Digital Transformation: How to Succeed and Avoid Common Mistakes

Digital transformation is a buzzword we've been hearing about for years, even decades (although it's often used synonymously with digitalization). We've seen many good and bad examples of its implementation. Nevertheless, its implementation is integral to our modern way of working. We can no longer put it off. Yet many initiatives fail almost from the beginning. Reasons for this vary, from the leadership not really believing in it and the organization resisting, through technological problems to bad change management. UX is also a fundamental, though often overlooked, aspect.

"Digital transformation is no longer a voluntary choice for companies to implement but has become a necessary and essential prerequisite for business operations,” states a study by Maja Durica and her fellow researchers. They continue, “The goal of digital transformation is not just the reengineering of business processes but the creation of organizational changes through the synergy of information, computing, communication technologies, and connectivity technologies." The latter, somewhat academic-sounding sentence, is very important because continuously developing technology undoubtedly has a positive impact on business. Still, digital transformation without a well-thought-out strategy can lead to failure, or at best, to huge costs with more or less no results.

Sensitive data inspected by AI agent - image made with Mid-journey

Companies are spending incredible amounts of money on this. According to a report by research firm IDC, the amount spent on digital transformation (DX) could reach $4 trillion by 2027. The financial services industry is growing the fastest, with a five-year CAGR (Compound Annual Growth Rate, which measures the return on an investment over a period of time, here for example 5 years) of 20.5%. The most developing areas are the scary-sounding "robotic process automation-based claims management," real-time financial advice, and the "digital banking experience." These all have something in common: they are extremely data-intensive and rely heavily on artificial intelligence (AI) and data and analytics technologies. Jun Wu draws attention to the latter aspect in his study, referring to research by the MIT Digital Business Center and McKinsey & Company, showing that the higher the level of data-driven decision-making in a company, the better its results. “The top one-third of companies using data-driven decision-making had 5% higher average productivity and 6% higher profit margins than their competitors” – states the study.

However, 70% of attempts fail, says Brian Harkin, a recognized expert on the subject. According to Harkin, the strategies that companies want to introduce are too ambitious and too broad, and their poor planning and structure prevent the success of digital transformation.

Digital transformation is not equal to digitalization

Let's first clarify what digital transformation is (although it should be noted that even in the academic world, the exact definition is debated). This rather broad term is often used as a synonym for "digitalization," which also shows how unclear the concepts are.

Digitization used to simply mean converting analog materials into digital form to store information more easily and efficiently. For example, scanning documents, and digitizing images, audio, and video materials. Today, we understand the general concept to mean the integration of digital applications into existing business, manufacturing, and operational processes. Typical examples are the introduction of systems such as customer relationship management (CRM) or automated workflows and the like, or in everyday life when you use an app to park your car or check into your hotel. But other, often complex developments also belong here, albeit at a higher level, such as when software used in different departments of the organization is brought together on a single common platform.

Becoming a digital organization, that is, engaging in digital transformation by definition, goes not one but many steps further. It is a complete strategic transformation in the business model, strategy, and organizational culture, as well as in the products themselves.

Those who succeeded… - case studies

Most people probably think of Netflix as an example of successful digital transformation. The company started as a DVD-sending service, but soon recognized the possibilities of streaming in time. Netflix moved at a good pace to produce its own content. It also capitalized on the fact that everyone was sitting at home during the Covid-19 pandemic, attracting millions of subscribers in a single year. Furthermore, Netflix continuously monitors user behavior and data, adapting its content and user interface accordingly.

Amazon is another frequently mentioned example. In the early days, it was just one of many online bookstores, but it quickly realized the enormous potential of online commerce, and of the internet in general (Amazon believed in it so much that it held on when the dotcom bubble burst, even though it hadn’t made a profit till then. And ever since, they have been spending huge amounts on research, even at the expense of profit). Today, Amazon is a huge conglomerate. It’s a logistics company and a cloud service provider. It owns one of the most vivid examples of DX: Kindle, which combines ebooks, audiobooks, the digital device itself, and internet service in one tangible place. A key factor in Amazon's success is its user-friendly interface and personalized recommendations, both products of data-driven UX design.

Who would have thought that a company that makes little plastic knick-knacks would be one of the best examples of successful DX? LEGO was in quite a bit of trouble in the early 2000s. Children wanted to play video games instead. Its patent on the little plastic knick-knacks had expired, so an infinite number of imitations appeared on the market. The company saw the solution in DX: it integrated logistics, sales, manufacturing, and IT into a single system, developed its online presence, and, as the best example, in addition to programmable LEGO robots, released AR sets and video games. LEGO integrated user feedback into the development of its AR experiences, video games, and online community platforms, consistently engaging its audience.

Although it didn't have to transform itself, since it started "digitally" from the outset, Tesla is a DX pioneer in the automotive industry itself. It relies on electric drive, software-centricity, and self-driving technology. "Over-the-air" updates, the Autopilot system, and direct (partly online) sales are all things it has pioneered. The company collects a huge amount of data from its cars, thus developing the vehicles themselves, the services, and the self-driving system.

