11 reasons why digital transformations fail, explained by pros
Digital transformations continue to be challenging and are prone to failure. Learn about 11 fatal mistakes to avoid at all costs.
Digital transformation has come a long way from being a buzzword to becoming imperative for business success. However, digital transformation failures continue to plague many businesses, even as their organizations invest heavily in transformation efforts. Companies spent $1.6 trillion in 2022, which is expected to reach $3.4 trillion by 2026, predicts to Statista research.
Moreover, the gains that companies do achieve tend to be fleeting, according to 2023 research from McKinsey that found the long-term impact of transformation projects is "rarer than one may think." The survey found that while a majority (56%) of respondents said their organizations have achieved most or all of their transformation goals, only 12% report they have sustained these goals for more than three years. Additionally, an average 42% of financial benefits are lost during the latter stages of a large-scale change effort, the survey found.
Broad categories of digital transformation failure
Part of the problem is that companies persist in seeing see digital transformation through the lens of technology, said Antony Edwards, managing director at PSG, a growth equity firm.
"Too many people treat digital transformation as something around infrastructure and IT," Edwards said. "It's not. It's about the company culture, it's about DNA, and it's about business models. And if you don't approach it from that kind of business and customer experience perspective, it's going to fail."
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What is digital transformation? Everything you need to know
The narrow lens on technology is compounded by the enterprise's tendency to latch on to the latest technology fads before an ongoing or existing transformation has proven its success or failure, said John King, a partner at Lotis Blue Consulting's business transformation practice.
Kristin Moyer, an analyst in Gartner's CEO and digital business leader practice, buckets digital transformation failures into three broad categories:
- Regression or "transformation-washing." This is when businesses say they are transforming but are embarking on initiatives that should have been implemented a while ago, like e-commerce.
- Underperformance. This is when businesses think small and don't put enough focus on projects that can create new value for their business, getting some digital transformation benefits but on a small scale.
- Digital product or service failure. This is a situation where companies try but fail to launch a new digital product or digital service and they are forced to discontinue it.
"The thing about digital business is that it takes a long time to transform, so you need to pace yourself," Moyer said.
"You need to be initially measuring the results that you're getting using leading indicators, like the number of customers, the number of transactions and the growth over time. And then you use lagging indicators after some time, like revenue and net profits, to measure your success," she advised.
11 reasons digital transformation failures happen
No matter the size of your business, all successful transformations begin with the leadership team having a clear understanding and vision of what the business is transforming into. Once the vision is set, organizations will face many challenges.
To keep on track, it's essential to avoid the common missteps that can lead to failure. This overview of 12 key reasons why organizations encounter digital transformation failures -- plus advice on how your organization can avoid these hurdles -- will help your teams build a digital transformation roadmap that brings business value.
1. Lack of executive (CXO) sponsorship
Nitish Mittal, partner at Everest Group, sees many digital transformation initiatives struggle due to lack of executive sponsorship. "Digital transformation initiatives, especially the major ones, need executive sponsorship, syndication and backing," he said.
This requires support right from the ideation and sign-off stage to ongoing governance and continual improvement. Without this support, early interest and enthusiasm can easily wane.
Lack of sponsorship can also erode accountability for these initiatives. "If everybody is responsible for the success of digital transformation, nobody is," Mittal said.
CEOs are pivotal in encouraging the mindset change required for successful transformations, Moyer said. "CEOs really need to get behind the transformation. They need to set the tone, they need to model the behaviors for transformation and then they need to operationalize those behaviors," she said.
CEO support for digital initiatives is also critical for securing an adequate digital transformation budget, said Jason Fruge, consulting chief information security officer at Risksilience, a cyber security consultancy.
If IT has a reputation in the organization for hindering rather than enabling change, it's essential that CIOs, CTOs, chief digital officers and other tech leaders act not just as the effort's execution partners. They must be agents for change and education in establishing IT as the organization's transformation enabler, Fruge said, and convince people this is the direction the company needs to go.
2. Not having a collaborative culture
An organization's inherent culture can make or break an organization's transformation initiatives, experts agreed.
Culture change is at the heart of digital transformation. Cultures that succeed with digital transformation embrace change and collaboration.
Regardless of whether it's changing products, internal operations or customer engagement methods, digital transformation always involves getting different departments and different groups within departments to work together in a more coherent and effective way.
"If you don't have a culture of collaboration across the different functions -- across different divisions -- the transformation is really going to fail," Edwards said.
Experts agreed change management is a key component in bringing about successful culture change. Effective change management can identify people who are most resistant to change and provide them with the right training and education to turn them into digital transformation champions.
