How to get more out of your digital investment strategy

Boards can help companies to realize higher returns from digital transformation by addressing key areas such as the investment mix.

In brief

• Many companies face the challenge of measuring returns on digital investments as they increase digital spending.
• Boards must work with executives to find the right mix of investment vehicles to help realize higher returns from digital transformation.
• Establishing robust governance and KPIs as well as creating a conducive culture for digital transformation are also crucial.

Companies are increasing their digital spending this year, driven by the pressure to bring new products and services to market and achieve efficiency. According to the EY-Parthenon 2022 Digital Investment Index (DII), Southeast Asian companies plan to allocate 5.6% of their revenues to digital spending this year, compared with 3.5% in the 2020 survey. For a company with US$10b in revenues, for example, this would mean an increase from US$350m to US$560m in digital spending.  

With the increased spending, firms have also stepped up their efforts to measure returns on digital investments (RODIs). Forty-three percent of the Southeast Asian respondents currently track their RODI. Even then, many companies still struggle to measure their RODI and don’t know how much they had spent on digital operating or capital expenditures the previous year or what value has been yielded.

Companies that have transformed digitally and are in tune with the performance of their digital investments are well placed to accelerate growth and revamp business models. Boards need to set out a clear digital vision to help the business navigate its digital-transformation journey. There are three ways that boards can steer the digital investment strategy for higher returns. 

Get the right mix of investment vehicles

To meet their innovation goals, companies need to decide whether to build internal capabilities or use inorganic investments. This will affect how quickly they can bring products and services to market and deliver their RODI. To achieve an optimal mix, firms should break down silos, synchronize the various investment types as well as align build, buy and partner decisions with their corporate objectives.

Inorganic investments offer many advantages. These include easier access to capital, enhanced quantity and quality of technology targets as well as a faster pathway to access new technologies and fill key capabilities and skills gaps. Unsurprisingly, the DII found that 54% of Southeast Asian respondents are opting for inorganic investments — such as corporate venture capital (CVC), M&As, and partnerships — rather than building capabilities themselves to accelerate innovation.

When deciding which inorganic investment vehicle to use, 45% of global survey respondents prefer CVC for its ability to support new market expansion and allow companies to have early access to forward-looking technology or assets. Thirty-four percent would opt for partnerships to gain financial returns with lower capital investment, while 32% prefer M&A to access new technology and products more quickly.

The board should seek to align executives on the right investment mix of “build, buy, partner or corporate venture” and drive an integrated approach to accelerate digital initiatives. Depending on the digital initiative, build, buy or partner may lead to different RODIs and implementation speeds.

A successful investment strategy requires alignment at the board level so that there is accountability when directing those investments. Breaking down organizational silos and playing to executives’ strengths (e.g., relying on chief digital officers and CEOs to develop in-house capabilities and lead on M&As respectively) are the best ways to develop a successful investment strategy.