What is a digital transformation strategy? Everything you need to know

What is digital transformation strategy?

A digital transformation strategy details how an organization will use digital technologies to continuously create new products, services, processes and engagement channels, as well as reengineer existing ones to meet ever-evolving customer needs and market conditions.

Ideally, a digital transformation (DX) strategy articulates what the organization wants to achieve and provides high-level direction as to how digital technologies will be used to reach those objectives. Business process improvement plans and any required shifts in organizational culture should also be included. "It needs to have enough detail so that the organization can understand it," said Joan Smith, managing director and global solutions lead at Protiviti Digital.

The strategy should be customer-centric and driven by the business outcomes that organizational leaders want to achieve. "It's focused on reshaping the organization's long-term competitiveness and the sustainability of the business," said Raja Ranganathan, chief growth officer at Randstad Digital.

A digital transformation strategy is a must-have for organizations today, according to executive advisers and management consultants.

"Everything is underpinned by the need for digitization, and every organization has to articulate how they're digitalizing and how they're evolving their digital state and how they leverage technology to execute on their business strategies," said Debbie Vavangas, a vice president at IBM Consulting and global lead for Garage, IBM's transformation model. "Transformation is pervasive across organizations, and it's constant. As we look forward, this strategy needs to be almost laser-focused on how you drive growth and optimization through technologies like generative AI, cloud and the integration of ecosystems."

Why is a digital transformation strategy important?

At its most basic level, a DX strategy is the use of digital technologies to create or reimagine how customers are served and how work gets done.

A well-thought-out and well-crafted digital transformation strategy ensures an organization correctly identifies what products, services and work need to be created or reimagined to remain competitive. For nonprofits or government agencies, this might mean effectively and efficiently delivering on their missions. For businesses, this typically means being as profitable as possible by boosting revenue, cutting costs and improving market share while meeting other strategic goals, such as sustainability.

Multiple studies and history show the importance of having a good digital transformation strategy. Indeed, an organization's success and often its very survival are at stake. Digital-leading organizations consistently outperform digital laggards, and digital disruptors can shutter legacy entities.

Case in point: In 2023, global consulting firm McKinsey & Company published the results of its study of 20 digital leaders and 20 digital laggards in the retail banking sector between 2018 and 2022. The study found digital leaders outperformed laggards in several financial metrics, including total shareholder returns.

Such figures have spurred executives to action. The "2023 State of Digital Transformation" report from TEKsystems, for example, found that only 17% of surveyed leaders lacked a strategy around digital initiatives. That's an encouraging statistic, as the report authors noted that "simply deploying technology, without a plan, is a recipe for disaster."

Vavangas said a DX strategy explains to everyone in the enterprise where the organization is heading, thereby helping to "bring everyone on the journey" and working toward the collective goals.

A thoughtful DX strategy also focuses the organization's attention, said Kamales Lardi, author of The Human Side of Digital Business Transformation and CEO of Lardi & Partner Consulting. More specifically, it focuses the organization on the most pressing digital initiatives -- those that deliver value toward meeting its enterprise-wide goals.

Lardi said this approach keeps teams from pursuing initiatives that introduce new technologies without understanding how they'll deliver value or implementing transformation projects that only help segments of the enterprise.

"True transformation comes when you look at the whole organization, and you transform the whole organization to be successful," Lardi added.

To illustrate this point, Lardi walked through how an organization should address plans to implement AI to transform customer support services, explaining that a well-crafted strategy recognizes and plans for transforming the back-end systems and processes required to support the new front-end use of AI.

Moreover, experts said a DX strategy assures stakeholders that executives and their teams are addressing ongoing competitive pressures and that they have a plan on how to use technologies to respond to those pressures in ways that are the most beneficial to the organization. In other words, a DX strategy clearly establishes the expectation that the enterprise is committed to and actively planning for change.

"By holding out a separate digital transformation strategy, you're calling it out, and there is a cultural and communication element to that … you've named [it] specifically as critical to the future of your company," said Jeff Wong, global chief innovation officer at professional services firm EY.

Furthermore, articulating DX plans and setting timelines for achievement, which are typical components of a DX strategy, encourage speed of action and create a sense of urgency -- both needed to keep up with today's rapid pace of technology evolution and the innovation it spurs.

"In any organization, it's easy to do what you were doing last year or the year before. [Therefore,] to ensure the organization is heading in a new direction, you have to call it out, which enforces the criticality of it and the speed at which it has to be done," Wong said.

A DX strategy establishes the agility, speed and ultimately the resiliency an organization needs to effectively compete in the 21^st century, where "the world is moving faster and faster," Wong added.

What are the key elements of a digital transformation strategy?

Successful digital transformation requires attention to an organization's technology resources, business processes, outcomes it seeks to achieve, and the products and services it delivers to the market to meet customers' needs and expectations.

As the idea of digital transformation takes off, DX experts have stressed the need to address all those pieces in concert. Addressing one or two areas might create new digital capabilities, more efficient processes and even new products, but it won't deliver the sustained, continuous innovation that meets or even anticipates the changing customer and market requirements that are hallmarks of a successful digital organization.

As such, a strong DX strategy must address how to advance enterprise operations, business models and the technology ecosystem. An ideal digital transformation strategy also addresses how customers and employees use and interact with those three elements.

