Guide to Digital Transformation. Define, Price, and Plan a Digital Transformation (Part 1)

The digital economy, an economy that functions primarily by means of digital technology, has defied the brick-and-mortar economy of the past century, and will continue to shape how products and services are generated and consumed for the foreseeable future, if not forever.

According to a 2017 CEB research paper titled “The New IT Operating Model for Digital”, “two-thirds of business leaders believe their companies will lose competitiveness if they don’t become significantly more digitized. The pace and volatility of digitization opportunities makes it more difficult for IT leaders to help their companies exploit emerging digital opportunities”. Consequently, organizations understand that their survival depends on their ability to adapt to this new economic model. They must go digital.

There is an abundance of literature addressing why organizations must become digital. However, information regarding the meaning of going digital and how to achieve this digital state is usually elusive. 

In addition, the number of articles that list the reasons behind digital transformation failures is almost inexhaustible, as shown in Box 1.  Yet, few offer an actionable and comprehensive approach to help organizations plan and execute their digital strategy more effectively.

This article attempts to not only remedy this gap, but also provide some clarity regarding the meaning of digital transformation. It does so by introducing a unique framework, labeled the Digital Transformation Framework (DTF), to help organizations understand the meaning of digital transformations, while suggesting possible courses of action to make digitization a reality.

The following section defines the term “digital” in order to delineate the boundaries of the Digital Transformation Framework. Next, the third section introduces the framework itself, and how companies can use it to model and price their digital transformations. The fourth section explains in details the building blocks that make up the Digital Transformation Framework, and their inter-dependencies with the financial and risk disciplines. The fifth section showcases the DFT in action and articulates how a financial services organization could apply this frame of reference to reinvent the middle office business capability for the digital era. Every business transformation requires a culture shift, and by embracing the digital era, companies must understand the importance of adjusting their culture accordingly. So, the sixth and final section provides some perspective on how failure to do so may affect the outcome of a digital transformation.

Stated succinctly, the objective of this article is to offer a simple framework and methodology to easily create, price, compare and ultimately validate which digital strategy an organization should pursue.

It is important to note that some implementation details have been purposefully omitted for conciseness.

Defining Digital

The online version of the Merriam-Webster dictionary offers seven definitions for the term “digital”, but two are particularly relevant to the context of this article. The first describes the term “digital” as “of, relating to, or being data in the form of especially binary digits”, such as the compilation of a software program into binary code. The second signifies an action “done with a finger”, such as interacting with mobile devices, as visually depicted in Figure 1.

Figure 1: Limited definition of the term digital
 

These two definitions offer a good starting point for defining the term “digital”, but in order to be applicable to the current business world, additional dimensions must be taken into account. For instance, these definitions do not specifically call out the notion of customer experience, when they probably should. Automation and cybersecurity are also important facets in this new hyperconnected era, and they are absent from these definitions. Finally, with social platforms becoming less novel and more intuitive, they have become ingrained in their users’ lives to the point of becoming an extension of themselves. As illustrated in Figure 2, the term “digital” is difficult to define, as it encompasses many interdependent ideas that suggest a new way to reach and securely transact with clients.

Figure 2: Expanded definition of the term digital

The number of concepts associated with the term “digital” may leave many organizations wondering how to apprehend a digital transformation to meet the demands of the new economic model. Their interconnectedness may even muddy the articulation of a digital strategy that must increasingly take into consideration economic value, risk and return on capital invested. Often, in the rush to become digital and stay on par with the competition, many companies neglect to fully comprehend what it means to go digital.

To help this select group of organizations, the next section introduces the Digital Transformation Framework, a frame of reference to assist businesses in articulating, modeling and pricing digital strategies. Its integration to an Enterprise Architecture framework is then highlighted as a means to reify digital transformations, and in particular through the elaboration of business and technology blueprints.

However, going digital is not the same as being digital.

In the context of this article, and as depicted in Figure 3, going digital refers to the identification and sequencing of a set of activities to achieve a targeted digital state.  Becoming digital alludes to the execution of these planned course of actions to reach a predetermined future digital shape.  Being digital represents a state of connectivity via numerical methods and devices.  This interconnectedness is coupled with distinct measurable characteristics that reflect a distinct state of an organization’s business and technology architectures.

Figure 3:  Digital stages
 

Therefore, being digital may be less about the newness of technologies used by an organization, and more about its level of connectivity to other firms, and its ability to leverage business and technology capabilities offered by external parties to further advance stated business goals faster, better and cheaper.  This connectedness is inspired by both the UML Composition and Aggregation relationships, and is closely related to the concept of the “composable” enterprise.  Consequently, understanding the desired level of business and technology composition an organization would like to achieve is key to planning, mapping and communicating the business intent of a digital transformation, as shown in Figure 4.

