Partly due to the impact of COVID-19, the term DX (Digital Transformation) has become a buzzword you hear everywhere. At the same time, we've increasingly heard people say they don't really understand what the word actually means.

With 2020 drawing to a close, not just large enterprises but small and medium-sized businesses too have started talking about DX. Yet these conversations often begin from the question of what DX actually is and what needs to be done about it in the first place. This time, to help you understand what DX really is, we'll walk through the big picture of DX. (Since this is a long article, if you just want a quick summary, feel free to jump straight to the conclusion.)

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What is DX (Digital Transformation)?

When it comes to explaining digital transformation, the following materials published by Japan's Ministry of Economy, Trade and Industry (METI) are commonly referenced.

• Guidelines for Promoting Digital Transformation
• DX Report

Beyond that, the term DX also appears frequently in ads and articles, often alongside keywords like "IoT," "AI," "blockchain," "agile," "bimodal," and "insourcing." But even after seeing all of this, you probably still feel like you don't really get it.

The reason it's so hard to grasp is that so many different keywords come up that it becomes difficult to see the overall picture of what DX actually entails. Since each keyword only represents a fragment of DX, it's important to first understand the big picture.

I think of the overall picture of DX as being divided into the following Phase 1 and Phase 2. "Phase 1" and "Phase 2" are labels I've applied on my own here, but I believe that in achieving DX, you can't move on to Phase 2 without first establishing the conditions of Phase 1. Below, I'll explain what's meant by each phase.

Phase 1 (Digitization and Digitalization)

• Overhauling legacy systems
• Insourcing, and building up technical skills and knowledge
• Transforming the organization and business processes

Phase 2 (Delivering new value to end users)

• Establishing a competitive advantage through products and business models that leverage technology

DX Phase 1 (Digitization and Digitalization)

Overhauling legacy systems

First, let's talk about overhauling legacy systems—but what exactly is a "legacy system"? In the context of DX, a legacy system refers to a system whose internal workings have become opaque, to the point where the organization itself can no longer modify it. The problem with relying on a legacy system is that your own system becomes a black box that people within the company can no longer touch. The DX Report also points out issues with legacy systems along these lines:

It has been pointed out that even if new digital technologies are introduced, their effectiveness will be limited because the utilization and integration of data will also be limited.

There are also several reasons why legacy systems come into being in the first place:

• The people with expertise in a system built in the past retire, leaving no one who can work on it
• Development was outsourced entirely to a vendor, so no one within the company understands the system
• As long as the system keeps working without maintenance in daily use, no one realizes it's "legacy"—until the hardware or packaged software reaches the end of its supportable life, at which point the legacy nature becomes apparent

Overhauling these legacy systems means doing the following:

• Rebuilding, on the cloud, any functionality that is still subject to change or that could be leveraged for the business
• Discontinuing any functionality that is no longer needed

What matters when overhauling a legacy system isn't simply "move it to the cloud"—the next point, "insourcing, and building up technical skills and knowledge," is what really matters.

Insourcing, and building up technical skills and knowledge

When talking about DX, insourcing and building up technical skills and knowledge are extremely important points. "Technical skills and knowledge" here doesn't just mean programming skills or system development expertise—it also includes things like statistical analysis.

As mentioned above, one of the core problems with legacy systems is that they become black boxes. Insourcing and accumulating technical knowledge in-house are also key to preventing that black-boxing from happening. For example, suppose you try to overhaul a legacy system by outsourcing the entire job to a vendor—where does the knowledge about that system end up? The contracted system vendor accumulates the expertise, while the client company accumulates no development know-how at all, and the system remains a black box. In that case, there was no point in overhauling the system in the name of DX. You need to recognize that your organization must define its own requirements, get involved in technology selection and design, and make the vendor's knowledge your own.

To carry out DX and translate it into actual business outcomes, you need to be able to quickly validate hypotheses, and to apply technology consistently across planning, design, development, and operations. Naturally, this requires accumulating technical knowledge in-house, and having an insourcing structure within the company is an indispensable element of DX.

That said, insourcing everything is difficult, so I'd suggest making good use of vendor resources while rethinking traditional waterfall-style contracted development—exploring contract structures that allow for agile development or lab-style development—and building your internal structure while making good use of both internal and external resources.