3. Not hiring digital transformation talent
Failing to assemble the right digital transformation team is another reason digital transformation efforts collapse. Companies often don't bring in people who have digital understanding and experience implementing such transformations.
"Anyone who thinks they can transform their company in such a fundamental way with all the same people and the same executive team is kidding themselves," Edwards said. That's especially applicable for non-native digital companies.
But finding people with the right skills for your digital transformation team can be a challenge, despite the recent upheaval and layoffs in the tech sector. Talent in high-demand fields like artificial intelligence and cybersecurity remain hard to come by.
Devin Redmond, co-founder and CEO of Theta Lake, advised companies to hire people who are aware of what can go wrong with such initiatives and can impart that knowledge to the rest of the organization. These change agents can help create the right focus, business processes and training procedures needed for success.
It is equally important to retain employees who "understand your market, your business, and your customers," Edwards said.
4. Lack of clear digital transformation goals
Companies implementing transformation efforts just for the sake of it, without setting clear goals, is another reason why such initiatives fail, according to Avi Shua, co-founder and chief innovation officer at Orca Security.
"Organizations need to understand what the key areas of focus are and what they are trying to achieve from the business point of view, be it reducing costs or being more agile or being more secure," Shua said.
Not defining clear goals means your organization will end up with employees going in many different directions. There will be no alignment, and eventually, it will lead to failure, Edwards said.
"Like any change initiative, the number one thing is just to make sure you have got your goals defined properly and then defining initiatives that actually deliver those goals," he said. Without that, companies not only don't understand how to transform, but their efforts are also often underfunded from the start.
5. Failing to think through the required technology
When implementing digital transformation projects, focusing solely on the enabling technology can lead to failure, according to Redmond.
Say, for example, a business in a highly regulated industry is looking at enabling a video-first communication environment. If it only focuses on how a tool like Zoom or WebEx can improve employee communication and fails to consider the compliance implications of the new software, the project will get held up, Redmond said.
"Instead, they should be doing that research in advance to say, 'OK, I should be looking at the full stack of technology if I'm going to be sharing information in a new way. And I need to have new security and compliance infrastructure in place. And I need to involve those other constituencies,'" he said.
Doing technology for the sake of technology has always been a bad idea, Shua warned.
While companies are utilizing cloud adoption to accelerate their digital transformation, it is important to remember cloud environments are dramatically different from on-premises environments, he said. He advised companies to avoid the lift-and-shift approach to the cloud. While it may work in the short-term, the outcome will always be suboptimal.
6. Adopting a fail fast attitude
Fail fast -- a mantra often associated with digital transformation -- can be another impediment to successful digital transformation, according to Parry Malm, CEO and co-founder of Phrasee. Adopting a fail fast mentality, however, often means companies might not give projects the room to succeed.
"The problem with this fail fast attitude is, first, you accept failure and, second, don't require any of your actions to be really thought through," Malm said.
Instead, he advised companies to strengthen their commitment to their initiatives if they fail the first time and focus on doing it "bigger and better."
Ray Wang, founder of Constellation Research, said a look at some of the companies that have experienced transformation failures underscores that digital transformation journeys require careful analysis and are not accomplished overnight.
"If you're doing digital and you want to be a digital giant, look at the business model and understand how you can monetize it," he said. "Understand that if you're going to collect all that data you need a long-term investment horizon, and make sure you have the right people. Those are the lessons learned from all these digital transformations."
7. Overfocus on technology fads
Related to fail fast is when a company's approach to transformation or response to failure is to embrace the latest technology before existing transformation efforts have clearly proven their success or failure. The result is that they end up with many half-implemented ideas and their personnel get fatigued, King said.
8. Unclear understanding of the role of digital technologies in transformation
In other cases, leaders push an established technology when it is not aligned with organizational objectives. Nick Kramer, leader of applied solutions at SSA & Company, a global consulting firm, sometimes sees IT proposing a digital technology even when it is not the best fit for the company's digital transformation. One example he has seen is where automation initiatives meet technical goals but are not aligned with business case objectives. The result is budgets misspent on initiatives destined to underachieve.
Kramer also observed that it's a mistake to think of digital as something separate from what the company is doing today, requiring an entirely new culture. While culture change is almost always necessary, he believes it is better to focus on forming new habits and ways of working within the existing culture make it more effective.
9. Lack of broader organizational alignment
Digital transformation efforts fail when they are not aligned their organization's broader business strategy and strategic business capabilities. When executives realize they've missed the opportunity to assess the bigger picture upfront, they need to pause transformation efforts and take the time to address questions they should have asked initially.
Danielle Phaneuf, partner cloud and digital strategy operating model leader at PwC, also sees cases where enterprises are primarily concerned about successfully implementing or migrating to a new technology rather than focusing on unlocking new business value through the transformation.
