Why Digital Transformations Fail — and How to Fix That

Tony Saldanha offers steps for businesses that want to transition to digital but don’t know how.

The transition to digital is a $1.7 trillion industry, yet 70% of attempts end up failing, according to McKinsey & Co. Tony Saldanha believes the lack of clear goals, and a disciplined process to achieve them, contributes to the high failure rate. He also blames some of the issues on confusing terminology. Saldanha is president of Transformant, a consulting firm helping organizations through digital shifts, and former vice president for IT and Global Business Services at Procter & Gamble. He sat down with Knowledge@Wharton to talk about problems and solutions outlined in his new book, Why Digital Transformations Fail: The Surprising Disciplines of How to Take Off and Stay Ahead. (Listen to the podcast at the top of this page.)

An edited transcript of the conversation follows.

Knowledge@Wharton: Give us a sense of your work with Procter & Gamble. Their products are so familiar to us.

Tony Saldanha: I had the incredible privilege over 27 years to be associated with and run internal business processes, called Global Business Services, at Procter & Gamble in every region of the world. That includes everything from the way you do accounting to HR to supply chain planning to advertising and so on.

Here’s the ironic problem that I was faced with about four years ago. P&G’s IT and Global Business Services was identified to be best in class in the industry, so vis-a-vis competition with similar capabilities. But internally, we knew that was insufficient because our bigger competition was no longer the other large companies but startups, which have a 50% cost advantage and a 10-times agility advantage. The issue that we were faced with was how do we create the next generation of those internal business operations so that we can start to compete with who matters the most, which is the startup. That meant things such as instead of having several hundred people do accounts receivables across the world for things like identifying whether a particular discount or claim is valid from a customer, can you use robots to do that? I’ll give you a great example that resonates with everybody. In today’s world, where there is enough data on every spend that you do during your business travel on your credit card, why would you ever force an employee to create an expense report? Those are the kinds of examples that we got into.

Knowledge@Wharton: Has the retail sector in general been significantly affected by digital?

Saldanha: The retail sector is probably one of the first industries to be disrupted by digital technology, which has driven the term “the retail apocalypse.” Certainly, Amazon and many of the similar digital native companies have driven that. But retail is not alone because insurance, medicine, finance, media, and so on and so forth, are all not far behind. What’s happening in retail is three things: One is the rise of completely new business models, which is now you have online or online plus physical presence. The second is dramatically improved internal business operations. As a consumer, you know immediately when you place an order with Amazon what is happening, and you get deliveries within 24 hours, which means dramatically improved logistics. The third is the rise of smart products. That’s an example of how digital can transform completely an entire industry.

Knowledge@Wharton: How do you lessen the potential for failure in this digital transformation?

Saldanha: Let me give you 10 seconds of context of why you have to do that. Because within the midst of the full industrial revolution, digital is transforming not as a technology, but it’s transforming other technologies. Medicine, bio, drones. You really have no choice but to transform yourself, yet 70% of digital transformations fail.

“The retail sector is probably one of the first industries to be disrupted by digital technology, which has driven the term ‘the retail apocalypse.’”

I’m really trying to drive education on narrowing down the precise meaning of digital transformation. I had the opportunity of talking to 100 executives about three or four years ago, and I asked each of them the same question. What does digital transformation mean to you? I got a range of answers from, “Oh, don’t worry about it. This is all hype. We used to have digital watches in the 1970s,” all the way to, “You’ve got to worry about it because it’s all about artificial intelligence and everything coming for our jobs.”

I understand why there are so many different interpretations, because the term “digital” is fuzzy. What I try and do in the book is provide five levels of digital transformation. Real digital transformation, to be precise, is the rewiring of an existing enterprise so that your physical product becomes smarter, your go-to-market models become more digital, and your internal operations become at least two times as efficient. But it’s a journey of five stages all the way from automating your typical accounting kind of stuff, which is stage one, through stage five, where not only have you changed your processes, people and other rewiring, but your organization culture becomes completely digital. Being extremely clear about what you’re aiming at and being very precise on which stage you are on that journey is the No. 1 issue that most companies face.

Knowledge@Wharton: Many people worry that their work culture will be deeply changed by digital, correct?

Saldanha: I think the concern isn’t as much about knowledge and what’s necessary in an organization for culture. The bigger challenge is how you change the behaviors and the motivations of the organization so that the organization acts with the agility and the urgency of a startup. That’s a harder transition. And that’s really where a lot of the fears are among the boards and CEOs among the Fortune 100s that I consult with. How do I almost re-do my organization’s agility and digital skills to compete with the startups?

As I say in the book, the first step is to have an organization plan. I’ll give you an example. Amazon recently announced that they’re setting aside $700 million to retrain their entire organization, its digital capabilities. I fell off my chair when I heard that because Amazon is arguably one of the most tech-savvy companies in the world. And if they realize that this is not a static goal but a constant reinvestment, that shows you the difference between a company that’s just starting to think about digital literacy and the one that’s in stage five.

“Within the midst of the full industrial revolution, digital is transforming not as a technology, but it is transforming other technologies.”

Knowledge@Wharton: Do many firms understand that it’s a long-term process and not just a quick, one-time change?

