Weighing Digital Transformation vs. Digital Modernization: Charting the Course for Business Excellence

Living in the 21st century, we find ourselves at the heart of a cybernetic transformation where expeditious technological and computational breakthroughs perennially shape our way of living. These advancements extend into the realm of business, enabling organizations to enhance operations, sweeten customer experience, and drive innovation. Organizations often employ two key strategies to harness these opportunities: digital transformation and digital modernization. While both might seem alike, they have distinct focuses and implications for an organization's growth and competitiveness. 

Understanding Digital Transformation and Digital Modernization

Understanding the differences between digital transformation and digital modernization is essential for making informed strategic decisions. 

What Is Digital Transformation? Through digital transformation, organizations can aim to integrate technology into business to drive a fundamental change, resulting in amplified productivity, enhanced business flexibility, and value creation for employees, customers, and investors. There are many possible avenues leading to digital transformation, and each organization's journey will be unique. For instance, it can mean implementing artificial intelligence (AI) to enhance customer experience (CX) or using machine learning (ML) to optimize the supply chain.

What Is Digital Modernization? Digital modernization, on the other hand, entails incorporating novel technologies, processes, and models—such as cloud, agile, automation, and containerization—into an organization's legacy IT infrastructure, architecture, and products to upheave productivity.

Comparing Transformation and Modernization

It is readily apprehensible why the two concepts might be used interchangeably, but in a nutshell, modernization means adopting new tech. At the same time, transformation creates an organization-wide impact by integrating new tech and reimagining the underlying processes, culture, people, and customer experiences.

Digital modernization does come with its fair share of risks, like snowballing mission sophistication and webbing of systems interconnectivity, all while the human capacity to manage these intertwined systems remains one-dimensional. As we evolve, does simply purchasing licenses to novel tech suffice? Or is it necessary to reinvent the business model in response to the changing environment?

Through digital transformation, we consider the influence of technology on companies as a whole, negating risks and maximizing value. To truly transform, we must leverage the same digital capabilities that had led to its increase in systems complexity. On top of this, the workforce needs to be able to keep up with the change, which might require training interventions or simply better awareness. Overlooking business compatibility & workforce readiness and solely focusing on getting new tech, failing to establish an effective process to maximize utilization, organizations might end up in what's known as "the modernization trap." 

More evidently, in a 2023 KPMG survey of 400 tech executives, 51%, on average, confirmed they did not observe an increase in performance or profitability from digital transformation investments. At the same time, 56% of executives confirmed that ROI for digital transformation efforts has exceeded expectations in the following areas: boosting efficiency and cost savings, increasing staff productivity, and improving customer engagement.  

Digital transformation continues to be a part of many CIOs' top agendas, and many acknowledge that aligning processes and tech advancements with business goals promotes innovation and enhances human experience. The challenge is to transform for the long-term advantage of businesses, employees, and customers. Organizations should prioritize internal and external processes and how people interact with them to accomplish a successful transformation journey before focusing on data and technology.  

Critical Success Factors for Catalyzing Digital Transformation Journey

Successful digital transformation requires various coordinated actions that result in capabilities to continually create great customer experiences, lower costs, and build value. According to research by BCG, most digital transformations fail, but ensuring these six critical success factors are met can boost success rates from 30% to 80%.

Capability to develop actionable plans to generate business value: Businesses should focus on transformation across an entire vertical rather than changing for use cases, which can provide considerable value for business. Also, any transformation endeavor should be guided by a roadmap outlining solutions and resources required to bring about the desired change.

Developing in-house capabilities: No business can achieve digital excellence alone via outsourcing. Being digital involves having someone continuously working alongside your staff involved in growing the business. Having in-house talent dedicated to working on transformation endeavors provides a much-needed boost.

Leadership commitment from CEO to middle management: Any transformation initiative demands strong levels of executive involvement and alignment, as well as middle-management ownership and accountability, which are often neglected.  

Distributed tech that enables autonomous innovation: Tech should make it simpler for teams to innovate & implement digital advancements for its customers. Recent developments in distributed tech facilitate the smart utilization of APIs to separate applications. It includes enhanced developer tools, strategically migrating high-value workloads to the cloud, and automated infrastructure provisioning.

Pristine data quality: Successful digital transformations require reliable, current data. Data architecture should generate reliable data available to teams across the organization, which also demands strong e-governance capabilities. The data product is the central component, which organizes multiple bits of data into a cohesive unit that teams and applications can readily consume.  

Effective integration and change management: Traditionally, tech adoption cycles have always been linear, which involves a sequential process of gathering requirements, designing solutions, and ultimately training the end user, resulting in poor adoption rates and eventually affecting efficacy. Digital transformations include a far more iterative process of planning, prototyping, gathering feedback, and enhancing the solution to realize its full value potential. As a general guideline, for every dollar spent designing a digital solution, another dollar should be spent implementing process modifications, user training, and change-management activities. Businesses should consider adoption and scaling at the start of their transformation so that they can allocate the resources required to implement the change.  

According to BCG's Digital Transformation Report, just 30% of transformations realized or surpassed their goal value, resulting in successful change. Another 44% added value but did not accomplish their objectives, resulting in modest long-term improvement. The remaining 26% added little value (less than 50% of the aim), resulting in no long-term change.  

For comparison, successful transformations generated 66% more value, enhanced organizational capabilities by 82%, and attained 120% more objectives on time than transformations that produced only limited value. Winners generated 29% more value than those who provided some value, enhanced skills by 20%, and met 32% more objectives on time.  

Why is ensuring transformation across a vertical essential?

Transformation across a vertical promotes efficacy since it incorporates all associated activities to provide a comprehensive solution. Instead of focusing just on one aspect of a process—for example, designing the approach for a consumer to get a credit card via an app—the domain would encompass all of the other activities (account creation, credit history verification, workflow automation, and so on) necessary to open the account. Complying with all of these additional actions is what enables a solution to provide value.   

What Drives Success?

When attempting to get everyone on board with the overall strategy, it's easy to compromise and lose sight of the transformative goal. This is generally when the issue begins. There needs to be clarity on the following:

Why transformation? Is there a need to be more sensitive to swiftly changing customer needs? Does our productivity need improvement? Is our ability to innovate lagging?  

What kind of transformation is needed? The extent of digital transformations ranges from focusing on people (for example, agile at scale) to reworking technology and infrastructure, replacing old IT systems, and migrating to the cloud. Many prioritize certain business goals, including customization, digital marketing, customer journeys, supply chains, and shared services.  

How to implement it? Factors like leadership, governance, resource allocation, priorities, strategy (such as employing pilots, incubators, or lighthouses), and sequencing must be considered. How do we ensure that product, channels, and support functions synchronize with the technology department, and how do we get middle management on board? 

The Bottom Line

Failure can be expensive, but success offers substantial rewards. Achieving milestones like adopting agile practices, shifting workloads to the cloud, or transitioning customers to new systems marks a beginning, not an endpoint. This phase opens a new chapter for businesses to leverage new capabilities and embrace continuous innovation in emerging technologies like AI, augmented and mixed reality, and edge computing. Companies that successfully integrate continuous innovation into their operations create a "bionic" approach. This eliminates the need for future transformation programs, as digital capabilities and an innovative mindset become ingrained in their processes. 

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