Over the last few years, Digital Transformation has moved to the top of the agenda of virtually every large corporation. The importance of the topic is undisputed, and massive efforts are underway to create strategic and organizational capabilities that enable companies to compete successfully in the digital ball game. The transformational agenda is fundamental, and it touches multiple stakeholders inside and beyond the corporation.

To get a more differentiated understanding of the challenges large and complex organizations face in this context, the Center for the Future of Organization at the Drucker School of Management conducted in-depth interviews with more than 30 top executives from six large global corporations to learn about their views, experiences, and strategic/ organizational responses related to digital transformation.

To get a broad perspective, we talked not only to CEOs and/or heads of digital transformation; we were also interested in key stakeholders such as IT, Marketing, Strategy, Sales, Communication, HR, or Innovation, who naturally view issues through their respective functional lenses. To add to the variety of perspectives, we selected organizations across a broad range of industries, spanning media, automotive, airline, retail, and an engineering conglomerate. All of them are major players in their space, and they employ hundreds of thousands of people across the globe.

Just getting the basics right remains a major obstacle for incumbents a fact that start-ups do not have to deal with

These companies tackle digitalization issues in a multiplicity of ways, designed to suit different divisions, businesses, and functions with different cultural and political contexts, different market dynamics, different stakeholder profiles, and a different readiness to change. Even within one company, some divisions and business units are more advanced in their path to digital maturity, while others lag. Yet, despite this high degree of variety, we found nine common denominators among the multiple challenges our sample companies face, that can be generalized for any organization once it reaches a certain size and complexity.

The Legacy Challenge

Much of the digitalization efforts in large corporations are related to relentless IT integration work, aimed at streamlining internal processes and improving customer experience. Many have spent years and millions of dollars to optimize processes again and again, only to end up in a patchwork of legacy infrastructure that has become a major barrier to change. One CIO, with a touch of exasperation, described how an app they were building to use across the organization needed to integrate with over fifty other IT systems and that ‘if any of those are old, it impacts the functionality of the new app’. Inevitably many of those systems will be old. Just getting the basics right remains a major obstacle for incumbents a fact that start-ups and emerging companies do not have to deal with.

The Resource Allocation Challenge

To better deal with the complexity of the digital transformation challenge, a simple framework can help to provide some logic to the various digital opportunities. Siemens Power Services, for example, allocates its transformation efforts to three distinctive arenas they call ‘buckets’:

• Save money by using digital technology to optimize existing processes, save costs, and improve overall efficiency and effectiveness.

• Make more money using digital technology to enhance the existing product/service portfolio to enhance its value for customers

• Make new money using digital technology to create entirely new revenue opportunities and market spaces, based on novel value propositions that often come with new business models, such as platform strategies.

Three dimensions form a self-reinforcing agile architecture which is instrumental for digital transformation to succeed

The segmentation helps to structure activities and makes it easier to communicate the purpose of change to employees and other stakeholders. It also helps to make the fuzzy and all-encompassing challenge of ‘digital transformation’ more tangible and digestible.

The three ‘buckets’ must be managed as a portfolio of operating models as each of them comes with its own strategic and organizational rationale. While saving money is primarily a matter of organizational efficiency and as such within the traditional domain of the IT department, the frame-bending (make more money) or even frame-breaking (make new money) initiatives are mainly market-driven and require novel collaborative network architectures that enable open innovation and co-creation with stakeholders inside and outside the corporation.

The Agility Challenge

Due to its dual role as a vehicle to create new solutions to business challenges, and as a driver for structural and cultural change, agility has become one of the key buzzwords related to digital transformation. It came as no surprise, that all the executives we spoke to agreed on the importance of overcoming silo culture and inward orientation.

Given the inflationary use of the agility concept, it is useful to distinguish three equally important dimensions of the term:

• Agile mindsets – relating to courage, curiosity, and a collaborative spirit as key elements of individual capabilities.

• Agile teams – relating to aggregating people from various functions in a dedicated team and providing them with a high degree of autonomy, circumventing the traditional organizational structure.

• Agile organization – relating to the way a company structures its collaboration with stakeholders of its business ecosystem. This includes engaging in co-creation efforts, designing open innovation architectures, participating in multi-stakeholder platforms, etc.

It is important to recognize this increasing fuzziness of functional boundaries and ensure an ongoing mutual cross-functional learning process

Together, these three dimensions form a self-reinforcing agile architecture which is instrumental for digital transformation to succeed. Limiting agility efforts to only one dimension won’t work. People with agile mindsets who remain trapped in traditional structures will either fall back into old routines or leave the company to work in more exciting environments. Agile teams that are composed of people without an agile mindset won’t be very effective. If agility does not become organizational in terms of reconfiguring a company’s collaboration patterns with the relevant environment, organizations will remain introverted, missing out on the critical inputs from the marketplace.

