McKinsey Explainers

What is digital
transformation?
Digital transformation is the rewiring of an organization,
with the goal of creating value by continuously deploying
tech at scale.

June 2023
 Digital transformation is the fundamental rewiring insights and enabling decision-making logic,
of how an organization operates. The goal of a digital any digital transformation should also be
transformation, as outlined in the new McKinsey an AI transformation.
book Rewired: A McKinsey Guide to Outcompeting
in the Age of Digital and AI (Wiley, June 20, 2023), As we’ll show, successful digital transformations
should be to build a competitive advantage by hinge less on how companies use digital and more
continuously deploying tech at scale to improve on how they become digital.
customer experience and lower costs.

Like many commonly used phrases, “digital What capabilities are needed to move
transformation” has devolved into a catchall term the needle on digital transformation?
that means different things to different people. Successful digital transformation requires a variety of
That’s a problem. Digital transformation is critical coordinated actions. Rewired lays out six capabilities
for organizations to not only compete but survive. critical for successful digital transformation:
If leaders can’t be clear about what a digital
transformation is—and align their organization — The ability to craft a clear strategy focused on
around a specific program—they can’t expect business value. Companies should focus their
to be successful. transformations on specific domains (customer
journeys, processes, or functions) that generate
Digital transformations are different from regular significant value for the business. The trans­
business transformations, in both small and big ways. formation should be guided by a road map, which
For one thing, business transformations usually details the solutions and resources needed to
end once a new behavior has been achieved. Digital deliver change to prioritized domains.
transformations, on the other hand, are long-term
efforts to rewire how an organization continuously — A strong talent bench with in-house engineers.
improves and changes (and that means really long No company can outsource its way to digital
term; most executives will be on this journey for the excellence. Being digital means having your own
rest of their careers). That’s because technology bench of digital talent working side by side with
is not only becoming further integrated in business your business colleagues. The best digital talent
but also constantly evolving. For example, given the programs go way beyond hiring: they should
growing importance of AI in generating business include employee value propositions that attract

What we mean by digital and AI transformation

Led by CEO and top team.

A digital and AI transformation is the process of developing

The source of organizational and technology-based capabilities

competitive
advantage. that allow a company to continuously improve It’s never been done!

its customer experience and lower its unit costs; Both matter.

and over time sustain a competitive advantage.

The finality.

2 What is digital transformation?

 and retain the best talent; agile and digital — Strong adoption and change management. In
HR processes to find, manage, and train talent; the past, the technology adoption cycle was a
and a healthy environment where the best linear process of gathering requirements,
talent thrives. developing solutions, testing, and then training
the end user. This process often resulted in low
— An operating model that can scale. Digital adoption rates and ultimately low business value.
transformations depend on cross-functional Digital transformations follow a far more iterative
teams that bring together people from process of designing, prototyping, collecting
across the company. Most companies already feedback, and improving the solution so it can
have a handful of these teams, but scaling to capture the full value potential. As a rule of
support hundreds or thousands of them requires thumb, for every dollar you spend on developing
a new operating model. There are three primary a digital solution, plan to spend at least another
operating models to consider: the digital factory, dollar on implementing process changes, user
the product and platform model, and the training, and change-management initiatives.
enterprise-wide agility model. Companies should think about adoption and
scaling at the beginning of their transformation
— Distributed technology that allows teams to so they can build in the resources needed to
innovate independently. Technology in an deliver the change.
organization should make it easier for teams to
continually develop and release digital No digital transformation can be successful without
innovations to users. To make this happen, coordinated action across all these areas.
organizations should foster a distributed
technology environment where every team can
access the data, applications, and software What is a domain and why does
development tools they need. Recent technology it matter?
advances can help create this distributed Digital transformations have a much improved
environment—these include the thoughtful use probability for success when teams focus on
of APIs to disengage applications, the availability changing entire domains (for example, a customer
of developer tooling, the selective migration journey, process, or functional area) rather than
of high-value workloads to the cloud, and the only on use cases (a single step within the domain,
automation of infrastructure provisioning. such as answering a customer-service call). A
focus on domains is conducive to effective change
— Access to data that teams can use as needed. because it encompasses all related activities to
Reliable, current data are crucial to successful deliver a complete solution. So instead of focusing
digital transformations. Data architecture on just one step of a process—such as creating the
should produce data that are easily accessible process for a customer to open a bank account
by teams across an organization, and should be through an app—the domain would also include all
continually assessed and updated. Strong the other activities (account setup, verification,
governance is required to enable this capability. workflow automation, etcetera) required to open
The core element is the data product, which the account. Reckoning with all those other
structures various pieces of data into a coherent activities is what allows a solution to deliver its value.
unit that can be easily consumed by a range of A domain should be large enough to be valuable
teams and applications. and noticeable to the company but small enough to

