Introduction

In today’s rapidly evolving digital landscape, businesses are increasingly embarking on digital transformation initiatives to stay competitive and drive innovation. However, these initiatives come with their own set of challenges and uncertainties. Effective risk management is crucial to navigating these complexities and ensuring the success of digital transformation efforts.

The importance of risk management in digital transformation cannot be overstated. It helps organizations anticipate and prepare for potential issues, ensuring that projects stay on track and within budget. By proactively managing risks, businesses can avoid costly disruptions, safeguard their investments, and achieve their strategic objectives. Neglecting risk and resource management often leads to significant cost leakage, derailing projects before they deliver value. Considering this, let’s explore common risks in digital transformations and actionable strategies to mitigate them.

Common Risks in Digital Transformation

1. Technological Risks

• Risk #1 Legacy systems: Many organizations rely on older systems which are often incompatible with modern technologies. This creates challenges with integration, causing delays and complications. Additionally, legacy systems tend to be costly to maintain and upgrade, which can strain the allocated budget for new initiatives. These systems are frequently customized and modified over time, resulting in highly tailored, complex structures that make integration even more difficult. Such modifications often turn the system into a tangle of adaptations, complicating any attempts to connect or replace it. Another critical challenge is contract management. When nearing the end of a contractual term for a legacy system, organizations often face a hard deadline. Extending the contract is usually undesirable, as the system is already slated for replacement. This creates time pressure, limiting the available window to transition to a new system effectively. What are some measures you can take to minimize or completely erase this type of risk?
  
  Mitigation plan: Modernizing Legacy Systems: Investing in the upgrade or replacement of legacy systems is essential to ensure compatibility and improve efficiency. This may involve adopting cloud-based solutions or seamlessly integrating new technologies with existing systems. As part of your digital transformation efforts, consider which legacy systems can be replaced simultaneously. While this increases project scope and complexity, it also offers significant long-term benefits if executed effectively. Given the risks associated with heavily customized legacy systems, a thorough system mapping is critical. This helps you understand the full impact of replacing the system and ensures the transition is handled optimally. From a contract management perspective, having a strong procurement team is invaluable. They can monitor upcoming contract expirations and negotiate extensions if necessary, providing additional time to implement changes without disrupting operations.
• Risk #2 Security Risks: Implementing new technologies can open new security threats, including cyberattacks and data breaches. These risks can result in the loss of sensitive information, damage to the organization’s reputation, and significant financial losses. With cyberattacks rising in frequency, robust security measures are non-negotiable. Any company can be targeted, which puts a higher requirement on their cybersecurity and preparedness. This means that every organization should have measures to minimize this risk, here are some examples.
  
  Mitigation plan – Security Measures: Implement robust security protocols and regular security audits to protect against cyber threats. This includes training staff in security awareness, using advanced security tools, and having an incident management plan. An important step is also allocating a security officer who should act as the owner of the project’s security and make sure there are no gaps present that could be exploited. Another step in this work is to conduct an information security screening where you identify and class information volumes in your systems and make sure that you have identified what information is located where and that you have the right measures in place to prevent any leaks and if leaks happen that you have measures to minimize the impact. Read more about what security measures you can implement in this article: Information Security: How Secure is Secure Enough?

2. Organizational Risks:

• Risk #1 Resistance to Change: Employees may be reluctant to adapt to new work methods and technologies, which can hinder progress. This resistance can stem from fear of the unknown, lack of understanding of the benefits of change, or concerns about job security. Poorly managed change initiatives often fail to address employee concerns, leading to disengagement. Some employees will then put up resistance, and the project will not have the desired effect. For more information on this topic, read our article: Tools for Managing Cultural Differences in Global Teams
  
  Mitigation Plan – Active Change Management: In order to mitigate the resistance to change you should develop a clear change management plan. The plan should include communication, training, and support for employees to be effective. It is important to involve employees in the change process, listen to their concerns, and provide them with the necessary tools and resources to succeed. An often-overlooked part of a change plan is to include more senior stakeholders, as they are not always thought of as part of the project. Including and involving the senior stakeholders actively will help with getting other employees on board, as the stakeholders usually hold major influence and power, which can be a great tool to use.
• Risk #2 Lack of Skills: Digital transformation requires specific skills that may not be present within the organization, leading to a skills gap. This can delay projects and increase costs for hiring or training staff. We can see that this risk is common when a project has begun without considering what specific skills will be needed but rather what roles are needed. The skill gap, if not addressed, can lead to big delays, a faulty solution, or failure to complete the initiative, leaving your company with a huge cost and nothing of value to show for it.
  
