The Value of Digital Transformation

Digital transformation:

Even though 89% of major businesses worldwide are undergoing a digital and AI transformation, they have only realized 31% of the projected revenue increase and 25% of the projected cost savings from the endeavor. Until corporate executives are certain of the worth and trustworthiness of… “Present me the cash!” In the Jerry McGuire film, Cuba Gooding Jr., who portrayed Rod Tidwell, cemented those remarks into popular culture. Not only was he voicing his concerns about committing to Tom Cruise’s sports agent persona, but he was also casting doubt on Cruise’s sincerity. When it comes to their company’s digital and AI revolutions, business executives, shareholders, and board members are increasingly saying the same thing, although in different terms. The 89% of large companies worldwide that are undergoing a digital and AI transformation have only achieved 31% of the expected revenue increase and 25% of the anticipated cost savings.

Given that history, certain difficult issues arise, like: Is all of this digital work worth it? Is it wiser to follow quickly, or do I truly need to lead my industry? Is this the cost of doing business in the contemporary era, or can I develop digital and AI skills that provide me with a sustainable competitive advantage?

 According to a recent McKinsey study, 89% of large companies globally have a digital and AI transformation underway.
According to a recent McKinsey study, 89% of large companies globally have a digital and AI transformation underway.

Until business leaders are convinced of its value and confident in their ability to obtain it, they are unlikely to make the difficult, hands-on changes required to increase their success rate, as we argue in our book Rewired: How to Outcompete in the Age of Digital and AI. However, we have discovered exactly where and how digital transformations add value—and what companies can do to outperform their rivals—using proprietary data.

Hard Evidence, Real Value

There is a dearth of concrete proof linking the digital and AI revolutions to gains in financial performance and operational KPIs.

To address this problem, we looked to the banking industry, where we had a unique longitudinal dataset and enough experience with digital transformations to provide insightful results.

First, we used McKinsey’s Finalta benchmark, which monitored the annual performance of eighty international banks between 2018 and 2022 based on fifty normalized variables, including the number of branches, the number of employees in contact centers, and the adoption of digital and mobile platforms. Then, in order to identify 20 digital leaders and 20 digital laggards, we separated performance into two metrics: the proportion of mobile adoption by their client base and the proportion of sales that started in digital channels. Within the industry, these two criteria are widely acknowledged as essential components of a digital retail banking strategy.

We then integrated this data with Corporate Performance Analytics from McKinsey to determine the final performance of banks in relation to financial indicators (such as total shareholder return, growth, and costs). We then conducted a blind evaluation of the digital and AI maturity of the top and bottom banks (i.e., the banks’ identities were concealed).

The results are startling. Compared to laggards, digital leaders are producing much greater shareholder value. Digital leaders had average annual total shareholder returns of 8.1% between 2018 and 2022, while laggards saw average annual returns of 4.9%. In addition, leaders’ return on pre-tax tangible equity (ROTE) increased from 15.5% in 2018 to 19.3% in 2022, while laggards’ ROTE increased more moderately, from 13.6% to 15.3%.

The executives’ accomplishments in augmenting revenue and more effectively managing spending account for this financial outperformance. Digital leaders projected a 0.5% annual increase in their active customer base and a 0.8% annual rise in retail sales between 2018 and 2022, while digital laggards saw no growth in their active customer base and a 1.4% annual decrease in retail revenues. In the same time frame, operational expenditures increased at a rate of 1.3% annually for leaders and almost double that rate of 2.3% annually for laggards. So how can leaders so clearly outcompete others?

Creating Value That’s Hard to Copy

From whence does value originate? Let’s take a peek “behind the digital hood.” The pace at which digital leaders and laggards are expanding mobile app usage is equal, and over time, the difference between them will remain stable at 14 to 15 percentage points. (See the chart below.) This is not unexpected. Whenever a bank rolls out a new feature on its mobile app, other banks notice and rapidly copy. The mobile application is unimportant.

Using digital sales offers a much more perceptive solution. In this case, leaders’ advantage over laggards has almost doubled over the previous five years, indicating a rapidly expanding gap between the two groups. As a matter of fact, digital laggards saw their growth slow to 8%, while digital leaders saw their growth accelerate to 70%.

This significant difference may be attributed to the fact that top banks are going above and beyond the mobile app to digitally alter the difficult-to-see and difficult-to-copy end-to-end process, which includes origination, fulfillment, and service. They need to coordinate hundreds of teams who are proficient in creating AI and digital breakthroughs every day across all of their customer journeys and essential company operations in order to achieve this.

Leading digital banks, for instance, use digital marketing campaigns and customization analytics from the beginning of the process to provide (possible) consumers with offers that are relevant to them. They provide an omnichannel experience in the midst of this process, giving branch and contact center employees the resources and information they need to assist clients at any point in the sales process—even if it began online. Moreover, these top banks provide real-time consumer approvals because of computerized credit-risk decisioning. They facilitate customer self-servicing at the tail end of the process by using well-designed digital processes made possible by a cutting-edge data architecture.

