From AI To Digital Transformation. The AI Readiness Framework

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From AI to digital transformation: The AI readiness framework

Jonny Holmstrom

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DOI: https://doi.org/10.1016/j.bushor.2021.03.006
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From AI to digital transformation:

The AI readiness framework

Jonny Holmström

Swedish Center for Digital Innovation


Department of Informatics

of
Umeå University
Sweden

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[email protected]
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From AI to digital transformation:

The AI readiness framework

Abstract

Strategies and means for selecting and implementing digital technologies that realize firms’
goals in digital transformation have been extensively investigated. The recent surge in
Artificial Intelligence (AI) technologies has amplified the need for such investigation, as they
are being increasingly used in diverse organizational practices, creating not only new
opportunities for digital transformation but also new challenges for managers of digital
transformation processes. In this paper I present a framework intended to assist efforts to
address one of the first of these challenges: assessment of organizational AI readiness, i.e., an
organization’s ability to deploy AI technologies to enable digital transformation, in four key

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dimensions: technologies, activities, boundaries and goals. I show that it can facilitate
analysis of an organization’s current socio-technical AI status, and future prospects for its

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fuller value-adding socio-technical deployment. The AI readiness framework invites fuller
theorizing of the roles that AI can, and will, play in digital transformation.
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Keywords: Artificial intelligence, AI readiness, digital transformation
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INTRODUCTION

Artificial intelligence (AI) has been touted as a means for organizations to cut costs and

enhance their quality of services, coordination, productivity, and practice efficiencies

(Davenport, 2018; Iansiti & Lakhani, 2020). Today, AI technologies are being increasingly

used in diverse organizational practices, creating new types of human-machine configurations

and playing an increasing role in contemporary organizing (Boden, 2016; Seidel et al. 2018).

Examples of organizational use of AI can be found in such diverse areas as management

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decision-making, manufacture, and design (Kittur et al. 2019). The AI systems involved can

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be described as rational agents that autonomously respond to inputs—with little or no user

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intervention—by performing tasks guided by their underlying models and functions
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(Bostrom, 2014; Canhoto & Clear, 2020). In this manner, AI technologies constitute a new
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type of agency in the context of contemporary organizing.


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Despite AI technologies’ proliferation, accessibility, scalability, and ease-of-use organizations

are still struggling to reap their full potential. For instance, a recent McKinsey report
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suggested that while the business world is beginning to harness these technologies and their
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benefits, fundamental transformation barriers remain (Boutetiere & Reich, 2018). For

organizations to reap the full potential of digital technologies in general and AI in particular,

they need to enable mutual adaptation of technology and organization. However, digital

technologies such as AI are said to be notoriously challenging and dynamic, as their adoption

entails multiple, continuous, and simultaneous adjustments of organizations’ resources,

staffing, culture, and decision-making (Davenport, 2018). A challenge for organizations

adopting AI in their operations is that AI platforms vary in both scope and complexity, which

hinders familiarity with them and hence their deployment to obtain competitive advantage

(Iansiti & Lakhani, 2020). This springs partly from the ‘black box’ nature of the algorithms

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(sets of digital instructions implemented to achieve defined goals) dictating AI responses,

which are difficult to understand for members of organizations that are being increasingly

shaped by AI (Hallinan & Striphas, 2014; Lindgren & Holmström, 2020; Pasquale, 2015). AI

platforms are likely to transform organizations in qualitatively different ways from other

technologies, so it is crucial to develop an understanding of organizations’ abilities to meet

these challenges (their AI readiness).

Since AI technologies have human-like cognitive capabilities (Huang & Rust, 2018),

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including knowing, learning, perceiving, sensing, acting, communicating and reasoning, their

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deployment may have far-reaching consequences for organizations and various associated

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ecosystem actors, including consumers, vendors, frontline service providers, and other
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stakeholders (Fernandes & Oliveira, 2021). However, there is a huge gap between the AI
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hype touted by AI vendors and its actual use in organizations. Thus, the importance of

organizations’ AI readiness in ongoing digital transformation has been recognized (Li et al.,
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2017; Pan, 2016). Moreover, there is a clear need for deeper exploration of AI’s impact on
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organizational activities, boundaries and goals, including the mechanisms and processes
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involved in harnessing its power in digital transformation (Aldrich & Ruef 2006).

