Written by: Eric Lamarre, Shital Chheda, Marti Riba, Vincent Genest and Ahmed Nizam | Published by: c.2023 Harvard Business School Publishing Corp.
“Show me the money!” Cuba Gooding Jr., playing Rod Tidwell, made those words a cultural touchstone in the movie Jerry Maguire. He was not just voicing his concerns about committing to a sports agent, played by Tom Cruise in this case; he was also questioning Cruise’s commitment.
Business leaders, shareholders and board members have increasingly been saying the same thing — albeit using different words — when it comes to their company’s digital and AI transformations. While 89% of large companies globally have a digital and AI transformation underway, they have only captured 31% of the expected revenue lift and 25% of expected cost savings from the effort.
That track record begs some tough questions: Is all this digital effort worth it? Do I really need to lead my industry or is being a fast-follower a smarter strategy? Can I create digital and AI capabilities that give me a lasting competitive advantage or is this just the price of doing business in the modern age?
Until business leaders are convinced of the value and confident in how to get it, they are unlikely to do the difficult, hands-in-the-dirt changes needed to improve their success rate. But using proprietary data, we’ve found just how and where digital transformations create value — and what businesses can do to beat the competition.
Hard Evidence, Real Value
Hard evidence that directly ties digital and AI transformation to improvements in operational KPIs and financial performance is scant.
To redress this issue, we turned to banking, a sector that has enough of a history with digital transformations to produce meaningful findings and where we own a unique longitudinal data set.
First, we used McKinsey’s Finalta benchmark, which tracked the performance of 80 global banks every year from 2018 to 2022 against a set of 50 normalized metrics, such as digital/mobile adoption, digital sales by banking product, number of people in contact centers and number of branches. We then isolated performance in two metrics — the percentage of mobile adoption by their customer base and the percentage of sales originated in digital channels — to define 20 digital leaders and 20 digital laggards. These two metrics are broadly recognized in the industry as core indicators of a digital retail banking model.
Next, we combined this data with McKinsey’s Corporate Performance Analytics to see how banks ultimately perform against financial metrics (e.g., total shareholder return, growth, expenses). We then ran a blind assessment (i.e., the identity of the banks was hidden) of the maturity of digital and AI capabilities of the leading and lagging banks.
The findings have been striking: Digital leaders are creating much more shareholder value than laggards. Between 2018 and 2022, digital leaders achieved average annual total shareholder returns of 8.1% vs. 4.9% for laggards. Leaders also had significantly better return on pretax tangible equity (ROTE), growing it from 15.5% in 2018 to 19.3% in 2022, vs. a more modest growth from 13.6% to 15.3% for laggards.
Creating Value That’s Hard To Copy
Where does value come from? Let’s look under the “digital hood.” Both digital leaders and laggards are growing adoption of their mobile app at the same rate, with a gap of 14 to 15 percentage points between them staying constant over time. This is not surprising. As soon as a bank introduces a new mobile app feature, others see it and follow suit relatively quickly. The mobile app is table stakes.
Turning to digital sales provides a much more insightful answer. Here, the gap between leaders and laggards is growing fast, with leaders almost doubling their advantage over laggards over the five-year period. In fact, digital leaders grew digital sales from 40% to 70%, while digital laggards grew from 8% to 17%.
The reason for this large differential is that to drive digital sales, leading banks go well beyond the mobile app to digitally transform what’s hard to see and hard to copy: the end-to-end process from origination to fulfillment to servicing. To do this, they must orchestrate hundreds of teams capable of developing digital and AI innovations, day-in, day-out, across all their customer journeys and core business processes.
The Capabilities needed to Outcompete
A company that aspires to outperform needs to do end-to-end changes across dozens of customer journeys and core business processes. That’s only possible when it is rewired with differentiated capabilities. Our study of more than 200 large-scale digital and AI transformations isolated the six core capabilities rewired companies develop:
CREATING AMBITIOUS AND FOCUSED TRANSFORMATION ROADMAPS. This requires business leaders to align their efforts on specific domains (e.g., journeys or processes) that matter to customers and generate significant value.
BUILDING A QUALITY DIGITAL TALENT BENCH. Leaders prioritize creating an environment that attracts top-notch engineers and allows them to thrive (e.g., tailored career tracks, autonomy).
AN OPERATING MODEL where hundreds of small cross-functional “pods” made up of business, engineering, and resources from control functions are mobilized against priority solutions. A single journey (or product) owner responsible for the end-to-end experience.
A DISTRIBUTED TECHNOLOGY ENVIRONMENT AND MODERN SOFTWARE ENGINEERING PRACTICES to allow the entire organization — not just IT — to develop digital and AI-based solutions.
DATA PRODUCTS AND MODERN DATA ARCHITECTURE that make it easy for different parts of the organization to consume data for their own applications.
CHANGE MANAGEMENT TO ENSURES DIGITAL SOLUTIONS ARE ADOPTED AND CAN SCALE by making them easy to use and reuse across the enterprise.
In our blind assessment of these capabilities for the leaders and laggards, we found that leaders stand out across the board on these capabilities. No single one explains their success. All are needed. With that baseline, the most differentiated capabilities are talent and operating model, not technology. Over time, these capabilities create ever-improving customer experiences and drive lower unit cost. Financial rewards follow.
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While our research has focused on banking, our experience reflects similar lessons and patterns in every industry, whether B2B or B2C, products or services. A digital and AI transformation, however, cannot be done in “special project” mode. To pull this off, the entire organization must be able to deliver constant digital innovation, which requires a holistic set of capabilities. The effort is significant, but so is the reward.
