Digital transformation explained

‘The Computer Chip’, by Brian Kostiuk—Unsplash

What is digital transformation? To adequately explain, or provide an easy definition of digital transformation, it’s necessary to look at the history of the term, and explore what a roadmap towards digital transformation might look like.

The definition of digital transformation as a concept varies from how it has actually happened historically, and different again from how it is often now used in modern parlance.

There are of course many practical examples of digital transformation—in government, in business and for individuals—but there are also wider underlying trends that makes these examples possible, and continue to define the shape digital transformation takes on.

What is digital transformation?

Digital transformation at its most basic is the introduction of digital technology to solve problems that had previously had more traditional solutions. That said, digital transformation is not uniform i.e. how it’s done varies dramatically depending on the context.

There are also different degrees of intensity. The transformation in question may serve to make the old ways of doing things more efficient, and they may be analogous to the old system (for example, moving where the data is stored), or instead they may represent complete paradigm shifts which make the old ways of doing things obsolete and incommensurable with the new.

Some industries are far more ‘digitalized’ than others, meaning the proliferation of digital tools to solve problems that were once solved using more traditional methods is much more widespread.

In the modern world every company is now a digital company, that is to say, they have some aspect of technology at the core of their business, but this doesn’t mean they are reaching their full potential, or are keeping up with the pace of change. They could be ripe for a digital transformation programme to get them closer to their potential.

How is digital transformation done?

Any programme of digital transformation will always be limited by two internal factors: the ‘what’ — the level of eagerness to pursue digital improvements, and the ‘why’ — the internal ability of the company to take advantage of digital solutions to deliver positive results for the business.

A more digitally-mature business would be looking to actively transform how it operates by integrating emerging technology, or creating an environment where ongoing change is possible, whereas a less-mature business might instead just look to solve an individual problem with technology somehow. At Elsewhen, like many digital consultancies, we frequently work on both standalone products and wider strategic implementations of digital transformation for FTSE 250 companies.

Culturally, a company large or small may see technology as an exciting opportunity for future growth — revealing currently unknown business opportunities — or instead see technology as something that must be engaged with to continue to exist.

The implementation of digital transformation, for example for large enterprise companies, simply means moving the organisation from one process to another and/or from one platform to another. They may have been using a digital solution already, but for example moving their data from client/server solutions to a solution hosted in the cloud, has been one of the most common forms of digital transformation of the last two decades.

The next phase, of moving large companies’ data from cloud-based software solutions to their own software (still hosted in the cloud), would again be an example of digital transformation.

Examples of widespread digital transformation are everywhere. It’s made new business models possible (think of subscription variants like freemium), changed the way we pay for goods and services, changed the ways we communicate and the tools we keep with us all times to do so, and made modern business almost paperless. So how did we get here?

A brief history of digital transformation

Portrait of Gottfried Wilhelm Liebniz, by Christoph Bernhard Francke

The origins of digital transformation go back to digitisation—the conversion of analog information into digital. We can go back further, but an obvious start point is the invention of the binary number system by Gottfried Wilhelm Liebniz — where any number can be expressed in a base-2 numeral system using ones and zeros.

The use of binary numbers, combined with the application of Boolean algebra (named after its inventor George Boole), provided the raw mathematical materials for digital circuitry as discovered in part by Claude Shannon among many others. This ultimately made the first (room-sized) digital computers possible.

From these crude early digital computers, another rapid phase of digital transformation began, as computers became more complex, smaller, and proliferated more widely. They grew into having many practical applications for governments, businesses and individuals. Finally, the widespread take-up of the World Wide Web brought about another paradigm shift in the exponential curve of increased digitalisation in society.

The phase of digital transformation made possible by the Web is the one we still find ourselves in, and there is still a long way to go. McKinsey estimates that the world leader in digital take-up (the USA) is operating at just 18% of its current digital potential.

What are the major trends in digital transformation?

