What is digital transformation? Everything you need to know about how technology is changing business

Digital transformation involves using technology to make a business process more efficient or effective. The idea is to use technology not just to replicate an existing service in a digital form, but to use technology to transform that service into something significantly better.

While the concept sounds simple, digital transformation can be a long, expensive, and complicated process that doesn't always go according to plan.

While digital transformation is one of the most used phrases in the IT industry, precise definitions vary. The scope and scale of a transformation range from a public sector organization digitalizing its paper records to a blue-chip enterprise using a host of emerging technologies to support a wide-scale business transformation.

Digital transformation can draw on many different technologies. The hottest areas are cloud computing, the Internet of Things, and artificial intelligence, particularly using large language models (LLMs) and generative AI (Gen AI). During the next few years, we should expect increased attention on other hyped-up tech topics, including the metaverse, blockchain, and quantum computing.

Digitalization is not, as is commonly perceived, simply about implementing more technology systems and services. A genuine digital transformation project involves fundamentally rethinking business models and processes, rather than tinkering with or enhancing traditional methods. 

This creative requirement to rethink existing models remains a tough ask for business leaders. Almost half (45%) of CEOs say they do not believe their business will be viable in a decade if it continues on its current path, according to PwC's 2024 Global CEO Survey, a rise from 39% in 2023. The consultant says the onslaught of emerging technologies, particularly Gen AI, is causing increased concern among business leaders.

Also: Time for businesses to move past generative AI hype and find real value

This gap between innovation and execution helps explain why digitalization and disruption have traditionally been seen as the preserve of nimble start-ups. But it doesn't have to be this way -- there are great examples of digital transformation in the enterprise sector, too. 

As cited above, digital transformation can involve a large-scale shift to a new business model in a traditional firm. Examples of successful new business models include Microsoft moving from packaged off-the-shelf software into cloud-based subscription services and Netflix transitioning from posting mail-order DVDs to an online streaming platform.

However, not all digitalization programs are so grand. An oft-cited example of digital transformation is the transition of legacy systems to cloud platforms. Many companies began their transition to on-demand IT more than a decade ago. Even today, transitioning to the cloud remains a key ambition for many CIOs. It's easier for organizations that move older systems to the cloud to update and change applications in response to new user demands. In this case, digital transformation helps support nimbler and flexible IT operations, making an existing process much more efficient and effective.

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Using technology to change or remove an inefficient working process is another example of digital transformation. Digitization of paper records is a good example. Using technology to change how information is recorded and stored makes it easier to search digital records in a way that would have been unthinkable in an era of paper records. Digitization is also a prerequisite for the introduction of generative AI. Employees can then use bots to search enterprise records for insight and boost productivity.

For those who weren't convinced about the positive benefits of digital transformation, the power of digitalization won over many doubters during the COVID-19 pandemic. When lockdown and social distancing started, digital transformation programs -- and the IT departments that carried out the work -- helped businesses function as normally as possible in the most challenging of conditions.

Digital transformation strategies were fast-forwarded at breakneck speed. Executive teams that might once have hesitated over the implementation of a multi-year investment in video-conferencing and collaborative technologies tasked their IT departments with establishing remote-working strategies in days or even hours. 

Also: 5 ways to create an effective hybrid working strategy, according to business leaders

CIOs and their IT teams stepped up and delivered -- from the support for home working to the provision of online learning, the establishment of new online e-commerce channels, and even the creation of whole new business models. The consensus from tech experts is that the rapid digital transformation pushed by CIOs and their teams has helped change the perception of IT for good.

Rather than being seen primarily as a service to other functions, such as sales and finance, technology is now recognized as a critical factor for long-term business success. Smart IT executives and their teams use that platform change to pursue new digital transformation opportunities.

With digital transformation proving its worth, business and digital leaders must find new technology projects to get their teeth stuck into.

Analyst Gartner says CEOs know they must accelerate the adoption of digital business and are seeking more direct digital routes to connect with their customers. However, with an eye on economic risks, bosses want to be efficient and protect margins and cash flow. Current digital transformation trends include:

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Gen AI is the latest -- and perhaps greatest -- technology to impact digital transformation. Two years since OpenAI first unleashed ChatGPT on the world, the hype about the technology remains cacophonous. Some experts predict its effect on global value chains is analogous to the steam engines of the Industrial Revolution.

The rapid rise of Gen AI is such that it wasn't even mentioned the latest time we updated this article (in August 2022). Since then, CIOs and their business peers have told ZDNET how their businesses are exploring how Gen AI can boost productivity and help to transform workplace activities, such as content creation, customer service, and coding.

