If you open the website of any major international company or business consulting firm these days, there is a good chance that you will spot the phrase “Digital Transformation” somewhere in there. “Digital Transformation” being used so similarly by all these organizations, has yet a different meaning for each of them. It is also the same among academia. Sometimes the term is used to explain something like “Business process reengineering” or “Business model” changes. In other cases, implementation of a new “core technology” is claimed as digital transformation.
On the other hand, smaller companies may struggle in first understanding the applicability and second the roadmap for a digital transformation suitable for them. Can a small shop or a small medium size enterprise (SME) go also through a digital transformation? And will the business benefit from such a transformation? How much does such a transformation cost and what is the return on such an investment?
But what Digital Transformation really is? Is digital transformation something which all businesses small or large should embark on? What is the role of technology or industry sector that a business belongs to in defining or achieving digital transformation? Can businesses claim digital transformation without adjustments or replacing their business processes and business models? These are some of the questions to which we will seek an answer in this article.
It is said that “Big data” is like teenage sex: everybody talks about it, nobody really knows how to do it, everyone thinks everyone else is doing it, so everyone claims they are doing it. It is the same for Digital Transformation. There are companies that claim having been or just being through digital transformation by just adjusting few paragraphs or at best few pages on their website. They rephrase their value proposition and pretend to be doing something profoundly different from what they have done over the decades long history of their business. But what they in reality are doing is “digital washing” to look digital friendly – as in “green washing” used by companies trying to seem environmentally friendly. It is quite disturbing to see some of those web pages in which you can find no information whatsoever about the real scope of work or products and services that these businesses are really delivering among all the flashy infographics and digital looking value proposition that they are trying to cast.
What is then Digital Transformation
Digital transformation has been defined as use of digital technologies to solve business problems (reference: Wikipedia). This definition is a good start but comes quickly too short. With this definition, even a simple software implemented in a tiny LCD display of a purely mechanical machine, can be claimed as an outcome of a digital transformation for the company who has built that machine, in its attempt to increase the readability of the measurement i.e. their business problem, shown on such the display. In some other definitions Digital transformation has been defined as use of digital technologies to modify or create new business processes, culture, and customer experiences to meet changing business and market requirements (reference: salesforce). According to Gartner’s definition, “Digital transformation” can refer to anything from IT modernization (for example, cloud computing), to digital optimization, to the invention of new digital business models. These are better definitions. But for now, instead of trying to find the best couple of sentences describing digital transformation, let us spend some minutes to investigate the Objectives and the Expected Outcomes from Digital Transformation first. Afterwards, we will examine some of the components of above definitions to see what our version of definition for Digital Transformation would be.
Digital Transformation Objectives
The ultimate aim of any action or project in business is to achieve results. Digital Transformation should not be an exception and hence should advance the business. Any application of digital technologies is a mean to achieve some form of advancement. Such an advancement should ultimately manifest itself in either increased revenues, profits, efficiency, or improved stakeholder satisfaction.
Business Model Innovation and Digital Transformation
As mentioned before Digital Transformation can only be achieved by applying digital technologies to one or more business processes. That is why any successful transformation including a digital one, can only be achieved by understanding and adjusting the business model of any organization and its underlying business processes, before employing any technologies and solutions.
Business Model can be seen a “Virtual Twin” of a business as it shows how a business and its components function. Now imagine creating a simulation of this business model in which the business processes and their interactions are visible in motion, behaving as close to the real business as possible. This is called a “Digital Twin” of the Business. Digital Transformation can be seen as bringing the “Digital Twin” of a Business and the “Real Business” closer and closer. This can be achieved by taking one process after another in the business model and re-engineer them to be suitable for partial or complete digitalization, resulting in an improved, replaced or removed business process blurring the boundaries between the physical and the digital components of the business.
