Managing the Risks of Digital Transformation

Digital transformation is a disruptive process that often throws companies into uncharted territory for their business.  Many organizations have plunged headlong into the process and are ahead of the curve while others, more unsettled by the turmoil, are slow and cautious in implementation.  The difference in adoption speed comes from both the real and perceived risks involved. Full digital transformation usually introduces new and unfamiliar operating processes and can change entire business models.

Further complicating the process is that while the impact of the transformation is felt throughout the enterprise, the impact on executive decision-making is especially difficult.  In many cases, execs may not be “geared” to make the right decisions on digital technology and deployment and may not have the experience and background to yet understand the model as well as understand the tech involved.

To move quickly and aggressively toward adoption or move more slowly and conservatively is an individual choice each organization must make.  However, there are traits associated with those companies that aggressively pursue digital transformation. One report by Deloitte states that companies must adopt both a “digital mindset” and the right degree of capital investment to enable a successful transformation.  In these companies, executives tend to engage early and overhaul the organization across the board, including staff, skillsets and operations.  The results speak for themselves in that 83% of companies with “risk-savvy” executives report being on track or ahead of schedule on digital transformation compared to 57% of other companies.

Habits for Successful Digital Transformation

In their 22nd Annual Global CEO Survey, PwC found that there were specific executive habits used to undertake a successful transformation.  These include:

• Buy In – Execs committed to moving forward aggressively often go “all-in” on transformation leading with a strategy, plan and performance metrics to measure the success of the initiative.  This includes governance across the operation to stay on track and on mission.
• Adding and Improving Skills – This includes adding skillsets to take advantage of leading-edge technologies such as AI and machine learning, but also in finding and retaining staff that have understanding and knowledge of these new techs in conjunction with traditional skillsets such as accounting or operations management.
• Matching Tasks to Appropriate Technologies – With the benefits of IoT, AI and Robotics Process Automation (RPA), teams are challenged to proactively find and assign tasks that play to these technologies core capabilities.  
• Real-Time Decision-Making – In traditional enterprise management, most decisions were based on historical analysis of trend data taken over time.  The analysis took time and the result was that little could be done in real time. With digital transformation, combining technologies such as IoT and AI can result in data and analysis in real-time that can point to and capture opportunities not possible before.  Risk can be managed at the time of occurrence rather than after the fact when the potential for damage may be higher due to the wait.
• Engaging Stakeholders - Because data is more often unsiloed during digital transformation, stakeholders can be informed with a consistent vision of what is happening and any associated risks.

Because the data is accessible, common and shared, the infrastructure of a digital transformation is integrated with the business.  This leads to better and more accurate predictive business strategies.

Cautions for Digital Transformation

But even with the best habits, there is always room for improvement.  One caution to be aware of is that regardless of the speed of transformation, companies tend to cluster around a subset of technologies for their digital transformation while other opportunities are less utilized or in many cases untapped altogether.

In one study by McKinsey it was discovered that fully 68% of organizations cite digitizing their current business model as a primary goal.  The study further found that most companies cluster toward four technologies – traditional web technology, cloud-based services, mobile technology and big data architecture.  Technologies such as augmented reality, advanced machine learning, robotic process automation and IoT are less regularly deployed.  

This suggests that opportunities may be left behind by the lack of exploration into more advanced or exotic technologies.  However, it is notable that despite the cluster towards traditional digital technology, those who proactively and aggressively undertake digital transformation and who do use all technologies available tend to adopt them technologies at a higher rate than those who move cautiously.

Risk Considerations

In considerations for approaches to risk in a digital transformation is the word “risk” itself.  The word risk is a general term that means different things to different people within an organization.  But transformations are complex, and the types of risk are important to consider depending on the business model, the stakeholders, the complexity of the operations and the type of technology deployed.  Some of the specific risk areas include:

• Technology Risks – Technology risks influence both systems and processes and can be related to obsolete technology or the scalability of technology deployed.
• Cyber Risks – The ever-present specter of unauthorized intrusion is one of the key concerns of all organizations.  Monitoring, app security and even network architecture can influence this type of risk.
• Strategic Risks – Strategic risks are closely linked to brand, reputation and customer experience.  The deployment of technology such as RPA can automate functions that were previously “high touch” and can impact a  customer’s perception of a company.  
• Third-Party Risks – Many companies operate with tight integration with vendors and suppliers, especially in areas such as supply chain.  This integration relies on vendor access to key internal systems.

While these are but a few areas that merit specific attention.  All can be mitigated and controlled by a transformation plan with strict governance and one that lays out the path, captures the metrics to measure the success and one that stays on mission throughout the buildout of the digital infrastructure.

Competitive Risk

While digital transformation is risky for any enterprise, it is perhaps an even bigger risk to not undertake a transformation at all.  Studies show that 87% of companies consider digital transformation to be a competitive advantage. Companies that do not transition to new technologies and digitize their operations may find themselves at a disadvantage greater than the combined effect of the risks discussed above.  This can occur in several ways.

• Loss of Relevance – Companies that don’t transform may find themselves left behind by those that do.  The availability of real-time data and deep analytics can power agile companies past their competitors who are still relying on aged reporting and trends derived from past data rather than current.  As the impact of social media and viral movement of ideas impacts a company’s product strategy, those who can’t respond quickly can lose relevance as a brand.
• Missed Opportunity -  The disruption of digital technology can lead to missed opportunities for companies behind the curve.  This could take the form of not being able to compete against a smaller, digitally savvy competitor who competes equally for product but has utilized a digital transformation to improve customer experience or to offer value added services such as field service or logistics in a way that both improves brand image and creates new revenue streams.  
• Inability to Collect Key Analytics – It isn’t enough to simply improve the analytics of the processes and systems a company has.  With new technology such as Industrial IoT, AI, advanced analytics and machine learning, a company can have access to data streams and trend analysis that they didn’t have before.  Those who are slower to undertake a transformation may find themselves locked out of market data and customer analysis that is crucial to developing new revenue streams and new business opportunities.

Risk is difficult to manage, but with careful consideration, planning and buy in, managers and decision makers can navigate a digital transformation successfully.  With it, comes new opportunities and an enhanced competitive advantage. But for those who are more cautious or who have let the fear of risk hold them back, not transforming may prove to be the biggest risk of all.

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