The end of digital transformation and the rise of business model innovation

Digital transformation represented among the largest investments in technology to modernize businesses starting in the early 2000s. But the call for digital transformation really gained popularity after 2011 when Capgemini, in partnership with MIT, officially coined the term, defining it as “the use of technology to radically improve performance or the reach of businesses.” From there, the phrase went viral among practitioners, media, researchers, and executives as it described strategic plans for competitiveness and growth. With the rise of generative AI, CEOs recognize an opportunity to shift from technology-led digital transformation to executive-led business reformation.Following the unprecedented proliferation of genAI with the launch of OpenAI’s ChatGPT in 2002, executives were forced to reckon with the effectiveness of digital transformation to date. Now, CEOs are thinking about the role AI plays in overall business and operational transformation, while realizing that digital transformation didn’t live up to its hype or promised returns.Digital transformation wasn’t really about transformationAs digital transformation became increasingly popular in 2011, I studied trends, investments, and outcomes as a principal analyst at Altimeter Group. Early on, I observed that business strategy was rarely driving digital transformation, resulting in very little transformation occurring. Instead, a vast majority of companies were investing in digitization. Cloud and digital technologies were used to modernize business as usual rather than focus on transformative outcomes. Enterprises did not rethink their companies or models to thrive in what was quickly becoming a digital-first world.On one side, my research emphasized how customer and employee behaviors and expectations were changing. On the other side, my work explored how work, processes, and supporting systems could evolve or be reimagined to transform business and operational models. The goal was to help executives see the bigger picture and to look beyond digital tools and shiny objects.At the time, I defined digital transformation as the investment in business strategies and digital technologies to change business operations, processes, and how value is created and delivered to customers and employees. I saw true transformation as vital for businesses to remain competitive.The reason digital transformation often failed to produce substantive improvements isn’t because digital transformation doesn’t work, but instead because companies never truly strived for transformation.For example, in my 2017 “State of Digital Transformation” report, I learned that only 37% of businesses viewed digital transformation as an investment in the fight against market evolution and disruption.More recently, KMPG reported in its 2023 Technology Survey that a majority of U.S. executives say they still have not seen an increase in performance or profitability from digital transformation investments to date.BCG research uncovered that 70% of digital transformations still fall short of their objectives, often with profound consequences. In contrast, those digital leaders who invested in competitiveness, productivity improvements, and better customer experiences—true digital transformations—outperformed their peers by achieving 1.8x times higher earnings growth.Generative AI requires leaders revisit transformationThe key difference between digital transformation and now generative AI leaders is that CEOs and CFOs, not CIOs, appear to be involved in guiding AI investments. As an example, in January 2024, Accenture reported that there were almost 40,000 mentions of AI on earnings calls by the end of 2023 as “C-Suite leaders gird for a ‘massive technology shift.’”Accenture Technology Vision 2024There’s a reason why CEOs and CFOs are talking about AI and generative AI, according to Accenture research. All signs point to AI reinventing business as we know it. And if there’s anything we learned from years of digitization vs. digital transformation, you can’t digitize your way to transformation.Given its enormous potential, it should be no surprise that almost every CEO plans to invest heavily in generative AI. Already, AI is a top-three tech priority, with 85% of top leaders intending to boost spending starting now, according to BCG.In fact, BCG found that the scale for generative AI interest and investment intentions has outpaced all other technology advancements over the course of the firm’s 61-year history. That would make generative AI potentially more disruptive than the internet, social media, and the mobile revolution.The state of ROI of genAIBusiness leaders are expecting a lot from AI. But there’s already a gap between where CEOs, CFOs, and other executive leaders hope to be with AI and where they are currently. According to BCG research, 66% of leaders are “ambivalent or outright dissatisfied” with their AI and generative AI progress. The top three reasons leaders feel that they are not moving fast enough are, 1) lack of talent and skills, 2) unclear AI and genAI roadmaps and investment priorities, and 3) no strategy responsible for AI and genAI.Yet, CEOs expect ROI within three to five years, with nearly half seeing it growing profitability in the next