…and those who failed - case studies

Nokia, a name once synonymous with mobile phones (one of its models, the 3310, is still a meme for indestructibility). Although it had previously shown great business agility, replacing its paper mills and rubber boot factories with mobile development without any problems, it was simply too slow; it couldn't change fast enough when the world fell in love with smartphones. Failure to recognize the situation and snail-slow innovation allowed competitors, mainly Apple and Samsung at the time, to sweep the market.

Despite making one of the first digital cameras, Kodak long believed primarily in its analog film business. Even around the turn of the millennium, it significantly underestimated the rapid spread of digital photography. (I worked in a similar field and still remember— let's face it, quite ridiculous—arguments that digital photos would never be as good as analog because they were made of pixels.) This was a serious strategic mistake by Kodak, and although it tried to turn strongly to digital photography in the 2000s, the poor sense of timing eventually led to bankruptcy.

The American retail giant Target had huge ambitions for its expansion into Canada. This ended in a spectacular and notorious failure because it rushed things and didn’t adequately prepare its IT and logistics systems for Canadian conditions. This then led to inventory shortages, and soon the company had to close more than 120 stores that had been opened with great fanfare.

Pitfalls in digital transformation: Omission of users, legacy systems, and silos

Although many factors played a role in all these examples of failure, the incorrect assessment of user needs and the internal operational problems—organizational and technological—are common to all of them. This is precisely where the broadly defined UX can contribute to successful digital transformation.

The structure of many organizations is divided into silos - image made by Mid-journey

These factors and challenges appear in a few well-defined areas:

• Failure to assess the often rapidly changing needs of users.
• Resistance to change, or a lack of strategy and change management. Organizations that work with old systems, or even manual processes, may also be culturally resistant to change: "We've always done it this way." Employees may fear that the computer will take their jobs, which may cause the organization to resist the process, quietly or not so quietly.
• Existence of silos. The structure of many organizations is divided into silos, separate departments and groups that work in isolation with a lack of communication and cooperation. This leads to poor resource allocation, conflicts, and fragmentation.
• Legacy systems. The use of old or legacy systems can seriously hinder digital transformation, as can a general lack of IT knowledge. In a KPMG survey, 54% of companies said that a lack of technically skilled labor hinders transformation.
• Poor design. Digital transformation is not cheap. A poorly designed project can slowly lead to a constantly changing scope, new projects coming in, a changing budget, and the whole thing getting out of hand. It's important to have clearly defined goals and to have a defined return on investment (ROI). This is not so easy in the case of DX, since the results are not necessarily immediately visible or convertible into a line in the financial report at the end of the quarter. ROI is often not only in financial terms but also in customer experience, employee productivity, or in general business agility.
• Security concerns, especially in industries that work with a lot of sensitive data (financial companies, healthcare companies, etc.). Most DX projects involve moving data, or at least part of it, to the cloud, integrating the company's data into a single system; there may be concerns about this.

Where UX helps in digital transformation

First and foremost, the UX approach contributes to the accurate assessment, understanding, and translation of user needs and problems into digital solutions. It helps create user-centered products that are easy to use and intuitive. On the other side, within the organization, it also helps to take into account the business and organizational aspects of the various stakeholders. UX designers can act as "advocates" for users in the process, not only "outward," taking into account the needs of customers, but also "inward," as it is very important that internal systems and processes are as smooth and usable as possible.

UX designers can act as advocates for users in the process - image made by Mid-journey

Therefore, UX contributes to the success of digital transformation in many ways:

• Assessing User Needs: UX designers use interviews, surveys, usability testing, and other research methods to uncover real user needs, pain points, and expectations. Based on these findings, they design digital solutions, ensuring that they actually solve specific problems.
• Managing Resistance to Change: Through workshops, prototype testing, and iterative design processes, UX designers can involve employees in the process and help them understand and accept new systems. Early involvement reduces fears and increases commitment.
• Breaking Down Silos: UX designers facilitate communication and collaboration between different departments by organizing joint workshops, design sprints, and other collaborative activities. Emphasizing shared goals and user perspectives can bring teams closer together.
• Modernizing Legacy Systems: UX designers help assess the usability of old systems, identify problem areas, and make recommendations for modernization, taking into account user needs and technological possibilities.
• Maximizing ROI: By improving the user experience, UX design contributes to increased customer satisfaction, reduced churn, improved efficiency, and ultimately, increased revenue.

Good UX helps to make any new workflows intuitive and user-friendly. It helps to identify uncertainties, obstacles, and redundancies, and generally clarify the picture. Overall, it can make business processes faster and more self-propelled, as well as more future-proof, in the sense that it ensures digital solutions can be adapted to possibly changing user needs in the future and can also follow technical developments. In this, the research and application of mental models can be a huge advantage, as they can reveal the real thinking of users, existing needs and possible previous useless functions.

Although it would be nice to think so, digital transformation is not a fixed end goal, but rather a new operating model or perspective. As a movie kung fu master would say, wisely stroking his long white beard, "The journey is important, not the destination." And on this journey, continuous innovation and user-centeredness are needed, as well as a deep and ever-deeper understanding of the digital world. If we give the right emphasis to UX in all of this, we can travel much faster and stumble less.