The six key ingredients needed for an effective digital transformation

As we write this piece, we wonder whether digital transformation is merely a catchphrase confused for an app launch here, a tool roll-out there? The usage of this term increased 44x between 2004 and 2021. Digital transformation, if misunderstood, can only yield fleeting benefits. Massachusetts Institute of Technology’s George Westerman made an apt comment once: “When digital transformation is done right, it’s like a caterpillar turning into a butterfly, but when done wrong, all you have is a really fast caterpillar.” We couldn’t agree more.

We looked closer and found it to have metamorphosized into a potent value lever undergoing further evolution. Interestingly, sectors with traditionally lower technology spend feel more disrupted than others and emerging economies exhibit a greater sense of urgency than developed ones. Chief information officers (CIOs) and chief technology officers (CTOs) still remain relevant, but the business steers the agenda with increasing engagement from the chief executive officer (CEO). The return on investment is no longer about cost savings or efficiency, and there is more fresh money going into “grow” and “transform” rather than “run-the-business”. Let’s understand how.

As per a Boston Consulting Group survey, 35% of chief experience officers (CXOs) globally recognize “digital technology” as disruptive to their business model (while the rest consider it pivotal to their current model). Within that, counter-intuitively, sectors with high technology spending (banking and insurance) acknowledge this more than low-spending sectors (manufacturing), 40% of which now see digital as a disruptor, at par with banking. Likewise, digital transformation is often seen as a “western” phenomenon led by North America and Europe. However, more executives in Asia-Pacific (40%) and South America (45%) are cognizant of digital disruption than their friends in North America (27%) and Europe (33%). Nearly 90% in emerging markets, including India, now consider digital transformation urgent.

Digital transformation is no longer purely a CIO’s/CTO’s mandate. Globally, 75%-plus of transformations are on the CEO’s/board’s agenda throughout the life cycle. India impresses us with 90%. The rise of the chief data officer (CDO) role reporting to business (COO/CEO) reflects a growing leadership commitment. A strong positive correlation between the prevalence of a CDO and a company’s digital maturity confirms the role’s contribution. Geographically, three-fourths of the companies in emerging markets prefer to have a CDO. And sectorally, more manufacturing companies have filled this role recently than their banking and financial services (BFS) and technology, media and telecom (TMT) friends. But consider yourself cautioned here: despite the business sponsorship and a CDO, the failure rate is 2x if the CEO doesn’t engage directly.

Transformations are making revenue acceleration the focal point and then investing in the needed technology capabilities. For instance, about 55% now prioritize end-to-end transformations over unconnected initiatives around cloud migration, cybersecurity, automation or analytics. Digital transformation is no longer a cost-cutting or efficiency enhancement exercise because customer-centricity-driven efforts eventually coalesce to a better business performance, making even traditional industries, such as manufacturing and healthcare, have higher customer focus. Overall, about 43% of firms generate 10%-plus of earnings before interest and taxes from their digital transformations if done right, whereas only 27% of the remaining do so.

While most executives anticipate increased investment in digital (Gartner estimates global IT spending at about $4.5 trillion in 2022), analysis of IT spend shows that about 70% is allocated to ‘run’, about 20% to ‘grow’, and the remaining 10% to ‘transform’ the business. Though, insurance TMT, BFS and consumer industries continue to have the highest ‘grow’ and ‘transform’ spend-share, the combined cross-vertical range is at 22-34% ($1-1.5 trillion in 2022), reaffirming digital transformation as a priority. Interestingly, smaller players are propelling this by adopting emerging technologies 2-3x faster than bigger ones and disrupting them faster, thereby keeping the transformation loop alive.

We believe that yesteryear’s digital backbenchers, such as manufacturing and healthcare, are fast catching up and increasing the density and intensity of digital transformations. However, a successful digital transformation truly means digital + transformation—a nuance not many understand.

A recipe for success involves a long-term strategy with “digital by default” at its core, dynamic goal-refinement since there is no “finish line” in digital, a transformation focus requiring minimal change management, a deep CEO commitment, pull for high-quality talent and a culture of innovation.

Embracing digital in a transformative way is no longer a choice for companies. The slower or complacent ones will struggle to survive. But 70% of those who will try will likely fail if they don’t meet the above six digital metamorphosis ingredients. Else, all they will have is “a really fast caterpillar”.

Rajiv Gupta is an MD & Senior Partner in BCG and leads DigitalBCG in India, Amit Bharti is a Principal in BCG. The article received inputs from Vipin Gupta (MD & Partner) and Anmol Rai (Senior Associate) at BCG. The views expressed are personal.