Phaneuf recommends leaders start with the business's top priorities and identify technology-driven solutions rather than let technology drive the strategy.
"This will ensure a transformation initiative that drives the business forward, generates ROI and isn't set up for failure," she said. For example, she finds that organizations that successfully adopt cloud and become cloud-powered companies begin with a firm understanding of their business priorities. This helps them analyze how they can use the technology to achieve their goals.
10. Not investing in appropriate oversight
Many companies invest in technologies and change management initiatives without implementing the appropriate oversight to see the initiative succeed. Phaneuf said that most organizations will realize some short-term savings when they start a transformation. However, if they do not invest in creating the appropriate oversight to sustain the transformation, the savings will disappear, and the organization will revert to its previous methods.
For example, a higher proportion of successful transformation initiatives employed a transformation management office staffed with leaders who were accountable for outcomes as well as equipped with tools to simplify and automate the management of complex initiatives.
"This is not free. And organizations who don't budget for this often shortchange it and, in turn, impact the success of the transformation," Phaneuf said.
Leaders need to establish a clear process for tracking the savings in the profits and losses as well as have a way to regularly monitor performance against the target. Often an afterthought, tracking requires investment upfront to build process, tools and organizational capabilities.
11. Not figuring out the right value and OKRs
Which brings us to this key reason for digital transformation failure: not having the right metrics. Objectives and key results (OKRs) are more effective at measuring success in digital transformation than transitional approaches, such as service-level agreements, KPIs and metrics, which tend to be system, process or function led, according to Mittal.
"Senior executives are often measured on OKRs, which tie together the key results needed for their specific organizational objectives," Mittal explained. Aligning around OKRs also ensures the organization is measuring the relevant data points.
These OKRs need to be leader-specific and tied to their respective roles in the digital transformation process. For example, CMO OKRs differ from CIO OKRs and CFO OKRs. In cloud-led transformations, for instance, the CIO should be tasked with selecting and deploying the right technology. The CFO must ensure the company can predict cloud costs and manage commitment-to-consumption gaps. CMOs need to focus on how they communicate this progress externally and internally.
Real-life digital transformation failures: Companies to learn from
It is important to remember that no matter the investment size, not all digital transformation initiatives are going to go as planned. You learn from them, Wang said. "Part of doing digital is that there's a lot of failures."
Here's a look back at some notable digital transformation failures that became learning experiences for their companies:
Too broad
Industrial giant General Electric set up a whole business unit, GE Digital, to transform GE's internal processes and offer digital transforming solutions to customers. King said in this case, the scope of GE Digital was too broad and included everything from centralizing and automating GE's internal systems and processes to building an industry-leading IoT platform for GE products and customers.
As a result of trying to do too much too soon, the organization grew at an accelerated pace, lost focus on its objectives, and delivered incremental or non-viable solutions in all areas, resulting in low impact and customer dissatisfaction. GE Digital was eventually sold off piecemeal, and the remnants were integrated into GE Power. In late 2022, GE split into three companies to target opportunities in aerospace, healthcare and energy more effectively.
Underestimated change management
A large global pharma group set out to implement a unified approach to a clinical platform. The idea was to unify disparate platforms across clinical, quality and safety systems by replacing individual siloed solutions with a single platform.
Mittal said that although this was a well-intentioned goal, the company underestimated the change management effort required to ensure the clinical and scientific communities were comfortable with the technology and the resulting workflow changes. This resulted in the group reworking the adoption journey, eventually delaying the overall rollout for three months.
"Getting user feedback initially is a key aspect in such initiatives," Mittal said.
Treated digital as separate entity
American car giant Ford attempted a digital transformation back in 2016 by creating a segment named Ford Smart Mobility to build digitally enabled cars. Its goal was to design, build, grow and invest in new mobility services as well as power Ford's efforts to be both an auto and mobility company. But the new business unit was created on the side and viewed as a separate entity. The unit reported a loss of about $300 million in 2017.
Ford learned from these lessons and went on to become a leader in the electric car industry. The company earned $25.5 billion in fiscal year ended June 2023, which represented a 9.25% increase from the prior year.
Challenging economic conditions
Consumer goods giant Procter & Gamble wanted to become "the most digital company on the planet" in 2012. The company was already well ahead of its competitors at the time but failed to invest in digital in a more focused way. It also ran into challenges created by a difficult economy. In 2013, CEO Robert McDonald was asked to resign by the board. Under new management and a renewed strategy, its stock grew from $75 to $144 between 2013 and 2023.
Wang said he believes each of these companies learned something from their undertakings. "Part of doing digital is that there's a lot of failures."