For the purposes of this paper I define AI readiness as an organization’s abilities to deploy

and use AI in ways that adds value to the organization. I present a novel approach (the AI

readiness framework) to assess and visualize four key dimensions of this readiness:

technologies, activities, boundaries, and goals. The framework has been applied in workshop

settings allowing an organizations’ members to grade their organization’s capabilities (current

and future potential) in each dimension. It highlights the risks and challenges involved in

digital transformation associated with firm-wide mobilization of AI technologies for new

ends, for which success rates are often low (e.g. Agarwal et al., 2010). The multi-dimensional

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AI readiness framework also provides a pragmatic tool that facilitates efforts to meet the

associated challenges, reduce the risks and increase success rates.

The remainder of the paper is structured as follows. The next section provides the theoretical

background and outlines the scope of the paper. The following sections describe the

framework for assessing organizational AI readiness and its implementation. Finally, a

concluding section summarizes the key contributions and limitations of the study.

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THEORETICAL BACKGROUND

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AI and Digital Transformation

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Digital technologies are radically changing the way firms operate (Henfridsson and Bygstad,
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2013; Jonsson et al., 2018) and it is hard to deal with organizing without considering digital
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technology (Kallinikos et al., 2013). Simply put, digital technologies are integral to
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contemporary firms to the extent that organizing and digitization are two sides of the same

coin. Digital technologies are seen as ‘‘products or services that are either embodied in
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information and communication technologies or enabled by them’’ (Lyytinen et al., 2016, p.


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49). As such, they exist in the shape of digital platforms (e.g., Tiwana et al., 2010) or artifacts

with digitized components (e.g., Ekbia, 2009). While there is a broad range of digital

technology types, a common theme for all types of digital technology is the decoupling of

digital information from the physical form of the material device (Yoo et al., 2010).

It must be clear that digitalization cannot occur without digitization. Digitization is the

conversion of analog to digital, whereas digitalization is the use of digital technologies and

digitized data to impact how work gets done, how customers and firms engage and interact,

and how revenue streams are created. Digitization refers to the internal optimization of

processes (e.g., work automation) which often results in cost reductions. Conversely,

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digitalization is process that goes beyond the implementation of technology to imply a deeper

change to the entire business model and the evolution of work (see Table 1).

[Insert Table 1 About Here]

In the end, very few businesses have undergone successful digital transformations. For

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instance, Kane et al (2017) found in a global study that only 25% of organizations had

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transformed into digital businesses, 41% were on transformative journeys, and 34% invested
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more time talking about the digital transformation trend than they did acting on it. What is
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noteworthy form this study, however, is that 85% of executives stated that attaining digital
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maturity is critical to organizational success.


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Despite various conceptualizations of digital transformation (Vial, 2019; Wessel et al. 2020),
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it is widely agreed that digital technologies, especially in the form of AI, can massively
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transform organizations (Constantinides et al., 2018; Davenport, 2018). Hence, in the last

decade increasing attention has been paid to the process and associated tensions as

organizations deploy AI in their operations (Agarwal et al., 2010; Hinings et al., 2018). Inter

alia, managers must decide whether to focus on exploiting existing technologies or invest in

new AI technologies for the future (e.g. Gibson & Birkinshaw, 2004; Raisch et al., 2009).

They also face pressures to change rapidly in order to keep up with competitors and investors’

demands, while avoiding rash decisions and carefully taking stock of long-term shifts in the

business environment and society (Perlow et al., 2002).

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The increasing utilization of digital technologies linked to various kinds of datasets has given

rise to diverse AI capabilities designed to augment organizational capabilities (e.g. Khrais &

Shidwan, 2020). Examples include provision of on-line conversation through text or text-to-

speech by chatbots to advanced digital services such as fraud detection and personalized

investment advice. However, despite growing recognition of AI’s potential to augment

organizational capabilities, there have been few conceptual and empirical investigations of

AI’s impacts on organizations’ digital transformation processes. This is connected to the

debate on ‘narrow’ vs ‘wide’ AI applications, where narrow AI applications are tied to a

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specific context with a specific (and limited) dataset (e.g. Brynjolfsson et al., 2018). The

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notion of AI readiness is especially important for wider AI applications due to their greater

complexity.
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Transformations introduce discontinuities into an organization’s life, and have potentially

disruptive effects on goals, boundaries, and activities (Aldrich & Ruef, 2006). Thus, as AI has
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developed in recent years it has permeated (sometimes explosively) every aspect of


