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June2023
Mckunsey
&company
McKinseyExplainers
Whatisdigitaltransformation?
Digitaltransformationistherewiringofanorganization,withthegoalofcreatingvaluebycontinuouslydeployingtechatscale.
Digitaltransformationisthefundamentalrewiringofhowanorganizationoperates.Thegoalofadigitaltransformation,asoutlinedinthenewMcKinsey
bookRewired:AMcKinseyGuidetoOutcompetingintheAgeofDigitalandAI(Wiley,June20,2023),shouldbetobuildacompetitiveadvantageby
continuouslydeployingtechatscaletoimprovecustomerexperienceandlowercosts.
Likemanycommonlyusedphrases,“digital
transformation”hasdevolvedintoacatchalltermthatmeansdifferentthingstodifferentpeople.
That’saproblem.Digitaltransformationiscriticalfororganizationstonotonlycompetebutsurvive.Ifleaderscan’tbeclearaboutwhatadigital
transformationis—andaligntheirorganizationaroundaspecificprogram—theycan’texpecttobesuccessful.
Digitaltransformationsaredifferentfromregular
businesstransformations,inbothsmallandbigways.Foronething,businesstransformationsusually
endonceanewbehaviorhasbeenachieved.Digitaltransformations,ontheotherhand,arelong-term
effortstorewirehowanorganizationcontinuouslyimprovesandchanges(andthatmeansreallylongterm;mostexecutiveswillbeonthisjourneyfortherestoftheircareers).That’sbecausetechnology
isnotonlybecomingfurtherintegratedinbusinessbutalsoconstantlyevolving.Forexample,giventhegrowingimportanceofAIingeneratingbusiness
insightsandenablingdecision-makinglogic,anydigitaltransformationshouldalsobe
anAItransformation.
Aswe’llshow,successfuldigitaltransformationshingelessonhowcompaniesusedigitalandmoreonhowtheybecomedigital.
Whatcapabilitiesareneededtomovetheneedleondigitaltransformation?
Successfuldigitaltransformationrequiresavarietyofcoordinatedactions.Rewiredlaysoutsixcapabilitiescriticalforsuccessfuldigitaltransformation:
—Theabilitytocraftaclearstrategyfocusedon
businessvalue.Companiesshouldfocustheir
transformationsonspecificdomains(customerjourneys,processes,orfunctions)thatgeneratesignificantvalueforthebusiness.Thetrans-
formationshouldbeguidedbyaroadmap,whichdetailsthesolutionsandresourcesneededto
deliverchangetoprioritizeddomains.
—Astrongtalentbenchwithin-houseengineers.Nocompanycanoutsourceitswaytodigital
excellence.Beingdigitalmeanshavingyourownbenchofdigitaltalentworkingsidebysidewithyourbusinesscolleagues.Thebestdigitaltalentprogramsgowaybeyondhiring:theyshould
includeemployeevaluepropositionsthatattract
WhatwemeanbydigitalandAItransformation
LedbyCEOandtopteam.
AdigitalandAItransformationistheprocessofdeveloping
Thesourceofcompetitiveadvantage.
organizationalandtechnology-basedcapabilities
It’sneverbeendone! Bothmatter.
thatallowacompanytocontinuouslyimprove
itscustomerexperienceandloweritsunitcosts;andovertimesustainacompetitiveadvantage.
Thefinality.
2Whatisdigitaltransformation?
andretainthebesttalent;agileanddigital
HRprocessestofind,manage,andtraintalent;andahealthyenvironmentwherethebest
talentthrives.
—Anoperatingmodelthatcanscale.Digital
transformationsdependoncross-functionalteamsthatbringtogetherpeoplefrom
acrossthecompany.Mostcompaniesalreadyhaveahandfuloftheseteams,butscalingto
supporthundredsorthousandsofthemrequiresanewoperatingmodel.Therearethreeprimaryoperatingmodelstoconsider:thedigitalfactory,
theproductandplatformmodel,andtheenterprise-wideagilitymodel.
