Digital Transformation done right

The digitalisation or digital transformation of an organisation is one of the most common changes. At the same time, it’s one of the most difficult ones. But why does the implementation of a new Enterprise Resource Planning (ERP) system fail so often? Why does the continuous use of digital technology to improve customer experience and lower costs fail so often? In order to get some answers, we’ll take a closer look at failed digitalisation projects of three organisations. One is the world’s leading car manufacturer. The second one is the world’s leading applied research organisation. And finally we also look at Germany’s largest bank. Their failures will lead us to practical tips on how to finish a digitalisation initiative or digital transformation successfully.

1. Volkswagen’s failed Digital Transformation

German car manufacturers like Mercedes-Benz, BMW or Volkswagen once were the global benchmark in the automotive industry. Unfortunately, they failed to transform or even disrupt themselves in time. They failed to understand the importance of software as interface to their customers’ data (the new gold). Tesla did. This is why Elon Musk‘s company became the most valuable automotive brand worldwide. And why it is miles ahead of the German carmakers in all major markets.

From a carmaker to a software company

That is why former CEO Herbert Diess wanted to transform the traditional carmaker into a high-tech and software company. Cars should become self-driving smartphones on four wheels. Therefore, Volkswagen started to build its own operating system (VW.OS) from scratch. And its software architecture (E3 1.2) for the electric vehicles.

Diess had set his employees to manage 60% of software developments by themselves by 2025. Quick reminder: Tesla, Apple & Co. do almost 100% by themselves. So Volkswagen is now cooperating – among 40 other shareholdings – with Chinese technologies provider ThunderSoft. They founded a joint venture (VW: 49% !) for connectivity and infotainment systems.

Ineffectiveness and restructuring instead

The executive board concentrated the software experts first in a group-wide operation called Car.software.org. In March 2021 Volkswagen renamed the unit Cariad (»Car, I am digital«). At that time, Volkswagen had already delivered its all new electric models (ID series). But customers all over the world complained a lot about the software.

In May 2022 McKinsey came to devastating conclusions: Developers hadn’t formulated precisely enough 647 of 738 hardware and function definitions. In addition: decision-making structures were ineffective and budgets had ballooned. Until the end of 2022, Cariad lost 2.1 billion euros on revenue of 800 million euros. It is therefore no surprise that the new CEO Peter Bosch already has to restructure Cariad (including job cuts) instead of being able to drive the digitale transformation of Volkswagen successfully.

2. Other failed Digitalisation Projects

But it’s not only the digital transformation of organisations that is challenging change leadership professionals. The same applies to digitalisation projects. This means the use of digital technologies – including Artificial Intelligence (AI) – to change business processes. Let’s have a look at the world’s leading applied research organisation and Germany’s largest bank:

Fraunhofer’s failed Digital Migration to SAP

Germany based Fraunhofer-Gesellschaft went through a difficult digitalisation process lately. The world’s leading applied research organisation wanted to migrate its 80 institutes from an old ERP system (“Sigma”) to SAP. According to the organisation, the aim was to standardise, modernise and automate the key business processes. This was the biggest change project in Fraunhofer’s history and the most complex software implementation in SAP’s history.

But according to the works council and publicly disclosed insiders, the management apparently made a number of serious mistakes:

1. Lack of user involvement in the run-up
2. Lack of system tests with the users
3. Lack of an overall concept for the introduction
4. Lack of adequate management structures
5. Lack of central support for all 80 institutes

Deutsche Bank’s failed Digital Post Merger Integration

In the year 2010, Deutsche Bank acquired Postbank. It took Germany’s largest bank 13 years to complete the migration of 12 million customers to Deutsche Bank’s IT platform. The first phase of this digital PMI was called “Magellan” (2012 – 2015) and had a total cost of 1.6 billion euros. The latest phase is called “Unity“. Since Easter 2022, the bank had merged twelve million Postbank customers with seven million Deutsche Bank customers in Germany on a shared platform in four waves.

As a result, Postbank customers were then no longer able to access their accounts. Or their accounts were blocked, and they were no longer able to pay direct debits. Obviously, customer service nearly collapsed under the weight of the complaints. Finally, the Federal Financial Supervisory Authority (BaFin) appointed a special representative for Deutsche Bank AG. His job: ensuring that it quickly and comprehensively resolves the disturbances affecting the retail banking business of Postbank.

3. Lessons Learned from Cariad & Co.

None of the above mentioned examples were changes that were completed in time and in budget. On the contrary. And although these digital transformations or digitalisation projects are still evolving, they all already hold important learnings for us change leadership experts:

1. Enable employee participation across the SDLC

The Fraunhofer use case seams to be an excellent example for the importance of effective user participation within the System Development Life Cycle (SDLC). It has been proofed uncountable times to have a positive effect on the success of digitalisation and digital transformation. Employee participation helps in terms of user satisfaction, system use, system quality, ease of use. It also helps to keep the project within the level of system acceptance as Mariem Ben Rehouma points out. We at viadoo recommend in addition to get into touch with the works council at a very early stage.

2. Get into dialogues with those affected

Of course usually only a few employees will join participating formats like workshops along SDLC. Most affected employees, in our experience, are only interested in the topic when the implementation is about to happen. It’s essential then, to respond flexibly to their information needs. To talk about their fears, the effects the new tool will have on them and how its implementation will proceed.

3. Start digital transformation in a single unit

No organisation can compensate the lack of visionary strategic thinking in the past simply with a huge amount of money (Volkswagen: 2 billion euros p.a. for Cariad) and manpower. We at viadoo thus usually recommend to start the digital transformation of an organisation in a single unit (e.g. Digital Unit or Innovation Lab). That’s what Volkswagen AG (600,000 employees) actually did with Cariad (6,000 employees = 1% of VW workforce). Btw: As we pointed out last year, Volkswagen managed to establish its Corporate Newsroom »The Bridge« after it failed in the first place.

4. Establish an agile & collaborative culture

Nevertheless, expanding a unit or start-up from zero to 6,000 employees within 24 months and implementing the organisational structures and ancient cultures of the parent company guarantees chaos and dysfunctional teams. Herbert Dies said: »We still have to learn software culture, which includes flexibility and speed.« The Volkswagen brands spend months arguing over who would assign which developers to Cariad and which projects would be tackled first. We at viadoo therefore recommend to establish an agile and collaborative culture in the Digital Unit.

5. Ensure an effective decision-making structure

When you need to speed up business the last thing you want to have is an ineffective decision-making structure – usually resulting from a culture of micromanagement and hierarchic structures. So we recommend to secure an effective decision-making structure – unlike the one at Cariad and allegedly at Fraunhofer-Gesellschaft and Deutsche Bank.

Picture: © D. Faust / viadoo GmbH