The Value of Digital Transformation

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. This raises important questions for business leaders: Is all this digital effort worth it? Should one lead the industry or adopt a fast-follower strategy? Can digital and AI capabilities provide a lasting competitive advantage, or are they merely essential for modern business?

Understanding the true value of digital transformation is critical. To address this, a study was conducted in the banking sector, a field with significant digital transformation history and a rich dataset. The study used McKinsey’s Finalta benchmark, which tracked 80 global banks annually from 2018 to 2022 against 50 normalized metrics, such as digital/mobile adoption and digital sales. It then isolated 20 digital leaders and 20 digital laggards based on mobile adoption and digital sales metrics.

Combining this data with McKinsey’s Corporate Performance Analytics revealed that digital leaders significantly outperformed laggards. Between 2018 and 2022, digital leaders achieved average annual total shareholder returns of 8.1% compared to 4.9% for laggards. Leaders also showed better return on pre-tax tangible equity (ROTE), growing from 15.5% in 2018 to 19.3% in 2022, versus 13.6% to 15.3% for laggards.

This outperformance stems from leaders' success in growing revenue and containing expense growth. Digital leaders increased their active customer base by 0.5% annually and retail revenues by 0.8%, while laggards saw no growth in their customer base and a 1.4% annual decline in retail revenues. Leaders' operating expenses grew by 1.3% per year, compared to 2.3% for laggards.

One key finding is that while both leaders and laggards grow mobile app adoption at similar rates, digital leaders excel in driving digital sales by transforming end-to-end processes from origination to fulfillment to servicing. This includes deploying personalization analytics, creating omnichannel experiences, and enabling real-time customer approvals through automated credit-risk decisioning.

For instance, a U.S. bank transformed its secured lending business by reinventing the entire loan process, reducing the approval time from 28 to 7 days. This transformation involved creating a comprehensive database of U.S. households, building a mobile-first customer experience, redesigning key processes, and implementing AI/ML models for better risk control. The result was a 35% increase in originations and a 20% reduction in origination costs.

To achieve such transformations, companies need to develop six core capabilities:

1. Ambitious and focused transformation roadmaps.
2. A quality digital talent bench.
3. An operating model with small cross-functional “pods.”
4. A distributed technology environment.
5. Data products and modern data architecture.
6. Effective change management to ensure adoption and scalability.

A study of over 200 large-scale digital and AI transformations showed that leaders excel across these capabilities, particularly in talent and operating models, leading to improved customer experiences and financial performance.

In conclusion, while the initial effort in digital transformation is significant, the long-term rewards are substantial. This transformation must be holistic, enabling constant digital innovation across the entire organization.

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