Figure 4:  Digital stages in action

Introducing the Digital Transformation Framework

Building on the expanded definition of the term “digital”, we introduce in figure 5 the Digital Transformation Framework (DTF), a frame of reference to guide digital transformations. At a high level, the (DTF) has one foundation layer and three pillars.

Starting from the bottom, the framework has its base rooted in cybersecurity, a critical dimension, given  the degree to which the digital world and its underlying economy is consistently under attack. Moving to the top left corner of Figure 5, the first pillar of the frame of reference is defined. It is labeled “Digital theme”, and proposes six key categories to logically organize the levers that organizations can pull to become digital. The second pillar, labeled “Customer Orientation”, suggests that clients, whether internal or externally facing an enterprise, are at the heart of any digital transformation. Finally, the last pillar, labeled “Competency Level”, indicates the level of excellence and efficiency an organization would like to achieve, for a given digital theme, as a possible way to distinguish itself from its competitors. The Competency Level pillar offers three possible distinct values: “Competitive”, “Industry” and “Minimum”, as shown in the diagram below.

Figure 5: The digital transformation framework

A “Competitive” value indicates that an enterprise has strategically decided to invest resources and capital into one or more digital themes to differentiate itself from its direct competition in the hope of generating superior economic performance and brand advantages. An “Industry” value signals that the organization has decided to invest into digital themes to only match its peers’ digital strategy, and the broader business segment it competes in. The “Minimum” value suggests that the firm does not consider any of the digital themes to provide any strategic advantage based on its current business model, and therefore has decided to invest to levels below amounts spent by its competitors or the industry in general.

Hopefully, this brief description of the framework has already highlighted the fact that becoming digital starts as a strategic initiative that must be linked to a business strategy to foster both business and economic value. The next section positions the DTF within an organization’s strategic planning process.

The Digital Transformation Framework has a well-defined place in an organization’s strategic planning process. It is a tool that bridges business, corporate finance, and technology to model with minimal ambiguity the possible digital transformation paths. It also helps price these transformation initiatives, and assess their contribution toward economic value-creation based on their inherent level of risk, as illustrated in Figure 6.

An enterprise’s business strategy and its digital elements are structured according the Object Management Group (OMG) Business Motivation Model. Once digital-oriented goals and objectives are defined, they are iteratively mapped against the DTF’s levers to articulate possible digital transformation options, which are subsequently organized into a collection of potential strategic and tactical initiatives.

This portfolio of tentative digital initiatives is subsequently analyzed against two metrics, the Economic Value Added (EVA) and the Risk-Adjusted Return on Capital (RAROC), to estimate the economic foundation of each proposed project, and validate their funding via a recognized capital budgeting mechanism. It is important to note that other risk and financial performance metrics may be used to supplement this analysis.

Figure 6: Place of the DTF in the context of strategic planning

The final set of digital-oriented projects constitutes a firm’s digital strategy for a given fiscal year. EVA and RAROC provide financial performance benchmarks that an organization could use to measure the economic effectiveness of its digital transformation strategy. Next, the DTF is exercised through an example to coalesce these different topics.

The digital frame of reference is simple to use, and should help organizations map the reasons (why) and the possible means (how) to prepare their transition to the digital economy. From a strategic perspective, the intersection of a “digital theme”, a “customer orientation” and a “competency level” is an expression of an enterprise’s digital strategy. For instance, Figure 7 shows how an organization can leverage the DTF to formulate two different digital strategies.

Looking at Figure 7, The first strategy is centered on strengthening automation to a level that is above the industry or segment the firm competes in, and for services that it offers to external customers. The company also intends to provide its external clients with a user experience that is on par with its direct competitors. As a result, the digital strategy can be summed up as delivering fully automated services to external-facing clients as brand and business differentiators, by providing a user experience that meets industry standards or norms, and for delivery channels that are characterized by electronic and computerized technology.

The second digital strategy considers investing in cloud Computing, but at a level that is below the industry’s level, and for its internal customers. A decision associated with the establishment of a minimum viable cloud as an exploratory step to refactor existing systems or develop new ones to natively run in a cloud environment in order to possibly rationalize an over bloated portfolio of applications and reduce cost. The strategy also calls for an increase in the organization’s social media presence to directly match the competition, and boost awareness of the firm’s brand, products and services.

Figure 7: The digital transformation framework in action

Two different digital strategies have been modeled with the Digital Transformation Framework. Each digital strategy is likely to involve dissimilar business and technology elements for its realization. The next phase connects the DTF with an Enterprise Architecture framework to identify what these elements might be.

