Digital transformation: How it works, key benefits and how to start

Published Friday 24 October 2025

Table of contents

• What is digital transformation?
• Types of digital transformation
• The purpose of digital transformation
• Benefits of digital transformation
• Challenges of digital transformation
• Digital transformation examples
• How to develop a digital transformation strategy
• Transform your business with confidence
• FAQs on digital transformation

Key takeaways

• Start with small, targeted digital transformation initiatives by identifying one or two key pain points like manual invoicing or data entry, then implement affordable cloud-based solutions that address these specific problems before expanding to larger changes.

• Develop a comprehensive digital transformation strategy that includes defining specific success metrics, planning technology investments within your budget, and creating a change management roadmap with pilot projects and regular team feedback sessions.

• Prioritize integration over isolated tools by choosing digital solutions that connect seamlessly with your existing systems, enabling automated data flow between platforms like accounting software, CRM systems, and payment processing.

• Recognize that digital transformation is an ongoing journey requiring continuous adaptation rather than a one-time project, focusing on building a culture that embraces experimentation and digital-first workflows across your organization.

What is digital transformation?

Digital transformation is the complete integration of digital technology across all business areas to fundamentally change how you operate and deliver customer value.

This goes beyond adopting individual software tools. True digital transformation involves:

• Overhauling processes by redesigning workflows around digital-first approaches
• Embracing a culture of continuous experimentation and change
• Integrating technology to connect systems and work seamlessly together

Successful transformation requires strategic planning to maximize ROI and minimize disruption, which is critical given that only about one-third of organizations meet their digital transformation objectives.

Types of digital transformation

Digital transformation isn’t a one-size-fits-all approach. It can take different forms depending on your business goals, so understanding the types helps you focus your efforts where they matter most.

• Improving your internal operations by automating repetitive tasks like data entry or invoicing to save time and reduce errors
• Changing your business model to deliver value in new ways, such as launching an ecommerce site to reach more customers
• Expanding into new markets by using your digital strengths, for example, offering online baking classes to create new revenue streams
• Building a digital culture by encouraging your team to embrace new tools, experiment, and adapt to digital ways of working

The purpose of digital transformation

Digital transformation eliminates manual processes by replacing them with automated, connected systems that boost efficiency and reduce errors.

Key transformation benefits include:

• Automating tasks to handle repetitive admin work
• Streamlining workflows to remove bottlenecks and redundant steps
• Enhancing collaboration to enable real-time teamwork across locations
• Gaining faster insights by analyzing data instantly for better decisions
• Personalizing service to customize customer interactions at scale

Benefits of digital transformation

• Automating daily admin to help you track resources, identify and minimize waste, and improve productivity
• Centralizing information so operational data, employee details, and communication flow through one place
• Collaborating online so you and your clients can access and work on documents, brainstorm remotely, and stay connected
• Ensuring data integrity by moving data from one system to another without double handling or manual entry

Challenges of digital transformation

Digital transformation presents several key challenges. Recent research identifies complexity, lack of technical expertise, and high costs as major challenges for leaders.

• Managing planning complexity by identifying current problems, researching solutions, and setting implementation timelines
• Covering upfront investment for software licensing, hardware upgrades, and staff training
• Navigating the learning curve as your team adapts and productivity temporarily dips
• Solving integration issues to ensure new systems work with existing tools and processes
• Addressing change resistance by supporting staff and maintaining business continuity

Plan for these challenges upfront to ensure smooth implementation and positive ROI.

Digital transformation examples

Here are common examples of digital transformation in small businesses.

Accounting software

Accounting software automation eliminates manual data entry by connecting directly to your bank accounts, POS systems, and ecommerce platforms. This integration captures transaction data automatically, reducing errors and freeing up time for strategic business tasks.

Websites and ecommerce

Websites can be your shopfront, a sales tool, and can process online transactions 24 hours a day – offering greater access and availability to customers. Online advertising can direct people to your site with a few clicks, making it a powerful digital tool for business.

Digital marketing

Many popular advertising channels are digital. They often come with built-in analytical tools to help you track your return on investment for each campaign. Digital communication channels also give your customers more ways to connect with your business.

Client relationship management (CRM)

Customer relationship management (CRM) systems centralize all customer data and interactions in one place, enabling personalized service and systematic follow-up.

CRM capabilities include:

• Unified customer profiles: Complete interaction history across all touchpoints
• Automated reminders: Never miss follow-ups or important customer milestones
• Personalized communications: Tailor messages based on customer preferences and behavior

Getting paid

Automated billing processes save you time by creating and sending invoices automatically. Invoicing software also gives your customers more convenient ways to pay.

Making payments

Automated accounts payable processes make it easier to capture bills and track what’s owed. You can plan and make payments from one place. Accounts payable software gives you greater visibility over your expenses and supports cash flow management.

Tax tools

Online accounting software can automatically record transactions, keep an up-to-date ledger, and create push-button end of financial year (EOFY) financial reports to speed up tax time.

Employee management

Employee management tools let you manage staff rosters online, review timesheets, and manage payroll. Employees can update their timesheets and personal information in a centralized database, which can improve engagement.

Collaboration tools (for workers and clients)

You can choose from a range of tools to support workflow management, internal messaging, document sharing, collaboration, and video conferencing. These tools help your team stay up to date and avoid saving multiple versions of documents.

Project management

Project management software offers digital ticketing and task management to allocate and resolve tasks. You can visualize workflows and set clear timelines. Teams can also communicate on projects within the software, keeping a record of key decisions and updates.

Data analytics

Data analytics software and automation help you capture and process large amounts of business data. This helps you identify patterns and trends, track return on investment, and optimize areas like inventory management, marketing spend, or cash flow.

Learn more in our guide How to track cash flow without using spreadsheets.

Forecasting and modeling

Forecasting and modeling software uses your transactional data to help you make informed financial decisions, manage resources, and predict cash flow. These tools can estimate your financial performance ahead of time and offer insight into other key performance indicators for your business.

Managing inventory

Inventory management technology saves you time by reducing manual inventory counts. This software helps you identify what’s selling quickly, when to order more, and which inventory lines are most profitable.

How to develop a digital transformation strategy

Strategic planning is essential for successful digital transformation because it affects every aspect of how your business operates.

Digital transformation strategy requires three core components:

1. Define success metrics: Set specific, measurable goals and identify what successful transformation looks like for your business
2. Plan your technology investment: Choose integrated solutions that fit your budget, including upfront costs and ongoing subscription fees
3. Create a change management roadmap:

Transform your business with confidence

Shifting to digital helps you take control and build a more resilient business. By automating tasks and gaining clearer insights, you free up time to focus on growth, serve your customers better, and find a healthier work-life balance.

You can manage your finances with confidence as you transform your business using Xero’s simple, powerful tools. Want to see how it works? Try Xero for free.

FAQs on digital transformation

Here are common questions about digital transformation for your small business.

What are the pillars of digital transformation?

A successful digital transformation is built on four key pillars: technology (the tools you use), data (the insights you gather), process (the workflows you improve), and people (the culture you build). Balancing all four helps make your changes effective and sustainable.

How do I start a digital transformation with a small budget?

You don’t need a huge budget to get started. Identify one or two key pain points, such as manual invoicing or messy bookkeeping. Focus on affordable, scalable cloud-based tools that solve those problems first. Small, incremental changes can lead to big results over time.

How long does a digital transformation take?

Digital transformation is an ongoing journey, not a one-time project with a fixed end date. You might implement a new tool in a few weeks, but real transformation comes from continuously adapting and improving as your business and technology evolve.