—Distributedtechnologythatallowsteamsto
innovateindependently.Technologyinan
organizationshouldmakeiteasierforteamstocontinuallydevelopandreleasedigital
innovationstousers.Tomakethishappen,
organizationsshouldfosteradistributed
technologyenvironmentwhereeveryteamcanaccessthedata,applications,andsoftware
developmenttoolstheyneed.Recenttechnologyadvancescanhelpcreatethisdistributed
environment—theseincludethethoughtfuluseofAPIstodisengageapplications,theavailabilityofdevelopertooling,theselectivemigration
ofhigh-valueworkloadstothecloud,andtheautomationofinfrastructureprovisioning.
—Accesstodatathatteamscanuseasneeded.
Reliable,currentdataarecrucialtosuccessful
digitaltransformations.Dataarchitecture
shouldproducedatathatareeasilyaccessible
byteamsacrossanorganization,andshouldbecontinuallyassessedandupdated.Strong
governanceisrequiredtoenablethiscapability.Thecoreelementisthedataproduct,which
structuresvariouspiecesofdataintoacoherentunitthatcanbeeasilyconsumedbyarangeof
teamsandapplications.
—Strongadoptionandchangemanagement.In
thepast,thetechnologyadoptioncyclewasa
linearprocessofgatheringrequirements,
developingsolutions,testing,andthentraining
theenduser.Thisprocessoftenresultedinlow
adoptionratesandultimatelylowbusinessvalue.Digitaltransformationsfollowafarmoreiterativeprocessofdesigning,prototyping,collecting
feedback,andimprovingthesolutionsoitcan
capturethefullvaluepotential.Asaruleof
thumb,foreverydollaryouspendondevelopingadigitalsolution,plantospendatleastanotherdollaronimplementingprocesschanges,usertraining,andchange-managementinitiatives.
Companiesshouldthinkaboutadoptionand
scalingatthebeginningoftheirtransformationsotheycanbuildintheresourcesneededto
deliverthechange.
Nodigitaltransformationcanbesuccessfulwithoutcoordinatedactionacrossalltheseareas.
Whatisadomainandwhydoesitmatter?
Digitaltransformationshaveamuchimproved
probabilityforsuccesswhenteamsfocuson
changingentiredomains(forexample,acustomerjourney,process,orfunctionalarea)ratherthan
onlyonusecases(asinglestepwithinthedomain,suchasansweringacustomer-servicecall).A
focusondomainsisconducivetoeffectivechangebecauseitencompassesallrelatedactivitiesto
deliveracompletesolution.Soinsteadoffocusingonjustonestepofaprocess—suchascreatingtheprocessforacustomertoopenabankaccount
throughanapp—thedomainwouldalsoincludealltheotheractivities(accountsetup,verification,
workflowautomation,etcetera)requiredtoopentheaccount.Reckoningwithallthoseother
activitiesiswhatallowsasolutiontodeliveritsvalue.Adomainshouldbelargeenoughtobevaluable
andnoticeabletothecompanybutsmallenoughto
Whatisdigitaltransformation?3
It’simportanttoexperimentandlearn
rapidly,butit’salsocriticaltoresistthetemptationtodevelopusecaseswith
excitingnewtechnologythatdoesn’tendupcreatingvalueforthebusiness.
betransformedwithoutrelyingtoomuchonother
partsofthebusiness.Managingtheinterconnectivityofusecasesandsolutionswithinadomainisone
ofthekeystotransformationsuccess.
WhatrolecanAIplayinadigitaltransformation?
AI,andparticularlygenerativeAI,isupendinghowcompaniesoperateandbuildvalue,presenting
hugeopportunitiesincludingcontentgeneration,newdiscoveries(particularlyinfieldssuchas
pharmaceuticalsandchemicals),andcoding.