Let me clarify this with an example. Imagine you are running a retail Business. A simple Retail Business Model can be visualized by a Business Model Canvas of such a Business. Such a model is like a Virtual Twin of the Business as it describes virtually how the different processes and components of this business interact and produce outcomes for the customers, the owners, and other stakeholders. Now imagine you have a simulation of the same business in the computer. You have shaped this Business into a computer animation which is showing you how this Business is in reality working. It is simulating how the customers are sending their requests for services and products. How the orders are being taken by sales teams and are processed. How the Production and Operations are producing the demanded products and services and how these products and services are delivered to the customers. Such a simulation can also show how the needed material, components and services are ordered to different suppliers by the procurement department. And how the invoices are issued, the customer payments are collected, and suppliers are paid.
What if now a piece of this simulator is not only simulating but is actually doing the job! Think of an automated customer order processing software which is registering customer requests and automatically ordering the needed amounts from different ingredients to the relevant suppliers as the customer orders the final product. If so, the procurement process in Business Model (or in real Business) is replaced or at least augmented by the software code doing what someone in this Business was supposed to do physically before. This is a Transformation for this Business. It touches the business model and it blurs the virtual simulation of the business process with its reality in life. Now you need to change the procurement process on the business model canvas of this business and replace it with the digital one enabled by software than by physical components of the past.
Using software to partially or completely automate certain business processes is decades old. CRMs, ERPs, and all other applications are the outcome of these transformations since half a century. Hence the term Digital Transformation is not something new in nature and is quite close to what has been called Automation for decades. But why do you hear it more often lately?
Digital Transformation for Everyone
There are three fundamental changes which make the steps being taken today different from the ones of last half century. The first one is about Business Models. Although application of Digital Technologies has always been having direct impact on how businesses and societies function, and although there has always been the recognition of such an impact, there is something profoundly different today. Airbnb was established in August 2008. Summer houses or places for short stay were nothing new. But the very fact that someone has offered such an availability at such a large scale first in a city and then beyond across United states and then the rest of the world, without owning any of those properties, was something new. Uber was established in March the year after. Although there were taxi companies with websites (and few of them even with mobile apps or at least text message booking services), there was no such company at such a scale without owning any single cars yet being the largest taxi company in the world. This was probably a revelation for many businesses and the academia. Now anyone owning a room, or a car could benefit from a new Business Model enabled by Digital Technology. Neither the asset (homes or cars) nor the technology (website or mobile Apps) were innovative. But the Business Model was. The very fact of making it possible for many people, as well as unbundling the ownership of asset (home, car or other) from being able to deliver a service (vacation home, transport service) are two of the potential results of Digital Transformation. This transformation made everyone a potential seller and a potential customer.
The other two changes enabling the massive digital transformation were a bit more technological, but yet easy to understand. The first one was “Cloud.” When in 2000’s the size of Software Programs and Files such as Photos or Videos started to increase, a new product line has emerged for some of the IT equipment manufacturers: External Hard Drives. Western Digitals, Seagates and Sandisks of this world started to create a nice and shiny shell around the same hard disk we used to have inside our desktop or laptop computers. Now they sold us two; one inside the computer we bought, and the other at a later stage as an external hard disk. But there were two problems. You could have left your hard disk behind at home or in your office or you could manage to lose it. On the Business side the same issue was there. Access to local area networks remotely (availability) and risk of losing data in case of a disaster (reliability). Add to that also the cost of running an army of servers as your business grew. As super fast Internet penetration increased, there was a new possibility for these hard disks and servers. They could retire! Storage and computation did not need to sit next to where the user was. And this way “The Cloud” at global and commercial scale was born. Now it was not only a ministry or a large corporation, but also the little shop in the corner who could run its accounts and business with literally not owning any software in-house.
The other change was “Available Data” as a consequence of dropping prices for storage in the cloud. You could now store anything and not wipe it out worrying about your servers becoming full. Higher speeds of connection also made the data readily available at anytime, anywhere. Availability of data and ability to work with it at anytime and anywhere opened the door to new applications of data such as creating algorithms to make sense of data. That is how commercially, and globally available Artificial Intelligence started to make sense. Now you could even translate a traffic board from Mandarin using your mobile phone and Google Translate or you could make sense of text documents by comparing them to thousands of similar ones stored in your cloud since years.
