Managing the fallout from technology transformations

| Survey

Companies are improving business performance as a result of technology-transformation efforts and largely see advanced technologies and strong IT performance as both competitive differentiators and drivers of growth. However, they may be pausing to digest what they have accomplished before undertaking further large-scale evolution of their technology organizations.

According to the results of the latest McKinsey Global Survey on the topic,1 nearly all respondents’ organizations—99 percent—have pursued a large-scale technology transformation in the past two years.2 While doing so, many have experienced cultural and talent gaps and weak partnerships between IT and the rest of the business. Overcoming these issues will require companies to reskill people, reboot culture, forge closer IT–business relationships, and rigorously measure IT’s value. To help their companies succeed, executives might learn from companies with technology organizations that perform in the top quartile on core technology tasks,3 where respondents say they have done well at meeting these challenges.

A strong technology organization is widely seen as a competitive edge and a growth engine

For many years, our research on business technology has shown that technology organizations often fall short of executives’ expectations. They have underperformed on core activities. Many managers outside IT have seen their technology counterparts as replaceable or as merely a cost center, and IT leaders have struggled to secure a seat in strategy discussions. But now, respondents’ three-year outlook on the value of their technology organiza­tions is more positive. A majority (54 percent) of respondents in IT and other functions say their technology organizations’ performance will significantly or completely differentiate their overall business from that of competitors (Exhibit 1). A similar share say the same of their companies’ use of IT. At companies with the best-performing technology organizations on core IT tasks, respondents are even more likely to describe their technology organizations and their use of technology as competitive advantages. (Explore the results from respondents at these companies in “An interactive look at technology transformations and IT activities.”)

Most respondents—especially those with top-quartile technology organizations—expect IT performance and use of technology to be competitive advantages.

What’s more, 65 percent of respondents expect that their companies’ use of technology is most likely to support revenue growth, rather than cost reduction, over the next three years. One-quarter of respondents say that increased revenue from new customers will be the primary outcome of their technology use in the next few years, and roughly one-fifth of other respondents expect technology to increase engagement with current customers (21 percent) or to increase revenue from new products or business models (19 percent). Another 21 percent of respondents say reduced costs through auto­mation and digitization will be the most likely outcome of their companies’ technology use, though respondents at companies with top-quartile tech­nology organizations are half as likely as others to make this prediction.

Companies continue to invest in technology transformations and see performance improvements from them

Amid these expectations, most respondents say that their companies are making significant investments in increasing revenue through the use of technology—and that they continue to update their core technology and the way the technology organization operates. Consistent with our past two surveys,4Can IT rise to the digital challenge?,” October 2018. more than half of respondents say their organizations have pursued IT-infrastructure modernization and operating-model changes in recent years. Responses also indicate progress on bringing together digital and traditional IT teams.5Toward an integrated technology operating model,” October 2017. One-third—up from 18 percent in the prior survey—report a common operating model for these teams, meaning one that is digitally integrated6 or fully digital.

McKinsey Global Surveys

McKinsey’s original survey research

Among respondents reporting digital transformations at their companies, nearly two-thirds say these change efforts have improved their overall performance, a similar share as in 2017. Further, roughly half say these efforts have succeeded at improving performance and at sustaining these improvements. These investments are also facilitating companies’ broader digital initiatives. Compared with the pre­vious survey, much smaller shares of respondents now say that it has been difficult to integrate digital technologies with core technology (the most commonly cited digital-transformation-related challenge in the previous survey) or that newer ways of working have made it harder to manage funding and demand during their transformations.

The top-quartile technology organizations have made even more progress. As in the previous survey, respondents at these companies are more likely than others to say they have digitized their business processes and transformed how they operate. They are also more than twice as likely (66 percent, up from 29 percent in 2017) to report an integrated or fully digital operating model at their companies. Other respondents, by contrast, report strong but smaller gains: they are 61 percent more likely now than in the last survey (21 percent, up from 12 percent) to report an integrated or fully digital operating model for technology.

Interest in new operating models may be tempered by persistent transformation challenges

Although companies have made progress in transforming IT and upgrading core technologies, our latest survey suggests that some are reconsidering the need to evolve their technology operating models further. When asked about the target state for how technology is delivered, respondents are 27 percent less likely than before to say they are working toward a digitally integrated or fully digital model. As was true in the previous survey, top-quartile respondents remain more likely than others to cite an integrated or fully digital operating model as their organizations’ target state (Exhibit 2).

Respondents are less likely than in the previous survey to say they are working toward a digitally integrated or fully digital operating model.

This reset of expectations coincides with emerging issues that respondents whose organizations undertook digital transformations cite as pain points in their experiences thus far. Chief among these are talent and culture. In the newest survey, when respondents identify the challenges resulting from their digital transformations, they most often cite the skill gaps that have opened on traditional IT teams when top talent moves to digital product teams (Exhibit 3). The second-most-cited challenge is cultural differences between traditional IT and digital teams. Overall, respondents say that to close the gap between current and future skill needs, their companies will have to replace or fundamentally retrain more than one-third of their IT employees over the next three years. Our survey has cited the growing talent challenge for several years,7Can IT rise to the digital challenge?,” October 2018; “IT’s future value proposition,” July 2017; “Partnering to shape the future–IT’s new imperative,” May 2016; Pedja Arandjelovic, Libby Bulin, and Naufal Khan, “Why CIOs should be business-strategy partners,” February 2015. but few companies have taken significant steps to address it: just 22 percent of respondents say their technology organizations have transformed their talent strategies.