Butitcanbeeasytogetdistractedbyshinynewtoys.Thelessonsofpasttechnologyinnovations
stillapply:valuecomesfromhavingaclear
understandingofbusinessgoalsandhow
technologycanhelpmeetthem.It’simportant
toexperimentandlearnrapidly,butit’salso
criticaltoresistthetemptationtodevelopuse
caseswithexcitingnewtechnologythatdoesn’tendupcreatingvalueforthebusiness.
BuildingvaluewithgenerativeAIrequiresthesamestrongcompetenciesneededforasuccessful
digitaltransformation,includingaclearstrategy,anin-housedigitaltalentpool,andaresponsiveand
scalableoperatingmodel.Andit’snotjustaone-and-done:companiesthatwishtoincorporategenAIintotheirvaluepropositionswillneedto
continuallyrevisittheirdigitaltransformationroadmapsandreviewprioritizedsolutionstodeterminehownewiterationsofgenerativeAImodelscan
supporttheirgoals.
Whatarethekeyleadershiprolesinadigitaltransformation?
Asuccessfuldigitaltransformationtouchesabroadrangeofanorganization’sfunctionssotheycan
worktogetherinnewways.Thisrequireslarge-
scaleandcoordinatedinvestments.Theonlypersonwhocanmakethatlevelofsustainedchange
happenistheCEO.OneoftheCEO’scrucialjobsistoensurealignment,commitment,and
accountabilityamongtheleadershipteam.Withoutanyofthese,progressondigitaltransformations
canrapidlystall.
LeadersattheC-suiteandbusinessunitlevelhave
crucialtasksaswell.Whenitcomestotech,the
chiefinformationofficertypicallyfocuseson
improvingtheinnerworkingsofthecompanywithtechnology.Thechieftechnologyofficerusually
worksonimprovingcustomerofferingswith
technology.Chiefdigitalofficers,inmanycases,actascoleadersofthetransformationandtypically
workwithdigitalandAItechnologiestocreatenewdigitalexperiencesforusers.Thechiefhuman
resourcesofficerplaysacrucialroleearlyinthetransformationtosecuredigitaltalentandto
4Whatisdigitaltransformation?
putinplacethetalentmanagementpracticesthatwilldevelopandretaindigitaltalent,whilethe
CFOoverseesthetransformationbusinesscaseandthetrackingofthevaluerealization.Finally,
thechiefriskofficerneedstodirecttheintegrationofriskchecksintothedevelopmentprocess,
andunderstandhowtorespondtonewrisks,suchasdataprivacyandcybersecurity,thatadigital
andAItransformationmaygenerate.
Howdoyouknowifadigitaltransformationisworking?
Itcanbesurprisinglydifficulttoknowhowadigitaltransformationisgoing.Withoutproperlytrackingandmeasuringoutcomes,leaderswillstruggleto
manageperformanceandensurethatthechangeshappeningarecreatingvalue.
Knowingwhattomeasureishalfthebattle.Indigitaltransformations,keyperformanceindicators(KPIs)usuallyfallintothreecategories:
—Valuecreation.DigitalsolutionstypicallytargetoneorafewoperationalKPIsthatcanusuallybetranslatedintofinancialbenefits.
—Teamhealth.Manydigitaltransformations
progressmoreslowlythaninitiallyplanned
becausetheirteamsareunderstaffed,theydidnotadoptmodernwaysofworkingsuchas
agile,ortheylackcriticalcapabilitiessuchasproductmanagementanduser-experience
design.Inourexperience,high-performing
teamscanbefivetimesmoreproductivethanlow-performingteams.
—Change-managementprogress.Thesemetricsmeasuretheprogressinbuildingnewcapabilitiesandthehealthofthetransformationitself.
Arewemobilizingteamsasplanned?Arepeopleengaged?Arewebuildingcapabilitiesandtalent?Arepeopleseamlesslyusingthetechnology,
tools,andproductsbeingdeveloped?Inourexperience,theperfectistheenemyofgoodwhenmanagingchange.
