Every day the business press is full of stories about digital transformation. Like rightsizing, outsourcing, lean and other management philosophies before it, digital transformation is the current management fad. Many senior executives are taking note, thinking about their digital transformation strategy, about their readiness for digital transformation and how this new way of working will affect their business.
Whether executives fully understand digital transformation or not, many are convinced that they must act. Meanwhile, hardware and software firms are creating a lot of messaging and hype about digital transformation. Understanding the digital transformation imperative can be difficult.
After almost a year of media hype, few people can provide a good definition of digital transformation, and why it matters so much. While some companies are already mostly digital – those that were designed and built as web-centric companies like Airbnb and Google – digital transformation is more confusing to businesses that make actual things – cars, dish washers and so forth. It will be much easier to declare a web-centric business as a “digital” business than it will be to transform a company that makes tangible products.
Today, the phrase “Digital transformation” is a catch-all that incorporates the idea of converting analog processes and capture systems to digital processes and data, as well as the implementation of a number of digital enablers – the Internet of Things, Industry 4.0, big data, blockchain and a host of other technologies. There isn’t a holistic, accepted definition of innovation, or for that matter a maturity index, so no one really knows exactly who is “transformed” or who isn’t. A recent report (2016) from McKinsey indicated that many European firms operate at only 12 percent of their digital potential, while the average in the US is approximately 18%. If these numbers are still somewhat reasonably accurate, there’s a lot of work to do to become truly digital.
Clearly, digital transformation is getting the lion’s share of attention from the media and management circles yet isn’t fully defined or even understood. The challenge this creates is that as the demand for digital transformation grows, attention and resources for other initiatives will necessarily dwindle. Corporate budgets and management bandwidth are a zero-sum game. Because this is true, I think digital transformation could have a significantly negative impact on innovation.
Admittedly my perspective on digital transformation is a bit contrarian. Most observers are welcoming the advent of digital transformation. Even many innovation consultants and market observers are on record saying that digital transformation will accelerate the pace of innovation. I believe that in the long run the more “digital” a business becomes, the more likely it is that innovation potential will increase, because digital processes and channels have greater flexibility and digital processes and products will create more data, leading to the potential of more insights. It’s not the long run I’m concerned about. What I am concerned about is the three to five-year transition that businesses must go through to achieve digital transformation.
Why digital transformation is dangerous for innovation
In this paper I’ll argue that digital transformation is necessary but insufficient as a strategy for future competitiveness and growth. In fact, I think we should emphasize the idea that digital transformation and its many components are simply creating a digital platform to help scale a business and create more efficient and effective processes, interactions, decisions and data management. And while these benefits are valuable, none of them has anything to do with improving innovation. Digital transformation is likely to become yet another productivity and efficiency enhancer, continuing a long string of implementations of other efficiency solutions like ERP, outsourcing, right sizing, lean and other strategies that now litter the recent past.
The concept of digital transformation and the underlying technologies like artificial intelligence, blockchain and IoT are interesting and powerful, but they are technologies, not solutions, and are often seeking a specific need or problem to solve. As has been the case with many other new technology introductions, these technologies are likely to be used to increase efficiency and productivity rather than create new ideas or solutions. This is not to say that efficiency is not a desirable goal. On the contrary, efficiency is important, but efficiency will not create new, disruptive products, create differentiated offerings or create new sources of growth and revenue. And right now, growth, differentiation and revenue are more important than more efficiency.
Paving the goat path
The digital transformation that so many analysts and experts talk about is simply the second or third wave of information systems and platform transformation that started in the late 1980s and early 1990s with large scale ERP implementations. Prior to the introduction of integrated ERP, most IT teams cobbled together various financial, operations and manufacturing software into one “integrated” solution that allowed for better financial management. While ERP was sold to increase productivity and free up workers to do more value-added work, it was typically justified through cost efficiencies and workforce reductions. In other words, ERP as a transformative solution for IT increased efficiency and cut costs but did not impact innovation. ERP and many other solutions have improved efficiency but haven’t addressed the ability to innovate, and have sometimes inadvertently created barriers to innovation.
If the inadvertent barriers weren’t enough, there’s another significant problem hidden in this story. Far too many corporations simply implemented ERP and subsequent applications on top of archaic business processes. In my day as an SAP consultant we called this “paving the goat path”. Instead of rethinking the business processes and leveraging simpler, standard operating models within the ERP software, companies configured the software to align to older, often inefficient business processes, codifying ineffective and circuitous processes. Thus, many companies today are locked into out of date business processes that are reinforced by their ERP systems. While these companies would like to be nimble, agile and up to date with their IT and data flows, they are somewhat trapped by their original ERP and other system implementations. Digital transformation has all the attributes to make this challenging situation even worse.
If history is any guide, digital transformation will simply be applied on top of the existing IT infrastructure. Few companies have the bandwidth or strategic forethought to rethink their information flows and business processes, or to create adaptive models to match emerging market conditions. Instead IoT, big data and other digital solutions will be layered on top of a rigid application layer which codifies the operating processes of the late 1980s or early 1990s. While digital transformation may make existing processes and operations more efficient by digitizing data, these solutions won’t necessarily ensure that the processes align to new market conditions. In effect we will be creating more data, more quickly, around digital processes that may be completely misaligned with customer and market needs.
