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10 November 20226 minute read

Tech Index 2022: Digital Transformation

Transformation requires real and radical change

Across almost every sector of the economy, organizations are talking with increased urgency about the need to transform their businesses by employing new and/or disruptive technologies.

However, many businesses use the term "digital transformation" loosely, characterizing operational changes they’re making as transformative when what they are actually describing falls far short of what can and should be achieved.

A big bank, for example, that finally replaces an outdated platform may portray this as transformation when really it’s just making the transition to a more capable technology that’s well overdue.

“True digital transformation is about using digital and Industry 4.0 technologies to fundamentally change business models.”

If an organization shifts from storing data in capex-heavy data centers to an opex-based approach using the cloud, it may be doing something that is transformational if this opens the way to using customer data in more powerful ways. But if the main motivation is just to cut costs, however important those savings are, then it’s really a case of financial engineering rather than digital transformation.

True digital transformation is about using digital and Industry 4.0 technologies to fundamentally change business models. For example, when a bank is offering customers the chance to agree a mortgage using a smart phone rather than reams of hand-signed documents and multiple separate process steps, it has truly transformed its business model.

That’s especially true given the massive amount of work that goes on behind the scenes around handling data, meeting regulatory requirements and making financial checks to make the online service possible. It’s a completely new way of doing business.


Who is driving change?

Although in past editions of our Index we have surveyed opinions on many of the digital technologies companies are deploying to transform their businesses – Internet of Things, connectivity, AI and robotics and 5G, for example – this is the first time we’ve asked them about the overall process of digital transformation.

We wanted to find out what benefits and challenges they see in digital transformation and who they think is driving change in this important area. Some of the answers were surprising.

Digital transformation involves profound change and is, by its nature, highly strategic. Any initiative that fundamentally changes the business model requires sign-off from the management team. Executives should be right at the forefront of any major digital transformation.

So, it’s surprising that less than one in ten companies in our survey believe senior management are the main driving force behind it.

In many cases, transformation is all about meeting changing customer expectations in new, more compelling ways. So, once again, it’s curious that only 8% of our respondents say that customers are driving digital transformation, with the same small proportion saying that internal customer service teams are providing the impetus.

Instead, four in ten businesses believe that the IT function is driving change, while about a quarter say it is third-party suppliers.

Customers do feature more prominently when respondents are asked to pinpoint the greatest benefits of digital transformation. Better communication with end customers, responding to customers changing needs in the digital age and achieving faster time to market for new products and services, all feature in the list of benefits.

Achieving competitive edge, often a key motivation for many of our clients embarking on a programme of deep transformation, also comes low in the list of perceived benefits, identified by just 12% of businesses in our survey.

Instead, increased flexibility and agility to meet business needs and enhanced decision-making thanks to faster information flows are seen as the chief benefits, identified by around two-fifths of businesses. Clearly the ability to harness data is key in this regard. Not for nothing is data now often referred to as "the new oil."


Security tops the main challenges

Exposure to greater security risks is identified as the most significant digital transformation challenge, and by quite a wide margin.

Over half of our respondents put this at the top of the list of challenges, ahead of the cost of disrupting the existing business (41%) and finding the right partner to work with (38%).

Given the intense war for talent we are seeing in the tech sector, it is not surprising to see lack of expertise and skilled staff featuring high up on the list of challenges. Two-fifths of our respondents pinpoint this as a concern.


Governments and regulators as enablers

Although companies across sectors are grappling with digital transformation, activity is particularly intense in key industries. Often that will depend on companies having the right political and regulatory environment to pursue fundamental change.

At key points in the development of the digital economy, action by governments and regulators has spurred companies to invest in emerging technologies and given consumers the confidence to use them.

We saw that in the late 1990s and early 2000s with the commercial advent of the internet. A raft of regulatory reforms – including early data protection laws, distance selling regulations, new rules around electronic transactions and cybersecurity – helped to engender trust in the online environment to allow ecommerce to fire into life.

Similar reforms have underpinned the transition from bricks and mortar to online digital commerce. However, we are now at another key moment, where government action and regulatory change will again prove critical. The advent of Web 3.0 technologies and the metaverse offers the potential for profound change in the next five to ten years, both socially and in the business environment.

Governments are just beginning to introduce regulatory reforms to unlock the potential of Web 3.0 and the metaverse and to address inevitable new challenges around security that they may unleash. At the same time new regulatory regimes are being built to support the development of AI and other technologies, like 5G, that will be important enablers as virtual and real worlds overlap.

Efforts to tackle climate change and speed up the development of green energy technologies is another area where we see huge potential for digital transformation. Here again government intervention will be vital in boosting innovation and speeding change. It’s significant that new US legislation agreed in August this year has earmarked hundreds of billions of dollars to speed up the development of clean energy technologies and electric vehicles.

More immediate challenges have also forced some sectors to embrace transformative technologies that enable new business models. The COVID-19 pandemic has reshaped the retail landscape, massively accelerating the growth of online shopping as the traditional giants of the sector look for ways to hold off disruptive new players in the market.

Similarly, the airline industry is struggling to recover from the shutdown of travel during the pandemic, having laid off thousands of workers. Many carriers are seeing this as an opportune moment to look again at their business models, asking what role digital transformation can play in helping them achieve a sustainable recovery from the biggest crisis in the industry’s history.

The lesson from businesses that have benefited most from digital transformation so far, or that are best placed to benefit in future is clear. For digital technology to be truly transformative, change needs to be real and radical.

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