Why the Digital Transformation Needs a Reset

Warren Buffet is reported to have said that digital transformation is a fundamental reality of business today.  McKinsey says that 70% of digital transformation projects fail. Both suggest the need to reset expectations about what digital transformation means and what success looks like in the inevitable transition to a more digitally-enabled global economy.

My colleagues at PYMNTS and I have been tracking the shift to digital, worldwide, across 37 distinct activities since March of 2020, when the physical world abruptly shuttered and consumers and businesses were forced to rely on digital methods to go about their day-to-day.

These quarterly studies of more than 15,000 consumers in 11 countries, along with monthly studies of nearly 4,000 consumers in the U.S. and hundreds of CFOs, is the most comprehensive dataset benchmarking the behavior of consumers and businesses over the forty-one months in which the world — and the digital habits of those living in it — radically transformed.

These tens of millions of datapoints — and the several hundred one-on-one conversations with CEOs and founders that I’ve had over those forty-one months — lead me to one conclusion.

It’s time for a new data-driven framework for turning digital transformation into a successful outcome for every business and the customers they serve.

That starts with an understanding of the five very distinct ways that digital transformation is changing every business — one way or the other. And not tomorrow, but right now.

1. Digital is more than a channel.

While at PricewaterhouseCoopers in the late 1990s, the consulting business debated how to position the firm as a leader in the dot com economy. We were considered late to the dot com party and needed a unique way to tell our “eBusiness” story. I suggested that we simply drop the “e” and tell our clients that online is the way business will be done. In other words, stop talking about it as a separate thing. eBusiness is business. It resonated.

Fast forward thirty years and the conversations about digital transformation seem a little déjà vu all over again to me.

It is remarkable to me that so many businesses still talk about digital as if it is a project, a distinct channel for doing business that they must master so they can check that box. This way of thinking has driven the steady decline of physical retail over the last 15 years and will throttle the massive potential for the industrial economy to find new ways to monetize their assets and simplify the complexity of their trading partner relationships.

Over nearly four years, connected devices and technology have shortened the distance between the customer and a business, moving commerce to anywhere with an internet connection.  Digital transformation is about the physical world becoming an extension of the digital world, not a bolt-on or a separate channel that is the stutter step to the analog processes that define business today. Digital must become a way of doing business, creating a fluid transition between the many digital and physical endpoints in which consumers and businesses engage.

In many ways, that means that a successful digital transformation starts with a shift in mindset.

2. Industries are defined by what customers do, not what companies produce.

Over the last thirteen years, all of us have had a ringside seat for the shift from a single connected device — the smartphone along with a series of single-purpose apps in an app store that defined the decade of the 2010s — to a series of connected devices and ecosystems in the decade that began in January of 2020.

Software platforms and marketplaces now organize once-discrete activities into a single digital front door. There one login, one set of embedded payment credentials, and the rich data to personalize and anticipate what customers may want next delivers a quick, easy, and secure experience for the consumer and new revenue flows to the platform. The critical mass of users on the platform is an incentive for complementary third parties to sign on, enhancing the consumer’s experience, creating new sources of revenue for these third parties and new, high-margin revenue streams for the platform. More engagement means more opportunities to extend the ecosystem’s remit to include more adjacent, complementary activities.

Take food. The activity called eating is what drives where and how consumers buy their food. Platforms help connect and aggregate the many options available to consumers to buy the food they want to eat, wherever they want to eat it.

In this connected economy, grocery stores and restaurants and aggregators now compete for the consumer’s share of stomach and food spend. They do that  in a category consumers don’t think of as grocery stores or restaurants or delivery aggregators, but eating.

Competition for market share and revenue streams suddenly includes players that don’t look or operate like the guy across the street or appear on the same list of  companies  with the same NAICS code. The competition is truly among those who can best satisfy the consumer’s desire to eat.

3. Companies break from conventional industry norms and business practices.

With $200 trillion in payments flows moving between trading partners globally every year, the opportunity to digitally transform how businesses do business with each other is massive. It is here where technology, data and payments create new business models that chip away at the industry practices put in place by long-standing intermediaries that have held sway in a more traditional physical-first world.

Brands that once exclusively sold products to end-consumers via the traditional B2B channels are using new technology, data, and embedded payments to test B2B2C models and build relationships with their end-customers — without cannibalizing the incumbent industry intermediaries that drive most of their sales today. Platforms are going direct to consumer and changing the economics once defined by traditional B2B intermediaries. Consumer brands are turning products into platforms and integrating third parties with complementary products — and monetizing that access. They use social media channels to create contextual opportunities to capture impulse sales and leverage new physical channels to meet consumers where they are — all to hedge their bets against a challenged and challenging physical distribution model.