Also: 4 ways to help your organization overcome AI inertia

Gabriela Vogel, senior director analyst in the Executive Leadership of Digital Business (ELDB) practice at research firm Gartner, told ZDNET that Gen AI is a rare technology -- one whose potential influence has piqued the interest of chief executives as much as CIOs and IT professionals. All eyes on digital transformation are now turning to how the business can create a competitive advantage through AI and machine learning.

"Our CEO survey shows that technology-related change is the second biggest priority for the CEO after growth," she said. "So, technology-enabled change is a top-of-mind topic for CEOs right now -- trying to understand how to generate value from all these investments that have been happening."

No one likes a futurist who sits on the fence, but I'm afraid this prediction requires some splinters. While the rapid rise of Gen AI has been remarkable, it's important to recognize that the rollout of high-profile services like ChatGPT, Microsoft Copilot, Google's Gemini, and Apple Intelligence are the visible manifestations of many years of research. What we see today with Gen AI is the tip of a much larger development iceberg beneath the surface -- and how that iceberg will change shape is up for debate.

After two years of non-stop hype, we're seeing the first signs of Gen AI fatigue from business leaders. Most companies struggle to move Gen AI projects from initial stages into production, according to Deloitte. The consulting giant says 70% of business leaders said their organization has moved 30% or fewer of their experiments into production. Worse still, Gartner recently predicted at least 30% of Gen AI projects will be abandoned after the proof-of-concept stage by the end of 2025.

Also: Do AI tools make it easier to start a new business? 5 factors to consider

Those indicators point to some concern about the long-term impact of AI on digital transformation. However, it's also important to recognize that those failures aren't stopping companies from investing cash in Gen AI -- at least not yet. The rate at which companies deployed Gen AI programs doubled between December last year and July 2024, according to Bloomberg Intelligence. 

As a starting point for building AI momentum in slower-moving organizations, Caroline Carruthers, CEO at Carruthers and Jackson, suggested four priorities for data leaders: start with purpose, focus on targeted outcomes, shout about your successes, and use data to prove your case. She told ZDNET that businesses looking to pursue Gen AI projects as part of a digital transformation initiative are on a journey: "While many data leaders feel they need to be doing something with AI, they also face an intrinsic level of resistance built-in before they can even start doing anything."

While most experts can agree that digitalization involves using technology to make a process more efficient or effective, just about every project that involves using technology gets badged as a digital transformation initiative.

Digital transformation has become the go-to marketing phrase for almost any adoption of new technology. The term is applied so broadly that it is in danger of becoming meaningless. Its ubiquity is such that it's no surprise when an attention-craving organization badges its new app or even something as mundane as a laptop refresh program as a "digital transformation initiative.".

Tech workers also express cynicism about the grand talk of digital. IT professionals don't want to spend their working days digitally transforming rather than coding, programming, and developing. For their part, CIOs will tell you the implementation of technology is simply the conduit to help the business meet its objectives, whether selling more widgets, making more money, or raising customer satisfaction.

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To critics, digital transformation offers tech vendors another opportunity to rebrand their offerings; it's not uncommon to see systems and services sold as a golden bullet for digital transformation. Such hype is just more fuel for detractors who feel that digital transformation is simply a solution searching for a problem.

None of this criticism should come as a shock. Even back in 2017, analyst Gartner warned that over-selling meant digital transformation was fast approaching the trough of disillusionment. Seven years later, critics would say we're now at the bottom of that trough.

One way to help silence the critics would be to find another name for digital transformation. We should stop using the term blindly and instead focus on the outcomes we're trying to achieve with technology.

That approach resonates with the CIO community: Almost every IT chief will tell you that their organization is running business transformation, not technology transformation, projects. Other industry commentators suggest culling the phrase digital transformation and creating a slightly modified alternative, such as digital landscape, underlying digital environment, or data-led plumbing. 

The big problem with all these alternative names is that they mean even less than digital transformation. For all its inherent faults, we all have a preconceived idea of what digital transformation means, even if making heavy use of the cloud or using emerging technology to automate work tasks previously dominated by manual means.

Also: 3 ways to create the right data culture in your business

These kinds of digital transformations have shown how technology can change the business for the better. Proving the value of technology has been a tough battle for CIOs and other IT professionals. Yes, the concept of digital transformation has flaws, but -- in some ways -- the IT industry should be pleased the business recognizes the great work the technology team is undertaking, regardless of what it's called. 

Remember that the rest of the business tends to have a problem with big IT concepts. Take the example of the phrase "cloud computing," which used to be met with nonplussed expressions from non-IT execs 10-plus years ago. Now, the cloud is a broadly understood and accepted term. 

Cloud found its footing by proving its value -- and so it is with other digital transformation projects, such as exploring Gen AI or implementing IoT and sensors. The business has seen the value of digital transformation in recent years and wants a lot more in the future.