A robust strategy does that by articulating the organization's current state in all those areas, envisioning the future and detailing the actions needed to move the organization forward.

"You need your objectives and visions, a map to make sure you're heading in the right direction, and the organizational and financial resources that are going to help you get there," said Ramesh Vishwanathan, practice senior director at TEKsystems Global Services.

An effective strategic plan is more than a description of where the organization is and what it wants to achieve, according to Vishwanathan and other DX experts. It contains and requires the following elements:

• C-suite sponsorship. "The CEO has to buy into the strategy," Wong said. "That is core and central for any successful digital transformation."
• A snapshot of the organization's current state. "You need an honest understanding of your business, its strengths and weaknesses, [and] the capabilities where you excel so you can leverage [those areas] where you're already good," Lardi said.
• Adequate funding and a funding mechanism that supports iterative development and innovation processes.
• Data and insights that provide an understanding of what existing, potential and future customers and constituents want from the organization.
• Risk and mitigation strategies.
• A list of priorities and information on how leaders will rank opportunities that arise in the future. "You might come up with 100 good ideas, but you have limited resources -- money, time -- so you're going to want to prioritize," Lardi said.
• The right talent and a plan to get the required skills, whether that's through training existing employees, hiring new ones, engaging partners or a combination of those options. "You need to put your most talented people and change agents in these digital transformation programs," Wong said.
• Plans to alter processes and change management strategies. "To build a new pathway for digital in your company, there are a lot of old habits, systems and processes that have to change," Wong said.
• Strategies to onboard new technologies and accelerate the adoption of new capabilities.
• Metrics to determine and measure success. "They should be laser-focused on the business value," Vavangas said.
• Feedback mechanisms that alert teams when initiatives don't deliver returns or achieve objectives.
• A communication and digital marketing plan to help create demand and excitement for the planned transformations.
• Timelines to initiate actions and achieve objectives, with the DX strategy itself lasting no longer than three years. Wong said some DX strategies provide plans on how to kick off the DX program with something like a plan for the first 100 days of execution.
• Flexibility. "The market and technology will change, so your targets and criteria might need to be adjusted as you move along," Wong said.

How to build a digital transformation strategy

With digital transformation an imperative for organizational success, DX experts stressed the criticality of building a complete and compelling strategy.

They also emphasized the importance of having executive engagement in the planning process and the needed resources -- such as market research and input from strategic partners -- to build a comprehensive plan.

Lardi outlined a four-step process that, at a high level, calls for the following:

1. Analyzing existing trends and the organization's current situation.
2. Identifying where the organization wants to go, which she said requires "disruptive visioning."
3. Plotting how to bring that disruptive vision into reality, laying out what should be done in what time frames to produce specific outcomes.
4. Executing on the plan, with pilots and buildouts.

Vavangas offered similar high-level steps, and added that an effective DX strategy starts with the following:

• Identifying and understanding what value means to the organization. "Know what transformation is going to do for your business," she said.
• Analyzing your platforms, processes and people and what needs to change in each of those areas for the organization to deliver the envisioned value.
• Detailing how to execute on the plans.

How to measure the success of a digital transformation strategy

To ensure an organization delivers value to its customers and can differentiate itself in the market, DX experts advise executives to use business metrics to determine whether their transformation initiatives are successful.

The following measurements can be used to evaluate transformation initiatives:

• Customer experience and engagement measures such as Net Promoter Score (NPS) or other customer-oriented figures, such as response time or customer retention. Ranganathan said these can be used to measure whether transformation efforts have a positive, neutral or negative effect.
• Business KPIs and Objectives and Key Results (OKRs), such as cost of customer acquisition, help keep transformation efforts "very business-outcome focused," Vishwanathan said.
• Revenue, which multiple DX experts cited as a solid measure to determine whether transformation initiatives deliver value.
• Profits, which capture not only whether transformation efforts are boosting the top line but generating efficiencies.
• Innovation -- such as the number of new products rolled out each month -- to determine whether the transformation has "fostered a culture of innovation," Ranganathan said.
• Capabilities -- like the innovation index -- look at the ability of the organization to deliver new functions at an increasing pace, and make faster and more accurate decisions around launching new products and services and entering new markets.
• The speed of change and successful change adoption, which DX authorities said helps measure whether the organization is becoming more capable of ongoing transformation.

Trends for digital transformation

The pressure to transform is not new. Organizations of all types have had to transform their operations, products and services, as well as how they engage with employees, customers and business partners.

However, the pace of change has been ramping up in recent decades thanks to computers, the internet and now digital technologies.

That pace and its continuous nature have made digital transformation distinct from prior eras of change, which gave organizations much more time to evolve, according to management consultants and transformation experts. Those same factors, they noted, are also why an organization should plan digital transformation as its own program.

However, as organizations become more capable of continuous transformation and learn to quickly embrace emerging technologies, some enterprise leaders and DX experts said the digital transformation strategy might be absorbed into the overall enterprise strategy.

"When I think about digital transformation and digital transformation strategy, I agree with the idea that it should simply be part of your overall strategy," Wong said. "It's something that supports the overall strategy, it's not separate from it."