Contact center personnel are another area where the benefits of this transformational strategy become evident. Over the previous five years, laggards saw a 20% rise in calls as a result of their inability to handle incoming calls from clients via digital channels. However, because of their superior online customer service and strong self-servicing capabilities, digital leaders were able to reduce contact center headcount by 11%.


This chart shows the story of banking through a series of bar charts, identifying the leaders and laggards according to selected metrics. The gap in mobile adoption between leaders and laggards has remained constant. This is not surprising, as banks are quick to copy each other’s features; the mobile app is table stakes. Meanwhile, the gap between leaders and laggards in digital sales is growing fast, because digital leaders transform the complete journeys, from origination to fulfillment to servicing, a deep re-wiring that is hard to copy. Digital Adoption by Peer Group: Percentage of total customers 90-day active in mobile in 2018 vs. 2022. Laggards grew from 18% in 20 18 to 35% in 20 22. Leaders grew from 32% in 20 18 to 50% in 20 22. Digital Sales by Peer Group: Percentage of sales through digital channels. Laggard grew from 8% in 20 18 to 17% in 20 22. Leaders grew from 40% in 20 18 to 70% in 20 22. Contact Center Staffing: Percentage change in inbound fulltime employees per 100 thousand customers between 20 18 and 20 22. Laggards grew this staff by 20%. Leaders’ staff declined by 11%. Source: McKinsey.

While knowing what to accomplish is crucial, how it is done is what really counts. Let’s examine the strategy a US bank used for its secured lending division. In the past, the bank typically required 45 days to process a customer’s loan application. Several requests for documentation were made to customers (pay stubs, W2s, letters of explanation, etc.), and a large amount of manual work was done on the back end (first file review, file assignment, ad hoc reports, etc.).

The executive team of the bank completely redesigned the procedure in order to change this trip. They created a database of tens of millions of American families, integrating credit, property, and income information utilizing internal and external data sources in order to expedite pre-approvals. They were able to create customized, pre-approved offers using this data, which clients could accept with a single click. They developed a mobile-first customer experience that allowed users to complete a pre-filled application on their phone or with a bank employee’s help and customize their offers based on real-time data. They created digital tools for operators to increase efficiency (like daily workflow management), automated important chores (like initial file scrubs), and restructured important procedures (like specialized loan “assembly lines”). Additionally, they updated the way credit policies were implemented to allow for more data to be used in underwriting (such as utilizing direct deposit data to estimate income) while preserving or tightening bank risk controls.

They deployed a customer data platform, AI/ML models (like propensity models), data products (like income), a digital customer app, and a workflow tool for the fulfillment center on a cloud-based platform-as-a-service infrastructure in order to enable all these innovations.

Over a dozen use cases were needed for this transition overall, and extensive change management activities (such as retooling and training) were needed for agents in branches, contact centers, and operations. However, the clearance procedure was cut from 28 to 7 days, only 18 months after the original introduction. By taking this step, the bank was able to raise originations by 35% and lower origination costs by 20%, positioning itself as a top originator of secured loans.

The capabilities needed to outcompete

To achieve superior performance, a corporation must implement comprehensive improvements that span several customer journeys and essential business processes, similar to what the bank mentioned above performed. That can only happen if it is rewired with unique capabilities. Our analysis of more than 200 significant digital and AI transitions revealed six key competencies that rewired businesses to cultivate:

Creating ambitious and focused transformation roadmaps. Business executives must thus coordinate their efforts on certain areas (such as journeys or processes) that are important to consumers and provide a substantial amount of value.

Building a quality digital talent bench. Major-notch engineers are drawn to environments that support their growth (e.g., customized career paths, autonomy), and this is a major priority for leaders.

An operational paradigm in which resources from control functions, engineering, and business are organized into hundreds of tiny cross-functional “pods” to work on priority problems. a single owner of the trip (or product) who is in charge of the whole experience.

A distributed technology environment and modern software engineering practices make it possible for the entire company to create AI- and digital-based solutions, not just IT.

Data products and modern data architecture make it simple for various departments within the company to use data for their own purposes.

Change management ensures digital solutions are adopted and can scale by making them simple to use and repurpose throughout the company.

We discovered that leaders excel in all areas when comparing these capabilities between leaders and laggards based on our blind evaluation of these skills. Nobody can fully account for their achievements. Everyone is required to In light of that foundation, personnel and operational models—rather than technology—are the most distinctive capabilities. These capabilities eventually result in reduced unit costs and continuously better client experiences. There are monetary benefits thereafter.

Although our study has concentrated on banking, our experience shows that comparable principles and trends apply to many industries, regardless of whether they provide B2B or B2C goods or services. However, a digital and AI transformation cannot be carried out in the “special project” style. A comprehensive set of skills is needed for the whole business to be able to produce continuous digital innovation in order to carry this off. The prize is worth the considerable effort.

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