What is digital transformation? Everything you need to know about how technology is changing business

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What is digital transformation?

At the most basic level, digital transformation involves using digital technologies to change a business process to become more efficient or effective. The idea is to use technology not just to replicate an existing service in a digital form, but to use technology to transform that service into something significantly better.

It sounds simple but digital transformation can be a long, expensive and complicated process that doesn’t always go according to plan.

What are the key areas of digital transformation?

Every definition of digital transformation is different, depending on the industry and the particular project. But the main components will likely include rethinking business models, changing the underlying technology stack, innovating with customer experience and also potentially even remaking company culture.

What does digital transformation involve?

Digital transformation can involve many different technologies, but the hottest topics right now are cloud computing, the Internet of Things, big data, and artificial intelligence. During the next few years, we can expect increased attention on some hyped-up tech topics, including the metaverse, and blockchain and digital currencies.

However, it’s not just about the technology: changing business processes and corporate culture are just as vital to the success of these initiatives. Digital transformation projects are often a way for large and established organisations to compete with nimbler, digital-only rivals. These projects tend to be large in scope and ambition but are not without risks.

While digital transformation is one of the most commonly used phrases in the IT industry, definitions vary. What everyone can agree on is that, beneath the hype, the fluff and the confusion, digital transformation involves some pretty important changes to business culture.

What is included in a digital transformation project?

Digitalisation is not, as is commonly suggested, simply the implementation of more technology systems and services. A genuine digital transformation project involves fundamentally rethinking business models and processes, rather than tinkering with or enhancing traditional methods.

This creative requirement remains a tough ask for business leaders. Most organisations do not have a problem generating new ideas, but many firms fail when it comes to implementing fresh business models or turning good ideas into organisational objectives, according to research from Cass Business School.

This gap between innovation and execution helps explain why digitalisation and disruption have traditionally been seen as the preserve of nimble start-ups. But it doesn’t have to be this way – there are great examples of digital transformation in the enterprise sector, too.

Digital transformation examples

The transition of legacy systems to cloud platforms is an oft-cited example of digital transformation. By moving older systems to the cloud, it becomes easier for organisations to update and change applications in response to new user demands. In this case, digital transformation is helping to support nimble and flexible IT operations – it is, in short, making an existing process much more efficient and effective.

Using technology to change or remove an inefficient working process is another good example of digital transformation. Think, for example, of the digitisation of paper records. By using technology to transform how an organisation records its information, it becomes possible to search digital records and run reports in a way that would have been unthinkable or at least unmanageable in an era of paper records.

While digital transformation often involves using cloud-based platforms and services, it can also involve the adoption of emerging technologies. We can expect to hear more about these kinds of use cases as the metaverse moves from the lab to the real world. Such is the level of hype that 40% more companies mentioned ‘metaverse’ in their company filing documents during the first quarter of 2022, according to researcher GlobalData.

Some progress is already being made. Think of a retailer allowing customers to use virtual reality apps to visualise its furniture from the comfort of their home. In this case, digitisation transforms the traditional physical retail interaction into a virtual relationship, where customers can try and then buy products at a distance.

How important is digital transformation?

For those who weren’t convinced about the positive benefits of digital transformation, the power of digitisation won over many doubters during the coronavirus pandemic.

When lockdown and social distancing started, it was digital transformation – and the IT departments that carried out the work – that helped businesses carry on functioning as normally as possible in the most challenging of conditions. IT teams had to spin up technology solutions to the challenges that businesses faced overnight.

Digital transformation strategies were fast-forwarded at breakneck speed. Executive teams that might once have hesitated over the implementation of a multi-year investment in video-conferencing and collaborative technologies tasked their IT departments with establishing remote-working strategies in days or even hours.

CIOs and their IT teams stepped up and delivered – from the support of home working to the provision of online learning and onto the establishment of new online e-commerce channels and even the creation of whole new business models:

The general consensus from experts around the tech industry is that the rapid digital transformation pushed by CIOs and their teams helped change the perception of IT for good. Rather than being seen primarily as a service to other functions, such as sales and finance, technology is now recognised as a critical factor for long-term business success.

What digital transformation trends are happening now?

