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Why digital transformation doesn’t have to be hard

Boards struggling with digital transformation should adopt a focused strategy that considers targeted M&A and plugs into the ecosystem.


In brief

  • As the pandemic spurs businesses to accelerate digital transformation, companies need a strategy fit for a digital world.
  • Boards should assess if digitalization is embedded into the heart of the business and adopt a holistic approach to digital transformation.
  • Leveraging M&As and ecosystem partnerships for digital transformation can give companies a competitive edge. 

The COVID-19 disruption has added a new urgency for businesses to accelerate their digital journey. In the 2020 EY-Parthenon Digital Investment Index study, nearly two-thirds of executives agreed that organizations must radically transform their operations over the next two years. Companies are expected to commit significant investments in automation and digital collaboration tools to help them manage the disruption, while finding innovative ways to deliver products and services to customers.

Yet, many companies run the risk of doing digital rather than being digital — using technology to address specific problems rather than as part of an overall strategy. For digital transformation to truly take off, companies need to critically assess if their strategy is fit for a digital world and determine how they can address current gaps through organic investments, strategic alliances or plugging into the digital ecosystem.

Companies struggle with the major commitment of a digital transformation because the transformation journey is complex, the end results are distant and unknown, the costs are high and their primary business is often cannibalized for a lower-margin profile. This naturally raises concerns at the board and the resulting digital path is piecemeal and not holistic. Even though firms know that digital transformation is inevitable, they tend to kick the can down the road.

EY-Parthenon teams have worked with several boards to chart a calibrated digital journey that considers three key strategies. 

Strategy one: Adopting a focused and strategic approach — “don’t try to solve everything”

A common pitfall in digital transformation is that companies fail to take a focused and holistic approach, with different groups within the organization rolling out digital technology in silos. This easily sets them up for failure in what is a costly and challenging undertaking.

For digital transformation to succeed, the board can play a pivotal role by working with the management to provide a clear vision from the top and setting the tone for an innovative culture. These elements can then be translated into a resilient and forward-looking digital strategy. A strong board mandate with a clear digital vision can galvanize the team to challenge its traditional notions of the industry and competition and rethink established ways of allocating and prioritizing funding.

Companies should view digitalization through the lens of how it can solve real user needs. From this standpoint, how can they set themselves apart with a unique technology platform to create customer stickiness? Importantly, the board should assess if digitalization is infused into the core of the business, rather than being an add-on, if the organization were to embrace its digital strategy holistically.




If the organization were to embrace its digital strategy holistically, the board needs to
assess whether it infuses digitalization into the core of the business instead of treating it
as an add-on.




Companies that succeed in doing so clearly stand to benefit. The Digital Investment Index found that digital leaders — firms that achieved higher returns from their digital investments — reported stronger revenue growth in the past two years and expected strong growth in the future. The research also found that digital leaders were much more likely to demonstrate clearer digital strategies, invest in the right emerging technology to execute such strategies, and devote funds to accelerate new digital products, services and business models. 

Strategy two: Scaling up through M&As — “buy to get a head start” 

Companies can accelerate their digital journey by either building in-house capabilities or acquiring them. The above study found that nearly three-quarters of the executives surveyed were shifting to M&As and partnerships to speed up digital initiatives. Notably, digital leaders were shifting an average of five percentage points of their investment mix from building internally to M&As.

 

M&As provide an effective route for acquiring the technology and talent needed to fuel digital transformation, and allow organizations to nimbly capture new opportunities ahead of the competition. Having said that, acquisitions bring their own set of challenges, not least the risk of failure in post-merger integration, the difficulty of estimating the value of the firm’s technology and determining the correct price if the acquisition target is a start-up.

 

The success of digital M&A will depend in no small measure on executive alignment and collaboration. The goals and values of the acquiring company and those of the acquired or partner firms should be coordinated. Equally important is internal alignment — leaders from different functional groups should be on the same page on the company’s digital M&A strategy. The board should assess if the executive team is aligned on the mix of investment vehicles used by the organization. It is important that the collaboration among management teams continues during the stage of owning and directing those investments. The board should look out for and address any organizational silos and assess if the executives are playing to their individual strengths in creating a successful digital investment strategy.

 

All these pay off when done right. Executives in the above study who reported that partnerships and digital M&As met or exceeded expectations were significantly more likely to say that they were implemented by a combination of C-suite executives.

Strategy three: Leveraging ecosystems — “don’t try to do everything yourself” 

 

Business models are increasingly moving toward platform-based setups that would eventually evolve to become one-stop solution platforms. With this shift, some companies may opt to build their own technology platforms, while others may prefer to forge partnerships and be part of a digital ecosystem. Joining forces can help bolster performance by allowing companies to access new opportunities to deliver products or services, and even create new assets. 

 

Nevertheless, ecosystem partnerships are not without their hurdles. Difficulties in finding the right ecosystem partner, managing customer data privacy issues and overlaps in operations, and determining ownership of the end-user relationship are among some of the key challenges.

 

The board should ask the management to consider if ecosystem participation has a place in the business strategy, particularly for areas of value that are too challenging or costly to achieve with existing in-house capabilities. Before deciding to build a platform or join an existing one, carrying out a comprehensive due diligence exercise is essential. After the company starts participating in an ecosystem partnership, establishing a recurring review process will allow all parties to generate and receive value from the ecosystem.

 

In a post-pandemic world, companies that have transformed digitally can expect to increase efficiency, accelerate growth, create new partnerships and revamp their business models to gain a competitive edge. Boards should have a firm grasp of the strategic opportunities that digitalization creates for the company and be able to bring their expertise to bear on overseeing a large-scale digital transformation strategy. Strong board stewardship will help steer the organization toward a future-fit and digitalized business model and capture opportunities for a first-mover advantage.

Boards should consider the following questions:

  • Does the organization have a clearly defined digital strategy that spells out its current and projected digital spend, technology requirements and a coherent path to execute its digital transformation?
  • Does the company have a robust governance model and KPIs to oversee digital initiatives and measure returns on digital investments, while identifying potential weaknesses in its digital strategy?
  • Have the sources of funding for digital investments been identified and does the organization have a long-term divestment plan, if needed?
  • Is the executive team aligned on the investment mix of “build, buy, partner or corporate venture” for digital transformation? Has it developed an integrated approach to accelerate the various digital initiatives?
  • Is the company making investments to build or tap into a digital ecosystem?

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Summary

Boards can help accelerate their organization’s digital transformation by taking a holistic approach, leveraging M&As to acquire the requisite technology and talent, and exploring ecosystem partnerships.


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