Change management and the digital strategy

To implement digital transformation successfully, it's wise to rely on a managerial discipline called change management. It is critical to performing digital transformation in a proper manner.

Upravljanje sprememb

Companies of all types and sizes are investing heavily in the digitization of their business models. Driven by the changing consumer expectations that B2C digital juggernauts like Uber, Netflix and Amazon have created, many companies are investing in reimagining their business. To achieve relevance in what is being called the Fourth Industrial Revolution, companies must be more customer focused, agile, lean and interactive.

Companies doing the digital transformation right will win market share while others have a negative ROI.

Digital strategy

Any digital transformation has at its core the strategy, which aligns the company's vision, customer experience, processes and technology. Digital transformation also requires user-centered approach, with top priority placed on mobile first and personalized design. The company must strive for improved agility in delivery, be iterative and adaptable. Digital transformation requires companies to integrate software, platforms and technology, always choosing the environments and products that harmonize. The use of data analytics enables the company to benefit from the constant feedback loop that can further continuous improvement. Another key component of digital transformation is the product design mindset applied to the digital product development, which calls for a minimal viable product and fail-fast mentality.

Although the digital transformation knowledge is widely available, most digital transformation initiatives fail. The Couchbase research report states that the digital disruption driven by digital leaders and IT managers ends in project failure in a high 90% of cases, which is mainly due to the data dilemma caused by ineffective and inefficient use of data within the company, and its inappropriate organizational culture. We need to ask ourselves what is it that successful digital implementers are doing differently. McKinsey research study based on the answers of 2,00 executives from 900 companies from different industries identifies seven core capabilities that determine the results of implementing change in a company.

Seven core capabilities that affect change implementation

  • Clear organization-wide ownership of and commitment to change across all levels organization.
  • Ability to focus organization on a prioritized set of changes.
  • Sufficient resources and capabilities to execute changes.
  • Clear accountability for specific actions during implementation.
  • Continuous improvements during implementation and rapid action to devise alternate plans.
  • Planning for long-term sustainability from day one.
  • Effective program management and use of standard change processes.

What exactly do these core capabilities mean for a company's digital transformation initiative? Clear organization-wide ownership of and commitment to change across all levels of the organization means that the management must be united in their engagement to successfully implement the company's digital transformation. It is important that the initiative also includes all departmental and team leaders. For the formulation and monitoring of the agreed digital transformation guidelines (e.g. targets, activities, KPIs), it is best to set up a stand-alone unit inside the company which is responsible for the digital transformation process. This digital unit needs to be made up of members of all departments who can actively contribute to the progress of the digitalization. The success of digital transformation will directly correspond with the state of the department with the lowest level of digital preparedness.

Although the above fact is surely relevant, resources are limited in all companies. Therefore, when implementing digital transformation processes, we should start by defining priorities and setting them in order. Clearly defined and agreed priorities matched with sufficient resources have much better chances of success. The company shall make sure that its priority action plan is the product of consensus among departments. It should never be a decree or order that will provoke resistance and hesitation in taking action, as such a digital transformation initiative will fail eventually.

Digitalna strategija

Digitally savvy staff

The success of the digital transformation initiative is conditioned with sufficient attention being paid to to the requirements of efficient execution of activities. In practice, this refers to the use of properly qualified staff (digital competencies, organizational knowledge, business competencies), availability of adequate financial capacities, building operational capacity to carry out activities, and establishing appropriate (digital) culture. If any of the above components is not at the required level, digital transformation in that particular segment will likely not be implemented as planned, which may lead to deviations from the final goals of priority activities needed to digitally transform the company.

The formed digital transformation unit within the company must prepare a clear list of persons responsible for specific segments od the transformation process. The responsibilities list and hierarchy must be clearly defined since the disputes and inconsistencies within one segment have a negative impact on the digital transformation of all remaining segments. Flexibility is welcome but in a limited scope and in a way that does not hinder the work activities of the company's key employees.

