Introduction: The enterprise capabilities that turn digital and AI into a source of ongoing competitive advantage

Business leaders will be digitally transforming their companies for the rest of their careers.

That statement reflects two fundamental realities: one is that digital is constantly changing. Over the past decade, digital has seeped into almost every aspect of our lives driven by the confluence of new technologies (e.g., cloud, AI), new architectural paradigms (e.g., micro-services, APIs), and new ways of building software (e.g., agile, DevSecOps), all inherited from the tech industry. And we haven't even scratched the surface of generative AI, edge computing, quantum computing, and other frontier technologies.1

As long as tech continues to evolve, your business will need to evolve.2 For this reason, the word transformation itself is a little misleading because it implies a one-time program with an end. In fact, a digital transformation is a journey to continuously increase competitiveness.

The second fundamental reality is that digital and AI transformations are hard. In our most recent annual survey on the subject, 89% of companies have launched a flavor of digital transformation. But they only captured 31% of the expected revenue lift and realized just 25% of total expected cost savings.3

There are, unfortunately, no quick fixes. You can't simply implement a system or a technology and be done. We see from the digital leaders that there isn't one "magic" use case. Instead, it's about having hundreds of technology-driven solutions (proprietary and off-the-shelf4) working together that you continuously improve to create great customer and employee experiences, lower unit cost, and generate value. And creating, managing, and evolving these solutions requires companies to fundamentally rewire how they operate. That means getting thousands of people across different units of the organization working together and working differently. It means bringing on new talent and developing accelerated learning loops that harness their skills and help them grow. As important as technology is, digital and AI transformations are also very much about developing new organizational capabilities.

No company is a stranger to this struggle. Even the tech darlings we all know have had to invest, experiment, fail, and adapt to succeed.5 Take Amazon's retail business. It has automated vendor onboarding, inventory replenishment, pricing, and order fulfillment. All these processes were automated with proprietary solutions developed by thousands of cross-functional teams composed of business, tech, and operational experts. But it didn't start that way - even Amazon wasn't the "Amazon" we now know early on. It rewired itself by investing in the technologies and enterprise capabilities - and continuously improving them over time - to become digital to its core."6

While Amazon's success is well known, there are also good examples of large, established companies that are winning the digital and AI transformation race, and creating greater digital distance between themselves and their rivals. Those successes are based on hard-won lessons that have coalesced into a recipe for what works. This book is that recipe. This book is their story.

Digital as a source of competitive advantage

Not so long ago, executives at established companies would often choose to delay changes to their core systems because "it would be cheaper and less risky to do it later when the system has been tested and proven by others." Executives would say, "We want to buy standard packages . it's too expensive and complicated to build custom ones." Technology was of course needed to run the company, but it rarely provided a competitive advantage because any company could buy the same technology from vendors. The advantage, if there was one, was to deploy these systems on time and on budget, and to make good use of the capabilities purchased.

This has all changed and been flipped on its head. Companies still purchase systems from vendors to run their enterprise, but the rise of digital technologies and the related new architectural paradigms and ways of developing software are making it possible to also develop and maintain proprietary applications. As the software industry matures and evolves, a software supply chain has emerged where you can develop applications by assembling them from existing software building blocks and develop new code only where necessary. These developments, and new ones on the horizon such as generative AI, are radically reducing the cost and time to develop proprietary applications, and making it possible for any company to compete on that basis now.7

So, where are those examples of established companies that have built a competitive advantage from digital and are being rewarded for it? Many factors impact a company's performance and, let's be honest, it takes time to transform a company deeply enough that the results will show on their financial performance. Nevertheless, the question remains fundamental. Established companies are making substantial organizational and financial commitments to digital. The low success rate raises questions if this is all worth the effort.

Our own analysis from surveys over the years has clearly indicated that top-performing companies achieve significant improvements when they implement a series of digital practices.8 Our most recent survey of more than 1,300 senior business executives, for example, reveals that 70% of top performers use advanced analytics to develop proprietary insights; 50% use AI to improve and automate decision making.9

Building on this baseline, we set out to develop some hard, empirical data that ties digital transformation to financial outperformance. We turned to the banking industry, where we have a unique benchmarking data set for 80 global banks in developed markets. And banking is a sector that has been digitally transforming for 5-10 years, providing enough time to see the effects of transformation.

Our research covered the 2018-2022 timeframe and focused on a group of 20 digital leaders and 20 digital laggards, which helped bring into sharp relief three major insights:10

1. Digital leaders outperformed. Digital leaders had better return on tangible equity (ROTE) - a key financial metric in banking - and had improved it more as well. Likewise for P/E ratio. Over this time period, digital leaders outgrew laggards with better operating leverage. As a result, they grew total return to shareholders (TSR) 8.2% annually versus just 4.9% for laggards. Digital leaders were financially rewarded.
2. Competitive advantage comes from end-to-end business model transformation. We looked at four measures of business model transformation in banking and how these measures progressed over time for our digital leaders and laggards (Exhibit I.1). The first metric looked at customer adoption of a mobile banking app. While leaders stayed ahead of laggards, both made robust improvements. That may seem surprising at first, but it's not. As soon as a bank introduces a new mobile feature, others follow within 6-12 months. The mobile app is table stakes in banking; it does not provide competitive differentiation. Most banks have managed to build a digital team that can develop and improve its mobile app.

   Now, let's look at the other three metrics: digital sales and staffing levels in the branch network and in contact centers. These metrics reflect true operational outperformance, and this is where leaders show accelerating improvements over laggards. Improving these metrics is much more difficult because each one requires an end-to-end process transformation.

   EXHIBIT I.1

   At the front end of this process, leading banks integrate personalization analytics and digital marketing campaigns to bring relevant offers to (potential) customers. In the middle of the process, they create an omnichannel experience where branch and contact center professionals have the tools and data to support customers at any stage of the sales journey, even if that journey was started online. These leading banks are also able to provide customer approvals in real time thanks to automated credit risk decisioning. At the back end of the process, they drive customer self-servicing through well-designed digital workflows enabled by a modern data architecture. In short, the digital transformation goes beyond the front-end mobile app to also transform marketing, sales, servicing, and risk management.

   Importantly, digital leaders are much faster at realigning sales and servicing capacity as customers shift their banking online. This seems simple but it's not. It requires a shift in incentives and performance management across the entire bank. This level of cross-functional alignment is core to what differentiates digital winners in any industry.

3. Digital leaders build better enterprise capabilities. We researched the underlying practices of leaders and laggards. Clear differences emerged. Leaders have gone further in building a quality digital talent bench, with a focus on creating an environment in which top-notch engineers thrive. They have adopted a new operating model that brings people from business, technology, and operations together to work in small, agile teams that continuously improve customer experience and lower unit cost...