Digital transformation is inevitably both a major challenge and opportunity for any organisation. The transition to new technology may not be straightforward, and there will be of course be a period of adjustment when using new tools.

That said, almost every imaginable industry stands to be disrupted by the trends that digital transformation represents, just as much as has already happened with the rise of e-commerce brought about by Amazon et al. Rather than a look at specific industries or narrower examples like chat bots, here are some of the wider trends that show how digital transformation will continue to be a factor in the future.

1. Customer-centricity

Customers now expect goods and services to be available around the clock, and from any device. Purchasing should be frictionless, and should be delivered to your door. Incumbent providers who can’t deliver this level of customer experience stand to struggle to retain customers. It’s also become clear that almost every service can be offered remotely — it’s now possible to have a consultation with a doctor, be prescribed medication as a result, and start taking it, all without leaving your home.

2. Interface owners cut out the middle men

The current market leaders in many industries now completely avoid the operating costs associated with the industries they inhabit. It’s not that those operating costs no longer exist, it’s just that someone else is picking up the tab. Instead, the leaders are the ones that own the interface with the customer. They manage and own the platforms which the customer uses, with the underlying services embedded within.

Major examples are how Alibaba, the world’s most valuable retailer, has no inventory. Or how Uber, the world’s largest taxi company, has no fleet of vehicles. Then you have AirBnb, the world’s largest accommodation provider, with no real-estate to speak of. Finally, in the rapidly-growing world of food delivery, companies like Deliveroo don’t make any food. Other industries stand to be disrupted in the same way.

3. Long-tail and segment-of-one selling

It used to be that industries were dominated by mass-market offerings, where there was limited or default choice for consumers, and providers would try to produce an offering that appealed to most people rather than everyone.

Consider an example like entertainment: where previously people would watch the television show that happened to be showing at that time, or read the articles that newspapers had printed that day, or listened to the songs that the radio deemed worthy of airtime, now they have far greater choice.

The long-tail offering of complete choice means you can watch, listen, and read more widely than ever before and this is made possible by companies no longer relying on the old margins that made mass-market the only game in town. On top of this, you now have segment-of-one offering, as found on social media, where every singer customer has a slightly different experience. These long-tail and segment-of-one offerings stand to disrupt other industries much more widely.

4. Increased competition

In most industries, it’s no longer the case that there are a handful of providers — historically the only people with the hard-gained market knowledge and deep understanding, or the cash and access—who can get to market.

The proliferation of cloud-hosting solutions, the breaking up of value chains into constituent parts, increased deregulation, breaking up monopolies, new direct access to customers, and the potential of seed investment rounds for new business ventures, all mean that small providers can carve out their own pieces of the market. Those small providers get bigger, and the bigger incumbents have to watch their back.

5. Automation

Since the industrial revolution, there has been a move to automate the work of humans to scale up and speed up what was previously possible. In agriculture and most manufacturing industries, they are now unrecognisable from how they used to operate. This will spread to every industry where there is a potential value in a machine replacing a human task.

6. Disintermediation of infrastructure owners

It used to be that the organisations that owned or simply ran the underlying infrastructure for a service, for example the gas pipes or phone cables, by default owned the relationship with the customer and set the terms of commerce. They were frequently state owned, and operated the whole service end-to-end.

This is no longer the case, and in fact new providers often benefit from the fact that the incumbent is managing the infrastructure, and handling the legal implications of doing so (for example regulation or safety controls), while they are free to develop new solutions on top. In this case, the incumbent providers become just utility providers, struggling to retain a relationship with the customer.

These are just a handful of examples of the underlying trends behind digital transformation, whereas we could look at many others. The continued development of more and more sophisticated APIs, faster and faster roaming internet speeds, the plummeting costs of cloud hosting, and new applications of location services, the list goes on.

Only two things are clear: change is a constant, and digital transformation will continue to be both a necessity and inevitability for organisations worldwide.