Digital Transformation: A New Roadmap for Success
This is the second of our three-part "Leading in the Digital Era" series. Read parts one and three.
For the past two years, we’ve been asking executives: Where is your company in its digital journey, and where do you want to go?
Roundtable discussions with 175 senior executives around the globe and a survey of more than 1,500 senior executives from over 90 countries helped form a picture of today’s digitally mature company. However, it’s one thing to know where you aspire to be, and another to understand how to get there. In this article, the second in a three-part series, we dive into the challenges these leaders confronted and strategies for how to address them.
Organizational change is never easy, but our roundtable discussions made clear that achieving digital maturity can be an especially arduous journey, even for digital-first companies. While the COVID-19 pandemic has made digital transformation an even more urgent need, companies must also morph iteratively to keep up with the speed of emerging technologies. It’s a process of continuous learning and pivoting to adapt to an evolving competitive landscape.
Despite the recognition by participants that speed is critical, they reported that digital transformation takes significant financial investment and time. Of those who reported making significant progress on their journey, 60 percent had been at it for at least five years. In calculating the resources, financial and otherwise, necessary for change, participants emphasized the need to plan for continual upgrading of technology, organizational capabilities, and talent.
With these dueling considerations in mind, we distilled our research findings into seven guiding principles for digital transformations at any stage—nascent, progressing, or stalled:
1. Recognize the emotional side of digital transformation
Digital transformation can be bewildering and exhausting for leaders and employees alike. Emerging digital technologies are disrupting everything from supply chains and manufacturing to selling and distribution, as companies battle to create differentiated end-to-end customer experiences in an unforgiving dynamic economy. As one executive put it, in a hyperconnected world, competitors can "pop up from anywhere and everywhere."
With rising expectations of customers and other stakeholders, no company can afford to stand still. Now more than ever, they must constantly attend to both top and bottom lines by launching new products, services, and experiences consistently. Leaders from software-as-a-service (SaaS) business models, for example, described how delivering at the price points and pace required today has required them to reimagine their processes and talent systems.
Embracing experimentation and the inevitable missteps and failures inherent to the innovation process is frankly nerve-racking for leaders and their teams. Step-change innovation takes courage, and even digital-first incumbents struggle to make the necessary longer-term investments when their investors focus on shorter-term metrics, participants say.
At the same time, companies must deliver value at speed. They’re cutting costs through automation, and most people we talked to report running lean—conditions that make it hard for leaders and their employees to take the risks required for innovation. Unfortunately, according to our survey, only 5 percent of executives consider the employee experience one of their top two priorities. Those who did, though, reported greater and faster progress in their digital transformation journey.
2. Align around a customer-centric narrative
Vision and strategy matter, but without a sense of shared purpose, employees aren’t willing to do the hard work required to build a digitally mature organization. Employees not only want to know where they are going, but also why they are going there. We heard time and again that too often leaders neglect to connect the dots between who they are, whom they serve, and how digital technology will help them deliver.
The sense of collective identity keeps employees aligned and committed to working in the new ways demanded of them in the digital era. Without it, employees, especially Millennials and Gen Z talent, don’t find their work as meaningful. They don‘t develop the sense of belonging they need to collaborate and deliver innovative solutions to customers. A shared sense of purpose anchors the organization as its leaders distribute authority and delegate decision-making.
Too often, leaders only communicate how digital transformation will improve the company’s performance. Instead, they must develop a narrative—a human-centric story—for how digital transformation will improve the lives or livelihoods of their customers and other stakeholders. As one executive put it, "We must explain how digital assets will help us become a sustainable enterprise, both profitable and a force for good in the broader society." Attention to purpose throughout a digital transformation helps counter short-termism, and encourages the psychological safety necessary for cultivating a growth mindset among employees.
To nurture that sense of shared purpose, as well as customer-centric thinking, participants described how they sent cross-functional or cross-level teams to observe customers using their products and services. Others talked about the benefits of running design thinking labs with customers to incubate new offerings. These approaches helped employees across the organization develop a shared understanding of the customer journey. As leaders explained, customer-centric organizations develop solutions to address customers‘ evolving needs and desires, rather than simply selling their existing products and solutions.
