- Nearly two-thirds (62%) of executives agree that organizations must radically transform their operations over the next two years.
- While companies plan to increase their digital investments, many still struggle to maximize their returns — only 9% of survey respondents are “leaders,” companies that achieved a mean return on digital investment (RODI) of 8.1%, six percentage points higher than non-leaders.
- Leaders reported roughly 40% more revenue growth over the past two years than non-leaders.
Cloud computing and artificial intelligence (AI) may now be table stakes in today’s business investment landscape, but scaling these digital initiatives — and maximizing their return — remains a challenge for business leaders, according to the Ernst & Young LLP (EY US)
Digital Investment Index
, conducted by EY-Parthenon, the strategy consulting teams of the EY organization.
The survey polled 1,001 global C-level and executive decision-makers at companies with $1b+ in annual revenue between September and November 2020 to reveal how they develop their own digital strategy and how they can enhance their RODI. Among its key findings: CEOs, chief digital officers and other senior executives are not yet aligned on investment strategies and struggle to measure RODI.
“Budget constraints in the pandemic economy and transformation fatigue across organizations threaten to turn digital promises into mere buzzwords — unless organizations can prove the value of their investments to the bottom line,” said Peter Ulrich, EY-Parthenon Principal, Digital Strategy and Transactions, Ernst & Young LLP. “EY data shows that executives have still more work ahead to bolster their digital investments and to realize results. A strategy which coherently outlines both growth and savings across an organization is necessary to carving a winning path forward.”
Digital leaders focused on boosting resilience and future-proofing the enterprise
Very few business leaders have been able to successfully steer their digital investment strategy toward differentiating upside — just 9% of respondents claimed to do so. Among these digital leaders, though, there were a handful of common themes that helped them achieve stronger returns; in fact, leaders reported roughly 40% more revenue growth than non-leaders.
Digital leaders are accelerating new digital products, services and business models, and have a clearly defined strategy to do so (48% vs. 36% of others). Their strategies commonly included a shift in focus from in-house development to mergers and acquisitions (M&A) and partnership (64% vs. 39% of others) and a reprioritization of digital initiatives to those with immediate cash returns, while discontinuing unnecessary initiatives (58% vs. 37% of others). That technology mix is more likely than others to include investments in the internet of things (IoT), cloud computing and advanced cyber defense — showing that leaders are creating a strong foundation (through cloud and cybersecurity) to rapidly accelerate emerging technology solutions, such as AI and IoT.
Realizing benefits from technology
Nearly two-thirds (62%) of executives agree that organizations must radically transform their operations over the next two years. To do that, they are starting to turn to emerging technologies. Among the most common investments of the next two years will be IoT, AI and cloud computing (67%, 64% and 61%, respectively). And while these capabilities will become prevalent across sectors and strategies, the impact of these investments to end clients and the bottom line might prove slow. Thus far, only 7% of respondents report achieving full benefits of AI and IoT.
“Executives need to grasp what stands in the way of their benefiting from transformative technologies, and that might not always be a simple analysis,” said Ulrich. “A majority of survey participants cited a lack of requisite skills or talent, a lack of budget, or poor-quality data and data analytics functions, suggesting that many companies are grappling with some mix of the three. Oftentimes, many companies think too early about the technology rather than establishing a sound digital strategy. Instead, businesses should focus on the value they want to bring to the business, and then find the technology to match.”
Aligning on organic vs. inorganic investment strategy
The EY Digital Investment Index shows that, while many executives understand which technologies they need to succeed in a digital future, many are uncertain about which investment vehicles are needed to acquire and implement these technologies.
M&A, corporate venture capital and partnership investments stand out as successes. Of the executives who pursued digital technologies via M&A, 52% say that the approach exceeded expectations, and 45% report similarly for digital partnerships.
However, the risk of not realizing for benefits from a startup deal is real. Of the executives who say that their digital M&A investments fell short of expectations, 64% say that misaligned sources of value were the primary concern.
Sonal Bhatia, Americas EY-Parthenon Transaction Strategy & Execution Leader, added, “Executives need to align on their mix of ‘build, partner, buy, and corporate venture.’ These are the fundamental building blocks of digital strategy execution, and their rewards should be balanced carefully against the capital and timing needed, and risk appetite, to make each a reality. Thriving tomorrow will be contingent on intelligently integrating digital investments with broader strategies.”
Looking externally to obtain skills and overcome barriers to scale
Even those companies that maintain a clearly defined digital strategy encounter barriers to achieving their goals. A lack of skills (65%), budget (59%) and operating model (45%) are the top barriers to challenges for survey respondents. Interestingly, a mere 14% cited market disruption as a problem.
“As with any winning strategy, a flexible operating model, well-skilled employees and a culture of innovation are critical to realizing full potential,” said Ulrich.
Leaders in the digital transformation space — those respondents who are experiencing above-average returns on their digital investment — are more likely than non-leaders to hire new employees (34% vs. 27%) and support flexible work policies (35% vs. 30%). Conversely, leaders are less likely than non-leaders to invest in retraining programs (18% vs. 21%) and outsource capabilities (10% vs. 19%).
“Removing barriers to implementation is not a straightforward process,” Ulrich continued. “Dual tracking and agile ways of working will be key to resolving operating model obstacles. Companies should have an eye toward quick-win projects that create value in weeks, not months, while also delivering on future strategic goals, like establishing a digital foundation and governance to measure results. And they should be prepared to move on from initiatives which don’t show promise.”
Establishing robust governance and metrics
There’s room to improve on defining how digital transformation has benefited business. Although more than 75% of executives say that digital initiatives have been a key component of success in the past two years, less than 25% actively measure RODI. Other key performance indicators, such as those tied to financial performance (57%) and operational efficiency (46%), are more prevalent.
“Companies that use RODI as a metric were more likely to achieve greater than 5% RODI in 2019, and were better equipped to make informed, strategic decisions,” said Bhatia.
Over half of executives, however, say that RODI is difficult for their companies to assess because it requires a clear strategy, leadership alignment and the right mix of skillsets, tools and data to measure results.
Bhatia added, “You need to show stakeholders effective and frequent measurement of your digital program. Returns increase as leadership prioritizes scale and metrics.”
About the survey
The EY Digital Investment Index gauges how organizations will need to transform to realize their digital strategy over the coming two years. The survey queried 1,001 executives from Europe, North America and Asia from a broad range of industries at companies with more than $1b in revenue. One-third of companies had annual revenues of over $10b. The survey represents CEOs, CDOs (Chief Digital Officers), CFOs, CSOs and CIOs from industries including advanced manufacturing and mobility (AM&M), consumer education, energy, financial services (FS), health care and life sciences, private equity, technology, media and entertainment, and telecommunications (TMT).
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