Digital Transformation is not a Server Upgrade

One of the hot corporate buzzwords these days is “Digital Transformation”.

But what is it, exactly?

A couple weeks ago I had a chance visit with my friend Alan Brown, professor of Entrepreneurship and Innovation at the University of Surrey (outside London). We sat together and pondered the digital transformation buzzword du jour and what it really means.

“Many execs hear the word ‘digital’ and assume this is something for the IT department”, observed Alan, “But digital transformation isn’t about technology, per se, at all. It’s about making your business competitive in the digital age – which has more to do with organizational strategy than it does servers and software”. In fact, “digital transformation” is just the current buzzword for what has always been true: companies need to continually optimize to keep competitive.

It has always been thus.

What’s different this year, of course, is the urgency created by the fact that native digital companies across many sectors have been out-performing well-established incumbent firms. In 2017, the so-called FAANG stocks (Facebook, Amazon, Apple, Netflix, Google/Alphabet) made up most of the S&P 500’s gain of 19.4%. The native digital companies are kicking butt right now.

In many cases they are kicking long-established butts into gutter. Look at the American corporate bankruptcies in the past two years – Macy’s, Toys ”R” us, Radio Shack, etc – most can be attributed to unrelenting competition from native-digital entrants. Bloomberg predicts that 50 more major retailers will file for bankruptcy in 2018 and meanwhile Amazon continues to eat everything in sight – 53% of all retail sales growth in the US went to Amazon last year.

And it’s not just happening in retail, of course. Native digital entrants such as Airbnb and Uber have cut a similar swath of destruction across their well-established sectors, as have many others.  Against this harsh backdrop, companies in all sectors are faced with the need to adopt new processes and strategies to stay competitive.

While digital transformation isn’t about technologies, per se, it’s certainly true that there are some significant new digital technologies part of the 2018 landscape. Technologies like AI, machine learning, chatbots, IoT, containerization, and blockchain will transform the ways that many businesses operate.  But these are simply part of the solution mixthat companies will incorporate as they transform themselves into organizations that can compete and thrive in today’s marketplace.

“It’s actually kind of false labeling to say that 2018 is about digital transformation”, said Alan, “because corporations have really been on a digital evolution path for a decade or two. The first phase was digitization (scanning documents), the second was digital processes (enterprise software), the third phase was digital value analysis (big data), and then digital business models (streaming music, everything-as-a-service). So it’s more of an evolution than a transformation, but suddenly in the past couple of years the native digital companies have been able to leapfrog the incumbent players in a way that now leaves them scrambling to catch up.”

So while many CEO’s will think that Digital Transformation is something for the IT department to work on (and many CIO’s will see this as an opportunity to get their favorite projects funded) the reality is much bigger than that. Digital Transformation means adopting the processes and strategies that native digital companies are successfully using today.

Broadly speaking, these include:

  • Agility: The companies that are thriving in today’s marketplace are able to turn on a dime. As startup guru Steve Blank says “The company that consistently makes and implements decisions rapidly gains a tremendous, often decisive, competitive advantage”. It once was that companies bought IT systems in order to establish process in a company. Today, CEO’s are more likely to be looking for systems that enable the rapid change of process, improving cycle times and reducing time-to-market.
  • All devices all the time: We live in a world where employees, customers, and partners use many devices and expect to be able to consume and produce from any of them. I shop and work on my home computer, my smartphone, my work laptop (and soon probably my car dashboard). All my data is there, from any device, with a consistent experience. This is the expectation today – workers are frustrated it their company’s IT systems don’t work like that, and consumers don’t spend money with companies that don’t work like that. The bar is set high.
  • Mass personalization: It’s been observed that the 20th century was all about mass production and the 21st century is all about mass personalization. This extends from target marketing to personalized benefit plans from the HR department, and everything in between.
  • Innovation-Optimized: One of the advantages that native digital companies have is being able to do experimentation and rapid iteration. Google can add a product feature, measure the response, and decide whether to develop it further or kill it – all in less time than most companies spend deciding on lunch. Once again, this has as much to do with organizational culture as it does with digital systems.
  • New business models: Traditionally companies sold goods and services. Send us money and we’ll ship you the product. Digital systems can open up entirely new business models – many aircraft engines today are sold as a service, with digital technologies reporting each hour of use and invoicing on-demand. And no one buys server infrastructure today – they pay for infrastructure as a service via AWS or Azure. Washing machines, in fact, could be sold using a model where the customer pays nothing to have the washing machine installed in their home – they just automatically get charged $5/wash. Digital is opening-up entirely new ways to bundle, price, and sell products to virtually every industry around the world.

Digital Transformation is hot for 2018, that much is for sure. The management consulting firms will be happy to sell you high-dollar consulting engagements and IT vendors will be delighted to sell you some shiny new software and servers. But the shift that we are now experiencing (which many are calling the 4th Industrial Revolution) is a profound one. As a recent paper from the World Economic Forum put it: “The business models of nearly every industry will be transformed at a speed and scale unlike anything we’ve experienced before”.

It will require a lot more than a server upgrade.