Cars are becoming software platforms on wheels while payments players, Big Tech and OEMs vie to become that digital-first point of entry to the driver and the commerce experiences that originate inside the car. Voice and AI will change how and with whom consumers discover brands and buy, something that 75% of Millennials believe will be a reality in less than five years. The promise of invisible payments will be realized and amplified as data, AI and identity become an embedded element of moving between these smart, connected endpoints.

The industrial economy is also being pressured to move their supply chains away from the paper-based processes that slow things down and create errors. Buyers seek ready access to a more diverse group of suppliers, and suppliers are adopting digital methods to decrease days sales outstanding to counter the impact of an expensive and constrained credit economy. Digital challengers are stepping in to give suppliers and buyers new ways of engaging, putting pressure on incumbents to participate or miss the opportunity to capture sales as part of their new digital workflow.

4. Platforms use technology to turn “incumbent loyalty” into their business opportunity.

Moving from the status quo to something new takes work, and in many cases a leap of faith that the new is better than the now. The friction of moving to that something new and unknown has kept consumers and businesses from making that move.  Macro-economic forces and killer apps give consumers and businesses the incentive to consider new alternatives. APIs and microservices that minimize the time and cost of switching are challenging the lock-in that established players often mistook for loyalty.

Innovation is now modular and plug-and-play — an opportunity for customers to test the waters incrementally with something new and move more of their business over time. Switching no longer must be an all-or-nothing commitment. The inertia that has prevented a more spirited embrace of digital transformation efforts by many established players is starting to weaken.

Take Igniting a B2B platform — perhaps the most challenging business model to get off the ground given the many intrenched dependencies that can prevent the adoption and use of new business models. Today, getting one off the ground is happening without asking express permission of the key stakeholders to get on board. Platforms are using AI to overcome supplier inertia to collect and standardize product descriptions to bring buyers on board with lots of product choice and competitive prices. These platforms turn the tables on reluctant suppliers by creating competition for the business they thought they’d always have. Buyer and supplier dynamics shift, as do the economics of those customer interactions. Incumbents are being disrupted without knowing it until after the fact as they become a participant in someone else’s platform, forced to play by the new rules of a new game.

5. Generative AI levels the competitive playing field

There is no denying Generative AI’s transformative potential, although the technology itself is in its very early days. GPT applications and use cases are proliferating and already changing how business works. Everything from customer service to content creation to sales and marketing and payments is being given a new GPT front end.  Foundational models are spawning applications that make this powerful technology more accessible and affordable to all businesses. Developers are glomming on. For that reason, Generative AI will, without a doubt, only accelerate the digital transformation of the global economy as apps and use cases will be more accessible to a much wider pool of businesses at a much faster pace: the democratization of AI.

The accessibility of these LLMs and the rapid pace of development will force businesses to focus on what truly makes them great. “Table stakes” will become a higher and higher bar as businesses large and small use GPT to level up their business processes. Generative AI will spawn new engagement models that make the outsourcing of activities to consumers and businesses easy and convenient as labor dynamics put pressure on businesses to shift basic customer service processes away from their internal teams. Success will be determined by how well businesses are able to adapt these models to amplify their competitive assets and create operational efficiencies for their businesses. Over time, GenAI will follow the path of software innovation and become vertically specialized for use cases that support the delivery of new customer experiences.

The Digital Transformation of the Consumer

In 2023, consumers are living their very best digital lives in the physical world.

After forty-one months — March of 2020 to August 2023 — PYMNTS data shows clear evidence of a consumer that has increased the number and frequency of the digital activities in which she engages‚ and of the digital flywheel accelerating. A consumer who increases her digital retail shopping activities by 10 percent also increases her use of digital channels to order groceries, use telemedicine and book travel using digital methods by 7 percent. Familiarity with digital breeds more engagement with the businesses that offer a seamless digital way to engage.

Consumers are not only doing more of the 37 activities that we track online, but they are also increasing the frequency with which they do them. Activities that were once done only occasionally using digital channels are now done monthly, such as using telemedicine services. Activities that were only done digitally monthly have become weekly, such as grocery shopping, using ride hailing or mobility services or making retail purchases. Activities that were once weekly have become daily, including banking, payments, streaming content, and ordering food for delivery or takeout. More than twice as many consumers order groceries online in 2023 than in 2019, with the majority of those online grocery shoppers being millennials who will drive grocery store sales for the next several decades.

For many consumers, using connected devices and apps to “multitask” means the ease and convenience of accomplishing things digitally that were once only possible with a visit to a physical establishment. A third of consumers order food for delivery or takeout while at work, 39% shop for groceries, and 15% check in on loved ones.

Saving time and saving money is why the shift to digital is indisputable, undeniable, and permanent.

Businesses see this behavior and want to create a better experience that appeals to a connected and increasingly digital-first customer — experiences that will force a change in how businesses themselves organize for success in a digital-first world.

That’s why digital transformation is not “maybe someday” thing nor a “one and done” project. It’s a journey, not a destination. From the consumers’ point of view, it’s a journey that’s already begun.

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