Why do most Digital Transformations fail?

According to a (2021) McKinsey study - 70% of digital transformation projects ultimately 'fail'.

By that measure, we will have ‘wasted’ $2.16 trillion in 2023.

To put that into perspective, that’s the size of Italy’s GDP - essentially discarded or at best, not effectively put to its intended use.

That’s just how massive annual spend on digital transformation is - and how much money is essentially ‘wasted’ due to poor strategy and badly executed efforts. Even more discouraging, this loss is only expected to grow in the next decade; as gross spend on digital transformation is expected to continuously rise by 16.4% YoY.

From a ROI perspective, it’s a ~~bet~~ investment few business leaders would feel confident in making, with a 30% chance of ‘success’ - however that’s measured.

With the long term survival of legacy businesses ultimately dependent on innovation, business leaders are essentially caught between a rock and a hard place. Without consistent digital transformation initiatives, market share will undoubtedly be lost to digitally native disruptors that better cater for the behaviours of the digital generations; with millennials and GenZ, according to Nielsen, now becoming the biggest consumer group in history.

What if, through careful planning and diligent analysis, we could somehow reverse engineer Digital Transformation failures, and double the average success rate to 60%?

Although far from being a high success rate, at least having over half of initiatives, would make approaching transformation less disheartening for technology and business leaders. Before even attempting to do so, we must first determine what the current biggest causes of Digital Transformation failure are, and objectively examine exactly how we could address them to improve the odds of success.

–

Leadership: it all starts at the top

Having strong and competent leadership in place is critical in ensuring any business performs, with McKinsey estimating that strong leaders generate ~80% more shareholder value over a ten-year period than their peers. This couldn’t be more true, and an important component for any organisation going through a large transformation.

Large incumbent businesses, even with less than stellar and innovative leadership teams, have a history of surviving despite stagnating growth, especially in [original] uncompetitive markets. Defensible moats are built over time, thanks in part to brand network effects and market share monopolisation. Eventually, however, without strong leadership in place driving much needed innovations, almost all will see slow and eventual death; from Kodak, to Blockbuster, to Blackberry.

When we add the many moving parts and risks of a business undergoing Digital Transformation and operating in an increasingly competitive market - that likely drove the pursuit of transformation in the first place - strong leadership is not only important, but paramount.

“No wind blows in favour of a ship without direction.”

Seneca

Coupled with strong leadership, having a clear vision and strategy is a crucial pillar every company leading a transformation ought to have. Not having this well-defined from day 1 will substantially increase the risk of the transformation efforts going in vain.

The responsibility of setting this vision naturally sits on the shoulders of the executive leadership team to both create and execute on. Their commitment and support to the vision has been argued by McKinsey to be imperative to the eventual success of the transformation.

That being said, even an unwavering commitment from the leadership team, and well-defined success parameters, obstacles may arise from within the organisation itself - which need to be addressed at risk of cannibalising its own success.

—

Cultural resistance is almost always encountered in all large scale digital transformation initiatives. It arguably cannot be helped as it is ultimately human nature. Employees, feeling threatened by their roles in the organisation post-transformation, will often resist changes and even lobby against them.

From Robotic Process Automation, to the implementation of custom CRMs, ERPs and AI Chatbots, a lot of the technologies that go hand in hand with digital transformation, ultimately bring with them the potential to replace human workers, either in their entirety or the great majority. This is especially true for those employees working in repetitive and manually intensive mid and back-office functions.

With the growing maturity of generative AI, wider parts of the enterprise will likely become ripe for further ~~disruption~~ enhancement in the next decade, with company-wide cultural resistance, from Engineering to Marketing, continuing to grow. Addressing the ‘human’ side of what is otherwise a ‘digital’ transformation - communication, training, and reassurance - is critical.

__

Whilst employee experience and the ways in which internal members of an organisation respond to transformation are important, so too is the user experience of the digital initiatives. Developing technology layers on top of an organisation can unlock numerous business efficiencies, but the nature of how those features are designed, and how both employees and end users ultimately interact with them can mean the difference between a successful transformation and a large waste of resources.

The importance of user experience on ROI can be illustrated by McKinsey’s Design Index (MDI), which compares shareholder returns of strong UX-led businesses with the industry benchmark. The difference can result in 50% less top-line growth and 40% lower shareholder value over the years.

Unsurprisingly therefore, a failure to prioritise user experience is often cited as one of the greatest contributing factors to transformation failures. How design fits in with the rest of the organisation and planned digital initiatives can act as either a headwind or tailwind depending on the design thinking connecting the wider organisation.

