Harnessing the potential of digital technology is critical to unlocking value in today’s global economy. For many corporations, digitizing has also become essential for their basic survival. It is no surprise that the "digital economy" features so prominently on this year’s agenda at the World Economic Forum Annual Meeting in Davos.
In my view, there are three factors driving the digital shift. First, the availability of information and the ability to synthesize data into business insights. Second, customer expectations. Third, and perhaps the most crippling for laggards, is the lightning speed at which "born digital” companies are disrupting older incumbents and transforming playing fields.
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The Massachusetts Institute of Technology Center for Information Systems Research (MIT CISR) conducted a study with our firm, AlixPartners, of more than 400 businesses to assess their digital “future readiness”. We found that 23% of these companies were what we considered “future-ready” – that is, they had digitally transformed their customer interface and business operations. Their net margins were 16 percentage points higher than the industry average.
As the leader of a specialist consulting firm, I am privy to the inner workings of many corporations. It is often surprising to learn who is leading the pack on digital transformation. Although it may seem most important to B2C companies, that is not always the case. In fact, consumer companies have a lot to learn from their B2B counterparts. In the same MIT CISR study, we found that B2B companies, such as those in manufacturing and heavy industry, tended to invest more in digital transformation. As a result, they were more future-ready than retail or financial services companies.
What is often overlooked is that digital transformation requires more than developing an attractive and intuitive customer interface. It means overhauling the underlying architecture and data platforms supporting business operations. In fact, digitizing the “back-end” of a business is often more fiscally impactful than fixing the consumer-facing “front-end”. We found that companies that had digitally transformed their front-end but not their back-end recorded significantly lower net margins than those who had transformed their back-end but not their front-end.
As they invest in their digital transition, businesses need to determine where they will reap the most reward. It is clear that the companies that invest the most are generally more profitable. Those who defer digitization, or try to minimize the cost of the investment, may discover that the consequences are farther-reaching than a short-term improvement to their profit margins. The decision could be critical to their survival.