Once the digital strategy has been mapped with the Digital Transformation Framework, it can then be translated into business and technology blueprints to not only understand its impact across the enterprise, but also to plan and estimate the cost of the transformation.

Figure 8 depicts a logical set of possible business and technology blueprints based on the first digital strategy presented in the earlier paragraph. Bringing the User Experience to industry standards may translate into re-designing the presentation layer of both an external web site and a mobile application. As a result, a couple of external business services may also be impacted.

Similarly, the automation aspect of the digital strategy may translate into the digitization of three business processes, the introduction of an API Gateway, the modification of a number of data repositories, and the introduction of new services, as indicated by the green squares.

Finally, both the Infrastructure and the Network layers are adjusted accordingly to support the business and technology stack above them.

Figure 8: Sample Business & Technology Blueprints

The DTF can also help model a multi-year digital strategy, as shown in Figure 9. A subsequent road map can be easily developed by mapping the multi-year digital plan to an Enterprise Architecture reference model, as explained in the prior paragraph. The blocks that define the digital path across the years collectively create a firm’s portfolio of digital initiatives. These blocks are explained in details on subsequent pages.

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Figure 9: multi-year digital strategy model with the DTF

The ability to price such a digital strategy is introduced next, as it is a critical aspect to planning a digital transformation.

The traceability between the Digital Transformation Framework and the subsequent blueprints is key to cost estimate the implementation of a digital strategy, as logically illustrated in Figure 10. Pricing transformation paths is paramount because it can help organizations increase the quality of strategic and operational decisions being made. Indeed, when used in conjunction with the Risk-Adjusted Return on Capital (RAROC) approach, investment decisions can be assessed in the context of economic creation for an anticipated level of risk that is associated with a specific target state, and implemented through one or several transformation initiatives.

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Figure 10: Pricing of a digital transformation

Going back to the digital strategy examples introduced in Figure 7, this technique allows an organization to price both digital evolutions and select the one that expresses the firm’s strategic intent the best, given internal and external factors.

For instance, the first digital strategy focused on the User Experience and Automation dimensions. This combination anticipates the delivery of superior execution and improved operational efficiency, resulting in possible increases in operating margins for a given transformation cost and risk level. The economic aspect of digital transformation along with its interdependency with risk and financial performance is further addressed throughout the document and in the Building Blocks of the Digital Transformation Framework section in particular.

Like the TOGAF framework, the Digital Transformation Framework is more descriptive or progressive and less prescriptive, so that it can be adapted to most business domains. However, a more precise description of the six digital themes that make up the framework is needed, as they represent actionable levers organizations can pull to become more digital.

The International Organization for Standardization (ISO) defines User Experience as “a person’s perceptions and responses resulting from the use and/or anticipated use of a product, system or service”. In other words, the User Experience theme encompasses all aspects of an end-user’s interaction with services or products offered by an organization. From a digital perspective, interactions between end users and services (business or technology) are often performed with mobile devices or Web sites, among other tools. This theme is linked to the Customer Orientation pillar to further qualify whether an end-user’s interaction is with internal or external services or products.

The Automation theme encompasses the conversion of manual human activities and certain physical resources, such as documents, text, or pictures, into a digital form that can be processed by a computer. Automation includes the digitization of both business and technical processes, as well as the introduction of any technology element to perform automatic operations, whether by computers or robots.

The Cryptography theme refers to the computerized encoding and decoding of data, and is connected to both the Automation and Cloud Computing themes. This ability to secure information has been around for centuries, techniques and applicability have just evolved with business and technological advances. This document consciously considers blockchain and cryptocurrencies as reifications of the broader cryptography capability.

The Cloud Computing theme refers to the on-demand delivery of computing resources or services over the Internet, and specifically, servers, computing power, storage, databases, networking, software, and analytics to name a few.

A definition for the Internet of Things (IoT) is still fluid because this theme usually reflects different perspectives. However, Gartner offers the following description, which is leveraged in this article: “the network of physical objects that contain embedded technology to communicate and sense or interact with their internal states or the external environment”. Like the Cryptography theme, IoT is also connected to both Automation and possibly Cloud Computing. However, in addition to its technological implications, this theme has also social repercussions. As a result, a conscious decision was made to make this theme a first-class item. The Social Media theme refers to all “forms of electronic communication (e.g.: “websites for social networking and microblogging) through which users create online communities to share information, ideas, personal messages, and other content.”

