The five stages of Digital Transformation

Small and medium enterprise owners have a unique window of opportunity to use the fourth industrial revolution to get ahead and stay ahead of their bigger brethren. The best way to leverage this chance is to set your goal correctly to stage five digital transformation.

It was the January of 2015 and Julio Nemeth, the newly minted President of Global Business Services at Procter & Gamble, mulled over an ironic problem. He was taking over an organization that was, by all external benchmarks, already best-in-class in the Shared Services industry. His predecessor, Filippo Passerini had left behind an enviable, globally awarded Global Business Services (GBS) organization, which had shaped the Global Shared Services industry itself along the way. Global Business Services is an industry construct that sweeps together all the supportive functions in an enterprise, ranging from IT and HR to Manufacturing and Selling services, and offers them as services to the product business units at dramatically better efficiency and effectiveness. At P&G, this was a multi-billion-dollar global service.

Nemeth’s problem was simple – how to further improve a business model that was already industry-leading. The external consultant advice to him was to do “more of the same” since the current P&G model obviously worked brilliantly. Being an innovator though, he knew that disrupting from a position of strength is always preferable to resting on your laurels.

Digital Transformation Applies to Shared Services Too

Nemeth wasn’t convinced that the Shared Services industry’s three-stage maturity model, with P&G being at stage three, was the ultimate framework. Knowing the disruptive power of the digital revolution, he wondered if it was possible to create a new fourth stage of evolution of GBS. This would apply not just to P&G but to the entire industry. He pulled me into the effort and together we created the Next Generation Services (NGS) organization to find and execute this next big disruption for Shared Services.

At the time, I had worked for 24 years with Procter & Gamble. Over this period, I had been privileged to have lived in 6 countries, worked in a dozen P&G roles and managed P&G’s GBS and IT for all regions of the world. I was delighted with the opportunity to transform the GBS model itself.

Inventing the Next Generation of Shared Services

We started with a simple question – why should the technology-driven disruptive forces that were acting upon just about every industry, not disrupt the Shared Services industry? If anything, the Shared Services Functions should have been disrupted faster and deeper, given that they were comprised of essentially information and data operations (e.g. Accounting, Payroll, IT operations, etc.).

Four years into the digital transformation journey, we know for a fact that there is indeed a fourth stage. Through the work my NGS team did at P&G, we created and implemented several 10X internal operations products (i.e. 10 times better top-line, bottom-line, or employee-centric). Along the journey, we captured a ton of learning on leading successful digital transformations. What we accomplished initially by intuition and trial-and-error was soon codified. All these lessons are the basis of the surprising disciplines of how to take off and stay ahead.

A Roadmap for Digital Transformation (Stage-5 Digital Transformation)

That question in early 2015 is not too different from the situation faced by most executives, entrepreneurs and public-sector leaders today. How do you go about successful Digital Transformation? It is certainly a top priority for most CEOs based on a study by the Economist Intelligence Unit.[1] Another study by Gartner[2] says that half the CEOs expect their industry to be substantially or unrecognizably transformed by digital. The issue is no longer whether to transform, but how to go about it. And frustration is building as the gap between understanding the criticality of digital transformation and actual results of successful transformations widens.

The Digital Transformation 5.0 Model to Get to Stage-5

Although various definitions of the term Digital Transformation exist, the one that I find most practical is the one that relates to the migration of organizations from the Third Industrial Revolution to the Fourth. The World Economic Forum has declared that we’re in the midst of the Fourth Industrial Revolution where the physical, biological and the social worlds are melding with and being reconstructed by the digital world. As with prior industrial revolutions, enterprises need a dedicated effort in the form of a transformation program to continue to survive and thrive in the new era. Further, during industrial revolutions changes come fast and furious. Therefore, a one-time transformation is inadequate for the enterprise to sustainably stay ahead of competition. The only logical end-point of successful digital transformations must be to reach the stage of perpetual market leadership via innovation. This is what I call true, sustainable, Stage-5 digital transformation.

The Five Stage Digital Transformation Model

Figure 1: The Five Stage Digital Transformation Model

The 5-Stage Digital Transformation ModelLocking in the right definition of Digital Transformation also helps cut through the hype of technology vendors and consultants who tend to brand their offerings as “digital transformation”. The 5-stage Digital Transformation model in Figure 1 is an easy way to distinguish between in-process stages and the end-stage. I elaborate on each of the five stages next.

