What is digital transformation?
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What is digital transformation?

Digital transformation is a strategic initiative that incorporates digital technology across all areas of an organization. Digital transformation evaluates an organization’s processes, products, operations, and technology stack to identify ways to improve operational efficiency and bring products to market faster.

It has become more important as organizations increasingly take a digital-first approach to all aspects of a business, from its business models to customer experiences to processes and operations. Organizations now use artificial intelligence (AI), automation, cloud environments and other digital technologies to leverage data and streamline intelligent workflows, faster and smarter decision-making, and real-time response to market disruptions. And ultimately, it can lead to the ability to pursue new opportunities and create new products that meet customer expectations.

Digital transformation is as much about business transformation and cultural change as it is about replacing analog processes with new technologies. It requires the CEO and CIO to work hand-in-hand to identify what changes need to happen within the organization to modernize and achieve their pressing business goals.

Many organizations felt an increasing need to reimagine their businesses and prioritize digital innovation during the Covid-19 pandemic, which supercharged the collective march into the digital age. That is when customer expectations and habits changed, leading to an over-reliance on digital experiences and decreased brand loyalty. As a result, organizations got more serious about change management, of which digital transformation is a major component.

Meeting the expectations of all stakeholders is a core component of digital transformation. For example, meeting customer expectations has always been an important component of the digital transformation journey. Today, customers expect to conduct all business digitally, wherever, and whenever, using any device, with all the supporting information and content they need close at hand. Ultimately, digital transformation is about meeting these ever-escalating expectations.

Companies are increasingly pursuing digital transformation because it can foster a competitive advantage, leading to an increase in business value and attractiveness to potential employees. McKinsey research found that digital leaders achieved about 65% greater annual total shareholder returns than digital “laggards” from 2018 to 2022.1

Its goal is to build a technical and operational foundation, to evolve and respond in the best possible way to unpredictable and ever-changing customer expectations, market conditions and local or global events.

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Digital transformation levers

As McKinsey points out in a recent report, several drivers are necessary to build a robust digital transformation framework effectively.2

  • Strategy: Establishing a strong digital transformation strategy involves identifying an organizational North Star and clear roadmap for execution. As Deloitte has posited, “digital transformation success starts at the top.”3 Enterprises start by envisioning the experience they want customers to have with their product and their brand for as many months or years as they want them to be customers. This objective means they must analyze their market, along with technology trends, to forecast or anticipate how customer needs or expectations may change and to spot opportunities for disruption. Organizations then determine how they must transform the digital business from end-to-end, including infrastructure, product development, operations, and workflows. And finally, they bring the customer experience to life and improve it continually in response to opportunity and change.
  • Data: No digital transformation will work unless the organization can identify, manage, and analyze the data they have produced. Thankfully, new technologies like AI and machine learning can streamline an organization’s ability to accomplish this important task. Those who harness their metrics better than the competition will have several competitive advantages. They can better understand their customers to improve user experience. They become experts at deploying new products quickly. They understand their energy consumption and output better, so they can improve their sustainability.
  • Talent: Digital transformation and employee experience go hand-in-hand. Organizations that incorporate new tools like generative AI, machine learning, Internet of Things and advanced data platforms also need to train their employees to use them. In addition, executives and HR leaders need to motivate employees to embrace change and participate in the transformation of the organization.
  • Operating model: Organizations that invest time and resources into beginning their digital transformation journey must also rethink their operating models. New technology and agile processes will matter little if the organization’s structure and hierarchy remain the same. The way an organization operates must be as flexible as the new tools allow.
Digital transformation technologies

Virtually any digital technology can play a role in an organization's digital transformation strategy. Here are some examples of digital transformation trends that every organization should consider embracing.

