Any digital transformation is heavy with risk, but many can be avoided if understood. There are risks if inexperienced. Some of which could result in full project failure and carry a significant financial impact. I’d like to address specific risks that are most common in digital transformations and provide insight on how to mitigate them.
One of the first and most common risks that organizations face during their digital transformations is the total cost of ownership.
This includes:
All the points above go into digital transformation and ultimately influence the total cost of ownership of any new technology. It sounds simple enough, however, most organizations have trouble managing costs, and typically digital transformation projects exceed their initial budget by a significant amount. The primary challenge that organizations face is how to deploy technology within a predictable total cost of ownership.
The main key to mitigating this risk is having realistic expectations about the price. This is a big blind spot for many organizations because they do not understand all the different costs that go into implementation and end up underestimating the cost.
Also, having strong project governance to tightly manage the resources and budget will be a tactic to managing a budget. Suppose there is an expansion to scope, causing additional modules to be deployed. Any increase in overall spending should lean on governance and firm decision-making.
Being aware of and managing the total cost of ownership is the main failure point within any technology transformation.
The second significant risk that digital transformations face is much more considerable, is the cost and the risk of operational disruption. What happens when at go-live, the product cannot be shipped or cannot place customer orders? Those are momentous issues that can cost organizations a huge amount of money.
Studies found that the cost of operational disruption frequently dwarfs the actual implementation cost. In other words, if an organization implements a solution for $10 million, but experience $20 million in operational risks, this is obviously a very significant increase in project business expenses. Not only that, but it is disruptive to customer satisfaction, employee morale, and the overall operation.
Over 50% of organizations experience some material operational disruption, and the average cost impact to the overall project is an additional 50% to 300% on average. There is a wide range, depending on the severity of the disruption.
This risk mitigation strategy if again, ensures that there is strong project governance that is followed to deploy the technology.
The other fundamental operation disruptions that need to be addressed are any non-technology components of transformation, organizational change management, and business process improvement. Avoiding operational disruption is critical to achieving any successful project and, in order to do so, these risk scenarios need to be planned in advance.
A commonly overlooked and unknown risk with digital transformation is its impact on employee morale and attrition. It is not so much that the technology deployment itself is has a direct impact on employee morale, it is when it becomes a mess or a pain point within the workforce experience. This perception leads to lower confidence in the project and ultimately, the business leadership.
In addition, any disorganization frequently results in attrition and employees leaving the company because the culture becomes stressful and chaotic. Or they do not feel like they have the support to do their jobs.
This brings us back to organizational change management and why it is so essential. OCM processes address these risks and help recognize the potential business benefits that digital changes can bring to the table. These strategies also focus on how to communicate this business value to the entire enterprise.
When planning for a digital transformation, make sure there are workstreams that will help mitigate risks of lower morale. If not addressed appropriately, there will be an increase in attrition or turnover among the staff due to the project. Especially in the current, “Great Resignation” where companies are struggling to find quality employees in general.
Another commonly overlooked risk of digital transformations is a loss of competitive advantage. Most organizations go into the digital transformations expecting that the new technology, process changes, and recent organizational changes will deliver new capabilities that make them more competitive.
This may be true, however, if the competitive advantage is unique, it’s unlikely to find commercial off-the-shelf software that can support these one-of-kind processes. The question then becomes, what can the company do about it? Knowing that there is a potential of watering down that competitive advantage, does there need to be changed in the business to fit the software?
The other possibility here is to find a third-party bolt-on system that better addresses the needs of that competitive advantage. In which case, now there is an increase in the risk of integration and data consistency.
The goal is that any competitive advantage needs to be preserved, but deciding on how to best achieve this protection needs to be considered in the planning processes in order to ensure alignment and project success.
The final risk I will cover is the lack of return on investment during a digital transformation. Now, ROI is a big bucket that can include many different things, depending on the organization and strategic goals. It could be everything from inventory reductions, improved efficiency, increased revenue, customer experience, employee experience, and so on. All these initiatives can be translated into specific, intangible metrics used to measure the actual results of the transformation.
The problem is most organizations either do not define what those metrics are or fail to realize those metrics. One of the most significant risks that organizations face is the concept of benefits realization. Companies need to set clear expectations and attach metrics to workstreams that can be tracked.
There are several different videos on my YouTube channel that address this exact topic of how to get more value out of digital transformation.
I hope this has helped put things into perspective when it comes to digital transformation pitfalls that every organization goes through. As more failures begin to arise, I encourage you to look into downloading our 2021 Annual Digital Transformation Report which provides best practices for how to deploy technology and also a more extensive list of ERP, CRM, and HCM systems. This could be the exact resource needed to avoid potential failure in the future.
If you have questions regarding potential failure points specifically or any additions/feedback, please don’t hesitate to reach out to me directly. I am happy to be an informal sounding board as you move through your digital transformation journey.