Everything as a Service
The next step in Digital Transformation was in shaping. You did not need your own servers to store your data anymore. You did not need your own local area network equipment, the way you did before to communicate among your people and offices anymore. You did not need to install the same software in full functionality on all your computers anymore. What else you could not need anymore?
Now you could buy “Storage as a Service,” “Virtual Private Network as a Service”, “Software as a Service” and “Computation as a Service.” The next step was to buy a “Total solution as a Service.” Instead of buying the infrastructure as a service and then installing your own Operations, HR, Finance, Logistics and so on that leased infrastructure, you could now even rent all these solutions as a service. Oracles, SAPs, Sales forces, and many more needed to adapt and instead of selling you “On-premise” installed applications on your own servers, they now could or should have sold you “subscription” to their ERPs or CRMs and so on.
This had two benefits. One for these providers and the other for their customers. The customer was saving all the investments and the efforts in the hardware and software they needed to install and maintain. The provider was able to create a “recurring income” from subscriptions which gave more predictability loved by the shareholders.
Today you can buy literally “Anything as a Service.” You buy less or no CDs and DVDs and instead subscribe to “Music as a Service” or “Video as a Service” on Spotify and Netflix. You buy less or no newspapers and magazines and instead subscribe for digital copy of their publication getting “Information as a Service.” Here in the Netherlands there are less and less companies accepting to even wash your windows if you want to do it couple of times a year. You need to buy monthly subscription for “Cleaning as a Service”. There are even restaurants now with subscription for “Dining as a Service” or opticians selling contact lenses ONLY with a subscription for “Vision as a Service”! And I am serious!
What is so digital in window cleaning now? Nothing! The service provider does not even have a website. Here a Technological trend enabling the society to experience technologically enabled products “as a service” made people psychologically ready to buy everything else also “as a service”. You could not imagine majority of people accepting to pay subscription for all these regular services twenty years or even ten years ago. But the change initiated mostly by Technological drivers has resulted in change in the Business Model of other non-digital businesses and their customers’ “way of purchasing” their services. This is how Digital Transformation and Business Model Innovation become intertwined so much so that sometimes they are used mistakenly for each other.
Result Oriented Digital Transformation
The only thing which matters is the outcome or the result. A Business should be able to produce products and services which are loved by its customers. Think of Apple products. Even opening the box of a new Apple device is an experience, let alone using it seamlessly with other products produced by them or by others. But what is really transformative about Apple products? Let us take an iPhone as an example. The first iPhone had other competitors such as Windows Phone Operating System enabled products such as HTC and others. And at that point, there was nothing dramatically different about what these devices could do. And then compare those iPhones with the ones of today. Even the home screen looks almost the same. What has been so revolutionary about iPhone? Nothing! The answer to the Digital Transformation of Apple is not in their devices. It is in their “App Store.” The concept of App Store which is similar to the iTunes music store has enabled the users to buy an already not so empty device, but yet fill it further with hundreds of new Apps giving them totally new experiences. From productivity Apps like Calendars and Planners to Educational Apps like Languages course Apps to also Gaming Apps. What “App Store” enabled was a new “Business Model” transforming Apple’s way of making money through a “Digital Enabler” called “App Store.” Now not only Apple, but also App Developers could earn money by selling Apps and Subscriptions for more functionalities or additional services which over years could sum up to a much higher amount than the price of the iPhone itself.
Now what is in this case the result? More revenue and profits for Apple and independent App Developers and new experiences for the iPhone device users so much that they do not like their devices, they simply love them! That is why outcome or result are the only things that in the transformations matter.
You may have to change, or as it is called by academia “re-engineer your business processes” to be able to make changes like Apple did. Think of subscription for the products you sell or the services you deliver like what the window cleaning or optician company does. Your digital transformation can be your beautiful and functioning website, your eCommerce solution, your seamless payment gateway and connected courier services and your presence on social media. The customers get what they have been promised, with few clicks. You do not need to do anything more! How much more you use Technology in delivering your products and services, is not necessarily important as far as you increase the value you deliver to your customers, enhance their experience, and make more sales and profits as a result. Changing Business Models or “Business Model Innovation” is primary to “Technological advancement” as technology without business results is only a hobby.