Stage one is the Foundation. This is where enterprises are actively automating internal processes, such as selling, manufacturing or finance, using SAP, Oracle, Salesforce or similar platforms. This is more automation (also called digitalization), than transformation, but it provides the digitalized foundation necessary for future transformation. Automating processes using digital platforms is necessary to convert manual effort into data.

The next stage is called Siloed. You might see individual functions or businesses start to use disruptive technologies to create new business models. So, for instance the manufacturing function may have made progress on using the Internet of Things to drive major changes in the way they manufacture or manage logistics, or the finance manager may have heard about Blockchain and transformed the way they do inter-company accounting across countries. Alternatively, a business unit within the enterprise may have used technology to create a completely new business model, such as selling direct-to-consumer as opposed to going via retailers. The point is that these efforts are siloed and there is no overall company strategy driving transformation.

Stage three is Partially Synchronized transformation. The enterprise leader, owner or CEO has recognized the disruptive power of digital technologies and defined a digital future state. At Stage-3, the organization has started rowing in the same direction. However, the enterprise has not completed transforming to a digital backbone or new business models, nor has the agile, innovative culture become sustainable. A good example of this is GE’s digital transformation, which ultimately stalled at this stage. CEO Jeff Immelt defined his vision for a digital industrial future. The entire firm started to move towards a single digital strategy. However, the new digital business model never matured enough to develop strong roots.

Stage four or Fully Synchronized marks the point where an enterprise-wide digital platform or new business model has fully taken root. However, it is a one-time transformation. It is still just one technology (or business model) change away from being disrupted. The only way to survive continuous disruption threats is to make digital capabilities and an agile innovative culture an ongoing living DNA of the enterprise.

Stage five or Living DNA is the step where the transformation becomes perpetual. You maintain ongoing industry trend leadership because you are disciplined in constantly innovating and setting industry trends. You’re not just a market leader; you’re a disciplined innovator.

Doing Digital Vs. Becoming Digital (Stage-5)

How to transform an existing organization can be an exhausting challenge, especially given the immense power of digital technologies. Digital technologies can enable so many things. Should you go after a new business model? Or try a new idea extension of your current business model? Perhaps you should pursue a digitally-enabled version of your existing business? The conventional wisdom here is to create a separate digital strategy to answer these questions.

My experience shows that this is a mistake. Instead, I recommend re-doing your current business strategy to fully transform using digital capabilities. The distinction is more than subtle. It’s the difference between “doing” digital and “becoming” digital. This goal of “becoming” digital is key to achieving perpetual digital transformation. An organization can “do” digital as part of a one-time transformation, but to achieve ongoing market leadership it needs to “become” digital.

The organization has reached the “become” stage when digital is the living DNA of its operation and its organization. A new digital strategy may deliver a one-time Stage-4 transformation, but it is unlikely to get you to an ongoing Stage-5 transformation. At Stage-5, the enterprise has “become” digital.

A Call to Action

An estimated 70% of all digital transformations fail. In my personal experience of having led transformations across the world for three decades, there are two simple drivers for this. One, most leaders are bombarded by hype and left confused by what digital transformation is, and two, most vendors over-emphasize technology over organization change. The five stage model addresses both these issues. Small and medium enterprise owners have a unique window of opportunity to use the fourth industrial revolution to get ahead and stay ahead of their bigger brethren. The best way to leverage this chance is to set your goal correctly to stage five digital transformation.

 

Adapted from Chapter 2 of the book Why Digital Transformations Fail by Tony Saldanha, published by Berrett- Koehler and to be released globally on July 23rd, 2019.

 

[1] Globalservices.bt.com. (2018). Digital transformation top priority for CEOs, says new BT and EIU research | BT for global business. [online] Available at: https://www.globalservices.bt.com/en/aboutus/news-press/digital-transformation-top-priority-for-ceos [Accessed 19 Dec. 2018].

 

[2] Gartner.com. (2018). Gartner 2016 CEO and Senior Business Executive Survey Shows That Half of CEOs Expect Their Industries to Be Substantially or Unrecognizably Transformed by Digital. [online] Available at: https://www.gartner.com/newsroom/id/3287617 [Accessed 19 Dec. 2018].

 

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