Whatcompaniesaredoingthiswell?
Tobedigital,everycompanyneedstorewirehowitworks.Onceuponatime,Amazonwasjust
anotherstart-up:ithadtoinvestinitstechnology,data,performancemanagement,andtalent
practicesoveryearstobecomeanindustry
leader.Thegoodnewsisthatsuccessfuldigitaltransformationsaren’tjustthepurviewofthe
techtitans.Establishedcompaniesofallkindscanbesuccessfulontheirdigitaltransformation
journeys.Herearethreeexamples:
—Thecopper-mininggiantFreeport-McMoRan
unlockednext-levelperformancebybuildinganddeployinganAImodelatanore-concentrating
millinBagdad,Arizona.Leadershipsetthe
aspirationtoincreasethesite’scopperoutput
withoutamassiveinjectionofcapital.The
companypulledtogethercross-functionalteamstobuild,test,anditerateontheAImodel,shiftingtheculturetofocusonrapiditerationsand
continuousimprovement.Freeport-McMoRanputaseniorproductmanagerinchargeto
helpcoordinateteamsandimproveallocationsacrossworkingteams,assignedafinance
directortomanageimpacttrackingand
reporting,andinstitutedaquarterlyplanning
system(similartoquarterlybusinessreviews)inwhichtopleadersfromthecompanycame
togethertosetobjectivesandkeyresultsandtofocusresourcesonhigh-priorityareas.
—Vistra,oneofthelargestpowerproducersintheUnitedStates,builtamultilayeredneuralnetworkmodeltoimproveoverallefficiency,improve
reliability,andreduceemissions.Themodel
combedthroughtwoyears’worthofdataattheplantandlearnedwhichcombinationoffactors
wouldoptimizeaplant’sefficiencyatanygiventime,convertingthemintoanAI-powered
enginethatgeneratesrecommendationsevery30minutesforoperatorstoimprovetheplant’sheat-rateefficiencywhileextendingassetlife.
Keytothesuccessofthisapproachwasbuildingacapabilitytoscalethesolutions(forexample,
Whatisdigitaltransformation?5
—“Thedigital-valueguardian:CEOsanddigitaltransformations,”December20,2021,EricLamarre,KateSmaje,andRodneyZemmel
—“ScalingAIlikeatechnative:TheCEO’srole,”O(jiān)ctober13,2021,JacomoCorbo,David
Harvey,NicolasHohn,KiaJavanmardian,andNayurKhan
—“Strategyforadigitalworld,”McKinseyQuarterly,October8,2021,SimonBlackburn,JeffGalvin,LauraLaBerge,andEvanWilliams
—“CHROperspectivesonleadingagilechange,”August30,2021,JasonInacio,DávidKincsem,andDánielRóna
—“HowCIOsandCTOscanacceleratedigital
transformationsthroughcloudplatforms,”
September15,2020,JayneGiemzo,MarkGu,JamesKaplan,andLarsVinter
amachine-learning-operationsinfrastructuretostandardizeandmaintainmodels)sotheycouldbeeasilyappliedandtailoredtoeachofthe
stationsinVistra’snetwork.Across-functional
teamincludingplantoperators,datascientists,
analyticstranslators,andpowerprocessexperts
ensuredrapiddevelopment,high-qualitymodels,andadoptionofthemodels.
—AnAIbothelpedEmiratesTeamNewZealand
winitsfourthAmerica’sCupin2021.Usingdeepreinforcementlearning,thebotlearnedhowto
Findmorecontentlikethisonthe
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becomeaprofessionalsailor.Thishappenedbybringingtogethersailorsanddatascientists
todevelopandtrainthebotssothattheycouldlearndynamicallyandgaingreateraccuracy
throughcontinuousfeedback.Theteamput
extensivetimeintofiguringouttherightlearningmodels,howbesttocoachthebot,andther
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