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organizational life, affecting such complex processes as classification, optimization,


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estimation, and image recognition (Agrawal et al., 2018; Brynjolfsson & McAfee, 2014;

Brynjolfsson et al., 2018). Thus, ‘digital transformation’ is considered a broader concept than

‘IT-enabled organizational change’, although most conceptualizations place digital

transformation within the boundaries of a single organization (Vial, 2019), because it is

deeply entangled with several layers of organizational reality. Hence, recent academic interest

in digital transformation focuses on mechanisms and processes that harness digital

technology’s power to transform firms’ activities, boundaries, and goals (Wessel et al., 2020;

Wimelius et al., 2021).

The Four Dimensions of Digital Transformation

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The AI readiness framework is designed to enable the capture and tracing of an organization’s

socio-technological AI status, assist the characterization of associated cultural factors, and

facilitate efforts to address key bottlenecks. It focuses attention on four key dimensions of the

fabric of organizational life: technologies, activities, boundaries, and goals. Technologies play

major roles in digital transformation by definition, and the others correspond to three

dimensions of the theoretical definition of organizations as goal-oriented, bounded entities

that participate in exchange activities across organizational boundaries with their

environments (Aldrich 1979; Aldrich & Roef, 2006). Transformations of elements associated

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with each of these dimensions may be difficult to achieve as they take place against a

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background of the daily reproduction of routines. Thus, in the framework presented here the
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dimensions are considered separately for clarity, although they are clearly interdependent.
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The process is illustrated in the following sub-sections by the first practical application of the
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framework, in which an insurance firm’s AI readiness was assessed by a team of the firm’s
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managers in a workshop, using the self-reporting questionnaire shown in Appendix 1.


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Technologies
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Debates about digital technologies’ effects on organizations and the nature of work seem to

have greatly intensified recently. This may largely be due to the rapid emergence and scaling

of new digital technologies (Huang et al., 2017), together with new and increased concerns

about their consequences associated with their increasing levels of complexity (Sandberg et

al., 2020). The new digital technologies developed and implemented in recent years have had

major effects, with large-scale transformations of occupations, job roles and entire industries

(Acemoglu & Autor, 2011; Mokyr et al., 2015). Several key functional qualities of digital

technologies, such as editability and generativity (Kallinikos et al., 2013; Yoo et al., 2010),

have been identified that shape firms’ activities, boundaries and goals (Alaimo et al., 2020).

Thus, the insurance firm’s management team initially focused on the technology dimension in

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the workshop. Using the questionnaire shown in Appendix 1, with the author acting as a

facilitator, the management team awarded the firm a score of 4 (‘excellent’) for their current

AI technology portfolio in terms of value it adds to their organization. This portfolio included

a chatbot function, with functionality that they did not intend to expand due to an assumption

that the best customer interactions were phone-mediated. The firm’s customer ratings had

been very high for many years and they did not see a reason to change channels. Their AI

technology portfolio also included data analytics capacities based on TensorFlow and

Tableau. The rating for their future AI technology portfolio was lower, 2 (moderate) on the 0-

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4 scale, because they had no strategy for using any further AI technology to add value to their

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organization. They merely intended to continue to use the chatbot function on their website,
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and analyze data using TensorFlow and Tableau. See full ratings in Appendix 2.
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Activities

Previous studies have shown that algorithm-governed digital systems can enable
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organizations to perform activities more effectively and augment their capacities, but they
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also have affordances that can have radically differing consequences from planned changes
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(Neff & Nagy, 2016). They can also organize, manage, and control many activities delegated

to them by humans, but this control is not always obvious or transparent (Feltzmann et al.,

2019). Specifically, learning algorithms have the potential to transform expertise in

organizations and reshape occupational boundaries (Faraj et al., 2018). Activities that may be

affected by such digital transformation include the handling of money transfer via mobile

banking (Malar et al., 2019), the emergent use of sensor-based technologies in the automotive

insurance industry (Marabelli et al., 2017), and fundamental AI-mediated changes in work

practices (Jarrahi, 2018). Thus, in the workshop, after appraising the insurance firm’s

technological status the team next considered the activities dimension, and awarded the firm a

score of 2 (‘moderate’) in terms of their AI’s value-adding support for key activities. The

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activities supported by AI technology at the time of the workshop were customer support and

data analytics. There were no concrete plans to expand these activities, or push for deeper use

of AI, but there was evidence of some enthusiam for expansion in the future as a score of 3

(‘high’) was awarded for the firm’s strategies for supporting future activities with AI.