Beneath the buzzwords, there is a crucial concept: Digitalization is helping smart businesses change the established economic order -- and the effects are everywhere. 

From Amazon's influence over retailing to Facebook's impact on publishing and onto fleet-of-foot FinTechs that are destabilizing banking and insurance operations, traditional firms are being challenged by nimble, digital-savvy operators. 

Also: 'Not just another initiative': How PepsiCo is combining innovation and sustainability

Consultant PwC's 2024 CEO survey concludes that the impetus to reinvent business models is intensifying. CEOs expect more pressure for change during the next three years than in the previous five due to digital transformation and a series of megatrends, such as sustainability and geopolitical instability.

It's also important to recognize that digital transformation is more than an IT concern. Line-of-business units are crucial to identifying where digitalization can create big benefits. As the Harvard Business Review suggests, digitalization is a road to nowhere without a fundamental business transformation.

Beauty company Avon International has used a direct-selling model for 130 years. The company normally sells its products through reps who call at clients' doors and collect orders from a paper brochure. However, that business model became untenable during the pandemic crisis and lockdown. 

The solution came in the form of a rapid digital transformation that allowed reps to carry on selling. The IT team focused first on putting in place a mechanism that allowed reps to ensure that the orders they were taking -- through WhatsApp, a text message, an email, or a phone call -- were delivered directly to Avon's customers rather than by hand.

As the company had 60 different enterprise resource planning systems globally and more than 200 back-office systems, changing the delivery address meant modifying a range of ordering and invoicing processes. The team implemented that new approach on top of its legacy platforms in 30 markets in six weeks. 

Also: 3 ways to help your staff use generative AI confidently and productively

Avon also started to develop a stronger e-commerce platform, such as via mobile and web. Sales through e-commerce channels grew six times in the first three weeks following lockdown. The company also started to produce digital brochures that could be updated far more easily and shared through social channels. 

Estimates suggest about 30% of the company's come from online orders, up from less than 10% before the pandemic. What's more, Avon's business transformation continues. CEO Angela Cretu said the company wants to become fully omnichannel. The company announced plans to open physical stores in the UK for the first time late last year.

Avon's approach to business transformation -- which spans years, platforms, and channels -- shows that effective digitalization is an ongoing journey that involves unexpected turns and new avenues to market.

Digital transformation projects have traditionally been associated with multi-year strategies. Here, CIOs have worked with their peers to think about how technology might help their organizations react to the threat of digital disruption. They've then created a long-term business strategy that uses technology to help the organization meet its aims.

The problem with many of those long-term strategies is that they've taken too long to come to fruition. IT teams are good at creating spot digitalization projects, such as moving systems to the cloud or creating new channels to market, but struggle to transform the whole business to support new operating models.

In an age where fleet-of-foot digital challengers can move into a new sector almost overnight, multi-year digital strategies are too slow. The multiple challenges associated with technological change, new geopolitical tensions, and macroeconomic pressures have shown that flexibility and agility are the watchwords for modern digital strategies. 

Also: What is a Chief AI Officer, and how do you become one?

McKinsey reflects that most companies' adoption of digital technologies sped up from years to months during the pandemic. That increase in pace is having a lasting impact. The consultant says what was considered best-in-class speed for business change four or five years ago is now seen as slower than average. 

This need for speed has an impact on digital transformation strategies. Instead of talking about five-year plans, boards demand constant iteration. That increase in pace has required a new agile way of working in many organizations.

Digital transformation is as much about establishing the right cultural change program as introducing new tech. Digitalization needs IT organizations to work out quickly what their business needs and how to deliver the best solutions. For many senior managers, the best way to find these answers is through an agile approach.

Agile management originated in software development, but as Harvard Business Review suggests, it has spread far beyond its product development and manufacturing roots. While agile won't be applied the same way in every organization, the basic principles -- decentralized decision-making, cross-organization teams, and cross-team empowerment -- are likely to resonate with most business leaders.

Also: Agile development can unlock the power of generative AI - here's how

Experienced digital leaders suggest the big benefit of an agile approach is cultural. By working in small, cross-organization groups to explore challenges and deliver solutions, IT staff and line-of-business professionals iterate around a problem and quickly create digital solutions.

Agile is also a good fit for companies that want to put AI at the core of their digital transformation strategies. Toby Alcock, CTO at Logicalis, told ZDNET that agile development has great potential for delivering generative AI projects. His firm's research suggests integrating AI effectively into the business is the number one priority for CIOs in 2024.

Companies have invested a lot of cash in cloud and collaboration technologies. These services will prove crucial in the coming years, as organizations attempt to find ways to support a hybrid mix of at-home and in-office knowledge workers.

Evidence so far suggests that managing this shift is far from easy. While many professionals have now got used to working from home -- and research suggests they're more productive, too -- their bosses are not always quite as keen to see them detached from the corporate HQ. Finding a successful middle ground between home and office work will be crucial.