—

Adding a high-tech AI chatbot on top of a poorly designed online banking portal is putting the cart before the horse.

Isolated initiatives, design-driven or not, rarely provide the desired outcome of a transformation. To ensure lasting transformation success, a series of initiatives, implemented in tandem to one another, is needed. Oftentimes, individual departments or teams embark on their own digital initiatives without considering the broader organisational context. This can lead to siloed efforts that don’t integrate well with each other, making it especially difficult for older companies that need to integrate new technology into dated and error-prone systems.

“If you automate a mess, you get an automated mess.”

Rod Michael

The companies that embark on digital transformation are either entirely non-digital in their early form (IKEA) or digitally-light (British Airways). The technical challenges they individually face, in varying degrees, can greatly contribute to the failure of their respective transformations. From poorly chosen technology, to outdated systems and integration issues, significant roadblocks can, and often do, arise.

An infamous worst case scenario of a major IT project failure was the TSB Migration Disaster. The British bank’s poorly executed migration led to a costly glitch that locked 1.9 million customers out of their online banking portals, taking TSB 232 days to fully return to business as usual. Whilst thorough technical due diligence and a more phased implementation strategy could have likely mitigated against such total system failure, highly skilled technical and architectural talent is ultimately needed to oversee any implementation.

—

This leads us to another contributing factor in the majority of transformation failures - the lack of skills and expertise within the transforming organisation.

The majority of companies undergoing digital transformation are in essence, almost by definition, non-digital. As a result, transformation projects almost always require the transforming business to acquire a new set of skills. Although these can be painstakingly built in-house from the ground up, they are more often better leased from external staffing specialists in the short-to-medium term. That being said, failure to eventually internalise the right talent, might hinder progress and transformation success in the long run. Whilst a digital seed can be successfully planted through the expertise of an external technology-first partner, business leaders should strive to internally grow these skills in-house in the 2.0 organisation.

Leveraging a technically skilled workforce for each phase of a digital transformation will naturally de-risk the efforts of any initiative. Professionally certified RPA, SAP and Salesforce developer consultants like those working for Carbon can be particularly effective given the competitive pricing seen in its strategic nearshore markets. The elastic nature of utilising providers specialised contract workforces has the added benefit of keeping fixed costs; arguably one of the leading contributing factors for transformation failures.

—

Every technology leader knows that estimating software development costs is notoriously difficult, humans are inherently terrible at predicting absolute outcomes. Projects are heterogenous and unique in their existence and can differ greatly one from another. What might appear to be an easy problem on the surface could prove to be far more technically complex to implement in reality, especially as ‘unknowns’ and edge cases undoubtedly arise.

Underestimating costs and timelines arguably ranks as one leading causes of Digital Transformation failures. Given that meaningful initiatives usually require a significant investment of time, money, and resources, underestimations can pose a substantial risk to project success. Companies that don’t adequately plan and allocate their resources effectively could easily find themselves overextended.

% IT projects with given issue (for those with budgets >$15 million)

As seen in the infographic above, software-focused IT projects see the greatest cost and timeline overruns, albeit luckily with the lowest average benefits shortfall. That means that although a transformation might experience a cost overrun, it doesn’t automatically make the project a failure, especially if the net positive outcome eventually makes up for it. This of course depends on the degree of the overrun and the ultimate benefit shortfall.

When cost overruns do happen, they have a tendency of falling considerably above the initial budget, potentially leaving a crippling impact on the organisation for years to come. In the case of the IBM and Queensland Health fiasco, costs exceeded the budget several multiples over. IBM’s development of a state payroll system in 2010, initially budgeted to cost $6 million and take 1 year to implement, ended up costing 400% more and took 3 times longer. Worst still, the error-prone system ultimately failed completely, accounting for $1.2bn in residual damages.

__

All things considered, innovation-seeking companies and business leaders going through Digital Transformation need to address multiple challenges head-on, whilst remaining adaptable to ensure that their efforts are strategic, holistic, and at all times, customer-centric. Access to skilled technical talent, led by strong and clear-visioned leadership can help mitigate some of the associated risks. Setting well-defined outcome parameters, and pursuing transformation efforts with a conscious and dynamic approach to cost optimisation, will further improve the odds of long term success. Ultimately, given the statistically bleak chance of success, companies committed to large transformation initiatives should use every tool in their arsenal to ensure their time-consuming and financially taxing efforts don’t go in vain.

Carbon is the go-to staffing specialist for Eastern European and North African technical talent. Trusted by the biggest names in technology and venture capital, Carbon’s hyperlocal expertise makes entering new talent markets for value-seeking global companies possible.

Honouring exceptional talent ®