Four Steps to Increase Returns on Your Digital Investments -PARTHENON
Four Steps to Increase Returns on Your Digital Investments
A major utility was preparing to capitalize on emerging trends in smart home technology, electric mobility, and sustainability—with the goal of increasing customer satisfaction through personalization and user-friendly interfaces. This transformation included developing new business models and product offerings. EY worked with the utility to develop a digital strategy, capabilities, and a multiyear transformation roadmap—all while communicating across the organization to ensure digital adoption and new ways of working. The result: the company is receiving top rankings for customer and employee satisfaction and is on track to improve efficiency by 5% to 15% while also increasing earnings per share.
Clearly, organizations that get their digital transformation efforts right are reaping significant rewards. Companies worldwide are expected to invest $6.8 trillion in digital transformation between 2020 and 2023.[i] However, despite significant investments, many executives are not seeing their investments pay off—and the pressure to show results is mounting. So why are so many companies failing to produce much-promised results?
What Digital Performance Leaders Are Doing Right
A recent EY Digital Investment Index study of more than a thousand respondents identified 9% as digital leaders—companies that achieved both roughly six percentage points more return on digital investments than others surveyed and stronger revenue growth.
Leaders clearly see mergers and acquisitions (M&A) as well as partnerships and alliances with tech natives as a critical lever for a successful digital investment strategy. Nearly three-quarters of executives say they are shifting to M&A and partnerships to accelerate digital initiatives.
The survey results also show that leaders:
- Have a clearly defined strategy and accountability for digital
- Prioritize digital initiatives with high cash returns while systematically and quickly discontinuing unnecessary initiatives
- Dedicate funds to accelerate new digital products, services, and business models
- Invest in emerging technologies and capabilities to execute on that strategy
In addition, the technology mix leaders use is likely to include investments in the internet of things (IoT), cloud computing, artificial intelligence (AI), and advanced cyber defense.
The chart below illustrates that higher investment levels in startup deals and organic development of digital solutions such as patents tend to produce higher share returns. Startup M&As are highly beneficial if the acquiring company has the proper digital foundation and capabilities. Pure inorganic investments without the internal digital foundation seem to decrease value.
Four Steps to Accelerate Digital Transformation
- Maximize Impact of Digital Spend
- Build IT and data infrastructure with both the business and customer needs in mind rather than focus on new technology without a strategy
- Use agile sprints to test impact of changes and drive value while establishing digital governance to measure results and secure funding
- Build a sustainable analytics foundation that meets current and future needs and enables data availability to all rather than only to business or functional silos
Digital solutions in action: A $3 billion mid-tier mining company in Australia invested in AI and machine learning (ML) capabilities to build digital twins for its milling operations. EY helped the company develop the twin to run in parallel with the legacy system and to predict optimal operational setpoints, identify ways to increase throughput, improve uptime, and increase yield quality—all leading to a business value improvement of more than $50 million.
- Align on Investment Strategy and Leverage M&A and Ecosystem Alliances
- Align on the best mix of buy, build, and partner investments
- Avoid a siloed approach: the CEO should own the investment approach and strategic direction and should establish collaboration incentives and a governing body to provide oversight
- Assign clear execution accountability for each investment vehicle based on C-suite roles and strengths
- Drive M&A value by recognizing differences in startups versus traditional M&A
Digital solutions in action: A leading U.S.-based retail pharmacy player was facing questions about operational performance and its business model. EY advised the company on how to acquire technology capabilities critical to drive operational gains, offer platform-based technology solutions to regional retail pharmacies, and build new business models to compete in the emerging e-commerce pharmacy segment. The company’s investments of more than $100 million in various companies during the past three years are now reaping significant returns.
- Remove Barriers to Scale
- Develop an operating model that is right-sized for your digital agenda, is flexible in changing environments, and enables development and incubation of new digital capabilities and solutions
- Establish a portfolio investment approach that balances short-term cash needs with long-term initiatives
- Create a digital talent pool that bridges business needs with technology
- Allow exploration of new ideas while establishing an outcome-based governance model focused on scale
Digital solutions in action: One nation’s government needed scalable rapid identification, containment, and treatment of the Covid-19 virus. With the help of EY, it rapidly deployed a digital care platform and care accelerator embedded with intelligence and analytics to eliminate barriers to patient outreach, monitor risk groups, understand citizen behavior, and manage demand spikes. EY worked with a second country on a similar scaled rollout that resulted in a 28% reduction in emergency visits in the initial stage of the virus outbreak.
- Establish Strong Governance Procedures and Proper Metrics
- Align on digital goals, funding mechanisms, and metrics connected to digital strategy
- Regularly review use-case portfolio, and focus on strategic solutions to drive revenue, reduce costs, and increase cash flow
- Establish an effective governance model to manage incubation funnel in an agile way
- Upgrade skills, data, and tools to measure financial impact and return on digital investment
Digital solutions in action: A city government had tried to increase connectivity among citizens and public services by adopting new digital technologies. EY’s diagnosis revealed that its implementation failed because of unclear digital governance, breakdown in coordination across departments, and inability to monitor priorities. EY designed an implementation strategy in which a central figurehead was accountable for communication and performance. Employees also used a new key performance indicator (KPI) framework to monitor performance, implementation pace, and coordination. The resulting governance framework enabled the city to regain control of the digital agenda.
Time Is of the Essence
As companies incubate new opportunities to drive growth and digitize their core businesses, they should continuously assess investment strategy, talent requirements, operating models, and funding constraints. M&A and other inorganic investment options can produce outsized results compared to other digital investment choices.
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The EY Digital Investment Index is a study of 1,001 CEOs, CDOs, CFOs, CSOs, and CIOs of companies with at least $1 billion in annual revenue, and it was conducted between September and November 2020.
Laura McGarrity is EY-Parthenon Leader for Digital Innovation. Thomas Holm Møller is EY-Parthenon EMEIA Digital Leader. Peter Ulrich is EY-Parthenon Leader for Digital Strategy and Transactions.
The views reflected in this article are the views of the authors and do not necessarily reflect the views of the global EY organization or its member firms.
[i] IDG, October 29, 2020, IDC Reveals 2021 Worldwide Digital Transformation Predictions; 65% of Global GDP Digitalized by 2022, Driving Over $6.8 Trillion of Direct DX Investments from 2020 to 2023