The Top 5 Barriers to Digital Transformation

It should no longer come as a surprise to anyone that digital technology has revolutionized the business landscape. With the recent announcement that Apple has become the first trillion-dollar company in history, digital technology is set to be the dominant market driver well into the future.

The internet has fundamentally changed how we communicate, and smartphones have only served to accelerate the pace of change. It was only 11 years ago that the iPhone – the first smartphone with a virtual keyboard – was first introduced to the market. Now, as of 2018, it’s estimated that 5.1 billion people (2/3 of the world’s population) own mobile phones.

We’ve all seen the change for ourselves. The truth is that consumer preferences for customer service channels are shifting more rapidly than ever, with the rate of consumers who identify digital channels as their preferred mode of communication ever on the rise. Additionally, the digital communication landscape has continued to grow increasingly complex, with the advent of increasing number of digital customer service platforms; 2018 alone has seen the entry of Apple Business Chat and WhatsApp for Business, in a market already crowded with Twitter, Facebook Messenger, Live Chat, and SMS.

It’s also clear that the stakes are high; powerful legacy brands like Nortel and Sears that have failed to keep up have fallen apart in ways that no one could have anticipated 20 years ago. Other companies, like Blackberry, have allowed complacency to take them from market leaders to laggards and are struggling to catch up and stay off the rocks. Brand loyalty is dead. Today’s consumer has higher expectations than ever, and they are quick to switch companies if those expectations are not met.

With such a stark outlook, it seems clear that businesses need to seriously invest in digital transformation to keep from being left behind. Unfortunately, many businesses have yet to fully invest in a comprehensive digital transformation strategy – creating a digital expectation gap that leaves large companies vulnerable to competition from start-ups who arise to fill the unmet needs of consumers who want to do business digitally.

The statistics about the slow pace of digital transformation are shocking:

  • 84% of ​companies say digital transformation is crucial, but only 3% have finished a company-wide initiative. (SAP)
  • 78% of executives see digital start-ups as a threat to their company either now or in the future (Dell)​

In other words, companies know that digital transformation is important. They’re just not acting on that knowledge. And this inaction occurs despite the proven rewards of implementing digital transformation initiatives:

  • Companies that invest in digital technology see higher rates of revenue growth – double that of companies who did not invest in digital technology (Forbes Insights)
  • “53% of organizations with strong alignment between customer expectations and their organization’s middle- and back-office functions/systems are achieving significant positive business impact from digital, compared with 3% of those with little alignment.” (Harvard Business Review)

All of this begs the question – if businesses know why they need to execute on digital transformation and they know the consequences of failing to do so, why is almost everyone continuing to drag their feet?

What are the barriers that keep organizations from investing and executing on organization-wide digital transformation, when the stakes have never been higher or more clear? What are the factors that have created such a wide gap between knowledge and action?

We’ve reviewed the research and identified 5 top barriers to organization-wide digital transformation: Legacy Systems, Organizational Silos, Lack of Change Management, Poor Leadership Engagement, and Risk Aversion.

1. Legacy Systems

It’s perhaps somewhat ironic that one of the largest barriers to effective organization-wide digital transformation is, in fact, previous technology investment that has resulted in a “vast accumulated legacy landscape of applications and systems that must be ever maintained, nursed, and supported before innovation can even be considered”. (ZDNet)

The increasing pace of change means that organizations are being pressed to do and achieve more in every budget cycle. However, the problem that many CIOs are facing is an era of relatively flat IT budgets, in an era of ever-increasing demands on already-strained IT budgets. Many CIOs must juggle the expenses of existing legacy systems operating along with increased costs in cyber security and regulatory compliance. Additionally, the cost of keeping existing systems operating takes up the lions’ share of most enterprise IT budgets: fully 82% of the IT budget in an average organization gets spent on keeping existing systems operating!

When it comes to the hard budget decisions, many companies are choosing to kick the can down the road. Rather than leading with innovation, most companies are hoping to do just enough to stay ahead of customer dissatisfaction driving customers to other companies. How widespread is this problem?

  • Only 22% of companies have seen their IT budgets increase by 10% or more in the past two years. (Forbes)
  • In that same time period, only 20% of companies have earmarked 10% of revenue for digital transformation efforts. And looking ahead to the next two years, fewer than half (40%) plan to do so. (Forbes)
  • According to Gartner’s 2018 CIO Agenda Survey – enterprise IT budgets are expected to grow 3% globally, and 2.1% in North America. Given current rates of inflation in the United States, a 2.1% increase may not even be enough to keep IT budgets flat. There is a good chance that this will end up in a net reduction of IT budgets.
  • 11% of surveyed executives expected their tech budgets to decline, and 43% expected budgets to remain flat (Gartner)

The stakes are high, but companies are standing still. By and large, companies are choosing short-term IT budget savings over the long-term revenue growth and increased efficiency that comes from investing in organization-wide digital transformation. By the time keep-the-lights-on and security expenses have been dealt with, very little money is left for investments that would make real, organization-wide progress towards true digital transformation.

This is a problem, because legacy problems cause more problems than just massive ongoing expense. Existing legacy infrastructure is one of the primary factors in the incompatibility of departmental data and infrastructure.

This inability to effectively manage data and systems across departments is one of the leading causes of the next barrier to organization-wide digital transformation: organizational silos, which we’ll cover in our next post. (This post is part of a series. You can find Part 3 here and Part 4 here.)

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About the Author: Anna Kreider