McKinsey's framework for digital transformation strategy

11 May 2020 11 min. read

Clear targets, management buy-in, and targeting easy wins early are just some of the key aspects of a successful digital transformation, according to experts from McKinsey & Company. Firms should also look to rapidly up-skill the digital expertise of their workers, and deploy agile ways of working.

Digital transformation offers plenty opportunities, with organisations using it to improve their customer services, optimise their internal operations and innovate their way to a sustainable future. However, mounting evidence shows that digital transformations are easier said than done, with more than half of all UK projects estimated to fail at realising their desired goals.

To help firms develop successful transformation programmes, consultants from McKinsey & Company have highlighted ten key factors which can help a firm to realise its digital potential. According to an article published on the firm’s website by Tanguy Catlin, Johannes-Tobias Lorenz, Bob Sternfels, and Paul Willmott, just 16% of business leaders say their organisations’ digital transformations successfully improved performance and also equipped them to sustain changes in the long term – but things like improved management buy-in and clear communication could be all it takes to see this drastically rise.

Digital transformation strategy

Senior management buy-in

Senior management buy-in is key to major organisational changes. It is key from a budget and decision-making perspective and from a change championship perspective. Executive buy-in will enable firms to make decisions quickly and gain buy-in for those decisions across the organisation as a whole. If the leadership team take a proactive role in a digital transformation, they can also manage expectations about the transformation and share the organisation’s priorities as a first step. The opportunity for a smooth transition process and thus buy-in from the rest of the organisation can be lost without this.

The researchers elaborated, “The CEO cannot simply sanction a digital transformation; he or she must communicate a vision of what needs to be achieved, and why, in order to demonstrate that digital is an unquestionable priority, make other leaders accountable, and make it harder to back-track. Hence, in 2015, Allianz announced that a key strategic growth initiative was to become ‘digital by default’—indicating the extent of the changes ahead. Similarly, ING branded its transformation ‘Fast Forward.’”

Set clear targets

Poor communication can be the undoing of even the strongest convictions, and still lead to digital transformation failures. Firms must identify key milestones and targets for the organisation to aim for – ideally with low-hanging fruit first to help build momentum – before relaying the road-map clearly to key stakeholder groups, and keeping them up-to-date through detailed communications plans. The frontline teams must also be clued into how close the group is to hitting its targets – providing a regular drumbeat with news and updates through channels such as newsletters, town hall meetings, and intranet articles.

McKinsey’s analysts explained, “Targets are needed for each source of value creation – cost savings, revenues, improved performance of agents, and satisfaction of employees and customers—and for new ways of working and the new capabilities required. They can be set, for example, for the frequency of releases, the percentage of processes that will be automated, the percentage of transactions that will be migrated from one channel to another, the fraction of new code that will be tested automatically, the level of personalisation that will be achieved, and the number of campaigns that will be run each month.”

Secure investment

Firms can often approach digital transformation in a cautious manner due to the large amounts of capital it requires. However, ultimately the phrase “you get what you pay for” holds true, and only firms willing to truly commit to the investment needed will be able to pull off a digital transformation. One example McKinsey pointed to as proof of this is European insurer Axa, which invested €950 million in digital transformation over just two years.

“Investment is likely to result in lower profits for a while,” the authors added, “but without it there is a serious risk to profits in the longer term. Importantly, companies will need to allocate investment both to improve the current business and to build new businesses as the insurance model evolves. To acquire expertise in new fields and keep abreast of innovation, for instance, insurers will need to invest in partnerships or a venture capital arm, perhaps both, as well as in their own innovation labs.”

Lighthouse projects

As mentioned in the planning phase, companies should initially target easy wins to help the firm build momentum toward loftier goals. A lighthouse project is a short-term, well defined, measurable project that serves as a model – or a “lighthouse” – for other similar projects within the broader digital transformation initiative. Targeting short-term goals like this will also have positive impacts on the firm’s service to its customers, helping boost sales before the transformation is even complete.

According to McKinsey’s consultants, “Such projects include customer services activities and the redesign of the claims process, from the moment a customer needs to file a claim to the moment of reimbursement. Customers will be delighted, cost savings can be as high as 40% and effectiveness, measured in return on investment, can rise by as much as five percentage points.”

