Digital transformation can be described as business transformation using digital capabilities. In other words, it’s more than just adopting technology for technology’s sake.
While every enterprise has a different digital transformation journey, companies tend to take four common pathways. In a new research briefing, Stephanie Woerner, Peter Weill and Andrea Patricia Diaz Baquero of the MIT Center for Information Systems Research look at why some companies choose different pathways for different business units, and how successful companies coordinate between them.
The researchers, who wrote an upcoming book about the paths to transformation, found that transformation must happen in two ways: Better customer experience and improved operational efficiency. Firms can make progress on one, both, or neither, and they typically take four different pathways to transformation:
The first pathway is a focus on transforming operations, which commonly means building new business services enabled by application programming interfaces (APIs). This path makes sense for firms with customer experience that’s comparable to the industry average, as it will likely take years for the customer experience to improve while core business systems are ripped out and replaced.
Alternatively, companies may focus on an integrated customer experience if metrics such as net promoter score fall well below the industry average. Adding features and expanding channels can grow a customer base quickly, but the marginal benefits of these improvements will decrease if legacy processes, systems, and data sources are pushed to do things they weren’t designed to do.
As a third option, companies can take incremental steps in each direction over several iterations, starting with a small step to improve the customer experience (such as a new mobile app) and following that with a small step to streamline operations (such as a new customer relationship management system). This approach has the advantage of reducing risk, and it works well if companies can identify specific customer experience improvements that are poised to make a difference. However, constantly focusing on transformation efforts may have a negative impact on employee performance.
The final pathway is starting fresh with a spinoff company — an option if leaders of the current company don’t think it’s possible to change culture, customer experience, and operations fast enough to survive. The advantage is that the new company is future ready and has the advantages built in. The disadvantage is the clear challenge of eventually integrating a parent company and a spinoff that have little in common.
But pathways suited to one business unit might not work for another, and sometimes it makes sense to pursue multiple pathways, the researchers found. One part of the business may need an immediate improvement to customer service, while another may have more latitude to take incremental steps.
If companies take this route, it’s important to coordinate — to share data, newly built components, or other innovations. For example, Bancolombia, the largest commercial bank in Colombia, created a set of APIs for internal use with the goal of developing digital ecosystems while also introducing an online-only bank that was successfully spun off as a separate business.
It often makes sense for large companies such as Bancolombia to take multiple roads to digital transformation. In this case, the bank took the third and fourth pathways.
Companies that get it right have leaders who coordinate efforts in three key ways:
- Focus on creating a cross-product customer experience that’s seamless across business units, largely through the use of API-enabled and reusable modules.
- Embrace a “coach and communicate" leadership approach instead of “command and control.” Coupled with agile methodologies, this encourages active involvement among all employees.
- Encourage innovation and reuse good ideas across the company if they succeed for one business unit.