What is digital transformation? 3

 It’s important to experiment and learn
rapidly, but it’s also critical to resist the
temptation to develop use cases with
exciting new technology that doesn’t end
up creating value for the business.

be transformed without relying too much on other continually revisit their digital transformation road
parts of the business. Managing the interconnectivity maps and review prioritized solutions to determine
of use cases and solutions within a domain is one how new iterations of generative AI models can
of the keys to transformation success. support their goals.

What role can AI play in a digital What are the key leadership roles in
transformation? a digital transformation?
AI, and particularly generative AI, is upending how A successful digital transformation touches a broad
companies operate and build value, presenting range of an organization’s functions so they can
huge opportunities including content generation, work together in new ways. This requires large-
new discoveries (particularly in fields such as scale and coordinated investments. The only person
pharmaceuticals and chemicals), and coding. who can make that level of sustained change
happen is the CEO. One of the CEO’s crucial jobs
But it can be easy to get distracted by shiny new is to ensure alignment, commitment, and
toys. The lessons of past technology innovations accountability among the leadership team. Without
still apply: value comes from having a clear any of these, progress on digital transformations
understanding of business goals and how can rapidly stall.
technology can help meet them. It’s important
to experiment and learn rapidly, but it’s also Leaders at the C-suite and business unit level have
critical to resist the temptation to develop use crucial tasks as well. When it comes to tech, the
cases with exciting new technology that doesn’t chief information officer typically focuses on
end up creating value for the business. improving the inner workings of the company with
technology. The chief technology officer usually
Building value with generative AI requires the same works on improving customer offerings with
strong competencies needed for a successful technology. Chief digital officers, in many cases, act
digital transformation, including a clear strategy, an as coleaders of the transformation and typically
in-house digital talent pool, and a responsive and work with digital and AI technologies to create new
scalable operating model. And it’s not just a one- digital experiences for users. The chief human
and-done: companies that wish to incorporate gen resources officer plays a crucial role early in the
AI into their value propositions will need to transformation to secure digital talent and to

4 What is digital transformation?

put in place the talent management practices that What companies are doing this well?
will develop and retain digital talent, while the To be digital, every company needs to rewire how
CFO oversees the transformation business case it works. Once upon a time, Amazon was just
and the tracking of the value realization. Finally, another start-up: it had to invest in its technology,
the chief risk officer needs to direct the integration data, performance management, and talent
of risk checks into the development process, practices over years to become an industry
and understand how to respond to new risks, such leader. The good news is that successful digital
as data privacy and cybersecurity, that a digital transformations aren’t just the purview of the
and AI transformation may generate. tech titans. Established companies of all kinds can
be successful on their digital transformation
journeys. Here are three examples:
How do you know if a digital
transformation is working? — The copper-mining giant Freeport-McMoRan
It can be surprisingly difficult to know how a digital unlocked next-level performance by building and
transformation is going. Without properly tracking deploying an AI model at an ore-concentrating
and measuring outcomes, leaders will struggle to mill in Bagdad, Arizona. Leadership set the
manage performance and ensure that the changes aspiration to increase the site’s copper output
happening are creating value. without a massive injection of capital. The
company pulled together cross-functional teams
Knowing what to measure is half the battle. In digital to build, test, and iterate on the AI model, shifting
transformations, key performance indicators (KPIs) the culture to focus on rapid iterations and
usually fall into three categories: continuous improvement. Freeport-McMoRan
put a senior product manager in charge to
— Value creation. Digital solutions typically target help coordinate teams and improve allocations
one or a few operational KPIs that can usually be across working teams, assigned a finance
translated into financial benefits. director to manage impact tracking and
reporting, and instituted a quarterly planning
— Team health. Many digital transformations system (similar to quarterly business reviews) in
progress more slowly than initially planned which top leaders from the company came
because their teams are understaffed, they did together to set objectives and key results and to
not adopt modern ways of working such as focus resources on high-priority areas.
agile, or they lack critical capabilities such as
product management and user-experience — Vistra, one of the largest power producers in the
design. In our experience, high-performing United States, built a multilayered neural network
teams can be five times more productive than model to improve overall efficiency, improve
low-performing teams. reliability, and reduce emissions. The model
combed through two years’ worth of data at the
— Change-management progress. These metrics plant and learned which combination of factors
measure the progress in building new capabilities would optimize a plant’s efficiency at any given
and the health of the transformation itself. time, converting them into an AI-powered
Are we mobilizing teams as planned? Are people engine that generates recommendations every
engaged? Are we building capabilities and talent? 30 minutes for operators to improve the plant’s
Are people seamlessly using the technology, heat-rate efficiency while extending asset life.
tools, and products being developed? In our Key to the success of this approach was building
experience, the perfect is the enemy of good a capability to scale the solutions (for example,
when managing change.

