What is digital transformation, really? And, what are we missing?
By: Scot Moir | October 31, 2018
In conversations about digital transformation one thing stood out, there is not a consistent view on what it is. Which is understandable, the fundamental definition of digital transformation is broad and covers a wide range of activities. Adding to the confusion is the appropriation of digital transformation as a label for a variety of technology-oriented trends. So, what is digital transformation, really? Answering that questions exposes relationships often missed. We’re missing, overlooking or ignoring, capabilities that are needed for digital transformation. What are we missing?
Early on, digital transformation was creating a representation of a thing in a digital format, as a series of digits, zeros and ones, binary, a format to be used in computing. Creating the digital representation was the transformation. While that is still valid, definitions of digital transformation have evolved. Digital is now more than the binary representation of a thing, it also refers to types of computing technologies, digital technologies like; mobile, cloud, internet of things (IoT), analytics and cognitive computing. Transformation is about more than the digital pieces it includes everything that is changed or formed to create the outcome, including process and organization. The term Digital transformation has evolved and includes the definition – a profound change through the use of technology. Which as it turns out, covers our first definition but it does not convey as much information. This is the nature of what we’re dealing with and why talking about and understanding digital transformation is difficult. All types of digital transformation share the basic definition but to begin a discussion, to distinguish between types you need more information.
So, to begin our discussion of digital transformation we’re going to narrow our focus to business, profoundly changing how organizations do business. To maintain this distinction, we’ll refer to it as digital business transformation or DBT. There are other terms being used to label types of DBT; digitization, digitalization, and digital are a few. These terms are being used to carve out specific areas of digital transformation. Like the term digital transformation, these terms have other definitions and need to be introduced to avoid confusion. At the forefront of DBT are several types of digital transformation, all move us more fully to digital business. I’ll cover three.
There is a preeminent type of DBT. It can be summed up as – organizations leveraging technology to create new value propositions and new business models. We’ll refer to it as External Digital Business Transformation, EDBT. Some definitions stress new technology or innovation. I put the emphasis on the outcome, the new value proposition or business model. Is what you’ve done successful? Applying an innovative approach from another industry is not necessarily innovative but it can be smart and digital transformation.
EDBT (aka digitalization or digital) is externally focused, it’s about what you offer and how you offer it. It challenges what constitutes goods and services, how you deliver them, how they’re consumed, how they’re monetized and how you engage with customers. EDBT gets most of the media attention, and rightfully so. Companies that do it well are reshaping markets and industries. Uber and Airbnb are well known examples. They are new companies disrupting industries, but industry incumbents, like Walmart, are also successfully doing EDBT.
What’s driving EDBT? Social, economic and technological trends are changing behaviors, and being leveraged to disrupt traditional business models. Trends like a sharing economy, social networks, consumer mobility and flexible consumption as well as enabling technologies like; mobile, cloud, internet of things (IoT), analytics and cognitive computing. While it’s not new for organizations to use digital transformation to create new business models, this is different. It's as much about creating the capabilities for business change as it is about creating business capabilities. It is unconstrained, organizations are applying transformation in unconventional and innovative ways. It’s more expansive, the rate of change is much faster, and it’s continuous, a journey not a destination.
Is this a revolution? It’s been called that, it feels like it. Time will tell but given its tremendous impact and momentum a wait and see approach doesn’t seem prudent. Every business will need to respond. It will be different for everyone, where they’re starting from, what technologies they leverage, how they intend to compete and what value proposition they pursue. While there may not be a typical approach there is some common ground. Business and Technology innovation are at the heart of it. The abilities to rapidly change and continuously make changes are consistent attributes. If you want rapid and continuous change, you need a foundation for execution. That comes from the second and third type of DBT.
The second type of DBT has more of an internal focus. It is about automating and optimizing your business operations. It can be summed up as – organizations leveraging technology to maximize the efficiency and effectiveness of their operations. We’ll refer to it as Internal Digital Business Transformation, IDBT.
We have been working on IDBT (aka digitization) for some time. It used to be the preeminent type of DBT. It really started to garner a lot of attention with the emergence of Enterprise Resource Planning (ERP) systems and a focus on best practices, integration across business functions and shared data, enterprise data. Over the years we’ve been expanding system coverage by extending platforms and implementing new systems. Working to achieve the promise of increased revenue and decreased cost through automation and improvements in operational efficiency and effectiveness. Although IDBT is well known, it continues to be difficult.
An organization’s operational systems are foundational for EDBT. In addition to running the business these are the systems that feed and support your EDBT efforts. If you are not well positioned here, then executing and sustaining EDBT will be more difficult. This is an area where Walmart is strong, they invested in systems and technologies that improved their operations. Their operational capabilities have been a critical asset in their battle for customers with Amazon. They were quickly able to create new offers and new ways to engage with customers. Without those capabilities we might have seen Walmart go the way of Sears or Toy “R” Us.
The third type of DBT has an internal focus as well, on IT. It is about automating and optimizing how you manufacture and deliver your IT services. Manufacture in this sense is software that is built or sourced and assembled into a service. It can be summed up as – organizations leveraging technology to improve the speed of delivery and quality of their IT products and services. We’ll refer to it as IT Digital Business Transformation, ITDBT.
ITDBT is frequently missed and is rarely talked about in context of EDBT. IT is often viewed as an impediment to change. Long cycle times, complex environments, complicated projects and not enough resources. While the last three of those are still true, and sometimes the first one, technologies, methods and tools have emerged to help.
- Technologies that enable change: virtualization, cloud computing, containers, etc.
- Methodologies and architectures that empower and emphasize incremental improvements: Agile, DevOps, Microservices, etc.
- Tools and systems that support core processes: software development, automated testing, continuous deployment, etc.
Collectively, they provide the building blocks for ITDBT.
Many of the early success stories in digital businesses were in large part due to their ability to leverage (sometimes create) these new technologies, tools and methods to quickly innovate; manufacture, test and evolve their offerings. Companies like Amazon and Netflix can make hundreds to thousands of systems changes a day.
ITDBT is foundational as well. If we look back at EDBT, we talk about new offerings, continuous change and speed of change. The capabilities provided by successfully transforming how you manufacture and deliver you IT services are critical for executing and sustaining your EDBT.
We’ve talked about digital transformation, what it was and what it has become. We narrowed our discussion of digital transformation to its application in business and discussed three types of digital business transformation; External Digital Business Transformation, EDBT, and Internal Digital Business Transformation, IDBT, and IT Digital Business Transformation, ITDBT. We touched on the difficulty in establishing meaningful and differentiated labels. Finally, we highlighted what is often missed.
Transformation is hard, business transformations are hard. Many (or the majority depending on your source) fail outright or fail to meet expectations. EDBT is the most difficult. It's new, not well understood, uses new technologies and relies on the capabilities created by the other two types of DBT. This is key – EDBT relies on the capabilities created by IDBT and ITDBT. These pieces are often missed, especially ITDBT, and consequently, EDBT initiatives stall out or can’t be sustained. If you are not already well positioned in these areas, you’re where most organizations find themselves. All three types of DBT must be worked. It will be difficult, requiring more planning and trade-offs, clear alignment on priorities, and a clean line of sight between the EDBT features and the capabilities needed to support them.
Transformation is difficult, every transformation is different but many aspects of what it takes to be successful are the same, experience counts. Look beyond what is being transformed, look up and down the value chain and make sure you have, or plan to have, the capabilities needed to make your transformation successful.