Profits that Kill in the Age of Digital Transformation
Digital transformation initiatives both increase revenue and decrease expenses according to our upcoming study titled Work AHEAD 2016 by Cognizant’s Center for the Future of Work. For this study we surveyed over 2,000 executives across 18 countries. The expected net business impact over the next 3 years of rapid digital transformation, i.e. hyper-transformation, is an increase in revenue of 11.4% (Revenue = 10.3%, Costs = -1.3%) amongst the companies in our study. These numbers represent the difference between success and failure in many industries.
To get the predicted revenue impact, companies expect to increase their spending on digital technologies from 11.3% of their revenue today, to 16.6% of revenue by 2020, while decreasing their non-digital investments.
In addition, our study reveals 64% of the futurists in our study, experts paid to study digital technology trends and to develop future strategies, believe digital transformation will boost revenues by 2020, 76% believe it will strengthen their competitive positioning, and 88% believe it will accelerate their speed to market. If you accept these predictions, then your organization should quickly transform itself and jettison the heavy baggage that accumulates as a result of decades of institutionalized methodologies developed and codified in an analog era - an era operating at a far slower operational tempo. The good news is that ROIs (return on investments) from digital transformation initiatives are compelling. Nearly 30% of the surveyed firms are receiving an ROI greater than 100%.
These revenue numbers have investors interested and asking about the digital transformation plans of companies they invest in, or are considering investing in today. We have all read about the list of companies that have failed this year due in part to their slow and/or inadequate response to digital technologies and changing competitive marketplaces. As a result investors today want to understand the speed and scale of their portfolio’s digital transformation initiatives, as these initiatives can be predictors of future value.
For executives, transforming an enterprise is difficult at any time, but when an enterprise is highly profitable - digital transformation is even harder. Why? The temptation to follow the maxim, “Don’t fix what isn’t broken,” is just too compelling. The challenge enterprises are faced with today, however, is that digital technologies are changing the competitive landscape faster and in different ways than executives have ever seen before.
Recently, we presented a workshop on digital transformation strategies for a highly profitable automotive parts and systems manufacturer. The company is filled with very smart people, and with very efficient long standing manufacturing systems and processes. The company is very innovative in R&D and forward thinking in the adoption of digital technologies and strategies for their products and services, but their internal operations remain deeply entrenched in the past.
The challenge we all faced in the room is how do we justify digital transformation when today, the old systems pay out in record profits. How do we tell the story that in the age of digital transformation, data takes on a whole new level of importance? In fact, executives believe big data and business analytics will have the biggest business impact of all technologies on businesses from years 2020-2025.
Today an enterprise’s system for collecting, analyzing, reporting and sharing data is mission critical, especially given the increasing importance of artificial intelligence, robotic process automation and machine learning to companies’ future success. The end-to-end system for managing this data we call the “optimized information logistics systems” or by its acronym, OILS. Having effective OILS is mandatory in order to become a digitally transformed enterprise (DTE). DTEs place a premium on data collecting, analysis, situational awareness and real-time action and reaction. Executives see the value in OILS, as 63% believe analytics will have a very strong impact on work by 2020, and 62% predict OILS will significantly enhance decision-making over the next 5 years.
DTEs see where their resources are located, where they are needed and how best to manage them at all times to successfully and efficiently accomplish their mission. They see how customers are using their products and how they are holding up. Real-time connectivity combined with OILS enables organizations to think, act and compete in real-time, a capability never before possible. It enables products in the field to be intimately tied to R&D and the manufacturing floor. It is a whole new world, which in spite of profits today, must be anticipated and invested in for tomorrow, or the profits of today might lead to the death of them tomorrow.
Authors: Tim Hillison, Senior Director, Cognizant Digital Works, and Kevin Benedict, Senior Analyst, Cognizant's Center for the Future of Work
*Source The Work Ahead, 2016, Cognizant Center for the Future of Work