The Ambidexterity Challenge

Successful companies usually combine an attractive value proposition with an efficient operating model. Their internal processes and their value chain management have been optimized for many years, to assure consistency and minimize risk and failure.

Embarking on a journey of digital transformation rocks that boat. Business model innovation is a risky endeavor as experimentation, failure, and iteration are at the core of dealing with unchartered waters. It is equally scary to abandon proven organizational processes, truly empower employees, and experiment with new ways of collaboration and customer interaction.

The unavoidable clash of the two paradigms lies at the heart of the ambidexterity challenge, which all established organizations face. They must reconcile the rationale of their existing mainstream operations with emerging business models that potentially threaten their very existence.

To do so requires structural agility; folding innovative hopefuls into the Procrustean bed of existing rules and regulations will quickly destroy their transformative potential, and keeping them separate and on their own makes it impossible to leverage their change energy.

This conundrum cannot be solved with the binary logic of either/or; managing ambidexterity requires accepting and supporting a portfolio of multiple operating models and many different types of micro organizations both inside and outside the corporation.

The Challenge of Working with Start-ups

It is nothing new that large organizations invest in start-ups as one element of their innovation strategy. The challenges of digital transformation have turbo-charged this approach; connecting with the start-up ecosystem has become a mantra for many as they hope to find an antidote for their slow and cumbersome operating models. Traditional corporate venturing is now enriched through innovation hubs, accelerators, shark-tank formats, and more. It is not only about getting early access to innovative products and solutions; companies equally hope that some elements of the much-revered start-up culture are rubbing off and crossing over to infect the traditional corporate culture.

Working with start-ups may expose corporations to hotbeds of new ideas and new ways of working, but their impact on the mainstream organization remains limited and is riddled with structural conflicts as the ambidexterity challenge raises its ugly head. Things work fine, as long as new ventures stay outside the parent organization; the moment corporations try to fold them into the rules and regulations of corporate governance, mutual immune systems kick in and the antibodies of the established organizational routines tend to be much stronger than the virus of the new.

The Connectivity Challenge

The digital context with its need for speed, flexibility, and customer centricity asks for a stronger role of stakeholders that are at the periphery without the cumbersome processes that traditional corporate governance is known for. Platform business models, for example, require new collaborative architectures that reach not only across functional and divisional silos but also connect the stakeholders of the external business ecosystem as a value-creating network, shaking up traditional functional roles and establishing market and stakeholder relationships.

Instead of vertical hierarchical command and control, organizations need to create mechanisms that foster integration through responsible self-governance of peripheral units, guided by overarching principles, and supported by institutionalized tools for horizontal collaboration and exchange. Such tools can be digital platforms, strategic dialogue architectures, dedicated units that serve as brokers between stakeholders, or other interventions that assure connectivity.

When we talk about the challenge of creating new forms of connectivity across silos, we tend to think about emphasizing horizontal collaboration across functional and divisional boundaries, and about engaging in novel networked ways with customers and other external value partners. As important as these two dimensions are, it is equally necessary to rethink the vertical processes that connect the top with the bottom (or, perhaps more fitting, the center with the periphery) of the organization. Top-down (or inside-out) processes are instrumental in creating the overall strategic and organizational context that enables effective ways to engage in and co-shape the business ecosystem. Bottom-up (or outside-in) processes are indispensable for understanding and leveraging customer and other market insights. Designing horizontal connectivity won’t be effective if it is not accompanied by new mechanisms of mutual vertical alignment that transcend the traditional command and control paradigm.

In this context, the creative design and management of organizational boundaries has become an indispensable organizational capability. The logic of the digital economy rewards those who excel in engaging stakeholders across functional verticals, and who can break up traditional value chains by establishing and leveraging the economics of newly configured, networked business ecosystems. The resulting cross-boundary collaboration means embarking on a joint organizational learning journey – a journey which will be only successful if stakeholders on both sides embrace the productive elements of friction that unavoidably happens at boundaries and recognize and fight unproductive friction by unmasking its often irrational and/or political foundation.

The Governance Challenge

When it comes to organizing digital transformation efforts, we noticed a high degree of variety between the companies we investigated; not two of them looked the same. This is not surprising. Much of an organization’s set-up will depend on its maturity stage in the transformation process, the degree of centralization/ decentralization, the diversity of its business portfolio, its size, and global reach, the industry context they are in, the perspective of the CEO and the top team on the issue, the micropolitical dynamics among key stakeholders, the influence of consultancies, and more. In addition, the transformation organization itself tends to be in constant change due to experiences and new intervening events.

Interestingly, none of the companies we talked to has a dedicated ‘Chief Digital Officer’ (CDO), a new C-level position that has gained popularity in recent years as organizations try to coordinate their digital transformation efforts under one roof. CDOs work across the entire company on all the elements of the digital strategy and organization. Specific job profiles will vary from company to company due to specific structural, cultural, and political conditions at the time the role is installed, but they typically cover a wide array of objectives (figure 1).