Size, Sector and Segment
A shop or a small service company can do something similar to the optician company removing or simplifying many of the administration and support processes. A regional technical installations company can automate all the above-mentioned processes like the optician company plus having a great appointment booking system which automatically estimates the cost of work and needed material and spare parts for the customer giving them a tentative indication of the cost of installation or maintenance work. In addition, the maintenance work can be sold in a renewed business model as a subscription service instead of invoicing per service (direct invoicing) model. And probably your service provider (like ours) already does this. This reduces the one-time cost for customers in case they run into a technical issue with their installations and at the same time creates a recurring revenue for the business. Hence, it is obvious that Digital Transformation and Business Model Innovation can enhance your business of any size, being a one-person shop, an SME, or an Enterprise.
I already mentioned examples from Apple in IT, Music, and much more that they do. The window cleaning company, the optician, the restaurant, a technical service company and more. Business Model Innovation and enabling that with Digital Transformation is applicable to any company in any Sector. You are a professional business model and business processes review away, from finding out which parts of your business could transform to produce more results for you and for your customers.
Imagine you are in the food value chain running a restaurant, a supermarket, a food processing business, fresh vegetable or meat products producers or a farm. There are at least five to ten areas you can transform in any of these segments in the food sector to gain more results. A restaurant can fully automate their booking system and use marketing automation reducing cost and increasing their sales. This is much simpler than you can imagine when done by someone who knows how to help you. In a supermarket, large or small, you can automate your marketing processes and also customer engagement. There are configurable solutions which enable these by a fraction of your daily or weekly sales which will stay with you and deliver additional sales and profit to your business for years and years with a very low running cost. For a food processing business, automating order management followed by use of some sensors to automate work processes is where you probably should start. And for a fresh vegetables producer or a farm there are automations possibilities in A to Z of farm or simply for production management. Hence Size, Sector or Segment does not matter. You can gain more efficiency, profits, and sales in any business by adjusting your business model and your processes using technology as much as necessary. And as you have learned, you can in most of the cases use these solutions “as a service” without bothering about heavy investments or maintenance costs of them as you might have done in the past. The return on such investments makes them a no brainer.
But what is then after all, a Real Digital Transformation
As promised, let us get back to the definition of a real Digital Transformation. Studying definitions from tens of sources, studying digital transformation of hundreds of companies in almost any size and from different industry sectors and from different segments in their value chain, I have come to my definition of Digital Transformation. Digital Transformation is not usually about a sudden change in a specific moment in your business’s history when for example you change the “core technology” powering your product. Digital Transformation is more a Business Management Approach. Digital Transformation is the outcome of a continuous process of reviewing your business performance, finding areas for improvement, and answering to these two questions: Can I achieve my next improvement through an adjustment in existing business processes? Do I need to deploy a new solution (powered by an existing or a new technology) enabling me to get more return on the resources and investment going into that process and to my overall business? If the answer is yes, then you need to embark on that improvement journey and go through your next Digital Transformation.
What is NOT digital transformation? Changing your website telling you love digital is for sure not. Telling your customers, you are publishing research papers about what the future of your business in a digitally transformed future will look like, is great! But that is also not digital transformation. Building a simple website for your business today, is not a digital transformation, although could be considered so, two decades ago. And playing with a lot of technologies and studying more of them while not using them in creating and delivering value for your customers and your stakeholders is also not digital transformation. This is what I call “digital washing” which is the act of some businesses who want to look digital friendly instead of using the real transformation to create more value for their customers, themselves, and their stakeholders.
What is then a digital transformation, is any application of a solution to your business or any of its processes which behind it has a digital enabler, making one or more of your business processes or your overall business model more efficient, effective, or redundant. An automation of marketing process is a way to make it more efficient. An automation of customer proposal creation by automating calculation of the elements on your offer or invoice makes your sales support and invoicing processes more effective. An automation of customer after sales registration and routing to technical support team may make your office-based customer support process redundant. These are example of real digital transformation enhancing your business and the value you create for yourself and your stakeholders.
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