3. Build a data-informed culture by upskilling talent
Fewer than half of survey respondents reported that their organizations had the right talent to compete in the digital era. Participants described the proliferation of "digital positions" in their companies, from Digital Project Manager or Digital Director to Chief Transformation Officer or Chief Innovation Officer. In one roundtable discussion, participants predicted that, over time, more senior leaders would have technical backgrounds. One media executive predicted that in five years, engineers would comprise a third of his company’s workforce.
Today, digital transformation requires upskilling all employees so they can harness digital tools and data. However, participants emphasized that executives must first understand the different generations in the workforce:
- digital natives, who grew up with digital tools;
- digital immigrants, who are open to learning and changing; and
- digital refugees, who avoid digital tools they view as unsettling and scary.
While not everyone needs to be able to code or understand the underlying dynamics of artificial intelligence (AI), participants say that almost all employees need a "basic understanding and comfort" of working with data—its potential and limitations. Digital specialists in an organization should implement user-friendly digital tools to help level the playing field for those who are less familar with them. For some companies, visualization tools have been key to getting everyone (even those who fear numbers and math) to use data to inform their decisions and actions. Unfortunately, the consensus among participants was that too often digital transformations don‘t devote enough time and resources to developing the mindsets and capabilities all employees need.
"Data, like all information, is power, and not everyone will embrace this transition readily."
Roundtable executives said senior leaders tend to be digital immigrants at best at most established companies. While they agreed that leaders urgently needed to expand their knowledge, they didn’t see eye to eye on what digital literacy means. A few argued that leaders should understand data analytics and AI deeply, and even learn to code. Most contended, however, that what really matters is a leader‘s capacity to collaborate with and learn from digital specialists on their teams.
To increase digital literacy, some companies are using reverse mentoring programs, with Millennials and Gen Z’ers educating those more senior (because of age or position) about the potential of digital tools to create value. One participant in China described how "twenty-somethings" joined C-suite meetings to share their perspectives on the opportunities and challenges of various digital projects under consideration.
4. Manage the power dynamics that come with data
As we argued before, companies shouldn’t aspire to create a data-driven culture, but rather a data-informed one. Data shouldn’t be touted as a replacement for expertise or experience. Instead, it should enable employees to question the organization’s status quo, using insights from data rather than hindsight or past experience.
It’s important to remember that data, like all information, is power, and not everyone will embrace this transition readily. Functional experts and leaders can become resistors to change, especially if the data challenges deeply held assumptions based on experience or expertise, or reveals unpleasant realities about customer or employee experiences. Some might consider the use of AI in "people decisions" dehumanizing. Again, leaders should prepare to manage the emotions associated with learning to use data to make better and faster decisions. Without a shared sense of purpose and attendant psychological safety, participants say that employees will likely reject data instead of incorporating it into the daily practices in their organizations.
It’s also imperative to have team members represent diversity of thought, and some participants argued for demographic diversity. We have all come to appreciate how algorithms can lead to unintended bias that harms certain employees and customers, and the company’s reputation (a bias story can go viral on social media within minutes).
5. Design for inclusive and agile problem-solving
As they become more senior, executives often have less contact with those at the front lines of their organizations and, as a consequence, their customers. Leaders need to be aware of these blind spots and empower their employees—including those closest to the customer experience—to take ownership of customers’ problems and innovate on their behalf.
As leaders develop and iterate their strategy for where they are going and how they will get there, they need to surround themselves with people who have their fingers on the pulse of the organization. Their advisers must closely monitor shifts in the competitive environment. Leaders need to actively "crowdsource" feedback and ideas from employees, customers, vendors, and regulators. They must spot even the weakest signals of change so their companies can proactively shape their future.
Participants acknowledge that there is no perfect organizational design. However, as much as possible, they recommend designing organizations to mirror the end-to-end experience of the customer so that employees solve problems "through the eyes of the customer." This structure tends to support an enterprise point of view, collaboration across functions, levels, or geographies, and more decentralized decision-making closer to the customer.
