What Is Business Transformation and How to Approach It?

Business transformation processes are designed to drive overall performance by increasing revenue, reducing operating costs, and improving customer satisfaction and employee productivity. We explore what business transformation is and how to make business transformation deliver value.

For years, the term 'business transformation' has been used to refer to the way in which organisations take a series of steps to realise their full potential.

Typically, companies used to approach business transformation processes by focusing first on improving financial performance and optimising organisational efficiency. Only when these objectives had been achieved did they begin to focus on growth, technology investment and the development of new business strategies.

However, this methodology places corporations in a stand-by situation where they are waiting for years to "earn the right to grow". In a market where change happens at a faster pace, this approach is no longer a skilful strategy, also at the financial level.

Companies can no longer wait for the best-case scenario to start a transformation process because, if the transformation is not started imminently, the best-case scenario will never happen:

• New digital players are disrupting industries, and many of them are already getting more value and better ratings from their customers than traditional companies.
• Companies committed to environmental, social and governance (ESG) criteria are increasingly prominent.
• Talent is more of a priority than ever in the C-suite, as leaders seek to increase the right capabilities to create value.

In such a dynamic business environment, organisations must be committed to exploring new ways of working, leveraging new capabilities and harnessing the potential of new technologies. 

However, transformation processes do not always go smoothly. According to McKinsey data, less than a third of transformations achieve their objectives and are reflected in improved performance.

What is a business transformation process?

Companies turn to business transformation processes because their leaders seek to activate unexploited potential or to increase profits, growth and efficiency. 

Along these lines, the most successful business transformations address most value creation opportunities. However, it is also possible to drive business transformation processes focused on a specific area, for example, the adoption of agile working methods.

On the other hand, some organisations undertake business transformation processes to achieve a specific set of objectives or to address urgent external challenges (disruptive new market entrants), industry discontinuities (technology is changing consumer behaviour) or macro-economic pressures such as supply chain issues. Other companies simply do it to stay competitive and drive growth through transformation methodologies with broader strategic objectives.

Holistic or delimited, pretty much all business transformations are digital transformations and therefore ask for investments in new technologies and technological processes.

Business transformation methodologies

As mentioned above, business transformation processes can be cross-functional or focus on one or more of the following areas:

• Agile coaching
• Cost reduction
• Customer experience
• DE&I
• Digital transformation
• IT and data-driven transformation
• Leadership development
• Start-ups, mergers and acquisitions
• Organisational effectiveness
• Supply chain and procurement
• Sustainable growth and ESG strategy
• Workforce transformation

Who is involved in business transformation?

Any business transformation process must be driven by two key figures: the CEO and the CTO.

• The CEO contributes to the success of a transformation process by communicating its importance, modelling the desired changes, building a strong management team and being personally involved.
• The CTO, an increasingly prominent C-suite function in many industries, is the high-level orchestrator of the transformation process. The CTO should be an extension of the CEO, with the mandate and authority to make decisions about people, investments and operations.

While senior management's role is crucial, a transformation process requires the involvement of many more people in the workforce, who play specific roles in the transformation process, such as leading workflows or being the manager of a particular initiative.

• Business transformation processes that involve at least 7% of employees are twice as likely to generate better overall results for shareholders.

Success factors of a business transformation process

The most successful business transformation processes turn ideas into detailed business plans with monitoring parameters and timelines to measure results. Ultimately, these business plans must translate into value creation, cost savings and growth opportunities.

According to recent research, the business transformation processes that produce the most value have 3 key actions in common:

• Identify opportunities for improvement based on objective facts. Any transformation process requires prior research to identify areas for improvement and opportunities. This research should be based on factual evidence that assesses the financial impact and expected outcomes of the transformation process. This knowledge base gives process leaders confidence and stimulates them to pursue ambitious but realistic objectives that aim to achieve the full potential of the process.
• Communicate a compelling reason why the business transformation process is necessary. It is not enough to simply state the results; managers must be able to communicate why employees need to do things differently. If the people involved do not understand how the transformation will impact their daily work, as well as the overall objectives of the company, their mindset and behaviour will not change. Talent and skills development, as well as building understanding and conviction, are essential to ensure that the workforce will commit to the transformation.
• Matching talent to value creation. This action highlights the importance of linking business and talent priorities by creating a clear vision of where value is generated in the business and who in the organisation has the ability to deliver that value.

On the other hand, the execution phase of the business transformation process —embedding the transformation disciplines into the usual structures, processes and systems— plays a major role in value creation.

In terms of motivating employees to embrace change and strive to achieve the desired results, targeted financial incentives are among the most effective measures.

• Companies that apply financial incentives directly linked to transformation outcomes achieve almost a five-fold increase in total return compared to companies without similar programmes.

A well-designed non-financial incentive programme can also foster enthusiasm and boost employees' discretionary efforts.

Finally, speed is of the essence. The best financial performers typically realise 74% of the value of their business transformation processes in the first 12 months. In turn, that initial value can be reinvested in new initiatives, creating a continuous cycle of improvement.

Factors that contribute to the failure of a transformation process

The most common factors that can endanger a business transformation process are:

• Take success for granted. As mentioned above, business transformation processes often produce most results in the first 12 months. This can lead process leaders to think that everything is already done. In successful business transformation processes, companies often turn their initial burst of value creation into an achievable and rigorous long-term plan.
• Lack of clarity about resources, initiatives and decision-makers. Without a clear plan of actions to be taken and those directly responsible, it is impossible to integrate rapid decision-making and reinforce new mindsets to keep the transformation moving forward.
• Not making changes over time. There is no single action, or set of actions, that defines successful transformation. However, leaders who invest in tangible changes to business-as-usual structures, processes and systems, prioritise transformations as the main event, and maintain a long-term mindset, can give their organisation the best chance of achieving its full transformation potential. In fact, many companies replace 70% of their initial initiatives after the first year of the process.

How to initiate a business transformation process?

Nowadays, all business transformation processes involve digital transformation processes.

When undertaking a business transformation or digital transformation process, companies often need experts' guidance on how to approach the process and advice on what techonologies they need to achieve the desired results.

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