Flexibility in the context of adjusting plans during the digital implementation can be much more helpful. In the modern digital environment, market and technological landscape is constantly changing and companies must be ready to adjust their strategies and plans accordingly. Adjustments must be promtp, quick and sustainable. It is vital that all negative impacts are reversed in the shortest time possible to reduce the risk of business loss incurred by the company. As mismanaged change may result in a decline in company performance, business loss remains one of the biggest pitfalls of digital transformation.

Digital transformation roadmap must be designed for long-term success

Successfully completed digital tranformation does not signify the end of digital change. It is a continuous process driven by society's technological development. If a company wishes to remain competitive and thrive in the market, it will have to embark on the path of continuous development in the 21st centur and regularly adapt to the changes in its environment. Digital transformation should therefore be sustainable, continuous and the foundation for further digital development in the upcoming decades.

Proces digitalne transformacije mora biti načrtovan dolgoročno od samega začetka

Last but not least, companies shall make sure that the new digital processes and capacities are used proactively and efficiently. It is important that not only digital leaders and teams but all employees of the company, regardless of their position and duties, possess digital competencies and skills. Digital transformation is much more than just transformation of programs, job positions and equipment; it is also the transofrmation of human resources, which are the most important asset of 21st century conmpanies, and the transformation of organizational culture.

Employee commitment a key component of digital transformation

According to the McKinsey Global Survey, change management continues to play a decisive role in successful digital implementations. For many, success remains elusive. Only a good third of respondents report successful implementation, which corresponds with the trend some researchers have been reporting for the last decade. McKinsey finds that the most common practices for supporting successful change efforts are the same as in 2014, but the results have worsened, which can be attributed to the length of the digital transformation process. This hypothesis is also confirmed by the above research that reports a declining employee commitment.

Employee commitment is an important indicator of the companies' capability for a successful implementation of the digital transformation. The potential to implement change was much more relevant in 2018 than in 2014, when the research was conducted. However, the ability to implement change has become a key factor in the time when the world is striving to cope with the consequences of Covid-19, caused by the virus Sars-Cov-2. We are still unable to grasp the scope of these consequences, but they are bound to be extensive, in particular in the field of organization of work.

Experts say that change management is often ineffective mainly due to the use of obsolete leadership models and techniques, out of touch with the dynamic business environment in which we live. Corporate digital transformation reaches beyond the traditional transformation and requires companies to utilize multiple resources and redefine their culture, while requiring employees to develop or upgrade their digital skill set. Digital transformation challenges are equally pressing on the most successful companies, and the McKinsey Global Survey shows that only 57 percent of respondents say they are ready and have a process for sourcing digital skills externally.

As mentioned earlier, digital change efforts necessitate new approaches, particularly for assessment. It is crucial for companies to regularly assess the impact of initiatives and changes once they have been implemented. Among the top implementers, those undergoing digital transformations are more likely to report this practice—along with testing major changes in smaller, controlled environments—than their peers involved in conventional change efforts. This result suggests that for top digital implementers, assessment is even more critical to the outcome of a transformation that involves digital solutions and tools. Successful digital implementers most often report that their organizations plan for long-term sustainability and demonstrate commitment to the changes, which plays a major role in securing the success of their digital transformation.

Seven core capabilities that affect change implementation

The figure shows that the respondents reported dramatic effects of their successful digital transformations. Top digital implementers perform better in all areas than the organizations that are less successful in their transformations. On average, top implementers score at least 62% above the other respondents. The gap is widest with regard to ‘Effective program management and use of standard change processes’, where the gap between both groups (successful vs unsuccessful) is 79% for the successful implementers.

Moreover, digitally transformed organizations do not push ahead of their competitors in only one category, but many, which leads us to believe that successful digital transformation may radically shift the balance of power within markets and industries.

