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Undertaking a digital transformation is not a choice; it's a business imperative.
As industries continue to digitize, companies must change to stay viable in a digital economy. On the other hand, attempting a digital transformation -- at whatever level a company does so -- has its risks, too. Failure rates are high, and digital transformations create new problems and disrupt business processes. For example, a supply chain transformation is likely to demand new skills.
Why you need a digital transformation strategy
Here are six critical steps that organizations should incorporate in a digital transformation strategy.
1. Create open communication
When HealthMarkets, a health insurance agency, underwent a successful transformation five years ago in response to the Affordable Care Act, the company had to act quickly, said Michael Stahl, executive vice president and chief marketing officer at the agency.
"Despite minor hiccups along the way here and there, ensuring that we openly communicated the end goal ... helped us stay on track and complete the transformation effectively," Stahl said.
Ensuring that all stakeholders understand what's happening and why it's happening can help lessen fears that naturally arise with change, he said.
2. Establish a baseline cost
Costs are always a factor, but they're not always judged in context. Know what your costs are now, and compare costs of alternative technologies and processes rather than focus on just the price of new investments.
"The most critical step in digital transformation is to create a baseline cost model of your 'as-is' environment, which includes resources, services, silos," said Bill Kirwin, the creator of the IT total cost of ownership methodology and corresponding models, which he established as an industry standard during his tenure as a Gartner analyst.
This is a foundation for how investments in a digital transformation strategy will perform, he said. You can extend the baseline to show future technical debt in the future as-is state. You can create alternative scenarios in parallel to understand how to create the greatest value.
"Failure to follow the money has led to digital transformation dead ends, lack of transparency, governance and IT credibility issues, and shortsighted funding decisions," Kirwin said.
3. Lead with a business initiative
Determine your most critical business needs, said Tom Austin, CEO and founder of The Analyst Syndicate.
For example, does your company need digital supply chain transformation to take advantage of emerging technology, such as machine learning and big data analytics? Once you decide on critical business needs, decide how to address them, and give them a defining name so the goal remains in focus.
"Many an executive sits in mortal fear of the threat of Amazon entering and conquering its business segment," Austin said. "So, they formulate business initiatives to defend and enhance their position vis-à-vis Amazon."
Best Buy, Kohl's, Trader Joe's and Walmart are four companies that created several new digital initiatives to hold Amazon at bay -- or at least to improve their competitive posture against the retail giant, Austin said. Those strategies were the following:
- Best Buy decided to defeat or reduce showrooming, which is people checking out the goods in the store before ordering the same on their phones. Best Buy achieved this by creating stores within a store for key suppliers.
- Kohl's decided to increase store foot traffic and revenue by setting up in-store Amazon return centers.
- Trader Joe's continued to invest in unconventional merchandizing and supply chain optimizations.
- Walmart decided to exploit inventory in its vast number of retail outlets to compete with Amazon on delivery and profit.
"Technology was part of the business strategy, of course, but first and foremost, it was business strategy," Austin said.
4. Build the infrastructure first
Digital transformation won't last long if it isn't built upon a solid foundation.
Everett HarperCo-founder, Truss
"Too many organizations try to save costs upfront, rather than investing in a strong product first and reducing costs over the long term," said Everett Harper, co-founder of Truss, a digital transformation consultancy. "Budgeting for more spend upfront to develop a strong, easily scalable prototype will serve your digital transformation efforts far better than throwing together a prototype and fixing bugs and scaling later on."
5. Plan compliance from the outset
If you try to bolt on compliance and security afterwards, you're making a mistake, Harper said. Build in everything you need from the ground up so that key compliance issues aren't overlooked in your digital transformation plan. This is especially critical for businesses such as those in the finance, energy and healthcare sectors, which face many regulations and compliance requirements.
"It's crucial that the research, design and development teams understand what those are so they can build a digital platform with those baked in," Harper said. "A great way to do this is to break down silos and make sure all lead stakeholders are on the same page about limitations and prioritizing them."
6. Plan to iterate
It's best to take a comprehensive approach to digital transformation, rather than a lurch forward with incomplete initiatives and one department's systems and achievements outpacing another's, said Mehdi Aftahi, CTO at Technology Evaluation Centers, a software advisory firm.
The options of where to start may be overwhelming, so organizations should break down the digital transformation goal into specific work steps. There are a number of overarching areas you should address when building a digital transformation strategy, Aftahi said. Here are a few:
- Scope and goals. Clearly identify the scope and goals of the transformation initiative, taking the next five to 10 years into account. Ensure all stakeholders are aligned on these; you don't want to revisit this two years down the line, except to make small adjustments as the business or market demands.
- Roadmap. Create a roadmap to take the organization from the current state to the future state. This may involve several projects, which can be phased out depending on the availability of resources to implement the goal.
- Subgoals. Scale down from there to actionable system acquisitions, and create projects for each -- with owners, plans and deadlines. For example, if a marketing automation system coupled with a new CRM system will enable your business's aspirations, assign one owner to lead the evaluation of marketing automation systems and another to handle CRM and customer experience software options -- so long as the two leaders work in tandem.