The most-cited obstacles encountered in digital transformations are talent and culture issues.

In addition, there are signs of weak IT–business partnerships. Fewer than half of IT respondents say they have a strong partnership with their business counterparts. Further, there is a 26-percentage-point gap between CIOs or CTOs and their C-level peers in their views of IT’s ability to measure its impact on the business effectively. Sixty-two percent of CIOs and CTOs say their technology organizations effectively evaluate the function’s performance, while 36 percent of other executives say the same.

Top technology organizations are meeting their transformation challenges

For ideas about how to overcome the organizational challenges that companies are facing during their technology-transformation efforts, executives might look at what the best-performing technology organizations do differently. One distinction is their approach to people—unsurprising, perhaps, given the aforementioned challenges with talent and culture. While talent transformations are the least common type of IT change effort we asked about, respondents at top-quartile companies are far likelier to say they’ve pursued one: 33 percent of these respondents report undertaking a talent transformation, compared with 19 percent of all others. They also say a smaller share of IT employees will need to be replaced or retrained in the next three years (25 percent of employees, compared with 39 percent among respondents at other organizations), and they are less likely to say employees have struggled in their new, post-transformation roles.

Another matter that top-quartile organizations seem to be getting right is IT’s partnership with the business. Previous survey findings have underscored the benefits of strong IT–business partnerships. But they also highlighted common shortcomings that keep the function from becoming an active partner with the rest of the business—particularly, IT’s operating model and a lack of clarity about IT’s priorities and role. In the latest survey, about half of IT respondents say their business colleagues support IT effectively on various dimensions of their work. But those at the best-performing technology organizations say so much more often. For example, they are two times more likely than other respondents to say their business colleagues partner effectively with IT on the execution of its work (Exhibit 4).

IT respondents at top-quartile organizations are more likely than those elsewhere to say their business colleagues support IT in various ways.

When asked which governance practices most help these IT–business partnerships maximize the value of technology investments, respondents most often identify presenting a strong business case, cited by 36 percent of respondents and 47 percent of top-quartile respondents. Top-quartile respon­dents are also much likelier than others to say the business and IT team up on strategy development. Forty percent of top-quartile respondents, but only 17 percent of others, say their companies’ IT strategies are jointly set by business and IT as part of the larger business strategy and revisited regularly.

Finally, the top-quartile technology organizations measure their overall performance and contribution to business value far more thoroughly than their peers do. The survey asked how companies mea­sure their performance on nine key IT outcomes. On average, 58 percent of top-quartile IT respondents say their companies produce metrics either in great detail or with cutting-edge analytics and discuss and share these metrics broadly. Just 26 percent of all other IT respondents say the same. Overall, IT respondents say their performance metrics focus on IT operations and costs, such as cost of technology delivery and system stability, and place less emphasis on digital enablement, revenue potential, and value to the business.

The CIO challenge Modern business needs a new kind of tech leader

The CIO challenge: Modern business needs a new kind of tech leader

The best-performing technology organizations are furthest ahead on measuring digital enablement, the financial benefits captured from IT, and the quality of partnership between business and IT (Exhibit 5). On the business side, non-IT executives at top-quartile companies are more aware than others are of their technology organizations’ performance on these outcomes. Overall, business respondents from companies with top-performing technology organizations are much more likely than their peers at other companies to say they are very aware of these IT outcomes, based on quantifiable metrics.

The best-performing technology organizations are furthest ahead on measuring digital enablement, financial benefits captured, and IT–business partnership.

Looking ahead

As companies look to advance their technology transformations, they can learn from how high-performing technology organizations address three key challenges:

  • Manage talent and culture modernization with the same rigor as technology modernization. Talent- and culture-related issues stand out as top challenges for digitizing organizations, and the findings highlight a critical need for retraining. But few technology organizations undertake talent transformations. To begin, they should take inventory of the skills employees possess and compare the results with the technology skills the company will need to attain its goals. Understanding the gaps can help executives direct talent-development efforts to where they will be most useful.
  • Strengthen the IT–business partnership with collaborative processes and structures. A digital transformation presents opportunities to establish processes for delivering business value (for example, iterative funding, up-front business cases, and preproject tech diligence), not just code. Creating and applying these processes together with business partners can help promote ongoing collaboration. Com­panies can increase alignment between the tech­nology organization and the rest of the business not only by including the CIO in strategy dis­cussions but also by bringing employees from IT and other business functions together on cross-functional teams that are jointly responsible for delivery of new technology.
  • Measure the business value created with technology and share it broadly. Technology-performance measurement often focuses on cost and risk, rather than value generation. CIOs should ensure their organizations measure and know the value they create for the business—and make sure the rest of the company knows it, too. As technology organizations shift to more agile, iterative ways of working, it’s also important to adjust how—and how often—they measure performance. Some organizations use quarterly business reviews, attended by both IT and business leadership, to highlight and pressure-test the value created by technology teams.
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