Defining a successful digital transformation
McKinsey partners say change must start from the top and engage the whole team, writes Chiratas Nivatpumin
No company today, no matter how large or small, can afford to ignore the impact of how digital technology is affecting their market, consumer expectations and business models.
But knowing what to do is very different than achieving success. According to consultancy McKinsey, less than 30% of companies surveyed actually succeed in digital transformation efforts, with an even lower rate of companies indicating that changes actually led to sustained performance improvements.
James Chavin, a McKinsey senior partner based in London and head of the company’s transformation work in Europe, shared that the difficulty in transformation programmes is usually not in defining what a company needs to do, but how.
“The real challenge that we see with our clients is not in defining what they have to do, but in figuring out how to get there, quickly, decisively, and sustainably,” he said. “It’s always possible to improve performance in the shortterm. You can always step on the scale. But if you don’t do it the right way, you will easily or often do long-term damage to the business.”
Cutting back on investments in R&D or customer service, for instance, may help immediate financial positions, but the improvement comes at the expense of the business in the medium-term.
Ed Lock, a partner at McKinsey’s Bangkok office and the lead for transformation services work in Southeast Asia, said many companies underestimate the challenges involved in achieving successful change.
“The big reason that [companies] fail to achieve [successful transformation] is not because they don’t know the hard content of what to do,” Mr Lock said. “The reason is that they don’t know how to get the people, the morale and the execution done.”
Mr Chavin added that change must begin at the top.
“If there is one precondition [to success], it’s who is going to be the change leader,” he said. “Is the chief executive ready to change and ready to lead his or her team? That’s an intensely personal question. And if the answer is yes, I find that you can fix almost everything else.
“The right leadership will put in place those things that will create the odds that will lead to success. And the wrong leader may say the right things, but ultimately won’t make the tough decisions or calls that are required.”
Based on McKinsey’s experience, success or failure in transformation does not necessarily hinge on industry, geography, culture or financial position.
“A company that is doing well may have more resources, more degrees of freedom to execute a plan than a company that is facing challenging financial conditions,” Mr Chavin said. “On the other hand, it can be harder to jolt a company that is in a growing industry out of complacency … There’s nothing like facing a liquidity squeeze or facing debt repayments that you can’t make to motivate the top teams to accept the things that have to change.”
Mr Lock agreed that regardless of the financial state of the company, the basic recipe for change is similar, both in terms of hardware and software.
One particular challenge for Thai companies is that key performance indicators are not strictly aligned with business performance, he said.
As a result, a key issue for McKinsey in working with clients is to redefine expectations and metrics for meeting the company’s change goals.
These expectations and targets start from the chief executive, then cascade down through senior management with incentives across the organisation aligned with the same plan.
Mr Chavin agreed that teamwork is essential.
“Typically, if you compare the good companies with the not-so-good companies, it’s not the external environment that differentiates the two,” he said. “All companies face challenges. And it’s not usually the individuals themselves taken on a one-by-one basis. It’s not the 10 people who are in the executive suites. It’s whether there is a leader who is able to stitch those 10 people together into a cohesive functioning team. That’s the good outcome.”
Lack of leadership on the other hand can doom a transformation project, due to lack of cooperation and infighting among executives and business units.
“It’s a complex machine, as anything is with human beings, and you need to adjust all the dials to get the right outcome,” Mr Chavin said.
Achieving improved business performance, in terms of more effective decision-making and better allocation of capital and operating expenditures, can be viewed in terms of changing organisational behaviour and how people interact internally, as well as the need for continuous workforce training and reskilling to stay relevant to changing business conditions and global trends.
Mr Chavin said behaviour in turn hinges on the values propagated throughout the organisation.
“At the end of the day, a transformation is going to be measured nine times out of ten through improved business performance,” he said. “But you will very rarely get there without tackling the questions of culture, organisational design and the organisational operating model head-on.
“If your organisation breeds a lack of accountability and a lack of transparency, where it’s not actually clear who is making this decision, if your operating model doesn’t create the notion of trackable, traceable decisions, people are going to predictably react in a manner that delivers poor-quality outcomes, which in turn will lead to poor-quality business performance.”
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The right leadership will put in place those things that will create the odds that will lead to success.
JAMES CHAVIN
McKinsey senior partner