Boundaries

Changes that occur in digital transformation may involve expansion, contraction or even

disappearance of boundaries (Aldrich & Ruef, 2006). Scholars have been concerned with

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boundary change in relation to mergers and acquisitions (Henningsson and Carlsson, 2011),

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organizations establishing new digital innovation units (Nylén et al., 2014), layoffs of

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organizational members (Spencer, 2018), and skill replacements (Gekara & Thanh Nguyen,
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2018). Boundary changes may also arise from physical products being increasingly enhanced
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with digital components such as sensors, and linear value creation being dissolved by drawing

on newly incorporated digital capabilities that allow addition of novel services during their
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lifecycles. For example, adding sensors in work contexts enables new forms of service
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arrangements (Jonsson et al., 2018; Westergren et al., 2019). Another example of boundary
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change is the emergence of the ‘gig economy’ with people increasingly working from remote

places (Lehdonvirta, 2018).

Clearly, in order to exploit the affordances of digital technologies, an organization must have

the ability to identify and implement appropriate boundary changes. Thus, in the workshop,

the management team considered boundaries as the third dimension of AI readiness and

awarded the firm a score of just 1 (‘low’) on the 0-4 scale for value-adding changes in

organizational boundaries associated with their use of AI. The only boundary-stretching

examples they mentioned were experiments with smart home solutions and emergence of big,

complex and unstructured datasets from such experiments. In the long run their boundaries

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with customers and real estate owners are likely to change, but current intiatives that could

induce or include boundary changes did extend beyond these experiments. However, the

participants expressed enthusiam about these experiments and hoped that some of the tested

ideas would be realized in the future, leading to a self-reported score of 2 (moderate) for

value-adding strategies to stretch organizational boundaries using AI in the future.

Goals

Digital transformation may have profound effects on organizations’ ‘deep structure’, e.g.,

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their goals and identities (Wessel et al., 2020). The process of creating, capturing and

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delivering value from digital transformation provides opportunities to create new processes,

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products, services, and ultimately new goals, typically by drawing on the affordances
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associated with digital technologies. Cross-disciplinary research has shown that
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organizational identity has important effects, as ‘who we are’ has implications for ‘what we

do’, which should be ideally both be clear and in sync (Ravasi et al., 2020). The alignment of
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organizational activities with organizational identity (Santos & Eisenhardt 2005) also has
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major implications for digital transformation efforts. For example, Baiyere et al. (2020) have
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demonstrated needs to consider, and if necessary adjust, business process management when

introducing new digital products and service offerings. Similarly, Gregory et al. (2015) have

illuminated complexities of digital transformation and associated needs for effective

management strategies for ‘ambidextrous’ resolution of ‘paradoxes’ (i.e., tensions arising

from conflicting needs, such as simultaneous needs for IT agility and stability). Thus, in the

workshop the management team finally used the AI readiness framework to focus on the

goals dimension, and awarded their insurance firm a score of 0, indicating that their present

AI use provides no value-added support for attainment of the organization’s goals. The

participants engaged in a debate about ways in which some new startups have entered the

market and seemed to appeal to the young customer base. For example, Hedvig (a purely

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digital startup in the insurance industry driven by AI) has taken a big slice of the market in the

Nordic countries. They also discussed US-based insurance companies’ stronger reliance on AI

than their European counterparts, which they attributed partly to technological factors and

partly to ethical issues (the managers insisted that they did not want to ‘cross an ethical line’

by finding out more about their customers). However, they expressed some interest in

increasing use of AI to provide value-adding support for the organization’s goals in the future,

and hence awarded the firm a score of 1 (low) in this respect.

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[Insert Table 2 About Here]
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The proposed model (rooted in research streams summarized in Table 2) frames the
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relationships between digital technology and the other dimensions, i.e.,. activities, boundaries

and goals. Thus, it moves beyond the prevailing assumption that treats technology as an entity
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that is distinct from the other dimensions, and includes it as an integral part of organizational
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fabric. It also avoids the frequently black-boxed representation of technology, which has

hindered previous attempts to thoroughly examine technologies’ true roles in digital

transformation. A further distinctive feature of the model is that the four dimensions can be

considered both separately from each other and holistically when analyzing organizational AI

readiness.