High-calibre launch team

The swift rise of the Chief Digital Officer (CDO) has seen companies in every industry begin to implement the role, thanks to the pressing need to ensure an orderly transition to the age of innovation and avoid becoming victims of digital disruption. A study by Strategy& previously found that approximately 19% of top global companies now have a CDO, 60% of whom were hired since 2015. It is a crucial – albeit temporary – role, similar to the fact that at the end of the 19th century, many companies employed a Chief Electricity Officer to ensure supplies of what was a new industrial commodity. A few years later, none did.

The authors argued, “The importance of securing a high-calibre launch team, often under a CDO, cannot be overstated. A CDO can prove invaluable in co-ordinating a transformation – avoiding duplication by devising a methodology for the redesign of customer journeys that can be replicated across the organisation as digitisation efforts are extended, for example. He or she can also ensure the appropriate technology and skills are in place, decide the sequence of the transformation, monitor progress against targets, and ensure that tactical day-to-day priorities get the attention they need.”

Promote agile ways of working

Agile is a way of working that emerged out of a growing dissatisfaction with IT techniques used in the late 90s, such as the waterfall method in software development. The approach puts speed and autonomy at its core, advocating a process characterised by the division of tasks into short phases of work and frequent reassessment and adaptation of plans. Setting up a digital unit independently of the organisation can feed into a firm’s agility, by promoting new ways of working essential for digital success, such as agile product development, while keeping the focus on customers, and cross-functional teams that pool specific types of expertise.

However, McKinsey warned this could cause other problems if mismanaged, stating, “Separating a digital component from the rest of the organisation is not entirely the answer, however. They can start to create channel conflict, particularly if innovations threaten to cannibalise revenue streams. The digital unit therefore needs to be reintegrated at some stage, and that becomes more difficult as time passes. Whatever the choice, the ultimate goal has to be to enmesh the old and the new.”

Nurture digital culture

To encourage the right culture that will get the wheels of a digital transformation in motion, education should be any organisation’s primary focus. It’s vital for every employee to understand why things are the way they are; why changes are happening within the business; what type of behaviours will be needed to make the changes effective. Without this basic transparency, it will prove impossible to get a company’s various teams behind any mission. To this end, McKinsey research has shown that 46% of financial services executives feel cultural or behavioural change is the biggest challenge they face in pursuing their digital strategies.

“There are relatively easy ways to kick-start change and gain support,” the authors argued. “For example, rather than making decisions by considering the business case or what competitors are doing, insist that the starting point is “How does this create value for the customer?” Moreover, change can begin in areas where there are fewer risks—in marketing, for example, by testing messages and channels to find out what is most effective.”

Sequence initiatives

Financial and human resources are never unlimited, but they are scarcer and more precious now than at any time in a generation. Deciding where to allocate them is thus more challenging — and more risky, because a wrong decision can mortally wound an organisation. Sequencing with a view to quick returns is therefore key to building scale fast. The more value a transformation captures as it progresses, the more it becomes self-funding and the greater the support it garners.

“A company’s financial pressures will shape the sequencing to some degree. So will its IT, if legacy systems restrict initial choices. And companies need to be flexible. It could prove hard to recruit the particular people needed, while technology and customer behaviour will continue to evolve… When initiatives are successful and deliver the intended financial benefits, the board and top team should be emboldened to push to achieve more,” McKinsey suggested.

Build capabilities

Skills as well as systems will need to be boosted during a digital transformation. Historically analogue firms typically attract people with specific industry and functional specialisations, and therefore possess gaps in their digital skills and competencies. The success of digitalisation efforts therefore hinge upon their abilities to acquire or develop specific functional competencies around digital skills, technologies and processes (or operating model), as most companies will struggle to hire several hundred new digitally skilled staff all at once.

The analysts argued, “Business leaders will need to understand IT’s strategic value—the reason one large European insurance group has set up an IT literacy program to educate and update business line managers, while all newly appointed top business managers must take a three-day training module to help them understand and capture IT’s strategic value.”

New operating model

An operating model is both an abstract and visual representation of how an organisation delivers value to its customers or beneficiaries as well as how an organisation actually runs itself. Many aspects of this will have to fundamentally change alongside a digital transformation, otherwise a company may fail to realise the true potential of its new technological infrastructure.

Concluding, the authors said, “Whatever structures a company chooses initially, it will reach the stage when only a fundamental organisational redesign will do. Silos drawn along functional lines have always been a drag on collaboration and performance in large organisations. In the digital age, when companies need to reinvent the way they work on the fly, an inability to connect all parts of the organisation to share data, expertise, and talent can be crippling.”