Digital transformation governance: What boards must know

  • Digital transformation has quickly become an issue of organisational survival.
  • The technology components of digital transformation need appropriate oversight to ensure they are all aligned with the strategy of the organisation.
  • The first step in the digital transformation journey starts with a readiness assessment

The COVID-19 pandemic surely dispelled all doubt any organisation ever had about the urgency for digital transformation. No longer is digital transformation merely some new marketing hype from the tech industry hungry for new sources of income. Instead, digital transformation has almost overnight become an issue of organisational survival, with clear implications for the board.

Unfortunately, this realisation has come far too late for many. Some organisations closed their doors for the very last time during the pandemic-induced lockdown because they were unable to sustain operations as analogue-only or even as marginally digital businesses. On the other hand, e-commerce hubs, virtual organisations, telcos, medical supplies or live video streaming companies are among the few organisations to have benefited from the situation, with their focus, in contrast, becoming one of ensuring reliability at greater scale.

As recently as 2018, research found that boards were inadequately equipped for digital transformation oversight1. Some of the concern was low technological maturity, but another concern is a low understanding of how digital technologies can create incremental value for an organisation, even entirely new digital revenue streams as some previously analogue-only restaurants have found. 

This article aims to paint a picture of the digital transformation imperative through a governance lens, and from there, to outline what the modern board can do in its quest to provide the relevant oversight of the transformation.   

What is digital transformation?

Digital transformation is not only about the technology. Sure, technology is involved, but it is only a part of what digital transformation is about. Instead, digital transformation is more a paradigm than a technology, and one that could just as equally have been called business transformation, except that the pandemic taught us that it is indeed the digital in digital transformation that is the driver of the transformation.

Ultimately, digital transformation involves understanding how digital technology — as a component of the organisation’s operating model — facilitates the organisation’s business model in such a way that it results in an enhanced customer experience that in turn positively impacts the organisation’s relevance and sustainability.

In other words, if a supposed digital transformation has not created a positive impact for the customer and consequently a benefit for the organisation, then it is just another technology deployment that has incurred operating and capital costs but with no customer benefit. With due consideration for cost, risk and incremental revenue streams, the ultimate test of digital transformation success is how it is seen through the customer's eyes, as measured by the extent to which adjectives like ‘easier’, ‘quicker’, ‘more integrated’, or ‘more convenient’ are used by the customer after the intervention. 

Emerging governance requirements of digital transformation

The governance implications of digital transformation, therefore, span the entire organisation. The span not only includes regular business governance, such as whether strategic targets are being met and ensuring legislative compliance, it includes a portfolio of IT governance, innovation governance and data governance requirements — three domains that the modern board is generally not well equipped to oversee.

IT governance

A key challenge concerns ensuring that there is a good strategic fit of what could be a young but proven technology within the organisation and that there is an IT architectural fit that will not cost a fortune to achieve given the typical technological debt that the organisation might be facing. This could involve a complexity that could be challenging to oversee without the appropriate skills.

Another is the challenge of being able to articulate the IT risks involved with what could be an emerging technology, which extend beyond some of the traditional IT governance risk imperatives of, for example, reliability, scalability and vendor management.

A further challenge involves mechanisms to track the benefits enabled by the new technology, given that shareholders are increasingly demanding that IT investments realise measurable benefits. There is also the question of ensuring the alignment of both the IT culture and the organisational culture with the new technology paradigm; culture has been recognised as IT’s single greatest critical success factor.

Innovation governance

For shareholders, the issue of innovation governance is front and centre for organisations undertaking new technological journeys to order to maintain continued relevance and sustainability. This is because organisations are investing more in exploring new technologies, an investment that can be considerable as a total cost to the company.

Without the appropriate governance, these costs can quickly escalate in pursuit of trying to find a valid use case for the new technology. Emerging practice suggests that there are two dimensions to innovation governance, the first being having oversight of the innovation process, and the second being oversight of the actual content of the innovation. These are exciting areas for the modern board to become proficient in.  

Data governance

As always, there is a strong need to understand the quality of the data that is used as input into transformational technologies like machine learning and artificial intelligence, as well as the metadata requirements that help ensure that the right data is mapped for the application. Without understanding the input data, the output of, for example, artificial intelligence applications cannot be trusted sufficiently to be able to make decisions from.

There are also challenges around data transport validation, a process that aims to prove that the data used in the transformational technology is an accurate rendition of the data in the source systems, which is incidentally a regulatory requirement for globally systemically important banks.

Also important are the privacy and security considerations of the new data flows, which may require changes to the existing privacy and security regimes. Assurance will be required to ensure that neither compliance, security nor reputation risk increase beyond acceptable risk tolerances in the process.     

Digital transformation by its nature involves (emerging) digital technology, which can make heavy demands on the board’s technology skills matrix.

