Digital transformation vs. digital optimization: How to choose

What is digital transformation?

Digital transformation lets companies use tech to improve and adapt to changing business and market needs. In other words, digital transformation can be transformational. But it also poses significant costs and risks, including the growing problem of transformation fatigue.

Today, enterprises are under increased pressure to do more with less, which could make digital optimization a better approach.

What is digital optimization?

Whereas digital transformation seeks a new optimal meeting point between IT and business operations, digital optimization realigns IT to mesh optimally with current practices. Digital optimization doesn't generally disrupt the business.

This method is also less likely to generate fatigue because it minimally affects departments dependent on digital processes. However, the short-term benefits are likely minor or too small.

What to look for in digital optimization

The first question to ask about a digital optimization plan is whether the benefits are too small to justify the cost and effort. CFOs expect projects to earn an ROI equal or higher than their internal rate of return (IRR).

CIOs and IT leaders should consider evaluating if the ROI will meet the IRR goal before pursuing digital optimization. If it doesn't, then a larger transformation might be required, or planners will need to ask another question.

That question is whether allocating some of the budget for an orderly IT infrastructure modernization meets most, if not all, the company's needs for digital optimization. However, it's rare for a transformation project to be cost-contained enough to fit into modernization plans.

Since optimization normally requires less investment, a good part of the project might fit into a modernization plan. If the optimization project can cover some costs as part of a modernization budget, it can raise project ROI enough to make optimization a viable choice. If optimization meets all ROI requirements, the question is whether transformation is still better in terms of achieving more per unit investment.

If optimization can't meet project ROI requirements, then transformation might be the only option.

What to look for in a digital transformation

If you've run a digital transformation project less than two years ago, finding support for another project is rarely easy to justify. The average financial write-down on tech investments is three to five years.

Another transformation project is likely to require writing off some of the equipment's residual value, making a brand-new project more difficult to justify for the CFO.

In addition, leading another transformation project so quickly can induce transformation fatigue. Unless a major external driver, such as new competition or regulations, emerged since the last project, consider a new project only if the company can gain extraordinary benefits.

There's also the possibility that the organization is in the process of completing a project. If the company still needs to complete a transformation project, the general rule is to select the option with the greatest ROI.

Enterprises also say that if no transformation project was completed in the last five or more years, it's very likely that the combination of organizational updates, market changes and tech upgrades since the last project means the current relationship between IT and operations is obsolete.

For example, optimization might leave too many unrealized benefits behind. Moreover, technical debt is accumulating during the process, placing stability, security and operations at risk. In this case, take a hard look at transformation vs. optimization.

Assuming that transformation ROI is higher than optimization and that the last transformation took place roughly two to five years ago, there's still questions to address.

For example, CIOs and IT leaders should consider the effects of transformation on operations. The difference between digital transformation and digital optimization is that the transformation realigns not only IT but also procedures and practices across the company.

That almost always influences productivity as workers accommodate a new way of completing their work. But if this change occurs at a time of high opportunity, competition or both, the result can be a loss of revenue.

What to expect from a project failure

CIOs and IT leaders should think about how much risk a digital transformation will create compared to optimization, the more conservative alternative. The larger the project, the greater the scope of potential issues, and the increased number of things that can go wrong.

A transformation project failure will likely generate a significant cost overrun, affect company departments more than expected, and increase digital transformation fatigue and technical debt.

If the ROI of transformation versus optimization is small, the risk might tip the scales back to optimization.

This advantage should demonstrate that the difference between digital transformation and digital optimization is often subtle.

The challenges of shifting from optimization to transformation

Once a project is underway, new situations often arise that weren't considered before approval.

For example, employees might need help visualizing application changes in abstract as well as recognizing issues and opportunities as the project progresses.

The difference between digital transformation and digital optimization is that the transformation realigns not only IT but also procedures and practices across the company.

There should be a mechanism to address these concerns, including defining a point where optimization needs to become transformation and how to prevent that transition when it poses a threat.

Changes suggested later in a project's timeline are more likely to affect project success. Where changes in one area affect other areas, project leaders might either halt the project for review and consider shifting to a digital transformation or hold the changes until the project is complete, then follow through on a separate phase to make the changes.

Suggested changes that emerge through project activity will likely continue. Effectively addressing those changes will become more complex as they accumulate.

Companies should not undertake any optimization project change that alters the dependencies between project tasks without a thorough review. Any suggested change that requires actual operational change should be considered a shift to a transformation model.

A pattern of smaller changes proposed during a project might be an indicator that the initial project assessment missed too many critical points to be trusted.

Once a project is at the point of integration testing and needs direct employee involvement in assessing input and output changes, defer any changes that might affect integration until completing a thorough review of the entire project design.

A decision to shift from optimization to transformation should always be explicit, starting with the creation and approval of a digital transformation plan. However, expect the shift to increase the risk of transformation fatigue and take leadership steps to mitigate that risk.

What's the best approach to comparing digital transformation and digital optimization? Think of it as starting with a calculation of the ROI for each activity, then factor in the risks of each project.

Remember that transformation is a long-term strategy. Don't undertake a project if business or technology changes could render the transformed approach obsolete before earning the expected benefits.

Tom Nolle is founder and principal analyst at Andover Intel, a consulting and analysis firm that looks at evolving technologies and applications first from the perspective of the buyer and the buyer's needs. By background, Nolle is a programmer, software architect, and manager of software and network products. He has provided consulting services and technology analysis for decades.