Everyone gets that investing in digital transformation is a “must do” endeavor, but that does not mean that everyone is having success with it. The most common problem I see is that people are approaching things from the wrong end. They are focusing on the digital and looking for the ROI. Instead, we should be focusing on a material net gain in ROI and looking for the digital that can deliver it.

Material net gains in ROI from digital transformation come in three forms, each of which calls for a different mindset, as follows:

1.      Optimization. This is the simplest one. There is always some amount of trapped value in your current processes in the form of scrap, rework, latency, and waste. Typically, it can be released through some form of automation. Specifically, robotic process automation (RPA) is gaining a lot of traction in this regard, both at the transactional level with low-code, no-code platforms that let end users automate their own worlds, and at the systems level with intelligent automation leveraging AI and machine learning.

The key with this type of investment is to focus on material gains. It is easy to end up “majoring in minors” because these are safe bets that get no one in trouble. The problem is, they get the enterprise as a whole in trouble because the opportunity cost of not dealing deeper sources of trapped value eventually catches up with you in the form of digital disrupters eating your lunch. That’s what leads to the next form of ROI.

2.      Neutralization. This is the “catch-up” game where the goal it to get to “good enough, fast enough.” A digital disrupter has you in their sights, and you need to get to some kind of parity before your customer base defects. 

The big challenge here is that the trapped value in this case is likely to be deeply integrated into your current operating model and business model. As the incumbent, the status quo is the source of the trapped value, which is how you came to attract the attention of the disrupter in the first place. The digital part of the change is easy to specify. You just need to copy whatever the disrupter is doing as best as you can. The change management part, on the other hand, is a bear because you are moving everybody’s cheese, and nobody is happy about it.

Nonetheless, this is by far the most common source of material ROI from digital transformation, and it is a rare global enterprise that should not be investing heavily here now. But as the foregoing paragraph makes clear, the primary investment is not the digital part—that you can outsource. Instead, it is the reengineering of the operating and business model “in flight.” You want to change the tires while the vehicle is in motion, and as the metaphor makes clear, you are headed for a crash. Instead, you have to take a “pit stop” approach to the race, breaking up the change into executable increments, and then focusing intensely on getting the new processes, roles, people, and technology up and running as fast as possible. 

This challenge provided the impetus behind Zone to Win. We called it playing “zone defense,” and it is the stuff that wins Super Bowls. That said, most spectators come to the game to see the offense, and that leads to the third and final source of material ROI from digital transformation.

3.      Differentiation. This is where you separate yourself from the pack. To do so, you need to be “unmatchable,” at least in the short term. As the amount of venture funding being deployed today indicates, there are plenty of opportunities to do. Indeed, the whole point of a start-up is to do just this. But what about established enterprises? Can they realistically expect to be disrupters?

The answer is, yes, but not the way they are going about it today. The standard playbook in current use calls for funding forays into next-generation digital technology leveraging a skunkworks approach. The problem is, this requires an A-team, and all the A-players are being poached by the venture ecosystem. Barring a handful of exceptions where the CEO is a visionary par excellence and in full control of the enterprise from the board on down, there is no realistic chance of getting to a material change in sustainable competitive differentiation following this path. So, what can you do?

Approach the transformation from the other end. This does require visionary capability, but not with respect to technology, rather with respect to operating models and business models. No one knows your industry and your customers better than you do. You know where the bodies are buried. You know where the trapped value lies. Much of it, to be truthful, lies in your own exploitation of lock-in and inertia, allowing you to extract profits that are not warranted by the value delivered.  That is, in essence, the business model that supports the status quo, and there is nothing wrong with it, as long as a better alternative is unavailable. 

The opportunity to differentiate is to overthrow the status quo. That means you voluntarily dismantle some portion of your current competitive advantage in order to develop a next-generation operating and business model that is materially superior to the current one. This is a big bet, and a scary one, but if it is the right thing to do, customers will lean in to help you, and eventually the ecosystem will capitulate as well, albeit grudgingly, as you are now moving their cheese as well. Nonetheless, you are initiating a J-curve in your financial performance which will alarm all your stakeholders. This was the other driver behind writing Zone to Win. 

To recap, there are three sources of material ROI from digital transformation. Each has a different risk/reward profile. The first does not disrupt your operating model or business model, it simply extracts more returns from them. The second keeps your business model intact but reengineers your operating model as fast as possible. In the short term, your financial performance will take a hit, but you can schedule your “pit stop” approach to modulate the impact. The third is the big bet where you go “all in” on the World Series of Business Poker, a leap of faith which requires everyone to align until the new business model and operating model are working at scale. In all three cases there is a digital transformation involved, but unlike venture-backed start-ups, in none of them does digital lead.