the new software, the project will get held up, Redmond said.
"Instead, they should be doing that research in advance to say, 'OK, I should be looking at the full stack of technology if I'm going to be sharing information in a new way, and I need to have new security and compliance infrastructure in place, and I need to involve those other constituencies,'" he said.
6. Adopting a fail fast attitude
Fail fast -- a mantra often associated with digital transformation -- can be another impediment to successful digital transformation, according to Parry Malm, CEO and co-founder of Phrasee. Adopting a fail fast mentality, however, often means companies might not give projects the room to succeed.
"The problem with this fail fast attitude is, first, you accept failure and, second, don't require any of your actions to be really thought through," Malm said.
Instead, he advised companies to double down on their initiatives if they fail the first time and focus on doing it "bigger and better."
Ray Wang, principal analyst and founder at Constellation Research, said a look at some of the companies that have experienced digital transformation failures (see "Real-life digital transformation failures: Companies to learn from") underscores how transformation requires careful analysis and is not accomplished overnight.
"If you're doing digital and you want to be a digital giant, look at the business model and understand how you can monetize it. Understand that if you're going to collect all that data you need a long-term investment horizon, and make sure you have the right people. Those are the lessons learned from all these digital transformations."
Real-life digital transformation failures: Companies to learn from
Even though the majority of companies today have embraced digital transformation, it is important to remember that no matter the investment size, not all transformation initiatives are going to go as planned. Here's a look back at three notable digital transformation failures:
- Industrial giant GE initiated a major transformation in 2011 that was aimed at positioning itself as the world's premier digital industrial company. Its transformation efforts included creating a new software platform for the internet of things and adding sensors to many of its products. In 2015, GE announced the creation of GE Digital, bringing together digital capabilities from across the company into one organization. Despite its efforts to undergo an "all-encompassing change," the company's stock prices continued to drop and CEO Jeff Immelt stepped down in 2017.
- American car giant Ford attempted a digital transformation in 2016 by creating a segment called Ford Smart Mobility to build digitally enabled cars. Its goal was to design, build, grow and invest in new mobility services and power Ford's efforts to be both an auto and mobility company. But the new business unit was created on the side and viewed as a separate entity. The unit reported a loss of about $300 million in 2017.
- Consumer goods giant Procter & Gamble embarked on becoming "the most digital company on the planet" in 2012. The company was already well ahead of its competitors at the time but failed to invest in digital in a more focused way and also ran into challenges that were fueled by a difficult economy. In 2013, CEO Robert McDonald was asked to resign by the board.
Businesses that create a new digital division that's separate from the rest of the company and label that as a digital transformation initiative are setting themselves up for failure, Eggplant's Edwards said, talking about Ford's digital transformation initiative. That separate division usually fails because it often doesn't have the proper backing, and people don't consider it the real business, he added.
Wang said he believes each of these three companies has learned something from their undertakings. "Part of doing digital is that there's a lot of failures," Wang said.
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