In the world of digital transformation, there are three key data points to know:
- 40% of CEOs recently acknowledged that the digital transformation of their organization was a top priority.
- They are spending $1.3 trillion to do it.
- 70% of those projects will fail to reach their objective.
That may sound like a dire prediction, but a recent survey by McKinsey found that,
“After years of McKinsey research on organizational transformations, the results…confirm a long-standing trend: few executives say their companies’ transformations succeed. Today, just 26 percent of respondents say the transformations they’re most familiar with have been very or completely successful at both improving performance and equipping the organization to sustain improvements over time.”
Other estimates show an even higher rate of failure: seven out of eight digital transformation projects failed to reach their intended objectives.
This data should stand out to senior management engaging in or currently considering digital transformation in their organization.
One very public example of this type of failure is the decline of General Electric that commenced during its attempt at digital transformation. In 2014 the venerable, 125-year-old company embarked on a company-wide effort of transformation. Focusing primarily on redeveloping itself as a technology company, the organization has invested billions to shift the company and its three hundred thousand employees into the digital future. GE Digital, the internal group that was given the mandate of making a profit and even started selling its services as transformation consultants to outside businesses. In the fall of 2017, Harvard Business Review published an article by then CEO Jeff Immelt entitled, “How I Remade GE.” Promising to take readers “inside GE’s transformation,” Immelt outlined the massive undertaking, touting how he had learned “to lead a giant organization through massive changes.”
The results of GE’s transformation efforts, however, have been anything but spectacular. During the time of Immelt’s transformation efforts, the company fell from number nine on the Fortune 500 list in 2014 to number eighteen in 2017. Earnings per share and dividends have dropped, and the company increased its debt by almost $80 billion. With this rapid decline, the company fallout was widespread, with the CEO, the CFO, the head of the largest business unit, and half of the board exiting within ten months. In late 2017, the company announced a layoff of more than twelve thousand employees. In 2018, Fortune published an article on GE’s drop entitled, “What the Hell Happened at GE?” in which it stated, “few corporate meltdowns have been as swift and dramatic as General Electric’s over the past eighteen months”
Atop it all, the result for GE has been a huge decline in shareholder value. At the time GE announced their initial transformation plans in 2013, GE’s share price hovered over $27 per share. Today the stock is down to $7.28 per share. That equates to a loss of $180 billion in GE’s market capitalization in four years.
Unfortunately, the story of GE’s decline is not different from that of many other companies. In fact, it is reflective of the fate of many companies in positions similar to GE’s.
Much of this poor performance at transformation can be chalked up to basic issues with change management and the cultural resistance to change. Change management guru John Kotter has found similar failure rates among businesses he’s studied over the last four decades. In other words, it’s not just about digital transformation. We are just really bad at change.
Why do organizations continue to persist in their transformation efforts, despite these seemingly unbeatable odds? The answer is because they have no choice. The promise of digital transformation is too alluring, and the threat if they don’t is even higher.
A recent survey of more than 2,000 CEOs and senior executives by global search and advisory firm Russell Reynolds, found that more than 50% of executives expected to face moderate to massive disruptions in the next year from digital technologies in the following industries: media, telecom, financial services, retail, technology, consumer products, education, non-profits, insurance, education, and professional services.
So, the question is, what can companies do to improve their odds of transformation success? To start, before even getting into the management, leadership, skills gap, and cultural issues with transformation, and they need to recognize two key problems.
The first problem is that, despite best branding efforts, transformation has largely become a codeword for improving operational efficiencies. In fact, by a factor of more than two to one, organizations cite operational efficiencies as the main goal of digital transformation. Improvement of customer experience is a distant, very distant third goal.
This is largely supported by big consulting firms who often describe transformation in terms of financial performance, calling transformation any effort that produces an earnings improvement by 25% or more. They often delineate between “Big T” “full potential” transformation and “Little t” transformation, focused on financial gains. They advocate the former, while helping mainly with the latter. This is ironic as a recent study by Bain found that digital transformation efforts only fully reached or exceeded their expected results five percent of the time, and in a full 75 percent of the time they actually diluted performance and achieved mediocre results.
Operational transformation is largely driven with shareholders, not consumers in mind. It takes a cost accounting view of looking for improvements in company performance, not customer outcomes. And that means that others who seek better customer outcomes will eventually win.
The second problem is that most transformation efforts would fail to pass the test of long-term strategic advantage. A simple VRIO test: Is it Valuable, Is it Rare? Is it Inimitable (i.e. hard to copy), Is it Operational?, would indicate that few of today’s transformation efforts would pass the test for adding long-term sustainable value to an organization.
While investment in digital transformation is the theme of the day, these efforts alone often go toward strategies that can be copied, internal processes that are replicated, and new technology that can be similarly acquired or developed, providing, at best, a transitory advantage. If every other organization in your industry has access to the same consultants, open source code, cloud computing partners, outsourcing partners, machine learning engines and algorithms, and so forth, is there a long-term advantage?
In fact, by the last standard of whether it creates long-term advantage, we might question how much, in the long run, the 30% success rate actually is a success.
In my next post, we’ll discuss the four major pitfalls of transformation that are the cause of these two problems and how companies can avoid them to create transformative outcomes with a higher probability of success and long-term advantage.
William Kilmer is an executive, founder, venture investor and author of the upcoming book, The Transformative Playbook, which will be published in 2019
 Digital transformation top priority for CEOs, says new BT and EIU research, 12 September 2017
 Worldwide Semi-annual Digital Transformation Spending Guide, International Data Corp (IDC), 15 December, 2017
 How to beat the transformation odds, David Jacquemont et al., McKinsey Global Survey 2015.
 Why 84 percent Of Companies Fail At Digital Transformation, Bruce Rogers, Forbes, 7 January 2016
 How I Remade GE, Harvard Business Review, Jeffrey Immelt, September-October 2017.
 What the Hell Happened at GE?, Geoff Colvin, Fortune Magazine, 24 May 2018
 Orchestrating a Successful Digital Transformation, Bain Briefing, 22 November, 2017.