THE AI READINESS FRAMEWORK

Experiences with AI have shown that it can greatly changes an organizations’ workforce,

required skills and ways of both communicating and cooperating (e.g. Ransbotham et al.,

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2017). AI and digital transformation go hand in hand, but a systematic effort is needed to

maximize the potential of this relationship. The presented AI readiness framework focuses

attention on the key dimensions of digital transformation—technologies, activities,

boundaries and goals—to facilitate acquisition of a rich picture of a firm’s AI readiness. The

framework addresses current situations and future expectations in relation to these

dimensions. Based on self-evaluation by people working in a focal organization, with scores

ranging from 0 to 4 for each dimension, the framework provides a convenient means for

assessing and visualizing (Figures 1 and 2) the organization’s AI readiness.

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[Insert Figure 1 About Here]
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To illustrate the visualization potential of the model, Figure 2 presents results from the
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workshop using the framework for measuring the insurance organization’s AI readiness. The
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assessment session showed that the organizational members felt comfortable with the current
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technology status, but less confident about the firm’s ability to harness the value-adding

potential of new technologies in the future. In a similar vein, there was a relatively high level

of confidence in the ways in which AI supports/relates to organizational activities, but they

were less certain of how AI supports/relates to future activities. Uncertainty was strongest and

most pervasive regarding AI’s support for, and relations to, boundaries and goals, so

subsequent workshops (not reported here) focused on these aspects.

[Insert Figure 2 About Here]

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According to Crossan, Lane & White (1999), a good framework has three key requirements.

First, it should identify the phenomenon of interest—in this case AI readiness. Second, the

key premises or assumptions underlying the framework must be stated. A key premise

underlying the presented AI readiness framework is that AI readiness is multi-dimensional,

and that digital transformation through AI affects all dimensions. Third, the relationships

among elements of the framework must be described. The presented AI readiness framework

focuses attention on each of the dimensions separately, but it is also intended to promote

consideration of interactions among elements associated with the dimensions, and tensions

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associated with AI-mediated digital transformation. I hope that it will help practitioners

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identify and manage the links between the dimensions and the tensions inherent in digital

transformation processes.
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To handle digital transformation effectively, employees must work together in a new way,

breaking down silos and collaboratively addressing cross-dimensional issues. Organizational


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members need to learn from each other in order to respond more quickly and consistently to
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changes in the market and within their own organization. Corporate cultures also need to
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move toward a digital mindset where innovation is rewarded, and additional digital expertise

can be brought in to help organizations to embrace the digital world and acquire the necessary

skills and knowledge. In addition, organizations need tools and frameworks to enable them to

avoid ‘reinventing the wheel’ and steer digital transformation efforts in an appropriate

direction. The presented AI readiness framework is intended to provide such ability by

facilitating the assessment of key organizational capabilities (or lack thereof) in relation to

four dimensions: technologies, activities, boundaries, and goals. For example, use of the

framework in the case considered here suggests that the firm had some capabilities related to

technologies and activities, but found building capabilities related to boundaries and goals

more challenging. Thus, it illustrates the potential utility of assessing and visualizing AI

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readiness in the four key dimensions for enabling organizations to develop their AI readiness

and identify skills and capabilities required to improve their AI readiness.

CONCLUSIONS

AI is a key driver of digital transformation in today’s organizations, largely due to its utility in

decision-making when combined with large datasets. Thus, deployment of AI technologies

provides some of the greatest opportunities and poses some of the most severe challenges

facing organizations. However, many leaders have little idea how to address them. They

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recognize that AI plays crucial roles in organizations’ performance, but not how their firms

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can deploy it to achieve desired performance outcomes and promote effective digital

transformation.
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Many organizations primarily focus on performance outcomes related to AI, which are

obviously important, but only one aspect of AI governance. Moreover, various studies have
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shown that sometimes short-term hits in performance must be accepted during AI-mediated
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digital transformation to enable long-term sustainability, so adaptability must be considered as


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well as performance. The presented framework for measuring an organization’s AI readiness

is intended to facilitate such consideration by enabling quantification of a firm’s potential for

digital transformation in four key dimensions: technologies, activities, boundaries and goals.