Given that many new technologies are initially implemented to gain efficiencies, then, and that digital transformation will build on top of already efficient systems, digital transformation creates challenges for innovation in at least four ways:
- First, management has limited bandwidth and can only focus on a few important initiatives at one time. Digital transformation will pull time, attention and resources away from innovation activities.
- Second, digital transformation seems more certain than innovation. Executives can see new IoT sensors or react to new analyses of big data, while innovation may or may not produce results in the short run.
- Third, the more that digital transformation reinforces existing efficient operating models, and even improves efficiency and reduces variance and risk by producing data and evidence, it will become more difficult for innovation to disrupt these efficient processes and in some cases will be difficult to conduct innovation except in a very defined, efficient manner.
- Finally, digital transformation will create far more data that must be captured, stored and analyzed. IoT devices, sensors, blockchain and other digital technologies will create exponentially more data, and that data must be managed, again pulling resources and management time away from innovation.
It’s for these reasons that I say that digital transformation could be a very significant nail in corporate innovation’s coffin if we aren’t careful. In the long run innovation may benefit from these intelligent applications and larger volumes of data, but the transition time to digital transformation could lead to lowered investment in innovation and will certainly lead to lower executive focus.
Current and future innovation challenges
The fact is, any innovation beyond simple incremental innovation is challenging in most corporations today. Over the past several decades we have implemented several systems and theories to improve efficiency: ERP, Business Process Re-engineering, outsourcing, right sizing, lean, six sigma and many other approaches. Increasingly large firms have become very risk adverse, good at incremental innovation while leaving more interesting or disruptive innovation to smaller firms and startups. If innovation activities are difficult to staff and fund now, if they introduce risk and uncertainty in the current environment, if they put efficiency at risk now, how much more so will they be if we introduce all these undesirable features as digital transformation unfolds?
If you read the literature about digital transformation carefully you’ll find very little commentary about the power of digital transformation to create new products, services or business models. Few firms ever became more innovative by focusing on becoming hyper efficient, and few firms really understand the impact of all the data that digital transformation will create. Corporations run a very distinct risk of creating internal capabilities and processes that are digital, operate effectively and reduce risk and uncertainty while generating a significant amount of data and evidence, and eliminating almost all room or opportunity for innovation. Digital transformation won’t create new ideas, enhance creativity or simplify corporate innovation. Instead it will detract from it.
The key question to ask about digital transformation is: who benefits? Which firms benefit from the implementation of IoT, blockchain, big data, smart systems, automated processes and so on? At first glance the firms that stand to benefit the most are hardware and software firms, who build these capabilities and tools. I’m sure many established and emerging hardware and software companies will benefit from digital transformation. However, if you look more closely you’ll find the real beneficiaries of digital transformation are many of the same firms that benefited from the ERP implementations – large consulting firms that implement new technologies. The design, implementation, testing and integration of these solutions will continue for quarters if not years, soaking up budgets and resources that could be used elsewhere. While these new technologies may be innovative, they won’t be used to make their users more creative or innovative.
Large consulting firms are usually interested in operational efficiency far more than they are interested in innovation. The projects for software and hardware installation and configuring new processes and systems are far larger, more lucrative and more dependable than innovation projects that often start or stop at a decision maker’s whim. With some careful examination we can see that many of the secondary or ancillary players in this drama have a stake in long systems implementations. For larger consulting firms, digital transformation will be far more lucrative than innovation, which means additional pressure will be placed on decision makers even from ostensibly neutral parties.
No explicit tradeoffs
While considerations between digital transformation and the need and ability to do more innovation may not seem all that similar, there are in fact explicit tradeoffs. Corporations MAY need to do some digital transformation, but the implementations and benefits should be more precisely defined. Currently digital transformation is a movement and a set of technologies not a clear solution. Since it is garnering a lot of attention from the media and from analysts, it will be top of mind for executives. This means it will receive some management attention and some technologies like IoT or big data will be implemented regardless of a larger conversation around digital transformation.
Corporate leaders must ensure that while they are conducting digital transformation projects they continue to provide resources and bandwidth for innovation. We know that many companies admit to under investing in innovation now, before the advent of digital transformation, and we must ensure that adequate resources continue to flow to innovation during the next few years as digital transformation takes place. Further executives must ensure that digital transformation outcomes don’t become barriers to innovation, creating such an efficient organization that innovation has no room to explore. Simultaneously, executives must re-engage ongoing and new innovation activities to demonstrate their investment in these activities, and hopefully will demonstrate how digital transformation may accelerate innovation due to the availability of more data to analyze, the availability of more people as efficiency takes hold, more insight or clarity about customer needs or impending market shifts.
Companies need to do both – consider the appropriate use of digital solutions and understand what digital transformation means for their business, as well as conduct more innovation and continue to push the envelope in terms of risk and uncertainty.
What I fear is that innovation will take a back seat to digital transformation, and once companies are complete with their “transformation” any innovation will be much more difficult to accomplish.