With digital transformation proving its worth in challenging times, the aim now is for organisations to find new technology projects to get their teeth stuck into.

Analyst Gartner says CEOs know they must accelerate the adoption of digital business and are seeking more direct digital routes to connect with their customers. But with an eye on economic risks, bosses want to be efficient and protect margins and cash flow. Current digital transformation trends include:

Cloud computing – On-demand IT has been the centre of digital transformation efforts for the past couple of years but that doesn’t mean the work is done. While many organisations aim for a cloud-first approach, few have moved their systems 100% to the cloud. Legacy tech remains a major hindrance to modernisation.
Data and AI – Companies have spent the past few years collecting huge amounts of information. The task now is to break down silos, to bring data together and to apply insight in ways that improve customer experiences and decision-making processes. Expect investment in artificial intelligence and machine learning to grow significantly.
Automation – Executives are finally beginning to see investments in robotic process automation pay dividends. Whether it’s reducing software-coding demands or introducing bots to deal with service requests, companies will use automation to remove repetitive tasks and allow staff to focus on work that produces value.
Customer experiences – From allowing professionals to work productively from home to providing new ways to help clients connect with the business, companies are going to spend big on developing great experiences for customers. Expect investments in the metaverse to become important here, too.
Cybersecurity – Underlying all these digital transformation efforts is a continued requirement to invest in IT defence mechanisms. Gartner points to the rise of the cybersecurity mesh, which enables stand-alone security solutions to work together and improve an organisation’s overall security posture.

What are the criticisms of digital transformation?

While most experts can agree that digitisation involves using technology to make a process more efficient or effective, just about every project that involves using technology gets badged as a digital transformation initiative.

Digital transformation has become the go-to marketing phrase for almost any adoption of new technology. In fact, the phrase is applied so broadly that it is in danger of becoming meaningless. Such is its ubiquity that it’s no surprise when an attention-craving organisation badges its new app or even something as mundane as a laptop refresh programme as a ‘digital transformation initiative’.

Tech workers also express cynicism about grand talk of digital. No IT professional spends their working day digitally transforming rather than coding, programming, and developing. For their part, CIOs will tell you the implementation of technology is simply the conduit to help the business meet its objectives, whether that’s selling more widgets, making more money or raising customer satisfaction levels.

To critics, digital transformation simply offers tech vendors another opportunity to rebrand their offerings: it’s not uncommon to see systems and services being sold as a golden bullet for digital transformation. Such hype is just more fuel for detractors who feel that digital transformation is simply a solution searching for a problem.

None of this criticism should come as a shock. Even back in 2017, analyst Gartner warned that over-selling meant digital transformation was fast-approaching the trough of disillusionment. Five years later and critics would say we’re now at the bottom of that trough.

What else could we call digital transformation?

One way to help silence the critics would be to find another name for digital transformation. If we stop using the term blindly, and instead focus on what we’re trying to achieve with technology, then we might find a more useful moniker.

That’s something that resonates with the CIO community: almost every IT chief will tell you that their organisation is running business transformation, not technology transformation, projects. Other industry commentators suggest culling the phrase digital transformation and creating a slightly modified alternative, such as ‘digital landscape’, ‘underlying digital environment’ or ‘data-led plumbing’.

The big problem with all these alternative names is that they mean even less than digital transformation. For all its inherent faults, we all have a perception of what digital transformation means, even if it’s just relying a lot more on the cloud and pushing technology into areas that were previously dominated by manual means.

Yes, the concept of digital transformation has its flaws, but – in some ways – the IT industry should just be pleased that the business has begun to recognise the great work that the technology team is undertaking, regardless of what it’s called.

Remember that the rest of the business tends to have a problem with big IT concepts. Take the example of the phrase ‘cloud computing’, which used to be met with nonplussed expressions from non-IT execs 10-plus years ago. Now, the cloud is a broadly understood and accepted term.

Cloud found its footing by proving its value – and so it is with digital transformation. The business has seen the value of digital transformation in recent years and now it wants a whole lot more in the future.

Why does digital transformation matter?

Beneath the buzzwords, there lies a crucial concept: digitalisation is helping smart businesses to change the established economic order – and the effects are everywhere.

