The Risk Implications of Digital Transformation

Digital transformation has been a hot topic in recent years. But it’s not without significant risk. The major consulting firms cite success rates below 30%. It also comes at a cost: a recent Harvard Business Review study found that 69% of the $1.3 trillion spent on digital transformation last year was wasted.

The invasive and intrusive nature of digital transformation exacerbates many traditional transformation risks. It also introduces new risks. To be a digital business a mature organisation must digitise first. That’s hard! From a governance perspective, effective oversight is difficult, but without it, the following risks may materialise.

Culture

A digital transformation is as much about culture and mindset as technology. If the organisation staffs its change team with many external hires, there is a real potential for conflict between the old and new ways of working. The new hires quickly become frustrated with the perceived bureaucracy. Day-to-day teams feel overwhelmed and resentful as their budgets are cut and their workload increased. False expectations at the executive level – the transition to a digital business will not be quick – add to the pressure.

Operational Risk

The tangled web of processes and legacy infrastructure in most mature organisations is exceptionally complex. Unpicking it will inevitably lead to errors. In the early stages there will be new manual workarounds as the transformation team focuses attention on delivering what they can in the “sprint” timeframe, rather than what needs to be done – creating more work and more errors.

More worryingly, the increased pressure to deliver day-to-day service will, more than likely, lead to higher absenteeism and staff turnover. Quality will deteriorate impacting the customer experience. Finally running multiple operating environments in parallel is almost certain to result in more systems outages as the complexity of the landscape initially increases.

Regulatory Compliance

With the emphasis on pace and agility, a mindset of minimum viable product and “fail fast” there is a heightened risk of regulatory breaches. The transformation team may fail to incorporate regulatory steps, appropriate controls and adequate documentation in their haste to complete the next sprint. From a BAU perspective, with resources so stretched, day-to-day breaches are also more likely.

Financial Risk

The market for digital talent is hot, pushing labour rates much higher. Costs are also impacted as new hires must be supplemented with subject matter experts to provide organisational knowledge. The complexity will stretch the schedule as methodologies clash and benefits will be impacted by the manual workarounds, delays in generating new revenue streams and slow progress on the more material aspects of the customer experience. Aligning longer term forecasting requirements with the methodology will also prove challenging.

Reducing operating budgets for the Run Team may be a false economy. If the team are unable to cope it will unleash a vicious cycle that will have a negative impact on revenue as customers exit. Costs will come under pressure as operational losses grow and additional resources are required to supplement the overwhelmed team. Addressing the issues once the team is out of control is far more expensive than staying in control.

Brand/Reputation Risk

Any of the above will impact the reputation of the organisation.  There are, however, additional elements to consider. With customer expectations being set by the digital natives (e.g. Google, Amazon, Uber etc), there is significant risk of not proceeding with a digital transformation.

Once underway, the primary area of focus should be on end-to-end automation along critical value chains. An organisation may look like it’s a digital business but if the fulfilment and servicing processes behind the scenes are not addressed, the customer experience will be seriously undermined.

Lead Indicators

Fortunately, there are many early warning signs:

1. BAU Red Flags: typical operational metrics e.g. workforce health, overtime, quality, system outages, customer attrition and risk reports will provide insight here.
2. Transformation Progress Indicators: There are two key metrics: a) the proportion of critical value chains fully automated; and b) the proportion of service requests flowing entirely through the automated process. And two supporting metrics: a) the proportion of changes introduced with manual workarounds; and b) the proportion of changes introduced “right first time”.
3. Collaboration: The third area to monitor is the connectivity between the BAU and transformation teams. This includes the proportion of external hires and the degree of coaching/cross-skilling existing staff as well as pulse checks of how well the teams are working together and exit interviews.

Providing oversight for a digital transformation is difficult. The transformation itself will materially impact the organisational risk profile, but of equal concern is the potential impact on BAU. For the transformation to succeed the BAU team must be welcomed into the transformational tent with joint accountability for its success. Given the operational nature of the transformation, from a governance perspective, having access to the right metrics is vital for maintaining oversight.

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Written by Nigel Adams.

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