Why Digital Transformation Fails: Common Pitfalls and How to Avoid Them

Digital is not something you can buy and build into a company. It's multi-layered and pervasive, and it doesn't just involve technology. Digital transformation is a continuous process of changing the way business is done. It requires fundamental investments in skills, projects, infrastructure, and often cleaning up IT systems. It requires mixing people, machines, and business processes with all the disruption that comes with it. It also requires continuous oversight and intervention from the top to ensure that both digital and non-digital leaders are making the right decisions regarding the transformation effort, highlighting the critical role of leaders and managers in this process.

Introduction

There's something special about technology change that makes executives at large, established companies act differently than they would otherwise. When managers invest in a typical strategic change, they know precisely what they want to achieve and what it takes to get there. Getting it right is hard work, but they know where they want to go and how to measure progress. If the metrics are heading in the wrong direction, you can take action to get on the right path or decide to phase out your investment. But as your digital transformation progresses, the need to adapt your approach becomes more apparent, highlighting the need for flexibility and adaptability.

Why do digital strategies fail?

After 15 years of original research on organizational transformation by McKinsey, the latest McKinsey Global Survey results confirm an immutable truth: the more transformation actions a company takes, the greater its chances of success. But success remains the exception, not the rule, thus highlighting the urgent need for a comprehensive approach to the transformation process, as average success rates remain low.

However, even companies that successfully transform do not always reap the full economic benefits from their efforts. So, there was a need to look at the different stages of the transformation lifecycle to understand where value is getting lost and what measures companies can undertake to preserve it. Our analysis shows that three core actions of transformation, or [specific core actions], are significant for value creation, and companies that have successfully transformed are more likely than others to pursue particular tactics to support it.

Several vital lessons emerge as significant efforts to develop digital capabilities run into fundamental financial performance problems. One is that many factors, such as the economy and product attractiveness, can affect a company's success as much as, or even more than, its digital capabilities. So managers shouldn't think of digitalization, or any other major technological innovation, as a surefire salvation.

It is, therefore, important to align digital investments with the industry's readiness (both customers and competitors). This strategic planning is crucial to a successful digital transformation. And if the existing business doesn't work, the call for new business models can become more powerful than necessary.

Building digital competencies

Research shows that organizations undertaking large-scale transformation fail about 70% of the time. John Garcia, senior partner and McKinsey's Transformation practice leader, shares his insights on the most common failures. However, organizations are not bound to these statistics. They can change the odds by being aware of and avoiding four common pitfalls. An edited transcript of his remarks follows:

The transformation process can be complex, and well-intentioned efforts often fail or are derailed before they begin. However, it's important to remember that success is not out of reach. While research shows that companies fail 70% of the time, we've also seen numerous successful transformations. In our experience,  lack of knowledge doesn't lead to failed outcomes; well-intentioned executive teams usually know what to do. We've led hundreds of comprehensive, large-scale transformations and have identified the four most common pitfalls that undermine success.

The first is failing to set ambitious goals that are based on facts. Instead of maximizing their organization's potential, leaders set too low -- goals that need to be supported by facts—leaders base numbers on consensus, not data. Setting fact-based and ambitious goals is essential for any change effort.

Second, organizations often fail to attach a compelling "why?" to their efforts. For large-scale change to be successful, thousands, or even tens of thousands, of employees need to embrace this new way of working. For many,  protecting the bottom line is not enough motivation. Leaders must provide every employee with a compelling reason why they must do things differently.

The third cause of transformation failure is poor implementation. Often, managers focus on the activities associated with the change rather than entirely on the results. Moreover, many act too slowly when difficult personnel decisions have to be made. This wastes valuable time, energy, and momentum in the change process.

Ultimately, organizations often need help to sustain the impact they've made. Performance discipline ends with the change effort. Incentives and budgets need to align with new goals fully. Management doesn't continue investing in the future, so they're unprepared for the next horizon or unexpected headwinds. Change is hard. Organizations are under pressure to achieve these goals. But they can turn the opportunity around by avoiding common pitfalls: Success requires compelling, fact-based objectives, a rigorous implementation infrastructure, and a performance culture that ensures lasting impact.

Conclusion

With the economy and the world undergoing such long-term and dramaticchange, the latest it is suggested that now is the time for companies to view transformation as more than just a side project or a single event but fundamentally as an opportunity -- changing how business is run. When companies free up bandwidth from other efforts and focus resources and energy solely on transformation, they can take the holistic approach necessary for success.