Transforming the organization and business processes

When it comes to achieving DX, I believe the first thing within an organization that needs to change is executive leadership. Executives need to deepen their understanding of IT, form their own vision of how cutting-edge technology can transform the company and the business, and then drive that change top-down. It's executive leadership that must build an organization that understands the necessity and value of technology and the people who use it. Without executive leadership taking the first step, the organization won't move toward insourcing either.

Next, business processes. Even while advocating for DX, if analog processes—like signing paper documents or using company seals—remain everywhere, you can imagine that those processes will become a bottleneck even when trying to introduce something like RPA. DX is built on top of digitization (digitizing information) and digitalization (processes that use digital data). Therefore, it's impossible to advance DX while business processes remain unchanged.

DX Phase 2 (Delivering new value to end users)

Establishing a competitive advantage through products and business models that leverage technology

Phase 2 is the real heart of DX, and the following points are key:

• Building products and business models that use digital technologies such as AI, IoT, and AR/VR
• Creating value by delivering new customer experiences
• Establishing competitive advantage through these efforts

I won't go into individual technologies like AI, IoT, or blockchain here, but building products with these technologies and aiming to deliver new customer experiences requires approaches and mindsets like agile development, DevOps, and design thinking. Let's introduce these below.

■ Agile development

Unlike traditional waterfall development, agile development is a methodology that assumes requirements will change. Unlike waterfall, where all features are built before release, agile allows you to repeat development and release in small increments and short cycles, validating as you go. Another benefit of agile development is that, because releases happen in small increments, you can validate each feature individually and keep the number of bugs in the overall system low. Many companies have probably had the experience of accepting a system built using waterfall, only to find hundreds of bugs during acceptance testing and end up in a dispute with the vendor. There have also likely been cases where, during acceptance, the delivered specifications didn't match what the client company had expected, delaying the release. Agile development makes it possible to create a situation where these kinds of problems are less likely to occur. There are downsides too, such as requiring more commitment from the client company and sharing responsibility for bugs with the vendor, but in a world where DX demands quick responses, agile development is likely to become even more mainstream.

■ DevOps

DevOps is the idea of combining the Dev (development) team and the Ops (operations) team to improve and deliver products to the market at a faster pace than before. Traditionally, development and operations teams are often kept separate, but DevOps brings them together into a single team to gain benefits such as:

• Increased communication as a single team spanning development through operations
• Faster improvement cycles by quickly implementing and delivering end-user feedback on the product
• Automating release processes such as testing and deployment

Even a newly built product won't be well received in today's world if it goes six months or a year without an update. DevOps is a necessary mindset for achieving the weekly or monthly update cadence common in today's applications.

■ Design thinking

Design thinking is an approach that applies the thinking methods and techniques used in design work to transform and solve problems in product development and business—it's different from what you'd typically imagine when you hear the word "design." In today's world, where end-user needs have diversified and convenient products are everywhere, simply building a product isn't enough. You need to think about who your end users could be, what they're looking for, and what kind of experience would satisfy their needs. That's why design thinking has become necessary when considering the customer experience (UX) you deliver to end users.

Summary

This has turned into a long article, but here's a rough summary of the overall picture of DX:

1. DX Phase 1 (digitization and digitalization) is about building a digital foundation for the company

• Systems that no one can touch anymore are slowing down the business, so pick and choose which functions are needed, move them onto new platforms like the cloud, and turn them into systems that are easy to use and maintain
• When renewing a system that no one can touch, build up the knowledge in-house so your own people can work on it, and establish an internal development structure
• Company leadership needs to understand software and IT, and drive change to the company and business processes from the top down
• Reduce analog processes and reorganize work so it can be replaced with digital tools

2. DX Phase 2 (delivering new value to end users) is the ongoing activity of using technology in the business to keep creating value

• Transform the development flow and product release flow
• Transform the organization to deliver a superior user experience
• Establish a competitive advantage through products and business models that leverage technology

3. You can't move to Phase 2 without first completing Phase 1

• DX only works once the foundation is in place

Doing everything all at once may be difficult, but the chance to transform is right in front of us. We've entered a world where change is required of both client companies and vendor companies alike. Let's ride this wave and build our companies with a proactive mindset!

We provide support for driving DX. We welcome inquiries not only about contracted development of new businesses and PoCs, but also about business process improvement, in-house technology workshops, UI/UX improvements, and more—please don't hesitate to reach out even just to talk!