As digital transformation matures, the ultimate prize for organizations is coming into view: increased agency.
Digital transformation has been high on the leadership agenda since 2011. Globally, companies are forecast to spend more than $3.4 trillion on digital transformation by 2026. These investments are on top of pandemic-accelerated investments. The cumulative effect is that many organizations are more advanced in their technology than in their business strategies or practices. This raises a crucial question: what are the leadership strategies for a digitally transformed business?
Customer centricity and digital technology
Customer centricity is synonymous with digital technology. The two fit each other perfectly: digital technologies enable deeper and more direct human interaction, and customer satisfaction is a driver of revenue. Customer centricity is a sound strategy when customers and companies benefit – yet this is not always the case in digital markets.
In different digital markets, digital solutions have created more customer value and utility than companies can recoup in revenue or margin. A 2017 McKinsey study projected that digital’s impact, creating new entrants and greater competition, would cause average revenues to decline by 12%, with earnings declining 10% (McKinsey, ‘The Digital Effect’, 2017). By 2025, an estimated 90% of the Fortune 500 will become digital providers, according to the 2023 Global Interconnection Index produced by Equinix. Take three examples from different industries. In automobile insurance, data and digital solutions identify lower-risk drivers and charge them less. In the hospitality industry, holiday rental services have disrupted more than a quarter of the long-stay market. In media, account sharing for streaming services creates customer value while challenging company revenue.
Leaders can easily face a win/lose digital proposition. Customers win as companies meet their expectations; companies lose, unable to monetize that value. This appears to be the case in a 2022 survey of more than 1,300 companies, which reported that average-performing companies only achieved a median average of 31% of their revenue goals from digital transformation and 25% of their cost goals. The top digital performers in the study fared better, but still realized only 50% of revenue and 40% of cost goals (McKinsey, ‘Three new mandates for capturing a digital transformation’s full value’, 2022). The graphic below illustrates these performance differences.
Leaders need to create new digital models and strategies that capture revenue, rather than raising the effectiveness of digital transformation projects. That starts with understanding the technical capabilities created by digital transformation.
The capabilities of a digitally transformed organization
Digital transformation involves systems and technologies that change an organization’s capabilities and competitiveness. Technically, a digitally transformed company has modernized API-based applications, highly available and consistent data, flexible infrastructures, greater insight, and new levels of operational automation.
The table below highlights changes in the pre-digital, digital transformation and potential post-digital world.
As a firm digitally transforms, leaders gain the ability to know more, know faster and act at speed and scale in ways they could not in the past. It is not enough to use these capabilities to implement traditional strategy, planning and execution processes better, faster or cheaper. Leaders need to evolve the way they think about their business to achieve the best pairing with the capabilities of a digitally transformed company.
Increasing agency to leverage digital transformation
Leaders have choices in how they see and run the business. They can continue current themes related to customer centricity and utility. They could become hyper-adaptive, agile and responsive to market changes. But these options do not resolve issues related to recapturing value, creating advantage and innovating business models. Addressing these issues requires that leaders increase their organization’s agency.
Agency is the degree to which you can control your actions and their consequences. Leaders have always had the ability to act, but in a fast paced, customer centric, highly competitive world, companies can easily become change takers, rather than change makers. Deciding which you will be is the first decision for post digital transformation leadership.
A change taker responds to and follows a trend. Companies with strategies that call for becoming the Amazon or Google of their industry are change takers, not change makers. Current customer centricity and experience strategies often lead to change-taking strategies. Change takers tend to give away utility in the face of customer expectations and competition. This places them on the back foot with customers and competitors.
Change makers have greater agency. They are more likely to incorporate their interests into strategies and set trends rather than follow them. Agency can apply internally, like Microsoft’s transformation to a cloud player, or externally, like Pfizer’s development of the Covid-19 vaccine. (Elon Musk and Twitter offer an example of agency run amok.) Firms with agency seem to ‘break the rules’ as much as they set new rules balancing customer, competitive, societal and company interests.