year through efficiency gains. For example, using gen AI in the automation of routine tasks is a leading use case to drive savings.While automation can certainly deliver quick wins and cost savings, it cannot alone deliver on the full potential of AI. Automation simply scales business as usual. The lack of ROI and meaningful outcomes from digital transformation investments means that technology leaders are going to have to think bigger and differently.In his book, The Creative Act: A Way of Being, legendary music producer Rick Rubin shared a profound observation that doesn’t just apply to creativity, but also to digital and AI transformation: “Beware of the assumption that the way you work is the best way simply because it’s the way you’ve done it before.”Leading businesses will question how things are done today and explore how AI changes how businesses work, can work, and why.Unlike digital transformation where technology decision-makers prioritized tech ahead of business outcomes, AI is motivating leading executives to explore ways to boost profits and create new revenue streams. Yet, only 14% of global organizations are fully prepared to embrace the growth prospects of AI according to Cisco research.Cisco also identified considerable gaps affecting genAI’s potential across six foundational business pillars — 1) strategy, 2) infrastructure, 3) data, 4) governance, 5) talent, and 6) culture — the key building blocks of any business.Place generative AI at the core of the business to transformBCG learned that beyond cost savings, the most ambitious companies don’t just bank savings from AI-centered automation, they’ll reinvest them to create new revenue streams and drive further growth.At its core, AI represents the opportunity to augment people and their work, and to not only elevate productivity, but also innovate in capabilities and performance. To grow and thrive in an era of AI, businesses need both automation and augmentation.What’s the difference between the two?Automation takes the work we did yesterday to repeat it at scale, saving costs while increasing efficiencies.Augmentation unlocks new opportunities to do the work we couldn’t do yesterday and achieve new value and outcomes tomorrow.The combination of automation and augmentation creates a business that becomes exponential. Businesses that automate and augment work will experiment, adapt, and grow at an accelerated pace. Those that prioritize automation and cost-cutting strategies are limited to linear growth, at best.GenAI-powered automation plus augmentation fuel exponential companiesPWC’s Global CEO Survey research underscores the importance of reimagining businesses by aligning AI investments with efficiency and also transformation and growth strategies.PwC’s 27th Annual CEO SurveyGlobally, 70% of CEOs see generative AI as significantly changing the way companies create, deliver, and capture value. Sixty-nine percent believe that most of their workforce will need to develop new skills. In the next three years, 68% believe gen AI will increase competitive intensity. And 58% see generative AI as playing a role in improving the quality of products and services.Global CEOs (64%) believe that gen AI will increase the amount of work employees can accomplish and 59% see it helping them become more productive in their own work. This is important, as a recent article in the New York Times pondered whether AI could also threaten CEO roles! CEOs are optimistic however, with 44% projecting genAI contributing to a net increase in profits and 35% anticipating an increase in revenue. And the top strategic priority on the CEO agenda is using generative AI to generate new revenue streams (52%).Gen AI possesses a duality of being a tool to produce efficiency gains and control costs (automation), while also enabling game-changing use cases and applications that create new value and results, and drive growth (augmentation). The combination of both approaches aligns productivity with creativity to achieve exponential outcomes. It’s game-changing augmentation that will disrupt business models and entire industries.Brian SolisClosing the gaps between digital and AI transformation to drive business model innovationThose who struggled during the digital transformation years will continue to fall into the same traps in an era of AI-first transformation if they don’t change what got them stuck in the first place.Generative AI isn’t the last wave of AI disruption. Business and operational model innovation is necessary to adapt to today’s opportunities while also creating a culture of adaptation and innovation for the coming waves.To break through the challenges that held digital transformations back, technology and business leaders need to come together to build the business of the future today.Looking at where companies failed or got stuck in digital transformation will help us think differently moving forward from here.1) Past failure: Digital transformation strategies often lacked clear goals, vision, and strategic alignment with the core business. Investments hadn’t tied us much to business strategy and goals as they were to iterative improvements, digitization, shiny objects, unrealistic expectations, under-resourced budgets, training, expertise, and resources, and a lack of commitment to change management.New