It is important to recognize that the proposed entries for the Digital Theme pillar are likely to evolve, as today’s hot digital topics may not be those of tomorrow.  The frame of reference has the capacity to evolve by customizing and extending certain aspects of the framework.  Custom entries such as Artificial Intelligence or Machine Learning can be supplied to the Digital Theme pillar, while new dimensions can be added from multiple viewpoints to withstand the test of time.

The Digital Transformation Framework can be further refined with matching examples under each Digital Theme, as shown in Figure 11. Finally, Technology is another dimension of the framework that is implicit to all the digital themes, as it cuts across them all. The level of maturity and novelty of the technology dimension must be taken into consideration when crafting a digital strategy because innovative and reliable technologies usually introduce an asymmetric level of operational risk.

Figure 11: Digital Transformation Framework

The next section introduces the concept of digital building blocks to assist organizations in analyzing the impacts and identity reusable patterns to accelerate their digital transformation while assessing and managing costs.

Building Blocks of the Digital Transformation Framework

Once an organization has mapped its digital strategy with the Digital Transformation Framework, the next step involves an analysis of each of the building blocks or “bricks” that have been identified. Continuing with one of the Digital Transformation examples from the prior section, two digital transformation bricks would need to be further explored. The first one represents the intersection between the Automation, Competitive Competency Level and External Customer Orientation pillars. The second digital brick is the intersection of User Experience, Industry Competency Level and External Customer Orientation, as illustrated in Figure 12.

Figure 12: Digital transformation building blocks - examples
 

Digital Transformation bricks constitute the core of the digital frame of reference, and are therefore introduced in more details to comprehend their use. Conceptually, the Digital Transformation Framework is composed of  bricks that represent the intersection of its three pillars and foundation layer, which were defined earlier. Also, each brick is further shaped by three additional characteristics: Functionality, Economic Value and Risk Management & Controls, as depicted in Figure 13. These three new facets are further explained to complete the overview of a digital transformation brick.

Figure 13: Digital transformation brick

The Functionality attribute refers to the set of business functions (what) selected for digital transformation. This attribute is closely linked to the Digital Theme characteristic, which indicates the mode, or how these business functions will evolve to perform more digitally.

The Economic Value attribute captures the potential for business value creation. This dimension is critical for understanding the economic consequences associated with any transformation. As mentioned earlier, any alteration or evolution of an operating model must be economically sensible to be viable and long lasting. This attribute can either measure quantifiable performance management ratios such as the risk-adjusted return on capital, or intangible ones such as the strengthening or possible erosion of a company’s brand.

The Risk Management & Controls attribute refers to the amount of risk associated with the planned digital transformation along with the ability to embed controls in the future operating models to monitor and mitigate risk. In the context of this document, risk is defined as a potential variation from expected outcomes, and may include any of operational, business, strategic, and/or reputational risk. It is important to notice that with any transformation, some types of risk may increase while others may decrease. It is critical to understanding the risk diffusion linked with a particular digital transformation, and whether controls can be unobtrusively inserted. For instance, an organization should be able to understand whether a specific digital transformation path, modeled by a digital transformation brick, will affect its operational risk profile, as depicted in Figure 14. Will the selected digital evolution path allow a business to continue operating within its Expected Loss tranche, or will it push the organization into the Unexpected Loss one? And if so, by how much? These are relevant discussion points to have before embarking on any transformation, especially a digital one.

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Figure 14: Understanding the impact of a digital transformation brick on future operational risk

Decisions may become challenging when a digital transformation path may generate economic value while pushing a firm to a greater likelihood of hitting its Unexpected Loss threshold from an operations perspective.

This scenario may be particularly relevant for companies at the forefront of innovation based on the law of diffusion of innovation, which is visualized in Figure 15.

Figure 15

A digital brick offers a mechanism to model and communicate the digital blueprint of an organization’s strategic intent. For instance, let’s consider an insurance carrier with the following strategic intent: “As a provider of insurance services, we want to expose our claim processing metrics to third party vendors that want to rank insurance organizations in order to guide external customers in selecting an insurance provider. By doing so, we directly expose our brand and share our performance in handling claims. We also indirectly compete against our challengers. We want to provide these data points in a controlled and secure environment to prevent unwanted and unauthorized access to our data. We also want to do so in a way that is cost effective from a development, maintenance and operating cost.”

Figure 16 shows how a digital brick could be quickly developed by mapping a firm’s strategic intent. Since digital bricks are atomic building blocks, an enterprise-wide digital strategy could be conceived from the ground up by developing multiple digital bricks. Indeed, similarly to user stories, a set of strategic intents could be developed and subsequently modeled into digital transformation bricks. The subsequent collection of digital blocks is rationalized and aggregated to formulate an organization’s digital strategy.