Also: Generative AI is the technology that IT feels most pressure to exploit

Managers will need to continue investing their digital transformation cash in technologies to help create the hybrid workplace of the future. They'll need to accompany this investment in digitization with an organizational transformation. Business leaders told ZDNET that a range of approaches, such as open communication and flexible guidelines, help companies to create an effective hybrid working strategy.

As the traditional guardians of technology investment, CIOs tend to have a big say in digital change projects. Yet CIOs are far from the only executives with a role in digital transformation management, and the pressure for change has led to the rise of other C-suite specialists, such as chief digital officers (CDOs).

Analyst firms fanned the flames by suggesting the appointment of CDOs could hasten the demise of the traditional IT leadership role. Gartner said a quarter of businesses would have a digital chief by 2015 and IDC said 60% of CIOs would be replaced by CDOs by 2020. Today, those predictions look way off-beam. 

What no one can deny, however, is the ever-increasing role of business professionals in IT purchasing decisions. Rather than the IT department going off and buying systems it thinks the company needs, modern business operations rely on professionals identifying their key challenges and then thinking about -- or even going out and buying -- technological solutions to these problems.

Also: 5 ways to be a great leader at work

Cloud computing makes it far easier for professionals in any department to buy IT services on demand. When requirements change, professionals can scale these services up or down depending on demand -- with or without the say-so of the tech team. The extent of the swing away from IT departments controlling procurement is such that Gartner's 2024 CEO Survey reports that 80% of CXOs and business leaders believe digital leadership is part of their job.

Gartner analyst Gabriela Vogel told ZDNET the story of modern digital transformation is about people beyond the IT department having a say in the direction of investment. While value comes from a collaborative approach to digitalization, most non-IT professionals don't feel digitally proficient and are looking to hone their technology skills.

"I think it's similar to what happened in finance many years ago," she said. "Today, people in all parts of the business know about the basics of finance because they did an MBA. We'll start seeing this trend happening in digital, where you have people who understand technology and departments that don't necessarily work with the core of technology."

However, the game is far from up for CIOs. While line-of-business employees might believe they can spot discrete digital solutions to their organizational challenges, CIOs have experience integrating systems and services. Effective digital transformation requires a close relationship between CIOs and their line-of-business colleagues. 

"Digital transformation is all about outcomes," said Nick Woods, CIO at MAG, a UK airport group that owns and operates Manchester, London Stansted, and East Midlands Airports. "It comes back to the partnerships and allegiances you're forming," he told ZDNET. "As a CIO, you can't be successful on your own. The business still needs to own its outcomes."

With companies now looking to get more from recent digital transformation projects, even greater focus will be placed on the tech leadership capabilities of CIOs, which means building even stronger bonds with the chief executive and the rest of the C-suite.

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Vogel told ZDNET that Gartner's 2024 CIO Agenda highlights how CIOs should base their partnership with CXOs on a franchise model, where they co-lead, co-deliver, and co-govern digital delivery. Gartner reports that 63% of digital initiatives meet or exceed outcome targets when CIOs set up franchise models. However, Vogel said only 12% of CIOs currently use a franchise model where they create digital solutions with the business.

The good news is CIOs who help their business colleagues reap the benefits of digitalization will be valued. Helen Fleming, executive director of search and specialisms at recruiter Harvey Nash, told ZDNET that CIOs who get the right approach could end up rising to the top of the business and fulfilling other senior roles in the organization, such as COO or even CEO. "CIOs are diversifying or progressing into the COO role," she said.

Fleming pointed to the example of Nash Squared, where CEO Bev White began her CIO career at one organization and progressed to COO and MD roles. White then took CEO positions at other companies. For most CIOs, this careful progression is the likely route to the top in an age of digital transformation.

It doesn't. Many people make the mistake of thinking of digital transformation as a discrete project. As researcher Forrester suggests, true transformation is a journey, not a destination. Digital transformation remains a slippery concept that involves the delivery of value to the business and its customers in new -- and perhaps unexpected -- ways.

Also: 5 ways to climb the career ladder and become a successful CIO

Just as digital transformation constantly changes, so do its constituent elements. Gartner's 2024 CEO Survey reports that over half (53%) of CEOs say their company's digital transformation is just beginning or is less than half done. Most transformation activities today involve the innovative use of data, whether AI, machine learning, or IoT. As digital transformation has evolved, it has become more about data-led change than anything else.

So, digital transformation continues to evolve, meaning the process of defining digitalization remains complex and contested. The one thing we can be sure of is that digital transformation -- in whatever form it takes -- is here to stay, which means IT professionals and their business peers must build an agile and sustainable strategy for change.