  • Artificial intelligence (AI) and automation: AI technologies, such as machine learning, enable a computer or machine to mimic the human mind's capabilities. AI learns from examples, recognizes objects, makes decisions and quickly processes large tasks. The list of things AI can do has increased significantly in recent years, especially with the rise of publicly available generative AI models. AI can replace manual activities, such as those in customer service. It can now answer questions and suggest content, helping customer care representatives work on higher-level problems. It can create personalized workflows and analyze large datasets, helping organizations make smarter and more efficient decisions.
  • Cloud computing: Companies are increasingly turning to the cloud as a way to manage IT costs, boost efficiencies, and remain agile. Those that do migrate to the cloud must decide whether they choose a hybrid cloud or multi-cloud environment.A hybrid cloud infrastructure is a cloud computing infrastructure that connects on-premises IT, public cloud and private cloud resources with orchestration, management and application portability. By creating a single, flexible, optimal cloud for running every workload—and by not locking an organization into a single platform or vendor—hybrid cloud provides the agility, scalability and resilience required for enduring digital transformation success.
  • Microservices: Microservices is a cloud-native application architecture in which a single application is composed of loosely coupled, independently deployable components. Together with Agile or DevOps methodologies, microservices are an engine for creating or countering digital disruption. It enables organizations to deploy new software or product features daily or sometimes hundreds or thousands of times a day.
  • Internet of Things: The Internet of Things (IoT) are objects and devices equipped with sensors that collect and transmit data over the internet. IoT devices are where digital technology meets physical reality. Applications like supply chain logistics and self-driving cars generate real-time data that AI and big data analytics applications turn into automation and decisions.
  • Blockchain: Blockchain is a distributed, permanent and immutable ledger or record of electronic transactions. Blockchain provides total transaction transparency to those who require it and is inaccessible to those that don't. Organizations are using blockchain as a foundation for super-resilient supply chain and cross-border financial services transformations.
  • Digitization: Also known as digitalization, digitization is the conversion of paper-based information into digital data. It’s also a cornerstone of foundational transformation initiatives in healthcare (electronic medical records or EMR), government (making public records more accessible and enabling citizens to make service requests online), and other industries.
Digital transformation initiatives

While every digital transformation project is different, there are some powerful initiatives that many organizations adopt to take full advantage of their investments.

  • Building digital experiences: Organizations as diverse as banks and other financial services companies, retailers, and entertainment providers have all in recent years prioritized their digital user experience. Now, customers can take a variety of actions, such as signing up for accounts, making purchases and checking balances without needing to chat with someone.
  • Automating customer service: Improvements in AI, machine learning and algorithms have revolutionized customer service. Increasingly, organizations make chatbots, self-service knowledge centers, and dynamic FAQs the first line of inquiry when customers need help. This frees up customer care professionals to focus on higher-level issues.
  • Tapping into external ecosystems: Digital transformation has created many different ways organizations can partner with each other to serve customers. The rise of business ecosystems, driven by APIs and other advanced technologies and a growing interconnectedness between non-competitive companies. Software providers can enable users to sign in with accounts from third parties. For example, an email provider may create a marketplace where users can connect their task management software or customer relationship management provider.
  • Digital twinning: Organizations can now make digital replicas of their physical solutions or factories to test out ways to improve features or efficiencies. For example, a factory can A/B test different placements of machinery to determine which will make the environment safer or able to produce more goods. Or a product manufacturer can create digital replicas of their products to identify ways to produce ones that are more ergonomic or easier to use.
Benefits of digital transformation
There are several benefits organizations can take advantage of if they master digital transformation.
  • Automating business processes: Adding AI and automation serve customers better and do higher-value work. They create intelligent workflows that simplify operating models, increase productivity and enable employees to make better decisions faster.
  • Defending against disruption: Digital transformation implements technologies and best practices for fast product creation, new customer experiences and new business models in response to shifts in competitive threats, market trends and customer expectations. 
  • Dealing with change effectively: This process can include modernizing legacy technology to run on modern infrastructure and interoperate with modern applications. It builds resilience into systems and processes and assimilates applications and data from acquisitions or mergers.
  • Enabling on-demand access to more resources, with fewer limits: Digital transformation empowers the business to adopt the widest possible range of solutions and services from ecosystem partners, industry solution leaders and multiple cloud service providers.
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