A typical feature of highly competitive sectors and job profiles in the present-day economic environment is that the difference between success and failure depends on the tiniest differences in costs and margins (>5%). Compared with the above figure, a completely different dimension. It can be concluded that digital transformation success can boost the organization’s competiveness by over 50%. These benefits are further enhanced through synergy effect. Rivals have no other alternative but to try to keep up with the leaders or get left behind, which in the rapidly developing and dynamic modern economic environment means practically zero chance of recovery.

Digital transformation: Most common mistakes to avoid

#1 Executives often forget that organizations are made of individuals

Individuals as employees in modern companies each see the organization through a different lens. They have different interests and different sets of core beliefs. Typical change-management programs mostly function on the departmental level, which means that changes are implemented in response to the needs of the entire department rather than a single job position. An individual cannot express their opinion but should follow the orders from his or her superiors. The digital transformation covers the change across the entire organization and a change in the culture, meaning that the contribution, beliefs, and interests of individual employees shall be held in extremely high regards.

#2 Using the return-on-investment (ROI) model

One of the most pressing challenges companies need to address at the very start of the digital transformation journeys is to formulate arguments in support of digital transformation. Researchers say that most management and executive teams use the following argument: digital transformation will increase profit at equal or lower costs. The employees who are trying to put forward other needs they have identified in the course of digital transformation for themselves or their departments will most likely be overheard. Higher ROI for improved bottom line is all that seems to matter.

#3 Overly complex and elaborate plan

Every company requires an elaborate digital transformation plan or strategy, but if the plan is overly complex and detailed, it will hinder efficient and quick adoption of new technologies, trends and market changes. Detailed goals and guidelines precluding deviations negatively affect the innovation potential of the companies and make the employees feel unempowered to actively participate in the digital transformation process.

When talking about digital transformation, successful company leaders persuade their employees to commit to the set digitalization goals by using facts and listening to their reservations. Such leaders encourage their staff to improvise, share their thoughts and opinions, and engage in open sand sincere digitization dialogue. They are also aware that the management cannot know everything and that the employees are much more than just a tool to carry out the management's agenda. The employees have the potential, capacities, resources, and are the main asset of companies in the 21st century. In order for a company to be successful in its implementation of digital transformation, it will have to take employees seriously, which may again require a change of organizational culture.

Digitalization is gaining in momentum

Before the onset of Covid-19, it was generally believe that the digitalization process would be lengthy, that digital disruption would increase gradually, and organizations will have some time on their hands to implement their digital transformation effectively and efficiently. In the recent months of the Covid-19 pandemic, it has become clear that the digitalization process is gaining momentum, and digital disruption is already causing tectonic movements in the ways we operate, which has forced companies to deal quickly and unprepared with the challenges posed by digital transformation.

Proces digitalizacije se izrazito pospešuje

Integration of digitization into business models is a demanding process in itself, and the need for quick implementation is only making things tougher. Many organizations therefore cannot or will not successfully complete their digitalization projects, which will negatively impact their competitiveness. Every digital transformation initiative, successful or not, is a process that spans years and every step in this process has to be carefully planned. Data access and technical knowledge may be relatively easy to acquire but practical execution of measures and full adoption of the change is harder to achieve. In order for an organization to maximize its digitalization output, it has to find place within the process for every department and member of staff. Change management is crucial to efficient digital transformation of every business.

Digital transformation is extremely challenging as regards short-term utilization of resources. The organization must provide financial, HR, and capacity resources to effectively carry out its actions. Long-term benefits are even greater and span all areas of business. With effective change management we stand a solid chance of successfully completing the digital transformation by being able to steer clear of the most common pitfalls and sticking to good practices and tested rules. Improved productivity, lower costs, remote working, shorter hours, new business models, increased innovativeness, and decisions based on real-time data are just a few from the endless list of benefits which digitalization brings to the business settings of organizations of all shapes and sizes that will leave its mark on the upcoming decade.

The article reflects the opinion of the author and not necessarily that of Mikrocop.

Tilen Gorenšek

Tilen Gorenšek is a certified Digital Transformation Management Professional and Director of the IPM Digital Institute.