Why Do Most Digital Transformations Fail?

According to a 2021 McKinsey study, 70 percent of digital transformation projects ultimately fail. If that rate held in 2023, it would mean 2.16 trillion dollars of global transformation spending delivered little or none of its intended return.

To put that into perspective, that amount is roughly equal to Italy’s entire GDP. It illustrates how enormous the annual investment in digital transformation has become and how much of that investment is effectively lost due to poor strategy and weak execution. Even more concerning, this loss is expected to grow. Overall spending on digital transformation continues to rise by an estimated 16.4 percent year over year.

From an ROI standpoint, it is an investment very few leaders would feel confident about, especially with only a 30 percent chance of success.

Yet legacy businesses cannot opt out of transformation. For most, survival depends on their ability to innovate. Without ongoing transformation, they risk losing relevance to digital-first competitors that better serve the expectations of younger, digitally native consumers. Millenials and Gen Z, according to Nielsen, are now the largest consumer group in history.

What if leaders could reverse engineer the most common causes of failure and double the average success rate from 30 percent to around 60 percent?

A 60 percent success rate is still not ideal, but it would provide far more confidence for organizations planning multi-year, high-stakes transformation initiatives. Before we can attempt this, however, we need a clear understanding of the primary factors that cause failure and how each can be mitigated.

Leadership: It Starts at the Top

Strong and competent leadership is one of the most consistent predictors of organizational performance. McKinsey estimates that exceptional leaders generate nearly 80 percent more shareholder value over a ten-year period than their peers. This holds especially true during periods of large-scale transformation.

Large incumbent businesses can sometimes survive for long periods despite slow innovation, particularly in uncompetitive markets where brand strength or market dominance creates protective moats. Eventually, however, without leadership capable of driving meaningful change, even the largest incumbents stagnate. Kodak, Blockbuster, and Blackberry are familiar examples of organizations that lost their position by failing to innovate.

Digital transformation raises the stakes significantly. Once a company is already under competitive pressure, strong leadership is no longer beneficial but essential.

“No wind blows in favor of a ship without direction.", Seneca‍

This applies directly to transformation. Clear vision and strong strategic alignment are foundational. Without them, the odds of failure rise sharply.

It is the responsibility of the executive leadership team to both define and uphold this vision. Their support and alignment, according to McKinsey, are essential to achieving meaningful transformation outcomes.

Even with strong leadership, however, the organization itself can introduce internal obstacles that undermine progress.

Cultural Resistance: The Human Barrier

Cultural resistance is nearly universal in large-scale transformation efforts. It is rooted in human nature. Many employees feel threatened by the potential impact that new technologies could have on their roles. As a result, they resist change and sometimes actively work against it.

Technologies associated with transformation, such as Robotic Process Automation, custom CRMs, ERPs, and AI chatbots, often introduce the possibility of reducing or restructuring human work. This is especially true in repetitive, labor-intensive functions across the mid and back office.

As generative AI becomes more capable, an even larger share of enterprise workflows will be impacted. Cultural resistance is likely to grow across Engineering, Marketing, Operations, and other functions. Addressing the human side of transformation through communication, training, and support is essential.

The Role of User Experience in Transformation Success

While employee adoption and internal culture are critical, the design and user experience of the technology itself are equally important. Transformation can unlock efficiencies, but poorly designed tools often create friction that erodes both user trust and productivity.

McKinsey’s Design Index (MDI) demonstrates the measurable financial impact of strong user experience. Companies that score highly on the index outperform industry benchmarks with up to 50 percent greater top-line growth and 40 percent higher shareholder value.

‍

Failure to prioritize user experience is consistently cited as a major reason for transformation failure. Design cannot exist in isolation. It must sit at the center of the transformation strategy, not on the edges.

Adding a sophisticated AI chatbot to a poorly designed online banking portal is an example of optimizing the wrong layer first.

Fragmented Digital Efforts and Technical Debt

Isolated initiatives rarely deliver the outcomes leaders expect. Successful transformation requires coordination across multiple functions and systems. When individual departments pursue digital upgrades without considering the broader context, the result is typically fragmentation and inconsistency. This is especially challenging for large organizations that must integrate modern technologies into old, brittle systems.

“If you automate a mess, you get an automated mess.”, Rod Michael

Many companies undergoing transformation are either entirely non-digital in their origins, such as IKEA, or only lightly digital, such as British Airways. Their technical debt and architectural limitations create inherent challenges. Poor technology choices, outdated systems, and flawed integration strategies can derail efforts entirely.

One of the most prominent examples is the TSB migration disaster. The British bank’s failed system migration left 1.9 million customers locked out of accounts and took 232 days to fully recover. Thorough technical due diligence and phased migration could have reduced the risk, but the most important missing element was experienced architectural oversight.

Skills Gaps and the Need for External Expertise

A lack of specialized technical skills is one of the most common contributors to transformation failure. Most companies undergoing transformation are not inherently digital, meaning they must acquire new capabilities.

While internal teams can build these skills over time, that approach is slow and often unrealistic for the scale and pace required. In many cases, external specialists provide a more reliable bridge during early phases. However, long-term success requires eventually internalizing this expertise.

Professionally certified RPA, SAP, and Salesforce consultants are particularly effective in early stages. Working with nearshore specialists like Carbon offers competitive pricing and access to talent pools with the required depth of experience.

Using flexible contract-based workforces also helps organizations avoid the fixed cost structures that often contribute to transformation failure.

Cost and Timeline Underestimation

Cost and timeline underestimation is one of the most frequent causes of failure. Humans consistently underestimate complexity, especially in software development. Projects appear simple at the surface but reveal edge cases and dependencies that significantly increase workload.

Meaningful transformation initiatives require substantial investment. Underestimating cost or duration exposes the business to both operational and financial risk. McKinsey data shows that software-led IT projects have the highest rate of cost and timeline overruns compared to other categories.

‍

As seen in the infographic above, software-focused IT projects see the greatest cost and timeline overruns, albeit luckily with the lowest average benefits shortfall. That means that although a transformation might experience a cost overrun, it doesn’t automatically make the project a failure, especially if the net positive outcome eventually makes up for it. This of course depends on the degree of the overrun and the ultimate benefit shortfall.

When cost overruns do happen, they have a tendency of falling considerably above the initial budget, potentially leaving a crippling impact on the organisation for years to come

The IBM and Queensland Health payroll system failure is a well-documented cautionary example. Initially budgeted at 6 million dollars with a one-year timeline, the project exceeded its budget by several multiples, took three times longer, and ultimately failed. Residual damages reached 1.2 billion dollars.

While not all overruns are catastrophic, even moderate miscalculations can impact the organization for years.

A Path Forward: How Companies Can Improve Their Odds

Innovation-focused organizations need to confront multiple risks head-on. Successful transformation requires adaptable leadership, access to specialized technical talent, thoughtful cost control, and a design-led approach to building systems that users trust.

Clear outcome metrics, strong internal alignment, and a willingness to adjust strategy as new information emerges all improve the likelihood of success. Given the historically low success rate, companies must use every available lever to safeguard their investment of time and resources.

When approached with rigor rather than optimism, digital transformation becomes more predictable and significantly more achievable.

‍

Carbon is the go-to staffing specialist for Eastern European and North African technical talent. Trusted by the biggest names in technology and venture capital, Carbon’s hyperlocal expertise makes entering new talent markets for value-seeking global companies possible.

Honouring exceptional talent ®