From Amazon’s influence over retailing to Facebook’s impact on publishing and onto fleet-of-foot FinTechs that are destabilising banking and insurance operations, traditional firms are being challenged by nimble, digital-savvy operators.

Consultant McKinsey reports that many executives believe their companies’ business models are becoming 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.

It’s also important to recognise that digital transformation is more than simply an IT concern. Line-of-business units are crucial to identifying where digitisation can create big benefits. As the Harvard Business review suggests, without a more fundamental business transformation, digitisation on its own is a road to nowhere.

Can you give me an example of what digital transformation looks like?

Beauty company Avon International has used a direct-selling model for 130 years. The company normally sells its products through reps who call at clients’ doors and collect orders from a paper brochure. But that model was all-but-impossible to continue during the coronavirus crisis and lockdown.

The solution to this challenge came in the form of a rapid digital transformation that allowed reps to carry on selling. The IT team focused first on putting in place a mechanism that allowed reps to ensure that the orders they were taking – through WhatsApp, a text message, an email, or a phone call – were delivered directly to Avon’s customers rather than by hand.

As the company had 60 different enterprise resource planning systems around the world and more than 200 back-office systems, changing the delivery address meant modifying a range of ordering and invoicing processes. The team implemented that new approach on top of its legacy platforms in 30 markets in just six weeks.

SEE: Digital transformation: Keeping e-commerce moving even when everyone is stuck at home

Avon also started to develop a stronger e-commerce platform, such as via mobile and web. Sales through e-commerce channels grew by six times in the first three weeks following lockdown. The company also started to produce digital brochures that could be updated far more easily and shared through social channels.

Today, 30% of the company’s sales contacts are made online in the UK, up from less than 10% before the pandemic. By finding ways to maintain sales and beef-up its e-commerce channels, Avon kept its customers served and its reps busy, gaining new clients along the way.

In short, digital transformation has helped to change the company’s business model – and that’s going to last forever. Chief executive Angela Cretu has said the company wants to become fully “omni-channel”, linking different methods of selling from stores to the doorstep, over the next few years.

How much does digital transformation cost?

Global spending on the digital transformation of business practices and products will reach $1.8 trillion in 2022, an increase of 17.6% over 2021, says tech analyst IDC. The researcher expects a five-year annual growth rate through 2025 of 16.6%

“As organisations accelerate their pursuit of a digital-first strategy, they are channelling these investments into both internal operations and external direct engagement,” says Craig Simpson, senior research manager at IDC. “The investments in internal operations are largely focused on improving efficiency and resilience while customer experience transformation has become a digital transformation priority for many companies.”

Gartner also reports that tech spending will increase across the board for most IT organisations through 2022 and beyond. The analyst projects global IT spending will total $4.4 trillion in 2022, an increase of 4% from 2021.

Something to note, though: digitisation is far from easy. The average enterprise has more than 200 technology solutions in its tech stack across the organisation, according to Futurum Research. The advisory firm’s analysis suggests the vast majority of digital transformation initiatives don’t consider the user and ultimately result in inefficient adoption.

How long does digital transformation take?

Digital transformation projects have traditionally been associated with multi-year strategies. Here, CIOs have worked with their peers to think about how technology might help their organisations react to the threat of digital disruption. They’ve then created a long-term business strategy that uses technology to help the organisation meets its aims.

The problem with many of those long-term strategies is that they’ve taken too long to come to fruition. Incumbents might be good at creating spot digitisation projects, such as moving systems to the cloud or creating new digital channels to market, but they’re much slower when it comes to transforming the whole business to support new operating models.

In an age where fleet-of-foot digital challengers can move into a new sector almost overnight, then multi-year strategies are simply too slow. The multiple challenges associated to dealing with a global pandemic, new geopolitical tensions and macro-economic pressures have shown that flexibility and agility are the watchwords for modern digital strategies.

McKinsey reflects on the fact that most companies’ adoption of digital technologies sped up by three to seven years in a span of months during the pandemic. That increase in pace is having a lasting impact. The consultant says what was considered best-in-class speed for business change four or five years ago is now seen as slower than average.