Figure 16: Mapping of a strategic business intent to a digital transformation brick

Furthermore, digital transformation bricks can be analyzed individually or collectively depending on the scope of the transformation. They can also be used by companies with a global presence to compare and contrast digital strategies formulated by each region. However, their most important aspect is their functional size.

Because of their functional focus and size, digital bricks may be more actionable than the digital strategy itself, enabling organizations to easily manipulate them to truly understand the impacts of a digital transformation on their business and system landscapes. For instance, one of the digital transformation bricks identified in the prior example is subsequently translated and modeled into an architecture view to identify business and technology elements that will be affected by the proposed evolution. Once completed, an implementation cost for a digital transformation brick can be assessed, as illustrated in Figure 17.

Figure 17: Architectural translation & effort analysis associated with a digital transformation brick

Conceptually, digital transformation bricks are inherently connected to TOGAF Architecture Building Blocks (ABBs) and Solution Building Blocks (SBBs), whether existing or new, as illustrated in Figure 18; a key point to document and communicate a digital transformation strategy to architecture and development teams.

Figure 18

More importantly, this connection allows firms to think about their transformation in terms of business and technology patterns, which enable repeatability, an important dimension of any maturity model. Consequently, digital transformation blocks may improve, by transitivity, an organization’s digital transformation maturity.

Through Solution Building Blocks (SBB), transformation bricks can be mapped to a normative technology stack to determine implementation patterns, as illustrated in Figure 19. This allows enterprises to identify and document reusable logical and implementation solutions to accelerate transformation initiatives.

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Figure 19: digital transformation brick & implementation patterns Identification.

This is an important concept, especially for companies with an international footprint, as transformation patterns can be reused to implement similar changes across multiple locations, bringing an element of industrialization to transformations.

It is also important to note that the Digital Transformation Framework integrates well with the Scaled Agile Framework (SAFe). Bricks become strategic inputs to the Portfolio layer of the software engineering methodology, as illustrated in Figure 21.

Figure 21: Integration of the digital transformation framework with SAFe

“The SAFe Portfolio is the highest level of concern in the methodology. It provides the basic constructs for organizing the Lean-Agile Enterprise around the flow of value via one or more Value Streams, each of which develop the systems and Solutions necessary to meet the strategic intent. The Portfolio level encapsulates these elements and also provides the basic budgeting and other governance mechanisms that are necessary to assure that the investment in the value streams provides the returns necessary for the enterprise to meet its strategic objectives.” Please refer to the Scaled Agile Web site under “Portfolio Level Abstract” for further information.

Part 1 Synopsis

Every business transformation is difficult to model and execute.  However, digital transformations appear harder to conceive and deliver because the technology characteristic associated with business alterations tends to muddy the affair.  The article first provided a collection of links to substantiate the challenging nature of digital transformations.  A formal definition of the term “digital” was then introduced to help delineate the boundaries connected with digital evolutions.  These boundaries, in turn, helped in distinguishing three possible digital states that organizations can use to anchor themselves to better align their efforts against transformation objectives.

A frame of reference labeled the Digital Transformation Framework (DTF) was subsequently presented to assist with the modeling of digital strategies.  Once defined, the article offered an approach to leverage the Enterprise Architecture discipline to price and plan these digital transformation paths.  Lastly, the concept of a digital building block was introduced.  The article explained how they form the essence of the Digital Transformation Framework, and how they can be leveraged to define a digital strategy from the ground up.

The next installment of this article will showcase how to use the Digital Transformation Framework (DTF) to digitally transform the Middle Office function of a financial services organization, so that its application can be further comprehended.  An imaginable target state architecture is then formulated to realize the digital strategy selected with the help of the DTF.  The concept of “the composable enterprise”, which is central to being a digital organization, will also be further explained and tied to the proposed future target architecture.

It is superficially easy to understand the importance of human resources to successfully execute a traditional, or non-digital, corporate restructuring.  However, digital transformations are different because their essence is to enable frequent and constant change.  Indeed, one of the main business motivations to digitally transform is to put organizational, operational and technological foundations in place to foster constant evolution and cross-functional collaboration.  In other words, companies are purposefully organizing themselves to be able to execute any transformation at any time in order to stay competitive and relevant in the future.  As a result, the article will briefly address the importance of altering a firm’s culture to successfully enable a digital change.  Finally, a few closing thoughts will be articulated to, I trust, successfully guide your own digital journey.

About the Author

Philippe Assouline is a seasoned expert in enterprise architecture, specializing in engineering economic performance, operational efficiency, and enterprise competitiveness by conjoining the risk management, cybersecurity and enterprise architecture disciplines.