The list of tasks is multifunctional and covers elements of strategy, communication, operations, IT, HR, innovation/R&D, OD, and marketing, and it adds an important stakeholder to the inner advisory circle of the CEO and the board. As such, the CDO role stretches not only the capabilities of any executive; it implies also structural conflicts with all those functions that traditionally carry the responsibility for the respective domain. This leads us to a more fundamental issue organizations face the erosion of traditional functional roles.

The Functional Identity Challenge

The role description of a typical CDO is a great testament to the genuinely multidisciplinary nature of the digital transformation challenge. In our conversations, we heard again and again that a monofunctional perspective is an impediment to change, and that functional boundaries need not only to become more permeable but also reframe their identity.

CIOs, for example, often lament that business executives lack digital acumen. At the same time, the role of IT is dramatically expanding as it becomes key to value creation in the digital world. In addition to their traditional task of assuring an effective, efficient, and secure hardware and software infrastructure for the organization, IT departments now become key stakeholders in the development of new digital or digitally enhanced products and services, which requires business acumen and engagement with customers. The traditional strategy practice gets equally uprooted, as the routine of strategic planning with its annual cycles gets replaced by an ongoing strategic learning process that requires tireless curiosity, creativity, agility, and just-in-time responsiveness. As industry boundaries blur, strategists must transcend their familiar domain and embrace radical business model innovation that may destroy the core of the old business.

HR, as another key function that traditionally has the responsibility to attract and retain the right talent, shape the culture of the organization, and develop the capabilities of leaders and employees, must put these domains into the new context of digital transformation. Assuring the best talent in the digital age means shifting HR’s mindset from the narrow model of formal employer contracts to a variety of relationship alternatives, that assure that the company gets preferred attention and loyalty from free agents who may never join a large firm. Equally, the design of learning architectures needs to reach beyond the boundaries of the firm and foster learner accountability, the enabling of self-organization, and support the creation and maintenance of networks.

When organizing for transformation, it is important to recognize this increasing fuzziness of functional boundaries and assure an ongoing mutual cross-functional learning process.

The people challenge: re-skilling, talent shortage, mindset issues

Digitalization means also a major shift in the structure of work, as current jobs become obsolete, and new capabilities are required. Companies are forced to find strategies to quickly reconfigure the skill sets of tens of thousands of employees, many of them ‘digital immigrants’ who are up to fifteen years away from retirement.

The speed of change and the massive scope of transformation require a paradigm shift of the learning and development practice, such as shifting the accountability for ongoing qualification to the learner, creating a learner-driven culture, the deployment of large-scale (digital) learning systems that enable self-organized just-in-time learning, reverse mentoring systems and more.

At the same time, competition for the scarce digital top talent in a tight labor market is already fierce and will get fiercer. Experts in software development, data science, artificial intelligence, robotics, and so on are in short supply, and they tend to join rather start-ups or major digital employer brands such as Google, Amazon, or Facebook than the megacorporations of the old economy.

But the most severe people challenge appears to be changing mindsets, which is widely regarded as the major issue in any company’s digital transformation efforts. ‘The way things are done’ is deeply engrained both in people’s neural pathways and the tacit rules that constitute the culture of an organization. The normative power of the factual is tough to transcend, both on an individual and organizational level. It is not easy to take on risk and decision power in a culture that punishes initiative, courage, and unavoidable failure. It is not easy to let go of supplier relationships which were the basis of past success but become obsolete in the new value creation system. Organizations face a difficult conundrum as culture, structure, and mindset form a self-reinforcing vicious circle: Changing mindsets requires a different structural and cultural context, and changing the context requires leaders with a different mindset, who feel comfortable in agile environments. It is important to understand that addressing mindset issues is both a people AND organizational challenge.

Summary and Conclusion

Our executive conversations indicated that there is a good basic understanding of digital transformation challenges as discrete issues. However, trying to map them as an integrated whole creates astonishing complexity. Managing ambidexterity, creating agile strategies, structures, and mindsets, organizing for customer centricity and co-creation, leveraging big data, dealing with massive skill gaps and talent shortage, assuring ubiquitous digital acumen, innovating products, and services, shortening strategic response times, upgrading legacy systems, staying on top of new developments, creating a culture that embraces change, empowering the periphery the list of issues companies need to address concurrently is mind-boggling and overwhelming.

Figure 2 is an attempt to summarize these challenges in one brief table.

In their totality, these challenges constitute a system of highly interdependent variables that all feed on each other. Untangling them is a challenge in itself, and we hope that our analysis helps to structure the arena.

There was consensus that the most promising avenue to cut through the digital knot is to focus on issues of culture and mindset, driven and supported by a collaborative strategic dialogue across traditional functions and hierarchies. Addressing this sweet spot with courage and discipline will unleash a joint process of ongoing strategic and organizational learning - which in itself will quickly become a showcase of how to compete for the digital future.