  Mitigation Plan – Skills Development: Invest in training and recruitment to ensure the organization has the necessary skills to carry out the transformation. This may involve offering internal training programs, partnering with educational institutions, or hiring experts in relevant fields. Consider identifying important previous experiences when hiring new employees; it is important that the new hires have the right previous experience and not only the correct previous role. This is especially important when hiring for long-term and ongoing projects, as the new employee will need to adapt to and grasp the project without having been involved from the start. Therefore, prior experience and possessing the right skill set are essential, as they will help shorten the onboarding period and ensure a smoother transition for the new hire.
• Risk #3 Scope Creep: As projects progress, there can be a tendency for the scope to expand beyond the original objectives. This can lead to increased costs, extended timelines, and resource strain. Scope creep often occurs due to unclear project requirements, stakeholder demands, or inadequate project management. Scope creep can occur during independent releases of a digital transformation initiative, creating complexity for coming releases or simply expanding the scope of a project.
  
  Mitigation Plan – Strict Scope Governance: To mitigate the risk of scope creep, it is crucial to clearly define the project’s scope and objectives from the start. Implementing strict change control processes ensures that any adjustments are managed effectively, preventing the project from losing focus or expanding uncontrollably. A robust governance model is equally important. Establishing a clear, structured process for evaluating proposed scope changes helps determine their necessity and identify the best course of action if changes are warranted. This disciplined approach maintains project alignment with its goals while minimizing disruptions.

3. Economical Risks

• Risk #1 Cost Overruns: Projects can become more expensive than planned due to unexpected expenses or inaccurate budget estimates. This can lead to project cancellations or negatively impact other parts of the business. Cost overruns are common in projects where the buyer overlooked the complexity of the project, for example, the complexity or vastness of the scope or the complexity in the execution. When underestimating either of these will subsequently lead to insufficient budgeting, undervaluing the resources and the time needed.
  An additional aspect is the lack of budget and cost review/follow up which causes a lack of insight into spend and therefore no control or proactivity will be possible.
  
  Mitigation Plan – Careful Budgeting: Create a detailed budget with allowances for unexpected expenses and regular follow-ups to keep costs under control. It is also important to have a flexible budget that can adapt to changing conditions and needs. Take into consideration the complexity and take input from people with this kind of project experience as well as the starting project team, as they will have a more detailed view of the budget and potential costs and risks with it. This bottom-up approach will help you get a closer understanding of the actual cost instead of the top-down approach, where we estimate what we want the cost to be and not what we believe it will be. When the budget has been created, and the project has started it is very important to monitor the spending and have regular follow-ups regarding the budget. This is to not lose control of costs and to be able to be proactive when you identify any major deviations.
• Risk #2 Return on Investment Risks: It may take longer than expected to see returns on investments in digital transformation. This can create frustration among stakeholders and affect the organization’s financial stability and support. This risk is usually caused by not keeping major stakeholders included in the information loop. This risk can also occur when stakeholders are not made aware of the gains the project has made even though it is progressing as intended. The root cause of this risk is usually that the stakeholders have not been informed or educated on the progress and gain of the project.
  
  Mitigation Plan – Measuring Return on Investment: Implement methods to continuously measure and evaluate the return on investments to adjust strategies as needed. This can include setting clear goals and key performance indicators (KPIs), conducting regular evaluations, and adjusting project plans based on collected data. Further, this risk can be mitigated by capturing “quick wins,” which shows the stakeholders the value the project adds early on and can create momentum for the project moving forward. Measuring the Impact of Digital Transformation Projects

 

Handling risks

From our perspective, a common approach to effective risk management is creating a RACI matrix. This tool clarifies roles by defining who is Responsible, Accountable, Consulted, and Informed. It helps ensure accountability in executing the risk mitigation plan, preventing tasks from being overlooked. Without a clear process, risk management can become inconsistent. It is crucial to work with risks continuously throughout the project, rather than relying on a single risk workshop at the beginning. Regular updates and ongoing risk management efforts help keep the project on track and reduce potential issues over time.

In resource-constrained projects, we have seen that prioritization is crucial to address the most critical risks without overextending capacity. A practical method is to evaluate risks based on their likelihood and impact. By scoring risks on these factors, you can focus on those with the highest scores, ensuring that resources are allocated where they will have the greatest effect. If you want to go a step further you could add a layer that covers the complexity of the risk, the bigger the circle the more complex the risk and it’s solution will be.

Conclusion

Digital transformation offers enormous opportunities for organizations to improve their operations and create long-term growth. However, to succeed, it is important to be aware of the risks that may arise and to have a clear plan to manage them. By modernizing legacy systems, implementing robust security measures, developing a strong change management plan, and carefully monitoring budget and return on investment, organizations can minimize risks and maximize the benefits of their digital transformation. With the right strategy and preparation, digital transformation can become a catalyst for success and innovation.

Effective risk management not only safeguards your digital transformation investments but also fosters a culture of resilience and adaptability. By staying aligned with stakeholders, maintaining clear communication, and being prepared to adapt to challenges, organizations can navigate their digital transformation journeys with confidence and achieve their strategic objectives.

Authors

Tobias Nilsson, and Natalie Mellin