Transformational oversight

Digital transformation by its nature involves (emerging) digital technology, which can make heavy demands on the board’s technology skills matrix as suggested in the previous section. However, before an organisation even tackles digital transformation, it needs to establish whether it is in a state of readiness to integrate the new technology. Forbes magazine put it this way:

 ‘A problem afflicts many companies undertaking transformation: they aren’t ready for innovation. But they need innovation to change their competitive positioning in the market. Today, many companies want their IT organisations to partner with the business to create opportunities for innovation and supportive services that drive transformation.’2

In this short paragraph, Forbes captures the challenges of the need to transform, the state of not being ready for it, and the need for IT to partner with business, emphasising what has been said so far.  

So how does a board assess the readiness of the organisation for digital transformation? Irrespective of whether the proposed transformation is for a business unit, an operating division or an entire organisation, readiness across each of the three pillars of digital transformation need to be assessed.

     Advertisement

Operating model considerations

There are other areas of the operating model besides people, process and technology that are impacted by digital transformation, but let us constrain the conversation to only considering the impact of these three components of the operating model.

First, common to any IT intervention, be sure that there is a common understanding of your core operating process, in other words, ensuring there is a common understanding of how value is created for the in-scope area. If there are gaps in the understanding, these will need to be closed.

Next, be sure of the relationship of the functionality of the proposed technology to the process. They will often be mismatched. The easier way to address the mismatch is to modify the process to suit the workflow inherent in the new tool. The hard way to close the gap is to customise the tool. Both are complex in their own way, and more importantly, can take considerable resources address.

Finally, understand what changes will be required to the capacity and capability of the team that will be impacted, noting that having the right culture has elsewhere been identified as the most critical success factor of any IT intervention. In particular, the gaps will be in capability, capacity and culture, and plans will need to be instituted to close all of these.

Business model considerations

The business model concerns the way the organisation makes money. This usually occurs as the transfer of cash from the customer in exchange for a product or service. The issue here is to identify shortcomings in the application of the business process, the supporting technology and the supporting staff across the organisation in facilitating this exchange of value. If not identified in advance, the transformational initiative could amplify the impact of any or all of these gaps.

Customer experience considerations

Finally, how would the customer experience change as a result of the transformational initiative? If it can’t be demonstrated that the customer is better served through the transformation as measured through the customer’s eyes, then questions need to be asked about whether the transformation is indeed sufficiently meaningful to the organisation.

After all, the goal of digital transformation is to increase the relevance and sustainability of the organisation to its customers, and if the transformation is not able to create greater relevance, and therefore to enhance the sustainability of the organisation, then the efficacy of the proposed transformation initiative should be questioned.

Conclusion

Digital transformation is not an easy journey, but if the lockdowns under COVID-19 have shown us anything, it is that without a sound digital capability, organisations can close and go out of business forever. In this way, digital transformation has just as suddenly become an imperative. While boards may not quite be ready for digital transformation, several things can be done to increase their skills in this respect.

The first is to realise that digital transformation must start with a readiness assessment, and the plan should be to address these gaps before piling on the impact of an initiative of as great strategic significance as digital transformation.

The next is to realise that the technology component consists of three major areas – IT, data and technological innovation — and that each of these will need the appropriate oversight to be sure they are all aligned with the strategy of the organisation, and that current and emerging privacy and security concerns are appropriately addressed in the process.

Finally, realise that the IT component is actually but a part of the overall digital transformation scope, and that appropriate oversight needs to ensure not only that the technology is a good fit within the organisation’s operating model, but that the digital transformation intervention increases the enablement of the organisation’s business model to such an extent that the customer is delighted by the transformation, with consequent benefits for the organisation.

Ultimately, digital transformation involves the entire organisation, and that the technology component is but a part of it, albeit an important part. If the director can increasingly articulate strategic questions around the three technology dimensions raised, as well as provide the appropriate oversight of the impact of that technology on the end customer (through the impact of the technology on the organisation’s operating model and its business model), then the board will have exercised its duty of care to ensure the success of their digital transformation journey, and ultimately its increased relevance and sustainability.  

Notes
  1. Pearce G, ‘Digital Transformation: Boards are not ready for it,’ ISACA Journal Vol 5, 2018, https://www.isaca.org/resources/isaca-journal/issues/2018/volume-5/digital-transformation-boards-are-not-ready-for-it
  2. Bendor-Samuel P, ‘Four Guidelines For Success In Innovation In Digital Transformation,’ Forbes, 23 July 2019, https://www.forbes.com/sites/peterbendorsamuel/2019/07/23/four-guidelines-for-success-in-innovation-in-digital-transformation/#61401a511aa9.

    

Guy Pearce can be contacted by email at guy@convergence.tech.

Material published in Governance Directions is copyright and may not be reproduced without permission. The views expressed therein are those of the author and not of Governance Institute of Australia. All views and opinions are provided as general commentary only and should not be relied upon in place of specific accounting, legal or other professional advice.