Saldanha: I wish I could say that this understanding is fairly prevalent. But at least in the research that I did and the 100 companies that I spoke with, I did not really find that understanding. Clearly, the best-in-class literature out there is starting to drive the message that digital transformation is an ongoing journey and you get there only by changing the DNA of the organization. The organization always cannibalizes its own business models and keeps reinventing. In the top 1% or 2% of the companies in the world, you see that because that’s second nature. That’s what Netflix did because it’s reinvented a business model four times now, from mail-in to streaming to original content to international.

Knowledge@Wharton: You mentioned The Washington Post as an example of a successful digital transformation. I’d be interested to get your thoughts on how they have done this, especially in the volatile sector of journalism and the newspaper industry?

Saldanha: The Washington Post is a fantastic example because all of the three ways of digital destruction that I talk about — change your internal operations, go to market differently, create smarter products — are something that they executed.

When Jeff Bezos acquired The Washington Post, he set aside a lot of his personal time to drive the understanding that digital transformation wasn’t a one-and-done kind of deal. This was an ongoing thing. The second thing he did was personally work with the engineers to change their internal operations. Newspapers come from a daily cycle of news. You have the 10 a.m. meeting to talk about your next day’s newspaper. Whereas, in the social media kind of world, this is an ongoing thing, which means tagging the content, being able to publish in real time. All of that needs totally different systems. Jeff Bezos and The Washington Post engineers completely redid many of their content-related systems. That’s the internal business operations.

There’s a third thing, which is how do you create smarter news? Not just report it, but have the ability to engage your consumers and give more value? That’s another thing he did. So, I think this is a great example that even in a somewhat traditional industry, it is possible to drive systemic digital transformations.

Knowledge@Wharton: You also look back at Studebaker, which was a well-known brand that suddenly vanished. Tell us about that.

Saldanha: Here is the back story of the automobile industry vis-à-vis the previous avatar of that, which is the carriage industry. In the early 1900s, there were hundreds of thousands of carriage providers. Only one or two of them successfully transitioned from the carriage industry to the automobile industry, and Studebaker was actually one of those. Yet 40 or 50 years later, they were dead. What happened was that inability to drive constant reinvention. In the case of Studebaker, they made brilliant cars. Some of their cars even today are considered to be the absolute best when it comes to collector items. Yet what happened was the inability to reduce costs, to save the money, to drive research and development, to constantly upgrade — that entire cycle was not done. That’s why we have the sad story of Studebaker no longer being around.

Knowledge@Wharton: Playing off the title of the book, it’s one thing to do the transformation, but it’s another thing to be able to stay ahead. How do you do that?

Saldanha: The way you do that is in my five-stage framework. Stage four is when you’re able to transform the one time, and stage five is when you’re able to sustain it. The way you do that is by not just changing or swapping out your older technology to digital technologies, but then to change the living DNA of the organization. This is when, like many of the successful companies in history, the organization looks to reinvent itself. And there needs to be the internal processes that reward that behavior and allow that risk-taking to happen.

“The best-in-class literature out there is starting to drive the message that digital transformation is an ongoing journey and you get there only by changing the DNA of the organization.”

What this takes is the single-minded customer focus that you might find with icons like Zappos, where a call center agent may spend 10 hours on the phone with a customer, not even talking about Zappos but just chatting because that’s what the customer wanted them to do. That kind of single-minded focus on the customer and that kind of risk-taking and doing whatever is needed for the business to maintain that equity is absolutely essential.

Knowledge@Wharton: An example in the book that caught my attention is how Procter & Gamble worked to integrate Gillette. Can you talk about that?

Saldanha: Yes, that was a very personal example for me. In 2005, Procter & Gamble acquired the Gillette company. Part of the promise that my boss at that time made was that we will take the internal operations — all the financials and supply chain and that kind of stuff — and run that at the same budget and head count at Procter & Gamble pre-acquisition. In other words, we will swallow that entire company without taking up either the P&G head count or budget. That’s a tall order in any situation, but when you have a business of $10 billion in sales and you try and absorb all of that, that’s tough.

The way I think we were able to do that was we started with being extremely clear about that particular goal, and then using a simple method of [determining] if we need to deliver Wall Street synergies of these amounts, this is what it means on a daily basis for every day of delay. Every challenge that you come across in the process, you go back and say, “Is this problem worth so many million dollars a day of risking Wall Street synergies?” And if that’s the case, we’re happy to talk. If not, let’s roll. Being extremely clear about the goal and rolling the entire organization and executional efficiency and integrity. That’s an absolutely fantastic case study that worked successfully.

Knowledge@Wharton: What is the Google ratio of 70:20:10 that you highlight in the book?

Saldanha: Google has this formula where 70% of their effort is against day-to-day activities, 20% is against continuous improvement, and 10% is against disrupting themselves. That’s stuff such as Google X, creating driverless cars or balloon internet and things like that. The reason I love that particular model is because most companies distinguish between day-to-day activities and change, but Google doesn’t distinguish between those three buckets of day-to-day, change and disrupt yourself. In the midst of an industrial revolution, which is where we are, if you do not have some activity, some investment in the third bucket, then you are definitely going to be left behind. That’s why I’m such a strong proponent of that model.