Digital Transformation is the latest buzz with businesses all over the world. It is an evolving topic of interest not only for businesses but for academia, non- profits and for the society. To know if Digital transformation is truly ‘transformative’ we should know its roots and its relationship with other similar terms like digitization and digitalization.
Digital Transformation and its role in Finance
Let us take an example of a quite common process until a few years ago. A salesman making business trips collects the receipts for business expenses, and files a manual expense report, which is approved by his boss . An Accountant verifies the receipts against policy and makes the payment and files it in folders. Delays to file the claims and making the payment, policy violations, approvals taking hundreds of business hours for both. Imagine the loss of productivity.
As a first step towards automation, the paper receipts were scanned and attached to the expense report and accepted as valid ones. That is an example of digitization. Digitization is the conversion of “analog/manual” data to “digital” and refers to the internal process optimization. (e.g., work automation, paper minimization) that results in cost reductions.
See the same process today. Employees uses approved credit card, expenses listed automatically which gets submitted, approved and the credit card directly paid. That is the example of digitalization. Digitalization is “the use of digital technologies to change a business process and provide new revenue and value-producing opportunities; it is the process of moving to a digital business”. In this case, no revenue made but “value-added” by cost saving through productivity gains by at least 8 – 10 times.
“Opening an email invoice attachment, updating the details within the system, matching to purchase order and making the payment” - all these steps are handled by digitalized process with no or minimum human involvement.
On the other hand, “Digital transformation” is a broader term for changing the people and the organizational culture using one or more digitalized processes and technologies to change the business model for new revenue streams and higher ROI.
The key here is the people involvement and cultural change along with new revenue streams.
Some samples to provide more perspective - when a university changes its business model from mainly in-person (100% in-person)to Virtual (80% online and 20% in-person), it provides new revenue due to
Increased classes offered per term – Virtual on-demand
Increased classes with minimum number of faculties - Increased productivity
An EV car maker completely changed the “service” process end-to-end to digital using mobile app. The process involves Service Appointment booking—Chat with representative—Quote—Approve Quote- On premises Service Execution-Invoice—payment with no involvement of phone service support.
A manufacturing assembly with more than 300 steps automates and digitalizes each step in the process with no manual data entry. Digital Transformation could include automation using assembly robots with digital entry of component parts at every stage.