Thus, it can be used to help organizations design and develop their AI-based business

opportunities by enabling more complete mapping of digital transformation opportunities and

bottlenecks.

From an evolutionary perspective, it can also be used to investigate the development of firms’

AI-related learning in each of the dimensions. Some organizations begin with a largely blank

slate, so they must initiate rules or principles and experiment with them until they find the

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most effective or appropriate AI use for them. Organizations that begin with inadequate

knowledge or experience will feel strong pressure to learn by doing. Organizations that have

acquired routines or organizing procedures from existing workplaces may find it easier to

muddle through the initial stages, but nonetheless must learn to anticipate and cope with

environmental changes. Regardless of their current AI readiness, all organizations must

understand the multi-dimensional and dynamic nature of digital transformation associated

with AI, and the presented framework may assist acquisition of this understanding.

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[Insert Appendix 1 Here]
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[Insert Appendix 2 Here]


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Table 1. Key digital constructs

Term Definition Key references

Digitization A technical transforming Tilson et al. 2012; Sandberg et al.


formats into digital formats
2020

Digitalization A sociotechnical process of Yoo et al. 2010; Nylen &


applying digitizing techniques to
broader social and institutional Holmström, 2015
contexts that render digital
technologies infrastructural

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Digital Transformation Digital transformation is the Matt et al. 2015; Vial 2019
profound transformation of

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organizational activities,
boundaries and goals to leverage
the opportunities of digital
technologies -p
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Table 2. Research streams related to digital transformation dimensions

Dimension of digital Manifested in Exemplary papers


transformation
Technologies Changes in digital Alaimo et al., 2020; Kallinikos
technology et al., 2013; Monteiro &
Parmiggiani, 2019; Wimelius et
al., 2021; Yoo et al., 2010
Activities Changes in activities, Faraj et al., 2018; Jarrahi, 2018;
triggered by changes in Malar et al., 2019; Marabelli et
digital technology al., 2017.
Boundaries Change in boundaries, Gekara and Thanh Nguyen,
triggered by changes in 2018; Jonsson et al., 2018;
digital technology Lehdonvirta, 2018; Nylén et al.,
2014; Spencer, 2018;
Westergren et al., 2019.

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Goals Change in goals, triggered Baiyere et al., 2020; Gregory et
by changes in digital al., 2015.
technology

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Figure 1. Scorecard for the AI readiness framework

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Figure 2. Completed AI readiness framework scorecard for the focal insurance firm

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Appendix 1: Questionnaire for the AI readiness framework

AI Readiness Score None Low Moderate High Excellent

Technologies
Our present AI
technology portfolio
Present
adds value to our
organization
We have a strategy for
using our AI
Future technology portfolio to
add value to our
organization
Activities

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Our present key
activities are

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Present supported by AI in
ways that add value to
our organization

Future
We have a strategy for
using AI to support
key activities in ways
-p
re
that add value to our
organization
lP

Boundaries
Our present
organizational
boundaries are
na

Present
stretched by AI use in
ways that add value to
our organization
ur

We have a strategy for


using AI to change our
organizational
Future
Jo

boundaries in ways
that add value to our
organization
Goals
Our present AI use
supports our goals in
Present
ways that add value to
our organization
We have a strategy for
using AI to support
Future our goals in ways that
add value to our
organization

25
Appendix 2: Questionnaire for the AI readiness framework and scores awarded for the

insurance firm

AI Readiness Score None Low Moderate High Excellent

Technologies
Our present AI
technology portfolio
Present
adds value to our
organization
We have a strategy for
using our AI
Future technology portfolio to

of
add value to our
organization
Activities

ro
Our present key
activities are
Present supported by AI in
ways that add value to
our organization
-p
re
We have a strategy for
using AI to support
Future key activities in ways
lP

that add value to our


organization
Boundaries
na

Our present
organizational
boundaries are
Present
stretched by AI use in
ur

ways that add value to


our organization
Jo

We have a strategy for


using AI to change our
organizational
Future
boundaries in ways
that add value to our
organization
Goals
Our present AI use
supports our goals in
Present
ways that add value to
our organization
We have a strategy for
using AI to support
Future our goals in ways that
add value to our
organization

26

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