What is digital transformation?

Driven by market demand and fueled by technology, digital transformation means adopting digital-first customer, business partner and employee experiences.

Detail view of businesswoman working on digital tablet during meeting in conference room

Defining digital transformation

Digital transformation takes a customer-driven, digital-first approach to all aspects of a business, from its business models to customer experiences to processes and operations. It uses AI, automation, hybrid cloud and other digital technologies to leverage data and drive intelligent workflows, faster and smarter decision-making, and real-time response to market disruptions. And ultimately, it changes customer expectations and creates new business opportunities.

While many organizations have undertaken a digital transformation in response to a single competitive threat or market shift, it has never been about making a one-time fix. According to MIT Sloan Management Review (link resides outside of ibm.com), "Digital Transformation is better thought of as continual adaptation to a constantly changing environment." 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.

It's also worth noting that while digital transformation is something that businesses undertake, the effect goes well beyond business. As one expert at Red Hat puts it, “Better living through software—that's what digital transformation is (link resides outside of ibm.com). How's that for a definition?” It's a solid definition, particularly if you think that 'better living' includes working and playing in a world that promises new opportunities, more convenience and greater resilience to change.

Digital transformation is why so many areas of business and life are fundamentally different from those of 20 years ago. It's also why we are now living in the digital age to one degree or another.


Digital transformation drivers

Customer expectations have always been the prime drivers of digital transformation. It began when a rush of new technologies made new kinds of information and capabilities accessible in new ways, such as: 

  • Mobile devices
  • Social media
  • The internet of things (IoT)
  • Cloud computing

Pioneers—disruptors—such as Amazon and Netflix snatched market share from their competition by adopting these technologies to:

  • Reinvent business models (ecommerce, electronic delivery).
  • Optimize processes (supply chain management, new feature development).
  • Constantly improve the customer experience (in-context customer reviews, personalized recommendations).

See how other organizations are transforming digitally.

Competitors adapted to provide even more capability and convenience (or they struggled and maybe even disappeared). 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. But often, an organization's entry point is a transformation initiative that addresses a specific means to this end, such as:

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.


COVID-19 pandemic: The ultimate driver?

In 2020, the COVID-19 pandemic laid bare every organization's digital transformation efforts and progress (or lack thereof). Manufacturers learned just how quickly and effectively they could get new products to market. Retailers scrambled to provide customers new and safer ways to shop. Employers adopted or expanded technologies that let employees work from home.

Among operational workflows, supply chains were the most glaringly exposed. Supply chains are always vulnerable; according to the McKinsey Global Institute, supply chain disruptions lasting one month or longer occur every 3.7 years (1). But shortly after the pandemic began, the United States suddenly imported almost 50% less from major trading partners (2). Companies were forced to undergo years or decades worth of supply chain transformation in weeks or months.

The impact figures to be lasting. In a recent study, Twilio called COVID-19 "the digital accelerant of the decade." Prior to the pandemic in October 2019, industry analyst IDC forecast worldwide spending on digital transformation would reach USD 2.3 trillion in 2023 (3). By December 2020, eight months into the pandemic, IDC nearly tripled that estimate to USD 6.8 trillion (4).

How businesses transform in uncertainty (PDF, 201 KB)


Transformational technologies

Virtually any digital technology can play a role in an organization's digital transformation strategy. But technologies that figure to play a central role today and in the near future include:

Artificial intelligence and automation

 

Artificial intelligence (AI) technologies, such as machine learning, enable a computer or machine to mimic the human mind's capabilities. AI learns from examples, recognizing objects, making decisions and more. When combined with automation, AI can infuse intelligence and real-time decision-making into any workflow. It can drive everything from innovative smart products, from increasingly personalized customer and user experiences to optimized workflows for supply chain management, change management and more.

Hybrid cloud

 

A hybrid cloud 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

 

Digitization, or digitalization, is the conversion of paper-based information into digital data. Digitizing printed information may seem like an old practice, but it’s a component of digital transformation efforts in virtually every industry or sector. It’s also a cornerstone of foundational transformation initiatives in healthcare (electronic medical records or EMR), government and education

 

 


Digital transformation strategy

A hundred organizations detailing their digital transformation strategies will likely result in 100 different roadmaps. Still, most successful digital transformations are aligned to a company's business strategy and follow two principles:

  1. They work backward, starting with the ideal customer experience.
  2. They take a holistic approach to transforming operations.

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.


Related solutions

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AI-powered automation solutions

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Business consulting services

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Business operations solutions

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Citations

¹ 'Risk, Resilience and Rebalancing in Global Value Chains' (link resides outside of ibm.com). McKinsey Global Institute, August 2020

² Covid 19 Digital Engagement Report (link resides outside of ibm.com). Twilio, Inc., page 5

³ Worldwide Spending on Digital Transformation Will Reach $2.3 Trillion in 2023, More Than Half of All ICT Spending, According to a New IDC Spending Guide (link resides outside of ibm.com). BusinessWire.com, October 28, 2019

 Digital Transformation Investments to Top $6.8 Trillion Globally as Businesses & Governments Prepare for the Next Normal (link resides outside of ibm.com). IDC.com, December 2020.