That said, participants say they‘re employing more ad hoc problem-focused teams as overlays to their more permanent organizational structures. These teams almost always include individuals with different expertise and perspectives—a critical ingredient for innovative thinking. The downside of this ad hoc approach is that it can add complexity and slow decision-making, just when speed is of the essence. When setting up these teams, clarity about decision-making rights and the rationale of decisions are critical: who should be consulted before making decisions; what decisions can they make; what should be escalated.
6. Encourage an outside-in and collaborative ecosystem perspective
Digital transformation requires continuous individual and collective learning. Forty-four percent of our survey respondents view continuous learning as key to success in the digital era. To help employees see the possibilities of a digital future, participants orchestrated visits to innovation hubs (like Silicon Valley) and opportunities to interact with people in other industries (at innovation labs or corporate accelerators, for example). Participants contend that an outside-in perspective can infuse the creativity and curiosity that digital transformation requires.
"Leaders must be empathic about the stress employees feel as they grapple with the complexity and change that comes with digital transformation."
Companies can also no longer go it alone, given the speed and capabilities necessary to compete. Leaders must forge new partnerships with key players in their ecosystems, including private companies, government, and sometimes non-profits. Competitors are even becoming partners; to stay at the cutting edge, companies are turning over essential but non-core activities like cloud storage to organizations with whom they compete in other domains. The pandemic has reminded all of us of our interdependencies across sectors. Without basic infrastructure—public health systems, adequate internet bandwidth, childcare—businesses cannot function. Competitors have found themselves coming together to make sure shared suppliers survive these times of unprecedented turmoil.
7. Safeguard ethics and take a proactive approach to governance and compliance
Three-quarters of survey respondents say their organizations demonstrated ethical governance of data "often" or "always," a number that seems inconsistent with what we heard in our roundtables. Participants say there’s still much work to do to embed ethical judgment throughout an organization and prepare for dilemmas on the horizon. While many companies have set parameters for using customer data, what about rules around employee data? Companies will need to confront these questions.
Only 18 percent of survey participants deemed ethical governance critical to success. However, those 18 percent were also significantly further along in the digital transformation process than those who reported otherwise. Some roundtable participants have added an "office of ethics" or ombudsman to provide oversight over ethics policies and practices and to adjudicate complex ethical challenges, engaging outside advisers, if necessary.
Participants are trying to stay ahead of new regulations and, as appropriate, help shape them (with the help of not-for-profit organizations more than traditional lobbying). In the digital world, leaders must stay informed of nascent and fast-changing compliance standards—globally and locally—as they make investment decisions.
Ultimately, leaders must articulate the values and principles that should guide how employees resolve inevitable ethical questions and create processes and habits that reinforce desired actions. These practices should provide the compass and guiderails for ethical decision-making—going beyond "do no harm." As technological advances open up new, previously unimagined use-cases, leaders must be prepared to ask and answer the question: "Just because we can do something, should we?" With regard to the use of data, leaders must be rigorous in encouraging employees to ask: "What expectations were set with employees or customers when we gathered their data?" "How would I personally feel if my data were used that way?"
Digital transformation is more about people than technology
While these seven principles might seem obvious to some, we’ve found that few companies have fully internalized them. True adoption requires conviction at the top of the organizational chart and a spirit of determination that permeates every level below. And real success will come from the details—how the company weaves these concepts into its corporate DNA and day-to-day operations.
After all, companies trying to digitally transform must change employees’ hearts (why they do their work), heads (how they see their work), and hands (how they do their work). It is no wonder leaders and employees often feel overwhelmed by the adaptations required of them individually and collectively in the digital age. Leaders must be empathic about the stress employees feel as they grapple with the complexity and change that comes with digital transformation. In time, the opportunity to deliver on a shared purpose helps align and motivate people.
Navigating the arduous journey of digital transformation requires certain mindsets and behaviors from leaders that are different from those required in the past. The final installment of this series will look at how leaders need to change if their companies are to reach digital maturity and be a positive force for customers, employees, and society.
About the Authors
Linda A. Hill is the Wallace Brett Donham Professor of Business Administration and faculty chair of the Leadership Initiative at Harvard Business School. Ann Le Cam is senior vice president of global talent and animation production at Weta Digital. Sunand Menon is chief product officer of RANE, a risk intelligence company. Emily Tedards is a research associate at HBS.
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