This need for speed has an impact on digital transformation strategies. Instead of talking about five-year plans, boards demand constant iteration. For many organisations, that shift has required a new Agile way of working.

What’s the relationship between Agile and digital transformation?

Digital transformation is as much about establishing the right cultural change programme as it is about introducing new tech. Digitisation needs organisations to work out quickly what their business needs and how they’re going to get there. For many managers, the best way to find these answers is by adopting Agile methods.

Agile management has its origins in software development, but as Harvard Business Review suggests, it has spread far beyond its product development and manufacturing roots. While Agile won’t be applied the same way in every organisation, the basic principles – decentralised decision making, cross-organisation teams and cross-team empowerment – are likely to resonate with most business leaders.

Experienced digital leaders suggest the big benefit of an Agile approach is cultural. By working in small, cross-organisation groups to explore challenges and deliver solutions, IT staff and line-of-business professionals can iterate around a problem and apply digital systems and services quickly.

How is digital transformation supporting the shift to hybrid working?

Companies have already invested a lot of cash in cloud and collaboration technologies. These services will prove crucial in the coming years, as organisations attempt to find ways to support a hybrid mix of at-home and in-office knowledge workers.

Evidence so far suggests that managing this shift is from easy. While many professionals have now got used to working from home – and research suggests they’re more productive, too – their bosses are not always quite as keen to see them detached from the corporate HQ. Finding a successful middle ground between home and office working will be crucial.

Managers will need to continue investing their digital transformation cash in technologies to help create the hybrid workplace of the future. Worldwide spending on public cloud services is forecast to grow 20.4% in 2022 to total $494.7 billion, up from $410.9 billion in 2021, according to Gartner.

Who is in charge of digital transformation?

As the traditional guardians of technology investment, CIOs tend to have a big say in digital change projects. Yet CIOs are far from the only executives with a role in digital transformation management, and the pressure for change has led to the rise of other C-suite specialists, such as chief digital officers (CDOs).

Analyst firms fanned the flames by suggesting the appointment of CDOs could hasten the demise of the traditional IT leadership role. Gartner originally claimed a quarter of businesses would have a digital chief by 2015, and IDC said 60% of CIOs would be replaced by CDOs by 2020. Today, those predictions look way off beam.

What no one can deny, however, is the ever-increasing role of business professionals in IT purchasing decisions. Rather than the IT department going off and buying systems that it thinks their organisation needs, modern business operations rely on all kinds of people identifying their key challenges and then thinking about – or even going out and buying – technological solutions to these problems.

Cloud computing makes it far easier for professionals in any department to buy IT services on-demand. When requirements change, professionals can scale these services up or down depending on demand – with or without the say-so of the tech team.

Yet the game is far from up for CIOs when it comes to digital transformation. While line-of-business employees are good at buying discrete digital technologies, CIOs have the experience of integrating systems and services. Effective digital transformation usually requires a close working relationship between CIOs and their line-of-business colleagues.

With companies now looking to get more from recent digital transformation projects, even greater focus will be placed on the tech leadership capabilities of CIOs – and that means building even stronger bonds with the chief executive and the rest of the C-suite.

As Boots UK CIO Richard Corbridge says, tech chiefs need to think very carefully about what they do next: “For me, that’s about being a transformation agent – it’s about being the person stood next to the executive committee, taking the things that we must do to transform this business and translating that into what digital can do to help us get there quicker, more efficiently, safer, or to help us make more money.”

When does digital transformation stop?

It doesn’t. Many people make the mistake of thinking of digital transformation as a discrete project. As Forrester suggests, true transformation is a journey, not a destination. Digital transformation remains a slippery concept that involves the delivery of value to the business and its customers in new – and perhaps unexpected – ways.

Just as digital transformation constantly changes, so do its constituent elements. Right now, most business transformation activities involve the innovative use of data, whether that involves analytics, IoT, artificial intelligence or machine learning. In many ways, as digital transformation has evolved it has become more about data-led change than anything else.

So the form of digital transformation continues to evolve, meaning the process of defining digitalisation remains complex and contested. The one thing we can be sure of is that transformation – in whatever form it takes – is here to stay, which means IT professionals and their business peers must build a sustainable strategy for change.