Agency in execution
Agency is not the antithesis of customer centricity. It is centricity with direction. Apple has been a leader in this strategy, building products and services that customers do not ask for, but which create value for both. It is an example of a customer strategy based on advancing a direction for what you want customers to become, as Michael Schrage has put it.
Leaders’ need for agency increases as the purpose of a company broadens from shareholder to social responsibility. Effective strategies for realizing ESG, diversity, equity and inclusion, and other social goals requires taking deliberate actions. Worthington Industries, for instance, is a $2.1 billion manufacturing company that has exercised agency by incorporating internal and product innovations that go beyond meeting external standards and scores. Greater agency also gives leaders the power to break long-held practices. Accenture, the global consulting company, is one of several firms removing their college education requirement. Dropping such practices and requirements demonstrates agency.
Some simple questions can help test your company’s agency. Select a few decisions or strategies and ask yourself the following questions:
- Why was this an issue?
- What were our options?
- Were we being proactive, or reactively following the market in our action?
- Did these options advance our capacity to create value for customers, ourselves, or both?
The answers will tell you much about your current agency.
Agency accelerates digital transformation
Exercising greater agency is an important aspect of realizing value from digital transformation.
The rate at which digital transformation fails to meet its original objectives ranges from 70% to 95%, according to a recent HBR article (Didier Bonnet, ‘3 Stages of a Successful Digital Transformation’, 2022).
As Kate Smaje has highlighted on the McKinsey Podcast, there is a common challenge associated with digital transformation. “What you typically see 12 months, 18 months, or two years into many transformations is this notion of, ‘I don’t feel I’m getting as much as I should be.’ The root cause of that is often a lack of alignment on where and how that value is going to be created.”
Actions for building greater agency
Leaders know that they need greater control of their direction and value creation in the face of continued digital commoditization, customer experience and accelerating competition. They build agency by leveraging the capabilities of post digital technology and leading the organization based on four key areas.
1 Knowing where they stand in terms of customers, competitors, and markets New combinations of external, internal and AI generated insight give them a perspective that goes beyond financial statements and budgets.
2 Having an ambition or direction This replaces mission and vision, which is often too high-level to drive operational choices. An ambition defines what the organization seeks to be in the future. Setting and communicating an ambition invites contributions and engagement.
3 Setting and updating the course of action at their own pace, based on the situation and ambition Composable and service-based applications facilitate constant changes and updates to realign and achieve the ambition.
4 Capturing a greater share of the customer value you create with experiences, products or services that create uniqueness through their insight and contextualization Advances in generative AI (such as ChatGPT), automation technologies and experience technologies (augmented reality, virtual reality or the metaverse) need to create unique value, not just follow the leader.
Increasing company agency
Leaders have rightly welcomed the tools and abilities associated with digital. Knowing more with greater insight, coupled with the agility to act, removes many of the barriers and blind spots limiting performance and value creation. The leadership challenge is how to use these tools to their best effect. Leaders can use these capabilities to create a better version of their company without an evolution in their strategy, doubling down on change-taking approaches to customer centricity and internal efficiency. These leaders can expect to compete in markets characterized by increased pressures from new entrants, rising customer expectations and margin pressures.
Alternatively, leaders who recognize that greater value comes from meaningful differentiation will use technology to increase their agency. These leaders use their heightened insight, flexibility and cost structures to act in ways that benefit customers, society and the company. Russell Reynolds estimates that 36% of leaders have these characteristics – a group they call Tech-First CEOs. The abilities attributed to such leaders stand as a description of what it takes to lead with agency.
The time to decide is soon
Digital transformation is nearing maturity, with mixed results. At the same time, the limits of existing growth strategies are becoming apparent. The relationship between companies and their customers, their technology and their future, is being rebuilt. Will that relationship rest on responding to change, or on creating the agency to set and realize a distinctive direction? It is time for leaders to decide.
Mark McDonald is distinguished vice president and fellow at Gartner Research, and author of several books on digital technology and business transformation. The opinions expressed in this article do not represent Gartner Research or its research positions.