Digital Modernization VS Digital Transformation

@Karima-Catherine Goundiam
11 July 2019

Upgrades and Evolutions:

The Difference between Digital Modernisation and Digital Transformation

A lot of organizations confuse digital transformation with digital modernization. Digital transformation involves a profound change of how an organization does business, interacts with its stakeholders and its ecosystems. It is about changing processes and practices. What most companies engage in is digital modernization. No company should plug in a new enterprise system and call it Digital Transformation!

Digital Modernization Digital Transformation

1. Digital modernization: What it means

It’s very tempting to describe digital modernization in terms that diminish how important it can be. Once any business process is defined with steps to completions, permissions or responsibilities for performance, and policies for handling the data the process generates, then technological tools can be used to modernize it. Most organizations have already undergone several phases, or stages, of digital modernization.

Digital Modernization Digital Transformation
Accounting Office, Brooklyn, NY, 1925.

The digital modernization of book-keeping and accounting, for example, has been remarkable to watch. A century ago, rooms full of clerks sat on stools at high desks, scribing incoming and outgoing expenses into bound ledgers for factories and firms.  Today? Accounting software can automatically process invoices and accept electronic deposits to generate a monthly, quarterly or annual report of the enterprise’s financial profitability, tax liability and trading compliance.

Digital modernization streamlines and accelerates well-known and well-understood business processes. This digital modernization has been compared to the factory model that was established during the industrial revolution. Ultimately, a series of patches and upgrades, digital modernization has its benefits.

“The digital factory model that most businesses tend to use to launch their digital programs can undeniably speed up a company’s pace of innovation in the short term,” says a July 2018 McKinsey report called Modernizing IT for Digital Reinvention.

The report tracked the adoption of new IT infrastructure and the benefits in time and cost savings were immediately apparent. Consider the example of moving businesses processes to the cloud from on-site servers.

“The number-one benefit that many leaders saw from adopting cloud was in time to market,” says the McKinsey report. “What that means is that they were able to deploy new applications using cloud services a lot faster than they were able before. Sometimes we were talking about the difference between weeks cut down to a few hours and sometimes less than one hour.”

Those dramatic time savings, added to reductions to the cost of hosting, and hosting hardware, and the case for digital modernization makes sense to IT decision-makers.

Notice I said IT decision-makers? That’s because the benefits are realized through IT. The rest of the organization generally remains unaffected by digital modernization.

The tools that support digital modernization do help companies realize cost and times savings, fair enough, but tools do not transform organizations. 

2. Digital transformation: The evolution of your business model

Digital transformation, unlike modernization, embraces the use of tools and their optimization of processes, but is not limited by tools. Digital transformation uses the abilities of the modern clerks who have been freed from their stools and ledgers. It puts data in their heads instead of quills in their hands so that they can dedicate their energies to analysis, consultation and the evolution of the business model itself.

Why is that important? The evolution of the business model enables growth. There are more than enough barriers to achieving that in our current economic culture.

“Twenty-three percent of CEOs see significant impacts to their own businesses arising from recent developments in tariffs, quotas and other forms of trade controls,” says a May 2019 Gartner report on growth challenges. “Another 58% of CEOs have general concerns about this issue, suggesting that more CEOs anticipate it might impact their businesses in future.”

Source: Gartner (May 2019)

How will digital transformation show itself to have more muscle than digital modernization when it comes to overcoming barriers to growth? The value of thought over tools is already apparent in how CEOs approach cost controls.

“When asked about their cost-control methods, 27% of respondents cited technology enablement, securing the third spot after measures around people and organization, such as bonuses and expense and budget management,” the Gartner report found. “However, when asked to consider productivity and efficiency actions, CEOs were much more inclined to think of technology as a tool. Forty-seven percent of respondents mentioned technology as one of their top two ways to improve productivity.”

That tools themselves never made it into the top spot shows that decision-makers know the limits of digital modernization and are looking toward digital transformation. Ultimately we apply digital modernization when we know the processes that tools can automate to free up human energy and intellect. When we use that human energy and intellect to solve problems, then we are leveraging the power of digital transformation.

What does that look like when solving the problem of a trade tariff or other barrier to growth? When hit with US tariffs on Canadian steel, and then retaliatory Canadian tariffs, companies on both sides of the border faced issues controlling costs and supply channels. Digital modernization meant that companies had tools to keep their inventory and production estimates at the ready. Data was always available to inform governments on both sides of the dispute what damage was happening.

Companies engaged in digital transformation with an eye to growth, on the other hand, could be more agile.  They could create business plans and model distribution channels to access new markets in the EU and Asia. This agility and evolution is only possible when you combine the data generated by digital tools with the application of very human strategies. The planned ability access to talent to overcome non-tariff barriers such as language, licence equivalencies and cultural understanding is also part of human capital piece.

Digital transformation uses human energy and intellect to define processes that have not been identified, evolve possibilities that have not been fully explored and to look for new opportunities for innovation. That search for innovation, followed by creating supports that let it evolve, is what separates digital transformation from digital modernization.

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