What is digital transformation? 5

 a machine-learning-operations infrastructure to — “The digital-value guardian: CEOs and digital
Find more content like this on the
standardize and maintain models) so they could transformations,” December 20, 2021, Eric
McKinsey Insights App
be easily applied and tailored to each of the Lamarre, Kate Smaje, and Rodney Zemmel
stations in Vistra’s network. A cross-functional
team including plant operators, data scientists, — “Scaling AI like a tech native: The CEO’s role,”
analytics translators, and power process experts October 13, 2021, Jacomo Corbo, David
ensured rapid development, high-quality Harvey, Nicolas Hohn, Kia Javanmardian, and
models, and adoption of the models. Nayur Khan

— An AI bot helped Emirates Team New Zealand — “Strategy for a digital world,” McKinsey Quarterly,
Scan • Download • Personalize
win its fourth America’s Cup in 2021. Using deep October 8, 2021, Simon Blackburn, Jeff Galvin,
reinforcement learning, the bot learned how to Laura LaBerge, and Evan Williams
become a professional sailor. This happened by
bringing together sailors and data scientists — “CHRO perspectives on leading agile change,”
to develop and train the bots so that they could August 30, 2021, Jason Inacio, Dávid Kincsem,
learn dynamically and gain greater accuracy and Dániel Róna
through continuous feedback. The team put
extensive time into figuring out the right learning — “How CIOs and CTOs can accelerate digital
models, how best to coach the bot, and the right transformations through cloud platforms,”
guardrails to put into place. To enable the scale September 15, 2020, Jayne Giemzo, Mark Gu,
of computation required, the team hosted many James Kaplan, and Lars Vinter
of the bots and applications on the cloud.
— “Welcome to the Digital Factory: The answer to
Learn more about McKinsey Digital, and learn about how to scale your digital transformation,” May 14,
digital transformation–related job opportunities if 2020, Somesh Khanna, Nadiya Konstantynova,
you’re interested in working at McKinsey. Eric Lamarre, and Vik Sohoni

Articles referenced: — “Products and platforms: Is your technology

operating model ready?,” February 28, 2020,
— “Beyond the anecdote: True drivers of digital- Ross Frazier, Naufal Khan, Gautam Lunawat,
delivery performance,” March 15, 2023, and Amit Rahul
Santiago Comella-Dorda, Dan Gardner, Lauren
McCoy, and Vik Sohoni — “Inside a mining company’s AI transformation,”
February 5, 2020, Red Conger, Harry Robinson,
— “Generative AI is here: How tools like ChatGPT and Richard Sellschop
could change your business,” December 20,
2022, Michael Chui, Roger Roberts, and — “Unlocking success in digital transformations,”
Lareina Yee October 29, 2018, Hortense de la Boutetière,
Alberto Montagner, and Angelika Reich
— “Digital transformation on the CEO agenda,” May
12, 2022, Kate Smaje and Rodney Zemmel — “‘Transformer in chief’: The new chief digital
officer,” September 1, 2015, Tuck Rickards, Kate
— “Three new mandates for capturing a digital Smaje, and Vik Sohoni
transformation’s full value,” June 15, 2022, Laura
LaBerge, Kate Smaje, and Rodney Zemmel

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6 What is digital transformation?