mindset: Accenture research shows that 93% of executives agree that with rapid technological advancements led by AI, it is more important than ever for organizations to innovate with purpose. Simon Sinek famously advised, “start with why.” Starting with why or “whAI” will help with AI to achieve its exponential potential, leaders must articulate a clear vision, purpose, strategy, goals, and desired outcomes for business transformation tied to market shifts and changing customer and employee behaviors and expectations. Leaders must develop realistic roadmaps supported by clear business objectives and outcomes, realistic timelines, adequate resources, and operational agility.2) Past: Leaders didn’t support real change, nor did they provide top-level support to ensure that digital transformation was prioritized and adequately resourced. As a result, digital was relegated as a technology initiative, not a business priority, and didn’t have the executive sponsorship to overcome resistance to adoption and cultural shifts needed to drive enterprise-wide transformation.New: Leaders are pivotal in driving change. They communicate vision, set the standards for success, and also set the bar for operationalizing future behaviors and norms. CEOs are responsible for creating the culture that the company embodies in its execution and evolution. AI leaders are the change agents. They must secure executive sponsorship and tie AI investments to executive vision for business model transformation and innovation.3) Past: Companies failed to prioritize customer and employee needs and understand evolving market dynamics. AI is changing everything, again.New: Explore how AI is challenging fundamental assumptions of your markets and customer and employee behaviors. Aligning vision with a clear view of what a future motivating state looks like serves as the foundation for linking AI and technology strategies to outcomes that employees and customers can stand behind.4) Past: Lack of leadership support, cross-functional collaboration, and proper governance kept silos not only intact but fortified.New: Now leaders are all-in, at least according to earnings calls. Hold them to task. Push for vision and desired outcomes. And make the case for ongoing support to bring tech and business decision-makers together.5) Past: Roadmaps underestimated the complexity of integrating new technologies with legacy systems. GenAI offers so much opportunity in everyday and also game-changing applications. Now, things will only get more complicated because you are automating yesterday and augmenting for tomorrow.New: Platform players now make it possible to connect the dots across systems to buy time, and extract value from legacy systems, while allowing cross-system workflows and data to inform AI how to optimize. Find your trusted partners. Build against a vision for business model innovation while finding opportunities to solve for 1) quick wins, 2) differentiated use cases, and 3) transformational initiatives.6) Past: Most companies possess a deep inability to adapt to disruptive innovations or cling to legacy business models by design. But in an era of AI, businesses do not have the luxury of surviving by digitizing yesterday’s models or work.New: It all comes back to leadership and strategic change management, i.e. ‘transformation.’ Digitization didn’t challenge business-as-usual conventions, processes, or mindsets. That all must change, and that requires definitive, innovative, leadership and a culture design initiative to support transformation and bring people along (willingly).7) Past: Employee adoption of new digital tools faced opposition for a variety of reasons including difficulty and cognitive biases of people wanting to work their way. There’s no room for that behavior or mindset. Disruption happens with doing new things, making the old things obsolete.New: AI requires an ambitious investment in people. In its DAI Study, BCG found that winning companies are upskilling their workforces. For example, 21% of organizations spending upward of $50 million on AI and GenAI next year have already trained more than a quarter of their people on the relevant tools (versus just 6% of companies overall). BCG’s research found that leaders too need upskilling with 60% of leaders possessing limited or no confidence in their executive team’s proficiency in GenAI.With a changed mindset and concrete actions, true business transformation is possible. Reimagine outcomes beyond optimizing the task at hand or yesterday’s work. Use AI to transform systems of record into systems of action, connecting the organization and work.Invest in everyday AI to improve productivity. Supercharge work. Remove the routine and mundane robotic work and empower people to be more efficient, effective, and focused on more value-added work.Rethink critical functions for enhancing efficiency and effectiveness. Explore opportunities to create new outcomes and value.Foster innovation! Innovate toward genAI-powered business models to build and hone competitiveness. Start with customer and employee experience.Let’s rethink digital transformation as business model transformation. Doing so will disrupt not only ourselves but entire industries. Not doing so will leave us open to disruption. It’s a gift we either give ourselves or our competitors.